<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the Period Ended March 31, 1998.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _________________ to
_________________ .
Commission File Number: 1-12478 (Irvine Apartment Communities, Inc.)
0-22569 (Irvine Apartment Communities, L.P.)
1-13721 (IAC Capital Trust)
IRVINE APARTMENT COMMUNITIES, INC.
IRVINE APARTMENT COMMUNITIES, L.P.
IAC CAPITAL TRUST
(Exact Name of Registrants as Specified in Their Charters)
Maryland 33-0698698
Delaware 33-0587829
Delaware 91-6452946
(State of Incorporation) (I.R.S. Employer Identification Number)
550 Newport Center Drive, Suite 300, Newport Beach, California 92660
--------------------------------------------------------------------
(Address of principal executive offices)
(714) 720-5500
--------------
(Registrants' telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrants (1) have 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 time as required), and
(2) have been subject to such filing requirements for the past 90 days.
Irvine Apartment Communities, Inc.: Yes [X] No [ ]
Irvine Apartment Communities, L.P.: Yes [X] No [ ]
IAC Capital Trust: Yes [X] No [ ]
(IAC Capital Trust only subject to such filing
requirements since January 14, 1998)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date. Irvine Apartment Communities,
Inc.: common stock, $0.01 Par Value - 19,982,856 shares as of April 30, 1998;
Irvine Apartment Communities, L.P.: units of common partnership interest -
44,936,043 units as of April 30, 1998.
================================================================================
<PAGE> 2
IRVINE APARTMENT COMMUNITIES, INC.,
IRVINE APARTMENT COMMUNITIES, L.P. and
IAC CAPITAL TRUST
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements - Irvine Apartment Communities, Inc.
- Consolidated Balance Sheets as of March 31, 1998 and December
31, 1997 1
- Consolidated Statements of Operations for the three months ended
March 31, 1998 and 1997 2
- Consolidated Statements of Changes in Shareholders' Equity for
the three months ended March 31, 1998 and 1997 3
- Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 4
Financial Statements - Irvine Apartment Communities, L.P.
- Consolidated Balance Sheets as of March 31, 1998 and December
31, 1997 5
- Consolidated Statements of Operations for the three months ended
March 31, 1998 and 1997 6
- Consolidated Statements of Changes in Partners' Capital for the
three months ended March 31, 1998 and 1997 7
- Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 8
Financial Statements - IAC Capital Trust
- Balances Sheet as of March 31, 1998 9
- Statements of Operations and Equity for the period January 20, 1998
(commencement of operations) to March 31, 1998 10
- Statement of Cash Flows for the period January 20, 1998
(commencement of operations) to March 31, 1998 11
Notes to Consolidated Financial Statements 12 to 16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 17 to 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
PART II OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
</TABLE>
<PAGE> 4
PART I - FINANCIAL INFORMATION
Item 1.
Irvine Apartment Communities, Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
(in thousands, except per share amounts) 1998 1997
==================================================================================================================
<S> <C> <C>
ASSETS (unaudited)
Real estate assets, at cost
Land $ 213,324 $ 208,687
Buildings and improvements 1,038,549 1,015,696
- ------------------------------------------------------------------------------------------------------------------
1,251,873 1,224,383
Accumulated depreciation (256,154) (248,245)
- ------------------------------------------------------------------------------------------------------------------
995,719 976,138
Under development, including land 149,601 148,424
- ------------------------------------------------------------------------------------------------------------------
1,145,320 1,124,562
Cash and cash equivalents 54,477 4,624
Restricted cash 1,550 1,464
Deferred financing costs, net 18,604 19,079
Other assets 15,542 13,948
- ------------------------------------------------------------------------------------------------------------------
$ 1,235,493 $ 1,163,677
==================================================================================================================
LIABILITIES
Mortgages and notes payable
Tax-exempt mortgage bond financings $ 324,701 $ 325,644
Conventional mortgage financings 131,595 132,256
Mortgage notes payable to The Irvine Company 50,181 50,397
Tax-exempt assessment district debt 21,506 21,544
Line of credit 75,000
Unsecured notes payable 99,236 99,222
- ------------------------------------------------------------------------------------------------------------------
627,219 704,063
Accounts payable and accrued liabilities 33,209 30,689
Security deposits 8,098 7,698
- ------------------------------------------------------------------------------------------------------------------
668,526 742,450
MINORITY INTEREST - REDEEMABLE PREFERRED INTEREST OF SUBSIDIARY 144,000
MINORITY INTEREST 210,523 210,307
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00 per share; 10,000 shares authorized;
no shares issued or outstanding
Common stock, par value $0.01 per share; 150,000 shares authorized;
19,983 shares and 19,901 shares issued and outstanding, respectively 200 199
Excess stock, par value $0.01 per share; 160,000 shares authorized;
no shares issued or outstanding
Additional paid-in capital 237,660 235,487
Accumulated deficit (25,416) (24,766)
- ------------------------------------------------------------------------------------------------------------------
212,444 210,920
- ------------------------------------------------------------------------------------------------------------------
$ 1,235,493 $ 1,163,677
==================================================================================================================
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
Page 1
<PAGE> 5
Irvine Apartment Communities, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31,
(unaudited, in thousands, except per share amounts) 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES
Rental income $49,587 $42,092
Other income 1,213 940
Interest income 769 248
- -----------------------------------------------------------------------------------------------------------
51,569 43,280
- -----------------------------------------------------------------------------------------------------------
EXPENSES
Property expenses 10,589 9,186
Real estate taxes 4,006 3,465
Property management fees 1,393 1,215
Interest expense, net 7,112 6,861
Amortization of deferred financing costs 491 649
Depreciation and amortization 8,041 6,751
General and administrative 2,158 1,634
- -----------------------------------------------------------------------------------------------------------
33,790 29,761
- -----------------------------------------------------------------------------------------------------------
INCOME BEFORE REDEEMABLE PREFERRED INTEREST AND MINORITY INTEREST IN INCOME 17,779 13,519
Redeemable preferred interest 2,441
Minority interest in income 8,522 7,408
- -----------------------------------------------------------------------------------------------------------
NET INCOME $ 6,816 $ 6,111
===========================================================================================================
EARNINGS PER SHARE:
Basic $ 0.34 $ 0.32
Diluted $ 0.34 $ 0.32
===========================================================================================================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 19,932 19,096
Diluted 20,049 19,244
===========================================================================================================
</TABLE>
See accompanying notes.
Page 2
<PAGE> 6
Irvine Apartment Communities, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Three Months Ended March 31,
(unaudited, in thousands, except per share amounts) 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK, PAR VALUE $0.01 PER SHARE
Balance at beginning of period $ 199 $ 186
Net proceeds from common stock offering 11
Proceeds from stock options exercised 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 200 $ 198
===================================================================================================================================
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period $ 235,487 $ 202,116
Net proceeds from dividend reinvestment and additional cash investment plan 1,584 110
Proceeds from stock options exercised 349 1,022
Stock awards issued 240 241
Net proceeds from common stock offering 29,559
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 237,660 $ 233,048
===================================================================================================================================
ACCUMULATED DEFICIT
Balance at beginning of period ($ 24,766) ($ 22,285)
Net income 6,816 6,111
Distributions to shareholders (7,466) (6,778)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at end of period ($ 25,416) ($ 22,952)
===================================================================================================================================
===================================================================================================================================
TOTAL SHAREHOLDERS' EQUITY $ 212,444 $ 210,294
===================================================================================================================================
SHARES OF COMMON STOCK OUTSTANDING
Balance at beginning of period 19,901 18,556
Additional shares issued under the dividend reinvestment and additional cash investment plan 53 5
Stock options exercised 21 63
Stock awards issued 8 9
Additional shares issued under common stock offering 1,150
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at end of period 19,983 19,783
===================================================================================================================================
</TABLE>
See accompanying notes.
Page 3
<PAGE> 7
Irvine Apartment Communities, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
(unaudited, in thousands) 1998 1997
========================================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,816 $ 6,111
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred financing costs 491 649
Depreciation and amortization 8,041 6,751
Minority interest in income 8,522 7,408
Redeemable preferred interest 2,441
Increase (decrease) in cash attributable to changes in assets and liabilities:
Restricted cash (86) (83)
Other assets (1,711) (2,178)
Accounts payable and accrued liabilities 4,474 2,225
Security deposits 400 318
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 29,388 21,201
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital improvements to operating real estate assets (726) (473)
Capital investments in real estate assets (29,641) (28,493)
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (30,367) (28,966)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under lines of credit 2,000 5,000
Payments on lines of credit (77,000) (21,000)
Payments on tax-exempt mortgage bond financings (943) (876)
Principal payments (915) (848)
Additions to deferred financing costs (15)
Net proceeds from issuance of redeemable preferred interest 143,985
Net proceeds from dividend reinvestment and additional cash investment plan 2,624 299
Proceeds from stock options exercised 348 1,023
Contributions from The Irvine Company 36,333
Net proceeds from common stock offering 29,969
Distributions to redeemable preferred interest holders (2,441)
Distributions to The Irvine Company and certain of its affiliates (9,202) (8,251)
Distributions to other common limited partners (143) (28)
Distributions to shareholders (7,466) (6,778)
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 50,832 34,843
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 49,853 27,078
Cash and Cash Equivalents at Beginning of Period 4,624 3,205
- ------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 54,477 $ 30,283
========================================================================================================================
Supplemental Disclosure of Cash Flow Information
Interest paid, net of amounts capitalized $ 5,737 $ 6,974
========================================================================================================================
</TABLE>
See accompanying notes.
Page 4
<PAGE> 8
Irvine Apartment Communities, L.P.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
(in thousands) 1998 1997
====================================================================================================
<S> <C> <C>
ASSETS (unaudited)
Real estate assets, at cost
Land $ 213,324 $ 208,687
Buildings and improvements 1,038,549 1,015,696
- ----------------------------------------------------------------------------------------------------
1,251,873 1,224,383
Accumulated depreciation (256,154) (248,245)
- ----------------------------------------------------------------------------------------------------
995,719 976,138
Under development, including land 149,601 148,424
- ----------------------------------------------------------------------------------------------------
1,145,320 1,124,562
Cash and cash equivalents 54,477 4,624
Restricted cash 1,550 1,464
Deferred financing costs, net 18,604 19,079
Other assets 15,542 13,948
- ----------------------------------------------------------------------------------------------------
$ 1,235,493 $ 1,163,677
====================================================================================================
LIABILITIES
Mortgages and notes payable
Tax-exempt mortgage bond financings $ 324,701 $ 325,644
Conventional mortgage financings 131,595 132,256
Mortgage notes payable to The Irvine Company 50,181 50,397
Tax-exempt assessment district debt 21,506 21,544
Line of credit 75,000
Unsecured notes payable 99,236 99,222
- ----------------------------------------------------------------------------------------------------
627,219 704,063
Accounts payable and accrued liabilities 33,209 30,689
Security deposits 8,098 7,698
- ----------------------------------------------------------------------------------------------------
668,526 742,450
REDEEMABLE PREFERRED LIMITED PARTNER UNITS
Redeemable series A preferred limited partner units, 6,000
partnership units outstanding at March 31, 1998 144,000
PARTNERS' CAPITAL
General partner, 19,983 common partnership units at March
31, 1998 and 19,901 at December 31, 1997 212,444 210,920
Common limited partners, 24,953 common partnership units
at March 31, 1998 and 24,919 at December 31, 1997 210,523 210,307
- ----------------------------------------------------------------------------------------------------
422,967 421,227
- ----------------------------------------------------------------------------------------------------
$ 1,235,493 $ 1,163,677
====================================================================================================
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
Page 5
<PAGE> 9
Irvine Apartment Communities, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31,
(unaudited, in thousands, except per unit amounts) 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES
Rental income $49,587 $42,092
Other income 1,213 940
Interest income 769 248
- ------------------------------------------------------------------------------------
51,569 43,280
- ------------------------------------------------------------------------------------
EXPENSES
Property expenses 10,589 9,186
Real estate taxes 4,006 3,465
Property management fees 1,393 1,215
Interest expense, net 7,112 6,861
Amortization of deferred financing costs 491 649
Depreciation and amortization 8,041 6,751
General and administrative 2,158 1,634
- ------------------------------------------------------------------------------------
33,790 29,761
- ------------------------------------------------------------------------------------
INCOME BEFORE REDEEMABLE PREFERRED INTEREST 17,779 13,519
Redeemable preferred interest 2,441
- ------------------------------------------------------------------------------------
NET INCOME $15,338 $13,519
====================================================================================
ALLOCATION OF NET INCOME:
General Partner $ 6,816 $ 6,111
Common Limited Partners $ 8,522 $ 7,408
====================================================================================
EARNINGS PER COMMON UNIT:
Basic $ 0.34 $ 0.32
Diluted $ 0.34 $ 0.32
====================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON UNITS OUTSTANDING:
Basic 44,863 42,230
Diluted 44,980 42,378
====================================================================================
</TABLE>
See accompanying notes.
Page 6
<PAGE> 10
Irvine Apartment Communities, L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Irvine Apartment
(unaudited, in thousands) Communities, Inc. Limited Partners Total
====================================================================================================
<S> <C> <C> <C>
PARTNERS' CAPITAL
Balance at January 1, 1997 $ 180,017 $ 140,327 $ 320,344
Net income 6,111 7,408 13,519
Contributions 30,944 46,906 77,850
Distributions (6,778) (8,279) (15,057)
- ----------------------------------------------------------------------------------------------------
Balance at March 31, 1997 $ 210,294 $ 186,362 $ 396,656
====================================================================================================
Balance at January 1, 1998 $ 210,920 $ 210,307 $ 421,227
Net income 6,816 8,522 15,338
Contributions 2,174 1,039 3,213
Distributions (7,466) (9,345) (16,811)
- ----------------------------------------------------------------------------------------------------
Balance at March 31, 1998 $ 212,444 $ 210,523 $ 422,967
====================================================================================================
COMMON PARTNERSHIP UNITS OUTSTANDING
Balance at January 1, 1997 18,556 22,292 40,848
Additional common partnership units issued 1,227 1,789 3,016
- ----------------------------------------------------------------------------------------------------
Balance at March 31, 1997 19,783 24,081 43,864
====================================================================================================
Balance at January 1, 1998 19,901 24,919 44,820
Additional common partnership units issued 82 34 116
- ----------------------------------------------------------------------------------------------------
Balance at March 31, 1998 19,983 24,953 44,936
====================================================================================================
</TABLE>
See accompanying notes.
Page 7
<PAGE> 11
Irvine Apartment Communities, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
(unaudited, in thousands) 1998 1997
=======================================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 15,338 $ 13,519
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred financing costs 491 649
Depreciation and amortization 8,041 6,751
Redeemable preferred interest 2,441
Increase (decrease) in cash attributable to changes in assets and liabilities:
Restricted cash (86) (83)
Other assets (1,711) (2,178)
Accounts payable and accrued liabilities 4,474 2,225
Security deposits 400 318
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 29,388 21,201
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital improvements to operating real estate assets (726) (473)
Capital investments in real estate assets (29,641) (28,493)
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (30,367) (28,966)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under lines of credit 2,000 5,000
Payments on lines of credit (77,000) (21,000)
Payments on tax-exempt mortgage bond financings (943) (876)
Principal payments (915) (848)
Additions to deferred financing costs (15)
Net proceeds from issuance of redeemable preferred limited partner units 143,985
Distributions to redeemable preferred limited partner unit holders (2,441)
Contributions from partners 2,972 67,624
Distributions to partners (16,811) (15,057)
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 50,832 34,843
- -----------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 49,853 27,078
Cash and Cash Equivalents at Beginning of Period 4,624 3,205
- -----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 54,477 $ 30,283
=======================================================================================================================
Supplemental Disclosure of Cash Flow Information
Interest paid, net of amounts capitalized $ 5,737 $ 6,974
=======================================================================================================================
</TABLE>
See accompanying notes.
Page 8
<PAGE> 12
IAC Capital Trust
BALANCE SHEET
March 31, 1998
<TABLE>
<CAPTION>
(unaudited, dollars in thousands)
============================================================================================================
Assets
<S> <C>
Cash $ 5
Investment in Subsidiary 150,000
- ------------------------------------------------------------------------------------------------------------
$150,005
============================================================================================================
Liabilities and Equity
Redeemable Preferred Securities, 25,000,000 securities authorized
Redeemable Series A Preferred Securities, 6,900,000 securities authorized,
6,000,000 securities issued and outstanding $150,000
Equity
Common Securities, 20,000 securities authorized, 200 securities issued and outstanding 5
- ------------------------------------------------------------------------------------------------------------
$150,005
============================================================================================================
</TABLE>
See accompanying notes.
Page 9
<PAGE> 13
IAC Capital Trust
STATEMENTS OF OPERATIONS AND EQUITY
For the Period January 20, 1998 (commencement of operations) to March 31, 1998
<TABLE>
<CAPTION>
(unaudited, in thousands, except per security amounts)
==========================================================================
<S> <C>
REVENUE
Income from investment in subsidiary $2,441
- --------------------------------------------------------------------------
INCOME BEFORE REDEEMABLE PREFERRED INTEREST 2,441
Redeemable preferred interest 2,441
- --------------------------------------------------------------------------
NET INCOME $ 0
==========================================================================
Issuance of common securities $ 5
Net income 0
- --------------------------------------------------------------------------
EQUITY - END OF PERIOD $ 5
==========================================================================
</TABLE>
See accompanying notes.
Page 10
<PAGE> 14
IAC Capital Trust
STATEMENT OF CASH FLOWS
For the Period January 20, 1998 (commencement of operations) to March 31, 1998
<TABLE>
<CAPTION>
(unaudited, in thousands)
=====================================================================================================
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 0
Adjustments to reconcile net income to net cash provided by operating
activities:
Redeemable preferred interest 2,441
- -----------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 2,441
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiary (150,000)
- -----------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (150,000)
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common securities 5
Proceeds from issuance of redeemable preferred securities 150,000
Distributions to preferred securities holders (2,441)
- -----------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 147,564
- -----------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5
Cash and Cash Equivalents at Inception 0
- -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5
=====================================================================================================
</TABLE>
See accompanying notes.
Page 11
<PAGE> 15
IRVINE APARTMENT COMMUNITIES, INC.,
IRVINE APARTMENT COMMUNITIES, L.P. AND
IAC CAPITAL TRUST
(UNAUDITED)
NOTE 1 - ORGANIZATION
Irvine Apartment Communities, Inc., a Maryland corporation (the "Company"),
operates as a real estate investment trust ("REIT") under the Internal Revenue
Code of 1986, as amended. In connection with the Company's initial public
offering of common stock (the "Offering"), the Company obtained a general
partnership interest in and became the sole managing general partner of Irvine
Apartment Communities, L.P., a Delaware limited partnership (the "Operating
Partnership"). The Operating Partnership was formed on November 15, 1993 and
began operations as of December 8, 1993, the date of the Offering. In connection
with the Offering, The Irvine Company transferred 42 apartment communities and a
99% interest in a limited partnership which owns one apartment community to the
Operating Partnership. At March 31, 1998, the Company had a 44.4% general
partnership interest in and was the sole managing general partner of the
Operating Partnership. At March 31, 1998, the common limited partners had a
55.6% common limited partnership interest in the Operating Partnership, with The
Irvine Company and certain of its affiliates owning a 55.4% common limited
partnership interest in the Operating Partnership. On February 4, 1997, the
Operating Partnership acquired the assets of Thompson Residential Company, Inc.
The purchase price was paid by the issuance of 74,523 common limited partnership
units in the Operating Partnership. At March 31, 1998, Thompson Residential
Company, Inc. had a 0.2% common limited partnership interest in the Operating
Partnership. The Operating Partnership's management and operating decisions are
under the unilateral control of the Company. The Company was incorporated in
Delaware on September 10, 1993. On May 2, 1996, the Company changed its state of
incorporation from Delaware to Maryland.
The Company is a self-administered equity REIT engaged in the operation and
development (through the Operating Partnership) of apartment communities in
Orange County, California and, beginning in 1997, other locations in California.
As of March 31, 1998, the Operating Partnership owned 59 apartment communities
representing 15,325 apartment units and 1,933 units under development
(collectively, the "Properties"). The Operating Partnership broke ground on its
first "off-Ranch" apartment community, located in Northern California's Silicon
Valley, in May 1997. On June 30, 1997, the Operating Partnership acquired a
923-unit apartment community in the La Jolla region of north San Diego County.
Until July 31, 2020, the Operating Partnership has the exclusive right, but not
the obligation, to acquire land from The Irvine Company for development of
additional apartment communities on the Irvine Ranch.
IAC Capital Trust, a Delaware business trust (the "Trust"), was formed on
October 31, 1997. The Trust is a limited purpose financing vehicle established
by the Company and the Operating Partnership. The Trust exists for the sole
purpose of issuing preferred securities and investing the proceeds thereof in
preferred limited partner units of the Operating Partnership.
Certain amounts in the 1997 financial statements have been reclassified to
conform with financial statement presentations in 1998.
Page 12
<PAGE> 16
NOTE 2 - BASIS OF PRESENTATION
The accompanying financial statements of the Company include the consolidated
accounts of the Operating Partnership and its financially controlled subsidiary.
All intercompany accounts and transactions have been eliminated in
consolidation. The Trust's investment in subsidiary relates to the redeemable
series A preferred limited partner units in the Operating Partnership. The
Trust has less than a controlling interest in the investment in subsidiary
which is accounted for using the equity method.
Profits and losses of the Operating Partnership are generally allocated to the
Company and to the common limited partners based upon their respective ownership
interests in the Operating Partnership. The holders of the redeemable preferred
limited partner units and redeemable preferred securities are entitled to
dividends at an annual rate of 8 1/4% of the stated value per unit/security. The
stated value of each unit/security is $25. Under the terms of the partnership
agreement, all costs incurred by the Company relating to the ownership of its
interest in and operation of the Operating Partnership, including the
compensation of its officers and employees, stock incentive plans, director fees
and the costs and expenses of being a public company, are paid by the Operating
Partnership. In addition, The Irvine Company generally has the right, but not
the obligation, to match on the same terms and conditions any capital
contributions made by the Company and the Operating Partnership based on the pro
rata ownership interest at the time of such contribution.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
March 31, 1998 and December 31, 1997, and the revenues and expenses for the
three months ended March 31, 1998 and 1997. Actual results could differ from
those estimates.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. 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 considered
necessary for a fair presentation have been included. All such adjustments are
of a normal, recurring nature. Operating results for the three months ended
March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. These financial statements
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto included in the Company's and the Operating Partnership's Annual
Report on Form 10-K for the year ended December 31, 1997.
NOTE 3 - MORTGAGES AND NOTES PAYABLE
Line of Credit: In June 1997, the Operating Partnership renewed its $250
million unsecured revolving credit facility. The credit facility has a term of
three years and currently bears interest at LIBOR plus 0.70% or prime. The
interest rates under the credit facility are adjusted up or down based on credit
ratings on the Operating Partnership's senior unsecured long-term indebtedness.
Under the credit facility, the Operating Partnership is able to borrow funds
from the participating banks through a competitive bid process to obtain a lower
interest rate. Borrowings under the credit facility, which are guaranteed by the
Company, are available to finance the Operating Partnership's ongoing rental
property development, possible acquisitions and for general working capital
needs. The Company and the Operating Partnership must comply with certain
affirmative and negative covenants, including limitations on distributions, and
the maintenance of certain net worth, cash flow and financial ratios. At March
31, 1998, the Company and the Operating Partnership were in compliance with all
of these covenants. In January 1998, all outstanding borrowings under the credit
facility were repaid with the proceeds of the preferred securities of the Trust.
Page 13
<PAGE> 17
Shelf Registration Statements: On May 14, 1997, the Company filed a shelf
registration statement with the Securities and Exchange Commission providing for
the issuance from time to time of up to $350 million of common stock, preferred
stock, and warrants to purchase common stock and preferred stock. The Company
plans to use the proceeds raised from any securities issued under its shelf
registration statement for general corporate purposes, including the development
of new apartment communities, acquisitions and the repayment of existing debt.
Availability under the Company's shelf registration statement was $350 million
at March 31, 1998. Concurrently, the Operating Partnership filed a shelf
registration statement with the Securities and Exchange Commission providing for
the issuance from time to time of up to $350 million of debt securities. The
Operating Partnership plans to use the proceeds raised from any securities
issued under its shelf registration statement for general corporate purposes,
including the development of new apartment communities, acquisitions and the
repayment of existing debt. On October 1, 1997, the Operating Partnership issued
$100 million aggregate principal amount of 7% senior unsecured notes (the
"Notes") pursuant to its shelf registration statement. Availability under the
Operating Partnership's shelf registration statement was $250 million at March
31, 1998.
Subsequent Event: The Operating Partnership, pursuant to a Prospectus Supplement
dated April 9, 1998, may issue from time to time up to $250 million aggregate
initial offering price of its Medium-Term Notes, Series A due nine months or
more from the date of issue. Issuances of Medium-Term Notes will reduce
availability under the Operating Partnership's Registration Statement by the
amount of Medium-Term Notes issued. Similarly, issuances of other debt
securities under the Operating Partnership's Registration Statement will reduce
the amount of Medium-Term Notes that may be issued.
NOTE 4 - MINORITY INTEREST; SHAREHOLDERS' EQUITY; AND PARTNERS' CAPITAL
On February 20, 1997, the Company sold, in a public offering, 1.15 million
shares of common stock at $27.50 per share. Concurrently, The Irvine Company
(see Note 6), pursuant to its rights under the partnership agreement, purchased
1.39 million additional common limited partnership units at $26.06 per unit
(which is equal to the public offering price of the common stock less an amount
equivalent to the underwriting discount) which are exchangeable for common stock
on a one for one basis, subject to adjustment and certain limitations. The
proceeds from the two transactions totaled $66 million and were used to repay
all indebtedness then outstanding under the credit facility, and for general
corporate purposes, including ongoing development activities on and off the
Irvine Ranch.
The Company and the Operating Partnership each paid cash distributions of $0.375
per share (or common partnership unit) on February 28, 1998. The Operating
Partnership and the Trust paid cash distributions of $0.42 per preferred limited
partner unit (or preferred security) on March 31, 1998. During the first quarter
of 1997, the Company and the Operating Partnership each paid a cash dividend of
$0.365 per share (or common partnership unit).
Page 14
<PAGE> 18
RECONCILIATION OF COMMON PARTNERSHIP UNITS OUTSTANDING
<TABLE>
<CAPTION>
(in thousands, except percentages) Three Months Ended March 31, 1998 Three Months Ended March 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
The Irvine The Irvine
Company and Company and
certain of certain of
Company its affiliates Other Total Company its affiliates Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period 19,901 24,844 75 44,820 18,556 22,292 40,848
Stock awards issued and options exercised 29 29 72 72
Dividend reinvestment and additional cash
investment plan 53 34 87 5 7 12
Common stock offering and related cash
contribution from The Irvine Company 1,150 1,394 2,544
Acquisition of Thompson Residential assets 75 75
Contributions of property by The Irvine
Company and certain of its affiliates 313 313
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of period 19,983 24,878 75 44,936 19,783 24,006 75 43,864
- ------------------------------------------------------------------------------------------------------------------------------------
Ownership interest at end of period 44.4% 55.4% 0.2% 100% 45.1% 54.7% 0.2% 100%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following tables represent a reconciliation of the minority interest
balances and the computation of the minority interest in income.
RECONCILIATION OF MINORITY INTEREST
<TABLE>
<CAPTION>
Three Months Ended March 31,
(in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period $ 210,307 $ 140,327
Minority interest in income 8,522 7,408
Distributions (9,345) (8,279)
Cash contributions from The Irvine Company 36,333
Contributions of property by The Irvine Company and
certain of its affiliates 8,408
Acquisition of Thompson Residential assets 2,000
Contributions under dividend reinvestment and additional
cash investment plan 1,039 165
- ---------------------------------------------------------------------------------------------------------
Balance at end of period $ 210,523 $ 186,362
- ---------------------------------------------------------------------------------------------------------
</TABLE>
COMPUTATION OF MINORITY INTEREST IN INCOME
<TABLE>
<CAPTION>
Three Months Ended March 31,
(in thousands) 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Income before minority interest $15,338 $13,519
Income allocated to the Company based on its ownership interest (6,816) (6,111)
- --------------------------------------------------------------------------------------------------
Minority interest in income $ 8,522 $ 7,408
==================================================================================================
</TABLE>
Page 15
<PAGE> 19
NOTE 5 - ACQUISITION OF THOMPSON RESIDENTIAL ASSETS
On February 4, 1997, the Operating Partnership acquired for $2 million the
assets of Thompson Residential Company, Inc. ("TRC"), a privately held, Northern
California-based multi-family development company. Included in the purchase were
options to purchase three development sites located in Northern California's
Silicon Valley. The purchase price was paid by the issuance of 74,523 common
limited partnership units in the Operating Partnership, exchangeable for common
stock of the Company, with a price per unit of $26.838 which was based on the
average closing price of the Company's common stock for the 10 trading days
preceding the acquisition's closing date. In addition, TRC may be paid up to an
additional $2 million in cash or common limited partnership units if the
apartment community currently under development (The Hamptons) achieves certain
performance targets. The three senior real estate executives at TRC have also
joined the Company with primary responsibility for the Company's operations
outside of the Irvine Ranch.
NOTE 6 - CERTAIN TRANSACTIONS WITH RELATED PARTIES
Substantially all costs incurred by the Company are borne by the Operating
Partnership. Included in general and administrative expenses are charges from
The Irvine Company pursuant to an administrative services agreement covering
services for risk management, income taxes, human resources and other services
of $67,000 and $29,000 for the three months ended March 31, 1998 and 1997,
respectively. The Irvine Company and the Company jointly purchase employee
health care insurance and property and casualty insurance. In addition, the
Company incurred rent totaling $129,000 and $120,000 for the three months ended
March 31, 1998 and 1997, respectively, related to leases with The Irvine Company
that expire at the end of 1998. For the three months ended March 31, 1998 and
1997, The Irvine Company contributed $1,039,000 and $164,000, respectively, in
connection with common limited partnership unit and stock issuances under the
dividend reinvestment and additional cash investment plan.
On February 10, 1997, the Operating Partnership acquired a land site for $8.4
million from The Irvine Company for the development of 316 rental units pursuant
to the Land Rights Agreement between the Operating Partnership and The Irvine
Company. The Company's board committee of independent directors approved the
purchase in accordance with the Land Rights Agreement. The purchase price was
paid through the issuance of 313,439 additional common limited partnership units
in the Operating Partnership to The Irvine Company. Pursuant to the terms of the
acquisition, a portion of the common limited partnership units in the Operating
Partnership are subject to forfeiture if the apartment community developed on
the site does not achieve a 10% unleveraged return on costs for the first twelve
months following stabilized occupancy.
Concurrent with the Company's common stock offering on February 20, 1997 (see
Note 4), The Irvine Company, pursuant to its rights under the partnership
agreement, purchased 1.39 million common limited partnership units at a price
equal to the public offering price of $26.06 per unit (which is equal to the
public offering price of the common stock less an amount equivalent to the
underwriting discount) which are exchangeable for common stock on a one for one
basis, subject to adjustment and certain limitations.
One of the Company's directors is chairman of a bank which participates in the
Company's line of credit and acts as trustee for the Notes. Based on the bank's
percentage participation in the credit facility, the Company estimates that the
amount of interest and fees paid to the bank totaled $87,000 and $46,000 for the
three months ended March 31, 1998 and 1997, respectively.
Page 16
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion compares the activities of the Company for the three
month period ended March 31, 1998 (unaudited) with the activities of the
Company for the three month period ended March 31, 1997 (unaudited). As used in
this Item 2, unless the context otherwise requires, the term "Company" includes
Irvine Apartment Communities, Inc. and the Operating Partnership (Irvine
Apartment Communities, L.P.). IAC Capital Trust (the "Trust") is a limited
purpose financing vehicle established by the Company and exists for the sole
purpose of issuing preferred securities and investing the proceeds thereof in
preferred limited partnership units of the Operating Partnership.
The following discussion should be read in conjunction with all the financial
statements appearing elsewhere in this report, as well as the information
presented in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
Certain information set forth below is forward looking and involves various
risks and uncertainties. Such information is based upon a number of estimates
and assumptions that inherently are subject to business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997.
The Company's income before minority interest in income (and the Operating
Partnership's net income) was $15.3 million for the three months ended March 31,
1998, up from $13.5 million for the same period of 1997. The Company's financial
results improved in 1998 due to the contribution of newly delivered rental units
from its development program, an acquisition, properties that stabilized during
1997 and an increase in rental rates within its stabilized portfolio partially
offset by a slight decrease in physical occupancy and an increase in redeemable
preferred interest (due to the issuance of preferred securities by the Trust).
Page 17
<PAGE> 21
REVENUE AND EXPENSE DATA
<TABLE>
<CAPTION>
Three Months Ended March 31,
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMUNITIES OWNED AND STABILIZED MORE THAN ONE YEAR (A)
Number of communities 48 48
Number of units at end of period 13,541 13,541
Operating revenues $44,040 $42,168
Property expenses $ 9,098 $ 8,997
Real estate taxes $ 3,430 $ 3,420
Property management fees $ 1,250 $ 1,195
Depreciation and amortization of real estate assets $ 7,251 $ 6,580
COMMUNITIES STABILIZED LESS THAN ONE YEAR (B)
Number of communities 2 2
Number of units at end of period 527 302
Operating revenues $ 2,212 $ 864
Property expenses $ 322 $ 189
Real estate taxes $ 170 $ 45
Property management fees $ 55 $ 20
Depreciation and amortization of real estate assets $ 431 $ 117
LEASE-UP AND NEWLY ACQUIRED COMMUNITIES (C)
Number of communities 4
Number of units at end of period 1,257
Operating revenues $ 4,548
Property expenses $ 1,169
Real estate taxes $ 406
Property management fees $ 88
Depreciation and amortization of real estate assets $ 226
========================================================================================================
</TABLE>
(a) Represents "same store" communities.
(b) Represents two communities (Baypointe and Santa Maria) that reached
stabilized occupancy (95%) at various dates in 1997.
(c) Represents an apartment community acquired on June 30, 1997, and three
communities in lease-up at March 31, 1998.
OPERATING REVENUES (rental and other income) increased to $50.8 million in the
first quarter of 1998, up from $43.0 million in the same period of 1997.
Operating revenues rose in 1998 because of higher rental rates and a larger
average number of rental units in service as a result of both new development
and an acquisition in June 1997. Newly delivered and acquired units and
communities stabilized less than one year added $6.8 million to operating
revenues in the first quarter of 1998 from 6 properties compared to $0.9 million
in the same period of 1997 from 2 properties. Operating revenues generated by
communities owned and stabilized more than one year increased 4.4% in the first
quarter of 1998 due to an improvement in the average monthly rental rate,
partially offset by a decrease in average physical occupancy to 94.1% from
94.9%. The average monthly rental rate for these communities increased 5.1% to
$1,125 in the first quarter of 1998, from $1,070 in the first quarter of 1997.
PROPERTY EXPENSES increased by 15.2% to $10.6 million in the first quarter of
1998, up from $9.2 million in the same period of 1997. The 1998 increase
primarily reflects the added expenses from the newly delivered and acquired
rental units and communities stabilized less than one year. Property expenses
for communities owned and stabilized more than one year increased by $0.1
million to $9.1 million in the first quarter of 1998. Average monthly property
expenses generated by these communities increased to $224 per unit in the first
quarter of 1998 from $221 per unit in the first quarter of 1997. Newly
delivered and acquired units and communities stabilized less than one year added
$1.5 million to property expenses in the first quarter of 1998 from 6 properties
compared to $0.2 million in the same period of 1997 from 2 properties. In order
to reduce its operating costs, effective April 1, 1998, the Company formed a
subsidiary, Irvine Apartment Management Company (IAMC), to manage the Company's
properties. Accordingly, there will be no management fees for the remaining
three quarters of 1998. Personnel and office costs of IAMC will now be included
in property expenses.
Page 18
<PAGE> 22
REAL ESTATE TAXES totaled $4.0 million in the first quarter of 1998 and $3.5
million in the same period of 1997. Real estate taxes increased in the first
quarter of 1998 due primarily to the addition of new rental units.
PROPERTY MANAGEMENT FEES increased to $1.4 million in the first quarter of 1998
compared to $1.2 million in the same period of 1997. Management fees increased
from the prior year due to the addition of rental units and increases in revenue
from communities stabilized more than one year.
NET INTEREST EXPENSE increased to $7.1 million in the first quarter of 1998
compared to $6.9 million in the same period of 1997. Total interest incurred
was $9.8 million in the first quarter of 1998 and $8.0 million in the same
period of 1997. The increase in the first quarter of 1998 was largely due to the
unsecured notes payable being outstanding for the entire quarter. The Company
capitalizes interest on projects actively under development using qualifying
asset balances and applicable weighted average interest rates. Capitalized
interest totaled $2.7 million in the first quarter of 1998 and $1.1 million in
the same period of 1997.
AMORTIZATION OF DEFERRED FINANCING COSTS decreased to $0.5 million in the first
quarter of 1998 compared to $0.6 million in the same period of 1997. The
$158,000 decrease in the first quarter of 1998 was due to the full amortization
of certain loan costs during the prior year.
DEPRECIATION AND AMORTIZATION EXPENSE increased 19.1% to $8.0 million in the
first quarter of 1998, up from $6.8 million in the same period of 1997. The
increase reflects the completion and delivery of newly developed rental units.
The 1998 amount also reflects three months of depreciation from the newly
acquired property.
GENERAL AND ADMINISTRATIVE EXPENSE increased to $2.2 million in the first
quarter of 1998, up from $1.6 million in the same period of 1997. The increase
was largely the result of increased staff levels necessitated by the Company's
growth.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that cash provided by operations will be adequate to meet
both operating requirements and payment of distributions by the Company in
accordance with REIT requirements in both the short and long term.
LIQUIDITY: The Company expects to meet its long-term liquidity requirements,
such as construction costs, scheduled debt maturities and potential future
property acquisitions, through the issuance or refinancing of long-term debt,
borrowings from financial institutions, or the issuance of additional equity
securities of the Company, partnership units by the Operating Partnership or
preferred securities by the Trust. In June 1997, the Operating Partnership
renewed its $250 million unsecured revolving credit facility for a three-year
term. Borrowings under the credit facility currently bear interest at LIBOR plus
0.70% or prime. The interest rates under the credit facility are adjusted up or
down based on the credit ratings on the Operating Partnership's senior unsecured
long-term indebtedness. In January 1998, all outstanding borrowings under the
credit facility were repaid from the proceeds of the offering by the Trust of
its 8 1/4% Series A REIT Trust Originated Preferred Securities (the "8 1/4%
Series A Preferred Securities").
SHELF REGISTRATION STATEMENTS: On May 14, 1997, the Company filed a shelf
registration statement with the Securities and Exchange Commission providing for
the issuance from time to time of up to $350 million of common stock, preferred
stock, and warrants to purchase common stock and preferred stock. The Company
plans to use the proceeds raised from any securities issued under its shelf
registration statement for general corporate purposes, including the development
of new apartment communities, acquisitions and the repayment of existing debt.
Availability under the Company's shelf registration statement was $350 million
at March 31, 1998. Concurrently, the Operating Partnership filed a shelf
registration statement with the Securities and Exchange Commission providing for
the issuance from time to time of up to $350 million of debt securities. The
Operating Partnership plans to use the proceeds raised from any
Page 19
<PAGE> 23
securities issued under its shelf registration statement for general corporate
purposes, including the development of new apartment communities, acquisitions
and the repayment of existing debt. On October 1, 1997, the Operating
Partnership issued $100 million aggregate principal amount of 7% senior
unsecured notes pursuant to its shelf registration statement. Availability under
the Operating Partnership's shelf registration statement was $250 million at
March 31, 1998. The Operating Partnership, pursuant to a Prospectus Supplement
dated April 9, 1998, may issue from time to time up to $250 million aggregate
initial offering price of its Medium-Term Notes, Series A due nine months or
more from the date of issue. Issuances of Medium-Term Notes will reduce
availability under the Operating Partnership's Registration Statement by the
amount of Medium-Term Notes issued. Similarly, issuances of other debt
securities under the Operating Partnership's Registration Statement will reduce
the amount of Medium-Term Notes that may be issued.
IAC CAPITAL TRUST: In January 1998, the Trust issued 6.0 million 8 1/4% Series A
Preferred Securities. The proceeds of $150 million were used to purchase an
equivalent amount of 8 1/4% Series A Preferred Limited Partner Units in the
Operating Partnership. The Operating Partnership used the $150 million of
proceeds, net of costs and expenses, all of which where paid by the Operating
Partnership, to repay all outstanding borrowings under the credit facility and
to fund development and an acquisition.
DEBT: The Company's conventional and tax-exempt mortgage debt bears interest at
fixed interest rates, or variable rates that have been effectively fixed through
interest rate swap agreements. Interest rates on conventional mortgage debt were
reduced to then-current market rates at the time of the Company's December 1993
initial public offering through interest rate buy-down agreements that are
scheduled to expire at various dates prior to loan maturity that range from 2000
to 2008. The weighted average effective interest rate on the Company's debt,
including the non-cash charges of amortization of deferred financing costs, was
6.49% at March 31, 1998. The Company uses interest rate swap agreements to
effectively convert its floating rate tax-exempt mortgage bond financings to a
fixed-rate basis, thus reducing the impact of fluctuations in interest rates on
future income. The average interest rate on the tax-exempt mortgage bond
financings after giving effect to the swap agreements and including all fees was
5.64% in the first quarter of 1998. The swap agreements terminate from 2002 to
2007.
DEBT STRUCTURE AT MARCH 31, 1998
<TABLE>
<CAPTION>
Debt Weighted Average
(dollars in millions) Balance Interest Rate
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed rate debt
Tax-exempt mortgage bond financings $324.7 5.73%
Conventional mortgage financings 131.6 7.12%
Mortgage notes payable to The Irvine Company 50.2 5.75%
Tax-exempt assessment district debt 5.4 6.27%
Unsecured notes payable 99.2 7.10%
- --------------------------------------------------------------------------------------------------------
Total fixed rate debt 611.1 6.26%
- --------------------------------------------------------------------------------------------------------
Variable rate debt
Tax-exempt assessment district debt 16.1 3.03%
- --------------------------------------------------------------------------------------------------------
Total variable rate debt 16.1 3.03%
- --------------------------------------------------------------------------------------------------------
Total debt $627.2 6.17%
- --------------------------------------------------------------------------------------------------------
</TABLE>
Page 20
<PAGE> 24
DEFERRED FINANCING COSTS
<TABLE>
<CAPTION>
Weighted Average
Balance at Remaining Term
(dollars in millions) March 31, 1998 (in years)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest rate buy-downs on
conventional mortgage financings $ 7.9 8.7
Loan origination costs and other 10.7 23.4
- -----------------------------------------------------------------------------------------------------------------
Total $18.6 17.1
=================================================================================================================
</TABLE>
OPERATING ACTIVITIES: Cash provided by operating activities was $29.4 million
and $21.2 million in the first three months of 1998 and 1997, respectively. Cash
provided by operating activities increased in the first quarter of 1998 compared
to the same period in 1997 primarily due to higher revenues from newly developed
and acquired apartment units, as well as an increase in revenues within the
Company's stabilized portfolio achieved through higher rental rates.
INVESTING ACTIVITIES: Cash used in investing activities was $30.4 million and
$29.0 million in the first three months of 1998 and 1997, respectively. This
increase resulted from increased development activity in the first three months
of 1998.
FINANCING ACTIVITIES: Cash provided by financing activities was $50.8 million
and $34.8 million in the first three months of 1998 and 1997, respectively. The
Operating Partnership received net proceeds of $144 million from the issuance of
8 1/4% Series A Preferred Limited Partner Units in the first quarter of 1998.
These proceeds were used to pay all outstanding borrowings under the credit
facility. Additionally, the Company paid $19.3 million in distributions in the
first three months of 1998 compared to $15.1 million in the first three months
of 1997.
CAPITAL EXPENDITURES
Capital expenditures consist of capital improvements and investments in real
estate assets. Capital improvements to operating real estate assets totaled $0.7
million and $0.5 million in the first three months of 1998 and 1997,
respectively. Capital investments in real estate assets totaled $29.6 million
and $28.5 million in the first three months of 1998 and 1997, respectively, and
consist of capital investments in new developments, nonrecurring capital
replacements and land purchases on and off the Irvine Ranch.
RECURRING CAPITAL REPLACEMENTS WITHIN ALL COMMUNITIES STABILIZED: The following
table details expenditures for recurring capital replacements for all
communities for the first three months of 1998.
<TABLE>
<CAPTION>
Three Months Ended
(dollars in thousands) March 31, 1998
- ------------------------------------------------------------------------------------
<S> <C>
Carpet replacements $299
Exterior painting, siding and stucco 72
Upgrades, renovations and major building items 3
Appliances, water heaters and air conditioning 40
Roofing, concrete and pavement 93
Equipment and other 219
- ------------------------------------------------------------------------------------
Total $726
====================================================================================
</TABLE>
Page 21
<PAGE> 25
RECURRING CAPITAL REPLACEMENTS WITHIN COMMUNITIES STABILIZED MORE THAN ONE YEAR:
Expenditures for recurring capital replacements within communities stabilized
more than one year totaled $0.7 million and $0.5 million in the first three
months of 1998 and 1997, respectively. Average recurring capital replacements
per unit were $53 and $35 in the first three months of 1998 and 1997,
respectively. Expenditures for recurring capital replacements for the full year
1998 are expected to be similar to the full year 1997 levels. The Company has a
policy of capitalizing expenditures related to new assets, acquisitions, the
material enhancement of the value of an existing asset, or the substantial
extension of an existing asset's useful life.
CAPITAL INVESTMENTS IN NEW DEVELOPMENT: Currently, the Company has eight
apartment communities under development that will require total expenditures of
approximately $320 million, of which $189.0 million had been incurred at March
31, 1998. Funding for these developments is expected to come from the Operating
Partnership's $250 million unsecured revolving credit facility (of which $250
million was available as of March 31, 1998), debt offerings of the Operating
Partnership, preferred securities offerings of the Trust and cash on hand. In
addition, the Company may issue other equity securities as discussed in the
Liquidity section.
CONSTRUCTION INFORMATION
<TABLE>
<CAPTION>
Estimated Total
Commencement Initial Estimated
Commencement of Leasing Stabilized Costs
Apartment Community Location Units Of Construction Activity Occupancy (in millions)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
The Colony(1) Newport Center, Newport Beach 245 7/96 4Q '97 1Q '99 $45.6
Santa Rosa II(1) Westpark II, Irvine 207 12/96 4Q '97 3Q '98 27.0
Rancho Santa Fe(1) Tustin Ranch, Tustin 316 2/97 4Q '97 1Q '99 39.0
The Hamptons Cupertino 342 5/97 2Q '98 2Q '99 51.9
Sonoma Oak Creek, Irvine 196 11/97 3Q '98 3Q '99 25.4
Brittany Oak Creek, Irvine 393 12/97 1Q '99 2Q '00 44.5
Stonecrest San Diego County 336 4/98 1Q '99 4Q '99 42.4
The Colony at Aventine San Diego County 232 5/98 3Q '99 1Q '00 44.2
- -----------------------------------------------------------------------------------------------------------------------------------
Total 2,267 $320.0
===================================================================================================================================
</TABLE>
(1) These three properties were in lease-up at March 31, 1998, with 334 units
delivered and 302 units occupied.
The timing of future commencement and completion of construction, the
commencement of leasing activity and initial stabilized occupancy and estimated
costs of apartment communities that are in development are only estimates.
Actual results will depend on numerous factors, many of which are beyond the
control of the Company. These include the extent and timing of economic growth
in the Company's rental markets; future trends in the pricing of construction
materials and labor; product design changes; entitlement decisions by local
government authorities; weather patterns; changes in interest rate levels; and
other changes in capital markets. No assurance can be given that the timing or
estimates set forth in the foregoing table will not vary substantially from
actual results.
NONRECURRING CAPITAL REPLACEMENTS: Nonrecurring capital expenditures consist of
special programs to upgrade and enhance a community to achieve higher rental
rates. Expenditures for nonrecurring capital replacements totaled $2.7 million
for the first three months of 1998. These expenditures were made to two
properties (Promontory Point and The Villas of Renaissance). There were no such
expenditures made in the first three months of 1997. Expenditures for
nonrecurring capital expenditures at Promontory Point and The Villas of
Renaissance are expected to be approximately $5 million for 1998.
SUBSEQUENT CAPITAL INVESTMENT IN NEW DEVELOPMENT. On April 30, 1998, the Company
purchased from an unrelated third party, a 119-unit, high-rise apartment
building under renovation located in Los Angeles County for $44.1 million.
Page 22
<PAGE> 26
IRVINE RANCH MASTER PLAN
The Irvine Company is a real estate investment and community development firm
engaged in the long-term development of the Irvine Ranch. The urbanization of
the Irvine Ranch began in the 1960s with the adoption of the pioneering
comprehensive Master Plan for future community development which originally
constituted a large map of the Irvine Ranch and a series of supporting maps
detailing land uses. Subsequently, The Irvine Company worked closely with the
various local jurisdictions which govern the Irvine Ranch to adopt general plans
for the future development of their jurisdictions. The Irvine Company's overall
Master Plan was refined to accord with the approved general plans and the
residential, commercial, industrial, environmental and aesthetic balance desired
by each jurisdiction. As a result, today the Irvine Ranch Master Plan is a
compilation of the various interlocking general plans described above. The
Irvine Company continuously engages in planning activities and the Master Plan
refinement process is ongoing. The Irvine Company works closely with local
government representatives, community residents and other civic and
environmental groups to obtain the necessary local support and entitlement for
its developments. The goal of the Master Plan was and remains to create
innovative urban and suburban environments through the well-planned, coordinated
development of residential communities and employment centers (which include
major business and retail centers, and research and development and industrial
parks) as well as civic, cultural, recreational, educational and other
supportive facilities, all with an emphasis on improving the quality of life and
achieving long-term balanced regional economic growth.
The success of the Irvine Ranch as a master-planned development is in the large
part attributable to the early creation of a broad employment base. The Irvine
Company has emphasized the promotion of job creation on the Irvine Ranch and has
been involved in creating four major employment centers on the Irvine Ranch,
each easily accessible by apartment residents and the surrounding area. The
Irvine Company has been the sole developer of the Irvine Spectrum, a 5,000-acre
research, technology and employment center which houses more than 2,200
companies and approximately 44,000 employees and includes 25 million square feet
of research and development and office space. The Irvine Business Complex, which
surrounds the John Wayne airport, houses over 100,000 employees and includes
more than 24 million square feet of office and other commercial space and over
14 million square feet of industrial space. Newport Center contains over 4.4
million square feet of office space, a 1.3 million square-foot regional mall
(Fashion Island), a tennis club and two country clubs. In addition, The Irvine
Company donated land to the University of California at Irvine, a 1,489-acre
campus which currently has more than 17,000 students and 6,000 employees. The
proximity of the Irvine Ranch Properties to these employment centers makes them
attractive residential locations.
YEAR 2000
Management has examined the Year 2000 issues and believes that they will not
have a material effect on the business, results of operations or financial
condition of the Company.
IMPACT OF INFLATION
The Company's business is affected by general economic conditions, including the
impact of inflation and interest rates. Substantially all of the Company's
leases allow, at time of renewal, for adjustments in the rent payable
thereunder, and thus may enable the Company to seek increases in rents.
Substantially all leases are for a period of one year or less. The short-term
nature of these leases generally serves to minimize the risk to the Company of
the adverse effects of inflation. For construction, the Company has entered into
various contracts for the development and construction of new apartment
communities. These are fixed-fee contracts and thus partially insulate the
Company from inflationary risk.
Page 23
<PAGE> 27
FUNDS FROM OPERATIONS
The Company generally considers funds from operations ("FFO") a useful measure
of performance for an equity REIT. The Company computes FFO in accordance with
standards established by the National Association of Real Estate Investment
Trusts ("NAREIT"). FFO is defined as net income (computed in accordance with
generally accepted accounting principles), excluding gains or losses from debt
restructuring and sales of property, plus depreciation and amortization of real
estate assets, and after adjustments for unconsolidated partnerships and joint
ventures. Other REITs may not use this definition of FFO. FFO should be
considered in conjunction with net income as presented in the Company's
Consolidated Financial Statements and Notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997. FFO should not
be considered an alternative to net income as an indication of the Company's
performance and is not indicative of cash available to fund all cash flow needs.
FFO does not represent cash flows from operating, investing or financing
activities as defined by generally accepted accounting principles.
CALCULATION OF FFO
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(in thousands, unaudited) 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 6,816 $ 6,111
Add:
Depreciation and amortization of real estate assets 7,908 6,697
Minority interest in income 8,522 7,408
- ----------------------------------------------------------------------------------------------
Funds from operations $23,246 $20,216
==============================================================================================
</TABLE>
SUPPLEMENTAL INFORMATION
The following section provides supplemental operating information. The
information is unaudited and is provided as a supplement to the accompanying
financial statements and management's discussion and analysis. It should be read
in conjunction with the Consolidated Financial Statements and Notes thereto
included herein and in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997. Operating results for the three months ended March 31,
1998 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998.
Page 24
<PAGE> 28
Irvine Apartment Communities, Inc.
Irvine Apartment Communities, L.P.
IAC Capital Trust
SELECTED OPERATING DATA
<TABLE>
<CAPTION>
Three Months Ended March 31,
(unaudited) 1998 1997 Difference
==============================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UNIT DATA
- ------------------------------------------------------------------------------------------------------------------------------
Average rentable units during the period 15,262 13,769 1,493
Rentable units at the end of the period 15,325 13,843 1,482
- ------------------------------------------------------------------------------------------------------------------------------
COMMUNITIES STABILIZED MORE THAN ONE YEAR (A)
- ------------------------------------------------------------------------------------------------------------------------------
Average physical occupancy 94.1% 94.9% (0.8%)
Average economic occupancy (b) 92.1% 93.4% (1.3%)
Average monthly gross scheduled rent per unit (c) $ 1,143 $ 1,080 5.9%
Average monthly rental income per occupied unit $ 1,125 $ 1,070 5.1%
- ------------------------------------------------------------------------------------------------------------------------------
COMMUNITIES STABILIZED LESS THAN ONE YEAR (D)
- ------------------------------------------------------------------------------------------------------------------------------
Average physical occupancy 94.0%
Average economic occupancy (b) 93.4%
Average monthly gross scheduled rent per unit $ 1,455
Average monthly rental income per occupied unit $ 1,464
- ------------------------------------------------------------------------------------------------------------------------------
LEASE-UP AND ACQUISITION COMMUNITIES (E)
- ------------------------------------------------------------------------------------------------------------------------------
Operating revenues (rental income and other income) - in thousands $ 4,547
Units in acquired community 923
Units delivered in the period 189
Cumulative units delivered at the end of the period 334
Units occupied in lease-up communities at the end of the period 302
Average units occupied in lease-up communities during the period 209
- ------------------------------------------------------------------------------------------------------------------------------
OTHER FINANCIAL DATA (IRVINE APARTMENT COMMUNITIES, INC.)
- ------------------------------------------------------------------------------------------------------------------------------
Dividends paid per share $ 0.375 $ 0.365
Funds from operations (FFO) payout ratio 72.4% 76.2%
==============================================================================================================================
</TABLE>
Footnotes:
(a) Financial results are for 48 properties totaling 13,541 units for comparable
periods of 1998 and 1997.
(b) Rental income divided by rental income plus vacant units at market rent.
(c) Rental income plus vacant units at market rent.
(d) Financial results are for two properties totaling 527 units that achieved
stabilized occupancy during 1997. No year over year comparison is provided
since the properties were not all stabilized for comparable periods of 1997.
(e) Financial results are for three properties that started lease-up at various
dates in late 1997 and the 923-unit Villas of Renaissance apartment
community purchased on June 30, 1997.
Page 25
<PAGE> 29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the first quarter of 1998, the Operating Partnership sold to
affiliates of The Irvine Company the following units of common limited
partnership interest ("common L.P. units") in the Operating
Partnership pursuant to Section 4(2) of the Securities Act of 1933:
An aggregate of 34,558 common L.P. units were sold in
February 1998 for $1.0 million in cash at prices ranging
from $30.0430 to $30.6560 per common L.P. unit, in
connection with The Irvine Company's exercise of its
proportional purchase rights under the Second Amended and
Restated Agreement of Limited Partnership of the Operating
Partnership with respect to sales of the Company's common
stock pursuant to its Dividend Reinvestment and Additional
Cash Investment Plan.
Each of the foregoing common L.P. units is exchangeable for common
stock of the Company on a one-for-one basis, subject to adjustment and
certain limitations set forth in the Second Amended and Restated
Agreement of Limited Partnership of the Operating Partnership.
In addition, in February 1998, the Company sold to The
Irvine Company pursuant to Section 4(2) of the Securities
Act of 1933, 5,847 shares of Common Stock for $0.2 million
in cash at prices ranging from $30.0430 to $30.6560 in
connection with The Irvine Company's exercise of its
proportional purchase rights under the Miscellaneous Rights
Agreement with respect to sales of the Company's Common
Stock pursuant to the Dividend Reinvestment and Additional
Cash Investment Plan.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
Page 26
<PAGE> 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. 10.17: Irvine Apartment Management Company Partnership
Agreement dated March 12, 1998 by and between
Apartment Management Company, LLC and Western
National Securities d/b/a Western National
Property Management ("WNPM").
Exhibit No. 10.18: Management Agreement dated as of April 1, 1998 by
and between Irvine Apartment Communities, L.P.
and Irvine Apartment Management Company.
Exhibit No. 10.19: Guaranty dated as of March 12, 1998 by Irvine
Apartment Communities, L.P. in favor of WNPM and
the WNPM Indemnities (as defined in Exhibit No.
10.17 hereto).
Exhibit No. 27.1: Financial Data Schedule for Irvine Apartment
Communities, Inc.
Exhibit No. 27.2: Financial Data Schedule for Irvine Apartment
Communities, L.P.
Exhibit No. 27.3: Financial Data Schedule for IAC Capital Trust.
(b) During the first quarter of 1998, the Company and the Trust
filed no current reports on Form 8-K.
Page 27
<PAGE> 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
IRVINE APARTMENT COMMUNITIES, INC.
Date: May 13, 1998 By: /s/ James E. Mead
--------------------------------------------
James E. Mead
Senior Vice President,
Chief Financial Officer and Secretary
By: /s/ Shawn Howie
--------------------------------------------
Shawn Howie
Vice President, Corporate Finance and
Controller (Principal Accounting Officer)
IRVINE APARTMENT COMMUNITIES, L.P.
By: Irvine Apartment Communities, Inc.,
its sole general partner
Date: May 13, 1998 By: /s/ James E. Mead
--------------------------------------------
James E. Mead
Senior Vice President,
Chief Financial Officer and Secretary
By: /s/ Shawn Howie
--------------------------------------------
Shawn Howie
Vice President, Corporate Finance and
Controller (Principal Accounting Officer)
IAC CAPITAL TRUST
Date: May 13, 1998 By: /s/ James E. Mead
--------------------------------------------
James E. Mead
Regular Trustee
Page 28
<PAGE> 32
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
10.17 Irvine Apartment Management Company Partnership Agreement dated March
12, 1998 by and between Apartment Management Company, LLC and Western
National Securities d/b/a Western National Property Management ("WNPM").
10.18 Management Agreement dated as of April 1, 1998 by and between Irvine
Apartment Communities, L.P. and Irvine Apartment Management Company.
10.19 Guaranty dated as of March 12, 1998 by Irvine Apartment Communities,
L.P. in favor of WNPM and the WNPM Indemnities (as defined in Exhibit
No. 10.17 hereto).
27.1 Financial Data Schedule for Irvine Apartment Communities, Inc.
27.2 Financial Data Schedule for Irvine Apartment Communities, L.P.
27.3 Financial Data Schedule for IAC Capital Trust.
</TABLE>
<PAGE> 1
EXHIBIT 10.17
IRVINE APARTMENT MANAGEMENT COMPANY
PARTNERSHIP AGREEMENT
March 12, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I
FORMATION OF PARTNERSHIP................................ 1
1.2 Formation and Effective Date of Agreement............................. 5
1.3 Name and Principal Place of Business.................................. 5
1.4 Intentionally Deleted................................................. 6
1.5 Agreement............................................................. 6
1.6 Business.............................................................. 6
1.7 Term.................................................................. 6
1.8 Formation Costs....................................................... 6
ARTICLE II
PARTNERS........................................ 7
2.1 Limited Liability..................................................... 7
2.2 Initial Partners...................................................... 7
2.3 Admission of Substitute Partners...................................... 7
2.4 Resignation or Withdrawal of a Partner................................ 7
2.5 Transactions with the Partnership..................................... 7
2.6 Partners Are Not Agents; No Management Authority...................... 7
ARTICLE III
CONTRIBUTIONS TO CAPITAL................................ 8
3.1 Initial Contributions................................................. 8
3.2 Additional Contributions.............................................. 8
3.3 AMC Loan Request...................................................... 8
3.4 Funding Notice........................................................ 8
3.6 Other Effects. ...................................................... 10
3.7 Interest.............................................................. 10
ARTICLE IV
MANAGEMENT OF THE PARTNERSHIP............................. 10
4.3 Board of Directors' Procedures........................................ 13
4.4 Delegation to Managing General Partner................................ 13
4.5 No Compensation....................................................... 14
4.6 Amendment of Filings.................................................. 15
4.7 Annual Business Plan and Annual Budget................................ 15
4.8 Removal of Managing General Partner................................... 16
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE V
NOTICES........................................ 16
5.1 Notices............................................................... 16
5.2 Waiver of Notice...................................................... 16
ARTICLE VI
ACCOUNTING AND RECORDS................................. 16
6.1 Financial and Tax Reporting........................................... 16
6.2 Supervision; Inspection of Books...................................... 16
6.3 Reliance on Records and Books of Account.............................. 19
6.4 Tax Returns........................................................... 19
6.5 Bank Accounts......................................................... 20
6.6 Accounting Decisions and Reliance on Others........................... 20
6.7 Tax Matters for the Partnership Handled by Tax Matters Partner........ 20
ARTICLE VII
ALLOCATIONS...................................... 20
7.1 Allocation of Net Income or Net Loss.................................. 20
7.2 Special Tax Provisions................................................ 20
ARTICLE VIII
DISTRIBUTIONS..................................... 21
8.1 Distributions......................................................... 21
8.2 Distributions in Kind................................................. 22
8.3 Restriction on Distributions and Withdrawals.......................... 22
8.4 No Other Withdrawals.................................................. 23
ARTICLE IX
TRANSFER OF PARTNERSHIP INTERESTS........................... 23
9.1 Transfer.............................................................. 23
9.2 Rights of Assignees................................................... 23
9.3 Call.................................................................. 23
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE X
INDEMNIFICATION AND LIMITATION OF LIABILITY...................... 24
10.1 Indemnification....................................................... 24
10.2 Limitation of Liability............................................... 27
ARTICLE XI
TERMINATION; DEFAULT.................................. 27
11.1 Termination........................................................... 27
11.2 Authority to Wind Up.................................................. 27
11.3 Winding Up and Certificate of Dissolution............................. 28
11.4 Distribution of Assets................................................ 28
11.5 Deficit Capital Account............................................... 28
11.7 No Action for Dissolution............................................. 29
ARTICLE XII
REIT SHARES...................................... 30
12.1 REIT Option granted to Initial Optionees.............................. 30
12.2 REIT Options to Additional Optionees.................................. 31
12.3 Exercise of Options................................................... 31
12.4 No Change to Partnership Percentages due to REIT Share
Contributions......................................................... 32
ARTICLE XIII
MISCELLANEOUS..................................... 32
13.1 Amendment............................................................. 32
13.2 Withholding Taxes..................................................... 32
13.3 Further Assurances.................................................... 32
13.4 Binding Effect........................................................ 33
13.5 Governing Law......................................................... 33
13.6 Entire Agreement...................................................... 33
13.7 Counterparts.......................................................... 33
13.8 Parties in Interest................................................... 33
13.9 Pronouns; Statutory References........................................ 33
13.10 Headings.............................................................. 33
13.11 Interpretation........................................................ 33
13.12 References to this Agreement.......................................... 33
</TABLE>
iii
<PAGE> 5
<TABLE>
<CAPTION>
Page
----
<S> <C>
13.13 Exhibits.............................................................. 33
13.14 Severability.......................................................... 34
13.15 Attorney Fees......................................................... 34
13.16 Time is of the Essence................................................ 34
13.17 Remedies Cumulative................................................... 34
13.18 Confidentiality and Publicity......................................... 34
</TABLE>
iv
<PAGE> 6
PARTNERSHIP AGREEMENT OF
IRVINE APARTMENT MANAGEMENT COMPANY
THIS PARTNERSHIP AGREEMENT (this "AGREEMENT") is entered into effective
as of March 12, 1998, by and between APARTMENT MANAGEMENT COMPANY, LLC, a
Delaware limited liability company ("AMC"), and WESTERN NATIONAL SECURITIES
D/B/A WESTERN NATIONAL PROPERTY MANAGEMENT, a California corporation ("WNPM").
ARTICLE I
FORMATION OF PARTNERSHIP
1.1 DEFINED TERMS: When used in this Agreement, the following terms have
the meanings set forth below:
"ACT" means the general partnership laws of the State of California, as
amended from time to time.
"ACCOUNTING PERIOD" means the period beginning on the 1st of January and
ending on the 31st of December; provided, however, the first Accounting Period
will commence on the date of formation of the Partnership and will end on
December 31, 1998; and provided, further, a new Accounting Period will commence
on any date on which an additional or Substitute Partner is admitted to the
Partnership or a Partner ceases to be a Partner for any reason.
"AFFILIATE" means any Person directly or indirectly controlling,
controlled by, or under common control with another Person. The term "control,"
as used in the immediately preceding sentence, means, with respect to a
corporation or limited liability company the right to exercise, directly or
indirectly, fifty percent (50%) or more of the voting rights attributable to the
controlled corporation or limited liability company, and, with respect to any
other Person, the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of the controlled entity
whether by contract or otherwise.
"AGREEMENT" means this Partnership Agreement, as the same may be amended
from time to time.
"AMC REPRESENTATIVES" means the four (4) representatives designated by
AMC, from time to time, to serve on the Board of Directors.
1
<PAGE> 7
"ASSETS" means all apartment projects owned by IAC during the term of
the Property Management Agreement and located on the Irvine Ranch in Orange
County, California, the Villas of Renaissance located in San Diego County,
California, and, to the extent practical (as determined by IAC in its sole and
absolute discretion and without any obligation to do so), any other apartment
projects located in Southern California and owned by AMC during the term of the
Property Management Agreement. WNPM acknowledges that in connection with any
acquisition or development of projects other than the Assets, IAC may appoint
another Person to act as property manager of such projects.
"ASSIGNEE" means a transferee of all or any portion of a Partner's
Partnership Interest who has not been admitted as a Substitute Partner.
"BANKRUPTCY" means with respect to any Person: (a) the filing of an
application by a Partner for, or such Partner's consent to, the appointment of a
trustee, receiver, or custodian of such Partner's other assets; (b) the entry of
an order for relief with respect to a Partner in proceedings under the United
States Bankruptcy Code, as amended or superseded from time to time; (c) the
making by a Partner of a general assignment for the benefit of creditors; (d)
the entry of an order, judgment, or decree by any court of competent
jurisdiction appointing a trustee, receiver, or custodian of the assets of a
Partner unless the proceedings and the person appointed are dismissed within
ninety (90) days; or (e) the failure by a Partner generally to pay such
Partner's debts as the debts become due within the meaning of Section 303(h)(1)
of the United States Bankruptcy Code, as determined by the Bankruptcy Court, or
the admission in writing of such Partner's inability to pay its debts as they
become due.
"BOARD OF DIRECTORS" means a committee composed of the AMC
Representatives and the WNPM Representatives, provided, however, if AMC or WNPM
commits an Event of Default under this Agreement, the defaulting Partner's
respective representatives on the Board of Directors will be immediately
removed; and provided, further, all of the WNPM Representatives shall be removed
at such time as AMC exercises the Call and purchases WNPM's Partnership Interest
as provided in Section 9.3.
"BUDGET" means an operating budget for the Partnership prepared by
Managing General Partner and approved by the Board of Directors, and any
revisions thereto approved by the Board of Directors.
"BUSINESS PLAN" means the annual business plan for the Partnership
prepared by Managing General Partner and approved by the Board of Directors, and
any revisions thereto approved by such Board of Directors.
"CALL" means a right of AMC to purchase WNPM's Partnership Interest on
the terms and conditions set forth in Section 9.3 of this Agreement.
2
<PAGE> 8
"CAPITAL ACCOUNT" means a capital account for each Partner which is
equal to the:
(i) the amount of such Partner's initial capital
contributions at formation; increased by
(ii) the aggregate capital contributions made, or deemed
to be made, by such Partner after formation (including the then fair market
value of any REIT shares contributed by AMC, which shall increase only AMC's
Capital Account); increased by
(iii) all items of income and gain allocated to such
Partner; decreased by
(iv) the amount of cash (or agreed value of property) of
cash or property distributions made, or deemed to be made, to such Partner
(including the cash distributed to AMC when a REIT Option is exercised, which
distribution shall be made only to AMC); and decreased by
(v) all items of deduction or loss allocated to such
Partner (including any deduction allocated to AMC at such time as a REIT Option
is exercised, which deduction shall be allocated only to AMC).
"CERTIFICATE" means the Certificate of Partnership recorded in the
Official Records of Orange County, California and San Diego County, California,
and as amended from time to time.
"CODE" means the Internal Revenue Code of 1986, as amended from time to
time.
"FISCAL YEAR" means the period from January 1 to December 31 of each
year, or as otherwise required by law.
"GP UNITS" means the general partnership units issued by IAC pursuant
to, and subject to the terms and conditions set forth in IAC's partnership
agreement, as revised or amended from time to time.
"IAC" means Irvine Apartment Communities, L.P., a Delaware limited
partnership.
"INDEMNIFICATION AMOUNT" means either the AMC Indemnification Amount or
WNPM Indemnification Amount, together with interest thereon at a rate per annum
equal to the Prime Rate, plus one percent (1%), from the date due until paid in
full.
"INITIAL OPTIONEES" means, collectively, Michael Hayde, Jerry Glass,
David Stone, Jeffrey Scott, Stephen Donohue, Rex DeLong and John Atherton.
"MANAGING GENERAL PARTNER" means WNPM, or any successor appointed by the
Board of Directors in accordance with the terms of this Agreement.
3
<PAGE> 9
"NET CASH FLOW FROM OPERATIONS" means, for any period, the gross revenue
actually received by the Partnership during such period, minus (1) all costs of
operation of the Partnership actually incurred during such period, (2) such
reserves as the Board of Directors determines are necessary to meet future
obligations, including, without limitation, contingent obligations, and (3)
amounts then due and payable with respect to any loans made to the Partnership
by third Persons.
"NET INCOME OR NET LOSS" means for any Accounting Period the amount
computed on an accrual basis as of the last day thereof of the net income or
loss computed under federal income tax principles and as adjusted pursuant to
the Treasury Regulations promulgated under Section 704(b) of the Code.
"OPTION PRICE" means, as to a REIT Option, the option exercise price per
REIT share as determined by the REIT Compensation Committee at the time of the
grant of such REIT Option.
"PARTNER" means each Person who (a) is an initial signatory to this
Agreement, has been admitted to the Partnership as a Partner in accordance with
the Certificate or this Agreement or is a Substitute Partner and (b) has not
resigned, withdrawn, been expelled or dissolved.
"PARTNERSHIP" means the California general partnership formed by this
Agreement.
"PARTNERSHIP INTEREST" means the rights of a Partner in the Partnership,
including the Partner's economic interest, any right to vote or participate in
management, and any right to information concerning the business and affairs of
the Partnership. All Partnership Interests are personal property.
"PARTNERSHIP PERCENTAGE" means the percentage ownership of a Partner in
the Partnership. The initial Partnership Percentage of AMC is fifty-one percent
(51%) and the initial Partnership Percentage of WNPM is forty-nine percent
(49%).
"PERSON" means a natural person, partnership (whether general or
limited), limited liability company, trust, estate, association, corporation,
custodian, nominee or any other individual or entity in its own or
representative capacity.
"PRIME RATE" means a rate of interest equal to the "prime rate"
announced, from time to time, by Bank of America NT & SA. For purpose of
calculating interest under this Agreement, the Prime Rate will change when and
as Bank of America announces a change in its prime rate.
"PROPERTY MANAGEMENT AGREEMENT" means that certain Property Management
Agreement between IAC and the Partnership providing for the management and
operation of the Assets, as amended from time to time.
4
<PAGE> 10
"REIT" means Irvine Apartment Communities, Inc., a Maryland corporation,
and general partner of IAC.
"REIT COMPENSATION COMMITTEE" means the compensation committee of the
REIT's board of directors, as such committee is constituted from time to time.
"REIT OPTION" means an option to acquire shares of the REIT issued
pursuant to Article XII.
"SUBSTITUTE PARTNER" means an Assignee who has been admitted to all the
rights of membership pursuant to this Agreement.
"TAX MATTERS PARTNER" is AMC or any successor appointed by the Board of
Directors in accordance with the terms of this Agreement.
"TREASURY REGULATIONS" means regulations issued pursuant to the Code.
"WNPM REPRESENTATIVES" means the three (3) representatives designated by
WNPM, from time to time, to serve on the Board of Directors.
1.2 FORMATION AND EFFECTIVE DATE OF AGREEMENT. The Partners hereby form
a general partnership pursuant to the provisions of the Act. The Partners agree
to execute all documents and to undertake all other acts, as reasonably may be
deemed necessary by any Partner, in order to comply with the requirements of the
laws of the State of California (and all other applicable jurisdictions) for the
formation, continuation, registration, qualification and operation of a
partnership in accordance with and subject to the terms of this Agreement. The
rights and liabilities of the Partners will be determined pursuant to the Act
and this Agreement. To the extent the rights or obligations of any Partner are
different by reason of any provision of this Agreement than they would be in the
absence of such provision, this Agreement will control to the extent permitted
by the Act. The relationship of the parties under this Agreement shall commence
on the effective date hereof, and the Partnership shall dissolve and terminate
in accordance with the provisions of this Agreement. If the Department of Real
Estate in the State of California allows limited liability companies to hold
real estate licenses for the management of apartment projects, the Partners
shall dissolve the Partnership in accordance with the terms of this Agreement
and form a Delaware limited liability company on substantially the same terms
and conditions set forth in this Agreement, so long as the Partners can do so
with no material adverse income tax consequences.
1.3 NAME AND PRINCIPAL PLACE OF BUSINESS. Unless and until amended in
accordance with this Agreement and the Act, the name of the Partnership is
"IRVINE APARTMENT MANAGEMENT COMPANY" The business of the Partnership may be
conducted under that name or, upon compliance with applicable laws, any other
name that the Board of Directors deems appropriate or advisable. The principal
place of business of the Partnership in California is 8 Executive Circle,
Irvine, California 92614, or in such other place or places as the Board of
Directors from time to time determines. Upon the effective date of this
5
<PAGE> 11
Agreement, the Partners shall sign, file and publish in the appropriate manner a
Certificate of Fictitious Name as required by Sections 17900 and 17930 of the
California Business and Professions Code, and shall sign, acknowledge and record
a Certificate of Partnership in the Official Records of Orange County, San Diego
County and in every other County in which the Partnership does business. The
Managing General Partner shall file any other filings, and any amendments
thereto, that the Board of Directors considers appropriate or advisable.
1.4 INTENTIONALLY DELETED.
1.5 AGREEMENT. For and in consideration of the mutual covenants herein
contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Partners executing this
Agreement hereby agree to the terms and conditions of this Agreement, as it may
from time to time be amended. It is the express intention of the parties hereto
that this Agreement be the sole statement of agreement between or among them
with respect to the Partnership.
1.6 BUSINESS. The sole purpose of the Partnership is to manage, operate
and lease the Assets for the benefit of IAC, as the owner of the Assets, and
pursuant to the terms of the Property Management Agreement, and to do any and
all acts and things necessary, appropriate, proper, advisable, incidental to or
convenient for the furtherance and accomplishment of the business, objectives,
and purposes herein set forth. The Partnership shall conduct no other business
unless the Board of Directors otherwise directs in accordance with Section 4.2.
1.7 TERM. The term of the Partnership will begin upon the later of the
execution of this Agreement or the filing of any document required by the Act to
be filed in connection with the formation of the Partnership. Unless the
Partners otherwise agree and absent a termination by a Partner upon the
occurrence of an Event of Default, the term of the Partnership will continue
until the expiration or earlier termination of the term of the Property
Management Agreement and for so long thereafter as the Board of Directors may
determine, in its reasonable discretion, is in the best interests of the
Partnership and its Partners, but in no event beyond December 31, 2018, unless
all of the Partners otherwise agree.
1.8 FORMATION COSTS. The reasonable costs of the Partners incurred prior
to the date hereof in connection with due diligence and the negotiation and
formation of the Partnership (collectively "FORMATION COSTS") shall be
reimbursed by the Partnership to the Partners within thirty (30) days after the
receipt of appropriate invoices evidencing that such Formation Costs have been
incurred by the Partner seeking reimbursement.
6
<PAGE> 12
ARTICLE II
PARTNERS
2.1 LIMITED LIABILITY. Except as required under the Act or as expressly
set forth in this Agreement, no Partner is personally liable for any debt,
obligation, or liability of the Partnership, whether that liability or
obligation arises in contract, tort, or otherwise.
2.2 INITIAL PARTNERS. The Initial Partners of the Partnership are AMC
and WNPM, each of which is admitted to the Partnership as a Partner as of the
date this Agreement becomes effective.
2.3 ADMISSION OF SUBSTITUTE PARTNERS. Notwithstanding any other
provision of this Agreement, no Assignee of a Partnership Interest may be
admitted as a Substitute Partner without the prior written consent of at least
five (5) members of the Board of Directors (unless, at the relevant time, there
are fewer than seven (7) members of the Board of Directors, then, by a majority
of the members of the Board of Directors in accordance with Section 4.2). If so
admitted, the Substitute Partner will have all the rights and powers and will be
subject to all the restrictions and liabilities of the Partner which originally
assigned the Partnership Interest. The admission of a Substitute Partner does
not release any Partner from liability to the Partnership that may have existed
prior to such substitution.
2.4 RESIGNATION OR WITHDRAWAL OF A PARTNER. Except as otherwise
specifically required by the Act or this Agreement, and subject to the
provisions for transfer contained in Article X, no Partner may resign or
withdraw from membership in the Partnership or withdraw its interest in the
capital of the Partnership.
2.5 TRANSACTIONS WITH THE PARTNERSHIP. A Partner may not lend money to
or transact business with the Partnership except in accordance with the terms of
this Agreement. Subject to any limitations set forth in this Agreement and with
the prior written approval of the Board of Directors after full disclosure of
the Partner's involvement, a Partner may lend money to and transact other
business with the Partnership. Subject to other applicable law, such Partner has
the same rights and obligations with respect thereto as a Person who is not a
Partner. This Section 2.5 does not apply to the making of an AMC Loan.
2.6 PARTNERS ARE NOT AGENTS; NO MANAGEMENT AUTHORITY. Pursuant to this
Agreement and the Certificate, the sole and exclusive right and authority to
manage the business and affairs of the Partnership is vested in the Board of
Directors. The day-to-day management of the Partnership is vested in the
Managing General Partner, subject at all times to the control, policies and
direction of the Board of Directors. Except as expressly authorized by the Board
of Directors or this Agreement or expressly required by the Act, no Partner
shall be an agent of the Partnership nor shall any Partner have the power or
authority to bind or execute any instrument on behalf of the Partnership. The
Partners have no power to participate in the management of the Partnership
except as expressly authorized by this Agreement or the Certificate and except
as expressly required by the Act.
7
<PAGE> 13
ARTICLE III
CONTRIBUTIONS TO CAPITAL
3.1 INITIAL CONTRIBUTIONS. Contemporaneously with the execution of this
Agreement, AMC shall contribute Fifty One Thousand Dollars ($51,000) and WNPM
shall contribute Forty Nine Thousand Dollars ($49,000) to the Partnership.
3.2 ADDITIONAL CONTRIBUTIONS. No Partner is required to contribute or
loan additional capital to the Partnership. No third party shall have the right
under any circumstances to require a Partner to make any additional capital
contributions to the Partnership.
3.3 AMC LOAN REQUEST. If the Board of Directors determines, in its sole
and absolute discretion, that additional capital is needed in order to enable
the Partnership to meet its existing or anticipated obligations, the Board of
Directors shall give written notice to AMC (a "AMC LOAN REQUEST") requesting AMC
loan such additional capital to the Partnership. The AMC Loan Request must set
forth the amount requested to be loaned to the Partnership (which amounts must
be increments of Twenty Thousand Dollars ($20,000) and shall be repaid by the
Partnership in increments of Twenty Thousand Dollars ($20,000) unless AMC
otherwise agrees) and the date by which the proceeds of the loan must be made
available to the Partnership (the "LOAN DATE"). AMC may elect, in its sole and
absolute discretion and without any obligation to do so, to make a loan (an "AMC
LOAN") to the Partnership on the conditions set forth in the AMC Loan Request by
delivering written notice of its election to the Board of Directors. If AMC
fails to deliver written notice of its election to make an AMC Loan within
thirty (30) days after receiving an AMC Loan Request, AMC shall be deemed to
have elected not to make an AMC Loan. Each AMC Loan will bear interest at the
Prime Rate, plus one percent (1%), and must be repaid prior to any distributions
to the Partners pursuant to the Agreement.
3.4 FUNDING NOTICE. If (a) AMC elects not to make (or is deemed to have
elected not to make) an AMC Loan and (b) the Board of Directors determines in
its sole and absolute discretion that the Partners should be requested to make
to make additional contribution of capital to the Partnership in order to enable
the Partnership to meet its existing or anticipated obligations, the Board of
Directors shall give written notice (a "FUNDING NOTICE") to each Partner of the
need for additional capital. Each Funding Notice must contain the following
information:
(a) AMOUNT OF FUNDS REQUIRED. The amount of cash which each of
the Partners is to contribute to the Partnership, which amounts must be in
proportion to each Partner's Partnership Percentage as of the date of the
Funding Notice.
(b) DATE FUNDS REQUIRED. The date (the "FUNDING DATE") by which
the cash is to be contributed to the Partnership.
8
<PAGE> 14
3.5 FAILURE TO MAKE CAPITAL CONTRIBUTION. If any Partner fails to make a
capital contribution to the Partnership in the amount and by the Funding Date
stated in the Funding Notice, the Partner contributing its share of cash in a
timely manner (the "CONTRIBUTING PARTNER") has the right to undertake any one of
the actions set forth in this Section 3.5. Not later than thirty (30) days after
the Funding Date, Contributing Partner shall deliver a written statement to the
Partner which did not contribute its share of cash in a timely manner (the
"NON-CONTRIBUTING PARTNER") of the action the Contributing Partner has elected
to make. The written statement must specify the date (the "EFFECTIVE DATE") when
such action will be taken or will be deemed to have been taken, which date may
not be earlier than ten (10) days, nor later than forty-five (45) days, after
such written statement has been given to the Non-Contributing Partner.
(a) MAKE A CONTRIBUTION ON BEHALF OF NON-CONTRIBUTING PARTNER.
The Contributing Partner may make a contribution on behalf of the
Non-Contributing Partner, in which event each Partner's Partnership Interest
will be adjusted to a respective percentage determined by increasing the
Contributing Partner's Partnership Interest by a percentage equal to the
Adjustment Fraction and decreasing the Non-Contributing Partner's Partnership
Interest by the amount by which the Contributing Partner's Partnership Interest
has been increased. As used in this Section 3.5(a), the "ADJUSTMENT FRACTION" is
a fraction the numerator of which is the aggregate amount of all capital
contributions made by the Contributing Partner to the Partnership and the
denominator of which is the aggregate amount of capital contributions made to
the Partnership by all Partners.
(b) MAKE A LOAN TO NON-CONTRIBUTING PARTNER. The Contributing
Partner may loan cash (a "CONTRIBUTING PARTNER LOAN") to the Non-Contributing
Partner in an amount equal to the Non-Contributing Partner's share of the
capital contribution requested in the Funding Notice. The Contributing Partner
Loan will be secured by the NonContributing Partner's Partnership Interest, will
be nonrecourse to the Non-Contributing Partner and will bear interest at a rate
equal to the Prime Rate, plus one percent (1%). Effective upon a Partner
becoming a Non-Contributing Partner, the Non-Contributing Partner grants to the
Contributing Partner a security interest in its Partnership Interest to secure
its obligation to repay such Contributing Partner Loan and agrees to execute and
deliver such UCC-1 financing statements and assignments of certificates of
membership (or other documents of transfer) as such Contributing Partner may
reasonably request.
9
<PAGE> 15
3.6 OTHER EFFECTS.
(a) If the amount of all Contributing Loans made to a
Non-Contributing Partner in the aggregate equals or exceeds the Non-Contributing
Partner's initial Capital Account balance, the following will occur.
(i) Unless otherwise expressly required by the Act, the
NonContributing Partner will lose its voting and
approval rights under the Act, the Certificate and
this Agreement (including the right of its Board of
Directors' representatives to vote); and
(ii) The Non-Contributing Partner will lose its ability
to actively participate in the management and
operations of the Partnership, including, without
limitation, the right to act as Managing General
Partner, the Contributing Member shall have the
right to replace the Non-Contributing Member's
Board of Directors' representatives and, if the
Non-Contributing Member is WNPM, the effect of
Section 4.2 shall be deemed suspended.
The Non-Contributing Partner will lose these rights until such time as the
Non-Contributing Partner reduces its outstanding Contributing Partner Loans to
an amount less than the NonContributing Partner's initial Capital Account
balance. If the Non-Contributing Partner was removed as Managing General Partner
solely by reason of this Section 3.6, such NonContributing Partner shall be
reinstated as Managing General Partner upon such reduction.
(b) A Contributing Partner shall have no other remedy other than
those provided in Section 3.5 and Section 3.6 with respect to a Partner's
failure to contribute all or any portion of its share of the cash requested
under any Funding Notice.
3.7 INTEREST. Except as provided in this Article III, no Partner is
entitled to any interest with respect to any contributions to the Partnership.
ARTICLE IV
MANAGEMENT OF THE PARTNERSHIP
4.1 BOARD OF DIRECTORS. The Board of Directors has the sole and
exclusive power, authority and control to be exercised by a vote of no less than
four (4) members of the Board of Directors, of all management powers relating to
the operations of the Partnership. No member of the Board of Directors is
entitled to receive any salary or other remuneration or expense reimbursement
from the Partnership solely for his or her service as a member of the Board of
Directors. Except as otherwise expressly provided to the contrary in this
Agreement, the Board of Directors shall act by vote of no less than four (4) of
its members. Without in any way limiting the foregoing and for purposes of
illustration and not
10
<PAGE> 16
limitation, the Board of Directors has the sole power and authority to authorize
and approve the following matters:
(a) The organizational structure of the Partnership,
including, without limitation, the number of staff
positions and general job descriptions for each position.
The initial organizational chart for the Partnership is
attached hereto as Exhibit A;
(b) Hiring and firing of the president or any vice president
of the Partnership;
(c) Compensation (including annual bonuses, if any) for the
president and any vice president or any area manager of
the Partnership and payroll schedules reflecting a range
of compensation for all other positions;
(d) Recommendations, if any, to the REIT Compensation
Committee that an employee be issued, on behalf of the
Partnership, REIT Options;
(e) Any subcontract with a Partner or an Affiliate of a
Partner entered into pursuant to the Property Management
Agreement and any annual renewal of any such subcontract;
(f) Any determination to make an AMC Loan Request;
(g) If AMC elects not to make an AMC Loan, any determination
to deliver a Funding Notice to the Partners;
(h) Any Business Plan;
(i) Any Budget;
(j) Adjusting, settling or compromising any claim against the
Partnership;
(k) The sale, transfer or other conveyance of any Partnership
property unless contemplated in the then current Business
Plan;
(l) The incurrence, directly or indirectly, of any nonrecourse
debt;
(m) Entering into any contracts other than the Property
Management Agreement and contracts contemplated in the
current Budget or Business Plan;
(n) Instituting any litigation other than as contemplated in
the Property Management Agreement;
11
<PAGE> 17
(o) Filing Bankruptcy or otherwise seeking relief under any
insolvency laws;
(p) The termination and liquidation of the Partnership
following a termination or expiration of the Property
Management Agreement; and
(q) Appointment of any successor to WNPM as Managing General
Partner.
Notwithstanding the foregoing, the Board of Directors may establish committees
as they see fit, and delegate to such committees, the Managing General Partner
and other Persons such power and authority as the Board of Directors determine
from time to time is appropriate. Any committee or Person acting within the
scope of its authority will have the power and authority of the Board of
Directors.
4.2 CERTAIN ACTIONS REQUIRING SUPERMAJORITY APPROVAL OF THE BOARD OF
DIRECTORS. Notwithstanding the provisions of Section 4.1, the Board of Directors
may not take any of the following actions without the approval of at least 5 of
the members of the Board of Directors (or if there are fewer than 7 members of
the Board of Directors, by a majority of the members of the Board of Directors).
(a) Amendment, extension or termination of the Property
Management Agreement;
(b) The incurrence, directly or indirectly, of any recourse
debt;
(c) The admission of new Partners and Substitute Partners;
(d) A change in the business purpose of the Partnership as set
forth in Section 1.6 or ceasing to do business prior to
the expiration of the Property Management Agreement;
(e) Any agreement with AMC or The Irvine Company, which
agreements must be on arms-length terms and conditions
comparable to the terms and conditions that would be
included in a similar agreement with a third Party;
(f) The adoption and amendment of the bylaws of the Partners.
The bylaws as adopted by the Board of Directors as of the
date of this Agreement are attached hereto as Exhibit B;
and
(g) Appointment of any successor to AMC as Tax Matters
Partner.
Unless all of the WNPM Representatives have been removed from the Board of
Directors in accordance with the terms of this Agreement, at least one (1) WNPM
Representative must be
12
<PAGE> 18
among the members of the Board of Directors approving an action described in
this Section 4.2.
4.3 BOARD OF DIRECTORS' PROCEDURES. The procedures governing the
meetings and actions of the Board of Directors are set forth in the bylaws, as
adopted and amended by the Board of Directors from time to time.
4.4 DELEGATION TO MANAGING GENERAL PARTNER. Without limiting the
generality of Section 4.1, but subject to the express limitations set forth
elsewhere in this Agreement, the business and affairs of the Partnership will be
managed by, and all partnership power will be exercised under the direction of,
the Board of Directors. The Board of Directors has delegated the management of
the day-to-day operations of the business of the Partnership to Managing General
Partner. Managing General Partner shall carry out the day-to-day operation of
the Partnership's business in a manner consistent with the Board of Directors'
policies and procedures, the Budget, the Business Plan and any other directive
given by the Board of Directors. The Managing General Partner shall perform its
duties in good faith, in a manner reasonably believed to be in the best
interests of the Partnership and its Partners, and with such care, including
reasonable inquiry, as an ordinarily prudent person in a like position would use
under similar circumstances. Subject to the limitations contained in this
Agreement, Managing General Partner shall perform the following functions:
(a) Recruit and hire employees of the Partnership and perform
all human resource functions (including performing all
withholding and other payroll functions) with respect to,
all employees of the Partnership;
(b) Prepare, for the Board of Directors' approval, an annual
Business Plan and Budget;
(c) Implement (including proper training and staffing) the use
of AMSI general ledger and accounts payable system on
IAC's areawide network and AMSI's budget control ledger no
later than October 1, 1998;
(d) Carry out all of the obligations of the Partnership under
the terms of the Property Management Agreement, including,
without limitation, all real estate management functions
(and Managing General Partner shall obtain all licenses
and permits necessary to perform such real estate
management functions); and
(e) Perform all functions and tasks assigned to it by the
Board of Directors consistent with the terms and
conditions of this Agreement, including, without
limitation, the business purpose of the Partnership set
forth in Section 1.6 of this Agreement.
13
<PAGE> 19
In carrying out of its obligations hereunder, Managing General Partner shall
devote such time to the affairs and operations of the Partnership as is
reasonably necessary for the beneficial carrying on of the business of the
Partnership.
4.5 NO COMPENSATION.
(a) Unless the Board of Directors otherwise approves or this
Article IV otherwise expressly provides, no Partner, including, without
limitation, the Managing General Partner is entitled to any compensation or
overhead in connection with any services provided to the Partnership by such
Partner.
(b) Notwithstanding Section 4.5(a), the Partners acknowledge that
from time to time, with the approval of the Board of Directors, certain
employees of Managing General Partner will perform services for the Partnership
for which Managing General Partner shall be reimbursed for the cost of such
services. Attached hereto as Exhibit C is a list of the positions, percentage
allocations of time, and allocated costs to the Partnership for the employees of
Managing General Partner who will perform services for the Partnership through
December 31, 1998 ("PAYROLL ALLOCATION"). Managing General Partner shall cause
the employees to spend not less than the allocated percentage of time set forth
on the Payroll Allocation on providing services to the Partnership. Concurrently
with Managing General Partner's submission of the Budget for the Board of
Directors' approval, Managing General Partner shall submit an updated Payroll
Allocation for the Board of Directors' approval.
(c) The Partners acknowledge that the Payroll Allocations may
need to be updated from time to time. If Managing General Partner discovers that
any WNPM employee is spending more or less time than the time allocated to such
employee on the Payroll Allocation (as the same may be updated in accordance
with the terms of this Agreement), Managing General Partner shall promptly
deliver to the Board of Directors written notice of such occurrence ("ALLOCATION
NOTICE"), together with an updated Payroll Allocation reflecting the changes
described in the Allocation Notice.
(i) If the Allocation Notice shows any WNPM employee as
spending less time, Managing General Partner promptly shall
reimburse the Partnership for any excess amounts actually paid by
the Partnership for such employee's time.
(ii) If the Allocation Notice shows any WNPM employee as
spending more time, the Partnership has no obligation to
reimburse Managing General Partner for such employee's excess
time.
The updated Payroll Allocation shall be submitted to the Board of Directors for
its approval. An updated Payroll Allocation may be approved by a vote of no less
than four (4) members of the Board of Directors. The Board of Directors may, in
its sole and absolute discretion and without any obligation to do so, also
approve the Partnership's reimbursement of Managing General Partner for any WNPM
employee that spends more time than the time set
14
<PAGE> 20
forth in the current Payroll Allocation by a vote of no less than four (4)
members of the Board of Directors. Notwithstanding anything to the contrary in
Section 6.2, any reimbursement made by Managing General Partner in accordance
with Section 4.5(c)(i) for any WNPM employee will not cure (or be deemed to
cure) any default of WNPM unless Managing General Partner makes such
reimbursement prior to submission of the semi-annual certification of such
employee as contemplated in Section 6.2(c)(iii)(2).
4.6 AMENDMENT OF FILINGS. The Managing General Partner has the duty and
authority to amend all filings of the Partnership as and to the extent necessary
to reflect any and all changes or corrections necessary or appropriate as a
result of any action taken by the Board of Directors in accordance with the
terms of this Agreement.
4.7 ANNUAL BUSINESS PLAN AND ANNUAL BUDGET. At least sixty (60) days
before the beginning of each Fiscal Year, Managing General Partner shall prepare
and submit to the Board of Directors for its review and approval a proposed
draft Business Plan and operating budget. The draft Budgets must be consistent
with the proposed Business Plan submitted by the Managing General Partner and
must be in such detail and be accompanied by such supporting material as any
Board of Directors' member reasonably requires. The Business Plan must be in the
form and detail and must be accompanied by such supporting material as any Board
of Directors' member reasonably requires. No modification of any item in or
aspect of a Budget may be made without the prior written approval of the Board
of Directors. If for whatever reason the Board of Directors has not, by the
beginning of a Fiscal Year, approved a Budget for such Fiscal Year, then, in the
absence of the Board of Directors' action to the contrary, the Managing General
Partner shall continue the operation of the Partnership in the ordinary course
pending approval of a Budget for the then current Fiscal Year. For this purpose,
the "ordinary course" means taking such actions and making such necessary
expenditures as, in the good faith judgment of such Managing General Partner,
are necessary in order to preserve and protect the Partnership's assets and
honor existing commitments of the Partnership. However, without Board of
Directors' approval, the Managing General Partner shall not have the right to
(a) incur any new obligation of the Partnership in excess of Fifty Thousand
Dollars ($50,000) or for a term for greater than one year; (b) enter into any
agreement involving a commitment of the Partnership in excess of Fifty Thousand
Dollars ($50,000) or for a term of greater than one year; or (c) initiate any
lawsuit, other than minor lawsuits in the ordinary course of business and in
compliance with Section 4.1(n).
15
<PAGE> 21
4.8 REMOVAL OF MANAGING GENERAL PARTNER. The Managing General Partner
shall be deemed to be immediately removed from such position in accordance with
Section 3.6 and upon the occurrence of any Event of Default hereunder which
occurs by reason of the act or omission of such Managing General Partner. Upon
such removal, the Board of Directors shall appoint a new Managing General
Partner, subject to reinstatement of the former Managing General Partner as set
forth in Section 3.6
ARTICLE V
NOTICES
5.1 NOTICES. Whenever, under the provisions of the Act or this
Agreement, notice is required to be given to any Partner, such notice shall be
given in writing addressed to the Partner at its address as it appears on the
records of the Partnership, and will be deemed effectively given upon personal
delivery, confirmation of receipt of delivery by facsimile, or three (3) days
after deposit in the United States mail, by registered or certified mail, return
receipt requested.
5.2 WAIVER OF NOTICE. Whenever any notice is required to be given under
the provisions of the Act or this Agreement, a waiver thereof in writing, signed
by the person or persons entitled to said notice, whether before or after the
time stated therein, will be deemed equivalent thereto.
ARTICLE VI
ACCOUNTING AND RECORDS
6.1 FINANCIAL AND TAX REPORTING. The Managing General Partner shall
prepare financial statements in accordance with generally accepted accounting
principles as from time to time in effect and shall prepare the Partnership's
income tax information returns using such methods of accounting and tax year as
Managing General Partner and Tax Matters Partner deem necessary or appropriate
under the Code and Treasury Regulations. Managing General Partner shall submit
for the review and approval by AMC (and Tax Matters Partner if other than AMC) a
draft of the Partnership's income tax information returns no later than February
15th of each year and a final version of the Partnership's income tax
information returns incorporating any comments that AMC (and Tax Matters
Partner, if other than AMC) may have no later than February 28th of each year.
6.2 SUPERVISION; INSPECTION OF BOOKS.
(a) Proper and complete books of account and records of the
business of the Partnership shall be kept under the supervision of the Managing
General Partner at the Partnership's principal office and at such other place as
designated by the Managing General Partner. The Managing General Partner shall
give notice to each Partner of any changes in
16
<PAGE> 22
the location of such books and records. Such books and records must be open to
inspection, audit and copying by any Partner, or its designated representative,
upon reasonable notice at any time during business hours for any purpose
reasonably related to the Partner's Partnership Interest in the Partnership. Any
information so obtained or copied must be kept and maintained in strictest
confidence except as required by law.
(b) AMC or its representatives may perform audit procedures on
the books and records of the Partnership as deemed appropriate by AMC in its
sole and absolute discretion. Managing General Partner shall cooperate to the
fullest extent possible and in a timely manner with AMC's audit of the
Partnership, and Managing General Partner shall not interfere with the
performance of any audit procedure.
(c) As used in this Section 6.2, the following terms have the
following meanings:
(i) "MATERIAL INDIVIDUAL DISCREPANCY" means a discrepancy
for any individual Material Matter in a calendar year in an
amount greater than Twenty-Five Thousand Dollars ($25,000) for
such calendar year.
(ii) "MATERIAL CUMULATIVE DISCREPANCY" means a cumulative,
aggregate discrepancy for all Material Matters in a calendar year
in an amount greater than Fifty Thousand Dollars ($50,000) for
such calendar year.
(iii) "MATERIAL MATTER" means any audit discrepancy,
including, without limitation, any of the following:
(1) A payroll allocation in excess of the
payroll allocation authorized by the Board
of Directors;
(2) A payroll allocation that is not justified
by sufficient supporting documentation as
determined by AMC in reasonable discretion,
including, without limitation, semi-annual
certifications by each applicable employee,
WNPM employee listed on the Payroll
Allocation and Managing General Partner;
(3) A misappropriation or intentional misuse of
any funds or assets of the Partnership;
(4) A misappropriation of any funds derived from
the Assets or an intentional misuse of any
Assets;
(5) Any expenditures or contracts that have not
been approved in accordance with the terms
of this Agreement;
17
<PAGE> 23
(6) Any payments to any Affiliates of WNPM that
have not been approved in accordance with
the terms of this Agreement;
(7) Any amounts charged by vendors with respect
to the Assets that are not comparable to
charges for similar services to Managing
General Partner's other properties;
(8) Any payments for compensation or bonuses to
the Partnership's employees that have not
been approved in accordance with the terms
of this Agreement;
(9) Any severance agreements or employment
contracts for the Partnership's employees
that have not been approved in accordance
with the terms of this Agreement;
(10) Any political, lobbying or charitable
contribution that has not been approved by
the Board of Directors;
(11) The institution of litigation by Managing
General Partner in violation of this
Agreement; and
(12) Entry of a settlement agreement or the
making of any payment with respect to any
authorized litigation that has not been
approved in accordance with the terms of
this Agreement.
(D) If AMC discovers any Material Individual Discrepancy or
Material Cumulative Discrepancy, such Material Individual Discrepancy or
Material Cumulative Discrepancy will be deemed a default by WNPM as provided in
Section 11.6(a)(ii). Notwithstanding the preceding sentence, AMC hereby waives
its right to terminate the Agreement for the first Material Individual
Discrepancy or Material Cumulative Discrepancy that meets each of the following
criteria:
(i) Managing General Partner has provided evidence
satisfactory to AMC, in its sole and absolute discretion,
that the Material Individual Discrepancy or Material
Cumulative Discrepancy was the result of an inadvertent
error by an individual who is not an officer of the
Partnership; and
(ii) The Material Individual Discrepancy or Material Cumulative
Discrepancy does not exceed One Hundred Thousand Dollars
($100,000).
18
<PAGE> 24
Notwithstanding AMC's waiver of its right to terminate the Agreement as set
forth in this Section 6.2(d), WNPM shall reimburse AMC for all losses suffered
by AMC as a result of such Material Individual Discrepancy or Material
Cumulative Discrepancy.
(e) If WNPM disputes the results and audit, AMC and WNPM shall
appoint and hire a qualified arbitrator to be the sole judge over the dispute.
As used in this Section 6.2(e), a "qualified arbitrator" is a person that is a
current or former audit partner with an international accounting firm that is
not an Affiliate of either WNPM or AMC. If after good faith efforts, AMC and
WNPM can not agree on the identity of the qualified arbitrator within ten (10)
business days after written notice of WNPM's dispute of the results and audit,
AMC and WNPM shall each appoint a qualified arbitrator and the two appointed
arbitrators shall select a third qualified arbitrator within twenty (20) days to
determine the dispute. No later than sixty (60) days after an arbitration is
commenced pursuant to this Section 6.2(e), the qualified arbitrator shall issue
its determination, together with written findings of fact supporting its
determination. The qualified arbitrator's determination must be supported by law
and substantial evidence and must comply with the terms of this Agreement. The
non-prevailing party in such arbitration shall pay the costs and expenses of any
arbitrator retained pursuant to this Section 6.2(e). Subject to the provisions
of Section 13.16, each Partner shall pay its own costs and expenses incurred in
preparation for any arbitration initiated under this Section 6.2(e).
(f) To the extent Managing General Partner, through its own
investigation and review of the Partnership's books and records, determines that
a Material Individual Discrepancy or Material Cumulative Discrepancy exists and
reimburses the Partnership for such Material Individual Discrepancy or Material
Cumulative Discrepancy prior to AMC's audit of such matter, such matter will not
be deemed a material breach of WNPM's obligations under this Agreement for
purposes of Section 11.6(a)(ii).
6.3 RELIANCE ON RECORDS AND BOOKS OF ACCOUNT. Any Partner may rely in
good faith upon the records and books of account of the Partnership and upon
such information, opinions, reports or statements presented to the Partnership
by its the Board of Directors, Managing General Partner, any of its Partners,
officers, employees or committees, or by any other person, as to matters the
Partner reasonably believes are within such other person's professional or
expert competence and who has been selected with reasonable care by or on behalf
of the Partnership, including information, opinions, reports or statements as to
the value and amount of the assets, liabilities, profits or losses of the
Partnership or any other facts pertinent to the existence and amount of assets
from which distributions to Partners might properly be paid.
6.4 TAX RETURNS. Managing General Partner shall, within sixty (60) days
after the end of each Fiscal Year, file a federal income tax information return
and transmit to each Partner a schedule showing such Partner's distributive
share of the Partnership's income, deductions and credits, and all other
information necessary for such Partners timely to file their respective federal
income tax returns. Managing General Partner similarly shall file,
19
<PAGE> 25
and provide information to the Partners regarding, all appropriate state and
local income tax returns.
6.5 BANK ACCOUNTS. The Managing General Partner shall maintain the funds
of the Partnership in one or more separate bank accounts in the name of the
Partnership, and shall not permit the funds of the Partnership to be commingled
in any fashion with the funds of any other Person. The authorized signatories
thereto shall be established from time to time by resolution of the Board of
Directors.
6.6 ACCOUNTING DECISIONS AND RELIANCE ON OTHERS. Managing General
Partner shall make decisions as to accounting matters, except as otherwise
specifically set forth herein. The Managing General Partner may rely upon the
advice of the Partnership's accountants as to whether such decisions are in
accordance with accounting methods followed for federal income tax purposes.
6.7 TAX MATTERS FOR THE PARTNERSHIP HANDLED BY TAX MATTERS PARTNER. The
Tax Matters Partner shall from time to time cause the Partnership to make such
tax elections as it deems to be in the best interests of the Partnership and the
Partners. The Tax Matters Partner, as defined in Code Section 6231, shall
represent the Partnership (at the Partnership's expense) in connection with all
examinations of the Partnership's affairs by tax authorities, including
resulting judicial and administrative proceedings, and shall expend the
Partnership funds for professional services and costs associated therewith. Each
Partner shall cooperate with the Tax Matters Partner and agrees to do or refrain
from doing anything reasonably requested by the Tax Matters member with respect
to any such proceedings. The Tax Matters Partner shall oversee the Partnership's
tax affairs in the overall best interests of the Partnership. If for any reason
the Tax Matters Partner can no longer serve in that capacity or is no longer a
Partner, the Board of Directors may designate another Partner to be the Tax
Matters Partner.
ARTICLE VII
ALLOCATIONS
7.1 ALLOCATION OF NET INCOME OR NET LOSS. For each Accounting Period,
Net Income and Net Loss shall be allocated to the Partners in proportion to
their Partnership Interests, provided, however, any deduction resulting from the
exercise of a REIT Option shall be allocated solely to AMC.
7.2 SPECIAL TAX PROVISIONS.
(a) Treatment as Partnership. The Partners expect and intend that
the Partnership be treated as a partnership for all federal income tax purposes.
Each Partner agrees that it (i) will not, on any federal, state, local or other
tax return, take a position inconsistent with such expectation and intent; (ii)
otherwise assert a position inconsistent with
20
<PAGE> 26
such expectation and intent; or (iii) do any act or thing which could cause the
Partnership to be treated as other than a partnership for federal income tax
purposes.
(b) Tax Allocations. Except as otherwise provided in this Article
VII, items of income, gain, loss or deduction recognized for income tax purposes
will be allocated in the same manner that the corresponding items entering into
the calculation of Net Income and Net Loss are allocated pursuant to this
Agreement.
(c) Section 704(c) Adjustments. In accordance with Code Section
704(c) and the Treasury Regulations thereunder, items of income, gain, loss and
deduction with respect to an asset, if any, contributed to the capital of the
Partnership shall, solely for tax purposes, be allocated among the Partners so
as to take account of any variation between the adjusted basis of such property
to the Partnership for federal income tax purposes and its value upon
contribution to the Partnership.
(d) Section 754 Election. A Code Section 754 election may be made
for the Partnership at the sole and absolute discretion of the Tax Matters
Partner. If an adjustment to the adjusted tax basis of any Partnership asset is
required under Code Section 734(b) or Code Section 743(b) pursuant to a Code
Section 754 election by the Partnership, subsequent allocations of tax items
shall reflect such adjustment consistent with the Treasury Regulations
promulgated under Sections 704, 734 and 743 of the Code.
(e) Allocations upon Transfers of Partnership Interests. If,
during an Accounting Period, a Partner transfers all or a portion of its
Partnership Interest to another Person in compliance with this Agreement, items
of Net Income and Net Loss, together with corresponding tax items, that
otherwise would have been allocated to the transferring Partner with regard to
such Accounting Period will be allocated between the transferring Partner and
the Substitute Partner in accordance with their respective Partnership
Percentages during the Accounting Period using any method permitted by Section
706 of the Code and selected by the Tax Matters Partner.
ARTICLE VIII
DISTRIBUTIONS
8.1 DISTRIBUTIONS. Net Cash Flow from Operations shall be distributed,
at such reasonable intervals as are determined by the Board of Directors, in the
following order of priority:
(a) First, to AMC with respect to any unpaid AMC Loan until all
principal and accrued interest on such AMC Loan is paid in full. If, at the time
any distribution is made pursuant to this Section 8.1(a), there is more than one
AMC Loan outstanding, payments of interest on, and the principal amount of an
AMC Loan shall be made in the reverse order in which the AMC Loans were made.
For example, the accrued but unpaid interest on the outstanding AMC Loans at any
time shall be paid first on the AMC Loan
21
<PAGE> 27
made most recently to the date of the payment. Payments in connection with an
AMC Loan shall be made first, to pay all accrued but unpaid interest on such AMC
Loan and second, to pay the outstanding principal balances of such AMC Loan.
(b) Second, to each Partner who is owed an Indemnification Amount
until such Indemnification Amount is paid in full. If, at the time any
distribution is made pursuant to this Section 8.1(b), more than one Partner has
an outstanding Indemnification Amount, distributions pursuant to this Section
8.1(b) shall be made pro rata based on the proportion that the aggregate amount
of Indemnification Amounts of each Partner bears to the total amount of
Indemnification Amounts of all Partners.
(c) Third, to each Partner who has made a Contributing Partner
Loan until all principal and accrued interest on the Contributing Partner Loan
is paid in full. If, at the time any distribution is made pursuant to this
Section 8.1(c), more than one Partner has made a Contributing Partner Loan,
distributions pursuant to this Section 8.1(c) shall be made pro rata based on
the proportion that the aggregate amount of Contributing Partner Loans made by
each Partner bears to the total amount of Contributing Partner Loans made by all
Partners.
(d) Fourth, to each Partner, pro rata in accordance with such
Partner's Partnership Percentage.
Notwithstanding the foregoing provisions of this Section 8.1, any distribution
to which a Non-Contributing Partner would otherwise be entitled shall be paid to
the Contributing Partner until all Contributing Partner Loans made by such
Contributing Partner, together with accrued interest thereon, have been repaid
in full. Payments received by the Contributing Partner shall be applied first to
interest (starting with interest on the Contributing Partner Loan most recently
made) and then to principal.
8.2 DISTRIBUTIONS IN KIND. All distributions shall be made in cash or
cash equivalents unless the Board of Directors has approved a distribution of
assets in kind.
8.3 RESTRICTION ON DISTRIBUTIONS AND WITHDRAWALS.
(a) Restriction on Distributions. The Partnership shall not make
any distribution to the Partners unless, immediately after giving effect to the
distribution, all liabilities of the Partnership, other than liabilities to
Partners on account of their interests in the Partnership and liabilities as to
which recourse of creditors is limited to specified property of the Partnership,
do not exceed the fair value of the Partnership assets. For purposes of the
preceding sentence, the fair value of any property that is subject to a
liability as to which recourse of creditors is so limited shall be included in
the Partnership assets only to the extent the fair value of the property exceeds
such liability.
(b) Restriction on Withdrawals. No Partner will be liable to the
Partnership for the amount of a distribution received if, at the time of the
distribution, such
22
<PAGE> 28
Partner did not know that the distribution was in violation of this Section 8.3.
A Partner that receives a distribution in violation of this Section 8.3, and
that knew at the time of the distribution that the distribution violated such
condition, will be liable to the Partnership for the amount of the distribution.
8.4 NO OTHER WITHDRAWALS. Except as provided in this Article VIII, no
withdrawals or distributions are required or permitted.
ARTICLE IX
TRANSFER OF PARTNERSHIP INTERESTS
9.1 TRANSFER.
(a) Restrictions. Except as expressly provided to the contrary in
this Article IX, no Partner may transfer, sell, encumber, mortgage, assign or
otherwise dispose of all or any portion of its Partnership Interest
(hereinafter, a "TRANSFER") without the prior written consent of the other
Partner, which consent may be withheld in such Partner's sole and absolute
discretion. Any purported transfer of all or any portion of a Partner's
Partnership Interest in contravention of this Article IX is void and of no
effect to, on or against the Partnership, any Partner, any creditor of the
Partnership or any claimant against the Partnership.
9.2 RIGHTS OF ASSIGNEES. The Assignee of a Partnership Interest has no
right to vote or to participate in the management of the business and affairs of
the Partnership or to become a Partner. The Assignee is only entitled to receive
distributions and to be allocated the Net Profits and Net Losses attributable to
the Partnership Interest transferred to the Assignee.
9.3 CALL.
(a) Grant. WNPM hereby grants AMC the Call, exercisable at any
time after March 31, 2001, upon delivery of written notice to WNPM and payment
of the Call Price. As used in this Agreement, the "CALL PRICE" means an amount
equal to the sum of the following:
(i) The WNPM's share of retained earnings on the date of
payment; plus
(ii) WNPM's initial capital contribution; minus
(iii) Any amounts loaned by AMC as a Contributing Partner
Loan.
(b) If AMC exercises the Call, AMC shall pay WNPM the Call Price
within thirty (30) days after the date of exercise. Upon AMC's delivery of the
Call Price, WNPM shall assign its Partnership Interest to AMC or its nominee. If
AMC exercises the Call, AMC and IAC covenant not to solicit any management
contracts for any property with
23
<PAGE> 29
respect to which WNPM has an existing management contract to manage property for
a period commencing on the date AMC purchases WNPM's Partnership Interest and
ending twenty four (24) months thereafter. The foregoing sentence does not apply
to (i) the solicitation of any management contract or the entering into of any
management contract with a Person who has terminated or failed to renew a
management contract with WNPM for any reason unrelated to any solicitation by
IAC or AMC and (ii) any property owned by AMC, IAC, The Irvine Company or an
Affiliate of any of the foregoing.
ARTICLE X
INDEMNIFICATION AND LIMITATION OF LIABILITY
10.1 INDEMNIFICATION.
(a) Partners. To the fullest extent permitted by the Act and by
applicable law, the Partners and the partners, members, shareholders,
controlling Persons, officers, directors and employees of the Partners (herein
referred to as "INDEMNITEES") shall, in accordance with this Section 10.1 be
indemnified and held harmless by the Partnership from and against any and all
loss, claims, damages, liabilities, expenses, judgments, fines, settlements and
other amounts arising from any and all claims (including reasonable attorneys'
fees and expenses), demands, actions, suits or proceedings (civil, criminal,
administrative or investigative) (collectively, "CLAIMS") in which they may be
involved, as a party or otherwise, by reason of their management of, or
involvement in, the affairs of the Partnership, or rendering of advice or
consultation with respect thereto, or which relate to the Partnership, its
properties, business or affairs, if such Indemnitee acted in good faith and in a
manner such Indemnitee reasonably believed to be in, or not opposed to, the best
interests of the Partnership, and, with respect to any criminal proceeding, had
no reasonable cause to believe the conduct of such Indemnitee was unlawful. The
termination of a proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere, or its equivalent, shall not, of itself, create a
presumption that the Indemnitee did not act in good faith and in a manner which
the Indemnitee reasonably believed to be in, or not opposed to, the best
interests of the Partnership or that the Indemnitee had reasonable cause to
believe that the Indemnitee's conduct was unlawful (unless there has been a
final adjudication in the proceeding that the Indemnitee did not act in good
faith and in a manner which the Indemnitee reasonably believed to be in or not
opposed to the best interests of the Partnership; or that the Indemnitee did
have reasonable cause to believe that the Indemnitee's conduct was unlawful).
Nothing contained in this Section 10.1(a) will be deemed to limit or affect the
obligations of WNPM or AMC under Sections 10.1(d) and 10.1(e), respectively, and
neither WNPM nor AMC shall be entitled to indemnification from the Partnership
for liability arising under Sections 10.1(d) and 10.1(e), respectively.
(b) Persons. The Partnership may also indemnify any Person who
was or is a party or is threatened to be made a party to any threatened,
pending, or completed action by or in the right of the Partnership to procure a
judgment in its favor by reason of the fact that such Person is or was an
officer, employee or agent of the Partnership, against expenses
24
<PAGE> 30
actually or reasonably incurred by such Person in connection with the defense or
settlement of such action, if such Person acted in good faith and in a manner
such Person reasonably believed to be in, or not opposed to, the best interests
of the Partnership, except that indemnification shall be made in respect of any
claim, issue or matter as to which such Person has been adjudged to be liable
for misconduct in the performance of the Person's duty to the Partnership only
to the extent the court in which such action or suit was brought, or another
court of appropriate jurisdiction, determines upon application that, despite the
adjudication of liability, but in view of all circumstances of the case, such
Person is fairly and reasonably entitled to indemnity for such expenses which
such court shall deem proper. To the extent the Person has been successful on
the merits or otherwise in defense of any proceedings referred to herein, or in
defense of any claim, issue or matter therein, the Person shall be indemnified
by the Partnership against expenses actually and reasonably incurred by the
Person in connection therewith. Notwithstanding the foregoing, no Person is
entitled to indemnification hereunder for any conduct arising from the gross
negligence or willful misconduct of such Person or reckless disregard in the
performance of its duties hereunder
(c) Expenses. Expenses (including reasonable attorneys' fees and
expenses) incurred in defending any proceeding under Sections 10.1(a) or (b) may
be paid by the Partnership in advance of the final disposition of such
proceeding upon receipt of an undertaking by or on behalf of the Indemnitee to
repay such amount if it is ultimately determined that the Indemnitee is not
entitled to be indemnified by the Partnership as authorized hereunder.
(d) WNPM Indemnification. WNPM hereby indemnifies, defends and
holds harmless AMC, its partners, controlling Persons, officers, directors and
employees (the "AMC INDEMNITEES") from and against any and all Claims arising
out of a breach by the Partnership of the Property Management Agreement or
arising out of the Partnership's indemnification obligations thereunder;
provided that WNPM shall not be required to indemnify the AMC Indemnitees to the
extent (but only to the extent) such breach was caused by, or the
indemnification obligation arose because of, the AMC Representatives acting in
bad faith or in a commercially unreasonable manner to cause the Partnership to
incur an indemnification obligation under the Property Management Agreement or
to be unable to perform the Partnership's obligations under the Property
Management Agreement. WNPM hereby indemnifies, defends and holds harmless the
Partnership and the AMC Indemnities from and against any and all Claims arising
out of any action brought by an employee of the Partnership who was formerly an
employee of WNPM to the extent such Claim is based on any matter related to such
employee's employment at WNPM, other than matters related to liability for
accrued benefit obligations assumed by the Partnership. Any indemnification
obligation (a "WNPM INDEMNIFICATION OBLIGATION") incurred by WNPM pursuant to
this Section 10.1(d) shall be recourse to WNPM.
(e) AMC Indemnification. AMC hereby indemnifies, defends and
holds harmless WNPM, its partners, controlling Persons, shareholders, officers,
directors and employees (the "WNPM INDEMNITEES") from and against any and all
Claims arising out
25
<PAGE> 31
of a breach by the Partnership of the Property Management Agreement or arising
out of the Partnership's indemnification obligations thereunder to the extent
(but only to the extent) such breach was caused by the AMC Representatives
acting in bad faith or in a commercially unreasonable manner to cause the
Partnership to incur an indemnification obligation under the Property Management
Agreement or to be unable to perform the Partnership's obligations under the
Property Management Agreement. AMC hereby indemnifies, defends and holds
harmless the Partnership from and against any and all Claims arising out of (i)
any action brought by a shareholder of the REIT against the Partnership based on
a breach of a duty or obligation owed to such shareholder by the REIT and (ii)
any action brought by an employee of the Partnership who was an employee of the
Sares-Regis Group, WNPM or J&M Realty based on any matter related to accrued
benefit obligations by such employee while an employee of the Sares-Regis Group,
WNPM or J&M Realty. Any indemnification obligation (an "AMC INDEMNIFICATION
OBLIGATION") incurred by AMC pursuant to this Section 10.1(e) shall be recourse
to AMC.
(f) Exclusive Right. The indemnification provided by this Section
10.1 shall not be deemed to be exclusive of any other rights to which any Person
may be entitled under any agreement, or as a matter of law, or otherwise, both
as to action in a Person's official capacity and to action in another capacity.
(g) Insurance. The Board of Directors may purchase and maintain
insurance on behalf of the Partnership, any employees or agents of the
Partnership and any other Indemnitees at the expense of the Partnership, against
any liability asserted against or incurred by them in any such capacity whether
or not the Partnership would have the power to indemnify such Persons against
such liability under the provisions of this Agreement. AMC shall cause IAC, at
IAC's sole cost and expense, to expand the coverage of IAC's existing directors'
and officers' insurance to include the (i) Board of Directors, (ii) the
president, any vice-president, any assistant secretary and the controller of the
Partnership, and (iii) the Partnership, its Partners and the officers and
directors of such Partners. If at any time IAC does not provide such insurance
coverage, AMC shall use its best efforts to cause such coverage to be provided,
so long as such coverage is available on commercially reasonable terms. The
directors' and officers' insurance required by this Section 10.1(g) will include
coverage for lawsuits brought against the Partnership by a shareholder of the
REIT.
(h) Counsel. With respect to (i) any Claim against the
Partnership that would also give rise to a WNPM Indemnification Obligation and
(ii) any Claim that would give rise to a WNPM Indemnification Obligation, the
Managing General Partner shall recommend to the Board of Directors legal counsel
that Managing General Partner proposes to use to defend the Partnership against
such Claim and in connection with all settlement negotiations (and Board of
Directors may approve such counsel by a vote of no less than four (4) members of
the Board of Directors).
26
<PAGE> 32
(i) Contribution. In the event a lawsuit is filed against, and a
complaint served on, the Partnership for which the Partners may be jointly and
severally liable, each Partner shall agree, in writing, with the other Partner
to pay, subject to any indemnification obligations the agreeing Partner may be
owed by the other Partner, its proportionate share of the uninsured portion of
any final judgment which is entered in connection with such lawsuit and which is
not stayed by the bankruptcy of the Partnership or court order preventing
enforcement against the Partnership, and shall provide evidence reasonably
satisfactory to the other Partner that such agreeing Partner has available to it
an amount to pay such proportionate share that is not less than the other
Partner's then net worth determined in accordance with generally accepted
accounting principles.
If a Partner fails to deliver to the other Partner such written
agreement, together with such satisfactory evidence of the available funds
within 60 days of such Partner's receiving a copy of such complaint, such
defaulting Partner shall be deemed to be a Non-Contributing Partner for all
purposes under this Agreement including, without limitation Section 3.6 until
such Partner delivers such agreement and such evidence. The non-defaulting
Partner shall have no other remedy for such failure.
10.2 LIMITATION OF LIABILITY. Except as expressly required to the
contrary by the Act or other applicable law, (a) notwithstanding anything to the
contrary herein contained, the debts, obligations and liabilities of the
Partnership shall be solely the debts, obligations and liabilities of the
Partnership and (b) no Partners will be obligated personally for any such debt,
obligation or liability of the Partnership solely be reason of being a Partner
of the Partnership.
ARTICLE XI
TERMINATION; DEFAULT
11.1 TERMINATION. The Partnership will be dissolved, its assets disposed
of and its affairs wound up upon the first to occur of the following:
(a) Expiration. The expiration of its stated term;
(b) Vote. The vote of the Board of Directors;
(c) Judicial Dissolution. The entry of a decree of judicial
dissolution under the Act.
(d) Default. A nondefaulting Partner's election to terminate the
Agreement pursuant to Section 11.6 of the Agreement.
11.2 AUTHORITY TO WIND UP. Upon the occurrence of any event specified in
Section 11.1, the Partnership will continue solely for the purpose of winding up
its affairs in an orderly manner, liquidating its assets, and satisfying the
claims of its creditors. The
27
<PAGE> 33
Board of Directors has all necessary power and authority required to marshall
the assets of the Partnership, to pay its creditors, to distribute assets and
otherwise wind up the business and affairs of the Partnership. In particular,
the Board of Directors has the authority to continue to conduct the business and
affairs of the Partnership insofar as such continued operation remains
consistent, in the judgment of the Board of Directors, with the orderly winding
up of the Partnership.
11.3 WINDING UP AND CERTIFICATE OF DISSOLUTION. The winding up of the
Partnership will be completed when all debts, liabilities and obligations of the
Partnership have been paid and discharged or reasonably adequate provision
therefor has been made, and all of the remaining property and assets of the
Partnership have been distributed by the Board of Directors Upon the completion
of winding up of the Partnership, the Board of Directors shall make all filings
necessary to terminate the existence of the Partnership.
11.4 DISTRIBUTION OF ASSETS. Upon dissolution and winding up of the
Partnership, the affairs of the Partnership shall be wound up and the
Partnership liquidated by the Board of Directors. The assets of the Partnership
shall be distributed as follows in accordance with the Act:
(a) To creditors of the Partnership in the order of priority
provided by law; and
(b) To Partners in the priority set forth in Section 8.1.
11.5 DEFICIT CAPITAL ACCOUNT. Upon liquidation of the Partnership, each
Partner shall look solely to the assets of the Partnership for the return of
such Partner's capital in the Partnership. Except as expressly required to the
contrary by the Act, no Partner is personally liable, either to the other
Partner or to any third Person, for a deficit capital account balance of such
Partner, it being expressly understood that the payment of the Partnership's
debts and the distribution of liquidation proceeds shall be made solely from
existing Partnership assets.
11.6 DEFAULT. The following each constitute an "EVENT OF DEFAULT" under
this Agreement.
(a) (i) A material breach of a Partner's obligation
under the Agreement (other than the failure to pay
any Indemnification Amount) which continues for
thirty (30) days after delivery of written notice;
or
(ii) The existence of a Material Individual Discrepancy
or Material Cumulative Discrepancy, which event
shall be a default by WNPM under this Agreement;
28
<PAGE> 34
(b) (i) Bankruptcy of a Partner; or
(ii) The entry of any order against any Partner
decreeing the dissolution of such Partner, which
order is not vacated or otherwise terminated within
thirty (30) days;
(c) Termination of the Property Management Agreement by IAC for
cause, which default shall be deemed to be a default by WNPM under this
Agreement unless the termination occurs solely by reason of the death of Michael
Hayde; provided, however, if the act or omission which constituted "cause" under
the Property Management Agreement is solely the result of the AMC
Representatives on the Board of Directors acting, in such capacity, in bad faith
or in a commercially unreasonable manner, such termination shall be deemed to be
a default by AMC under this Agreement;
(d) Fraud or wilful misconduct by a Partner;
(e) A Partner's failure to pay its Indemnification Amount within
ten (10) days after receipt of a written demand for payment;
(f) Any attempted dissolution of the Partnership in violation of
Section 11.7; and
(g) Any attempted withdrawal from the Partnership in violation of
this Agreement.
Upon the occurrence of an Event of Default, the nondefaulting Partner may elect
to either (1) purchase the defaulting Partner's Partnership Interest, for a
price equal to the lesser of such Partner's initial Capital Account balance or
then Capital Account balance (in each case minus any amounts loaned to the
defaulting member as a Contributing Partner Loan), or (ii) to terminate the
Agreement and liquidate the Partnership, in the manner set forth in this Article
XI. If the nondefaulting Partner elects to purchase the defaulting Partner's
Partnership Interest, the nondefaulting Partner shall pay the price described in
the preceding sentence no later than ninety (90) days after delivery of a notice
of default. If the Event of Default is the result of the act or omission of the
Managing General Partner, such Managing General Partner shall be deemed to be
immediately removed from such position.
11.7 NO ACTION FOR DISSOLUTION. Except as expressly permitted in this
Agreement, a Partner shall not take any voluntary action that directly causes a
dissolution of the Partnership. The Partners acknowledge that irreparable damage
would be done to the goodwill and reputation of the Partnership if any Partner
should bring an action in court to dissolve the Partnership under circumstances
where dissolution is not required by Section 11.1. This Agreement has been drawn
carefully to provide fair treatment of all parties and equitable payment in
liquidation of the Partnership Interests. Accordingly, except where the Board of
Directors has failed to liquidate the Partnership as required by this Article
XI, each Partner hereby waives and renounces its right to initiate legal action
to seek the appointment of a receiver or trustee to liquidate the Partnership or
to seek a decree of judicial dissolution
29
<PAGE> 35
of the Partnership on the ground that (a) it is not reasonably practicable to
carry on the business of the Partnership in conformity with the Certificate or
this Agreement, or (b) dissolution is reasonably necessary for the protection of
the rights or interests of the complaining Partner. Damages for breach of this
Section 11.7 are monetary damages only (and not specific performance), and the
damages may be offset against distributions by the Partnership to which such
Partner would otherwise be entitled. Each Partner hereby irrevocably waives any
right which it may have to maintain any action for partition with respect to the
property of the Partnership during the term of the Partnership.
ARTICLE XII
REIT SHARES
12.1 REIT OPTION GRANTED TO INITIAL OPTIONEES. As compensation for
rendering services to the Partnership and for causing WNPM to perform its
obligations as Managing General Partner, the Initial Optionees have been granted
by the REIT Compensation Committee, at the request and for the benefit of the
Partnership, One Hundred Thousand (100,000) REIT Options for an Option Price
equal to $30.4375 per share.
(a) Each Initial Optionee will receive a percentage of the
aggregate number of REIT Options granted as shown on Exhibit D attached hereto.
(b) The REIT Options have a ten (10) year term, commencing on the
date of date of grant, and will vest on the earliest to occur of the following:
(i) The date on which this Agreement terminates for
reasons other than a default by WNPM;
(ii) Thirty (30) days after the date on which AMC
purchases WNPM's Partnership Interest pursuant to
AMC's exercise of the Call;
(iii) January 1, 2002 (with respect to only the first
33.3% of the REIT Options issued to each Initial
Optionee);
(iv) January 1, 2003 (with respect to only the second
33.3% of the REIT Options issued to each Initial
Optionee);
(v) January 1, 2004 (with respect to only the remaining
33.4% of the REIT Options issued to each Initial
Optionee).
30
<PAGE> 36
If this Agreement is terminated because of WNPM's default, the Initial Optionees
will be immediately removed, their respective employment contracts terminated
and any REIT Options which have not then vested will be void and of no further
force or effect.
12.2 REIT OPTIONS TO ADDITIONAL OPTIONEES. In its sole and absolute
discretion, the Board of Directors may, from time to time, recommend to the REIT
Compensation Committee that the REIT issue to other designated Partnership
employees ("ADDITIONAL OPTIONEES") (the Initial Optionees and Additional
Optionees, if any, are collectively referred to as "OPTIONEES"), at the request
of and for the benefit of the Partnership, REIT Options on terms and conditions
and with a vesting schedule as the Board of Directors may recommend in such
recommendation. If the REIT Compensation Committee decides, in it sole and
absolute discretion, to approve the issuance of a REIT Option(s) to Additional
Optionees, then such REIT Options shall be issued to the one or more Additional
Optionees on such terms, conditions and vesting as shall be approved by the REIT
Compensation Committee.
12.3 EXERCISE OF OPTIONS. Promptly upon receipt of notice that a REIT
Option has been exercised, AMC shall cause the REIT to notify the Partnership.
At such time as any REIT Option is exercised by an Optionee, the following will
be deemed to occur in the following order:
(a) The REIT shall be deemed to have purchased from IAC a number
of GP Units equal to the number of REIT shares covered by the exercised REIT
Option, divided by the Conversion Factor (as defined in IAC's partnership
agreement);
(b) The REIT shall be deemed to have purchased the GP Units for a
price equal to the fair market value of such shares at the date of exercise of
the REIT Option;
(c) IAC shall be deemed to have purchased the number of REIT
shares covered by the exercised REIT Option for such market value of such
shares;
(d) IAC shall be deemed to have contributed such shares to AMC
and then AMC shall be deemed to have contributed such shares to the Partnership
and AMC's Capital Account will be increased by the fair market value of such
shares;
(e) The Partnership shall be deemed to have sold such REIT shares
to the Optionee for an amount equal to the product of the Option Price and the
number of shares covered by such exercised REIT Options (the "TOTAL SHARE
PRICE");
(f) The Partnership shall be deemed to have distributed to AMC
and then AMC shall be deemed to have distributed to IAC the Total Share Price;
(g) A deduction in the amount of the Total Share Price shall be
made to AMC's Capital Account in the Partnership; and
31
<PAGE> 37
(h) The Partnership shall allocate to AMC a deduction (the "REIT
DEDUCTION AMOUNT") in the amount of (i) the difference between the per share
fair market value of the shares deemed to have been contributed and the Option
Price multiplied by (ii) the number of shares deemed to have been contributed.
The Partnership shall then make a corresponding reduction in an amount equal to
the REIT Deduction Amount to AMC's Capital Account.
For ease of administration, upon the exercise of a REIT Option, the above-steps
shall be consummated by (1) the REIT, on behalf of the Partnership, issuing REIT
shares covered by the exercised REIT Option directly to the Optionee, (2) the
Optionee paying the Total Share Price directly to the REIT for the account of
the Partnership and (3) the REIT, on behalf of the Partnership and AMC,
assigning the Total Share Price directly to IAC. Notwithstanding the preceding
sentence, each of steps (a) through (h) above shall be deemed to have occurred
for the purposes of this Agreement.
12.4 NO CHANGE TO PARTNERSHIP PERCENTAGES DUE TO REIT SHARE
CONTRIBUTIONS. Upon any exercise of a REIT Option, AMC shall be solely
responsible for contributing the REIT shares covered by such REIT Option. Upon
AMC's deemed contribution of any REIT shares covered by a REIT Option, AMC will
receive an increase in its Capital Account in an amount equal to the fair market
value of such shares at the date of such exercise. At such time as any such
shares are delivered to the Optionee, the Partnership will be deemed to have
made a distribution to AMC, in cash, in the amount of the Option Price and AMC
will be allocated a deduction in the amount of the Total Share Price. Such
distribution and deduction shall cause corresponding reductions to be made in
AMC's Capital Account. Based on the forgoing, there will be no adjustment in the
Partners' Partnership Percentages as a result of such contribution by AMC of
REIT shares to the Partnership.
ARTICLE XIII
MISCELLANEOUS
13.1 AMENDMENT. This Agreement may be amended only with the prior
written consent of both of the Partners.
13.2 WITHHOLDING TAXES. If the Partnership is obligated to withhold and
pay any taxes with respect to any Partner, any tax required to be withheld may
be withheld from any distribution otherwise payable to such Partner, or in lieu
thereof upon remittance to the appropriate tax authority may be charged to that
Partner's Capital Account as if the amount of such tax had been distributed to
such Partner.
13.3 FURTHER ASSURANCES. The Partners shall execute and deliver any
further instruments or documents and perform any additional acts which are or
may become necessary to effectuate and carry on the Partnership created by this
Agreement.
32
<PAGE> 38
13.4 BINDING EFFECT. Subject to the restrictions on transfer set forth
in Article X, this Agreement is binding on and inures to the benefit of the
Partners and their respective permitted transferees, successors, assigns and
legal representatives.
13.5 GOVERNING LAW. The laws of the State of California, including,
without limitation, the Act, govern the organization and internal affairs of the
Partnership and the liability of the Partners of the Partnership.
13.6 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
among the parties with respect to the subject matter herein.
13.7 COUNTERPARTS. This Agreement may be executed in one (1) or more
counterparts with the same force and effect as if each of the signatories had
executed the same instrument.
13.8 PARTIES IN INTEREST. Except as expressly provided in the Act,
nothing in this Agreement confers any rights or remedies under or by reason of
this Agreement on any Persons other than the Partners and their respective
permitted successors and assigns, nor does anything in this Agreement relieve or
discharge the obligation or liability of any third Person to any party to this
Agreement, nor does any provision give any third Person any right of subrogation
or action over or against any party to this Agreement.
13.9 PRONOUNS; STATUTORY REFERENCES. All pronouns and all variations
thereof are deemed to refer to the masculine, feminine, or neuter, singular or
plural, as the context in which they are used may require. Any reference to the
Code, the Regulations, the Act, or other statutes or laws includes all
amendments, modifications, or replacements of the specific sections and
provisions concerned.
13.10 HEADINGS. All headings herein are inserted only for convenience
and ease of reference and are not to be considered in the construction or
interpretation of any provision of this Agreement.
13.11 INTERPRETATION. If any claim is made by any Partner relating to
any conflict, omission or ambiguity in this Agreement, no presumption or burden
of proof or persuasion shall be implied because this Agreement was prepared by
or at the request of a particular Partner or its counsel.
13.12 REFERENCES TO THIS AGREEMENT. Numbered or lettered articles,
sections and subsections herein contained refer to articles, sections and
subsections of this Agreement unless otherwise expressly stated.
13.13 EXHIBITS. All Exhibits attached to this Agreement are incorporated
and shall be treated as if set forth herein.
33
<PAGE> 39
13.14 SEVERABILITY. If any provision of this Agreement or the
application of such provision to any person or circumstance is held invalid, the
remainder of this Agreement or the application of such provision to persons or
circumstances other than those to which it is held invalid will not be affected
thereby.
13.15 ATTORNEY FEES. If any dispute between the Partnership and the
Partners or among the Partners should result in litigation or arbitration, the
prevailing party in such dispute is entitled to recover from the other party all
reasonable fees, costs and expenses of enforcing any right of the prevailing
party, including, without limitation, reasonable attorneys' fees and expenses
and expert witness fees.
13.16 TIME IS OF THE ESSENCE. All dates and times in this Agreement are
of the essence.
13.17 REMEDIES CUMULATIVE. The remedies under this Agreement are
cumulative and shall not exclude any other remedies to which any person may be
entitled at law or in equity.
13.18 CONFIDENTIALITY AND PUBLICITY. The parties agree to keep this
transaction, this Agreement and any documents received from each other in
connection herewith confidential, except to the extent necessary to comply with
applicable law and regulations, or in order to carry out the obligations set
forth in this Agreement. No press release or other public disclosure may be made
by either party or any of its agents concerning this transaction without the
prior written consent of the other parties.
34
<PAGE> 40
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
APARTMENT MANAGEMENT COMPANY, LLC,
a Delaware limited liability company
By: Irvine Apartment Communities, L.P.,
a Delaware limited partnership
By: Irvine Apartment Communities, Inc.,
a Maryland corporation,
its general partner
Name: /s/ Shawn Howie
---------------------------------------------
Shawn Howie
Vice President, Finance and Controller
WESTERN NATIONAL SECURITIES, D/B/A WESTERN NATIONAL PROPERTY
MANAGEMENT,
a California corporation
By: /s/ Michael Hayde
- --------------------------------------
Michael Hayde
Chief Executive Officer
35
<PAGE> 41
EXHIBIT B
BYLAWS OF THE PARTNERSHIP
D-I BOARD OF DIRECTORS'S MEETINGS.
D-1.1 DATE, TIME AND PLACE OF MEETINGS OF THE BOARD OF DIRECTORS;
SECRETARY. The Board of Directors shall meet from time to time, no less
frequently than monthly, but as often as necessary or desirable to carry out its
management functions. The Board of Directors shall meet by telephone conference
or by other means of communications acceptable to the Board of Directors, or at
the principal office of the Partnership or elsewhere in Orange County as the
Board of Directors may agree. At any Board of Directors' meeting, the members of
the Board of Directors (the "MEMBERS") shall appoint a person to preside at the
meeting and a person to act as secretary of the meeting. The secretary of the
meeting shall prepare minutes of the meeting, which shall be placed in the
minute books of the Partnership.
D-1.2 POWER TO CALL MEETINGS. Unless otherwise prescribed by the Act or
by the Certificate, meetings of the Board of Directors may be called by any
Member for the purpose of addressing any matters on which the Board of Directors
may vote.
D-(a) NOTICE OF MEETING. Written notice of a meeting of the Board
of Directors shall be sent or otherwise given to each Member in accordance with
Section D-1.3 not less than three (3) business days nor more than thirty (30)
business days before the date of the meeting. The notice shall specify the
place, date and hour of the meeting and the general nature of the business to be
transacted. No other business may be transacted at this meeting unless otherwise
agreed by the Members.
D-1.3 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any
meeting of the Board of Directors shall be given either personally or by
first-class mail or telegraphic or other written communication, charges prepaid,
addressed to the Member at the address of that Member appearing on the books of
the Partnership or given by the Member to the Partnership for the purpose of
notice. If no such address appears on the Partnership's books or is given,
notice shall be deemed to have been given if sent to that Member by first-class
mail or telegraphic or other written communication to the Partnership's
principal executive office. Notice will be deemed effectively given upon
personal delivery, confirmation of receipt of delivery by facsimile, or three
(3) days after deposit in the United States mail, by registered or certified
mail, return receipt requested. If any notice addressed to a Member at the
address of that Member appearing on the books of the Partnership is returned to
the Partnership by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the Member at
that address, all future notices or reports shall be deemed to have been duly
given without further mailing if these shall be available to the Member on
written demand of the Member at the principal executive office of the
Partnership for a period of one year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any meeting
shall be executed
B-1
<PAGE> 42
by the Member or any secretary or any agent of the Managing General Partner
giving the notice, and shall be filed and maintained in the minute book of the
Partnership.
D-1.4 VALIDITY OF ACTION. Any action approved at a meeting, other than
by unanimous approval of those entitled to vote, shall be valid only if the
general nature of the proposal so approved was stated in the notice of meeting
or in any written waiver of notice.
D-1.5 QUORUM. The presence in person or by proxy of at least four (4)
Members of the Board of Directors shall constitute a quorum at a meeting of the
Board of Directors. The Members present at a duly called or held meeting at
which a quorum is present may continue to do business until adjournment,
notwithstanding the loss of a quorum, if any action taken after loss of a quorum
(other than adjournment) is approved by at least four (4) Members.
D-1.6 ADJOURNED MEETING; NOTICE. Any Board of Directors meeting, whether
or not a quorum is present, may be adjourned from time to time by the vote of
the majority of the Members at that meeting, either in person or by proxy, but
in the absence of a quorum, no other business may be transacted at that meeting,
except as provided in Section D-1.5. When any meeting of the Board of Directors
is adjourned to another time or place, notice need not be given of the adjourned
meeting if the time and place are announced at a meeting at which the
adjournment is taken, unless a new record date for the adjourned meeting is
subsequently fixed, or unless the adjournment is for more than thirty (30) days
after the date set for the original meeting, in which case the Members shall set
a new record date. At any adjourned meeting, the Partnership may transact any
business that might have been transacted at the original meeting.
D-1.7 WAIVER OF NOTICE OR CONSENT. Subject to the terms and conditions
of the Agreement, the actions taken at any meeting of the Board of Directors
however called and noticed, and wherever held, have the same validity as if
taken at a meeting duly held after regular call and notice, if a quorum (or if
required by the Agreement, a supermajority) is present either in person or by
proxy. All such waivers, consents or approvals shall be filed with the
Partnership's records and made a part of the minutes of the meeting.
Attendance of a person at a meeting shall constitute a waiver of
notice of that meeting, except when the Member objects, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened, and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if that objection is expressly made at the meeting. Neither the
business to be transacted nor the purpose of any meeting of the Board of
Directors need be specified in any written waiver of notice except as provided
in Section D- 1.4.
D-1.8 ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action that may
be taken at a meeting of the Board of Directors may be taken without a meeting,
if a consent in writing setting forth the action so taken, is signed and
delivered to the Partnership by the appropriate number of Members required for
such action. All such consents shall be filed
B-2
<PAGE> 43
with the Members or the secretary, if any, of the Partnership and shall be
maintained in the Partnership records. Any Member giving a written consent, or
the Member's proxy holders, may revoke the consent by a writing received by the
Members or secretary, if any, of the Partnership before written consents of the
number of votes required to authorize the proposed action have been filed.
D-1.9 TELEPHONIC PARTICIPATION BY MEMBER AT MEETINGS. Members may
participate in any Board of Directors meeting through the use of any means of
conference telephones or similar communications equipment as long as all Members
participating can hear one another. A Member so participating is deemed to be
present in person at the meeting.
D-1.10 PROXIES. Every Member entitled to vote on any matter has the
right to do so either in person or by one or more agents authorized by a written
proxy signed by the Member and filed with the Board of Directors or secretary,
if any, of the Partnership. A proxy shall be deemed signed if the Member's name
is placed on the proxy (whether by manual signature, typewriting, telegraphic
transmission, electronic transmission or otherwise) by the Member or the
Member's attorney-in-fact. A proxy may be transmitted by an oral telephonic
transmission if it is submitted with information from which it may be determined
that the proxy was authorized by the Member or the Member's attorney-in-fact. A
validly executed proxy that does not state that it is irrevocable shall continue
in full force and effect unless (a) revoked by the Member executing it, before
the vote pursuant to that proxy, by a writing delivered to the Partnership
stating that the proxy is revoked, or by a subsequent proxy executed by, or
attendance at the meeting and voting in person by, the person executing the
proxy; or (b) written notice of the death or incapacity of the maker of that
proxy is received by the Partnership before the vote pursuant to that proxy is
counted; provided, however, no proxy shall be valid after the expiration of
eleven (11) months from the date of the proxy, unless otherwise provided in the
proxy.
D-II OFFICERS.
D-2.1 APPOINTMENT OF OFFICERS. The officers of the Partnership, if
deemed necessary by the Board of Directors, may include a president, vice
president, secretary, assistant secretary and controller, and any other officers
the Board of Directors deems appropriate. The officers shall serve at the
pleasure of the Board of Directors, subject to all rights, if any, of an officer
under any contract of employment. Any individual may hold any number of offices.
The officers shall exercise such powers and perform such duties as specified in
this Agreement and as shall be determined from time to time by the Board of
Directors.
D-2.2 REMOVAL, RESIGNATION AND FILLING OF VACANCY OF OFFICERS. Subject
to the rights, if any, of an officer under a contract of employment, any officer
may be removed, either with or without cause, by the Board of Directors at any
time. Any officer may resign at any time by giving written notice to the Board
of Directors. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice.
B-3
<PAGE> 44
Unless otherwise specified in that notice, the acceptance of the resignation
shall not be necessary to make it effective. Any resignation is without
prejudice to the rights, if any, of the Partnership under any contract to which
the officer is a party. A vacancy in any office because of death, resignation,
removal, disqualification or any other cause shall be filled in the manner
prescribed in this Agreement for regular appointments to that office.
D-2.3 SALARIES OF OFFICERS. The salaries of all officers of the
Partnership shall be fixed by a resolution of the Partnership.
D-2.4 DUTIES AND POWERS OF PRESIDENT. The president shall be the chief
executive officer of the Partnership, and shall, subject to the control of the
Board of Directors, have general management of the business of the Partnership
and shall see that all orders and resolutions of the Board of Directors and
Managing General Partner are carried into effect. The President shall have the
general powers and duties of management usually vested in the office of
president of a corporation, and shall have such other powers and duties as may
be prescribed by the Board of Directors.
D-2.5 DUTIES AND POWERS OF VICE-PRESIDENT. The vice-president, or if
there shall be more than one, the vice-presidents in the order determined by a
resolution of the Board of Directors, shall, in the absence or disability of the
president, perform the duties and exercise the powers of the president and shall
perform such other duties and have such other powers as may be prescribed by the
Board of Directors.
D-2.6 DUTIES AND POWERS OF SECRETARY. The secretary shall attend all
meetings of the Board of Directors, unless directed not to do so by a majority
of the Members and shall record all the proceedings of the meetings in a book to
be kept for that purpose, and shall perform like duties for the standing
committees when required. The secretary shall keep, or cause to be kept, at the
principal executive office, a register, or a duplicate register, showing the
names of all Members, Partners, their addresses, and their Partnership
Interests. The secretary shall have the general duties, powers and
responsibilities of a secretary of a corporation. The secretary shall give, or
cause to be given, notice of all meetings of the Board of Directors and shall
perform such other duties as may be prescribed by the Board of Directors.
D-2.7 DUTIES AND POWERS OF CONTROLLER. The controller shall keep and
maintain, or cause to be kept and maintained, adequate and correct books and
records of accounts of the properties and business transactions of the
Partnership, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, and Partnership Interests. The books of
account shall at all reasonable times be open to inspection by any Partner.
The controller shall have the custody of the funds and securities
of the Partnership, and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Partnership, and shall deposit all
moneys and other valuable effects in the name and to the credit of the
Partnership in such depositories as may be designated by the Members.
B-4
<PAGE> 45
The controller shall disburse the funds of the Partnership as may
be ordered by the Board of Directors and Managing General Partner in accordance
with the terms of the Agreement, taking proper vouchers for such disbursements,
and shall render to the president and the Members, at their regular meetings, or
when Board of Directors so require, at a meeting of the Board of Directors an
account of all its transactions and of the financial condition of the
Partnership.
The controller shall perform such other duties and shall have
such other responsibility and authority as may be prescribed from time to time
by the Board of Directors. The controller shall have the general duties, powers
and responsibility of a controller of a corporation, and shall be the chief
financial and accounting officer of the Partnership.
D-2.8 ACTS OF OFFICERS AS CONCLUSIVE EVIDENCE OF AUTHORITY. Any note,
mortgage, evidence of indebtedness, contract, certificate, statement,
conveyance, or other instrument in writing, and any assignment or endorsement
thereof, executed or entered into between the Partnership and any other Person,
when signed by the president or any vice president, and any secretary, or the
controller, is not invalidated as to the Partnership by any lack of authority of
the signing officers in the absence of actual knowledge on the part of the other
Person that the signing officers had no authority to execute the same.
D-2.9 SIGNING AUTHORITY OF OFFICERS. Subject to any restrictions imposed
by the Members, any officer, acting alone, is authorized to endorse checks,
drafts, and other evidences of indebtedness made payable to the order of the
Partnership, but only for the purpose of deposit into the Partnership's
accounts. All checks, drafts, and other instruments obligating the Partnership
to pay money in any amount must be signed on behalf of the Partnership by any
two (2) officers acting together. Any two (2) officers acting together, shall be
authorized to sign contracts and obligations on behalf of the Partnership. The
foregoing restrictions may be modified by resolution of the Board of Directors.
B-5
<PAGE> 46
EXHIBIT D
ALLOCATION OF REIT OPTIONS
<TABLE>
<CAPTION>
Number of REIT Options
----------------------
<S> <C>
Michael Hayde 40,850
Jerry Glass 40,850
David Stone 4,300
Jeffrey Scott 4,000
Stephen Donohue 5,000
Rex DeLong 3,000
John Atherton 2,000
</TABLE>
D-1
<PAGE> 1
EXHIBIT 10.18
MANAGEMENT AGREEMENT
BY AND BETWEEN
IRVINE APARTMENT COMMUNITIES, L.P.
A DELAWARE LIMITED PARTNERSHIP
AS "OWNER"
AND
IRVINE APARTMENT MANAGEMENT COMPANY,
A CALIFORNIA GENERAL PARTNERSHIP
AS "MANAGER"
DATED AS OF APRIL 1, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1. EXCLUSIVE AGENCY........................................................ 1
ARTICLE 2. TERM OF AGREEMENT....................................................... 1
ARTICLE 3. TERMINATION............................................................. 2
3.1 Termination With Notice For Cause................................. 2
3.2 Termination Without Notice For Cause.............................. 3
3.3 Termination Following Sale of the Project......................... 5
3.4 Final Accounting.................................................. 6
3.5 Continued Obligations of Owner.................................... 6
ARTICLE 4. BUDGETS, ACCOUNTING AND REPORTING....................................... 8
4.1 Budget............................................................ 8
4.2 Operation in Accordance With Budget............................... 9
4.3 Books of Account.................................................. 10
4.4 Financial Reports................................................. 10
4.5 Supporting Documentation.......................................... 11
4.6 Changes in Manager's Operations Manual............................ 11
4.7 Audit............................................................. 11
ARTICLE 5. OWNER'S RIGHT TO AUDIT.................................................. 12
5.1 Owner's Right to Audit............................................ 12
ARTICLE 6. LEASING ACTIVITIES...................................................... 12
6.1 Manager's Leasing Obligations..................................... 12
ARTICLE 7. MANAGEMENT OF PROJECT................................................... 13
7.1 Duties of Manager; Standards...................................... 13
.................................................................. 19
ARTICLE 8. BANK ACCOUNTS........................................................... 19
8.1 Revenue Account................................................... 19
8.2 Operating Account................................................. 19
8.3 Security Deposit Account.......................................... 19
8.4 Change of Banks................................................... 20
ARTICLE 9. INSURANCE AND INDEMNIFICATION........................................... 20
9.1 Insurance Types................................................... 20
9.2 Evidence of Insurance............................................. 21
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
9.3 Damages........................................................... 21
9.4 Workers' Compensation Insurance................................... 21
9.5 Comprehensive or Commercial General Liability Insurance........... 22
9.6 Automobile Liability Insurance.................................... 22
9.7 Comprehensive Crime Insurance..................................... 22
9.8 Insurance to be Maintained by Owner............................... 22
9.9 Conditions to Owner's Insurance Being Primary..................... 23
9.10 Manager's Obligations............................................. 23
9.11 Waiver of Subrogation............................................. 24
9.12 Additional Insured................................................ 24
9.13 Claims Procedures................................................. 24
9.14 Insurance Audit; Refunds.......................................... 25
9.15 Owner's Election to Insure....................................... 25
ARTICLE 10. COMPENSATION OF MANAGER................................................ 25
10.1 Management Fee.................................................... 25
10.2 Project Income.................................................... 25
10.3 Intentionally Deleted............................................. 26
ARTICLE 11. PAYMENT OF EXPENSES.................................................... 26
11.1 Costs Eligible for Payment from Operating Account................. 26
11.2 Non-Reimbursable Costs............................................ 27
ARTICLE 12. GENERAL PROVISIONS..................................................... 29
12.1 Independent Contractor............................................ 29
12.2 Notices........................................................... 29
12.3 Brokers........................................................... 29
12.4 Attorneys' Fees................................................... 29
12.5 Assignment........................................................ 30
12.6 Amendments........................................................ 30
12.7 Licensing......................................................... 30
12.8 Entire Agreement.................................................. 30
12.9 Counterparts...................................................... 30
12.10 Governing Law..................................................... 30
12.11 Third-Party Disputes.............................................. 31
12.12 Fiduciary Relationship............................................ 31
12.13 Gifts............................................................. 31
12.14 Confidentiality................................................... 31
12.15 Subordination to Mortgages........................................ 32
12.16 Hazardous Wastes.................................................. 32
12.17 Regulatory Compliance............................................. 35
12.18 Approvals......................................................... 35
12.19 Proposition 65 Compliance......................................... 35
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
12.20 Indemnifications.................................................. 36
</TABLE>
EXHIBIT A - DESCRIPTION OF THE PROJECT
EXHIBIT B - MINIMUM INSURANCE REQUIREMENTS FOR OUTSIDE
CONTRACTORS NOT CLASSIFIED AS CLASS I
EXHIBIT C - MINIMUM INSURANCE REQUIREMENTS FOR CLASS I
OUTSIDE CONTRACTORS
EXHIBIT D - CLASS I CONTRACTORS
EXHIBIT E - OWNER'S AUTHORIZED REPRESENTATIVES
EXHIBIT F - MANAGEMENT FEE SCHEDULE
iii
<PAGE> 5
SCHEDULE OF DEFINED TERMS
The terms listed below are defined in the Sections of this Agreement referenced
below.
<TABLE>
<S> <C>
"Affiliate".................................................................Section 3.1
"Anti-Discrimination Policy".............................................Section 7.1(n)
"Approved Budget"........................................................Section 4.1(c)
"Budget Year"............................................................Section 4.1(d)
"Claim"....................................................................Section 9.13
"Class I Contractors"....................................................Section 9.1(a)
"Class I Work"...........................................................Section 9.1(a)
"Commencement Date"...........................................................Article 2
"Contractors"............................................................Section 9.1(a)
"Contracts".........................................................Section 7.1(d)(iii)
"Control"...................................................................Section 3.1
"Covered Personnel"......................................................Section 7.1(n)
"Deposit Account"...........................................................Section 8.3
"Gift"....................................................................Section 12.13
"Hazardous Wastes"......................................................Section 12.16.2
"HMCP"..................................................................Section 12.16.1
"Income"...................................................................Section 10.2
"Losses".................................................................Section 7.1(m)
"Major Categories"..........................................................Section 4.2
</TABLE>
iv
<PAGE> 6
<TABLE>
<S> <C>
"Management Fee"...........................................................Section 10.1
"On Site Personnel".........................................................Section 9.4
"Operating Account".........................................................Section 8.2
"Original Management Agreement"...............................................Recital B
"Owner Indemnitees"........................................................Section 9.12
"Project".....................................................................Recital A
"Project Income"...........................................................Section 10.2
"Proposition 65"..........................................................Section 12.19
"Public Official".........................................................Section 12.13
"Regulatory Agreement"....................................................Section 12.17
"Rent".....................................................................Section 10.2
"Revenue Account"...........................................................Section 8.1
"Term"........................................................................Article 2
</TABLE>
v
<PAGE> 7
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (the "AGREEMENT") is made and entered
into as of the 1st day of April, 1998, by and between IRVINE APARTMENT
COMMUNITIES, L.P., a Delaware limited partnership ("OWNER") and IRVINE APARTMENT
MANAGEMENT COMPANY, a California general partnership ("MANAGER").
RECITAL
Owner is the owner of the apartment projects more particularly
described on EXHIBIT A attached hereto. Owner desires to appoint Manager as its
agent to lease, manage and operate the Projects.
NOW THEREFORE, in consideration of the foregoing recitals and the
mutual promises and covenants contained herein, Owner and Manager agree as
follows:
ARTICLE 1. EXCLUSIVE AGENCY
Owner hereby grants to Manager the sole and exclusive right to
lease, rent and manage all of the projects described in Exhibit A attached
hereto, any other apartment project located on the Irvine Ranch in Orange
County, California, the Villas of Renaissance located in San Diego County,
California and acquired, completed or constructed by Owner during the term of
this Agreement, and, to the extent practical (as determined by Owner in its sole
and absolute discretion and without any obligation to do so), any other
apartment projects located in Southern California and acquired, completed or
constructed by Owner during the term of this Agreement. (individually, a
"PROJECT" and collectively, the "PROJECTS"). Manager acknowledges that in
connection with any acquisition or development of projects other than the
Projects, Owner may appoint another Person to act as property manager of such
projects. Manager hereby accepts such appointment, upon the terms set forth
herein. Exhibit A shall be amended, from time to time, as may be necessary to
reflect the addition of apartment projects acquired, completed or constructed by
Owner after the date hereof.
1
<PAGE> 8
ARTICLE 2. TERM OF AGREEMENT
The term (the "TERM") of this Agreement shall commence on April
1, 1998 (the "COMMENCEMENT DATE") and shall terminate on March 31, 2001, unless
sooner terminated as provided in ARTICLE 3 below.
ARTICLE 3. TERMINATION
3.1 TERMINATION WITH NOTICE FOR CAUSE. Owner may terminate this
Agreement "FOR CAUSE" (as defined below) by the delivery of written notice of
such termination to Manager. The acts or omissions of Manager which shall
entitle Owner to terminate this Agreement "FOR CAUSE" shall include: (a) failure
to operate or lease the Projects in an independent manner in the best interest
of Owner without favoritism to any other property in which Manager or any
Affiliate (as defined below) of Manager has any direct or indirect interest,
unless Owner fails to act in a commercially reasonable manner in approving the
budgets for such Projects; (b) failure to operate or lease a Project in
accordance with the standards presently in effect with respect to the operation
and leasing of such Project, unless Owner fails to act in a commercially
reasonable manner in approving the budgets for such Projects; (c) failure to
operate or lease a Project at a level of quality at least equal to any other
property of a type similar to such Project located in Orange County or San Diego
County, California (as applicable) in which Manager or any Affiliate has any
direct or indirect interest, unless Owner fails to act in a commercially
reasonable manner in approving the budgets for such Projects; (d) failure to
provide accurate and timely reporting of financial and other information as
required by this Agreement; or (e) failure to cure any other breach of this
Agreement by Manager within the time period specified herein. Any termination
pursuant to this SECTION 3.1 shall be effective upon the expiration of ten (10)
days following the giving of such notice of termination to Manager, unless
Manager cures the specified failure within such ten (10) day period, or,
alternatively, if such failure is not capable of cure within ten (10) days,
unless Manager, within ten (10) days following the giving of such notice, shall
have initiated all necessary and appropriate action to cure such failure and
continues such action diligently to completion; provided, however, that in no
event shall such cure period exceed a total of sixty (60) consecutive days. For
purposes of this Agreement, "AFFILIATE" shall mean any managing general partner
of Manager and any person or entity (other than Owner and The Irvine Company)
which directly, or indirectly through one or more intermediaries, Controls, is
Controlled by or is under common Control (as such terms are defined below) with
a general partner of Manager (ii) any director or executive officer of Manager
or a general partner of Manager, or (iii) any person or entity holding an
ownership interest in Manager or a general partner of Manager. For purposes of
this Agreement, the term "CONTROL" shall mean either (a) the ownership of fifty
percent (50%) or more of the beneficial interest or the voting power of the
appropriate entity, or (b) the power to direct or cause the direction of the
management policies of such entity, by contract or otherwise.
2
<PAGE> 9
3.2 TERMINATION WITHOUT NOTICE FOR CAUSE.
(a) In addition to Owner's rights set forth in SECTION 3.1, Owner
may terminate this Agreement, without notice, upon the occurrence of any of the
following: (i) dissolution or termination of Manager or any day-to-day managing
general partner of Manager by merger, consolidation or otherwise; (ii) the sale,
pledge or other disposition or transfer of more than forty percent (40%) of the
interests of any day-to-day managing general partner of Manager to persons or
entities other than the current owners thereof; (iii) the termination or
suspension of Manager's real estate brokerage license, if such license is
legally required as a condition to manage or lease the Project in accordance
with the terms hereof; (iv) the death of Michael Hayde; (v) the cessation on the
part of Manager or on the part of any managing general partner of Manager to
continue to do business; (vi) the failure of Manager to deal properly with and
account for trust funds or the bank accounts established hereunder; (vii) the
commission of any fraud, misrepresentation, breach of fiduciary duty or willful
misconduct in connection with the performance of Manager's duties under this
Agreement; (viii) the bankruptcy, insolvency, reorganization or reconstitution
of Manager or any day-to-day managing general partner of Manager or any
assignment for the benefit of the creditors of Manager or any day-to-day
managing general partner of Manager, (ix) an audit by Owner of any of the
financial reports required under SECTION 4.4 reveals a Material Individual
Discrepancy (as hereafter defined) in the income, expenses, billings or
reimbursements reflected therein or (x) an audit by Owner of any of the
financial reports required under SECTION 4.4 reveals a Material Cumulative
Discrepancy (as hereafter defined) in the income, expenses, billings or
reimbursements reflected therein.
(b) Owner or its representatives may perform audit procedures on
the books and records of the Manager as deemed appropriate by Owner in its sole
and absolute discretion. Manager shall cooperate to the fullest extent possible
and in a timely manner with Owner's audit of Manager, and Manager shall not
interfere with the performance of any audit procedure.
(c) As used in this Section 3.2, the following terms have the
following meanings:
(i) "MATERIAL INDIVIDUAL DISCREPANCY" means a discrepancy
for any individual Material Matter in a calendar year in an
amount greater than Twenty-Five Thousand Dollars ($25,000) for
such calendar year.
(ii) "MATERIAL CUMULATIVE DISCREPANCY" means a cumulative
discrepancy for all Material Matters in the aggregate in a
calendar year in an amount greater than Fifty Thousand Dollars
($50,000) for such calendar year.
3
<PAGE> 10
(iii) "MATERIAL MATTER" means any audit discrepancy,
including, without limitation, any of the
following:
(1) A misappropriation of any funds derived from
the Assets or an intentional misuse of any
Assets;
(2) Any expenditures or contracts that have not
been approved in accordance with the terms
of this Agreement;
(3) Any payments to any Affiliates of Manager
that have not been approved in accordance
with the terms of this Agreement;
(4) Any payments for compensation or bonuses to
Manager's employees for which Manager is
entitled to reimbursement that have not been
approved in accordance with the terms of
this Agreement;
(5) Any severance agreements or employment
contracts for Manager's employees that have
not been approved in accordance with the
terms of this Agreement;
(6) Any political, lobbying or charitable
contribution that has not been approved by
Owner;
(7) The institution of litigation by Manager or
Manager's managing general partner in
violation of this Agreement; and
(8) Entry of a settlement agreement or the
making of any payment with respect to any
authorized litigation that has not been
approved in accordance with the terms of
this Agreement.
(d) Notwithstanding anything to the contrary in Section 3.2(a),
Owner hereby waives its right to terminate the Agreement without notice for
cause for the first Material Individual Discrepancy or Material Cumulative
Discrepancy that meets each of the following criteria:
(i) Manager's managing general partner has provided evidence
satisfactory to Owner in its sole discretion that the
Material Individual Discrepancy
4
<PAGE> 11
or Material Cumulative Discrepancy was the result of an
inadvertent error by an individual who is not an officer
of Manager; and
(ii) The Material Individual Discrepancy or Material Cumulative
Discrepancy does not exceed One Hundred Thousand Dollars
($100,000).
Notwithstanding Owner's waiver of its right to terminate the Agreement pursuant
to this Section 3.2(d), Manager shall reimburse Owner for all losses suffered by
Owner as a result of such Material Individual Discrepancy or Material Cumulative
Discrepancy.
(e) If Manager disputes the results and audit, Owner and managing
general partner of Manager shall attempt to agree on a qualified arbitrator to
be the sole judge over the dispute. As used in this Section 3.2(e), a "qualified
arbitrator" is a person that is a current or former audit partner with an
international accounting firm that is not an Affiliate of either Manager or
Owner. If after good faith efforts, Owner and managing general partner of
Manager can not agree on the identity of the qualified arbitrator within ten
(10) business days after written notice of Manager's dispute of the results and
audit, Owner and managing general partner of Manager shall each appoint a
qualified arbitrator and the two appointed arbitrators shall select a third
qualified arbitrator within twenty (20) days to determine the dispute. No later
than sixty (60) days after an arbitration is commenced pursuant to this Section
3.2(e), the qualified arbitrator shall issue its determination, together with
written finding of fact supporting its determination. The qualified arbitrator's
determination must be supported by law and substantial evidence and must comply
with the terms of this Agreement. The non-prevailing party in such arbitration
shall pay the costs and expenses of any arbitrator retained pursuant to this
Section 3.2(e). Subject to the provisions of Section 12.14, Owner and Manager
shall pay their respective costs and expenses incurred in preparation for any
arbitration initiated under this Section 3.2(e).
(f) To the extent that Manager through its own investigation and
review of Manager's books and records determines that a Material Individual
Discrepancy or Material Cumulative Discrepancy exists and reimburses the Manager
and Owner, as appropriate, for such Material Individual Discrepancy or Material
Cumulative Discrepancy prior to Owner's audit of such matter, Owner will have no
right to terminate this Agreement for cause because of such matter.
3.3 TERMINATION FOLLOWING SALE OF THE PROJECT. In the event Owner
sells, conveys, effects a tax-deferred exchange of or otherwise transfers any or
all of the Projects, Owner may elect, but shall have no obligation, to terminate
this Agreement with respect to the Project or Projects to be transferred by
written notice to Manager, with such termination to be effective concurrently
with such transfer.
5
<PAGE> 12
3.4 FINAL ACCOUNTING. Upon termination or expiration of this
Agreement for any reason, Manager shall deliver to Owner with respect to each
Project as to which the termination is effective, the following:
(a) a final accounting, setting forth the balance of
income and expenses of such Project as of the date of termination, to be
delivered within sixty (60) days after such termination, and an interim
accounting, in the form set forth in SECTION 4.4, for the thirty (30)
day period immediately following the date of termination;
(b) any balance of funds of Owner or tenant security
deposits applicable to such Project, to be delivered immediately;
(c) all records, contracts, leases, receipts for deposits,
unpaid bills, keys, paid invoices, tenant correspondence files and other
papers or documents which pertain to such Project, to be delivered
immediately. Manager may, at its expense, retain copies of any of the
foregoing documents (excluding keys) for its records;
(d) copies of all policies of insurance required to be
maintained in accordance with ARTICLE 9 hereof; and
(e) whenever received by Manager, all refunds or return of
deposits attributable to Workers' Compensation Insurance paid for by
Owner pursuant to the terms of this Agreement.
Manager's obligations under this SECTION 3.4 shall survive the termination or
expiration of this Agreement.
3.5 CONTINUED OBLIGATIONS OF OWNER.
(a) Upon the termination or expiration of this Agreement
for any reason, Owner shall, subject to the limitations contained in
this Agreement, remain obligated to Manager for any unpaid Management
Fee (as defined below) earned by Manager pursuant to SECTION 10.1
through the date of termination and for all reimbursements due to
Manager pursuant to this Agreement (offset, however, by (i) the amount
of any damages incurred by Owner as the result of any defaults by
Manager under this Agreement, including, without limitation, the
reasonable expenses of Owner and Owner incurred in curing such default,
and (ii) any other amounts due to Owner from Manager). Owner agrees to
defend, indemnify and hold Manager free and harmless against any and all
Losses (as defined below) arising from the acts of Owner or any
successor to Manager under the Contracts (as defined below) following
the date of termination as provided in SECTION 7.1(m) of this Agreement.
6
<PAGE> 13
(b) In the event Owner terminates this Agreement by reason
of a sale or other conveyance of any or all of the Projects as described
in SECTION 3.3, the following provisions shall govern with respect to
the payment of the Management Fee with respect to each Project sold or
conveyed:
(i) If Owner gives Manager at least thirty (30)
days' prior written notice of such sale and termination of this
Agreement or, without regard to whether any such prior notice is
given, the transferee elects to engage Manager to lease, manage
and operate the transferred Project or, in the case of the sale
or conveyance of all of the Projects, to assume Owner's and
Owner's obligations hereunder, Owner shall pay to Manager any
unpaid portion of the Management Fee earned with respect to each
Project being sold or conveyed as of the date of termination or
transfer, as well as any other expenses payable to Manager
hereunder as of such date, and no further sums shall be due
Manager from Owner; or
(ii) If Owner fails to give Manager at least thirty
(30) days' prior written notice of such sale and termination and
the transferee elects not to engage Manager or to assume Owner's
obligations hereunder, Owner shall pay to Manager, in addition to
the portion of the Management Fee earned with respect to each
Project being sold or conveyed, through the date of termination,
an amount equal to the Management Fee Manager would have earned
with respect to such Project(s), but for the termination, during
the thirty (30) days' period following such termination. Except
as provided in this SUBSECTION 3.5(b)(ii), upon any sale or
transfer of a Project, Owner shall be released from all of their
respective obligations hereunder (other than those obligations
which have accrued as of the date of termination), any
obligations to be performed hereunder with respect to such
Project after the date of termination and any continuing
indemnification obligations hereunder.
(c) If Manager is entitled to a Management Fee or any sums
following a termination of this Agreement, Owner shall pay to Manager,
within twenty (20) days after the effective date of such termination, an
amount equal to the Management Fee due Manager, pro-rated to the date of
termination, less any amounts which may be due Owner from Manager and
the amount of any damages incurred by Owner as the result of any
defaults by Manager under this Agreement including, without limitation,
the reasonable expenses of Owner incurred in curing such default. Any
amounts in addition to the Management Fee earned as of the date of
termination and payable under SUBSECTION 3.5(b)(ii) shall be paid within
twenty (20) days following the expiration of the thirty (30) day period
described in SUBSECTION 3.4 (b)(ii).
7
<PAGE> 14
Owner's obligations under this SECTION 3.5 shall survive termination and
expiration of this Agreement.
ARTICLE 4. BUDGETS, ACCOUNTING AND REPORTING
4.1 BUDGET.
(a) If any portion of a Project is leased as of the
Commencement Date, Owner shall deliver to Manager the budget for such
Project for the period commencing on the Commencement Date and ending
ninety (90) days thereafter. Manager shall, within thirty (30) days
after the Commencement Date, provide Owner with Manager's written
comments with respect to such budget. If a Project is not ready for
leasing as of the Commencement Date, within forty-five (45) days prior
to the availability of the first residential unit for leasing, Manager
shall prepare and submit to Owner the budget for such Project as
hereinafter described. With respect to the Budget Year (as defined
below), or any applicable portion thereof during the first calendar year
of the Initial Term, and for each Budget Year thereafter during the
Term, Manager shall prepare and submit to Owner, for Owner's approval, a
proposed budget for each Project, in form reasonably acceptable to
Owner, for the promotion, operation, repair and maintenance of the
Project for each forthcoming Budget Year. Manager shall use its best
efforts to minimize the cost to Owner of goods and services supplied to
all Projects (including the utilization of competitive bids, where
possible) without adversely affecting the physical condition, standards
of maintenance or operations of the Projects, taken individually and as
a whole. Owner acknowledges, however, that certain line items to be
included in the proposed budget (e.g., property taxes and charges
imposed by public utility companies) are beyond Manager's control. Each
proposed budget shall be delivered to Owner no later than one hundred
twenty (120) days prior to the end of the Budget Year preceding the
Budget Year for which the proposed budget is to be effective or as
otherwise instructed in writing by Owner. Notwithstanding the foregoing,
Owner shall have the right, from time to time, upon written notice to
Manager, to reasonably modify Manager's duties under this SECTION
4.1(a).
(b) Such proposed budget shall include a proposed
marketing and staffing plan, leasing parameters and an estimated capital
budget, with all line items classified in accordance with a chart of
accounts approved by Owner. Each proposed budget shall include a current
year forecast of operating revenues and expenses for the Project for
which the proposed budget has been prepared.
(c) For each Project Owner shall approve, or specify an
alternative to, the proposed budget or any individual line item set
forth therein in its sole and absolute discretion. Owner shall, on or
before the commencement of each Budget
8
<PAGE> 15
Year, at its option, either give written notice of its approval of the
proposed budget or give written notice of an alternative budget. Each
budget, as approved or otherwise specified by Owner in writing, shall be
referred to herein as the "APPROVED BUDGET." Notwithstanding the
foregoing, Owner shall have the right, from time to time, upon written
notice to Manager, to modify any Approved Budget for any Budget Year.
(d) As used herein, "BUDGET YEAR" shall mean the twelve
(12) month period elected by Owner from time to time in its discretion.
Until otherwise elected by Owner, on behalf of Owner, "BUDGET YEAR"
shall mean the fiscal year beginning on January 1 and ending on the
following December 31. In the event Owner, on behalf of Owner elects to
change the Budget Year at any time during the Term, Manager shall revise
the Approved Budget for each affected Project in accordance with the
provisions of this SECTION 4.1 to reflect such change, and Manager shall
cooperate with Owner as necessary to accommodate the change in the
Budget Year.
4.2 OPERATION IN ACCORDANCE WITH BUDGET. Manager shall use its
best efforts to insure that the actual costs of maintaining and operating each
Project do not exceed the amounts agreed upon in the Approved Budget with
respect to such Project, either in total or with respect to any individual line
item. Any change to an Approved Budget shall be subject to the prior written
approval of Owner which approval may be withheld in Owner's sole discretion. All
expenses must be charged to the proper account on the Approved Budget and no
expense may be classified or reclassified for the purpose of avoiding an excess
in the annual budgeted amount of any accounting category. If Manager advances
for Owner's account any amount for the payment of any expenses of Manager, Owner
shall reimburse Manager therefor only if: (a) such expenses are for items on the
Approved Budget and (b) Manager has submitted appropriate details of such
expenses, including, without limitation, paid invoices without Manager's markup.
During any Budget Year, Manager shall not, without the prior written approval of
Owner: (a) disburse any amounts attributable to items not reflected in the
Approved Budget which exceed, in the aggregate, Five Thousand Dollars ($5,000),
except in the case of an emergency situation threatening imminent injury to
persons, damage to property or interruption of essential services to tenants, or
(b) make any expenditure which in Manager's reasonable judgment will cause, on
an annual basis, either the total Approved Budget to be exceeded or the amounts
allocated to the following categories: Payroll and Related Expenditures, General
and Administrative Expense, Advertising and Promotion, Turnover,
Maintenance-Buildings, Maintenance-Grounds, Maintenance-Non-Recurring, Utilities
and Capital Expenses (collectively, the "MAJOR CATEGORIES") to be exceeded;
provided, however, Manager shall be entitled to make expenditures which exceed
individual line items included within the Major Categories by an amount not to
exceed the greater of (i) ten percent (10%) of the budgeted amount for such line
item, or (ii) Ten Thousand Dollars ($10,000), so long as neither the total
budgeted amount for the applicable Major Category nor the total Approved Budget
is exceeded.
9
<PAGE> 16
4.3 BOOKS OF ACCOUNT. Manager shall maintain adequate and
separate books and records for each Project with entries supported by supporting
documentation sufficient to allow Owner or its agents to ascertain their
accuracy. Such books and records shall be made available to Owner and its agents
in connection with independent financial audits of Owner, as well as audits by
any governmental authority, including, without limitation, the Internal Revenue
Service, the Franchise Tax Board and the Orange County Assessor's Office.
Manager shall maintain and safeguard such books and records at Manager's office
or at such other location as may be agreed upon in writing. Manager shall ensure
such control over accounting and financial transactions as is reasonably
necessary to protect Owner's assets from theft, error or fraudulent activity by
Manager's employees. Unless any losses arising from any such occurrences are
covered by any of the insurance policies required to be maintained hereunder,
Manager shall bear all monetary losses arising from such occurrences, including,
without limitation, the following:
(a) Theft of assets by Manager's principals, officers,
employees or Affiliates;
(b) Late charges, penalties or interest due to delay in
payment of invoices, bills or other like charges, for any reason other
than the failure of Owner to deposit funds in the Operating Account (as
defined below) in a timely manner. Such late charges, penalties or
interest shall be borne by Manager and paid directly by Manager;
(c) Overpayment or duplicate payment of invoices arising
from either fraud or negligence;
(d) Overpayment of labor costs arising from either fraud
or negligence;
(e) A sum equal to the value of any form of payment or
property from suppliers to Manager's employees arising from the purchase
of goods or services for the Project(s), excluding, however, gifts of
nominal value received in the ordinary course of business and in
compliance with SECTION 12.13; and
(f) Unauthorized use of facilities in any Project by
Manager's employees.
4.4 FINANCIAL REPORTS. No later than the third (3rd) business day
of each calendar month, Manager shall furnish to Owner with respect to each
Project, in such form as Owner may require, a report of all transactions
occurring during the preceding month. Manager shall deliver to Owner no later
than the tenth (10th) day of each calendar month, in such form as Owner may
require, a statement of income and expenses for each Project for the preceding
month and a balance sheet for each Project, each prepared on a cash and
10
<PAGE> 17
accrual basis according to generally accepted accounting principles and
accompanied by supporting summaries of adjusting journal entities, bank
reconciliations applicable to the most recent statements prepared by the banks
handling Project funds, an analysis of prepaid rent (if any), a schedule of all
expenses and amounts billed by Manager to Owner and all amounts reimbursed by
Owner to Manager, and such other financial statements or reports as Owner may
require. Manager shall notify Owner, in writing, on a monthly basis, of all
rental arrearages that in its judgment are properly written off as
uncollectible.
4.5 SUPPORTING DOCUMENTATION. As additional supporting
documentation for the monthly financial statements required under SECTION 4.4,
unless otherwise directed by Owner, Manager shall make available, at Manager's
office, the following:
(a) all bank statements and bank deposit slips;
(b) detailed cash receipts and disbursement records;
(c) detailed trial balance for receivables and payables
and billed and unbilled revenue items;
(d) paid invoices;
(e) supporting documentation for payroll, payroll taxes
and employee benefits;
(f) appropriate details of accrued expenses and property
records; and
(g) information necessary for preparation of Owner's tax
returns, including a description of and a statement of amounts
expended in connection with repairs, capital improvements,
taxes, lease summaries and professional fees.
4.6 CHANGES IN MANAGER'S OPERATIONS MANUAL. Within one hundred
twenty (120) days following the end of each calendar quarter, Manager shall
deliver to Owner copies of any changes which have been made in Manager's
Operations Manual during the last preceding calendar quarter.
4.7 AUDIT. Using an in-house audit specialist, Manager shall, at
least 1.5 times per calendar year, audit all books, records and files maintained
by Manager for Owner with respect to the Projects in accordance with the audit
guidelines previously or hereafter delivered by Owner. Owner shall have the
right to revise such audit guidelines from time to time upon written notice to
Manager. Manager shall (i) deliver to Owner an audit schedule within thirty (30)
days after the Commencement Date and (ii) deliver to Owner a copy of the
11
<PAGE> 18
completed audit report and discrepancy responses no later than thirty (30) days
after completion of each audit during the Term.
ARTICLE 5. OWNER'S RIGHT TO AUDIT
5.1 OWNER'S RIGHT TO AUDIT. Owner, or persons appointed by Owner,
may, at Owner's expense, examine all books, records and files maintained for
Owner by Manager. Owner may, at its expense, perform any audit or investigation
relating to Manager's activities either at the Project to which such books,
records or files relate or at any office of Manager if such audit or
investigation relates to Manager's activities for Owner. Should Owner's
employees or representatives discover either weaknesses in internal control or
errors in recordkeeping, Manager shall correct such discrepancies either upon
discovery or within a reasonable period of time thereafter. Manager shall inform
Owner in writing of the action taken to correct any audit discrepancies. Nothing
contained in this SECTION 5.1 shall be deemed to limit Owner's right to
terminate this Agreement "FOR CAUSE" as set forth in SUBSECTION 3.2(i).
ARTICLE 6. LEASING ACTIVITIES
6.1 MANAGER'S LEASING OBLIGATIONS. Subject to the direction of
Owner Manager shall use its good faith, diligent efforts to lease the Projects
in accordance with the Approved Budgets and rental rates, shall act in a
fiduciary capacity with respect to Owner and shall deal at arm's length with all
third parties, including, without limitation, Affiliates. Without limiting the
generality of the foregoing, Manager's leasing obligations shall include the
following:
(a) Manager shall diligently undertake the rental of all
residential units within the Projects which are or may become vacant
during the Term. Manager shall establish controls so that ample time is
available to renew leases or obtain new tenants and shall use its best
efforts to avoid vacancies and loss of income.
(b) In leasing any portion of a Project, Manager shall
utilize only a standard lease form approved by Owner, with no
modifications thereto. Manager shall require each prospective tenant to
submit financial information sufficient to allow Manager to verify the
ability of such prospective tenant to perform its obligations under its
lease.
(c) Manager is hereby authorized, during the Term as agent
for Owner, to execute residential lease agreements in the form of the
then approved standard lease form, provided that Manager shall comply
with all terms and provisions hereof, including, without limitation, the
leasing guidelines previously or
12
<PAGE> 19
hereafter delivered by Owner (the "LEASING GUIDELINES"). Owner shall
have the right to revise such Leasing Guidelines from time to time upon
written notice to Manager. In no event shall any lease executed by
Manager provide for a lease term in excess of twelve (12) months,
without Owner's prior written consent. The rental rates established or
approved by Owner shall hereinafter be referred to as the "RENTAL
SCHEDULE."
(d) Manager shall from time to time, but not less often
than once per calendar quarter, submit to Owner, for review and approval
by Owner, in writing, recommended rental rates for each Project. Such
recommendation shall be in writing and shall be sent to Owner no later
than fifteen (15) days prior to the end of each calendar quarter during
the Term. Owner shall, at its option, give written notice of its
approval of such recommendation or, alternatively, of such other rental
rates which Owner desires to establish for each Project. The failure by
Owner to notify Manager, in writing, of Owner's approval of such
recommended rental rates shall be deemed to be Owner's disapproval
thereof. If Owner does not elect to adopt new rental rates for a
Project, the rental rates previously in effect for such Project shall be
controlling. In no event shall Manager deviate from the rental rates
established by Owner for each Project, unless otherwise approved in
writing by Owner.
(e) Manager shall schedule monthly meetings with Owner in
order to review all advertising and promotional materials for each
Project, which materials shall be subject to Owner's approval and shall
comply with all applicable laws, ordinances and regulations, including,
without limitation, any policies or procedures which may be established
by Owner and communicated in writing to Manager. In addition, Manager
shall obtain the prior approval of Owner (which approval need not be in
writing), prior to using any advertising or promotional material not
approved by Owner at such monthly meetings. The cost of all advertising
and promotional procedures and advertising campaigns shall be within the
limits set forth for such expenses in the Approved Budget for the
related Project or as otherwise approved by Owner in writing from time
to time.
ARTICLE 7. MANAGEMENT OF PROJECT
7.1 DUTIES OF MANAGER; STANDARDS. Manager shall manage, operate
and maintain each Project in accordance with the general standards set forth in
this ARTICLE 7, the guidelines, policies and procedures issued by Owner from
time to time (including, without limitation, the HMCP, as defined below) and
Manager's Operations Manual for such Project, in the form delivered to Owner
from time to time. Owner will provide Manager with any additional documentation
reasonably necessary to establish Manager's authority to act as required
hereunder. Without limiting the generality of the foregoing, Manager's functions
hereunder shall include the following:
13
<PAGE> 20
(a) Manager shall manage each Project in an efficient and
businesslike manner consistent with the standards currently in effect
for such Project, having due regard for the age and physical condition
of such Project. In addition, Manager shall operate each Project so as
to maintain the good name and reputation of Owner in the community in
which such Project is located. Manager shall perform all services in a
diligent and professional manner in accordance with recognized standards
of the property management industry and in compliance with such
standards and practices as are prevalent in the geographic area where
the Project is located. Manager shall act in a fiduciary capacity with
respect to the proper protection of and accounting for Owner's assets,
in an independent manner with all third parties and in the best
interests of Owner at all times.
(b) Manager shall use its best efforts to collect all
rents and other charges which may become due at any time from any tenant
of a Project, or from others for services provided in connection with or
for the use of a Project or any portion thereof. Manager shall collect
and identify any income due Owner from miscellaneous services provided
to tenants or the public, including, without limitation, parking income,
tenant storage, and coin-operated washers, dryers and other machines of
all types. All funds received by Manager for or on behalf of Owner shall
be deposited in a bank designated by Owner in the Revenue Account (as
defined below).
(c) Manager shall, at Owner's expense, maintain and make
or cause to be made such ordinary repairs and alterations as Manager may
deem advisable or necessary, subject to and within the limitations of
the Approved Budget for each Project and of this Agreement.
(d) (i) Manager shall, at Owner's expense, make or cause
to be made such capital improvements to a Project pursuant to plans and
specifications approved by Owner, as are included in the Approved Budget
for such Project or are otherwise approved by Owner, as well as all
remodeling and refurbishing of tenant premises as approved by Owner in
connection with the requirements of tenant leases. Manager shall make
recommendations, select contractors and follow such bid procedures as
are required by Owner in writing from time to time and shall supervise
all such work to obtain compliance with contract requirements and
applicable law.
(ii) Manager shall, at Owner's expense, contract for
those utilities and provide, or cause to be provided, other
building operation, landscaping and maintenance services Manager
or Owner shall deem advisable. Manager shall not enter into any
contracts with any Affiliate without the prior written consent of
Owner. In the event Manager or an Affiliate is then managing
other projects similar to the Projects, whether or not any of
such other projects are owned in whole or in part by Owner,
Manager shall, if
14
<PAGE> 21
possible and subject to the provisions of this SUBSECTION
7.1(d)(ii), use its best efforts to utilize the same individuals
or entities under such service contracts as are performing
similar services for Manager or an Affiliate in connection with
such other projects, if such a procedure would result in cost
savings to Owner. All contractors performing work on a Project
shall comply with, and shall have incorporated in their
contracts, the provisions for OSHA Compliance and Safety and Fire
Requirements previously or hereafter delivered to Manager by
Owner. Manager shall use all reasonable diligence in evaluating,
selecting and supervising all contractors retained by Manager to
perform the services set forth herein. Subject to the provisions
of ARTICLE 4, Manager hereby agrees that it shall use its best
efforts to utilize any group or bulk purchasing opportunities
made available to Manager by Owner. Subject to the provisions of
ARTICLE 4, Manager shall, at Owner's expense, purchase and keep
the Projects furnished with all necessary supplies. The cost of
such supplies shall be charged to Owner at net cost and Owner
shall be credited with all rebates, refunds, allowances and
discounts allowed to Manager.
(iii) All contracts entered into by Manager with
respect to a Project pursuant to this SECTION 7.1(d)
(collectively, the "CONTRACTS") shall, unless Owner otherwise
consents in writing, be on a standard form approved by Owner in
writing and shall include a provision for early termination in
the event of a sale, conveyance or exchange of such Project by
Owner (as described in SECTION 3.3 hereof) if Owner or the
transferee elects to terminate such Contract, a provision for
early termination in the event this Agreement is terminated by
Owner pursuant to SECTION 3.2(h), and a provision obligating the
other contracting party to continue to perform under its Contract
in the event (a) this Agreement is terminated for any reason and
Owner elects to take an assignment of such Contract and require
the other contracting party to continue its performance
thereunder directly on behalf of Owner, or (b) of a sale,
conveyance or exchange of such Project by Owner if the transferee
elects to take an assignment of such Contract and require the
other contracting party to continue its performance thereunder
directly on behalf of such transferee. Subject to this SUBSECTION
7.1(d)(iii), Manager shall be responsible for the negotiation of
all such Contracts and all such Contracts shall be executed by
Manager on its own behalf and not as agent for Owner; provided,
however, that as between Owner and Manager, Owner shall be
responsible for all expenses associated with any such Contract,
so long as such expenses are incurred in compliance with the
applicable Approved Budget and the terms of this Agreement.
Manager shall not enter into any Contract which would cause, on
an annual basis, either the total Approved Budget or the amounts
allocated to Major Categories to exceed the limits set forth in
SECTION 4.2 hereof. Promptly upon the execution thereof, Manager
shall deliver to Owner one fully executed original of any
Contract in an amount equal to or greater
15
<PAGE> 22
than Five Thousand Dollars ($5,000). In addition, Manager shall,
within five (5) days after Owner's written request therefor,
deliver to Owner a copy of any other Contract requested by Owner.
(e) Intentionally deleted.
(f) Manager shall operate, in accordance with a budget
approved by Owner, Owner's Information Center and Owner's corporate
housing program.
(g) If requested by Owner in writing, which request shall
specify the applicable amounts due and payable, Manager shall pay from
the Operating Account all bills for payments due under mortgages and
ground leases with respect to the Projects, all real estate, personal
property and improvement taxes and assessments due with respect to the
Projects and insurance premiums for insurance coverage carried by Owner
with respect to the Projects. In such event, all such expenses shall be
included in the Approved Budget for the related Project. Owner shall be
responsible for prosecuting the appeal of any property tax assessment
for each Project and the payment of all costs incurred in connection
therewith.
(h) Subject to the other provisions of this Agreement, at
Owner's expense, Manager shall be responsible for compliance with all
federal, state and municipal laws, ordinances, regulations and orders
related to the leasing, use, operation, repair and maintenance of each
Project, including, without limitation, compliance with all state or
federal fair housing laws, rules and regulations, with the rules,
regulations or orders of the local Board of Fire Underwriters or other
similar body and with the Americans with Disabilities Act. Manager shall
promptly notify Owner of any violation of any such law, ordinance, rule,
regulation or order, and, with the approval of Owner, promptly remedy
any such violation which comes to its attention, at Owner's expense.
Expenses incurred in so complying and in correcting any such violation
shall be included in the Approved Budget for such Project or otherwise
approved in advance by Owner in writing, except in the case of an
emergency threatening imminent personal injury or property damage or a
situation which, in the absence of immediate action, could subject Owner
to civil or criminal penalties, in which event Manager shall use its
best efforts to notify Owner of such violation and corrective action so
taken. Manager shall familiarize itself with the terms of and be
responsible for avoiding any violations of the requirements of Owner set
forth in any development agreement, ground lease, tenant lease,
mortgage, deed of trust or other instrument affecting each Project and
delivered to Manager by Owner, including, without limitation, subject to
the provisions of SECTION 12.17 hereof, any regulatory agreement,
declaration of covenants, conditions and restrictions or similar
document affecting a Project that imposes any requirements regarding
permitted income levels of Project tenants or other restrictions imposed
by applicable governmental agencies in connection with any revenue bond
or similar financing
16
<PAGE> 23
applicable to such Project, and shall otherwise comply with any written
instructions of Owner with respect thereto. Manager shall furnish to
Owner, upon receipt by Manager, each notice or order affecting any
Project, including, without limitation, any notice from any taxing or
other governmental authority and notice of violation of any requirement
or order issued by any Board of Fire Underwriters or other similar body
against such Project or Owner, any notice of default or otherwise from
the holder of any mortgage or deed of trust or any notice of renewal,
termination or cancellation of any insurance policy. Manager, however,
shall not take any action under this SECTION 7.1(f) in the event Owner
notifies Manager, in writing, that Owner is contesting or intends to
contest such notice, order or requirement, provided that Manager shall
be subject to no liability resulting from Manager's failure to take such
action during the pendency of such contest. Notwithstanding the
foregoing, however, Manager's responsibilities under this SECTION 7.1(f)
shall not extend to matters requiring the expenditure of Owner's funds
but disapproved in writing by Owner.
(i) Manager shall, at Owner's expense, arrange for the
obtaining and renewal of all business licenses affecting each Project;
provided, however, that the cost of obtaining or renewing any broker's
or similar business license required to be obtained by Manager in order
to fulfill its obligations under this Agreement shall be borne solely by
Manager.
(j) Manager shall, at Owner's expense, engage counsel and
cause such legal proceedings to be instituted and prosecuted in an
expeditious manner as may be necessary to enforce payment of rent and
compliance with leases or to dispossess tenants. Manager shall use legal
counsel approved by Owner to institute such actions and all settlement
negotiations involving claims in excess of Three Thousand Five Hundred
Dollars ($3,500) shall be subject to the prior approval of Owner.
Attorneys' fees and costs so incurred shall be borne by Owner and shall
be submitted to Owner for approval prior to payment, unless the cost is
already reflected in the Approved Budget for the applicable Project or
unless payment is due under a contract previously approved by Owner.
(k) Manager shall employ at all times a sufficient number
of capable employees to enable it to manage, operate and maintain the
Projects properly, adequately, safely and economically. Except as
expressly provided in SECTION 7.1 to the contrary, all matters
pertaining to the employment, supervision, compensation, promotion and
discharge of such employees shall be the responsibility of Manager.
Manager will negotiate with any union lawfully entitled to represent
such employees and shall execute in its own name, and not as agent for
Owner, collective bargaining agreements or labor contracts resulting
therefrom. At least once per year Manager shall train its employees in
the compliance with the HMCP, all state or federal fair housing laws,
rules and regulations and in the reduction of general liability risks.
Owner shall not have any liability with respect to any employment
arrangements with
17
<PAGE> 24
employees employed in connection with the management of any Project, and
all employment arrangements shall expressly so provide. Manager shall
comply with the Americans With Disabilities Act and all applicable
governmental requirements relating to workers' compensation, social
security, unemployment insurance, hours of labor, wages, working
conditions, equal employment laws and regulations and other
employer-employee related matters.
(l) If requested by Owner, Manager shall notify Owner of
the identities, job titles and salaries of the on-site employees to be
responsible for the direct management of each Project. Manager shall
notify Owner in advance of any staffing changes relating to the on-site
employees responsible for the direct management of each Project or the
off-site employees responsible for the handling of the relationship
between Owner and Manager and Manager shall cooperate with Owner in
addressing Owner's concerns in connection with such staffing changes.
Manager shall require coverage of all employees by fidelity bond or
coverage under Manager's comprehensive crime insurance policy, each in
amounts required by Owner. Manager shall identify to Owner the job
description of employees whose salaries Manager will initially charge to
a Project for direct services rendered to such Project. All employee
salaries and positions shall be consistent with the Approved Budget for
the related Project.
(m) Manager shall be responsible for administering the
enforcement of all Project parking rules and regulations established by
Owner and furnished in writing to Manager.
(n) Manager hereby agrees to cooperate with any financial
institution or other lender designated by Owner to provide financing for
any Project and consents to the assignment by Owner, individually and as
agent for Owner, of this Agreement as security for any loan to Owner
from such lender. Manager further agrees to cooperate with brokers and
prospective purchasers designated by Owner in connection with the sale,
conveyance or exchange of any Project.
(o) Promptly following the execution of this Agreement and
thereafter upon the commencement of work in connection with the Projects
by any Covered Personnel (as defined below), Manager shall deliver a
copy of the Anti- Discrimination Policy (as defined below) to all
Covered Personnel and shall obtain a written acknowledgment from each
such employee, in form and substance acceptable to Owner, certifying
that they have read and understand the Anti-Discrimination Policy and
agree to abide by its terms. Manager shall maintain and safeguard the
Anti-Discrimination Policy and the original written acknowledgments
relating thereto with the books and records for each Project as provided
in this Agreement. As used herein, the term "COVERED PERSONNEL" shall
mean (i) all of Manager's personnel now or hereafter involved in the
leasing of a Project, whether such employees are on- or
18
<PAGE> 25
off-site personnel, and (ii) all of Manager's personnel now or hereafter
employed on-site at a Project. As used herein, the term
"ANTI-DISCRIMINATION POLICY" shall mean a written anti-discrimination
policy prepared by Manager and approved by Owner.
(p) Manager shall maintain frequently and update on a
periodic basis but in no event less than once per year, a complete
inventory of all of Owner's personal property located at each Project
site. Manager shall deliver a copy of such inventory to Owner prior to
the commencement of each Budget Year or more frequently as requested by
Owner.
ARTICLE 8. BANK ACCOUNTS
8.1 REVENUE ACCOUNT. Manager shall deposit all Project Income (as
defined below) and other funds collected from the operation of each Project in a
special account in a bank approved by Owner (interest bearing, if possible)
(individually the "REVENUE ACCOUNT" and collectively the "REVENUE ACCOUNTS") for
such Project in the name of Owner or as Owner may designate. Manager shall have
no authority to withdraw funds from the Revenue Account. Manager shall instruct
the bank to hold such funds in trust for Owner.
8.2 OPERATING ACCOUNT. Owner shall establish one or more bank
accounts, including, without limitation a principal account for the projects
(the "OPERATING ACCOUNT") which shall be used for the payment of all costs and
expenses to be borne by Owner hereunder. Manager shall have the authority to
withdraw funds from the Operating Account to fulfill its obligations under this
Agreement, but shall otherwise have no right, title or interest in such funds.
Manager shall in no event allow any funds withdrawn from the Operating Account
to be commingled with any other funds or bank accounts of Manager. Following
written notification from Manager of projected cash requirements for the
Project, which notices shall be delivered to Owner not more often than once per
week, Owner shall maintain in the Operating Account an amount sufficient to pay
all budgeted expenses for the Projects for each month in a timely manner.
Manager shall pay from the Operating Account the operating expenses of the
Projects and any other required payments applicable to the Projects, as set
forth in this Agreement.
8.3 SECURITY DEPOSIT ACCOUNT. If applicable law requires a
segregated account for tenant security deposits, Manager will open a separate
interest bearing account (the "DEPOSIT ACCOUNT") for each Project in Owner's
name at a bank approved by Owner, and shall instruct the bank to hold the funds
in trust for Owner. Manager shall maintain the Deposit Account, if required, in
accordance with applicable law and shall otherwise comply in all respects with
CALIFORNIA CIVIL CODE SECTION 1950.5. Manager shall use the Deposit Account only
to maintain security deposits for the related Project. Manager shall maintain
19
<PAGE> 26
detailed records of all security deposits and allow Owner or its designees
access to such records.
8.4 CHANGE OF BANKS. Owner may direct Manager, in writing, to
change a depository bank or any depository arrangements, provided that any costs
or expenses associated with such change shall be paid by Owner.
ARTICLE 9. INSURANCE AND INDEMNIFICATION
9.1 INSURANCE TYPES.
(a) Manager shall not commence any work under this
Agreement until it obtains all insurance required to be obtained by
Manager hereunder. Manager will not permit any other party with whom it
may contract to perform services on a Project site (hereinafter the
"CONTRACTORS") to commence work under the applicable Contract until the
insurance requirements for Contractors who are not Class I Contractors
(as defined below) described in EXHIBIT B attached hereto and by this
reference incorporated herein, or the insurance requirements for Class I
Contractors described in EXHIBIT C attached hereto, as applicable, have
been complied with by the applicable Contractor and incorporated into
the applicable Contract. As used herein, "CLASS I CONTRACTORS" shall
mean the Contractors performing any of the work or services (the "CLASS
I WORK") described in EXHIBIT D attached hereto and such other
Contractors as may be designated as Class I Contractors by Owner from
time to time. In the event any Contractor is performing work or services
which are both Class I Work and work or services which would not be
considered Class I Work, such Contractor shall be deemed to be a Class I
Contractor with respect to all of the work or services which it
performs.
(b) All insurance described under this ARTICLE 9 which is
to be carried by Manager will be maintained by Manager with insurance
carriers licensed and approved to do business in California, having a
general policyholders' rating of not less than an "A" and a financial
rating of not less than "X" in the most current Best's Key Rating Guide.
In no event shall such insurance be terminated or otherwise allowed to
lapse prior to termination of this Agreement or such longer period as
may be specified herein, unless such terminated or lapsed insurance is
immediately replaced by substitute insurance meeting the requirements of
this ARTICLE 9. Manager may provide the insurance described in this
ARTICLE 9, in whole or in part, through a policy or policies covering
other liabilities and projects of Manager; provided, however, that any
such policy or policies shall: (i) allocate to each Project the full
amount of insurance required hereunder; and (ii) contain, permit or
otherwise unconditionally authorize the waiver contained in SECTION
9.10.
20
<PAGE> 27
9.2 EVIDENCE OF INSURANCE. As evidence of Manager's specified
insurance coverage, Owner shall accept certificates and endorsements issued by
Manager's insurance carrier acceptable to Owner showing such policies in force
for the specified period. Owner retains the right to review the actual insurance
policies upon its request. Such evidence shall be delivered to Owner promptly
following the execution of this Agreement or prior to commencement of work,
whichever first occurs. Each policy and certificate shall be subject to approval
by Owner (such approval not to be unreasonably withheld), and shall provide that
such policy shall not be subject to material alteration or cancellation without
thirty (30) days' notice in writing to be delivered by registered mail to Owner.
Should any policy expire or be cancelled prior to the expiration or earlier
termination of this Agreement, and Manager fails immediately to procure other
insurance as specified herein, Owner reserve the right, but shall have no
obligation, to procure such insurance and to deduct the cost thereof from any
sum due Manager under the terms of this Agreement. Manager shall permit Owner to
inspect such evidence of insurance as Manager obtains from its Contractors.
9.3 DAMAGES. Nothing contained in this ARTICLE 9 is to be
construed as limiting the extent of Manager's responsibility for the payment of
damages resulting from Manager's operations under this Agreement nor shall
anything contained herein be deemed to place any responsibility on Owner for
ensuring that the insurance required hereunder is sufficient for the conduct of
Manager's business.
9.4 WORKERS' COMPENSATION INSURANCE. Manager shall obtain and
maintain full Workers' Compensation Insurance, including Employer's Liability,
at a minimum limit of One Million Dollars ($1,000,000) or current limit carried,
whichever is greater, for all personnel whom it employs in carrying out
Manager's obligations under this Agreement, including an endorsement evidencing
waiver of subrogation by the insurance carrier with respect to Owner. Such
insurance shall be in substantial accordance with the requirements of the most
current and applicable State Workers' Compensation Insurance Laws in effect from
time to time. Owner shall bear the cost of such insurance attributable to and
covering Manager's On-Site Personnel (as defined below) and Manager shall bear
the cost of such insurance attributable to and covering any other personnel who
perform services in connection with any of the Projects but who are not On-Site
Personnel. The cost of such insurance attributable to On- Site Personnel shall
not exceed the amount set forth in the applicable Approved Budget, as such
amount may be increased as a result of any audit by the insurer. For the
purposes of this Agreement, the term "ON-SITE PERSONNEL" shall be deemed to
include only those employees of Manager who are located on a Project site on a
full time basis or who are located on a Project site on a part-time basis but
who provide direct services to a Project, such as landscaping, maintenance and
the like. In no event shall "ON- SITE PERSONNEL" include Manager's general
administrative or supervisory employees who provide services to more than one
project.
21
<PAGE> 28
9.5 COMPREHENSIVE OR COMMERCIAL GENERAL LIABILITY INSURANCE.
Manager shall, at Owner's expense, obtain and maintain Comprehensive or
Commercial General Liability Insurance on an "occurrence" basis, with acceptable
deductibles, with a combined single limit for bodily injury and property damage
of Five Million Dollars ($5,000,000) or current limit carried, whichever is
greater, covering Operations, Independent Contractors, Products and Completed
Operations, Contractual Liability (specifically covering the indemnification
contained in SECTION 9.13), Broad Form Property Damage (including completed
operations), claims and lawsuits by one insured against another insured,
Personal Injury and Explosion, Collapse and Underground Hazards (X,C,U). The
limits of liability of the insurance coverage specified in this SECTION 9.5 may
be provided by any combination of primary and excess liability insurance
policies. If excess risks are involved, greater limits of liability may be
required by Owner.
9.6 AUTOMOBILE LIABILITY INSURANCE. Manager shall obtain and
maintain owned, hired and non-owned automobile liability insurance covering all
use of all automobiles, trucks and other motor vehicles utilized by Manager in
connection with the performance of its obligations hereunder, with a combined
single limit for bodily injury and property damage of Five Million Dollars
($5,000,000) or current limit carried, whichever is greater. Owner shall bear
the cost of such insurance attributable to and covering Manager's On-Site
Personnel and Manager shall bear the cost of such insurance attributable to and
covering any other personnel of Manager who perform services in connection with
the Project but who are not On-Site Personnel. The cost of such insurance
attributable to On- Site Personnel shall not exceed the amount set forth in the
applicable Approved Budget.
9.7 COMPREHENSIVE CRIME INSURANCE. Manager shall, at Manager's
expense, obtain and maintain either a policy of comprehensive crime insurance or
a fidelity bond, at Manager's option, in an amount not less than Two Hundred
Fifty Thousand Dollars ($250,000) per occurrence for any of Manager's employees
who may handle funds or property in connection with a Project and to provide
coverage to protect Owner.
9.8 INSURANCE TO BE MAINTAINED BY OWNER. Owner shall, at Owner's
expense, obtain and maintain "All Risk" Insurance covering loss or damage to
each Project, with such deductibles as Owner shall determine in its sole
discretion. Owner shall also maintain Comprehensive or Commercial General
Liability Insurance, with such deductibles or self insured retention as Owner
shall determine in its sole discretion, with a combined single limit for bodily
injury and property damage of One Million Dollars ($1,000,000) and shall, on a
primary basis, name Manager as an additional insured for claims arising out of
Owner's negligence. Owner shall, at Manager's written request to be made not
more than annually, deliver to Manager a certificate issued by Owner's insurance
carrier showing such Comprehensive or Commercial General Liability Insurance to
be in force.
22
<PAGE> 29
9.9 CONDITIONS TO OWNER'S INSURANCE BEING PRIMARY. Owner's
obligation to name Manager as additional insured pursuant to SECTION 9.8 shall
be subject to the following conditions:
(a) Manager shall comply with Owner's accident reporting
procedures, which may be modified from time to time upon written notice
to Manager;
(b) Manager shall notify Owner immediately upon learning
of any material loss, damage or injury occurring on a Project;
(c) Manager shall not take any action (such as an
admission of liability) which might bar Owner from obtaining any
protection afforded by any insurance policy of Owner or which might
prejudice Owner in defending a claim based on any loss, damage or
injury;
(d) Owner shall have the exclusive right, at its option,
to conduct the defense of any claim, demand or suit within limits
prescribed by the policy or policies of insurance;
(e) Manager shall cooperate with Owner in the disposition
of claims, including furnishing all available information to Owner and
Owner's insurers;
(f) Manager shall not be covered for any claims against
Manager by Owner's insurers or Owner, as Owner is specified in SECTION
9.12; and
(g) Manager recognizes that the foregoing conditions shall
not diminish Manager's duties, obligations and responsibilities under
this Agreement.
9.10 MANAGER'S OBLIGATIONS. Manager shall:
(a) Comply with Owner's accident reporting procedures,
which may be modified from time to time upon written notice to Manager;
(b) Notify Owner immediately upon learning of any material
loss, damage or injury occurring on a Project;
(c) Not take any action (such as an admission of
liability) which might bar Owner from obtaining any protection afforded
by any insurance policy of Owner or which might prejudice Owner in
defending a claim based on any loss, damage or injury;
23
<PAGE> 30
(d) Cooperate with Owner in the disposition of claims,
including furnishing all available information to Owner and Owner's
insurers;
(e) Not be covered for any claims against Manager by
Owner's insurers or Owner, as Owner is specified in SECTION 9.12; and
Owner shall have the exclusive right, at its option, to conduct the defense of
any claim, demand or suit within limits prescribed by the policy or policies of
insurance;
9.11 WAIVER OF SUBROGATION. Owner and Manager hereby waive all
rights against each other for damages caused by fire and other perils and risks
to the extent covered by Manager's policies of insurance and Owner's "All Risk"
Insurance, except such rights as Owner, as specified in SECTION 9.12, may have:
(a) to the proceeds of such insurance held by Owner as trustee, and (b) to
payment for damages as set forth in SECTION 9.13.
9.12 ADDITIONAL INSURED. Owner, as specified below, shall be
included as an additional insured under the coverage specified in SECTIONS 9.5
AND 9.6 , with the following endorsement or provision included within each
applicable policy: "It is understood and agreed that the coverage afforded by
this Policy shall also apply to Irvine Apartment Communities, L.P., a Delaware
limited partnership, and its respective officers, directors, agents, servants,
employees, divisions, subsidiaries, partners, shareholders and affiliated
companies of each of them as additional insureds, but only with respect to legal
liabilities or claims caused by, arising out of or resulting from the acts or
omissions of the named insured or of others performed on behalf of the named
insured." In the event Owner assigns this Agreement in connection with the sale,
conveyance or exchange of a Project, the endorsement or provision required
pursuant to this SECTION 9.12 shall use the name of such transferee in lieu of
Irvine Apartment Communities, L.P.
9.13 CLAIMS PROCEDURES. In the event an incident occurs or any
legal action or other claim (a "CLAIM") is asserted by a third party against
Owner, as the result of an alleged injury or loss sustained within a Project
during the Term, Manager shall, promptly after receipt of actual knowledge of
such Claim, investigate same and submit a report to Owner in accordance with
Owner's incident reporting procedures. Upon receipt of such information,
together with any filed pleadings, Owner shall submit such information to its
insurer and/or claims adjusting firm for the purpose of initiating investigation
and disposition of the Claim. Manager shall, within a reasonable time after its
report to Owner notify its insurer that Owner's insurer and/or claims adjusting
firm is investigating such Claim and determining whether to settle, deny or
defend such Claim. Owner may instruct its insurer and/or claims adjusting firm
to contact Manager's insurer before any offer of settlement is made for the
purpose of agreeing upon the respective negligence of, and participation in such
settlement by, Owner and Manager. All costs of the foregoing investigation,
settlement and defense, and any judgments and other costs related to any such
Claim, shall be shared by Owner and Manager in proportion to their respective
negligence.
24
<PAGE> 31
9.14 INSURANCE AUDIT; REFUNDS. Any insurance charges, including,
without limitation, Workers' Compensation Insurance, which are submitted to
Owner by Manager shall be subject to audit by Owner. Any insurance dividends
earned or returned premiums applicable to the policies required to be carried
hereunder at Owner's expense, including, without limitation, Workers'
Compensation Insurance, shall be refunded by Manager to Owner immediately upon
receipt thereof, and any such refunds shall be accompanied by supporting
documentation evidencing the refunded amounts.
9.15 OWNER'S ELECTION TO INSURE. Owner reserves the right, but
shall have no obligation, to procure the insurance, or any portion thereof, for
which Manager is herein responsible and which is described in this ARTICLE 9.
Owner shall notify Manager if Owner exercises its right, whereupon Manager's
responsibility to carry such duplicative insurance shall cease and the sums paid
by Owner to Manager hereunder shall be equitably adjusted by the parties to
reflect any resulting cost saving to Manager. Owner further reserves the right
at any time, with thirty (30) days' prior notice to Manager, to require that
Manager resume the maintenance of any insurance for which Owner has elected to
become responsible pursuant to this SECTION 9.15; and in such event, the sums
paid to Manager by Owner shall increase to the extent of any previously agreed
and implemented reduction as aforesaid attributable to Owner's prior assumption
of the particular insurance coverage.
ARTICLE 10. COMPENSATION OF MANAGER
10.1 MANAGEMENT FEE. As compensation for the performance of its
obligations hereunder, Manager shall be paid a monthly management fee
("MANAGEMENT FEE") as set forth on EXHIBIT F attached hereto.
10.2 PROJECT INCOME. For purposes of this Agreement, "PROJECT
INCOME" shall mean with respect to each Project the sum of (a) all Rent (as
defined below) recognized on an accrual basis during such month, and (b) all
other Income (as defined below) from such Project operations recognized on an
accrual basis during such month. For purposes of this Agreement, "RENT" shall
mean all amounts collected from Project tenants, licensees and concessionaires,
excluding, however (i) security and other tenant deposits (other than as applied
to pay rent or other amounts included within Project Income), (ii) fees paid by
tenants of such Project for special services or programs, including, without
limitation, payments made by tenants to Manager or any third party in connection
with rental insurance or furniture rental programs, and (iii) rents paid in
advance by tenants, except the portion of any such advance payment applied to
the rent due for the current month. For purposes of this Agreement, "INCOME"
shall mean all income from such Project other than Rent, including, without
limitation, income from coin-operated washers and dryers installed at such
Project, parking charges and fees and amounts paid for vending machine rental
charges. Income shall not include interest income, extraordinary receipts,
amounts received in settlement of insurance claims, costs and fees recovered in
litigation and refunds or returns
25
<PAGE> 32
from governmental authorities or public agencies of taxes paid, amounts received
as compensation for condemnation or other similar proceedings affecting all or
any portion of such Project, the proceeds of the sale, conveyance, exchange or
refinancing of all or any portion of such Project or refunds from contractor's
or service providers of amounts paid under construction or service contracts.
10.3 INTENTIONALLY DELETED.
ARTICLE 11. PAYMENT OF EXPENSES
11.1 COSTS ELIGIBLE FOR PAYMENT FROM OPERATING ACCOUNT. Manager
shall pay all expenses incurred in connection with the operation, maintenance
and repair of each Project, to the extent, and only to the extent, included in
the Approved Budget for such Project directly from the Operating Account,
subject to the conditions set forth in ARTICLE 7, including the following:
(a) costs of the gross salary and wages or proportionate
shares thereof, payroll taxes, employee's health insurance, workers'
compensation, termination benefits payable pursuant to California law
and other benefits of Manager's employees who are located on-site,
including temporary employees performing on-site services in connection
with such Project (and including, without limitation, accrued benefits
owed to former employees of the Sares-Regis Group, J&M Realty and
Western National Property Management and assumed by Manager and any
accrued benefits owed by Manager to any On-site Personnel upon
termination of this Agreement), and are required to manage, operate and
maintain such Project properly, adequately, safely and economically, in
accordance with this Agreement, provided that such costs are provided
for in the Approved Budget for such Project and provided that in no
event shall Owner, in its capacity as Owner, be responsible for any
compensation paid to any such employee in the form of stock or options
to acquire stock in Irvine Apartment Communities, Inc. Manager shall not
be entitled to pay such employees in advance;
(b) costs incurred to correct the violation of any
governmental requirement relating to the leasing, use, repair and
maintenance of the Project, or relating to the rules, regulations or
orders of the local Board of Fire Underwriters or other similar body, if
such costs are not incurred as the result of Manager's negligence or
willful misconduct;
(c) actual and reasonable costs of all repairs,
decorations and alterations, if such cost is not the result of Manager's
negligence or willful misconduct;
26
<PAGE> 33
(d) all costs incurred in connection with all service
agreements approved by Owner;
(e) all costs of collection of delinquent rents collected
by a collection agency approved in advance by Owner;
(f) all legal fees of attorneys approved (or designated as
provided in SECTION 7.1(h)) by Owner in advance of retention, if Owner
has approved the specific amount of such attorneys' fees in advance of
payment;
(g) the cost of capital expenditures;
(h) with the prior written approval of Owner, the cost of
cash registers, adding machines and other equipment of such type and use
(including any and all electronic data processing equipment) located at
the Project site and owned or leased by Owner;
(i) the cost of utilities;
(j) the cost of advertising approved by Owner;
(k) the cost of the insurance policies required to be
maintained by Manager at Owner's expense pursuant to ARTICLE 9;
(l) the cost applicable to the items set forth in SECTION
7.1(f), to the extent Owner has requested that Manager pay such items;
(m) if approved in advance by Owner, the cost of travel by
Manager's employees described in SECTION 11(a) hereof, incurred in
connection with the performance of Manager's obligations hereunder,
exclusive of daily commuting expenses to and from the Project;
(n) the Management Fee;
(o) emergency expenses incurred pursuant to SECTION 4.2
hereof; and
(p) such other amounts as may be approved in advance by
Owner.
11.2 NON-REIMBURSABLE COSTS. The following expenses or costs
incurred by or on behalf of Manager in connection with the management and
leasing of the Projects shall be at the sole cost and expense of Manager and
shall not be reimbursed by Owner:
27
<PAGE> 34
(a) cost of gross salary and wages, payroll taxes,
insurance, workers' compensation and other benefits of Manager's office
and other off-site personnel (including any stock options granted to
off-site personnel);
(b) general accounting and reporting services within the
reasonable scope of Manager's responsibility to Owner;
(c) the cost of printed checks for each bank account
required to be maintained hereunder;
(d) cost of printed forms, papers, ledgers and other
supplies and equipment not located at the Project sites;
(e) cost of electronic data processing hardware and
software, including repair and maintenance expenses related thereto,
located at Manager's office and used for preparation of reports,
information and returns to be prepared by Manager under the terms of
this Agreement;
(f) cost of electronic data processing provided by
computer service companies for preparation of reports, information and
returns to be prepared by Manager under the terms of this Agreement;
(g) cost of daily commuting expenses incurred by Manager's
employees to and from the Projects;
(h) cost of transferring Manager's employees to the
Project, unless such cost is approved in advance by Owner;
(i) vacation and other benefits earned by Manager's
employees which are transferred to a Project, which benefits are earned
by such employees prior to the date of such transfer;
(j) costs charged by Manager to Owner unless such costs
have been approved in advance by Owner;
(k) costs charged by any Affiliate of Manager under any
subcontract unless such costs have been approved in advance by Owner;
(l) costs attributable to losses arising from negligence,
fraud, willful misconduct or misrepresentation on the part of Manager or
Manager's employees;
28
<PAGE> 35
(m) cost of workers' compensation insurance with respect
to Manager's personnel performing services in connection with the
Projects (other than On-Site Personnel);
(n) cost of the comprehensive crime insurance or fidelity
bond required pursuant to SECTION 9.7; and
(o) unless required by Owner, the cost of comprehensive
crime insurance or other fidelity bond or other insurance purchased by
Manager for its own account.
ARTICLE 12. GENERAL PROVISIONS
12.1 INDEPENDENT CONTRACTOR. It is expressly understood and
agreed that Manager will act as an independent contractor in the performance of
its duties and responsibilities set forth in this Agreement. No provisions
hereunder shall be intended to create a partnership or a joint venture between
Owner and Manager with respect to any Project or otherwise; and neither party
shall have the power to bind or obligate the other party, except as expressly
set forth in this Agreement.
12.2 NOTICES. All notices, demands and reports provided for in
this Agreement shall be in writing and shall be personally served or sent by
certified mail, postage prepaid and return receipt requested, to the parties at
their respective addresses for notice set forth following their signatures to
this Agreement or to such other address as either may provide to the other by
written notice. For purposes of this Agreement, notices shall be deemed to have
been "given" upon personal delivery thereof or two (2) business days after
having been deposited in the United States mail, postage prepaid and properly
addressed.
12.3 BROKERS. If Owner executes a listing agreement for the sale
of a Project, Manager shall cooperate with such broker to permit the broker to
exhibit such Project during reasonable business hours, provided that such broker
has secured Manager's permission in advance, and shall cooperate with
prospective purchasers of the Project. At Owner's, Manager's duties shall also
include, but shall not be limited to, using diligent efforts to obtain, at
Owner's expense, tenant estoppel certificates from tenants then leasing
residential units within the Project.
12.4 ATTORNEYS' FEES. In any judicial action between the parties
to enforce any of the provisions of this Agreement or any right of any party
under this Agreement, regardless of whether such action or proceeding is
prosecuted to judgment and in addition to any other remedy, the unsuccessful
party shall pay to the prevailing party all costs and expenses, including
reasonable attorneys' fees and expenses (including fees and charges
29
<PAGE> 36
attributable to legal assistants or other non-attorney personnel performing
services under the supervision of an attorney), incurred by the prevailing
party.
12.5 ASSIGNMENT. Manager may not voluntarily or involuntarily,
directly or indirectly, sell, assign, hypothecate, pledge or otherwise transfer
or dispose of all or any portion of its interest in this Agreement to any third
party without the prior written consent of Owner, which may be withheld in
Owner's sole and absolute discretion. Any such attempted sale, assignment,
hypothecation, pledge or other transfer without such consent shall be void.
Owner shall be entitled to assign or otherwise transfer or dispose of all or any
portion of its interest under this Agreement at any time without the consent of
Manager and upon any such assignment or transfer Owner shall be released from
all obligations hereunder (other than those obligations which have accrued as of
the date of such assignment or transfer), any obligations to be performed
hereunder after the date of such assignment or transfer and any continuing
indemnification obligations hereunder. In addition to the foregoing, Owner
assign, pledge, hypothecate or otherwise grant a security interest in and to all
of its rights under this Agreement as may from time to time be required by any
lender as security for a loan by such lender to Owner.
12.6 AMENDMENTS. Except as otherwise provided herein, all
amendments to this Agreement shall be in writing and executed by Owner and
Manager.
12.7 LICENSING. Manager represents and warrants that it is, and,
as necessary, its employees are, and Manager covenants and agrees that at all
times throughout the Term it and, as necessary, its employees shall be, fully
qualified and licensed, to the extent required by law, to manage real property
and perform all of the obligations of Manager hereunder. Manager agrees to take,
and to cause its employees to take, any and all action necessary to retain all
licenses required to carry out its duties hereunder and otherwise to comply with
all such laws now or hereafter in effect.
12.8 ENTIRE AGREEMENT. This Agreement and the Exhibits attached
hereto and made a part hereof comprise the entire agreement of the parties with
respect to the matters described in this Agreement and such Exhibits. The
Exhibits attached to this Agreement are incorporated into this Agreement as
though set forth herein in full.
12.9 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument.
12.10 GOVERNING LAW. This Agreement is executed and shall be
governed by and construed in accordance with the laws of the State of
California.
30
<PAGE> 37
12.11 THIRD-PARTY DISPUTES. Should any claim, demand, action or
other legal proceeding arising out of matters covered by this Agreement be made
or instituted by any third party against a party to this Agreement, the other
party to this Agreement shall furnish such information and reasonable assistance
in defending such proceeding as may be reasonably requested by the party against
whom such proceeding is brought. The requesting party shall pay the reasonable
and customary expenses incurred by the other party in complying with any such
request.
12.12 FIDUCIARY RELATIONSHIP. Manager shall at all times act as a
fiduciary of Owner in connection with its duties, responsibilities and actions
pursuant to this Agreement. Without limiting the generality of the foregoing,
Manager shall disclose in advance any affiliation of Manager or an Affiliate
with any vendor rendering services or supplying materials to any Project. Any
contract with such a vendor shall be entered into on an arm's length basis and
for fair market value, and Manager shall receive prior written approval of any
such contract from Owner. Manager shall disclose to Owner any conflict-of-
interest which may arise in connection (a) with Manager's negotiations with
prospective tenants or vendors of a Project, or (b) as a result of Manager's or
an Affiliate's management of other projects, changes in Manager's or Affiliate's
structure or as a result of other potentially conflicting actions taken by
Manager.
12.13 GIFTS. Manager agrees not to accept any "GIFT" from vendors
employed in connection with any Project, other than gratuities of nominal value
received in the ordinary course of business. Manager shall not, on Owner's or
Owner's behalf or in connection with the services being rendered under this
Agreement, provide any "GIFT" to or otherwise entertain any "PUBLIC OFFICIAL" or
any other person required under California law to file a Statement of Economic
Interest. The term "PUBLIC OFFICIAL" means every member, officer, employee or
consultant of a state or local agency. The term "GIFT", as used herein, includes
any service or merchandise of any kind, discounts on merchandise or services,
meals and other entertainment expenses and all other transfers of cash or any
other item of value. Under no circumstances shall Owner be deemed to have waived
the provisions of this Section as to a specific gift unless the waiver is in
writing and signed by two (2) authorized officers of Owner.
12.14 CONFIDENTIALITY. Except as provided in this SECTION 12.14 or
unless otherwise approved by Owner in writing, Manager shall treat this
Agreement as confidential and shall not disclose the contents of this Agreement
to any party. Manager shall hold confidential any information which Manager
receives in connection with the performance of its obligations hereunder and
which concerns Owner or Owner's operations or business or the Projects and shall
not disclose all or any portion of such information to any third party, except
for such disclosures as are necessary to perform Manager's obligations
hereunder, as are approved by Owner in writing or as are required by law, any
governmental agency or any proposed lender or mortgagee of a Project.
31
<PAGE> 38
12.15 SUBORDINATION TO MORTGAGES. Manager acknowledges and agrees
that (i) it has no right, title or interest in any of the Projects, and (ii) its
rights hereunder are expressly subordinate to the right, title and interest of
the holder of any mortgage or deed of trust encumbering each Project, whether
the lien of such mortgage or deed of trust attaches to such Project before or
after the execution or effectiveness of this Agreement. Manager agrees to
acknowledge any assignment by Owner of the Project Income to any lender as
security for a loan by such lender to Owner. In the event that a Project is
transferred as a result of a foreclosure of any mortgage or deed of trust
covering such Project or pursuant to a deed in lieu of foreclosure, Manager may,
at its sole option, at any time thereafter, terminate this Agreement with
respect to such Project by written notice of termination to the then owner of
the Project.
12.16 HAZARDOUS WASTES.
12.16.1 Owner has developed a Hazardous Materials Compliance
Program ("HMCP") which outlines Manager's responsibilities with respect to
Hazardous Wastes (as defined below) at each Project. The HMCP is set forth in a
Manual that Owner will furnish to Manager. Manager shall take all steps
necessary or appropriate to carry out the HMCP, as it may be amended from time
to time. Such steps shall include the following:
(a) surveying existing and prospective maintenance
contractors with respect to existing and intended uses of
Hazardous Wastes on or about the Project;
(b) ensuring that spills or dumping of Hazardous Wastes
that occur on the Project are reported to agencies and cleaned up
in accordance with applicable regulatory requirements;
(c) informing Owner: (i) immediately of any spills or
dumping of Hazardous Wastes that occur on the Project; and (ii)
in regular monthly reports of any other incidents involving
Hazardous Wastes affecting the Project;
(d) providing tenants with notice and disclosure forms
provided by Owner with respect to Hazardous Wastes or asbestos
affecting the Project;
(e) implementing any asbestos management program
established by Owner for the Project; and
(f) establishing and maintaining a recordkeeping system
for information concerning Hazardous Wastes on the Project.
32
<PAGE> 39
12.16.2 Manager agrees that it shall not place or cause or permit
to be placed on any Project, other than in the ordinary course of performing its
obligations under this Agreement and in compliance with applicable law, any
hazardous or toxic wastes or substances, as such terms are defined during the
period up to and including the end of the Term by Federal, State or municipal
statutes or regulations promulgated thereunder (collectively, "HAZARDOUS
WASTES"). In the event Manager discovers the existence of any Hazardous Wastes
on any Project, Manager shall immediately notify Owner. If such Hazardous Wastes
were placed or permitted to be placed on a Project by Manager, Manager shall, at
its cost, diligently arrange for and complete the immediate removal thereof in
accordance with the terms of this Agreement. Except as expressly provided herein
to the contrary, Manager shall not be responsible for any Hazardous Wastes
present on any Project prior to the date hereof, unless deposited thereon by
Manager; provided, however, Manager shall immediately notify Owner of any notice
received by Manager from any governmental authority of any actual or threatened
violation of any applicable laws, regulations or ordinances governing the use,
storage or disposal of any Hazardous Wastes and shall cooperate with Owner in
responding to such notice and correcting or contesting any alleged violation.
12.16.3 Without limiting the generality of anything contained in
SECTION 12.16.2, if, as a result of any act or failure to act on a Project by
Manager or its employees, agents, representatives or consultants, the presence,
use or on-site or off-site disposal or transport of Hazardous Waste on, to,
under, from or about such Project results in any spills or releases, any injury
to any person or any injury or damage to such Project, or if Manager, Owner, or
any governmental entity reasonably suspects that any such spills, injury or
damage has occurred or is likely to occur, Manager shall promptly and at its
sole cost: (a) notify Owner; (b) if such spill, injury or damage has occurred,
obtain all permits and approvals necessary to remove such Hazardous Waste or
otherwise remedy any suspected problem; (c) if such spill, injury or damage has
occurred, remove such Hazardous Wastes and remedy any associated problems to the
reasonable satisfaction of Owner, in accordance with applicable legal
requirements and good business practices; and (d) if such spill, injury or
damage is likely to occur, take all measures reasonably necessary to prevent
such spill, injury or damage.
12.16.4 If any Hazardous Waste comes to be located on a Project
during the Term as a result of illegal or unauthorized disposal or dumping by
any person, Manager shall promptly upon discovery of the Hazardous Waste: (a)
notify Owner; and (b) at Owner's cost, take all measures reasonably necessary to
secure the site to prevent further disposal or dumping.
12.16.5 If, as a result of work on a Project by Manager or its
employees, agents, representatives or consultants, the presence, use or on-site
or off-site disposal or transport of Hazardous Material on, to, under, from or
about such Project results in any spills or releases affecting persons or
property off-site, or any injury or damage to the
33
<PAGE> 40
environment or to any other real or personal property wherever situated, or if
Manager, Owner or any other governmental entity reasonably suspects that any
such spill, injury or damage has occurred or is likely to occur, Manager shall
promptly and at its sole cost: (a) notify Owner if applicable; (b) obtain all
permits and approvals necessary to remove such Hazardous Waste or otherwise
remedy any suspected problem; and (c) remove such Hazardous Waste and remedy any
associated problems to the reasonable satisfaction of Owner, in accordance with
applicable legal requirements and good business practices.
12.16.6 Manager shall be responsible for providing its employees,
agents, consultants, governmental entities and the public with any notices or
disclosures concerning Hazardous Waste associated with each Project required to
be delivered by Manager under any applicable laws, including, without
limitation, any notices or disclosures concerning Hazardous Waste which Manager
has received from Owner. Owner shall have the right to review such notices and
disclosures prior to their distribution or submission by Manager and shall have
the right, but not the obligation, to prescribe the form and content of any such
notices or disclosures as long as the form and content prescribed by Owner
complies with all applicable laws relating to such notices or disclosures. Owner
shall provide Manager with any notices or disclosures concerning Hazardous Waste
associated with the Project required to be delivered by Owner under any
applicable laws.
12.16.7 Manager shall not, and shall ensure that all employees,
agents and consultants of Manager do not, cause or permit any
asbestos-containing material to be brought upon or incorporated into any
Project, unless: (a) such materials are specifically authorized and approved by
Owner; or (b) no substitute is available at a reasonable cost and Manager
obtains Owner's prior written approval.
12.16.8 Manager shall immediately notify Owner in writing of any
circumstances or incident known to Manager involving Hazardous Waste that may
affect any Project or that may give rise to liability on the part of Owner or
Manager. Promptly upon receipt or submission thereof, Manager shall provide
Owner with true, correct, complete and legible copies of all notices,
complaints, orders, reports, citations, listings, disclosure forms and
correspondence received or submitted by Manager with respect to any Hazardous
Waste associated with the Project.
12.16.9 Manager shall ensure that all of its employees, agents
and consultants comply with all of the terms of this SECTION 12.16. Manager
shall monitor all such persons to ensure such compliance.
12.16.10 Manager shall include in its contracts with employees,
agents and consultants a specific provision requiring compliance by such persons
with the terms of SECTION 12.16.
34
<PAGE> 41
12.17 REGULATORY COMPLIANCE. In the event that a Project is
encumbered at any time during the Term by a local, state or federal regulatory
or other agreement or similar declaration of restrictions ("REGULATORY
AGREEMENT") containing any leasing or other restrictions related to any
tax-exempt revenue bonds or similar instruments issued in connection with the
financing of such Project or related to affordable housing requirements, Owner
shall deliver to Manager a copy of such Regulatory Agreement, together with any
documents related thereto, and a copy of Owner's Bond Compliance Manual. Owner
represents to Manager that: (a) the information in the Bond Compliance Manual
conforms, in all material respects, with the provisions of the Regulatory
Agreement and the provisions of other related documents which are summarized
therein, and (b) as of the date hereof, Owner has received no notices of default
or similar communications with respect to the Regulatory Agreement nor, to the
best of its knowledge, does there exist any occurrence which, with the giving of
notice or the passage of time, or both, would constitute an event of default
thereunder. Neither Owner makes warranty or representation whatsoever that the
Bond Compliance Manual reflects all terms and provisions of the Regulatory
Agreement and the documents relating thereto. Manager shall be responsible for
avoiding any violations of the terms of the Regulatory Agreement, including,
without limitation, restrictions governing the permitted income levels of such
Project's tenants and reporting requirements to applicable entities, including
the Internal Revenue Service; however, Manager shall not be responsible for any
violations of the provisions of the Regulatory Agreement as of the Commencement
Date and, in fulfilling its obligations hereunder, Manager shall be entitled to
rely upon the Monthly Summary of Income and Rent Restrictions delivered to
Manager by Owner from time to time, setting forth, among other things,
permissible tenant income levels. Owner agrees to cooperate with Manager in
interpreting the terms and conditions of the Regulatory Agreement and to respond
promptly to Manager's requests for clarification of any of the terms thereof or
additional information with respect thereto.
12.18 APPROVALS. In the event any provision in this Agreement
requires Owner's approval of a particular document, any financial information or
any action by Manager hereunder, whether or not such provision sets forth a
specific period of time within which such approval must be obtained, Owner shall
use its best efforts to approve or disapprove such matter in a timely manner.
All such requests for approvals must be directed by Manager to Owner. The
authorized representatives of Owner upon whose notices of approval or
disapproval Manager shall be entitled to rely are identified on EXHIBIT E
attached hereto, as the same may be amended from time to time by written
notification by Owner to Manager.
12.19 PROPOSITION 65 COMPLIANCE. Manager shall, at all times and at
Owner's expense, comply with any program or policy of Owner relating to
compliance by Owner with the terms of SECTION 25249.5 ET SEQ. of the California
Health and Safety Code and all rules and regulations promulgated pursuant
thereto, as such statute, rules and regulations may hereafter be amended
(collectively, "PROPOSITION 65"). Owner shall indemnify, defend and hold Manager
harmless from and against any and all Losses incurred
35
<PAGE> 42
by Manager in connection with Manager's compliance with any such program or
policy of Owner. In addition, and without limiting the generality of the
foregoing, Manager shall, promptly upon receipt of knowledge thereof, notify
Owner of the existence on the Project site of any "HAZARDOUS SUBSTANCE" (as
defined under Proposition 65), notice of the existence of which has not been
given to tenants of the Project. Manager shall, at all times, and at its sole
cost and expense, comply with the requirements of Proposition 65 which apply to
Manager in its capacity as a manager of real property and with which Manager
would not otherwise be obligated to comply pursuant to this SECTION 12.19.
12.20 INDEMNIFICATIONS. Manager shall defend, indemnify and hold
Owner, and its officers, directors, agents, servants, employees, divisions,
subsidiaries, partners, shareholders, affiliated companies, successors and
assigns (the "OWNER INDEMNITEES") harmless from and against any and all loss,
claim, damage, fines, penalties, disbursements, actions, causes of action, cost,
expense, (including, without limitation, reasonable attorneys' fees and costs)
and every other liability whatsoever (collectively, "LOSSES") arising out of or
incurred directly or indirectly by reason of (1) [Intentionally Deleted] (2)
Manager's failure or alleged failure to perform its obligations under any
Contract, unless such failure or alleged failure directly arises from Owner's
failure to maintain funds in the Operating Account in accordance with SECTION
8.2 hereof or otherwise arises directly from Owner's or Owner's failure to
perform its obligations hereunder, (3) loss or damage to Owner's or Owner's
property or any claim, suit or judgment brought by or on behalf of any person or
persons for damage, loss, liability or expense due to, but not limited to,
bodily injury or property damage sustained by such person or persons, which
arises out of, is occasioned by or is in any way attributable to the negligence
or willful misconduct of Manager or its employees or otherwise attributable to
Manager's negligence in selecting or supervising any of its agents, any
Contractor and/or any other person or entity supplying service or performing
work in connection with the operation of any Project, or the breach of any of
Manager's obligations hereunder, except to the extent any such Loss is caused by
the negligence or willful misconduct of an Owner Indemnitee, (4) the payment of
any cost or expense from the Operating Account, or the incurrence by Manager of
any obligation to pay any cost or expense, except in accordance with a current
Approved Budget or otherwise in accordance with Section 4.2 and Section 11.1,
(5) the investigation, preparation for, service as a witness in or defense of
any action or proceeding, whether actually commenced or threatened, or in
removal or remediation of any Hazardous Wastes on, under, from or about a
Project, to the extent arising out of or relating to, directly or indirectly,
Manager's breach of any of the terms of SECTION 12.16, (6) any violation by
Manager of any term, condition or restriction set forth in any Regulatory
Agreement applicable to a Project, unless such violation arises out of Manager's
reliance on a written interpretation or instruction from Owner, or (7) Manager's
fraud, gross negligence or willful misconduct or other failure to perform its
obligations hereunder. This indemnity shall survive expiration or termination of
this Agreement.
36
<PAGE> 43
Owner shall defend, indemnify and hold Manager harmless from and
against any and all Losses arising out of, or incurred directly or indirectly as
a result of, (1) Owner's failure or alleged failure to perform, from and after
the date of assumption, its obligations under any Contract assumed by Owner on
the termination of this Agreement, (2) any claims asserted against Manager by
any of Owner's former employees whether or not employed by Manager, to the
extent such claim is alleged and determined by a court of competent jurisdiction
to result solely from Owner's acts in terminating the employment of the employee
bringing such action, (2) any loss or damage to Manager's property or any claim,
suit or judgment brought by or on behalf of any person or persons for damage,
loss, liability or expense due to, but not limited to, bodily injury or property
damage sustained by such person or persons if and to the extent such Loss arises
out of, is occasioned by or is in any way attributable to the condition of any
Project existing prior to the date Manager or any partner of Manager in its
individual capacity began managing such Project or otherwise results from an
occurrence beyond Manager's reasonable control not involving a breach by Manager
of any of its duties or obligations hereunder (3) investigation, preparation
for, service as a witness in or defense of any action or proceeding, whether
actually commenced or threatened, or in removal or remediation of any Hazardous
Wastes on, under, from or about a Project, to the extent arising out of or
relating to, directly or indirectly, Owner's breach of any of the terms of
SECTION 12.16. This indemnity shall survive the expiration or termination of
this Agreement.
37
<PAGE> 44
IN WITNESS WHEREOF, Owner and Manager have executed this
Management Agreement as of the day and year first above written.
MANAGER:
IRVINE APARTMENT MANAGEMENT COMPANY,
a California general partnership
By: APARTMENT MANAGEMENT COMPANY, LLC,
a Delaware limited liability company,
its general partner
By: IRVINE APARTMENT COMMUNITIES, L.P.,
a Delaware limited partnership,
its sole member
By: Irvine Apartment Communities, Inc.,
a Maryland corporation,
its general partner
By: /s/ Shawn Howie
------------------------------------------
Shawn Howie
Vice President, Finance and Controller
By: WESTERN NATIONAL SECURITIES, d/b/a WESTERN NATIONAL PROPERTY
MANAGEMENT,
a California corporation,
its managing general partner
By: /s/ Michael Hayde
--------------------------------------------
Michael Hayde
Chief Executive Officer
Address for Notice:
c/o Western National Property Management
8 Executive Circle
Irvine, California 92614
Attention: Mr. Jeffrey Scott and Mr. Michael Hayde
38
<PAGE> 45
OWNER:
IRVINE APARTMENT COMMUNITIES, L.P.,
a Delaware limited partnership,
its general partner
By: Irvine Apartment Communities, Inc.,
a Maryland corporation,
its general partner
By: /s/ Shawn Howie
-------------------------------------------
Shawn Howie
Vice President, Finance and Controller
Address for Notice:
Irvine Apartment Communities, Inc.
550 Newport Center Drive, Third Floor
Newport Beach, CA 92660
Attn: Vice President and Controller
39
<PAGE> 46
EXHIBIT A
DESCRIPTION OF THE PROJECTS
Project Name (No. of Units) Street Address
- --------------------------- --------------
A-1
<PAGE> 47
EXHIBIT B
MINIMUM INSURANCE REQUIREMENTS
FOR
OUTSIDE CONTRACTORS
NOT CLASSIFIED AS CLASS I
1. Commencement of Work. No Contractor shall commence any
work on any Project site until it obtains all insurance required to be obtained
by such Contractor under this EXHIBIT B. No Contractor will permit any of its
subcontractors to commence work on the Project site under the applicable
subcontract until all insurance requirements specified in this EXHIBIT B have
been complied with by such subcontractors.
2. Maintenance of Insurance. All insurance described under
this EXHIBIT B shall be maintained by the applicable Contractor at its expense
with insurance carriers licensed and approved to do business in California and,
in the case of liability insurance, the carrier must be listed in Best's Key
Rating Guide. In no event shall such insurance be terminated or otherwise
allowed to lapse prior to termination or expiration of the applicable Contract.
3. Commercial General Liability Insurance. Unless Owner
otherwise agrees in writing, each Contractor shall maintain Commercial General
Liability insurance on an "occurrence" basis, without a deductible, with a
combined single limit for bodily injury and property damage of Three Hundred
Thousand Dollars ($300,000) or current limit carried, whichever is greater.
4. Automobile Liability Insurance. Each Contractor shall
maintain automobile liability insurance covering all use of all automobiles,
trucks and other motor vehicles utilized by such Contractor in connection with
the work with a combined single limit for bodily injury and property damage of
Three Hundred Thousand Dollars ($300,000) or current limit carried, whichever is
greater.
5. Workers' Compensation Insurance. Each Contractor shall
maintain full Workers' Compensation Insurance for all persons whom it employs in
carrying out the work under the applicable Contract. Such insurance shall be in
strict accordance with the requirements of the most current and applicable
California State Workers' Compensation Laws.
6. Additional Insured. Owner, the respective officers,
directors, agents, servants, employees, divisions, subsidiaries, partners,
shareholders and affiliated companies and Manager and its officers, directors,
agents, employees, shareholders, subsidiaries and partners shall be included as
additional insureds on a primary basis under the coverage
B-1
<PAGE> 48
specified in SECTION 3 of this EXHIBIT B, but only with respect to legal
liability or claims caused by, arising out of or resulting from the acts or
omissions of the named insured or of others performed on behalf of the named
insured.
7. Evidence of Insurance. As evidence of specified insurance
coverage, Manager shall, in lieu of actual policies, be provided certificates
and/or endorsements showing such policies in force for the specified period.
Such evidence shall be delivered to Manager promptly following the execution of
the applicable Contract or prior to commencement of work on a Project site,
whichever first occurs. Each policy and certificate/endorsement shall be subject
to approval by Manager and shall provide that such policy shall not be subject
to material alteration or cancellation without thirty (30) days' notice in
writing to be delivered to Manager. Should any such policy expire or be canceled
before termination or expiration of the applicable Contract and the Contractor
fails immediately to procure other insurance as specified, Manager shall have
the right, but not the obligation, to procure such insurance and to deduct the
cost thereof from any sum due the Contractor under its Contract. Each Contractor
shall permit Manager to inspect such evidence of insurance as such Contractor
obtains from its subcontractors.
8. Damages. Nothing contained in these insurance requirements
shall be construed as limiting the extent of any Contractor's responsibility for
payment of damages resulting from its operations under its Contract, nor shall
anything contained herein be deemed to place any responsibility on Owner or
Manager for ensuring that the insurance required hereunder is sufficient for the
operation of any Contractor's business.
9. Indemnification. Each Contractor shall defend (with
attorneys approved by Owner, which approval may not be unreasonably withheld),
indemnify and hold harmless Owner and Manager from and against any and all
Losses incurred directly or indirectly by reason of loss of or damage to
Owner's, Owner's or Manager's property or any claim, suit or judgment brought by
or on behalf of any person or persons for damage, loss or expense due to, but
not limited to, bodily injury or property damage sustained by such person or
persons which arise out of, are occasioned by or are in any way attributable to
the negligence or willful misconduct of such Contractor or its employees or
otherwise attributable to such Contractor's negligence in selecting or
supervising any of its agents or the subcontractors and/or service companies
involved in such Contractor's work under the applicable Contract, or the breach
of any such Contractor's obligations under its Contract with Manager, except to
the extent any such damage, loss, cost or expense is caused by the sole
negligence or willful misconduct of Manager (with respect to such Contractor's
indemnification of Manager only), Owner (with respect to such Contractor's
indemnification of Owner only) or Owner (with respect to such Contractor's
indemnification of Owner only). Each Contractor agrees that its obligation under
this indemnification provision shall survive the expiration or earlier
termination of its Contract with Manager.
B-2
<PAGE> 49
EXHIBIT C
MINIMUM INSURANCE REQUIREMENTS
FOR
CLASS I OUTSIDE CONTRACTORS
1. Commencement of Work. No Contractor shall commence any
work on any Project site until it obtains all insurance required to be obtained
by such Contractor under this EXHIBIT C. No Contractor will permit any of its
subcontractors to commence work on the Project site under the applicable
subcontract until all insurance requirements specified in this EXHIBIT C have
been complied with by such subcontractors.
2. Maintenance of Insurance. All insurance described under
this EXHIBIT C shall be maintained by the applicable Contractor at its expense
with insurance carriers licensed and approved to do business in California and,
in the case of liability insurance, the carrier must have a rating level of not
less than "A-" and financial size rating of not less than "VI" in the most
current Best's Key Rating Guide (unless specifically waived in writing by
Owner). In no event shall such insurance be terminated or otherwise allowed to
lapse prior to termination or expiration of the applicable Contract or such
longer period as may be specified herein. Any Contractor may provide the
insurance described in this EXHIBIT C, in whole or in part, through a policy or
policies covering other liabilities and projects of such Contractor provided,
however, that any such policy or policies shall: (i) allocate to the Project the
full amount of insurance required hereunder, and (ii) contain, permit or
otherwise unconditionally authorize the waiver contained in SECTION 9 of this
EXHIBIT C.
3. Commercial General Liability Insurance. Unless Owner
otherwise agrees in writing, each Contractor shall maintain Commercial General
Liability insurance on an "occurrence" basis, with a maximum deductible of Ten
Thousand Dollars ($10,000), with a combined single limit for bodily injury and
property damage of One Million Dollars ($1,000,000) or current limit carried,
whichever is greater, covering Operations, Independent Contractors, Products and
Completed Operations, Contractual Liability specifically covering the
indemnification contained in SECTION 10 of this EXHIBIT C, Broad Form Property
Damage, claims and lawsuits by one insured against another insured, Personal
Injury, and Explosion, Collapse and Underground Hazards.
4. Automobile Liability Insurance. Each Contractor shall
maintain owned, hired and non-owned, automobile liability insurance covering all
use of all automobiles, trucks and other motor vehicles utilized by such
Contractor in connection with the work with a combined single limit for bodily
injury and property damage of One Million Dollars ($1,000,000) or current limit
carried, whichever is greater.
C-1
<PAGE> 50
5. Workers' Compensation Insurance. Each Contractor shall
maintain full Workers' Compensation Insurance, including Employer's Liability
with a minimum limit of Five Hundred Thousand Dollars ($500,000), for all
persons whom it employs in carrying out the work under the applicable Contract,
including a waiver of subrogation by the insurance carrier with respect to Owner
and Manager. Such insurance shall be in strict accordance with the requirements
of the most current and applicable California State Workers' Compensation Laws.
6. Additional Insured. Owner, its officers, directors,
agents, servants, employees, divisions, subsidiaries, partners, shareholders and
affiliated companies, and Manager and its officers, directors, agents,
employees, shareholders, subsidiaries and partners shall be included as
additional insureds on a primary basis under the coverages specified in SECTIONS
3 and 4 of this EXHIBIT C, but only with respect to legal liability or claims
caused by, arising out of or resulting from the acts or omissions of the named
insured or of others performed on behalf of the named insured.
7. Evidence of Insurance. As evidence of specified insurance
coverage, Manager shall, in lieu of actual policies, be provided certificates
and/or endorsements showing such policies in force for the specified period.
Such evidence shall be delivered to Manager promptly following the execution of
the applicable Contract or prior to commencement of work on a Project site,
whichever first occurs. Each policy and certificate/endorsement shall be subject
to approval by Manager and shall provide that such policy shall not be subject
to material alteration or cancellation without thirty (30) days' notice in
writing to be delivered to Manager. Should any such policy expire or be canceled
before termination or expiration of the applicable Contract and the Contractor
fails immediately to procure other insurance as specified, Manager shall have
the right, but not the obligation, to procure such insurance and to deduct the
cost thereof from any sum due the Contractor under its Contract. Each Contractor
shall permit Manager to inspect such evidence of insurance as such Contractor
obtains from its subcontractors.
8. Damages. Nothing contained in these insurance requirements
shall be construed as limiting the extent of any Contractor's responsibility for
payment of damages resulting from its operations under its Contract, nor shall
anything contained herein be deemed to place any responsibility on Owner or
Manager for ensuring that the insurance required hereunder is sufficient for the
operation of any Contractor's business.
9. Waiver Of Subrogation. Each Contractor and each of its
subcontractors shall waive all rights against Owner and Manager, and each other
for any claims for damages or injuries to the extent covered by such
Contractor's and applicable subcontractor's policies of insurance.
10. Indemnification. Each Contractor shall defend (with
attorneys approved by Owner, which approval may not be unreasonably withheld),
indemnify and hold harmless
C-2
<PAGE> 51
Owner and its officers, directors, agents, employees, shareholders, subsidiaries
and partners and Manager and its officers, directors, agents, employees,
shareholders, subsidiaries and partners from and against any and all Losses
incurred directly or indirectly by reason of loss of or damage to Owner's or
Manager's property or any claim, suit or judgment brought by or on behalf of any
person or persons for damage, loss or expense due to, but not limited to, bodily
injury or property damage sustained by such person or persons which arise out
of, are occasioned by or are in any way attributable to the negligence or
willful misconduct of such Contractor or its employees or otherwise attributable
to such Contractor's negligence in selecting or supervising any of its agents or
the subcontractors and/or service companies involved in such Contractor's work
under the applicable Contract, or the breach of any such Contractor's
obligations under its Contract with Manager, except to the extent any such
damage, loss, cost or expense is caused by the sole negligence or willful
misconduct of Manager (with respect to such Contractor's indemnification of
Manager only), Owner (with respect to such Contractor's indemnification of Owner
only) or Owner (with respect to such Contractor's indemnification of Owner
only). Each Contractor agrees that its obligation under this indemnification
provision shall survive the expiration or earlier termination of its Contract
with Manager.
C-3
<PAGE> 52
EXHIBIT D
CLASS I CONTRACTORS
The term "CLASS I CONTRACTOR" shall be deemed to include the following
contractors performing work on a Project site and any other Contractor
designated by Owner in its reasonable discretion:
EXTERIOR PAINTING
HAZARDOUS MATERIALS CONTRACTORS (CONTACT OWNER FOR SPECIAL INSURANCE
REQUIREMENTS)
ROOFERS
TREE TRIMMERS
D-1
<PAGE> 53
EXHIBIT E
OWNER'S AUTHORIZED REPRESENTATIVES
<TABLE>
<CAPTION>
ARTICLE SUBJECT AUTHORIZED Owner
- ------- ------- ----------------
FOR OWNER
---------
<S> <C> <C>
3 Termination President or Vice President,
Asset Management
3.4 Final Accounting Vice President and
Controller or Vice
President, Asset
Management
4 Budget Approval Vice President, Asset
Management
4.2 Operation in Accordance with Vice President, Asset
Budget Management or Director of
Asset Management
4.4 Financial Reports Vice President, Asset
Management or Director of
Asset Management
6 Leasing Reports Vice President, Asset
Management or Director of
Asset Management
6.1(d) Leasing (Rental Rates) Vice President, Asset
Management or Director of
Asset Management
6.1(e) Leasing (Advertising) Vice President, Asset
Management or Director of
Asset Management
</TABLE>
E-1
<PAGE> 54
<TABLE>
<CAPTION>
ARTICLE SUBJECT AUTHORIZED AGENT
- ------- ------- ----------------
FOR OWNER
---------
<S> <C> <C>
7.1(d) Management of Project Vice President, Asset
(Capital Improvements) Management or Director of
Asset Management
7.1(e) Management of Projects Vice President, Asset
(Contracts) Management
7.1(i) Management of Projects Vice President, Asset
(Legal Counsel/Settlements) Management
8.1 Revenue Account Vice President and
Controller
8.2 Operating Account Vice President and
Controller
8.3 Security Deposit Account Vice President and
Controller
9.1 Insurance Types Vice President, Asset
Management
9.4 Comprehensive Crime Vice President, Asset
Management
Insurance/Fidelity Bonds
12.5 Assignment Vice President, Asset
Management
12.6 Amendments Vice President, Asset
Management
12.16 Hazardous Wastes Vice President, Asset
Management
</TABLE>
Note: For guidance or approval concerning other Owner related directives,
Manager's primary contacts shall be either Vice President, Asset
Management or Director of Asset Management.
E-2
<PAGE> 55
EXHIBIT F
MANAGEMENT FEE SCHEDULE
IRVINE APARTMENT COMMUNITIES, LP
- --------------------------------------------------------------------------------
MANAGEMENT FEE PAID TO IRVINE APARTMENT MANAGEMENT COMPANY, LLC
I. FULLY STABILIZED PROPERTIES
Definition of Fully Stabilized NOI:
Preliminary property NOI*
plus: corporate housing operating contribution
less: marketing advertising programs paid by IAC, IAC Information
Center operating expenses, property related insurance premiums and
risk management costs.
*Fully Stabilized NOI does not include property taxes or managment fees
CALCULATION OF PAYMENT
- ----------------------
NOI growth percentages specified for an increase in managment fees will be based
on increases in NOI compared to the prior year for same-store properties. The
fee schedule is as follows:
<TABLE>
<CAPTION>
FULLY STABILIZED ANNUAL NOI GROWTH PER UNIT FEE
- ---------------------------------- ------------
<S> <C>
2% $22
to to
16% $28
</TABLE>
NOI will be reviewed quarterly and calculated by a comparison of NOI as defined
above for the most recent quarter to the same period of the previous year. The
management fee will be paid monthly based on an estimate using the management
fees from the previous quarter and adjusted in the following quarter for actual
results of the current quarter. An annual reconciliation will be performed to
adjust for quarterly fluctuations in NOI, as defined above. In the situation of
newly stabilized properties such as Baypointe and Santa Maria, the NOI growth
would not be used in the management fee calculation until the property has
stabilized operations for an entire year (the data of the same quarter in the
prior year is not comparable). the year of stabilized operations would commence
with the first full quarter of operations after the project has reached
stabilization. From April, 1998, through September 30, 1999, the minimum per
unit fee paid will be $22.86.
II. LEASE-UP PROPERTIES
Definition of "Lease-up Properties": properties stabilized four quarters or
less.
For purposes of management fee calculation, all stabilized properties which have
achieved stabilization within the last year would remain classified under the
lease-up category. Stabilization will continue to be defined as 95% occupancy or
one year after completion of construction, whichever occurs first. As such, for
all properties categorized as lease-up, IAMC will receive a management fee based
on the lease-up fee structure until comparable data is available for NOI growth
measurement.
CALCULATION OF PAYMENT
- -----------------------
The fee schedule is as follows:
<TABLE>
<CAPTION>
TERM/PERIOD PER UNIT FEE
----------- ------------
<S> <C>
4 months initial lease-up $15
4 successive months $2/month increase
Through 4 stabilized quarters $25 plus bonus potential of $3
</TABLE>
A discretionary bonus of up to $3 per unit during the $25 phase will be
determined solely by IAC after year-end results and will be paid, if awarded, in
the February following year-end.
F-1
<PAGE> 1
EXHIBIT 10.19
GUARANTY
THIS GUARANTY (the "GUARANTY") is made as of March 12, 1998, by
IRVINE APARTMENT COMMUNITIES, L.P., a Delaware limited partnership ("GUARANTOR")
in favor of WESTERN NATIONAL SECURITIES D/B/A WESTERN NATIONAL PROPERTY
MANAGEMENT, a California corporation ("WNPM") and the WNPM Indemnities (as
defined in the Partnership Agreement).
1. Except as otherwise provided in this Guaranty, initially
capitalized terms used in this Guaranty without definition are defined in that
certain Irvine Apartment Management Company Partnership Agreement of even date
herewith by and between Apartment Management Company, LLC, a Delaware limited
liability company ("AMC"), and WNPM (the "PARTNERSHIP AGREEMENT"). Under the
terms of the Partnership Agreement, AMC and WNPM have formed Irvine Apartment
Management Company, a California general partnership (the "PARTNERSHIP").
2. (a) Guarantor is an Affiliate of AMC and as such, Guarantor
agrees that WNPM's agreement to enter into the Partnership Agreement is of
substantial and material benefit to AMC. In order to induce WNPM to enter into
the Partnership Agreement, Guarantor hereby unconditionally and irrevocably
guarantees to the WNPM Indemnitees, the full and prompt payment of any AMC
Indemnification Obligation. The obligations guaranteed pursuant to this Section
2 are hereinafter referred to as the "GUARANTEED OBLIGATIONS."
(b) Notwithstanding anything to the contrary contained
herein, Guarantor's maximum aggregate liability under Section 2(a) shall not
exceed Thirty Million Dollars ($30,000,000) (the "MAXIMUM LIABILITY AMOUNT").
3. In accordance with California Civil Code ("CC") Section 2856,
(a) Guarantor waives all rights and defenses available to
Guarantor by reason of CC Sections 2787 to 2855, inclusive, 2899 and
3433 including, without limitation, any and all rights or defenses
Guarantor may have by reason of protection afforded to the principal
with respect to any of the Guaranteed Obligations or to any other
guarantor of any of the Guaranteed Obligations with respect to such
guarantor's obligations under its guaranty, in either case, pursuant to
other laws of this state limiting or discharging the principal's
indebtedness or such other guarantor's obligations; and
(c) Guarantor waives all rights and defenses arising out
of an election of remedies by WNPM Indemnitees, even though that
election of remedies, has destroyed Guarantor's rights of subrogation
and reimbursement against AMC.
1
<PAGE> 2
No other provision of this Guaranty shall be construed as limiting the
generality of any of the covenants and waivers set forth in this Paragraph 3.
4. Guarantor represents and warrants to the WNPM Indemnitees that
Guarantor is a member in AMC. In that regard, Guarantor agrees that WNPM
Indemnitees's agreement to enter into the Partnership Agreement is of
substantial and material benefit to Guarantor and further agrees as follows:
(a) Guarantor shall continue to be liable under this
Guaranty and the provisions hereof shall remain in full force and effect
notwithstanding (i) any modification, agreement or stipulation between
AMC and WNPM or their respective successors and assigns, with respect to
the Partnership Agreement or the obligations encompassed thereby,
including, without limitation, the Guaranteed Obligations, (ii) WNPM's
waiver of or failure to enforce any of the terms, covenants or
conditions contained in the Partnership Agreement or in any modification
thereof, (iii) any discharge or release of AMC or any other guarantor
from any liability with respect to the Guaranteed Obligations, (iv) any
loans or financial accommodations made to AMC and (v) the manner or
order by which payments are applied to obligations under the Partnership
Agreement. Without limiting the generality of the foregoing, Guarantor
hereby waives the rights and benefits under CC Section 2819, and agrees
that by doing so Guarantor's liability shall continue even if WNPM
alters any obligations under the Partnership Agreement in any respect or
the WNPM Indemnitees' remedies or rights against AMC are in any way
impaired or suspended without Guarantor's consent.
(b) Guarantor's liability under this Guaranty shall
continue until all Guaranteed Obligations owed to the WNPM Indemnitees
have been satisfied in full.
5. The liability of Guarantor under this Guaranty is a guaranty
of payment and not collectibility and is conditioned and contingent upon the
genuineness, validity, regularity or enforceability of the Partnership Agreement
or other instruments relating to the creation or performance of the Guaranteed
Obligations (unless the lack of enforceability is the result of the Bankruptcy
of AMC) or the pursuit by the WNPM Indemnitees of any remedies which it now has
or may hereafter have with respect thereto under the Partnership Agreement, at
law, in equity or otherwise.
6. Guarantor agrees that the WNPM Indemnitees may enforce this
Guaranty without proceeding against AMC or resorting to or exhausting any
security or collateral of AMC.
7. (a) Guarantor agrees that nothing contained herein shall
prevent the WNPM Indemnitees from suing on the Partnership Agreement and
that the exercise of
2
<PAGE> 3
any of the aforesaid rights shall not constitute a legal or equitable
discharge of Guarantor.
(b) Guarantor agrees that Guarantor waives all benefits
and defenses under CC Sections 2847, 2848 and 2849 and agrees that
Guarantor shall have no right of subrogation against AMC, no right of
subrogation against any collateral or security provided for in the
Partnership Agreement and no right of contribution against any other
guarantor unless and until all Guaranteed Obligations have been
indefeasibly paid and satisfied in full, and the WNPM Indemnitees have
released, transferred or disposed of all of its rights, title and
interest in any collateral or security. To the extent the waiver of
Guarantor's rights of subrogation, reimbursement and contribution as set
forth herein is found by a court of competent jurisdiction to be void or
voidable for any reason, Guarantor further agrees that Guarantor's
rights of subrogation and reimbursement against AMC and Guarantor's
rights of subrogation against any collateral or security shall be junior
and subordinate to any rights the WNPM Indemnitees may have against AMC
and to all rights, title and interest the WNPM Indemnitees may have in
such collateral or security, and Guarantor's rights of contribution
against any other guarantor shall be junior and subordinate to any
rights the WNPM Indemnitees may have against such other guarantor. The
WNPM Indemnitees may use, sell or dispose of any item of collateral or
security as it sees fit without regard to Guarantor's subrogation and
contribution rights, and upon disposition or sale, of any item, any and
all rights of Guarantor relating to such item shall terminate. With
respect to the foreclosure of any security interest in any personal
property collateral then securing the Guaranteed Obligations, the WNPM
Indemnitees agrees to give Guarantor 5 days' prior written notice, in
the manner set forth in this Guaranty, of any sale or disposition of any
such personal property collateral, other than collateral which is
perishable, threatens to decline speedily in value, is of a type
customarily sold on a recognized market, or is cash, cash equivalents,
certificates of deposit or the like.
(c) Guarantor's sole right with respect to any such
foreclosure of personal property collateral shall be to bid at such sale
in accordance with applicable law. Guarantor acknowledges and agrees
that the WNPM Indemnitees may also bid at any such sale and in the event
such collateral is sold to the WNPM Indemnitees in whole or in partial
satisfaction of the Guaranteed Obligations (or any portion thereof),
Guarantor shall have no right or interest with respect thereto.
Notwithstanding anything to the contrary contained herein, no provision
of this Guaranty shall be deemed to limit, decrease, or in any way to
diminish any rights of set-off the WNPM Indemnitees may have with
respect to any cash, cash equivalents, certificates of deposit, letters
of credit or the like which may now or hereafter be deposited with the
WNPM Indemnitees by AMC.
3
<PAGE> 4
8. Guarantor agrees to withhold the exercise of any and
all rights of subrogation, reimbursement and contribution against AMC,
against any other person or entity, and against any collateral or
security for any of the Guaranteed Obligations, including, without
limitation, any such rights pursuant to CC Sections 2847 and 2848, until
the Guaranteed Obligations have been indefeasibly paid and satisfied in
full, and the WNPM Indemnitees have released, transferred or disposed of
all of its right, title and interest in such collateral or security.
9. All notices, requests and demands to be made hereunder to the
parties hereto shall be in writing (at the addresses set forth below) and shall
be given in writing addressed to the party at its address as it appears below,
and will be deemed effectively given upon personal delivery, confirmation of
receipt of delivery by facsimile, or three (3) days after deposit in the United
States mail, by registered or certified mail, return receipt requested.
To WNPM: c/o Western National Group
8 Executive Circle
Irvine, California 92614-6736
Attention: Mr. Jeffrey Scott and Mr. Michael Hayde
Telephone: (714) 862-6208
Facsimile: (714) 862-6494
To Guarantor: Irvine Apartment Communities, L.P.
550 Newport Center Drive
Suite 300
Newport Beach, California 92660
Telephone: (714) 720-5530
Facsimile: (714) 720-5532
Attention: Mr. Scott Newnam
10. This Guaranty is solely for the benefit of the WNPM
Indemnitees and AMC.
11. The WNPM Indemnitees may not assign this Guaranty without
Guarantor's prior written consent, which consent may be given or withheld in
Guarantor's sole and absolute discretion. As used herein, the singular shall
include the plural, and the masculine shall include the feminine and neuter and
vice versa, if the context so requires.
12. In the event of any dispute or litigation regarding the
enforcement or validity of this Guaranty should result in litigation or
arbitration, the prevailing party in such dispute is entitled to recover from
the other party all reasonable fees, costs and expenses of
4
<PAGE> 5
enforcing any right of the prevailing party, including, without limitation,
reasonable attorneys' fees and expenses and expert witness fees.
13. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.
14. No provision of this Guaranty may be changed, waived, revoked
or amended without WNPM's prior written consent. If any provision of this
Guaranty or the application of such provision to any person or circumstance is
held invalid, the remainder of this Agreement or the application of such
provision to persons or circumstances other than those to which it is held
invalid will not be affected thereby.
15. This Guaranty embodies the entire agreement among the parties
hereto with respect to the matters set forth herein, and supersedes all prior
agreements among the parties with respect to the matters set forth herein. If
any claim is made by any party relating to any conflict, omission or ambiguity
in this Guaranty, no presumption or burden of proof or persuasion shall be
implied because this Guaranty was prepared by or at the request of a particular
party or its counsel. No failure or delay on the part of the WNPM Indemnitees to
exercise any power, right or privilege under this Guaranty shall impair any such
power, right or privilege, or be construed to be a waiver of any default or an
acquiescence therein, nor shall any single or partial exercise of such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privilege.
16. This Guaranty is in addition to all other guaranties of
Guarantor and any other guarantors of AMC's obligations to the WNPM Indemnitees.
17. GUARANTOR ACKNOWLEDGES THAT GUARANTOR HAS BEEN AFFORDED THE
OPPORTUNITY TO READ THIS DOCUMENT CAREFULLY AND TO REVIEW IT WITH AN ATTORNEY OF
GUARANTOR'S CHOICE BEFORE SIGNING IT. GUARANTOR ACKNOWLEDGES HAVING READ AND
UNDERSTOOD THE MEANING AND EFFECT OF THIS DOCUMENT BEFORE SIGNING IT.
[SIGNATURE ON NEXT PAGE]
5
<PAGE> 6
IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of
the day and year first above written.
GUARANTOR: IRVINE APARTMENT COMMUNITIES, L.P.
a Delaware limited partnership
By: Irvine Apartment Communities, Inc.,
a Maryland corporation,
its general partner
Name: /s/ Shawn Howie
-------------------------------------------
Shawn Howie
Vice President, Finance and Controller
S-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS OF IRVINE APARTMENT COMMUNITIES,
INC. FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000912084
<NAME> IRVINE APARTMENT COMMUNITIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 54,477
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 54,477
<PP&E> 1,251,873
<DEPRECIATION> 256,154
<TOTAL-ASSETS> 1,235,493
<CURRENT-LIABILITIES> 33,209
<BONDS> 627,219
0
144,000
<COMMON> 200
<OTHER-SE> 212,244
<TOTAL-LIABILITY-AND-EQUITY> 1,235,493
<SALES> 0
<TOTAL-REVENUES> 51,569
<CGS> 0
<TOTAL-COSTS> 24,029
<OTHER-EXPENSES> 2,158
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,603
<INCOME-PRETAX> 17,779
<INCOME-TAX> 0
<INCOME-CONTINUING> 17,779
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,816
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS OF IRVINE APARTMENT COMMUNITIES,
L.P. FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001038358
<NAME> IRVINE APARTMENT COMMUNITIES, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 54,477
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 54,477
<PP&E> 1,251,873
<DEPRECIATION> 256,154
<TOTAL-ASSETS> 1,235,493
<CURRENT-LIABILITIES> 33,209
<BONDS> 627,219
0
144,000
<COMMON> 0
<OTHER-SE> 422,967
<TOTAL-LIABILITY-AND-EQUITY> 1,235,493
<SALES> 0
<TOTAL-REVENUES> 51,569
<CGS> 0
<TOTAL-COSTS> 24,029
<OTHER-EXPENSES> 2,158
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,603
<INCOME-PRETAX> 17,779
<INCOME-TAX> 0
<INCOME-CONTINUING> 17,779
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,338
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS OF IAC CAPITAL TRUST FOR THE
QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001048922
<NAME> IAC CAPITAL TRUST
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 150,005
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
150,000
<COMMON> 5
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 150,005
<SALES> 0
<TOTAL-REVENUES> 2,441
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,441
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,441
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
