<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 27, 1996
CRESCENT REAL ESTATE EQUITIES, INC.
(Exact name of Registrant as specified in its Charter)
Maryland 1-13038 52-1862813
(State of Incorporation) (Commission File (IRS Employer Identification Number)
Number)
900 Third Avenue, Suite 1800
New York, New York 10022
(Address of Principal Executive Offices) (Zip Code)
(212) 836-4216
(Registrant's telephone number, including area code)
<PAGE> 2
Item 7. Financial Statements and Exhibits.
(c) Exhibits
The exhibits listed in the following index relate to the Registration
Statement on Form S-3 (No. 33-97794), as amended, of the registrant and are
filed herewith for incorporation by reference in such Registration Statement.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
1.01 Form of Underwriting Agreement
4.01 Form of Registration Agreement relating to the acquisition of the Greenway
Plaza Portfolio
4.02 Registration Rights Agreement, dated as of June 26, 1996, relating to Canyon
Ranch - Tucson
5.01 Opinion of Shaw, Pittman, Potts & Trowbridge as to the legality of the
securities being registered by the registrant
8.01 Opinion of Shaw, Pittman, Potts & Trowbridge regarding certain material tax
issues relating to the registrant
8.02 Opinion of Locke Purnell Rain Harrell (A Professional Corporation) regarding certain
Texas franchise tax matters
10.01 1996 Crescent Real Estate Equities Limited Partnership Unit Incentive Plan
10.02 Agreement, dated as of August 15, 1996, relating to the acquisition of the
Greenway Plaza Portfolio
23.01 Consent of Shaw, Pittman, Potts & Trowbridge (Included in its opinions filed
as Exhibits 5.01 and 8.01)
23.02 Consent of Locke Purnell Rain Harrell (A Professional Corporation) (Included in
its opinion filed as Exhibit 8.02)
</TABLE>
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: September 27, 1996 CRESCENT REAL ESTATE EQUITIES, INC.
By: /s/ Dallas E. Lucas
-------------------------
Dallas E. Lucas
Senior Vice President and
Chief Financial Officer
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EXHIBIT 1.01
CRESCENT REAL ESTATE EQUITIES, INC.
(a Maryland corporation)
COMMON STOCK
(Par Value $.01 Per Share)
TERMS AGREEMENT
---------------
Dated: September 26, 1996
To: CRESCENT REAL ESTATE EQUITIES, INC.
777 Main Street
Fort Worth, Texas 76102
Attention:
Ladies and Gentlemen:
We (the "Representative") understand that Crescent Real Estate
Equities, Inc. ("the Company") proposes to issue and sell shares of its Common
Stock, $.01 par value per share (the "Common Stock") such shares of Common
Stock being collectively hereinafter referred to as the "Underwritten
Securities". Subject to the terms and conditions set forth or incorporated by
reference herein, the underwriters named below (the "Underwriters") offer to
purchase, severally and not jointly, the respective numbers of Initial
Underwritten Securities (as defined in the Underwriting Agreement referenced to
below) set forth below opposite their respective names, and a proportionate
share of Option Securities (as defined in the Underwriting Agreement referred
to below) to the extent any are purchased, at the purchase price set forth
below.
<TABLE>
<CAPTION>
Number of Shares of Initial
Underwriter Underwritten Securities
----------- ---------------------------
<S> <C>
Merrill Lynch , Pierce, Fenner & Smith 2,150,000
Incorporated
Dean Witter Reynolds Inc. 2,150,000
PaineWebber Incorporated 2,150,000
Smith Barney Inc. 2,150,000
Alex. Brown & Sons Incorporated 100,000
CS First Boston Corporation 100,000
Donaldson, Lufkin & Jenrette 100,000
Securities Corporation
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
A.G. Edwards & Sons, Inc. 100,000
Furman Selz LLC 100,000
NatWest Securities Limited 100,000
Salomon Brothers Inc 100,000
Southwest Securities, Inc. 100,000
UBS Securities LLC 100,000
EVEREN Securities, Inc. 50,000
Friedman, Billings, Ramsey & Co., Inc. 50,000
Hanifen, Imhoff Inc. 50,000
Harris Webb & Garrison, Inc. 50,000
Edward D. Jones & Co., L.P. 50,000
Legg Mason Wood Walker, 50,000
Incorporated
Principal Financial Securities, Inc. 50,000
Rauscher Pierce Refsnes, Inc. 50,000
Raymond James & Associates, Inc. 50,000
Sutro & Co. Incorporated 50,000
Total 10,000,000
========================
</TABLE>
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The Underwritten Securities shall have the following terms:
Common Stock
Title of Securities: Common Stock, par value $.01 per share
Number of Shares: 10,000,000
Public offering price per share: $40.375
Purchase price per share: $ 38.255
Number of Option Securities, if any, that may be purchased
by the Underwriters: 1,500,000
Delayed Delivery Contracts: not authorized
Additional co-managers, if any: Dean Witter Reynolds Inc., PaineWebber
Incorporated and Smith Barney Inc.
Closing date and location: October 2, 1996, Hogan & Hartson L.L.P., Columbia
Square, 555 Thirteenth Street, N.W., Washington, DC 20004-1109
All the provisions contained in the document attached as Annex
A hereto entitled "Crescent Real Estate Equities, Inc._Preferred Stock, Common
Stock and Common Stock Warrants_Purchase Agreement" are hereby incorporated by
reference in their entirety herein and shall be deemed to be a part of this
Terms Agreement to the same extent as if such provisions had been set forth in
full herein. Terms defined in such document are used herein as therein
defined.
<PAGE> 4
Please accept this offer no later than 4:30 o'clock P.M. (New York City time)
on September 26, 1996 by signing a copy of this Terms Agreement in the space
set forth below and returning the signed copy to us.
Very truly yours
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: /s/
--------------------------------------------
Acting on behalf of itself and the
other named Underwriters.
Accepted: September 26, 1996
By: CRESCENT REAL ESTATE EQUITIES, INC.
By: /s/
-------------------------------
<PAGE> 5
CRESCENT REAL ESTATE EQUITIES, INC.
(a Maryland corporation)
Preferred Stock, Common Stock and Common Stock Warrants
PURCHASE AGREEMENT
September 26, 1996
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Merrill Lynch World Headquarters
World Financial Center
North Tower
New York, New York 10281-1305
Dear Ladies and Gentlemen:
Crescent Real Estate Equities, Inc., a Maryland corporation (the
"COMPANY") proposes to issue and sell its Preferred Stock, no par value (the
"PREFERRED STOCK"), Common Stock, $.01 par value per share (the "COMMON STOCK")
and Common Stock Warrants for the purchase of Common Stock (the "WARRANTS"),
from time to time, in one or more offerings on terms to be determined at the
time of sale (the Preferred Stock, the Common Stock and the Warrants are
collectively referred to herein as the "SECURITIES"). Each series of Preferred
Stock may vary, as to the specific number of shares, title, stated value,
liquidation preference, issuance price, ranking, dividend rate or rates (or
method of calculation), dividend payment dates, any redemption or sinking fund
requirements, any conversion provisions and any other variable terms as set
forth in the Company's First Amended and Restated Articles of Incorporation
(the "ARTICLES OF INCORPORATION") or any articles supplementary of the Company
containing resolutions of the Board of Directors establishing the preferences
and rights of such series of Preferred Stock. As used herein, "you" and
"your," unless the context otherwise requires, shall mean the parties to whom
this Purchase Agreement (the "AGREEMENT") is addressed together with the other
parties, if any, identified in the applicable Terms Agreement (as hereinafter
defined) as additional co-managers with respect to Underwritten Securities (as
hereinafter defined) purchased pursuant thereto.
At such time, if any, as the Company determines to make an
offering of Securities through you or through an underwriting syndicate managed
by you, the Company will enter into an agreement (the "TERMS AGREEMENT")
providing for the
<PAGE> 6
sale of such Securities (the "UNDERWRITTEN SECURITIES") to, and the purchase
and offering thereof by, you and such other underwriters, if any, selected by
you that have authorized you to enter into such Terms Agreement on their behalf
(the "UNDERWRITERS," which term shall include you, whether acting alone in the
sale of the Underwritten Securities or as a member of an underwriting
syndicate, and any Underwriter substituted pursuant to Section 10 hereof). The
Terms Agreement relating to the offering of Underwritten Securities shall
specify the number of Underwritten Securities of each class or series to be
initially issued (the "INITIAL UNDERWRITTEN SECURITIES"), the names of the
Underwriters participating in such offering (subject to substitution as
provided in Section 10 hereof), the number of Initial Underwritten Securities
which each such Underwriter severally agrees to purchase, the names of such of
you or such other Underwriters acting as co-managers, if any, in connection
with such offering, the price at which the Initial Underwritten Securities are
to be purchased by the Underwriters from the Company, the initial public
offering price, if any, of the Initial Underwritten Securities, the time and
place of delivery and payment, any delayed delivery arrangements and any other
variable terms of the Initial Underwritten Securities (including, but not
limited to, current ratings, designations, liquidation preferences, conversion
or exchange provisions, redemption provisions, and sinking fund requirements
applicable to the Initial Underwritten Securities and the terms of the Warrants
and the terms, prices and dates upon which such Warrants may be purchased). In
addition, each Terms Agreement shall specify whether the Company has agreed to
grant to the Underwriters an option to purchase additional Underwritten
Securities to cover over-allotments, if any, and the number of Underwritten
Securities subject to such option (the "OPTION SECURITIES"). As used herein,
the term "Underwritten Securities" shall include the Initial Underwritten
Securities and all or any portion of the Option Securities agreed to be
purchased by the Underwriters as provided herein, if any. The Terms Agreement,
which shall be substantially in the form of Exhibit A hereto, may take the form
of an exchange of any standard form of written telecommunication between you
and the Company. Each offering of Underwritten Securities through you or
through an underwriting syndicate managed by you will be governed by this
Agreement, as supplemented by the applicable Terms Agreement, and such Terms
Agreement shall inure to the benefit of and be binding upon each Underwriter
participating in the offering of such Underwritten Securities.
The Company has filed with the Securities and Exchange
Commission (the "COMMISSION") a registration statement on Form S-3 (No.
33-97794) for the registration of the Securities under the Securities Act of
1933, as amended (the "1933 ACT"), and the offering thereof from time to time
in accordance with Rule 415 of the rules and regulations of the Commission
under the 1933 Act (the "1933 ACT REGULATIONS"), and the Company has filed such
amendment or amendments thereto as may have been required prior to the
execution of the applicable Terms Agreement. Such registration statement, as
amended, has been declared effective by the Commission. Such registration
statement and the prospectus constituting a
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<PAGE> 7
part thereof (including each amendment thereto and each prospectus supplement
relating to the offering of Underwritten Securities pursuant to Rule 415 of the
1933 Act Regulations, which Underwritten Securities are covered by a single
Terms Agreement or related Terms Agreements (the "PROSPECTUS SUPPLEMENT")),
including all documents incorporated therein by reference, as from time to time
amended or supplemented pursuant to the 1933 Act, the Securities Exchange Act
of 1934, as amended (the "1934 ACT"), or otherwise, through the Closing Time or
Closing Times for such Underwritten Securities and used or delivered in
connection with the offering of such Underwritten Securities, are referred to
herein as the "REGISTRATION STATEMENT" and the "PROSPECTUS," respectively;
provided, that if any revised prospectus shall be provided to you by the
Company for use in connection with the offering of Underwritten Securities
which differs from the Prospectus on file at the Commission at the time the
Registration Statement becomes effective (whether or not such revised
prospectus is required to be filed by the Company pursuant to Rule 424(b) of
the 1933 Act Regulations), the term "Prospectus" shall refer to each such
revised prospectus from and after the time it is first provided to you for such
use; provided, further, that a Prospectus Supplement shall be deemed to have
supplemented the Prospectus only with respect to the offering of Underwritten
Securities to which it relates. All references in this Agreement to financial
statements and schedules and other information which is "contained," "included"
or "stated" in the Registration Statement or the Prospectus (and all other
references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which is or is deemed
to be incorporated by reference in the Registration Statement or the
Prospectus, as the case may be; and all references in this Agreement to
amendments or supplements to the Registration Statement or the Prospectus shall
be deemed to mean and include the filing of any document under the 1934 Act
which is or is deemed to be incorporated by reference in the Registration
Statement or the Prospectus, as the case may be. If the Company elects to rely
on Rule 434 under the 1933 Act Regulations, all references to the Prospectus
shall be deemed to include, without limitation, the form of prospectus and the
abbreviated term sheet, taken together, provided to the Underwriters by the
Company in reliance on Rule 434 under the 1933 Act (the "RULE 434 PROSPECTUS").
If the Company files a registration statement to register a portion of the
Securities and Common Stock issuable upon exercise of the Warrants (the
"WARRANT SHARES") and relies on Rule 462(b) for such registration to become
effective upon filing with the Commission (the "RULE 462 REGISTRATION
STATEMENT"), then any reference to "Registration Statement" herein shall be
deemed to be to both the registration statement referred to above (No.
33-97794) and the Rule 462 Registration Statement, as each such registration
statement may be amended pursuant to the 1933 Act.
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<PAGE> 8
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
OPERATING PARTNERSHIP.
(a) The Company and Crescent Real Estate Equities Limited
Partnership, a Delaware limited partnership (the "OPERATING PARTNERSHIP"),
jointly and severally, represent and warrant to you as of the date hereof and
to you and each other Underwriter named in the applicable Terms Agreement as of
the date thereof (in each case, a "REPRESENTATION DATE"), as follows:
(i) The Registration Statement and the Prospectus, at the
time the Registration Statement became effective, complied, and at
each Representation Date, will comply, in all material respects with
the requirements of the 1933 Act and the 1933 Act Regulations; the
Registration Statement, at the time the Registration Statement became
effective, did not, and as of each Representation Date, will not,
contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus, as of the date
hereof does, and as of each Representation Date (unless the term
"Prospectus" refers to a prospectus that has been provided to the
Underwriters by the Company for use in connection with the offering of
Underwritten Securities that differs from the Prospectus on file at
the Commission at the time the Registration Statement becomes
effective, in which case at the time it is first provided to the
Underwriters for such use) and at the Closing Time and each Date of
Delivery referred to in Section 2(c) hereof, will comply in all
material respects with the requirements of the 1933 Act and the 1933
Act Regulations and, as of the date hereof does not, and as of each
Representation Date will not contain an untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that the representations
and warranties in this subsection shall not apply to statements in or
omissions from the Registration Statement or Prospectus made in
reliance upon and in conformity with written information furnished to
the Company through you specifically for inclusion in the Registration
Statement or the Prospectus.
(ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued and no
proceeding for that purpose has been instituted or, to the knowledge
of the Company or the Operating Partnership, threatened by the
Commission or by the state securities authority of any jurisdiction.
No order preventing or suspending the use of the Prospectus has been
issued and no proceeding for that purpose has been instituted or, to
the knowledge of the Company or the Operating Partnership, threatened
by the Commission or by the state securities authority of any
jurisdiction.
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<PAGE> 9
(iii) Each of Arthur Andersen LLP, the accounting firm
whose report on the financial statements and supporting schedule of
the Company is included in the Registration Statement, KPMG Peat
Marwick LLP, the accounting firm whose report on the financial
statements of The Crescent is included in the Registration Statement,
Huselton & Morgan, A Professional Corporation, the accounting firm
whose report on the financial statements of Spectrum Center Ltd. is
included in the Registration Statement, Grant Thornton LLP, the
accounting firm whose report on the financial statements of the
Greenway Property Portfolio is included in the Registration Statement
and any other accounting firm whose report on financial statements is
included in the Registration Statement, is an independent public
accountant as required by the 1933 Act and the 1933 Act Regulations.
(iv) The financial statements (including the notes
thereto) included in the Registration Statement and the Prospectus
present fairly the financial position of the respective entity or
entities presented therein at the respective dates indicated and the
results of their operations for the respective periods specified, and
except as otherwise stated in the Registration Statement, said
financial statements have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis. The
supporting schedule included in the Registration Statement presents
fairly the information required to be stated therein. The financial
information and data included in the Registration Statement and the
Prospectus present fairly the information included therein and have
been prepared on a basis consistent with that of the financial
statements included in the Registration Statement and the Prospectus
and the books and records of the respective entities presented
therein. The pro forma financial information included in the
Prospectus has been prepared in accordance with the applicable
requirements of the Rules 11-01 and 11-02 of Regulation S-X under the
1933 Act and other 1933 Act Regulations and American Institute of
Certified Public Accountants ("AICPA") guidelines with respect to pro
forma financial information and includes all adjustments necessary to
present fairly the pro forma financial position of the respective
entity or entities presented therein at the respective dates indicated
and the results of their operations for the respective periods
specified. Other than the historical and pro forma financial
statements (and schedule) included therein, no other historical or pro
forma financial statements (or schedules) are required by the 1933 Act
or the 1933 Act Regulations to be included in the Registration
Statement. Except as reflected or disclosed in the financial
statements included in the Registration Statement or otherwise set
forth in the Prospectus, none of the Company, the Operating
Partnership, any of the Subsidiaries or the Residential Development
Corporations (as such terms are hereinafter defined) are subject to
any material indebtedness, obligation, or liability, contingent or
otherwise.
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<PAGE> 10
(v) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as
otherwise stated therein, (A) there has been no material adverse
change in the condition, financial or otherwise, or in the earnings,
assets, business affairs or business prospects of the Company, the
Operating Partnership, the Subsidiaries and the Residential
Development Corporations, considered as one enterprise, whether or not
arising in the ordinary course of business, (B) no material casualty
loss or material condemnation or other material adverse event with
respect to any real property or improvements thereon owned or leased
by any of the Company, the Operating Partnership, any of its
Subsidiaries or any of the Residential Development Corporations (each
individually a "PROPERTY" and collectively, the "PROPERTIES"),
including any property underlying indebtedness held by the Company,
the Operating Partnership, any of the Subsidiaries or any of the
Residential Development Corporations has occurred that is material to
the Company, the Operating Partnership, the Subsidiaries and the
Residential Development Corporations considered as one enterprise, (C)
there have been no acquisitions or other transactions entered into by
the Company, the Operating Partnership, any Subsidiary or any
Residential Development Corporation other than those in the ordinary
course of business, which are material with respect to such entities,
considered as one enterprise, or would result in any inaccuracy in the
representations contained in Section 1(a)(iv) above, (D) except as
described in the Prospectus and except for regular quarterly dividends
or distributions on the Common Stock, there has been no dividend or
distribution of any kind declared, paid or made by the Company, or by
the Operating Partnership with respect to its partnership interests,
and (E) there has been no change in the capital stock of the Company
or its Subsidiaries or the Residential Development Corporations or the
partnership interests of the Operating Partnership, or any increase in
the indebtedness of the Company, the Operating Partnership, the
Subsidiaries or the Residential Development Corporations that is
material to such entities, considered as one enterprise.
(vi) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the state
of its incorporation as set forth in the Registration Statement with
corporate power and authority to own, lease and operate its
properties, to conduct the business in which it is engaged or proposes
to engage as described in the Prospectus and to enter into and perform
its obligations under this Agreement. The Company is duly qualified
as a foreign corporation to transact business and is in good standing
in New York and each other jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or
the conduct of business, except where the failure to so qualify would
not have a material adverse effect on the condition, financial or
otherwise, or the earnings, assets, business affairs or business
prospects of the Company, the Operating Partnership, the
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<PAGE> 11
Subsidiaries and the Residential Development Corporations considered
as one enterprise.
(vii) The Operating Partnership has been duly formed and is
validly existing as a limited partnership in good standing under the
Delaware Revised Uniform Limited Partnership Act (the "DELAWARE ACT")
with partnership power and authority to own, lease and operate its
properties, to conduct the business in which it is engaged or proposes
to engage as described in the Prospectus and to enter into and perform
its obligations under this Agreement. The Operating Partnership is
duly qualified or registered as a foreign partnership and is in good
standing in each jurisdiction in which such qualification or
registration is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the
failure to so qualify or register would not have a material adverse
effect on the condition, financial or otherwise, or the earnings,
assets, business affairs or business prospects of the Company, the
Operating Partnership, the Subsidiaries and the Residential
Development Corporations considered as one enterprise. The First
Amended and Restated Agreement of Limited Partnership of the Operating
Partnership, as amended (the "PARTNERSHIP AGREEMENT") is a valid and
binding agreement enforceable in accordance with its terms. At the
Closing Time (as hereinafter defined), Crescent Real Estate Equities,
Ltd., a Delaware corporation ("CGP, INC."), a wholly owned subsidiary
of the Company, will be the sole general partner of the Operating
Partnership and will be the holder of one percent (1%) of the
interests in the Operating Partnership. Entities in which the Company
directly or indirectly has a majority ownership interest are
hereinafter referred to as the "SUBSIDIARIES," and each, individually,
a "SUBSIDIARY." Houston Area Development Corp., a Texas corporation,
Mira Vista Development Corp., a Texas corporation, and Crescent
Development Management Corp., a Delaware corporation, in which the
Company owns no voting securities, and as to which the Company does
not have the right to exercise control, are referred to hereinafter
collectively as the "RESIDENTIAL DEVELOPMENT CORPORATIONS."
(viii) Each of the Subsidiaries and the Residential
Development Corporations has been duly organized and is validly
existing as a corporation, limited partnership, or limited liability
company as the case may be, in good standing under the laws of its
respective state of organization, with full power and authority to
own, lease and operate its properties, to conduct the business in
which it is engaged or proposes to engage as described in the
Prospectus. Each of the Subsidiaries and the Residential Development
Corporations is duly qualified as a foreign corporation, limited
partnership, or limited liability company, as the case may be, to
transact business and is in good standing in each jurisdiction in
which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of
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<PAGE> 12
business, except where the failure to so qualify would not have a
material adverse effect on the condition, financial or otherwise, or
the earnings, assets, business affairs or business prospects of the
Company, the Operating Partnership, the Subsidiaries and the
Residential Development Corporations considered as one enterprise.
Each of the partnership agreements, limited liability company
agreements, or other, similar instruments to which the Company or any
of its Subsidiaries is a party has been duly authorized, executed and
delivered by the parties thereto and constitutes the valid agreement
thereof, enforceable in accordance with its terms. All of the issued
and outstanding shares of capital stock of each of the corporate
Subsidiaries and the Residential Development Corporations have been
duly authorized and validly issued and are fully paid and
non-assessable. The ownership by the Company, the Operating
Partnership or the Subsidiaries of the shares of capital stock or
limited partnership or equity interests, as the case may be, of each
of the Subsidiaries and the Residential Development Corporations is as
described in the Prospectus and such shares or limited partnership
interests, membership interests or other, similar instruments owned by
the Company, the Operating Partnership or the Subsidiaries are free
and clear of all liens, charges and encumbrances.
(ix) The authorized, issued and outstanding capital stock
of the Company is as set forth in the Prospectus (except for
subsequent issuances, if any, pursuant to clauses (A), (B) and (C)
below); and such shares have been duly authorized, are validly issued,
fully paid and non-assessable and have been offered and sold in
compliance with all applicable laws (including, without limitation,
federal and state securities laws). No shares of capital stock of the
Company are reserved for any purpose except in connection with: (A)
the incentive compensation plans of the Company as described in the
Prospectus, (B) the possible issuance of shares of Common Stock upon
the exchange of units of ownership interest in the Operating
Partnership (the "UNITS") pursuant to the Partnership Agreement, for
which sufficient shares of Common Stock have been reserved for
possible future issuance, and (C) in connection with the acquisition
of the Greenway Plaza portfolio or the Canyon Ranch-Lenox property as
described in the Prospectus. Except for Units and shares of Common
Stock issuable upon the exercise of options as described in the
Prospectus, there are no outstanding securities convertible into or
exchangeable for any capital stock of the Company and no outstanding
options, rights (preemptive or otherwise) or warrants to purchase or
to subscribe for shares of such stock or any other securities of the
Company.
(x) The Underwritten Securities have been duly authorized
for issuance and sale to the Underwriters pursuant to this Agreement
and the applicable Terms Agreement and, when issued and delivered by
the Company pursuant to the Terms Agreement against payment of the
consideration set
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<PAGE> 13
forth in the Terms Agreement, will be validly issued, fully paid and
non-assessable. Upon payment of the purchase price and delivery of
the Underwritten Securities in accordance with this Agreement and the
applicable Terms Agreement, each of the Underwriters will receive
good, valid and marketable title to the Underwritten Securities, free
and clear of all security interests, mortgages, pledges, liens,
encumbrances and claims. The Underwritten Securities will be offered
and sold at the Closing Time, or the Date of Delivery, as the case may
be, in compliance with all applicable laws (including, without
limitation, federal securities laws). The terms of the Common Stock
conform to all statements and descriptions related thereto contained
in the Prospectus. The form of stock certificate used to evidence the
Common Stock, the Preferred Stock or the Warrants, as applicable, is
in due and proper form and complies with all applicable legal
requirements. The issuance of the Underwritten Securities is not
subject to any preemptive or other similar rights and, except as
summarized in the Prospectus and set forth in the Company's Articles
of Incorporation or Bylaws, there are no restrictions on the voting or
transfer of the Common Stock pursuant to the Company's Articles of
Incorporation or Bylaws or any agreement or other instrument.
(xi) If applicable, the Warrants have been duly authorized
and, when issued and delivered pursuant to this Agreement and
countersigned by the Warrant Agent as provided in the Warrant
Agreement, will have been duly executed, countersigned, issued and
delivered and will constitute valid and legally binding obligations of
the Company entitled to the benefits provided by the Warrant Agreement
under which they are to be issued; the issuance of the Warrant Shares
upon exercise of the Warrants will not be subject to preemptive or
other similar rights; and the Warrants conform in all material
respects to all statements relating thereto contained in the
Prospectus.
(xii) If applicable, the Common Stock issuable upon
conversion of any of the Preferred Stock or the Warrant Shares will
have been duly and validly authorized and reserved for issuance upon
such conversion or exercise by all necessary corporate action and such
shares, when issued upon such conversion or exercise, will be duly
authorized and validly issued and will be fully paid and
non-assessable, and the issuance of such shares upon conversion and
exercise will not be subject to preemptive or other similar rights;
the Common Stock issuable upon conversion of any of the Preferred
Stock or the Warrant Shares, conform in all material respects to all
statements relating thereto contained in the Prospectus.
(xiii) The applicable Warrant Agreement, if any, will have
been duly authorized, executed and delivered by the Company prior to
the issuance of any applicable Underwritten Securities, and each
constitutes a valid and
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<PAGE> 14
legally binding agreement of the Company enforceable in accordance
with its terms, except as enforcement thereof may be limited by
bankruptcy, insolvency or other similar laws relating to or affecting
creditors' rights generally and by general equity principles
(regardless of whether enforcement is considered in a proceeding in
equity or at law); and the Warrant Agreement, if any, conforms in all
material respects to all statements relating thereto contained in the
Prospectus.
(xiv) The authorized, issued and outstanding Units are as
set forth in the Prospectus except to the extent of changes due to the
conversion of Units to Common Stock or the exercise of existing
options to acquire Units. All of the Units outstanding at the Closing
Time were duly authorized for issuance by the Operating Partnership
and are validly issued and fully paid. The Units were offered and
sold in compliance with all applicable laws (including, without
limitation, federal and state securities laws). Except as summarized
in the Prospectus or set forth in the Limited Partnership Agreement,
there are no preemptive or other rights to subscribe for or to
purchase, nor any restriction upon the voting or transfer of, any
Units pursuant to the Partnership Agreement or other instrument. The
terms of the Units conform to all statements and descriptions related
thereto contained in the Prospectus.
(xv) None of the Company, the Operating Partnership, any
Subsidiary or any Residential Development Corporation is in violation
of its charter, by-laws, certificate of limited partnership,
partnership agreement, or limited liability company agreement as the
case may be, and none of the Company, the Operating Partnership, any
Subsidiary or any Residential Development Corporation is in default in
the performance or observance of any obligation, agreement, covenant
or condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which such entity is a
party or by which such entity may be bound, or to which any of the
property or assets of such entity is subject, except where a default
thereunder would not have a material adverse effect on the condition,
financial or otherwise, or the earnings, assets, business affairs or
business prospects of the Company, the Operating Partnership, the
Subsidiaries and the Residential Development Corporations considered
as one enterprise.
(xvi) The execution and delivery of this Agreement, any
applicable Terms Agreement or any applicable Warrant Agreement, the
performance of the obligations set forth herein or, if applicable,
therein, and the consummation of the transactions contemplated hereby
or thereby or in the Prospectus by the Company, the Operating
Partnership, the Subsidiaries and the Residential Development
Corporations, as applicable, will not conflict with or constitute a
breach or violation by such party of, or default under, (A) any
material contract, indenture, mortgage, loan agreement, note, lease,
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<PAGE> 15
joint venture or partnership agreement or other instrument or
agreement to which the Company, the Operating Partnership, any
Subsidiary or any Residential Development Corporation is a party or by
which they, any of them, any of their respective assets or any
Property may be bound or subject; (B) the charter, by-laws,
certificate of limited partnership, partnership agreement, or limited
liability company agreement, as the case may be, of the Company, the
Operating Partnership, any Subsidiary or any Residential Development
Corporation; or (C) any applicable law, rule, order, administrative
regulation or administrative or court decree.
(xvii) The Company has full right, power and authority under
its organizational documents to enter into this Agreement, the
applicable Terms Agreement and the Delayed Delivery Contracts, if any,
and this Agreement has been, and as of each Representative Date, the
applicable Terms Agreement and the Delayed Delivery Contracts, if any,
will have been duly authorized, executed and delivered by the Company
(xviii) The Operating Partnership has full right, power and
authority under its organizational documents to enter into this
Agreement and this Agreement has been duly authorized, executed and
delivered by the Company.
(xix) There is no action, suit or proceeding before or by
any court or governmental agency or body, domestic or foreign, now
pending, or, to the knowledge of the Company or the Operating
Partnership, threatened against or affecting the Company, the
Operating Partnership, any Subsidiary, any Residential Development
Corporation, any Property, or any property underlying indebtedness
held by the Company, the Operating Partnership, any of the
Subsidiaries or any of the Residential Development Corporations, or
any officer or director of the Company that is required to be
disclosed in the Registration Statement (other than as disclosed
therein) or that, if determined adversely to the Company, the
Operating Partnership, any Subsidiary, any Residential Development
Corporation, any Property, including any property underlying
indebtedness held by the Company, the Operating Partnership, any of
the Subsidiaries and any of the Residential Development Corporations,
or any such officer or director, might (A) result in any material
adverse change in the condition, financial or otherwise, or in the
earnings, assets, business affairs or business prospects of the
Company, the Operating Partnership, the Subsidiaries and the
Residential Development Corporations considered as one enterprise or
(B) materially and adversely affect the consummation of the
transactions contemplated by this Agreement. There is no pending
legal or governmental proceeding to which the Company, the Operating
Partnership, any Subsidiary or any Residential Development Corporation
is a party or of which any of their respective properties or assets or
any Property, including any property underlying
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<PAGE> 16
indebtedness held by the Company, the Operating Partnership, any of
the Subsidiaries or any of the Residential Development Corporations,
is the subject, including ordinary routine litigation incidental to
the business, that is, considered in the aggregate, material to the
condition, financial or otherwise, or the earnings, assets, business
affairs or business prospects of the Company, the Operating
Partnership, the Subsidiaries and the Residential Development
Corporations considered as one enterprise. There are no contracts or
documents that are required to be filed as exhibits to the
Registration Statement by the 1933 Act or by the 1933 Act Regulations
which have not been filed as exhibits to the Registration Statement or
to a document incorporated therein by reference.
(xx) The Company qualified as a real estate investment
trust under the Internal Revenue Code of 1986, as amended (the
"CODE"), with respect to its taxable years ended December 31, 1994 and
December 31, 1995, and is organized in conformity with the
requirements for qualification as a real estate investment trust, and
its manner of operation has enabled it to meet the requirements for
qualification as a real estate investment trust as of the date of the
Prospectus, and its proposed manner of operation will enable it to
meet the requirements for qualification as a real estate investment
trust in the future.
(xxi) None of the Company, the Operating Partnership, any
Subsidiary or any Residential Development Corporation is, or at
Closing Time will be, required to be registered under the Investment
Company Act of 1940, as amended (the "1940 ACT").
(xxii) None of the Company, the Operating Partnership, any
Subsidiary or any Residential Development Corporation is required to
own or possess any trademarks, service marks, trade names or
copyrights (collectively, "PROPRIETARY RIGHTS") not now lawfully owned
or possessed in order to conduct the business now operated by such
entity or as proposed to be operated by it as described in the
Prospectus and no such entity has received any notice or is otherwise
aware of any infringement of or conflict with asserted rights of
others with respect to any proprietary rights.
(xxiii) All authorizations, approvals or consents of any
court or governmental authority or agency that are necessary in
connection with the offering, issuance or sale of the Underwritten
Securities hereunder have been obtained, except such as may be
required under the 1933 Act or the 1933 Act Regulations or state
securities or real estate syndication laws.
(xxiv) Each of the Company, the Operating Partnership, the
Subsidiaries and the Residential Development Corporations possesses
such certificates, authorizations or permits issued by the appropriate
state, federal
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<PAGE> 17
or foreign regulatory agencies or bodies necessary to conduct the
business now conducted by it, or proposed to be conducted by it, as
described in the Prospectus, and none of the Company, the Operating
Partnership, any Subsidiary or any Residential Development Corporation
has received any notice of proceedings relating to the revocation or
modification of any such certificate, authority or permit which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially and adversely affect the
condition, financial or otherwise, or the earnings, assets, business
affairs or business prospects of the Company, the Operating
Partnership, the Subsidiaries and the Residential Development
Corporations considered as one enterprise.
(xxv) The documents incorporated or deemed to be
incorporated by reference in the Prospectus, at the time they were or
hereafter are filed with the Commission, complied and will comply in
all material respects with the requirements of the 1934 Act and the
rules and regulations of the Commission under the 1934 Act (the "1934
ACT REGULATIONS"), and, when read together with the other information
in the Prospectus, at the time the Registration Statement became
effective and as of each Representation Date or during the period
specified in Section 3(f) hereof, did not and will not include an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading.
(xxvi) No labor dispute with the employees of the Company,
the Operating Partnership, any Subsidiary or any Residential
Development Corporation exists or, to the knowledge of the Company or
the Operating Partnership, is imminent.
(xxvii) Except as otherwise described in the Prospectus, (A)
each of the Company, the Operating Partnership, the Subsidiaries, or
the Residential Development Corporation, as the case may be, has good
and marketable title in fee simple to all real property owned by such
entity and good and marketable title to the improvements, if any,
thereon and all other assets that are required for the effective
operation of such real property in the manner in which they currently
are operated; (B) any real property and buildings held under lease by
the Company, the Operating Partnership, any Subsidiary or any
Residential Development Corporation are in full force and effect, and
such entity is not in default in respect of any of the terms or
provisions of such leases and such entity has not received notice of
the assertion of any claim by anyone adverse to the Operating
Partnership's rights as lessee under such leases, or affecting or
questioning the Operating Partnership's right to the continued
possession or use of the real property and buildings held under such
leases or of a default under such leases; (C) all liens, charges,
encumbrances, claims, or restrictions on or affecting any of the
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<PAGE> 18
Properties, including any property underlying indebtedness held by the
Company, the Operating Partnership, any of the Subsidiaries or any of
the Residential Development Corporations, and the assets of the
Company, the Operating Partnership, any Subsidiary or any Residential
Development Corporation which are required to be disclosed in the
Prospectus are disclosed therein; (D) none of the Company, the
Operating Partnership, any of the Subsidiaries, any of the Residential
Development Corporations nor any tenant of any of the Properties is in
default under any of the leases pursuant to which the Operating
Partnership, as lessor, leases its Property (and neither the Company
nor the Operating Partnership knows of any event which, but for the
passage of time or the giving of notice, or both, would constitute a
default under any of such leases) other than such defaults that would
not have a material adverse effect on the condition, financial or
otherwise, or on the earnings, assets, business affairs or business
prospects of or with respect to the Operating Partnership, any
Subsidiary or any Residential Development Corporation or any Property;
(E) except as described in the Prospectus, no person has an option or
right of first refusal to purchase all or part of any material
Property or any interest therein; (F) each of the Properties complies
with all applicable codes, laws and regulations (including, without
limitation, building and zoning codes, laws and regulations and laws
relating to access to the Properties), except if and to the extent
disclosed in the Prospectus and except for such failures to comply
that would not individually or in the aggregate have a material
adverse impact on the condition, financial or otherwise, or on the
earnings, assets, business affairs or business prospects of such
Property or the Operating Partnership; (G) there are in effect for the
Properties, including, to the knowledge of the Company, any property
underlying indebtedness held by the Company, the Operating
Partnership, any of the Subsidiaries and any of the Residential
Development Corporations, and the other assets of the Company, the
Operating Partnership, the Subsidiaries and the Residential
Development Corporations insurance policies covering risks and in
amounts that are commercially reasonable for the assets owned by them
and that are consistent with the types and amounts of insurance
typically maintained by present owners of similar types of properties;
and (H) neither the Company nor the Operating Partnership has
knowledge of any pending or threatened condemnation proceedings,
zoning change, or other proceeding or action that will in any manner
affect the size of, use of, improvements on, construction on or access
to the Properties, including any property underlying indebtedness held
by the Company, the Operating Partnership, any of the Subsidiaries or
any Residential Development Corporation, except such proceedings or
actions that would not have a material adverse effect on the
condition, financial or otherwise, or on the earnings, assets,
business affairs or business prospects of the Operating Partnership or
with respect to such Property, including any property underlying
indebtedness held by the
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<PAGE> 19
Company, the Operating Partnership, any of the Subsidiaries or any
Residential Development Corporation.
(xxviii) Except as disclosed in the Prospectus, (A) each
Property, including, without limitation, the Environment (as defined
below) associated with such Property, is free of any Hazardous
Substance (as defined below), except for Hazardous Substances that
would not have a material adverse effect on the condition, financial
or otherwise, or on the earnings, assets, business affairs or business
prospects of or with respect to the Company, the Operating
Partnership, the Subsidiaries and the Residential Development
Corporations considered as one enterprise; (B) none of the Company,
the Operating Partnership, any Subsidiary or any Residential
Development Corporation has caused or suffered to occur any Release
(as defined below) of any Hazardous Substance into the Environment on,
in, under or from any Property, and no condition exists on, in, under
or, to the knowledge of the Company and the Operating Partnership,
adjacent to any Property that is reasonably likely to result in the
incurrence of material liabilities or any material violations of any
Environmental Law (as defined below), give rise to the imposition of
any Lien (as defined below) under any Environmental Law, or cause or
constitute a health, safety or environmental hazard to any property,
person or entity; (C) none of the Company, the Operating Partnership,
any Subsidiary or any Residential Development Corporation intends to
use the properties or assets described in the Prospectus or any other
real property for the purpose of handling, burying, storing,
retaining, refining, transporting, processing, manufacturing,
generating, producing, spilling, seeping, leaking, escaping, leaching,
pumping, pouring, emitting, emptying, discharging, injecting, dumping,
transferring or otherwise disposing of or dealing with a Hazardous
Substance, except for materials utilized in the ordinary course of
business of the properties, provided such use would not, in the
ordinary course of business, give rise to liability under any
Environmental Law; (D) none of the Company, the Operating Partnership,
any Subsidiary or any Residential Development Corporation has received
any notice of a claim under or pursuant to any Environmental Law or
under common law pertaining to Hazardous Substances on or originating
from any Property; (E) none of the Company, the Operating Partnership,
any Subsidiary or any Residential Development Corporation has received
any notice from any Governmental Authority (as defined below) claiming
any violation of any Environmental Law; (F) no Property is included
or, to the knowledge of the Company and the Operating Partnership,
proposed for inclusion on the National Priorities List issued pursuant
to CERCLA (as defined below) by the United States Environmental
Protection Agency (the "EPA") or on the Comprehensive Environmental
Response, Compensation, and Liability Information System database
maintained by the EPA, and has not otherwise been identified by the
EPA as a potential CERCLA removal, remedial or response site or
included or, to the knowledge
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<PAGE> 20
of the Company and the Operating Partnership, proposed for inclusion
on, any similar list of potentially contaminated sites pursuant to any
other Environmental Law and (G) there are no underground storage tanks
located on or in any Property except where the presence thereof would
not have a material adverse effect on the condition, financial or
otherwise, or the earnings, assets or business affairs or business
prospects of the Company, the Operating Partnership, the Subsidiaries
and the Residential Development Corporations considered as one
enterprise.
As used herein, "HAZARDOUS SUBSTANCE" shall include, without
limitation, any hazardous substance, hazardous waste, toxic substance,
pollutant, solid waste or similarly designated materials, including,
without limitation, oil, petroleum or any petroleum-derived substance
or waste, asbestos or asbestos-containing materials, PCBs, pesticides,
explosives, radioactive materials, dioxins, urea formaldehyde
insulation or any constituent of any such substance, pollutant or
waste, including any such substance, pollutant or waste identified or
regulated under any Environmental Law (including, without limitation,
materials listed in the United States Department of Transportation
Optional Hazardous Material Table, 49 C.F.R. Section 172.101, as the
same may now or hereafter be amended, or in the EPA's List of
Hazardous Substances and Reportable Quantities, 40 C.F.R. Part 302, as
the same may now or hereafter be amended); "ENVIRONMENT" shall mean
any surface water, drinking water, ground water, land surface,
subsurface strata, river sediment, buildings, structures, and ambient,
workplace and indoor air; "ENVIRONMENTAL LAW" shall mean the
Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended (42 U.S.C. Section 9601 et seq.) ("CERCLA"), the
Resource Conservation and Recovery Act of 1976, as amended (42 U.S.C.
Section 6901, et seq.), the Clean Air Act, as amended (42 U.S.C.
Section 7401, et seq.), the Clean Water Act, as amended (33 U.S.C.
Section 1251, et seq.), the Toxic Substances Control Act, as amended
(15 U.S.C. Section 2601, et seq.), the Occupational Safety and Health
Act of 1970, as amended (29 U.S.C. Section 651, et seq.), the
Hazardous Materials Transportation Act, as amended (49 U.S.C. Section
1801, et seq.), and all other federal, state and local laws,
ordinances, regulations, rules, orders, decisions and permits relating
to the protection of the environment or of human health from
environmental effects; "GOVERNMENTAL AUTHORITY" shall mean any
federal, state or local governmental office, agency or authority
having the duty or authority to promulgate, implement or enforce any
Environmental Law; "LIEN" shall mean, with respect to any Property,
any mortgage, deed of trust, pledge, security interest, lien,
encumbrance, penalty, fine, charge, assessment, judgment or other
liability in, on or affecting such Property; and "RELEASE" shall mean
any spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, dumping, emanating or
disposing of any Hazardous Substance into the Environment, including,
without limitation, the abandonment or discard
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<PAGE> 21
of barrels, containers, tanks (including, without limitation,
underground storage tanks) or other receptacles containing or
previously containing any Hazardous Substance or any release,
emission, discharge or similar term, as those terms are defined or
used in any Environmental Law.
(xxix) Each of the Company, the Operating Partnership, the
Subsidiaries and the Residential Development Corporations has filed
all federal, state, local and foreign income tax returns which have
been required to be filed (except in any case in which the failure to
so file would not have a material adverse effect on the condition,
financial or otherwise, or the earnings, assets, business affairs or
business prospects of such entities considered as one enterprise) and
has paid all taxes required to be paid and any other assessment, fine
or penalty levied against it, to the extent that any of the foregoing
is due and payable, except, in all cases, for any such tax,
assessment, fine or penalty that is being contested in good faith.
(xxx) Neither the Company, the Subsidiaries, the
Residential Development Corporations nor the Operating Partnership,
nor any of their directors, officers or controlling persons, has taken
or will take, directly or indirectly, any action resulting in a
violation of Rule 10b-6 under the 1934 Act, or designed to cause or
result under the Securities Act or otherwise in, or which has
constituted or which reasonably might be expected to constitute, the
stabilization or manipulation of the price of any security of the
Company or facilitation of the sale or resale of the Underwritten
Securities.
(b) Any certificate signed by any officer of the Company
or the Operating Partnership and delivered to you or to counsel for the
Underwriters shall be deemed a representation and warranty by such entity to
each Underwriter as to the matters covered thereby.
SECTION 2. PURCHASE AND SALE.
(a) The several commitments of the Underwriters to purchase the
Underwritten Securities pursuant to the applicable Terms Agreement shall be
deemed to have been made on the basis of the representations and warranties
herein contained and shall be subject to the terms and conditions set forth
herein or in the applicable Terms Agreement.
(b) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company may grant, if so provided in the applicable Terms Agreement relating to
the Initial Underwritten Securities, an option to the Underwriters named in
such Terms Agreement, severally and not jointly, to purchase up to the number
of Option Securities set forth therein at the same price per Option Security as
is applicable to
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<PAGE> 22
the Initial Underwritten Securities. Such option, if granted, will expire 30
days or such lesser number of days as may be specified in the applicable Terms
Agreement after the Representation Date relating to the Initial Underwritten
Securities, and may be exercised in whole or in part from time to time only for
the purpose of covering over-allotments which may be made in connection with
the offering and distribution of the Initial Underwritten Securities upon
notice by you to the Company setting forth the number of Option Securities as
to which the several Underwriters are then exercising the option and the time
and date of payment and delivery for such Option Securities. Any such time and
date of delivery (a "DATE OF DELIVERY") shall be determined by you, but shall
not be later than seven full business days and not be earlier than two full
business days after the exercise of said option, unless otherwise agreed upon
by you and the Company. If the option is exercised as to all or any portion of
the Option Securities, each of the Underwriters, acting severally and not
jointly, will purchase that proportion of the total number of Option Securities
then being purchased which the number of Initial Underwritten Securities each
such Underwriter has agreed to purchase as set forth in the applicable Terms
Agreement bears to the total number of Initial Underwritten Securities, subject
to such adjustments as you in your discretion shall make to eliminate any sales
or purchases of fractional Initial Underwritten Securities.
(c) Payment of the purchase price for, and delivery of, the
Underwritten Securities to be purchased by the Underwriters shall be made at
the offices of Hogan & Hartson L.L.P., Columbia Square, 555 Thirteenth Street,
N.W., Washington, D.C. 20004-1109, or at such other place as shall be agreed
upon by you and the Company, at 9:00 A.M., New York City time, on the third
business day (unless postponed in accordance with the provisions of Section 10
hereof) following the date of the applicable Terms Agreement or, if pricing
takes place after 4:30 P.M. New York City time on the date of the applicable
Terms Agreement, on the fourth business day (unless postponed in accordance
with the provisions of Section 10 hereof) following the date of the applicable
Terms Agreement, or at such other time as shall be agreed upon by you and the
Company (each such time and date being referred to as a "CLOSING TIME"). In
addition, if any or all of the Option Securities are purchased by the
Underwriters, payment of the purchase price for, and delivery of certificates
representing, such Option Securities, shall be made at the above-mentioned
offices of Hogan & Hartson L.L.P., or at such other place as shall be agreed
upon by you and the Company on each Date of Delivery as specified in the notice
from you to the Company. Unless otherwise specified in the applicable Terms
Agreement, payment shall be made to the Company by wire transfer or by
certified or official bank check or checks in federal or similar same-day funds
payable to the order of the Company against delivery to you for the respective
accounts of the Underwriters of the Underwritten Securities to be purchased by
them. The Underwritten Securities shall be in such authorized denominations
and registered in such names as you may request in writing at least two
business days prior to the applicable Closing Time or Date of Delivery, as the
case may be. The Underwritten Securities, which may be in temporary form, will
be made available
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<PAGE> 23
for examination and packaging by you on or before the first business day prior
to the applicable Closing Time or Date of Delivery, as the case may be.
If authorized by the applicable Terms Agreement, the
Underwriters named therein may solicit offers to purchase Underwritten
Securities from the Company pursuant to delayed delivery contracts ("DELAYED
DELIVERY CONTRACTS") substantially in the form of Exhibit B hereto with such
changes therein as the Company may approve. As compensation for arranging
Delayed Delivery Contracts, the Company will pay to you at Closing Time, for
the respective accounts of the Underwriters, a fee specified in the applicable
Terms Agreement for each of the Underwritten Securities for which Delayed
Delivery Contracts are made at the applicable Closing Time as is specified in
the applicable Terms Agreement. Any Delayed Delivery Contracts are to be with
institutional investors of the types described in the Prospectus. At the
applicable Closing Time, the Company will enter into Delayed Delivery Contracts
(for not less than the minimum number of Underwritten Securities per Delayed
Delivery Contract specified in the applicable Terms Agreement) with all
purchasers proposed by the Underwriters and previously approved by the Company
as provided below, but not for an aggregate number of Underwritten Securities
in excess of that specified in the applicable Terms Agreement. The
Underwriters will not have any responsibility for the validity or performance
of Delayed Delivery Contracts.
You shall submit to the Company, at least three business days
prior to the applicable Closing Time, the names of any institutional investors
with which it is proposed that the Company will enter into Delayed Delivery
Contracts and the number of Underwritten Securities to be purchased by each of
them, and the Company will advise you, at least two business days prior to the
applicable Closing Time, of the names of the institutional investors with which
the making of Delayed Delivery Contracts is approved by the Company and the
number of Underwritten Securities to be covered by each such Delayed Delivery
Contract.
The number of Underwritten Securities agreed to be purchased by
the several Underwriters pursuant to the applicable Terms Agreement shall be
reduced by the number of Underwritten Securities covered by Delayed Delivery
Contracts, as to each Underwriter as set forth in a written notice delivered by
you to the Company; provided, however, that the total number of Underwritten
Securities to be purchased by all Underwriters shall be the total number of
Underwritten Securities covered by the applicable Terms Agreement, less the
number of Underwritten Securities covered by Delayed Delivery Contracts.
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<PAGE> 24
SECTION 3. COVENANTS OF THE COMPANY AND THE OPERATING PARTNERSHIP.
Each of the Company and the Operating Partnership covenants with
you, and with each other Underwriter participating in the offering of the
Underwritten Securities, as follows:
(a) Immediately following the execution of the applicable Terms
Agreement, the Company will prepare a Prospectus Supplement setting forth the
number of Underwritten Securities covered thereby and their terms not otherwise
specified in the Prospectus pursuant to which the Underwritten Securities are
being issued, the names of the Underwriters participating in the offering and
the number of Underwritten Securities which each severally has agreed to
purchase, the names of the Underwriters acting as co-managers in connection
with the offering, the price at which the Underwritten Securities are to be
purchased by the Underwriters from the Company, the initial public offering
price, if any, the selling concession and reallowance, if any, any delayed
delivery arrangements, and such other information as you and the Company deem
appropriate in connection with the offering of the Underwritten Securities; and
the Company will promptly transmit copies of the Prospectus Supplement to the
Commission for filing pursuant to Rule 424(b) of the 1933 Act Regulations
within the time period required by such Rule and will furnish to the
Underwriters named therein as many copies of the Prospectus and such Prospectus
Supplement as you shall reasonably request. If the Company elects to rely on
Rule 434 under the 1933 Act Regulations, the Company will prepare an
abbreviated term sheet that complies with the requirements of Rule 434 under
the 1933 Act Regulations and will provide the Underwriters with copies of the
form of Rule 434 Prospectus, in such number as the Underwriters may reasonably
request, and file or transmit for filing with the Commission the form of
Prospectus complying with Rule 434(c)(2) of the 1933 Act Regulations in
accordance with Rule 424(b) of the 1933 Act Regulations by the close of
business in New York on the business day immediately succeeding the date of the
applicable Terms Agreement.
(b) The Company will notify you immediately, and confirm such
notice in writing, of (i) the effectiveness of any amendment to the
Registration Statement relating to or affecting the offering of the
Underwritten Securities, (ii) the transmittal to the Commission for filing of
any Prospectus Supplement or other supplement or amendment to the Prospectus or
any document to be filed pursuant to the 1934 Act relating to or affecting the
offering of the Underwritten Securities, (iii) the receipt of any comments from
the Commission relating to or affecting the offering of the Underwritten
Securities, (iv) any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information relating to or affecting the offering of the
Underwritten Securities, and (v) the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement relating to or
affecting the offering of the Underwritten Securities or the
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<PAGE> 25
initiation of any proceedings for that purpose; and the Company will make every
reasonable effort to prevent the issuance of any such stop order and, if any
stop order is issued, to obtain the lifting thereof at the earliest possible
moment.
(c) At any time when the Prospectus is required to be delivered
under the 1933 Act or the 1934 Act in connection with sales of the Underwritten
Securities, the Company will give you notice of its intention to file or
prepare any amendment to the Registration Statement or any amendment or
supplement to the Prospectus (including any revised prospectus which the
Company proposes for use by you in connection with the offering of Underwritten
Securities which differs from the prospectus on file at the Commission at the
time the Registration Statement became effective, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) of the 1933 Act
Regulations), whether pursuant to the 1933 Act, 1934 Act or otherwise, and will
furnish you with copies of any such amendment or supplement a reasonable amount
of time prior to such proposed filing or preparation, as the case may be, and
will not file or prepare any such amendment or supplement or other documents in
a form to which you or counsel for the Underwriters shall reasonably object.
(d) The Company will deliver to each Underwriter, as soon as
available, as many signed and conformed copies of the Registration Statement as
originally filed and of each amendment thereto (including exhibits filed
therewith or incorporated by reference therein) as the Underwriters may
reasonably request.
(e) The Company will furnish to each Underwriter, from time to time
during the period when the Prospectus is required to be delivered under the
1933 Act or the Exchange Act, such number of copies of the Prospectus (as
amended or supplemented) as such Underwriter may reasonably request for the
purposes contemplated by the 1933 Act or the 1934 Act or the respective
applicable rules and regulations of the Commission thereunder.
(f) If any event shall occur as a result of which it is necessary,
in the opinion of counsel for the Underwriters or counsel for the Company, to
amend or supplement the Prospectus in order to make the Prospectus not contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances existing at the time it is delivered to a purchaser, not
misleading, or if it shall be necessary, in the opinion of either such counsel,
at any such time to amend or supplement the Registration Statement or the
Prospectus in order to comply with the 1933 Act or the 1934 Act, the Company
will forthwith prepare an amendment of or supplement to the Registration
Statement or the Prospectus (in form and substance satisfactory to counsel for
the Underwriters), whether by filing documents pursuant to the 1933 Act, the
1934 Act or otherwise, which will amend or supplement the Prospectus so that it
will not contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light
of the
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<PAGE> 26
circumstances existing at the time it is delivered to a purchaser, not
misleading, or to make the Registration Statement and Prospectus comply with
such requirements, and the Company will furnish to the Underwriters a
reasonable number of copies of such amendment or supplement.
(g) The Company will endeavor, in cooperation with the
Underwriters, to qualify the Underwritten Securities, the Warrant Shares, if
any, and the Common Stock issuable upon conversion of the Preferred Stock for
offering and sale under the applicable securities laws and real estate
syndication laws of such states and other jurisdictions of the United States as
the Underwriters may designate. In each jurisdiction in which the Underwritten
Securities, the Warrant Shares, if any, and the Common Stock issuable upon
conversion of the Preferred Stock have been so qualified, the Company will file
such statements and reports as may be required by the laws of such jurisdiction
to continue such qualification in effect for a period of not less than one year
from the effective date of the Registration Statement.
(h) With respect to each sale of Underwritten Securities, the
Company will make generally available to its security holders as soon as
practicable, but not later than 90 days after the close of the period covered
thereby, an earnings statement (in form complying with the provisions of Rule
158 of the 1933 Act Regulations) covering a 12-month period beginning not later
than the first day of the Company's fiscal quarter next following the
"effective date of the registration statement" (as defined in such Rule 158).
(i) The Company, during the period when the Prospectus is required
to be delivered under the 1933 Act or the 1934 Act in connection with sales of
the Underwritten Securities, will file all documents required to be filed with
the Commission pursuant to Section 13, 14 or 15 of the 1934 Act within the time
periods prescribed by the 1934 Act and the 1934 Act Regulations.
(j) If applicable, the Company will use the net proceeds received
by it from the sale of the Underwritten Securities in the manner specified in
the Prospectus under the caption "Use of Proceeds."
(k) If requested by you, the Company will use its best efforts to
effect the listing of the Underwritten Securities on the New York Stock
Exchange or such other national exchange on which the Securities are then
issued.
(l) During the period from the date of the applicable Terms
Agreement until 90 days after Closing Time, the Company and the Operating
Partnership will not, without your prior written consent, directly or
indirectly, sell, offer to sell, grant any option for the sale of, or otherwise
dispose of, any shares of Common Stock or Units or any other security
convertible into or exchangeable into or exercisable for the Common Stock,
otherwise than in accordance with this Agreement or as contemplated in the
Prospectus except for (i) options granted under
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<PAGE> 27
the stock incentive plans of the Company, (ii) shares of Common Stock issued in
exchange for Units and (iii) shares of Common Stock or Units issued in
connection with the acquisition of real property or interests therein.
(m) The Company will use its best efforts to meet the requirements
to continue to qualify as a "real estate investment trust" under the Code.
(n) If requested by you, the Company and the Operating Partnership
will cause, or have caused, the officers and directors of the Company to enter
into lock-up agreements in form and substance reasonably satisfactory to the
Underwriters, and each of the Company and the Operating Partnership
acknowledges that the Underwriters are intended third party beneficiaries of
such agreements.
(o) If the Preferred Stock is convertible into shares of Common
Stock, the Company will reserve and keep available at all times, free of
preemptive or other similar rights, a sufficient number of shares of Common
Stock for the purpose of enabling the Company to satisfy any obligations to
issue such shares upon conversion of the Preferred Stock, as the case may be,
or upon the exercise of the Warrants.
(p) If the Preferred Stock is convertible into Common Stock, the
Company will use its best efforts to list the Common Stock issuable on
conversion of the Preferred Stock on the New York Stock Exchange or such other
national exchange on which the Company's shares of Common Stock are then
listed.
(q) Except for the authorization of actions permitted to be taken
by the Underwriters as contemplated herein or in the Prospectus, neither the
Company nor the Operating Partnership will (i) take, directly or indirectly,
any action designed to cause or to result in, or that might reasonably be
expected to constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Underwritten
Securities, (ii) sell, bid for or purchase the Underwritten Securities or pay
any person any compensation for soliciting purchases of the Underwritten
Securities or (iii) pay or agree to pay to any person any compensation for
soliciting another to purchase any other securities of the Company.
(r) During the period from the Closing Time until five years after
the Closing Time, the Company will deliver to you, (i) promptly upon their
becoming available, copies of all current, regular and periodic reports of the
Company mailed to its stockholders or filed with any securities exchange or
with the Commission or any governmental authority succeeding to any of the
Commission's functions, and (ii) such other information concerning the Company,
the Operating Partnership, any Subsidiary or any Residential Development
Corporation as you may reasonably request.
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<PAGE> 28
(s) Prior to Closing Time and if not described in the Prospectus,
the Company and the Operating Partnership will notify you in writing
immediately if any event occurs that renders any of the representations and
warranties of the Company and the Operating Partnership contained herein
inaccurate or incomplete in any respect.
(t) If at any time during the 25-day period after the Registration
Statement becomes effective or during the period prior to the final Date of
Delivery, any rumor, publication or event relating to or affecting the Company
shall occur as a result of which in your opinion the market price of the
Underwritten Securities has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates
supplements to or amendments of the Prospectus), the Company will, after
written notice from you advising the Company to that effect, promptly prepare,
consult with you concerning the substance of, and disseminate a press release
or other public statement, reasonably satisfactory to you, responding to or
commenting on such rumor, publication or event.
(u) From the date hereof until notice of termination pursuant to
Section 9(a) hereof is received by you, the Company shall furnish to you and
its counsel (at least two business days prior to filing with the Commission)
and provide them with a reasonable opportunity to review and comment upon
copies of any document proposed to be filed with the Commission pursuant to
Section 13, 14 or 15 of the 1934 Act.
SECTION 4. PAYMENT OF FEES AND EXPENSES.
The Company will pay all expenses incident to the performance
of its obligations under this Agreement or the applicable Terms Agreement,
including (i) the printing and filing of the Registration Statement as
originally filed and of each amendment thereto, (ii) the printing of this
Agreement and the applicable Terms Agreement and other documents related
hereto, (iii) the preparation, issuance and delivery of the certificates for
the Underwritten Securities and the Warrant Shares, if any, to the
Underwriters, (iv) the fees and other charges of the Company's counsel and
accountants, (v) the qualification of the Underwritten Securities and the
Warrant Shares, if any, under securities laws and real estate syndication laws
in accordance with the provisions of Section 3(g) hereof, including filing fees
and the fees and other charges of counsel for the Underwriters in connection
therewith and in connection with the preparation of a blue sky memorandum (the
"BLUE SKY MEMORANDUM"), (vi) the printing and delivery to the Underwriters of
copies of the Registration Statement as originally filed and of each amendment
thereto, of the preliminary prospectus, and of the Prospectus and any
amendments or supplements thereto, (vii) the printing (and reproduction) and
delivery to the Underwriters of copies of the Blue Sky Memorandum, (viii) the
printing and delivery to the Underwriters of copies of the Warrant Agreement,
if
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<PAGE> 29
any, (ix) any fees charged by nationally recognized statistical rating
organizations for the rating of the Underwritten Securities, (x) the fees and
expenses, if any, incurred with respect to the listing of the Underwritten
Securities, the Warrant Shares or the Common Stock issuable on conversion of
the Preferred Stock, if any, on any national securities exchange, and (xi) the
fee of the National Association of Securities Dealers, Inc. (the "NASD"),
including the fees and other charges of counsel for the Underwriters in
connection with the NASD's review of the proposed public offering of the
Underwritten Securities.
If the applicable Terms Agreement is canceled or terminated by
you in accordance with the provisions of Section 5 or Section 9 hereof, the
Company also shall reimburse the Underwriters named in such Terms Agreement for
all of their out-of-pocket expenses, including the reasonable fees and other
charges of counsel for the Underwriters.
SECTION 5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS.
The obligations of the Underwriters hereunder and under the
applicable Terms Agreement are subject to the accuracy, as of the date hereof
and at Closing Time, of the representations and warranties of the Company and
the Operating Partnership herein contained, to the performance by the Company
and the Operating Partnership of their respective obligations hereunder, and to
the following further conditions:
(a) At the applicable Closing Time (i) no stop order
suspending the effectiveness of the Registration Statement shall have been
issued under the 1933 Act or proceedings therefor initiated or threatened by
the Commission, (ii) the rating assigned by any nationally recognized
statistical rating organization to any Preferred Stock of the Company and any
indebtedness of the Company or the Operating Partnership as of the date of the
applicable Terms Agreement shall not have been lowered since such date nor
shall any such rating organization have publicly announced that it has placed
any Preferred Stock of the Company and any indebtedness of the Company or the
Operating Partnership on what is commonly termed a "watch list" for possible
downgrading, and (iii) there shall not have come to your attention any facts
that would cause you to believe that the Prospectus, together with the
applicable Prospectus Supplement, at the time it was required to be delivered
to purchasers of the Underwritten Securities, included an untrue statement of a
material fact or omitted to state a material fact necessary in order to make
the statements therein, in light of the circumstances existing at such time,
not misleading.
(b) At Closing Time, you shall have received:
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<PAGE> 30
(i) The favorable opinions, dated as of the
Closing Time, of Shaw, Pittman, Potts & Trowbridge, counsel for each
of the Company, the Operating Partnership, the Subsidiaries and the
Residential Development Corporations, and Locke Purnell Rain Harrell
(A Professional Corporation), special Texas counsel for the
Subsidiaries that are Texas entities and the Residential Development
Corporations (collectively, the "TEXAS ENTITIES"), each in form and
substance satisfactory to counsel for the Underwriters, to the effect
that:
(A) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the state of its incorporation as set forth in the
Registration Statement. The Company has full corporate power
and authority to own, lease and operate its properties, to
conduct the business in which it is engaged or proposes to
engage as described in the Prospectus, and to enter into and
perform its obligations under this Agreement, the Partnership
Agreement, the applicable Terms Agreement and the Warrant
Agreement, if any (collectively, the "LISTED AGREEMENTS"), to
which it is a party. The Company is duly qualified as a
foreign corporation to transact business and is in good
standing in New York and each other jurisdiction in which such
qualification is required, whether by reason of the ownership
or leasing of property or the conduct of business, except
where the failure to so qualify would not have a material
adverse effect on the condition, financial or otherwise, or
the earnings, assets, business affairs or business prospects
of the Company, the Operating Partnership, the Subsidiaries
and the Residential Development Corporations considered as one
enterprise.
(B) The Operating Partnership has been duly
formed and is validly existing as a limited partnership in
good standing under the Delaware Act. The Operating
Partnership has full partnership power and authority to own,
lease and operate its properties, to conduct the business in
which it is engaged or proposes to engage as described in the
Prospectus and to enter into and perform its obligations under
this Agreement and the Listed Agreements to which it is a
party. The Operating Partnership is duly qualified or
registered as a foreign partnership and is in good standing in
Texas, Colorado, Arizona, New Mexico, Louisiana, Nebraska and
each other jurisdiction in which such qualification or
registration is required, whether by reason of the ownership
or leasing of property or the conduct of business, except
where the failure to so qualify or register would not have a
material adverse effect on the condition, financial or
otherwise, or the earnings, assets, business affairs or
business prospects of the Company, the Operating Partnership,
the Subsidiaries and the Residential Development Corporations
considered as one enterprise. CGP, Inc., a
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<PAGE> 31
wholly owned subsidiary of the Company, is the sole general
partner of the Operating Partnership.
(C) Each of the Subsidiaries and the Residential
Development Corporations has been organized and is validly
existing as a corporation, limited partnership or limited
liability company, as the case may be, in good standing under
the laws of its respective state of organization, with full
corporate or partnership (as the case may be) power and
authority to own, lease and operate its properties, to conduct
the business in which it is engaged or proposes to engage as
described in the Prospectus, and to enter into and perform its
obligations under any Listed Agreements to which it is a
party. Each of the Subsidiaries and the Residential
Development Corporations is duly qualified as a foreign
corporation, limited partnership or limited liability company,
as the case may be, to transact business and is in good
standing in each jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure
to so qualify would not have a material adverse effect on the
condition, financial or otherwise, or the earnings, assets,
business affairs or business prospects of the Company, the
Operating Partnership, the Subsidiaries and the Residential
Development Corporations considered as one enterprise. All of
the issued and outstanding shares of capital stock of each of
the corporate Subsidiaries and the Residential Development
Corporations have been duly authorized and validly issued and
are fully paid and non-assessable. The ownership by the
Company, the Operating Partnership and the Subsidiaries of the
shares of capital stock or limited partnership or equity
interests, as the case may be, of each of the Subsidiaries and
the Residential Development Corporations is as described in
the Prospectus and such ownership is free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim
or equity.
(D) The authorized, issued and outstanding shares
of capital stock of the Company are as set forth in the
Prospectus. All of such shares of Common Stock are validly
issued, fully paid and non-assessable and have been offered
and sold in compliance with all applicable laws (including,
without limitation, federal securities laws). No shares of
capital stock of the Company are reserved for any purpose
except in connection with (i) the option plans of the Company
as described in the Prospectus, (ii) the possible issuance of
shares of Common Stock upon the exchange of Units pursuant to
the Partnership Agreement and (iii) in connection with the
acquisition of the Greenway Plaza portfolio or the Canyon
Ranch-Lenox property, as described in the Prospectus. Except
for Units, shares of Common
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<PAGE> 32
Stock issuable upon the exercise of options and certain
options to acquire Units as described in the Prospectus, there
are no outstanding securities convertible into or exchangeable
for any capital stock of the Company and no outstanding
options, rights (preemptive or otherwise) or warrants to
purchase or to subscribe for shares of such stock or any other
securities of the Company.
(E) The Underwritten Securities were duly
authorized for issuance and sale to the Underwriters pursuant
to this Agreement, and, when issued and delivered by the
Company pursuant to this Agreement and the Terms Agreement
against payment of the consideration set forth in the Terms
Agreement and any Delayed Delivery Contract, will be validly
issued, fully paid and non-assessable. Upon payment of the
purchase price and delivery of the Underwritten Securities in
accordance herewith, each of the Underwriters is receiving
good, valid and marketable title to the Underwritten
Securities, free and clear of all security interests,
mortgages, pledges, liens, encumbrances and claims. The
Underwritten Securities will be offered and sold at the
Closing Time, or the Date of Delivery, as the case may be, in
compliance with all applicable laws (including, without
limitation, federal securities laws). The terms of the
Underwritten Securities and the Common Stock, Preferred Stock
and Warrants conform to all statements and descriptions
related thereto contained in the Prospectus. The form of
stock certificate evidencing the Common Stock, the Preferred
Stock or the Warrants, as applicable, is in due and proper
form and complies with all applicable legal requirements. The
issuance of the Underwritten Securities is not subject to any
preemptive or other similar rights and, except as set forth in
the Prospectus, there are no restrictions on the voting or
transfer of the Common Stock, Preferred Stock or Warrants
pursuant to the Company's Articles of Incorporation or Bylaws
or any agreement or other instrument known to such counsel.
(F) If applicable, the Warrants have been duly
authorized and, when issued and delivered pursuant to this
Agreement and countersigned by the Warrant Agent as provided
in the Warrant Agreement, will have been duly executed,
countersigned, issued and delivered and will constitute valid
and legally binding obligations of the Company entitled to the
benefits provided by the Warrant Agreement under which they
are to be issued.
(G) If applicable, the shares of Common Stock
issuable upon conversion of the Preferred Stock or the
exercise of the Warrant Shares have been duly and validly
authorized and reserved for issuance upon
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<PAGE> 33
such conversion or exercise by all necessary action on the
part of the Company and such shares, when issued upon such
conversion in accordance with the charter of the Company, the
Warrant Agreement, the Terms Agreement and the Delayed
Delivery Contract, as the case may be, will be duly authorized
and validly issued and will be fully paid and non-assessable,
and the issuance of such shares upon such conversion will not
be subject to preemptive or other similar rights arising by
operation of law or otherwise.
(H) The applicable Warrant Agreement, if any, has
been duly authorized, executed and delivered by the Company
and, assuming due authorization, execution and delivery by the
Warrant Agent, constitutes a valid and legally binding
agreement of the Company enforceable in accordance with its
terms; and the Warrant Agreement, if any, conforms in all
material respects to all statements relating thereto contained
in the Prospectus.
(I) If applicable, the relative rights,
preferences, interests and powers of the Preferred Stock, as
the case may be, are as set forth in the articles
supplementary containing resolutions of the Board of Directors
relating thereto, and all such provisions are valid under
Maryland law.
(J) At the Closing Time, the number of
authorized, issued and outstanding Units will be as set forth
in the Prospectus, except to the extent of changes due to
either the conversion of Units to Common Stock or the exercise
of existing options to acquire Units. All of the Units
outstanding at the Closing Time were duly authorized for
issuance by the Operating Partnership and are validly issued
and fully paid. To our knowledge, the Units were offered and
sold in compliance with all applicable laws (including,
without limitation, federal securities laws). Except as
summarized in the Prospectus, there are no preemptive or other
rights to subscribe for or to purchase, nor any restriction
upon the voting or transfer of, any Units pursuant to the
Operating Partnership's Partnership Agreement or other
instrument. The terms of the Units conform to all statements
and descriptions related thereto contained in the Prospectus.
(K) Each of this Agreement, the applicable Terms
Agreement and any Delayed Delivery Contract has been duly
authorized, executed and delivered by each of the Company and
the Operating Partnership, as applicable.
(L) None of the Company, the Operating
Partnership, any Subsidiary or any Residential Development
Corporation is in violation
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<PAGE> 34
of its charter, by-laws, certificate of limited partnership,
partnership agreement, limited liability company agreement or
similar instrument, as the case may be, and, to the knowledge
of counsel, none of the Company, the Operating Partnership,
any Subsidiary or any Residential Development Corporation is
in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, note, lease or other
instrument filed as an exhibit to the Registration Statement
or any document incorporated therein by reference or as
otherwise identified by the Company as material in an
officer's certificate to which such entity is a party or by
which such entity is bound, or to which any of the property or
assets of such entity is subject, except where a default
thereunder would not have a material adverse effect on the
condition, financial or otherwise, or the earnings, assets,
business affairs or business prospects of the Company, the
Operating Partnership, the Subsidiaries and the Residential
Development Corporations considered as one enterprise.
(M) Each of the Listed Agreements was duly and
validly authorized, executed and delivered by the Company and
the Operating Partnership, as applicable, and, assuming due
authorization, execution and delivery by any other party
thereto, is a valid and binding agreement, enforceable in
accordance with its terms, except as such enforceability may
be (1) limited by bankruptcy, insolvency, reorganization,
liquidation, moratorium and other similar laws affecting the
rights and remedies of creditors generally and (2) subject to
general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at
law).
(N) The execution and delivery of the Listed
Agreements, the performance of the obligations set forth in
each of the Listed Agreements, and the consummation of the
transactions contemplated thereby or in the Prospectus by the
Company, the Operating Partnership, the Subsidiaries and the
Residential Development Corporations, as applicable, will not
conflict with or constitute a breach or violation of, or
default under: (1) to the knowledge of counsel, any material
contract, indenture, mortgage, loan agreement, note, lease,
joint venture or partnership agreement or other instrument or
agreement filed as an exhibit to the Registration Statement or
any document incorporated therein by reference or as otherwise
identified by the Company as material in an officer's
certificate to which the Company, the Operating Partnership,
any Subsidiary or any Residential Development Corporation is a
party or by which they or any of them or any of their
respective properties or other assets or any Property may be
bound or subject; (2) the charter,
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<PAGE> 35
by-laws, certificate of limited partnership, partnership
agreement, or limited liability company agreement, or similar
instrument, as the case may be, of the Company, the Operating
Partnership, any Subsidiary or any Residential Development
Corporation; or (3) any federal or Maryland law. The
descriptions of the Listed Agreements, if any, contained in
the Prospectus are correct and complete in all material
respects.
(O) To the knowledge of counsel, there is no
action, suit or proceeding before or by any court or
governmental agency or body, domestic or foreign, now pending
or threatened against or affecting the Company, the Operating
Partnership, any Subsidiary, any Residential Development
Corporation, any Property, any property underlying
indebtedness held by the Company, the Operating Partnership,
any of the Subsidiaries or any Residential Development
Corporation, or any officer or director of the Company that is
required to be disclosed in the Registration Statement (other
than as disclosed therein) or that, if determined adversely to
the Company, the Operating Partnership, any Subsidiary, any
Residential Development Corporation, any Property, including
any property underlying indebtedness held by the Company, the
Operating Partnership, any of the Subsidiaries or any of the
Residential Development Corporations, or any such officer or
director, would reasonably be expected to (1) result in any
material adverse change in the condition, financial or
otherwise, or in the earnings, assets, business affairs or
business prospects of the Company, the Operating Partnership,
the Subsidiaries and the Residential Development Corporations,
considered as one enterprise, or (2) materially and adversely
affect the consummation of the transactions contemplated by
this Agreement. To the knowledge of counsel, there is no
pending legal or governmental proceeding to which the Company,
the Operating Partnership, any Subsidiary or any Residential
Development Corporation is a party or of which any of their
respective properties or assets or any Property, including any
property underlying indebtedness held by the Company, the
Operating Partnership, any of the Subsidiaries or any of the
Residential Development Corporations is the subject, including
ordinary routine litigation incidental to the business, that
is, considered in the aggregate, material to the condition,
financial or otherwise, or the earnings, assets, business
affairs or business prospects of the Company, the Operating
Partnership, the Subsidiaries and the Residential Development
Corporations, considered as one enterprise. To the knowledge
of counsel, there are no contracts or documents of the
Company, the Operating Partnership, the Subsidiaries or the
Residential Development Corporations which are required to be
filed as exhibits to the Registration Statement by the 1933
Act or by the
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<PAGE> 36
1933 Act Regulations which have not been filed as exhibits to
the Registration Statement or a document incorporated therein
by reference.
(P) The Company qualified as a real estate
investment trust under the Code with respect to its taxable
years ending on or before December 31, 1995 and is organized
in conformity with the requirements for qualification as a
real estate investment trust, its manner of operation has
enabled it to meet the requirements for qualification as a
real estate investment trust as of the date of the Prospectus
Supplement, and its proposed manner of operation will enable
it to meet the requirements for qualification as a real estate
investment trust in the future. In connection therewith, you
are entitled to rely on the opinions of Shaw, Pittman, Potts &
Trowbridge filed as Exhibit 8 to the Registration Statement,
the opinions attached to such opinions as exhibits thereto,
and any other opinions rendered to the Company with respect to
tax matters and described in the Prospectus, all as if
rendered to you on the date of Closing.
(Q) None of the Company, the Operating
Partnership, any Subsidiary or any Residential Development
Corporation is required to be registered under the 1940 Act.
(R) All authorizations, approvals and consents of
any court or governmental authority or agency that are
necessary in connection with the offering, issuance or sale of
the Underwritten Securities under this Agreement and the
applicable Terms Agreement have been obtained, except such as
may be required under the 1933 Act or the 1933 Act Regulations
or state securities or real estate syndication laws with
respect to the Underwritten Securities.
(S) The Registration Statement has been declared
effective under the 1933 Act and, to the knowledge of counsel,
no stop order suspending the effectiveness of the Registration
Statement has been issued under the 1933 Act or proceedings
therefor initiated or threatened by the Commission.
(T) The Registration Statement and the Prospectus
(other than the financial statements and supporting schedules
included therein, as to which no opinion need be rendered) as
of their respective effective or issue dates at the
Representation Date complied as to form in all material
respects with the requirements of the 1933 Act and the 1933
Act Regulations. Each document filed pursuant to the 1934 Act
(other than the financial statements and supporting schedules,
included therein as to which no opinion need be rendered) and
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<PAGE> 37
incorporated or deemed to be incorporated by reference in the
Prospectus complied when so filed as to form in all material
respects with the 1934 Act and the 1934 Act Regulations.
(U) The information in the Registration Statement
under the captions "Description of Preferred Stock,"
"Description of Common Stock," "Description of Common Stock
Warrants," "Certain Provisions of the Articles of
Incorporation, Bylaws and Maryland Law" and "ERISA
Considerations," to the extent applicable to the offering of
the Underwritten Securities and to the extent that it
constitutes matters of law or legal conclusions, has been
reviewed by such counsel, is correct and presents fairly the
information required to be disclosed therein.
(V) The information in the Prospectus Supplement
under the caption "Federal Income Tax Considerations" and in
the Prospectus under the caption "Risks Relating to
Qualification and Operation as a REIT" fairly summarizes the
federal income tax considerations that are likely to be
material to a holder of Underwritten Securities and, to the
extent that they constitute matters of law or legal
conclusions, they have been reviewed by such counsel, they are
correct and present fairly the information required to be
disclosed therein.
In giving its opinion required by this Section
5(b)(i), such counsel shall in addition provide the opinions
referenced in the Prospectus Supplement under the caption
"Federal Income Tax Consequences."
In giving its opinion required by this Section
5(b)(i), such counsel shall additionally state (which shall
not constitute an opinion) that nothing has come to the
attention of such counsel that causes it to believe that the
Registration Statement (except for financial statements and
schedules and other financial data included therein, as to
which counsel need make no statement), at the time such
Registration Statement became effective under 1933 Act or at
the time an Annual Report on Form 10-K or the latest Quarterly
Report on Form 10-Q was filed by the Company with the
Commission (whichever is later), or at the date of the
applicable Terms Agreement, at the Representation Date or as
of the date of such opinion, contained an untrue statement of
a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements
therein not misleading, or the Prospectus or Prospectus
Supplement (except for financial statements and schedules and
other financial data included therein, as to which counsel
need make no statement), as of the date of the applicable
Terms Agreement, at the Representation
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<PAGE> 38
Date or as of the date of such opinion, included an untrue
statement of a material fact or omitted to state a material
fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not
misleading.
In giving the opinions required by this
Section 5(b)(i), Shaw, Pittman, Potts & Trowbridge and Locke
Purnell Rain Harrell (A Professional Corporation) may rely,
(A) as to all matters of fact, upon certificates and written
statements of officers and employees of and accountants for
each of the Company, the Operating Partnership, the
Subsidiaries or the Residential Development Corporations; (B)
as to the qualification and good standing of each of the
Company, the Operating Partnership, the Subsidiaries or the
Residential Development Corporations to do business in any
jurisdiction, upon certificates of appropriate government
officials or opinions of counsel in such jurisdictions; and
(C) as to all Texas franchise tax matters, upon the opinion,
dated as of Closing Time, of Locke Purnell Rain Harrell (A
Professional Corporation).
The opinion of Locke Purnell Rain Harrell (A
Professional Corporation) shall be limited to the laws of the
State of Texas.
(ii) The favorable opinion, dated as of Closing
Time, of Locke Purnell Rain Harrell (A Professional Corporation),
counsel to each of the Company and the Operating Partnership, that it
has reviewed the discussion in the Prospectus Supplement under the
caption "Federal Income Tax Considerations - State and Local Taxes"
with respect to Texas franchise matters and is of the opinion that it
accurately summarizes the Texas franchise tax matters expressly
described therein.
(iii) The favorable opinion, dated as of Closing
Time, of Hogan & Hartson L.L.P., counsel for the Underwriters, with
respect to the matters set forth in (A) (first sentence only), (B)
(first sentence only), (E) (first and fourth sentences only), (F),
(G), (H), (I), (K), (S) and (T) (first sentence only) of Section
5(b)(i) and a statement (which shall not constitute an opinion)
similar to the statement referred to in the third to last paragraph of
Section 5(b)(i) above. In giving its opinion, Hogan & Hartson L.L.P.
may rely, (A) as to all matters of fact, upon certificates and written
statements of officers and employees of and accountants for each of
the Company, the Operating Partnership, the Subsidiaries or the
Residential Development Corporations, (B) as to the qualification and
good standing of each of the Company, the Operating Partnership, the
Subsidiaries or the Residential Development Corporations to do
business in any state or jurisdiction, upon certificates of
appropriate government officials or opinions of counsel in such
jurisdictions, which opinions shall be in form and substance
satisfactory to
- 34 -
<PAGE> 39
counsel for the Underwriters, and (C) as to certain matters of law,
upon the opinion of Shaw, Pittman, Potts & Trowbridge given pursuant
to Section 5(b)(i) above.
(c) At Closing Time, (i) there shall not have been, since
the respective dates as of which information is given in the Registration
Statement and the Prospectus, any material adverse change in the condition,
financial or otherwise, or in the earnings, assets, business affairs or
business prospects of the Company, the Operating Partnership, the Subsidiaries,
the Residential Development Corporations and the Properties considered as one
enterprise, whether or not arising in the ordinary course of business, (ii) no
proceedings shall be pending or, to the knowledge of the Company or the
Operating Partnership, threatened against such entity before or by any federal,
state or other commission, board or administrative agency wherein an
unfavorable decision, ruling or finding might result in any material adverse
change in the condition, financial or otherwise, or in the earnings, assets,
business affairs or business prospects of the Company, the Operating
Partnership, the Subsidiaries, the Residential Development Corporations and the
Properties considered as one enterprise other than as set forth in the
Prospectus, (iii) no stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued and no proceedings
for that purpose have been instituted or, to the knowledge of the Company or
the Operating Partnership, threatened by the Commission or by the state
securities authority of any jurisdiction, and (iv) you shall have received, at
Closing Time, a Certificate of the Chief Executive Officer of the Company and
the Operating Partnership, and the chief financial or chief accounting officer
of each such entity, dated as of Closing Time, evidencing compliance with the
provisions of this subsection (c), stating that the representations and
warranties set forth in Section 1(a) hereof are accurate as though expressly
made at and as of the Closing Time, and stating that the conditions precedent
set forth in this Section 5 have been satisfied or waived. As used in this
Section 5(c), the term "Prospectus" means the Prospectus in the form first used
to confirm sales of the Underwritten Securities.
(d) At the time of execution of the applicable Terms
Agreement, you shall have received from Arthur Andersen LLP a letter dated such
date, in form and substance satisfactory to you, to the effect that: (i) they
are independent public accountants with respect to the Company and the
Rainwater Property Group (as defined in the financial statements included in
the Registration Statement) as required by the 1933 Act and the 1933 Act
Regulations; (ii) it is their opinion that the financial statements and
supporting schedule included in the Registration Statement and covered by their
opinions therein comply as to form in all material respects with the applicable
accounting requirements of the 1933 Act and the 1933 Act Regulations; (iii)
they have performed limited procedures, not constituting an audit, including a
reading of the latest available interim financial statements of the Company and
the Rainwater Property Group, a reading of the minute books of the
- 35 -
<PAGE> 40
Company, inquiries of officials of the Company responsible for financial and
accounting matters and such other inquiries and procedures as may be specified
in such letter, and on the basis of such limited review and procedures nothing
came to their attention that caused them to believe that (A) the unaudited
financial statements and supporting schedules of the Rainwater Property Group
included in the Registration Statement do not comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act and the
1933 Act Regulations or are not in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that of
the audited financial statements included in the Registration Statement, (B)
the unaudited operating data and balance sheet data of the Company and the
Rainwater Property Group set forth in the Prospectus under the caption
"Selected Financial Information" were not determined on a basis substantially
consistent with that used in determining the corresponding amounts in the
audited financial statements included in the Registration Statement, (C) the
pro forma financial information included in the Registration Statement was not
prepared in accordance with the applicable accounting requirements of the 1933
Act and the 1933 Act Regulations with respect to pro forma financial
information or was not determined on a basis substantially consistent with that
of the audited financial statements included in the Registration Statement or
(D) at a specified date not more than three days prior to the date of the
applicable Terms Agreement, there has been any change in the partners' capital,
owner's equity or debt of the Rainwater Property Group or any increase in the
debt of the Rainwater Property Group or any decrease in the net assets of the
Rainwater Property Group, as compared with the amounts shown in the most recent
consolidated balance sheet of the Company included in the Registration
Statement or, during the period from most recent consolidated statement of
operations included in the Registration Statement to a specified date not more
than three days prior to the date of the applicable Terms Agreement, there were
any decreases, as compared with the corresponding period in the preceding year,
in revenues, net income or funds from operations of the Rainwater Property
Group, except in all instances for changes, increases or decreases which the
Registration Statement and the Prospectus disclose have occurred or may occur;
and (iv) in addition to the examination referred to in their opinions and the
limited procedures referred to in clause (iii) above, they have carried out
certain specified procedures, not constituting an audit, with respect to
certain amounts, percentages and financial and statistical information which
are included in the Registration Statement and Prospectus and which are
specified by you, and have found such amounts, percentages and financial and
statistical information to be in agreement with the relevant accounting,
financial and other records of the Company identified in such letter.
(e) At Closing Time, you shall have received from Arthur
Andersen LLP a letter dated as of Closing Time to the effect that they reaffirm
the statements made in the letter furnished pursuant to subsection (d) of this
Section 5,
- 36 -
<PAGE> 41
except that the "specified date" referred to shall be a date not more than
three days prior to Closing Time and, if the Company has elected to rely upon
Rule 430A of the 1933 Act Regulations, to the further effect that they have
carried out procedures as specified in clause (iv) of subsection (d) of this
Section 5 with respect to certain amounts, percentages and financial
information specified by you and deemed to be a part of the Registration
Statement pursuant to Rule 430A(b) and have found such amounts, percentages and
financial information to be in agreement with the records specified in such
clause (iv).
(f) At Closing Time, counsel for the Underwriters shall
have been furnished with such documents and opinions as they may reasonably
require for the purpose of enabling them to pass upon the issuance and sale of
the Underwritten Securities as herein contemplated and related proceedings, or
in order to evidence the accuracy of any of the representations or warranties,
or the fulfillment of any of the conditions, herein contained, and all
proceedings taken by the Company in connection with the issuance and sale of
the Underwritten Securities as contemplated in the applicable Terms Agreement
shall be satisfactory in form and substance to you and counsel for the
Underwriters.
(g) In the event the Underwriters exercise their option
provided in a Terms Agreement as set forth in Section 2(b) hereof to purchase
all or any portion of the Option Securities, the representations and warranties
of the Company and the Operating Partnership contained herein and the
statements in any certificates furnished by the Company and the Operating
Partnership hereunder shall be true and correct as of each Date of Delivery,
and you shall have received:
(i) A certificate of the Chief Executive Officer
or the President and Chief Operating Officer, of the Company and the
Operating Partnership and the chief financial or chief accounting
officer of each such entity, dated such Date of Delivery, confirming
that the certificate delivered at the Closing Time pursuant to Section
5(c) hereof remains true and correct as of such Date of Delivery.
(ii) The favorable opinions of Shaw, Pittman,
Potts & Trowbridge, counsel for each of the Company, the Operating
Partnership, the Subsidiaries and the Residential Development
Corporations, and Locke Purnell Rain Harrell (A Professional
Corporation), special counsel for the Texas Entities, each in form and
substance satisfactory to counsel for the Underwriters, dated such
Date of Delivery, relating to the Option Securities and otherwise to
the same effect as the opinion and statement required by Section
5(b)(i) hereof.
(iii) The favorable opinion of Locke Purnell Rain
Harrell (A Professional Corporation), counsel to each of the Company
and the Operating Partnership, dated such Date of Delivery, with
respect to all Texas franchise
- 37 -
<PAGE> 42
tax matters and otherwise to the same effect as the opinion required
by Section 5(b)(ii) hereof.
(iv) The favorable opinion of Hogan & Hartson
L.L.P., counsel for the Underwriters, dated such Date of Delivery,
relating to the Option Securities and otherwise to the same effect as
the opinion and statement required by Section 5(b)(iii) hereof.
(v) A letter from Arthur Andersen LLP, in form
and substance satisfactory to you, dated such Date of Delivery,
substantially the same in scope and substance as the letter furnished
to you pursuant to Section 5(e) hereof, except that the "specified
date" in the letter furnished pursuant to this Section 5(g)(iv) shall
be a date not more than three days prior to such Date of Delivery.
If any condition specified in this Section 5 shall not have
been fulfilled when and as required to be fulfilled, the applicable Terms
Agreement may be terminated by you by notice to the Company at any time at or
prior to Closing Time, and such termination shall be without liability of any
party to any other party or Date of Delivery, as the case may be, except as
provided in Section 4 hereof.
SECTION 6. INDEMNIFICATION.
(a) Each of the Company and the Operating Partnership
agrees, jointly and severally, to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
section 15 of the 1933 Act, and any director, officer, employee or affiliate
thereof, as follows:
(i) against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, arising out of any untrue
statement or alleged untrue statement of a material fact contained in
the Registration Statement (or any amendment thereto), including the
information deemed to be part of the Registration Statement pursuant
to Rule 430A(b) of the 1933 Act Regulations, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus
or the Prospectus or the omission or alleged omission therefrom of a
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; provided, however, that neither the Company nor the
Operating Partnership shall be required under this subsection (i) to
indemnify any Underwriter with respect to any loss, liability, claim,
damage or expense to the extent such loss, liability, claim, damage or
expense arises out of any untrue statement or
- 38 -
<PAGE> 43
omission or alleged untrue statement or omission made in reliance upon
and in conformity with written information furnished to the Company by
you specifically for inclusion in the Registration Statement or the
Prospectus;
(ii) against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, to the extent of the
aggregate amount paid in settlement of any litigation or of any
investigation or proceeding by any governmental agency or body,
commenced or threatened, or of any claim whatsoever for which
indemnification is provided under subsection (i) above, if such
settlement is effected with the written consent of the Company and the
Operating Partnership; and
(iii) against any and all expense whatsoever
(including, without limitation, the fees and other charges of counsel
chosen by you) reasonably incurred in investigating, preparing or
defending against any litigation, or any investigation or proceedings
by any governmental agency or body, commenced or threatened, or any
claim whatsoever for which indemnification is provided under
subsection (i) above, to the extent that any such expense is not paid
under subsection (i) or (ii) above.
(b) Each Underwriter severally agrees to indemnify and
hold harmless the Company and the Operating Partnership, and each person, if
any, who controls the Company or the Operating Partnership within the meaning
of Section 15 of the 1933 Act, and any director, officer, employee or affiliate
thereof, against any and all loss, liability, claim, damage and expense
described in the indemnity contained in subsection (a) of this Section 6, as
incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration Statement (or any
amendment thereto) or any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto) in reliance upon and in conformity with
written information furnished to the Company by you specifically for inclusion
in the Registration Statement or the Prospectus.
(c) Each indemnified party shall give notice as promptly
as reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, but failure
to so notify an indemnifying party shall not relieve such indemnifying party
from any liability hereunder to the extent it is not materially prejudiced as a
result thereof and in any event shall not relieve it from any liability which
it may have otherwise than on account of this indemnity agreement. An
indemnifying party may participate at its own expense in the defense of such
action. If it so elects within a reasonable time after receipt of such notice,
an indemnifying party, jointly with any other indemnifying parties receiving
such notice, may assume the defense of such action with counsel chosen by it
and approved by the indemnified parties defendant in
- 39 -
<PAGE> 44
such action, unless such indemnified parties reasonably object to such
assumption on the ground that the named parties to any such action (including
any impleaded parties) include both such indemnified parties and an
indemnifying party, and such indemnified parties reasonably believe that there
may be legal defenses available to them which are different from or in addition
to those available to such indemnifying party. If an indemnifying party
assumes the defense of such action, the indemnifying parties shall not be
liable for any fees and expenses of counsel for the indemnified parties
incurred thereafter in connection with such action. In no event shall the
indemnifying parties be liable for fees and expenses of more than one counsel
(in addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar
or related actions in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution could
be sought under this Section 6 or Section 7 hereof (whether or not the
indemnified parties are actual or potential parties thereto), unless such
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of
any indemnified party.
(d) If at any time an indemnified party shall have
requested an indemnifying party to reimburse the indemnified party for fees and
expenses of counsel, such indemnifying party agrees that it shall be liable for
any settlement of the nature contemplated by Section 6(a)(ii) effected without
its written consent if (i) such settlement is entered into more than 45 days
after receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such settlement
at least 30 days prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed such indemnified party in
accordance with such request prior to the date of such settlement.
SECTION 7. CONTRIBUTION.
In order to provide for just and equitable contribution in
circumstances in which the indemnity agreement provided for in Section 6 hereof
is for any reason held to be unenforceable by the indemnified parties although
applicable in accordance with its terms, the Company and the Operating
Partnership, on the one hand, and the Underwriters, on the other, shall
contribute to the aggregate losses, liabilities, claims, damages and expenses
of the nature contemplated by said indemnity agreement incurred by the Company
and the Operating Partnership and the Underwriters, as incurred, in such
proportions that the Underwriters are
- 40 -
<PAGE> 45
responsible for that portion represented by the percentage that the
underwriting discount appearing on the cover page of the Prospectus bears to
the initial public offering price appearing thereon and the Company, the
Operating Partnership Parties are responsible for the balance; provided,
however, that no person guilty of fraudulent misrepresentation (within the
meaning of section 11(f) of the 1933 Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation. For
purposes of this Section, each person, if any, who controls an Underwriter
within the meaning of section 15 of the 1933 Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each
officer of the Company who signed the Registration Statement, and each person,
if any, who controls the Company or the Operating Partnership within the
meaning of section 15 of the 1933 Act and each director, officer, employee or
affiliate thereof shall have the same rights to contribution as the Company and
the Operating Partnership.
The Underwriters' obligations to contribute pursuant to this
Section 7 are several in proportion to their respective underwriting
commitments and not joint. For purposes of this Section 7, the Company and the
Operating Partnership shall be deemed one party and jointly and severally
liable for any obligations hereunder.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY.
All representations, warranties and agreements contained in
this Agreement and the Terms Agreement, or contained in certificates of
officers of the Company or the Operating Partnership submitted pursuant hereto,
shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or any controlling
person, or by or on behalf of the Company or the Operating Partnership or any
controlling persons, and shall survive delivery of the Underwritten Securities
to the Underwriters.
SECTION 9. TERMINATION OF AGREEMENT.
(a) This Agreement (excluding the applicable Terms
Agreement) may be terminated for any reason at any time by the Company or by
you upon the giving of 30 days' written notice of such termination to the other
party hereto, provided that the continued effectiveness of this Agreement shall
not in any way limit or prohibit the Company's right to offer any or all of the
Securities through any other underwriter or pursuant to any other selling
arrangement.
- 41 -
<PAGE> 46
(b) You may also terminate the applicable Terms
Agreement, by notice to the Company, at any time at or prior to Closing Time,
(i) if there has been, since the date of such Terms Agreement or since the
respective dates as of which information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, assets, business affairs or business prospects of the Company, the
Operating Partnership, the Subsidiaries and the Residential Development
Corporations considered as one enterprise, whether or not arising in the
ordinary course of business, (ii) if there has occurred any material adverse
change in the financial markets in the United States or any outbreak of
hostilities or other calamity or crisis or escalation of any existing
hostilities, or any change or development involving a prospective change in
national or international political, financial or economic conditions, in each
case the effect of which is such as to make it, in your judgment, impracticable
to market the Underwritten Securities or enforce contracts for the sale of the
Underwritten Securities, (iii) if trading in any of the securities of the
Company has been suspended or limited by the Commission or on any exchange or
any over-the-counter market, or if trading generally on either the New York
Stock Exchange or the American Stock Exchange or in the Nasdaq National Market
has been suspended or limited, or minimum or maximum prices for trading have
been fixed, or maximum ranges for prices for securities have been required, by
either of said exchanges or by order of the Commission or any other
governmental authority, or if a banking moratorium has been declared by federal
or New York authorities, (iv) if the rating assigned by any nationally
recognized statistical rating organization to any Preferred Stock of the
Company or any indebtedness of the Company or the Operating Partnership as of
the date of the applicable Terms Agreement shall have been lowered since such
date or if any such rating organization shall have publicly announced that it
has placed any Preferred Stock of the Company or any indebtedness of the
Company or the Operating Partnership on what is commonly termed a "watch list"
for possible downgrading, (v) a banking moratorium has been declared by either
Federal or New York authorities, or (vi) pursuant to Section 10(b) below. As
used in this Section 9(b), the term "Prospectus" means the Prospectus in the
form first used to confirm sales of the Underwritten Securities.
(c) In the event of any such termination, (x) the
covenants set forth in Section 3 hereof with respect to any offering of
Underwritten Securities shall remain in effect so long as any Underwriter owns
any such Underwritten Securities purchased from the Company pursuant to the
applicable Terms Agreement and (y) the covenant set forth in Section 3(h)
hereof, the provisions of Section 4 hereof, the indemnity and contribution
agreements set forth in Sections 6 and 7 hereof, and the provisions of Sections
8 and 13 hereof shall remain in effect.
- 42 -
<PAGE> 47
SECTION 10. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS.
If one or more of the Underwriters shall fail at Closing Time
to purchase the Underwritten Securities which it or they are obligated to
purchase under the applicable Terms Agreement (the "DEFAULTED SHARES"), then
you shall have the right, within 24 hours thereafter, to make arrangements for
one or more of the non-defaulting Underwriters, or any other underwriters, to
purchase all, but not less than all, of the Defaulted Shares in such amounts as
may be agreed upon and upon the terms herein set forth; if, however, you shall
not have completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Shares does not exceed ten
percent (10%) of the Underwritten Securities to be purchased pursuant to the
Terms Agreement, the non-defaulting Underwriters named in such Terms Agreement
shall be obligated to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting Underwriters; or
(b) if the number of Defaulted Shares exceeds ten percent
(10%) of the Underwritten Securities to be purchased pursuant to the Terms
Agreement, the applicable Terms Agreement shall terminate without liability on
the part of any non-defaulting Underwriter.
No action taken pursuant to this Section 10 shall relieve any
defaulting Underwriter from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement, you and the Company each shall have the right to
postpone the Closing Time for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements.
SECTION 11. NOTICES.
All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given if mailed or transmitted by
any standard form of telecommunication. Notices to the Underwriters shall be
directed c/o Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, at Merrill Lynch World Headquarters, North Tower, World Financial
Center, New York, New York 10281-1305, attention of Michael F. Profenius,
Managing Director; notices to either the Company or the Operating Partnership
shall be directed to each of them, c/o the Operating Partnership at 777 Main
Street, Suite 2100, Fort Worth, Texas, 76102, attention of John C. Goff, Chief
Executive Officer of the Operating Partnership.
- 43 -
<PAGE> 48
SECTION 12. PARTIES.
This Agreement and the applicable Terms Agreement shall each
inure to the benefit of and be binding upon the parties hereto and thereto and
their respective successors. Nothing expressed or mentioned in this Agreement
or the applicable Terms Agreement is intended or shall be construed to give any
person, firm or corporation, other than those referred to in Sections 6 and 7
hereof and their successors, heirs and legal representatives, any legal or
equitable right, remedy or claim under or in respect of this Agreement or the
applicable Terms Agreement or any provision herein or therein contained. This
Agreement and the applicable Terms Agreement and all conditions and provisions
hereof and thereof are intended to be for the sole and exclusive benefit of the
parties hereto and thereto and their respective successors and said controlling
persons and officers and directors and their heirs and legal representatives,
and for the benefit of no other person, firm or corporation. No purchaser of
Underwritten Securities from any Underwriter shall be deemed to be a successor
by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME.
This Agreement and the applicable Terms Agreement shall be
governed by and construed in accordance with the laws of the State of New York
applicable to agreements made and to be performed in said State. Specified
times of day refer to New York City time.
- 44 -
<PAGE> 49
If the foregoing is in accordance with your understanding of
our agreement please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement among the Underwriters, the Company and the Operating Partnership in
accordance with its terms.
Very truly yours,
CRESCENT REAL ESTATE EQUITIES,
INC.
By: /s/
------------------------------------------
CRESCENT REAL ESTATE EQUITIES
LIMITED PARTNERSHIP
By: Crescent Real Estate Equities, Ltd.
General Partner
By: /s/
-------------------------------------
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: Merrill Lynch, Pierce, Fenner & Smith
Incorporated
By: /s/
---------------------------------
- 45 -
<PAGE> 50
EXHIBIT A
CRESCENT REAL ESTATE EQUITIES, INC.
(a Maryland corporation)
[Title of Securities]
FORM OF TERMS AGREEMENT
-----------------------
Dated: , 1996
------------ --
To: CRESCENT REAL ESTATE EQUITIES, INC.
777 Main Street
Fort Worth, Texas 76102
Attention:
Ladies and Gentlemen:
We (the "Representative") understand that Crescent Real Estate
Equities, Inc. ("the Company") proposes to issue and sell the number of its
[Preferred Stock, no par value (the "Preferred Stock")] [Common Stock, $.01 par
value per share (the "Common Stock")] [Common Stock Warrants to purchase Common
Stock of the Company (the "Warrants")] (such [Preferred Stock] [Common Stock]
[Warrants] being collectively hereinafter referred to as the "Underwritten
Securities"). Subject to the terms and conditions set forth or incorporated by
reference herein, the underwriters named below (the "Underwriters") offer to
purchase, severally and not jointly, the respective numbers of Initial
Underwritten Securities (as defined in the Underwriting Agreement referenced to
below) set forth below opposite their respective names, and a proportionate
share of Option Securities (as defined in the Underwriting Agreement referred
to below) to the extent any are purchased, at the purchase price set forth
below.
<TABLE>
<CAPTION>
Number of Shares of Initial
Underwriter Underwritten Securities
----------- ---------------------------
<S> <C>
--------------------
Total $
===================
</TABLE>
<PAGE> 51
The Underwritten Securities shall have the following terms:
[Preferred Stock] [Common Stock]
Title of Securities:
Number of Shares:
[Current Ratings:]
[Dividend Rate: [$ ] [ %], Payable:]
[Stated Value:]
[Liquidation Preference:]
[Ranking:]
Public offering price per share: $ [, plus accumulated dividends, if any,
from , 19 .]
Purchase price per share: $ [, plus accumulated dividends, if any, from
, 19 .]
[Conversion provisions:]
[Redemption provisions:]
[Sinking fund requirements:]
Number of Option Securities, if any, that may be purchased by the Underwriters:
Delayed Delivery Contracts: [authorized] [not authorized]
[Date of Delivery:
Minimum Contract:
Maximum number of Shares:
Fee:
Additional co-managers, if any:
Other terms:
Closing date and location:
[Warrants]
Number of Warrants to be issued:
Warrant Agent:
Issuable jointly with Common Stock [yes] [no]
[Number of Warrants issued with each share of Common Stock:]
[Detachable data:]
Date from which Warrants are exercisable:
Date on which Warrants expire:
Exercise Price(s) of Warrants:
Initial public offering price: $
Purchase price: $
Title of Warrant Securities:
Principal amount purchasable upon exercise of one Warrant:
Interest rate: Payable:
- 2 -
<PAGE> 52
Date of maturity:
Redemption provisions:
Sinking fund requirements:
[Delayed Delivery Contracts: [authorized] [not authorized]
[Date of delivery:
Minimum contract:
Maximum aggregate principal amount:
Fee: %]
Other terms:
[Closing date and location:]]
All the provisions contained in the document attached as Annex
A hereto entitled "Crescent Real Estate Equities, Inc._Preferred Stock, Common
Stock and Common Stock Warrants_Purchase Agreement" are hereby incorporated by
reference in their entirety herein and shall be deemed to be a part of this
Terms Agreement to the same extent as if such provisions had been set forth in
full herein. Terms defined in such document are used herein as therein
defined.
- 3 -
<PAGE> 53
Please accept this offer no later than ________ o'clock P.M. (New York City
time) on ______________ by signing a copy of this Terms Agreement in the space
set forth below and returning the signed copy to us.
Very truly yours
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
------------------------------------------
Acting on behalf of itself and the
other named Underwriters.
Accepted:
By: CRESCENT REAL ESTATE EQUITIES, INC.
By:
--------------------------------
Name:
Title:
- 4 -
<PAGE> 54
EXHIBIT B
CRESCENT REAL ESTATE EQUITIES, INC.
(a Maryland corporation)
[Title of Securities]
DELAYED DELIVERY CONTRACT
-------------------------
Dated: , 1996
------------ --
To: CRESCENT REAL ESTATE EQUITIES, INC.
900 Third Avenue, Suite 1800
New York, New York 10022
Attention:
-------------------
Ladies and Gentlemen:
The undersigned hereby agrees to purchase from Crescent Real
Estate Equities, Inc. ("the Company"), and the Company agrees to sell to the
undersigned on ___________ ___, 19__ (the "Delivery Date"), ___________________
_____________________________ of the Company's [insert title of security] (the
"Securities"), offered by the Company's Prospectus dated ____________ ___,
19__, as supplemented by its Prospectus Supplement dated ___________ _____,
19__, receipt of which is hereby acknowledged, at a purchase price of [$
_________] to the Delivery Date and on the further terms and conditions set
forth in this contract.
Payment for the Securities which the undersigned has agreed to
purchase on the Delivery Date shall be made to the Company or its order by
[certified or official bank check in New York Clearing House] [same day] funds
at the office of ____________________________________________________, on the
Delivery Date, upon delivery to the undersigned of the Securities to be
purchased by the undersigned in definitive form and in such denominations and
registered in such names as the undersigned may designate by written or
telegraphic communication addressed to the Company not less than five full
business days prior to the Delivery Date.
The obligation of the undersigned to take delivery of and make
payment for Securities on the Delivery Date shall be subject only to the
conditions that (1) the purchase of Securities to be made by the undersigned
shall not on the Delivery Date be prohibited under the laws of the jurisdiction
to which the undersigned is subject and (2) the Company, on or before _________
__, 19__, shall have sold to the Underwriters of the Securities (the
"Underwriters") such principal
<PAGE> 55
amount of the Securities as is to be sold to them pursuant to the Terms
Agreement dated ____________, 19__ between the Company and the Underwriters.
The obligation of the undersigned to take delivery of and make payment for
Securities shall not be affected by the failure of any purchaser to take
delivery of and make payments for Securities pursuant to other contracts
similar to this contract. The undersigned represents and warrants to you that
its investment in the Securities is not, as of the date hereof, prohibited
under the laws of any jurisdiction to which the undersigned is subject and
which govern such investment.
Promptly after completion of the sale to the Underwriters, the
Company will mail or deliver to the undersigned at its address set forth below
notice to such effect, accompanied by a copy of the opinions of counsel for the
Company delivered to the Underwriters in connection therewith.
By the execution hereof, the undersigned represents and
warrants to the Company that all necessary corporate action for the due
execution and delivery of this contract and the payment for and purchase of the
Securities has been taken by it and no further authorization or approval of any
governmental or other regulatory authority is required for such execution,
delivery, payment or purchase, and that, upon acceptance hereof by the Company
and mailing or delivery of a copy as provided below, this contract will
constitute a valid and binding agreement of the undersigned in accordance with
its terms.
This contract will inure to the benefit of and be binding upon
the parties hereto and their respective successors, but will not be assignable
by either party hereto without the written consent of the other.
It is understood that the Company will not accept Delayed
Delivery Contracts for a number of Securities in excess of ______ and that the
acceptance of any Delayed Delivery Contract is in the Company's sole discretion
and, without limiting the foregoing, need not be on a first-come, first-served
basis. If this contract is acceptable to the Company, it is requested that the
Company sign the form of acceptance on a copy hereof and mail or deliver a
signed copy hereof to the undersigned at its address set forth below. This
will become a binding contract between the Company and the undersigned when
such copy is so mailed or delivered.
2
<PAGE> 56
This Agreement shall be governed by the laws of the State of
New York.
Yours very truly,
---------------------------------------
(Name of Purchaser)
By:
-------------------------------------
Title:
----------------------------------
----------------------------------------
----------------------------------------
(Address)
Accepted as of the date first above written.
Crescent Real Estate Equities, Inc.
By:
-------------------------------------
Name:
Title:
PURCHASER--PLEASE COMPLETE AT TIME OF SIGNING
The name and telephone number of the representative of the
Purchaser with whom details of delivery on the Delivery Date may be discussed
are as follows: (Please print.)
<TABLE>
<CAPTION>
Telephone No.
Name (including Area Code)
---- ---------------------
<S> <C>
----------------------------------- -----------------------------------
</TABLE>
3
<PAGE> 1
EXHIBIT 4.01
SCHEDULE XXVII
TO
AGREEMENT
FORM OF REGISTRATION AGREEMENT
REGISTRATION AGREEMENT
This REGISTRATION AGREEMENT, dated as of ___________,
1996, by and between CRESCENT REAL ESTATE EQUITIES, INC., a Maryland
corporation (the "Company"), and THE NORTHWESTERN MUTUAL LIFE INSURANCE
COMPANY, a Wisconsin corporation ("Northwestern"), and KEMPER INVESTORS LIFE
INSURANCE COMPANY, an Illinois corporation ("Kemper");
WITNESSETH:
WHEREAS, each of Northwestern and Kemper has
purchased an aggregate of _______ shares of Common Stock (as hereinafter
defined), pursuant to the terms of the Greenway Agreement (as hereinafter
defined); and
WHEREAS, this Agreement is being entered into
pursuant to the provisions of the Greenway Agreement;
NOW, THEREFORE, in consideration of the foregoing and
the respective covenants and agreements herein contained, the parties hereto
agree as follows:
Section 1. Definitions.
"Business Day" means any day other than (i) a
Saturday or Sunday or (ii) any day on which commercial
banks in Houston, Texas are authorized by law to close.
"Common Stock" means common stock, $0.01 par value,
of the Company.
"Demand Date" means a date on which a Holder gives
written notice to the Company requiring that the
Company purchase the Common Stock held by such Holder as
provided for and required in Section 9 of this Registration
Agreement.
"Demand Notice" means a written notice given by a
Holder to the Company requiring that the Company
purchase the Common Stock held by such Holder as provided for
and required in Section 9 of this Registration Agreement.
"Greenway Agreement" means the Agreement entered into
as of _________, 1996 between and among Crescent Real
Estate Equities Limited Partnership, CRE Management III Corp.,
the Company, Greenway Plaza, Ltd., Nine Greenway, Ltd.,
Northwestern, NW Greenway #1, Inc., NW Greenway #9, Inc., K-P
Greenway Plaza Limited Partnership, J/K-G/P #1, Ltd., Edloe
Devco, Corp., Melvin A. Dow, J/K-G/P #9, Ltd., Kemper, and
the other parties listed in Section 1.7 thereof.
<PAGE> 2
"Holder" means Northwestern, Kemper, any Northwestern
Affiliate, any Kemper Affiliate, and any other transferee
of Registrable Securities from Northwestern, Kemper,
a Northwestern Affiliate, or a Kemper Affiliate to whom
the Registration rights of Northwestern or Kemper under
or pursuant to this Agreement with respect to the Registrable
Securities transferred to such transferee are transferred with
the approval of the Company pursuant to Section 8, if and only
if such transferee assumes and agrees to be bound by all the
terms, provisions and conditions of this Agreement applicable
to its transferor with respect to all Registrable Securities
transferred to such transferee.
"Kemper Affiliate" means a corporation which is,
directly or indirectly, wholly owned by Kemper Corporation, a
Delaware corporation, and which has assumed and agreed to be
bound by all the terms, provisions, and conditions of
this Agreement applicable to "Kemper" with respect to all
Registrable Securities transferred to such corporation.
"Northwestern Affiliate" means a corporation which
is, directly or indirectly, wholly owned by Northwestern and
which has assumed and agreed to be bound by all the terms,
provisions, and conditions of this Agreement applicable to
"Northwestern" with respect to all Registrable Securities
transferred to such corporation.
"Prevailing Price" means, as of an applicable Demand
Date, the average of the closing prices per share of
Common Stock as reported on the New York Stock Exchange for
the ten trading days last preceding such Demand Date.
"Register," "Registered," and "Registration" mean a
registration effected by preparing and filing a
Registration statement or similar document in compliance with
the 1933 Act, with such Registration statement becoming
effective in accordance with the rules and regulations of the
SEC.
"Registrable Securities" means and includes (1) the
shares of Common Stock sold to Northwestern and Kemper
pursuant to the Greenway Agreement and (2) any Common Stock or
other security of the Company issued or issuable as a dividend
or other distribution with respect to, or in exchange for, or
upon conversion or in replacement of, the Common Stock.
Notwithstanding the foregoing, any particular Registrable
Security shall cease to be a Registrable Security at such time
as (i) it has been effectively registered under the 1933 Act
and sold or transferred in accordance with the Registration
statement covering it or (ii) it has been distributed to the
public pursuant to Rule 144 (or any similar provision then in
force) under the 1933 Act.
"SEC" means the Securities and Exchange Commission or
any other federal agency with jurisdiction to administer the
1933 Act.
"1934 Act" means the Securities Exchange Act of 1934,
as amended from time to time.
"1933 Act" means the Securities Act of 1933, as
amended from time to time.
Schedule XXVII, Page 2
<PAGE> 3
Section 2. Registration.
(a) Prior to the expiration of the Lock-up Period
(as defined in the Greenway Agreement), the Company shall file a Registration
statement for all Registrable Securities and shall use its best efforts to
cause such Registration statement to become effective not later than the
Business Day immediately following the last day of the Lock-up Period. The
Company shall use its best efforts to maintain the effectiveness of such
Registration and to maintain such Registration statement current (as defined in
Section 9) until there are no longer any Registrable Securities held by any
Holder.
(b) The Company shall not include any primary
sales of any of its equity or equity related securities or permit any secondary
sales of its equity or equity related securities by other stockholders to be
included in the Registration pursuant to this Section 2.
Section 3. Expenses of Registration. All expenses
in connection with the Registration pursuant to Section 2 (excluding
underwriter's discounts and commissions and reasonable fees and disbursements
of counsel and accountants for the Holders), including, without limitation, all
Registration, qualification and filing fees, printing expenses, accounting
fees, fees and expenses payable pursuant to Blue Sky Laws, and fees and
disbursements of counsel and accountants for the Company, shall be paid by the
Company.
Section 4. Registration Procedures. The Company
will keep each Holder advised in writing as to the initiation of the
Registration, qualification and compliance and as to the completion thereof.
At its expense the Company will:
(a) Keep the Registration effective and current
(as defined in Section 9) until the Holder or Holders have
completed the distribution described in the Registration
statement relating thereto;
(b) Furnish such number of prospectuses and other
documents incident thereto as a Holder from time to time may
reasonably request;
(c) Register or qualify the securities covered by
such Registration statement under the Blue Sky Laws of such
jurisdictions as the Company shall reasonably determine to be
appropriate for the distribution of the securities covered by
such Registration statement (provided that the Company shall
not be required to qualify as a foreign corporation to do
business under the laws of any such state in which it is not
then qualified or to file any general consent to the service
of process in any such state); and
(d) In connection with any underwritten offering
pursuant to a Registration, if requested by the underwriters
enter into an underwriting agreement containing such
representations, warranties, indemnities and agreements as are
customarily included by an issuer in an underwriting agreement
with respect to primary distributions (and, with respect to
any indemnification agreement, not substantially different
from that set forth in Section 6(a) hereof) including, without
limitation, agreements to provide opinions of counsel and
"cold comfort" letters from the Company's accountants;
provided that the Holder or Holders participating in such
underwritten offering shall also be parties to such
underwriting agreement.
Schedule XXVII, Page 3
<PAGE> 4
Section 5. Furnish Information. Each Holder hereby
agrees (i) to cooperate reasonably with the Company and to furnish to the
Company in a timely manner such information regarding such Holder and the
distribution proposed by such Holder as the Company may request in writing and
as the Company reasonably determines to be required in connection with the
Registration or qualification referred to in this Agreement, and (ii) to
deliver or cause to be delivered a copy of the prospectus or offering circular
to any purchaser of the Registrable Securities covered by the Registration.
Section 6. Indemnification. With respect to the
Registration pursuant to Section 2:
(a) The Company will indemnify and hold harmless
each Holder, each of its officers, directors, or partners, as
the case may be, and each person controlling such Holder, with
respect to which Registration or qualification has been
effected pursuant to this Agreement, and each underwriter
(within the meaning of the 1933 Act), if any, and each person
who controls any underwriter against all claims, losses,
damages, and liabilities, joint or several (or actions in
respect thereof), arising out of or based upon any untrue
statement (or alleged untrue statement) of a material fact
contained in any Registration statement, prospectus, or
offering circular, or in any document incorporated by
reference in any of the foregoing, or arising out of or based
upon any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to
make the statements therein not misleading, or any violation
by the Company of any rule or regulation promulgated under the
1933 Act applicable to the Company and relating to action or
inaction required of the Company in connection with any such
Registration or qualification, and will promptly reimburse
each such Holder, each of its officers, directors, or
partners, as the case may be, and each person controlling such
Holder, each such underwriter and each person who controls any
such underwriter, for any legal and any other expenses
reasonably incurred in connection with investigation or
defending any such claims, loss, damage, liability or action;
provided, however, that the Company will not be liable in any
such case to the extent that any such claims, loss, damage,
liability or expense arises out of or is based upon any untrue
statement or omission based upon written information furnished
to the Company by such Holder or underwriter and used in any
such Registration statement, prospectus or offering circular
by mutual agreement of such Holder and the Company or of such
Holder, such underwriter and the Company, as applicable. The
obligations of the Company under this Section 6 shall survive
the completion of the offering of Registrable Securities under
the Registration statement and otherwise.
(b) Each Holder will indemnify the Company, each
of its directors and officers, and each underwriter, if any,
employed by or on behalf of the Company to sell Company's
securities covered by such Registration statement, and each
person who controls the Company or such underwriter within the
meaning of the 1933 Act, against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of
or based upon any untrue statement (or alleged untrue
statement) of a material fact contained in any prospectus,
offering circular or Registration statement incident to any
such Registration or qualification, or arising out of or based
upon any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to
make the statements therein not misleading, and will promptly
reimburse the Company, such directors, officers, persons,
underwriters or control persons for any
Schedule XXVII, Page 4
<PAGE> 5
legal or any other expenses reasonably incurred in connection
with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to
the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such
prospectus, offering circular or Registration statement in
reliance upon and in conformity with written information
furnished to the Company by such Holder and used in any such
Registration statement, prospectus or offering circular by
mutual agreement of such Holder and the Company; provided,
however, that the obligations of such respective Holders
hereunder, which obligations shall be several and shall not be
joint, shall be limited to an amount equal to the proceeds to
each such particular Holder of Registrable Securities sold as
contemplated herein.
(c) Each indemnified party shall give
notice to the indemnifying party promptly after such
indemnified party has actual knowledge of any claim as to
which indemnity may be sought, and shall permit the
indemnifying party to assume the defense of any such claim or
any litigation resulting therefrom, provided that counsel for
the indemnifying party, who shall conduct the defense of such
claim or litigation, shall be approved by the indemnified
party (whose approval shall not unreasonably be withheld), and
the indemnified party may participate in such defense at such
party's expense. The omission so to notify the indemnifying
party shall not relieve the indemnifying party of its
obligations to such indemnified party under this Agreement
unless such omission is prejudicial to the indemnifying
party's ability to defend such action; and the omission of one
indemnified party so to notify the indemnifying party shall
not release the indemnifying party from its obligations to any
other indemnified party. No indemnifying party, in the
defense of any such claim or litigation, shall, except with
the consent of each indemnified party, consent to entry of any
judgment or enter into any settlement which does not include
as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all
liability in respect to such claim or litigation.
(d) To provide for just and equitable
contributions in any case in which any indemnified party makes
a claim for indemnification pursuant to this Section 6 but it
is judicially determined (by entry of a final judgment or
decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case,
notwithstanding the fact that the provisions of this Section 6
provide for indemnification in such case, then, in each such
case, (i) the indemnifying party and (ii) said indemnified
party, shall contribute to the aggregate losses, claims,
damages, liabilities or expenses to which they may be subject
(after contribution from all others, if applicable) in such
proportion that the indemnifying party and said indemnified
party are responsible based on the relative fault of the
indemnifying party, on the one hand, and said indemnified
party, on the other hand, in connection with the statements or
omissions which resulted in such losses, claims, damages,
liabilities and expenses. Such relative fault shall be
determined by reference to, among other things, whether in the
case of an untrue statement of a material fact or the omission
to state a material fact, such statement or omission relates
to information supplied by the indemnifying party or by such
indemnified party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent
such untrue statement or omission. For purpose of this
Section 6(d), the term "damages" shall include, without
limitation, any legal or other expenses (including attorneys'
fees) reasonably incurred by the indemnified party in
connection with
Schedule XXVII, Page 5
<PAGE> 6
investigating or defending any action or claim that is the
subject of the contribution provisions of this Section 6(d).
Section 7. Rule 144 Reporting. With a view to
making available to the Holders the benefits of certain rules and regulations
of the SEC which may permit the sale of the Registrable Securities to the
public without Registration, the Company agrees, so long as any Holder owns
Registrable Securities, to make and keep available "adequate current public
information," as those terms and such phrase are understood and defined in Rule
144 under the 1933 Act.
Section 8. Transfer of Registration Rights. The
Registration rights of Northwestern or Kemper under or pursuant to this
Agreement may not be assigned by Northwestern or Kemper to a transferee or
assignee of any Registrable Securities held by Northwestern or Kemper except to
any one or more of Kemper, Northwestern, a Kemper Affiliate, or a Northwestern
Affiliate without the Company's prior written consent, which consent shall not
unreasonably be withheld or delayed; provided that (a) the Registration rights
of Kemper under or pursuant to this Agreement may not be assigned to more than
two (2) Holders other than Kemper or Kemper Affiliates, and (b) the
Registration rights of Northwestern under or pursuant to this Agreement may not
be assigned to more than two (2) Holders other than Northwestern or
Northwestern Affiliates.
Section 9. Failure to Register or Maintain
Registration. In any of the following circumstances (herein severally and
collectively called a "Registration Failure"):
(a) if the Company shall for any reason
whatsoever fail to Register any Registrable Securities on or
prior to the first Business Day immediately following the last
day of the Lock-Up Period,
(b) if the Company shall fail for any reason
whatsoever to maintain the effectiveness of such Registration
as to any Registrable Securities held by any Holder at any
time after the last day of the Lock-Up Period,
(c) if the Company shall fail for any reason
whatsoever to maintain the Registration statement current at
any time after the last day of the Lock-Up Period while any
Registrable Securities are held by any Holder, or
(d) if the effectiveness of the Registration
statement shall be suspended by a stop order issued by the
Securities and Exchange Commission for any reason whatsoever
at any time after the last day of the Lock-Up Period while any
Registrable Securities are held by any Holder,
then, in any such event, at any time while a Registration Failure exists while
a Holder holds Registrable Securities, such Holder shall have the right, at its
election, to give notice of such Registration Failure to the Company and, if
such Registration Failure continues at the expiration of five (5) days after
giving of such notice, shall have the right, at its election, at any time
thereafter while such Registration Failure continues to require that the
Company purchase all of the Registrable Securities held by such Holder by
giving written notice (a Demand Notice) to the Company, in which event the
Company shall purchase and pay for, by wire transfer of immediately available
federal funds to such bank account in the United States of America as shall be
directed in such Demand Notice, all of the Registrable Securities held
Schedule XXVII, Page 6
<PAGE> 7
by such Holder, for a price per share of the Common Stock held by such Holder
constituting Registrable Securities equal to the Prevailing Price as of the
Demand Date when such Demand Notice was given by such Holder, with such price
being payable by the Company immediately upon tender by such Holder to the
Company, at the Company's address set forth in Section 14 of this Registration
Agreement, of the certificates evidencing ownership of such Registrable
Securities, duly endorsed to the Company, at any time after the expiration of
five (5) days after the Company's receipt of the Demand Notice. A Registration
statement shall not be considered to be "current" at any time when, by reason
of occurrence of any event or by reason of the passage of time, such
Registration statement does not meet the requirements of Section 10, Section
12(2) or Section 17 of the 1933 Act, or such Registration Statement contains an
untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading.
Section 10. Suspension of Registration. The Company
shall promptly notify each Holder of, and confirm in writing, the issuance by
the Securities and Exchange Commission of any stop order suspending the
effectiveness of the Registration statement or the initiation of any
proceedings for that purpose. The Company shall use its best efforts to obtain
the withdrawal of any order suspending the effectiveness of the Registration
statement at the earliest possible moment.
Section 11. Amendment, Modification and Waiver.
This Agreement may be amended or modified with the consent of the Company and
the Company may take any action herein prohibited, or omit to perform any act
herein required to be performed by it, only if the Company shall have obtained
the written consent to such amendment, modification, action or omission to act,
of the Holders of a majority of the shares of Registrable Securities held by
the Holders. Each Holder of any Registrable Securities at the time or
thereafter outstanding shall be bound by any consent authorized by this Section
11, regardless of whether such Holder consented to such amendment,
modification, action or omission.
Section 12. Assignment. This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties
hereto and, with respect to the Company, its respective successors and assigns
and, with respect to the Holders, any subsequent Holder or Holders of any
Registrable Securities; provided that no person or entity shall be entitled to
any rights hereunder unless and until such person or entity has assumed and
agreed to be bound by all the terms, provisions and conditions of this
Agreement applicable to its transferor with respect to all Registrable
Securities transferred to such person or entity.
Section 13. Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the State of Texas,
without giving effect to principles of conflicts of law.
Section 14. Notices. All notices hereunder shall be
deemed given if in writing and delivered personally or by telegram, telecopy,
or by registered or certified mail (return receipt requested) to the parties at
the following addresses (or at such other addresses as shall by specified by
like notice):
(a) If to the Company, to:
Schedule XXVII, Page 7
<PAGE> 8
<TABLE>
<S> <C>
Crescent Real Estate Equities, Inc.
777 Main Street, Suite 2100
Fort Worth, Texas 76102
Attention: David M. Dean and James Eidson
Telecopy: (817) 878-0429
with copies to:
Shaw, Pittman, Potts & Trowbridge
2300 N Street
Washington, D.C. 20037
Attention: Robert B. Robbins and Wendelin A. White
Telecopy: (202) 663-8007
(b) If to Northwestern, to:
The Northwestern Mutual Life Insurance Company
720 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Attention: Donald L. O'Dell
Telecopy: (414) 299-1557
with a copy to:
Fulbright & Jaworski L.L.P.
1301 McKinney, Suite 5100
Houston, Texas 77010-3095
Attention: Uriel E. Dutton
Telecopy: (713) 651-5246
(c) If to Kemper, to:
Kemper Investors Life Insurance Company
120 South LaSalle Street, 13th Floor
Chicago, Illinois 60603
Telecopy: 312-499-8416
with a copy to:
Timothy R. Verrilli
Senior Counsel
Zurich/Kemper Life
120 South LaSalle Street, 13th Floor
Chicago, Illinois 60603
Telecopy: 312-499-1040
with a copy to:
</TABLE>
Schedule XXVII, Page 8
<PAGE> 9
Rudnick & Wolfe
203 North LaSalle Street
Chicago, Illinois 60601-1293
Attention: Kenneth Hartman
Telecopy: 312-236-7516
(d) If to any Holder other than Northwestern or
Kemper, to the address that such Holder shall have furnished
to the Company in writing.
Any notice given by mail, telegram, or telecopy shall be effective when
received.
Section 15. Counterparts. This Agreement may be
executed in separate counterparts, each of which will be deemed to be an
original, but all of which shall be considered one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this
Agreement to be executed and delivered by their respective officers thereunto
duly authorized as of the date first above written.
CRESCENT REAL ESTATE EQUITIES, INC., a
Maryland corporation
By
------------------------------------------
Gerald W. Haddock
President and Chief Operating Officer
THE NORTHWESTERN MUTUAL LIFE INSURANCE
COMPANY, a Wisconsin corporation
By
------------------------------------------
Donald L. O'Dell
Vice President, Asset Management
KEMPER INVESTORS LIFE INSURANCE COMPANY,
an Illinois corporation
By
------------------------------------------
Name:
Title:
AND
By
------------------------------------------
Name:
Title:
Schedule XXVII, Page 9
<PAGE> 1
EXHIBIT 4.02
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is entered into
effective as of this 26th day of June 1996 by and among Crescent Real Estate
Equities, Inc., a Maryland corporation (the "Company"), Crescent Real Estate
Equities Limited Partnership (the "Operating Partnership") and Canyon Ranch,
Inc. ( "CRI").
WHEREAS, CRI has acquired limited partnership interests (the
"Partnership Interest") and Partnership Units ("Units") in the Operating
Partnership, all of which were offered and sold to Senterra pursuant to one or
more exemptions from registration under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to an offering by the Operating Partnership
of such Partnership Interest and Units to CRI;
WHEREAS, pursuant to the Operating Partnership Agreement (as defined
below) and the Contribution Agreement executed by and between Operating
Partnership and CRI on or before the date hereof , CRI has obtained certain
rights (the "Exchange Rights") to exchange its Partnership Interest and Units,
in whole or in part, for an aggregate number of shares of common stock of the
Company, $0.01 par value per share (the "Common Stock"), equal to the
aggregate number of Units owned by such Holder, on the terms and conditions
specified in the Operating Partnership Agreement (specifically including the
Tenth Amendment thereto) and the Contribution Agreement, and pursuant to which
the Company shall have the option to deliver cash in lieu of shares of Common
Stock;
WHEREAS, in consideration of the purchase of the Partnership Interest and
Partnership Units by CRI, the Company has agreed to provide CRI and certain of
its assignees, as described herein, with the registration rights set forth in
Section 2 hereof;
NOW, THEREFORE, in consideration of the mutual promises and agreements
set forth herein, and other valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as set
forth herein.
1. Certain Definitions.
As used in this Agreement, the following capitalized defined terms shall
have the following meanings.
"Common Stock" shall have the meaning set forth above in the recitals
hereto and, in addition, shall include any equity securities of the Company or
any corporate successor of the Company into or for which shares of Common
Stock are converted or exchanged, and, if the Company is merged into or with,
or conveys its assets to, or otherwise is converted into and becomes, a real
estate investment trust under the Texas Real Estate Investment Trust Act, the
term "Common Stock" shall mean common shares in said real estate investment
trust, and references in this Agreement to "shares of Common Stock" shall be
deemed to refer to common shares of such real estate investment trust.
"Company" shall have the meaning set forth above in the recitals hereto.
<PAGE> 2
"Exchange Rights" shall have the meaning set forth above in the recitals
hereto.
"Holders" shall mean (i) CRI, (ii) any Person who succeeds to the rights
of CRI hereunder by instrument of merger, consolidation, or similar
instrument, and who executes this Agreement in connection therewith, (iii) any
Person who is a beneficial owner of the equity securities of CRI as of the
date first above written, to whom CRI assigns all or a portion of its rights
hereunder and who executes this Agreement in connection with such assignment,
(iv) family members of any beneficial owner specified in clause (iii) (which,
for purposes hereof, shall mean any spouse, child, or grandchild or, in the
case of a trust, the grantor or beneficial owner(s) thereof) to whom such
beneficial owner assigns all or a portion of its rights hereunder and who
execute this Agreement in connection with such assignment, (v) any Person who
succeeds to all or a portion of the rights hereunder of any Holder by will or
intestate succession and who executes this Agreement in connection therewith,
and (vi) any Person to whom any Holder assigns all or a portion of its rights
hereunder as part of a charitable donation and who executes this Agreement in
connection therewith. No Person shall be considered a Holder for purposes
hereof unless and until such Person shall have executed this Agreement, as the
same may be amended in accordance with the provisions hereof.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"Offering" shall mean the issuance of a Partnership Interest and Units to
CRI.
"Operating Partnership" shall have the meaning set forth above in the
recitals hereto and also shall include the Operating Partnership's successors
and subsidiaries.
"Operating Partnership Agreement" shall mean the First Amended and
Restated Agreement of Limited Partnership of the Operating Partnership, as
amended through and following the date hereof, including the Tenth Amendment
thereto (which, among other matters, admits CRI to the Operating Partnership
as a Limited Partner and as a holder of Units).
"Partnership Interests" shall have the meaning set forth above in the
recitals hereto.
"Person" shall mean an individual, partnership, corporation, trust, or
unincorporated organization, or a government agency or political subdivision
thereof.
"Prospectus" shall mean the prospectus included in a Registration
Statement, including any preliminary prospectus, as amended or supplemented by
any prospectus supplement, with respect to the terms of the offering of any
portion of the Registrable Shares covered by such Registration Statement, and
by all other amendments and supplements to such prospectus, including
post-effective amendments, and in each case including all material
incorporated by reference therein.
"Registrable Shares" shall mean any Common Stock issued to the Holders
pursuant to the exercise of Exchange Rights by any of such Holders in exchange
for the Units received by the Holders on the date hereof but shall not include
any shares of Common Stock issued to the Holders in exchange for the Units and
subsequently transferred to any Person other
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<PAGE> 3
than (i) another Holder or (ii) a Person who becomes a Holder pursuant hereto
within ten days following any such transfer.
"Registration Expenses" shall mean any and all expenses incident to
performance of or compliance with this Agreement, including, without
limitation: (i) all SEC, stock exchange or NASD registration and filing fees;
(ii) all fees and expenses incurred in connection with compliance with state
securities or "blue sky" laws (including reasonable fees and disbursements of
counsel in connection with "blue sky" qualification of any of the Registrable
Shares and the preparation of a Blue Sky Memorandum) and compliance with the
rules of the NASD; (iii) all expenses of any Persons in preparing or assisting
in preparing, word processing, printing and distributing any Registration
Statement, any Prospectus, certificates and other documents relating to the
performance of and compliance with this Agreement; (iv) all fees and expenses
incurred in connection with the listing, if any, of any of the Registrable
Shares on any securities exchange or exchanges pursuant to Section 2(c)
hereof, and (v) the fees and disbursements of counsel for the Company and of
the independent public accountants of the Company, including the expenses of
any "cold comfort" letters required by or incident to such performance and
compliance. Registration Expenses shall specifically exclude any brokerage or
underwriting commissions and taxes of any kind (including, without limitation,
transfer taxes) and any legal, accounting and other fees and expenses incurred
by Holder with respect to any disposition, sale or transfer of Registrable
Shares.
"Registration Statement" shall mean any registration statement of the
Company and any other entity required to be a registrant with respect to such
registration statement pursuant to the requirements of the Securities Act
which covers any of the Registrable Shares, and all amendments and supplements
to such registration statement, including post-effective amendments, in each
case including the Prospectus contained therein, all exhibits thereto and all
materials incorporated by reference therein.
"SEC" shall mean the Securities and Exchange Commission.
"Units" shall have the meaning set forth above in the recitals hereto.
2. Registration of Shares. The provisions relating to a Holder's and the
Company's rights and obligations with regard to registration of Shares are set
forth in this Section 2.
(a) Prior to the last day of the thirteenth full month following the
month in which the closing of the Offering occurs, the Company shall file, and
shall use its best efforts to cause to become effective on, or as soon as
practicable following, the last day of such thirteenth month, a Registration
Statement for all Registrable Shares. The Company shall use its best efforts
to maintain the effectiveness of such Registration Statement until there are
no longer any Registrable Shares held by any Holder.
(b) Notice of Effectiveness. The Company shall notify each Holder of
the effectiveness of the Registration Statement and shall furnish to each
Holder such number of copies of the Registration Statement (including any
amendments, supplements and exhibits), the Prospectus
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<PAGE> 4
contained therein (including each preliminary prospectus and all related
amendments and supplements), and any documents incorporated by reference in
the Registration Statement or such other documents as the Holder may
reasonably request in order to facilitate its sale of the Registrable Shares
in the manner described in the Registration Statement.
(c) Amendments and Supplements to Registration Statement; Listing. The
Company shall prepare and file with the SEC from time to time such amendments
and supplements to the Registration Statement and prospectus used in
connection therewith as may be necessary to keep the Registration Statement
effective and to comply with the provisions of the Securities Act with respect
to the disposition of all the Registrable Shares until such time as all of the
Registrable Shares have been disposed of in accordance with the intended
methods of disposition by the Holders as set forth in the Registration
Statement. Upon five business days' notice, the Company shall file any
supplement or post-effective amendment to the Registration Statement with
respect to the plan of distribution of such Holder's ownership interests in
Registrable Shares that is necessary to permit the sale of the Holder's
Registrable Shares pursuant to the Registration Statements, including
supplements or post-effective amendments required to give effect to the
designation of any underwriter or underwriting syndicate specified by such
Holder. The Company shall file any necessary listing applications or
amendments to the existing applications to cause the Shares registered under
any Registration Statement to be then listed or quoted on the primary exchange
or quotation system on which the Common Stock is then listed or quoted.
(d) SEC Requests. The Company shall promptly notify each Holder of, and
confirm in writing, any request by the SEC for amendments or supplements to
the Registration Statement or the Prospectus related thereto or for additional
information. In addition, the Company shall promptly notify each Holder of,
and confirm in writing, the filing of the Registration Statement or any
Prospectus, amendment or supplement related thereto or any post-effective
amendment to the Registration Statement and the effectiveness of any
post-effective amendment.
(e) Prospectus Delivery. At any time when a Prospectus relating to the
Registration Statement is required to be delivered under the Securities Act,
the Company shall immediately notify each Holder of the happening of any event
as a result of which (i) the Prospectus included in the Registration
Statement, as then in effect, includes an untrue statement of a material fact
or omits to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading, and (ii) an amendment to the Registration Statement
is a requirement (an "Event Notice"). In such event, the Company shall
promptly prepare and furnish to each Holder a reasonable number of copies of a
supplement to such Prospectus (or, after declaration of effectiveness by the
SEC, of any amendment to the Prospectus required to be filed as an amendment
to the Registration Statement) as may be necessary so that, as thereafter
delivered to the purchasers of Registrable Shares, such prospectus shall not
include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Company will, if necessary, amend the Registration Statement
of which such Prospectus is a part to reflect such amendment or supplement and
use its best efforts promptly to obtain an effectiveness order for such
amendment from the SEC. From and after the date of any Event Notice, no
Holder shall offer
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<PAGE> 5
or sell any Registrable Shares until such time as the Company delivers any
such Prospectus supplement or amendment to the Holder.
3. State Securities Laws.
Subject to the conditions set forth in this Agreement, the Company shall,
in connection with the filing of any Registration Statement hereunder, file
such documents as may be necessary to register or qualify the Registrable
Shares under the securities or "Blue Sky" laws of such states as any Holder
may reasonably request, and the Company shall use its best efforts to cause
such filings to become effective; provided, however, that the Company shall
not be obligated to qualify as a foreign corporation to do business under the
laws of any such state in which it is not then qualified or to file any
general consent to service of process in any such state, provided that the
Company shall file a Uniform Consent to Service of Process on Form U-2 or its
successor in any state that requires such a filing in connection with the
offering of the Registrable Shares and in which the Holder proposes to offer
Registrable Shares. Once effective, the Company shall use its best efforts to
keep such filings effective until the earliest of (ai) such time as the
Registrable Shares have been sold, or (bii) in the case of a particular state,
a Holder has notified the Company that it no longer requires an effective
filing in such state in accordance with its original request for filing. The
Company shall promptly notify each Holder of, and confirm in writing, the
receipt by the Company of any notification with respect to the suspension of
the qualification of the Registrable Shares for sale under the securities or
"Blue Sky" laws of any jurisdiction or the initiation or threat of any
proceeding for such purpose.
4. Expenses.
The Company shall bear all Registration Expenses incurred in connection
with the registration of the Registrable Shares pursuant to this Agreement.
Each Holder shall bear its pro rata share of all other expenses resulting
from any disposition, sale or transfer of Registrable Shares sold by such
Holder.
5. Cooperation.
Each Holder hereby agrees (i) to cooperate with the Company and to
furnish to the Company in a timely manner all information that the Company may
reasonably request in connection with the preparation of the Registration
Statement and any filings with any state securities commissions concerning its
plan of distribution and ownership interests with respect to its Registrable
Shares and any other information and (ii) to deliver or cause delivery of the
Prospectus contained in the Registration Statement to any purchaser of the
shares covered by the Registration Statement from the Holder except to the
extent provided to the contrary in Section 42(e) above.
6. Suspension of Registration Requirement.
(a) The Company shall promptly notify each Holder of, and confirm in
writing, the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose. Each Holder agrees not to effect any sales from
the date of such notice until the Company obtains the
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<PAGE> 6
withdrawal of any such order suspending the effectiveness of the Registration
Statement. The Company shall use its best efforts to obtain the
withdrawal of any order suspending the effectiveness of the Registration
Statement at the earliest possible moment and shall notify each Holder of such
withdrawal within one business day thereafter.
(b) Each holder of Registrable Shares whose Registrable Shares are
covered by a Registration Statement filed pursuant to Section 2 hereof agrees,
if requested by the Company in the case of a Company-initiated nonunderwritten
offering or if requested by the managing underwriter or underwriters in a
Company-initiated underwritten offering, not to effect any public sale or
distribution of any of the securities of the Company of any class included in
such Registration Statement (or any security the value of which is determined
with reference to the value of such securities), including a sale pursuant to
Rule 144A or Rule 144 under the Securities Act (except as part of such
Company-initiated registration), during the 15-day period prior to, and during
the 90-day period beginning on the date of effectiveness of each Company
initiated offering made pursuant to such Registration Statement, to the extent
timely notified in writing by the Company or the managing underwriters
provided, however, that such 90-day period shall be extended by the number of
days from (and including) the date of the giving of any notice pursuant to
Section 2(dc) or (ed) hereof to (and including) the date when each seller of
Registrable Shares covered by such Registration Statement shall have received
the copies of the supplemented or amended Prospectus contemplated by Section
2(e) hereof.
7. Additional Shares.
The Company, at its option, may register, under any registration
statement and any filings with any state securities commissions filed pursuant
to this Agreement, any number of shares of unissued Common Stock of the
Company or any Common Stock of the Company owned by any other shareholder or
shareholders of the Company unless the underwriter or underwriters specified
by the Holder asserts in writing that such additional shares will, in its
opinion, have a significant adverse effect on the marketing of the Holder's
Registrable Shares.
8. Indemnification.
(a) Indemnification by the Company. The Company agrees to indemnify and
hold harmless each Holder and each person, if any, who controls any Holder
within the meaning of Section 15 of the Securities Act of 1933 as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto) pursuant to which the Registrable
Shares were registered under the Securities Act, including all documents
incorporated therein by reference, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary
to make the statements therein not misleading or arising out of any
untrue statement or alleged untrue statement of a material fact contained
in any Prospectus (or any amendment or supplement thereto), including all
documents incorporated therein by reference, or the omission or alleged
omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or investigation or proceeding by
any governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, if such settlement is effected with
the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred
(including reasonable fees and disbursements of counsel), reasonably
incurred in investigating, preparing or defending against any litigation,
or investigation or proceeding by any governmental agency or body,
commenced or threatened, in each case whether or not a party, or any
claim whatsoever based upon any such untrue statement or omission, or any
such alleged
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<PAGE> 7
untrue statement or omission, to the extent that any such expense is not
paid under subparagraph (i) or (ii) above;
provided, however, that the indemnity provided pursuant to this Section 8 does
not apply to any Holder with respect to any loss, liability, claim, damage or
expense to the extent arising out of (x) any untrue statement or omission or
alleged untrue statement or omission made in reliance upon and in conformity
with written information furnished to the Company by such Holder expressly for
use in the Registration Statement (or any amendment thereto) or the Prospectus
(or any amendment or supplement thereto) or (y) such Holder's failure to
deliver an amended or supplemental Prospectus if such loss, liability, claim,
damage or expense would not have arisen had such delivery occurred.
(b) Indemnification by Holders. Each Holder severally agrees to
indemnify and hold harmless the Company and the other selling Holders, and
each of their respective directors and officers (including each director and
officer of the Company who signed the Registration Statement), and each
person, if any, who controls the Company or the other selling Holders within
the meaning of Section 15 of the Securities Act, to the same extent as the
indemnity contained in Section (a) hereof (except that any settlement
described in Section 8(a)(ii) shall be effected with the written consent of
such Holder), but only insofar as such loss, claim, damage or expense arises
out of or is based upon (x) any untrue statements or omissions, made in the
Registration Statement (or any amendment thereto) or any Prospectus (or any
Registration Statement (or any amendment or supplement thereto) in reliance
upon and in conformity with written information furnished to the Company by
such Holder expressly for use in such Registration Statement (or any amendment
thereto) or such Prospectus (or any amendment or supplement thereto) or (y)
such Holder's failure to deliver an amended or supplemental Prospectus if such
loss, liability, claim, damage or expense would not have arisen had such
delivery occurred.
(c) Conduct of Indemnification Proceedings. The indemnified party shall
give reasonably prompt notice to the indemnifying party of any action or
proceeding commenced against it in respect of which indemnity may be sought
hereunder, but failure so to notify the indemnifying party (i) shall not
relieve it from any liability which it may have under the indemnity agreement
provided in paragraphs (a) or (b) of this Section 8, unless and to the extent
it did not otherwise learn of such action and the lack of notice by the
indemnified party results in the forfeiture by the indemnifying party of
substantial rights and defenses and (ii) shall not, in any event, relieve the
indemnifying party from any obligations to the indemnified party other than
the indemnification obligation provided under paragraphs (a) or (b) of this
Section 8. If the indemnifying party so elects within a reasonable time after
receipt of such notice, the indemnifying party may assume the defense of such
action or proceeding at such indemnifying party's own expense with counsel
chosen by the indemnifying party and approved by the indemnified party,
which approval shall not be unreasonably withheld; provided, however, that, if
the indemnified party reasonably determines that a conflict of interest exists
where it is advisable for the indemnified party to be represented by separate
counsel or that, upon advice of counsel, there may be legal defenses available
to it which are different from or in addition to those available to the
indemnifying party, then the indemnifying party shall not be entitled to assume
such defense, and the indemnified party shall be entitled to separate counsel
at the indemnifying
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<PAGE> 8
party's expense. If the indemnifying party is not entitled to assume
the defense of such action or proceeding as a result of the provisions of the
preceding sentence, the indemnifying party's counsel shall be entitled to
conduct the indemnifying party's defense and counsel for the indemnified party
shall be entitled to conduct the defense of the indemnified party, it being
understood that both such counsel will cooperate with each other to conduct the
defense of such action or proceeding as efficiently as possible. If the
indemnifying party is not so entitled to assume the defense of such action or
does not assume such defense, after having received the notice referred to in
the first sentence of this paragraph, the indemnifying party will pay the
reasonable fees and expenses of counsel for the indemnified party. In such
event, however, the indemnifying party will not be liable for any settlement
effected without the written consent of the indemnifying party, with such
consent not to be unreasonably withheld. If an indemnifying party is entitled
to assume, and assumes, the defense of such action or proceeding in accordance
with this paragraph, the indemnifying party shall not be liable for any fees
and expenses of counsel for the indemnified party incurred thereafter in
connection with such action or proceeding, subject to the proviso set forth in
the second sentence of this paragraph (c).
9. Contribution.
In order to provide for just and equitable contribution in circumstances
in which the indemnity agreement provided for in Section 8 is for any reason
held to be unenforceable although applicable in accordance with its terms, the
Company and each Holder shall contribute to the aggregate losses, liabilities,
claims, damages and expenses of the nature contemplated by such indemnity
agreement incurred by the Company and each such Holder, in such proportion as
is appropriate to reflect the relative fault of the Company on the one hand
and such Holder on the other, in connection with the statements or omissions
which resulted in such losses, claims, damages, liabilities or expenses, as
well as any other relevant equitable considerations. The relative fault of
the indemnifying party and indemnified party shall be determined by reference
to, among other things, whether the action in question, including any untrue
or alleged untrue statement of a material fact or omission or alleged omission
to state a material fact, has been made by, or relates to, information
supplied by, the indemnifying party or the indemnified party, and the parties'
relative intent, knowledge, access to information and opportunity to correct
or prevent such action.
The parties hereto agree that it would not be just or equitable if
contribution pursuant to this Section 9 were determined by pro rata allocation
or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 9, each Holder shall be
required to contribute the amount of any damages which such Holder is required
to pay by reason of such untrue statement or omission, provided, however, that
no Holder shall be required under such circumstances to pay any amount in
excess of the amount by which the total price at which the Registrable Shares
of such Holder were offered to the public.
Notwithstanding the foregoing, no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 9,
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<PAGE> 9
each person, if any, who controls a Holder within the meaning of Section 15 of
the Securities Act shall have the same rights to contribution as such Holder,
and each director of the Company, each officer of the Company who signed the
Registration Statement and each person, if any, who controls the Company
within the meaning of Section 15 of the Securities Act shall have the same
rights to contribution as the Company.
10. No Obligation to Issue Common Stock to Holders; No Other Obligation to
Register.
(a) No Obligation to Issue Common Stock. The Holders hereby acknowledge
that, upon any exercise of their Exchange Rights, the Company has the option
pursuant to the Operating Partnership Agreement, in its sole discretion, to
deliver either cash or shares of Common Stock in exchange for the Units as to
which a Holder submitted for exchange.
(b) No Other Obligation to Register Shares. Except as otherwise
expressly provided in this Agreement, the Company shall have no obligation to
a Holder to register the Registrable Shares under the Securities Act.
11. Holder Representations, Warranties and Agreements.
Each Holder, jointly and not severally, and solely on behalf of itself,
represents and warrants to, and agrees with, the Company, that:
(a) Such Holder, if not a natural person, is duly organized, validly
existing and in good standing under the laws of its jurisdiction of
organization. Such Holder has all requisite power and authority to execute,
deliver and perform this Agreement. All necessary proceedings of such Holder,
if not a natural person, have been duly taken to authorize the execution,
delivery, and performance of this Agreement by such Holder. This Agreement
has been duly executed and delivered by such Holder, and is the legal, valid
and binding obligation of such Holder, and is enforceable as to such Holder in
accordance with its terms. No consent, authorization, approval, order,
license, certificate or permit of or from, or declaration or filing with, any
federal, state, local or other governmental authority or any court or other
tribunal is required by such Holder for the execution, delivery or performance
of this Agreement (except filings under the Securities Act which will be made
and such consents consisting only of consents under Blue Sky or state
securities laws which will be obtained) by such Holder. No consent of any
party to any contract, agreement, instrument, lease, license, arrangement or
understanding to which such Holder is a party, or to which any of such
Holder's properties or assets are subject, is required for the execution,
delivery and performance of this Agreement which has not been obtained, and
the execution, delivery and performance of this Agreement will not violate,
result in a breach of, conflict with or (with or without giving of notice or
the passage of time or both) entitle any party to terminate or call a default
under any such contract, agreement, instrument, lease, license, arrangement or
understanding, or, if such Holder is not a natural person, violate or result
in a breach of, or conflict with, any law, rule, regulation, order, judgment
or decree binding on such Holder or to which any of such Holder's operations,
business, properties or assets are subject, which, in any of such events,
would prohibit, impair or restrict the ability of such Holder to
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<PAGE> 10
execute and deliver this Agreement, perform in accordance with the terms
hereof or consummate the transactions contemplated hereby, or would adversely
affect the rights or benefits, or both, hereunder of any other party hereto.
(b) Neither such Holder nor any of such Holder's affiliates (as defined
in the regulations under the Securities Act), will take, directly or
indirectly, during the term of this Agreement, any action designed to
stabilize (except as may be permitted by applicable law) or manipulate the
price of any security of the Company.
(c) Such Holder shall promptly furnish to the Company any and all
information as may be required by, or as may be necessary or advisable to
comply with the provisions of, the Securities Act, the Exchange Act, and the
rules and regulation of the SEC thereunder in connection with the preparation
and filing of any Registration Statement pursuant hereto, or any amendment or
supplement thereto, or any Preliminary Prospectus or Prospectus included
therein. All information to be furnished to the Company by or on behalf of
such Holder expressly for use in connection with the preparation of any
Preliminary Prospectus, the Prospectus, the Registration Statement, or any
amendment or supplement thereto, will not include any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading.
12. Underwritten Registration.
No Holder of Registrable Securities may participate in any underwritten
registration hereunder unless such Holder (i) executes and delivers the
underwriting agreement or similar documents relating thereto pursuant to which
such Holder shall agree to sell, upon the terms and subject to the conditions
therein set forth, such Holder's Registrable Securities on the basis provided
therein, and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, custodial or escrow agreements and such other documents
as may be necessary, advisable or required pursuant to the terms thereof or as
may be from time to time reasonably requested by the underwriter or
underwriters named therein, the Company, or their respective legal counsel, in
connection therewith.
In the event of any conflict between the indemnification and contribution
terms as herein set forth and as set forth in any underwriting agreement
entered pursuant hereto, the underwriting agreement shall control.
13. Survival of Representations and Agreements.
All representations, warranties, covenants and agreements contained in
this Agreement shall be deemed to be representations, warranties, covenants
and agreements at the effective date of each Registration Statement
contemplated by this Agreement, and such representations, warranties,
covenants and agreements, including the indemnity and contribution agreements
contained in Sections 8 and 9 hereof, shall remain operative and in full force
and effect regardless of any investigation made by or on behalf of the
Company, any Holder or any Person which is entitled to be indemnified under
Section 8 hereof, and shall survive termination of this Agreement.
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<PAGE> 11
14. Amendments and Waivers.
The provisions of this Agreement may not be amended, modified,
supplemented or waived without the prior written consent of the Company and
the Holders of Registrable Shares.
15. Notices.
Except as set forth below, all notices and other communications provided
for or permitted hereunder shall be in writing and shall be deemed to have
been duly given if delivered personally or sent by telex or telecopier,
registered or certified mail (return receipt requested), postage prepaid, or
courier or overnight delivery service to the respective parties at the
following addresses (or at such other address for any party as shall be
specified by like notice, provided that notices of a change of address shall
be effective only upon receipt thereof), and further provided that in case of
directions to amend the Registration Statement pursuant to Section 2(c), a
Holder must confirm such notice in writing by overnight express delivery with
confirmation of receipt:
If to the Company: Crescent Real Estate Equities, Inc.
c/o Crescent Real Estate Equities Limited
Partnership
777 Main Street
Suite 2700
Fort Worth, Texas 76102
Attn: Gerald W. Haddock, President
Telephone: (817) 878-0444
Telecopier: (817) 878-0429
with a copy to: Crescent Real Estate Equities, Inc.
c/o Crescent Real Estate Equities Limited Partnership
777 Main Street
Suite 2700
Fort Worth, Texas 76102
Attn: David M. Dean, Senior Vice President-Law
Telephone: (817) 878-0442
Telecopier: (817) 878-0429
If to CRI: Canyon Ranch, Inc.
Attn: Jerrold Cohen
8600 East Rockcliff Road
Tucson, Arizona 85750
Telephone:
Telecopier: (520) 749-0662
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<PAGE> 12
with a copy to: W. James Harrison, Esq.
W.J. Harrison & Associates, P.C.
3651 East Sunrise, Suite 201
Tucson, Arizona 85750
Telephone: (520) 529-3700
Telecopier: (520) 529-8977
In addition to the manner of notice permitted above, notices given
pursuant to Sections 2 and 6 hereof may be effected telephonically and
confirmed in writing thereafter in the manner described above.
16. Successors and Assigns.
This Agreement shall be binding upon the parties hereto and their
respective successors and assigns and shall inure to the benefit of the
parties hereto. This Agreement may not be assigned by any Holder, except for
an assignment (i) by CRI to any Person who succeeds to the rights of CRI
hereunder by instrument of merger, consolidation, or similar instrument, and
who executes this Agreement in connection therewith, (ii) by CRI of all or
any portion of its rights hereunder to any Person who is a beneficial owner of
the equity securities of CRI as of the date first above written, and who
executes this Agreement in connection with such assignment, (iii) by any
beneficial owner specified in clause (ii) of all or any portion of its rights
hereunder to one or more family members (which, for purposes hereof, shall
mean any spouse, child, or grandchild or, in the case of a trust, the grantor
or beneficial owner(s) thereof) of such beneficial owner who execute this
Agreement in connection with such assignment, (iv) by any Holder of all or any
portion of its rights hereunder to any Person by will or intestate succession
and who executes this Agreement in connection therewith, (v) by any Holder of
all or any portion of its rights hereunder to any other Holder, and (vi) by
any Holder of all or any portion of its rights hereunder to any person as part
of a charitable donation and who executes this Agreement in connection
therewith. Any attempted assignment hereof by any Holder to any Person other
than pursuant to this Section 16 will be void and of no effect and shall
terminate all obligations of the Company hereunder with respect to such
Holder. No Person shall be considered a Holder for purposes hereof unless and
until such Person shall have executed this Agreement, as the same may be
amended in accordance with the provisions hereof.
17. Counterparts.
This Agreement may be executed in any number of counterparts and by the
parties hereto in separate counterparts, each of which when so executed shall
be deemed to be an original and all of which taken together shall constitute
one and the same agreement.
18. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Maryland applicable to contracts made and to be performed
wholly within said State.
- 12 -
<PAGE> 13
19. Severability.
In the event that any one or more of the provisions contained herein, or
the application thereof in any circumstances, is held invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the
remaining provisions contained herein shall not be in any way impaired
thereby, it being intended that all of the rights and privileges of the
parties hereto shall be enforceable to the fullest extent permitted by law.
20. Entire Agreement.
This Agreement is intended by the parties as a final expression of their
agreement and intended to be the complete and exclusive statement of the
agreement and understanding of the parties hereto in respect of the subject
matter contained herein. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein, with respect
to such subject matter. This Agreement supersedes all prior agreements and
understandings (except the Operating Partnership Agreement, which is
incorporated by reference herein and hereby made a part of this Agreement)
between the parties with respect to such subject matter.
21. No Shareholder Liability.
No shareholder or other equity owner of the Company assumes any personal
liability for the obligations listed herein or for the Company's performance
of such obligations.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above.
CRESCENT REAL ESTATE EQUITIES, INC.
By: /s/ DAVID M. DEAN
-----------------------------------------
Name: David M. Dean
Title: Senior Vice President
CRESCENT REAL ESTATE EQUITIES
LIMITED PARTNERSHIP
By: CRESCENT REAL ESTATE EQUITIES,
LTD., its general partner
By: /s/ DAVID M. DEAN
-----------------------------------------
Name: David M. Dean
Title: Senior Vice President
- 13 -
<PAGE> 14
"CRI" OR "HOLDER"
CANYON RANCH, INC.
By: /s/ JERROLD COHEN
-----------------------------------------
Name: Jerrold Cohen
Title: President
- 14 -
<PAGE> 1
[SHAW, PITTMAN, POTTS & TROWBRIDGE LETTERHEAD]
September 27, 1996
Crescent Real Estate Equities, Inc.
900 Third Avenue, Suite 1800
New York, New York 10022
Ladies and Gentleman:
We have acted as counsel to Crescent Real Estate Equities, Inc., a
Maryland corporation (the "Company"), in connection with the registration of up
to 11,500,000 shares (including the underwriters' overallotment option, if
exercised) of its common stock, par value $0.01 per share (the "Shares"),
pursuant to a Registration Statement on Form S-3 (Registration No. 33-97794),
including the prospectus and all amendments, exhibits and documents related
thereto (collectively, the "Registration Statement"), under the Securities Act
of 1933, as amended, and with the proposed sale of the Shares to the public
through certain underwriters.
Based upon our examination of the originals or copies of such documents,
corporate records, certificates of officers of the Company and other instruments
as we have deemed necessary and upon the laws as presently in effect, we are of
the opinion that the Shares have been duly authorized for issuance by the
Company, and that upon issuance and delivery in accordance with the purchase
agreement and related terms agreement referred to in the Registration
Statement, the Shares will be validly issued, fully paid and nonassessable.
We hereby consent to the incorporation by reference of this opinion as
an exhibit to the Registration Statement. We also consent to the reference to
Shaw, Pittman, Potts & Trowbridge under the caption "Legal Matters" in the
prospectus.
Very truly yours,
/s/ SHAW, PITTMAN, POTTS & TROWBRIDGE
-------------------------------------
SHAW, PITTMAN, POTTS & TROWBRIDGE
<PAGE> 1
EXHIBIT 8.01
[SHAW, PITTMAN, POTTS & TROWBRIDGE LETTERHEAD]
September 27, 1996
Crescent Real Estate Equities, Inc.
900 Third Avenue
Suite 1800
New York, New York 10022
Ladies and Gentlemen:
On October 14, 1995, Crescent Real Estate Equities, Inc. ("Crescent
Equities") filed a Registration Statement on Form S-3, file number 33-97794,
with the Securities and Exchange Commission, which was declared effective on
June 18, 1996. Such registration statement (the "Registration Statement")
includes a prospectus supplement filed on September 30, 1996 (the "Prospectus
Supplement") to the prospectus contained in the Registration Statement
(the "Prospectus"). In connection with the filing of the Prospectus
Supplement, you have asked us to render certain opinions regarding the
application of the U.S. federal income tax laws to Crescent Equities,(1)
Crescent Real Estate Equities Limited Partnership (the "Operating Partnership")
and certain partnerships and limited liability companies in which the Operating
Partnership has an ownership interest (the "Subsidiary Partnerships"). The
Subsidiary Partnerships currently include Crescent Real Estate Funding I, L.P.
("Funding I"), Crescent Real Estate Funding II, L.P. ("Funding II"), Crescent
Real Estate Funding III, L.P. ("Funding III"), Crescent Real Estate Funding IV,
L.P. ("Funding IV"), Crescent Real Estate Funding V, L.P. ("Funding V"),
Waterside Commons Limited Partnership ("Waterside"), G/C Waterside Associates
LLC ("Associates"), Woodlands Office Equities - '95 Limited (the "Woodlands
Partnership"), 301 Congress Avenue, L.P ("301 Congress"), Crescent/301, L.L.C.
("Crescent/301") and Spectrum Mortgage Associates, L.P. ("SMA"). All
capitalized terms used but not otherwise defined herein shall have the
respective meanings given to them in the Prospectus Supplement, unless
otherwise noted.
- ----------------------------------
(1) Unless otherwise noted, all references to Crescent Equities herein
refer to Crescent Equities and its wholly owned subsidiaries,
Crescent Real Estate Equities, Ltd. ("CREE"), CRE Limited
Partner, Inc. ("CLP, Inc."), CRE Management I Corp., CRE Management II
Corp., CRE Management III Corp., CRE Management IV Corp. and CRE
Management V Corp.
<PAGE> 2
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 2
We have acted as tax counsel in connection with the preparation of the
Prospectus and the Prospectus Supplement. Specifically, you have requested
that we render opinions addressing the following:
1. Whether Crescent Equities qualified as a REIT under sections
856 through 860 of the Internal Revenue Code of 1986, as
amended (the "Code") with respect to its taxable years ending
on or before December 31, 1995, whether Crescent Equities is
organized in conformity the requirements for qualification as
a REIT, whether its manner of operation enabled it to meet the
requirements for qualification as a REIT as of the date of the
Prospectus Supplement, and whether Crescent Equities' proposed
manner of operation, as set forth in the Registration
Statement, will enable it to meet the requirements for
qualification as a REIT in the future;
2. Whether the Residential Development Properties will be treated
for federal income tax purposes as owned by the Residential
Development Corporations;(2)
3. Whether amounts derived by the Operating Partnership with
respect to the stock of the Residential Development
Corporations will be treated as distributions on stock (i.e.,
as dividends, a return of capital, or capital gain, depending
upon the circumstances) for purposes of the 75 percent and 95
percent gross income tests of section 856(c) of the Code;
4. Whether the Residential Development Property Mortgages
constitute debt for federal income tax purposes;(3)
5. Whether contingent interest derived by the Operating
Partnership from the Residential Development Corporations
under the terms of certain of the Residential Development
Property Mortgages will be treated as being based on a fixed
percentage of sales, and therefore all interest derived
therefrom will qualify as interest paid on mortgages on real
property for purposes of the 75 percent and 95 percent gross
income tests of section 856(c) of the Code;
- ----------------------------------
(2) For purposes of this letter, the term "Residential Development
Properties" will be deemed to include any assets of HBCLP, Inc.
("HBCLP"), unless otherwise noted, and the term "Residential
Development Corporations" will be deemed to include HBCLP, unless
otherwise noted.
(3) For purposes of this letter, the term "Residential Development
Property Mortgages" will be deemed to include the $25,000,000
line of credit secured by HBCLP, Inc.'s limited partner interest in
Hudson Bay Partners, L.P. (the "HBCLP Note"), unless otherwise noted.
<PAGE> 3
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 3
6. Whether the leases of the Hotel Properties will be treated as
leases for federal income tax purposes and whether the rent
payable thereunder will qualify as "rents from real property"
for purposes of the 75 percent and 95 percent gross income
tests of section 856(c) of the Code;
7. Whether Crescent Equities will be considered to own any of the
voting securities of the Residential Development Corporations
for purposes of section 856(c)(5)(B) of the Code;
8. Whether the Operating Partnership and each of the Subsidiary
Partnerships will be classified for federal income tax
purposes as partnerships and not as (a) associations taxable
as corporations or (b) publicly traded partnerships; and
9. Whether the material under the heading "Federal Income Tax
Considerations" in the Prospectus Supplement is accurate and
summarizes the material federal income tax considerations to a
prospective holder of Common Stock.
The opinions set forth herein are based upon the existing provisions
of the Code, Treasury Regulations, and the reported interpretations thereof by
the Internal Revenue Service ("IRS") and by the courts in effect as of the date
hereof, all of which are subject to change, both retroactively or
prospectively, and to possibly different interpretations. We assume no
obligation to update the opinions set forth in this letter. We believe that
the conclusions expressed herein, if challenged by the IRS, would be sustained
in court. However, because our opinions are not binding upon the IRS or the
courts, there can be no assurance that contrary positions may not be
successfully asserted by the IRS.
I. Documents and Representations
For the purpose of rendering these opinions, we have examined and
relied on originals, or copies certified or otherwise identified to our
satisfaction, of the following: (1) the First Amended and Restated Articles of
Incorporation of Crescent Real Estate Equities, Inc.; (2) the First Amended and
Restated Agreement of Limited Partnership of Crescent Real Estate Equities
Limited Partnership, as amended (the "Operating Partnership Agreement"); (3)
the First Amended and Restated Agreement of Limited Partnership of Crescent
Real Estate Funding I, L.P. (the "Funding I Agreement"); (4) the First Amended
and Restated Agreement of Limited Partnership of Crescent Real Estate Funding
II, L.P., as amended (the "Funding II Agreement"); (5) the Limited Partnership
Agreement of Waterside Commons Limited Partnership, as amended by the First
Amendment to the Limited Partnership Agreement of Waterside Commons Limited
Partnership, dated August 23, 1995 (the "Waterside Agreement"); (6) the
Articles of Organization
<PAGE> 4
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 4
of G/C Waterside Associates LLC (the "Associates Articles"); (7) the
Regulations of G/C Waterside Associates, LLC (the "Associates Regulations");
(8) the Amended and Restated Agreement of Limited Partnership of Woodlands
Office Equities - '95 Limited (the "Woodlands Partnership Agreement"); (9)
Limited Partnership Agreement of 301 Congress Avenue, L.P. (the "301 Congress
Partnership Agreement"), (10) the Limited Liability Company Agreement of
Crescent/301, L.L.C. (the "Crescent/301 Agreement"), (11) the Registration
Statement, as amended through the date hereof; (12) the Prospectus Supplement;
(13) copies of all existing leases (including amendments) entered into as of
the date hereof with respect to property owned or probably to be acquired by
the Operating Partnership or the Subsidiary Partnerships; (14) copies of the
Residential Development Property Mortgages; (15) the Agreement of Limited
Partnership of Crescent Real Estate Funding III, L.P. (the "Funding III
Agreement"), (16) the Agreement of Limited Partnership of Crescent Real Estate
Funding IV, L.P. (the "Funding IV Agreement"), (17) the Agreement of Limited
Partnership of Crescent Real Estate Funding V, L.P. (the "Funding V
Agreement"), (18) the Amended and Restated Agreement of Limited Partnership of
Spectrum Mortgage Associates, L.P. (the "SMA Agreement") and (19) such other
documents or information as we have deemed necessary for the opinions set forth
below. In our examination, we have assumed the genuineness of all signatures,
the legal capacity of natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies, and the
authenticity of the originals of such copies.
In addition, these opinions are conditioned upon certain
representations made by Crescent Equities and the Operating Partnership as to
factual and other matters as set forth in the attached letter and in the
discussion of "Federal Income Tax Considerations" in the Prospectus Supplement.
These opinions are also based on the assumptions that (i) the Operating
Partnership will be operated in accordance with the terms and provisions of the
Operating Partnership Agreement, (ii) each of the Subsidiary Partnerships will
be operated in accordance with the terms and provisions of its organizational
documents, (iii) Crescent Equities will be operated in accordance with the
terms and provisions of its First Amended and Restated Articles of
Incorporation, and (iv) the various elections, procedural steps, and other
actions by Crescent Equities or the Operating Partnership described in the
discussion of "Federal Income Tax Considerations" in the Prospectus Supplement
will be completed in a timely fashion or otherwise carried out as so described.
Unless facts material to the opinions expressed herein are
specifically stated to have been independently established or verified by us,
we have relied as to such facts solely upon the representations made by
Crescent Equities and the Operating Partnership. We are not, however, aware of
any facts or circumstances contrary to or inconsistent with the
representations. To the extent the representations are with respect to matters
set forth in the Code or Treasury
<PAGE> 5
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 5
Regulations, we have reviewed with the individuals making such representations
the relevant provisions of the Code, the Treasury Regulations and published
administrative interpretations.
II. Opinions
1. Qualification of Crescent Real Estate Equities, Inc. as a REIT
Based on the foregoing, it is our opinion that (i) Crescent Equities
qualified as a REIT under sections 856 through 860 of the Code with respect to
its taxable years ending on or before December 31, 1995, (ii) Crescent Equities
is organized in conformity with the requirements for qualification as a REIT
and its manner of operation has enabled it to meet the requirements for
qualification as a REIT as of the date of the Prospectus Supplement, and (iii)
Crescent Equities' proposed manner of operation will enable it to meet the
requirements for qualification as a REIT in the future.
2. Ownership of the Residential Development Properties and Treatment
of Amounts Derived by the Operating Partnership with Respect to the Stock of
the Residential Development Corporations
If the Residential Development Corporations are not respected for tax
purposes, then the Operating Partnership would be treated for tax purposes as
directly owning certain of the Residential Development Properties. In such a
case, the income from the sales of the Residential Development Properties
treated as directly owned by the Operating Partnership would not qualify under
the 75 percent and 95 percent gross income tests and would count as gain from
the sale of assets for purposes of the 30 percent of gross income limitation.
In addition, such income would be considered "net income from prohibited
transactions" and thus would be subject to a 100 percent tax. Moreover, to the
extent that the Operating Partnership would be treated as directly owning
HBCLP's limited partner interest in Hudson Bay Partners, L.P. ("HB Partners"),
the Operating Partnership would be treated as owning any securities held by HB
Partners, and such deemed ownership could cause Crescent Equities to be treated
as owning more than 10 percent of the voting securities of one or more issuers
in violation of section 856(c)(5)(B). However, as a general rule,
corporations, as long as they have a business purpose or carry on any business
activity, are not disregarded for federal income tax purposes. Moline
Properties, Inc. v. Commissioner, 319 U.S. 436, 438-439 (1943).
The Residential Development Corporations are not mere formalities
created for tax purposes. Crescent Equities and the Operating Partnership have
represented that each of the Residential Development Companies will have their
own employees (except HBCLP, which will have no employees), will act
independently in owning, developing, and selling the Residential
<PAGE> 6
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 6
Development Properties, and will not act as agents of the Operating Partnership
or Crescent Equities. Moreover, Mira Vista Development Corporation ("MVDC")
and Houston Area Development Corporation ("HADC") should shield the Operating
Partnership against any liabilities generated by their respective property
development businesses, while Crescent Development Management Corporation
("CDMC") and HBCLP should shield the Operating Partnership from any liabilities
generated by any future business conducted directly by CDMC and HBCLP,
respectively.
Therefore, it is our opinion that for federal income tax purposes the
Operating Partnership will not be treated as owning the Residential Development
Properties held directly by the Residential Development Corporations and,
consequently, all amounts derived by the Operating Partnership with respect to
the stock of the Residential Development Corporations will be characterized as
distributions on stock (i.e., as dividends, a return of capital, or capital
gain, depending on the circumstances) for purposes of the 75 percent and 95
percent gross income tests.
3. Characterization of the Residential Development Property Mortgages
as Debt and Treatment of Amounts Paid Pursuant to Residential Development
Property Mortgages
a. Characterization as Debt. Debt instruments, especially
instruments that are held by persons related to the debtor, may under certain
circumstances be characterized for income tax purposes as equity, rather than
as debt. The characterization of an instrument as debt or equity is a question
of fact to be determined from all surrounding facts and circumstances, no one
of which is conclusive. See Kingbay v. Commissioner, 46 T.C. 147 (1966);
Hambuechen v. Commissioner, 43 T.C. 90 (1964). Among the criteria that have
been found relevant in characterizing such instruments are: (1) the intent of
the parties, (2) the extent of participation in management by the holder of the
instrument, (3) the ability of the corporation to obtain funds from outside
sources, (4) the "thinness" of the capital structure in relation to debt, (5)
the risk involved, (6) the formal indicia of the arrangement, (7) the relative
position of the obligees as to other creditors regarding payment of interest
and principal, (8) the voting power of the holder of the instrument, (9) the
provision of a fixed rate of interest, (10) the contingency of the obligation
to repay, (11) the source of the interest payments, (12) the presence or
absence of a fixed maturity date, (13) a provision for redemption by the
corporation, (14) a provision for redemption at the option of the holder, and
(15) the timing of the advance with reference to the organization of the
corporation. Fin Hay Realty Co. v. United States, 398 F.2d 694 (3d Cir. 1968).
Although the Residential Development Property Mortgages are held by
the Operating Partnership, which owns all of the nonvoting stock of the
Residential Development Corporations, and an approximately 39 percent indirect
equity interest in Whitehawk Development Group, LLC,
<PAGE> 7
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 7
these mortgages possess a number of attributes weighing in favor of debt
treatment. For instance, each of the Residential Development Property
Mortgages is clearly denominated as debt, has a fixed term of seven or more
years (except the HBCLP Note which has a term of five years), provides for the
return of a fixed principal amount plus interest, and is secured by the
Residential Development Properties (or in the case of the CDMC Mortgage,
secured by an interest in a limited partnership which holds indirect interests
in several Residential Development Properties, or in the case of the HBCLP
Note, secured by HBCLP's interest in HB Partners). The interest on the
Residential Development Property Mortgages accrues at either a fixed rate or,
in the case of the Whitehawk Note, at the prime rate plus one percent per annum
(not including any additional interest based on gross sales proceeds). In
addition, the Residential Development Property Mortgages are not subordinated
to other indebtedness of the Residential Development Corporations. Crescent
Equities and the Operating Partnership have represented that at the time that
each of the Residential Development Property Mortgages were acquired by the
Operating Partnership, the outstanding principal amount of such mortgages did
not exceed 80 percent of the fair market value of the Residential Development
Properties (or in the case of the HBCLP Note, Crescent Equities and the
Operating Partnership have represented that at the time the HBCLP Note was
acquired by the Operating Partnership the maximum amount that could be drawn
under the line of credit under such note did not exceed 50 percent of the fair
market value of HBCLP's interest in HB Partners) and that the interest to be
charged, including any contingent interest, represents a commercially
reasonable rate of interest. In addition, based on our experience and an
examination of the Residential Development Property Mortgages, the interest
appears to represent a commercially reasonable rate of interest.
Based on the foregoing, it is our opinion that each of the Residential
Development Property Mortgages constitutes debt for federal income tax
purposes.
b. Treatment of Amounts Paid Pursuant to Residential
Development Property Mortgages. Section 856(f) of the Code defines "interest"
for the purposes of section 856(c)'s gross income tests to include contingent
interest that is based on a fixed percentage of any person's receipts or sales.
On the other hand, contingent interest provisions that are based on a specified
portion of the gain realized on the sale of the real property securing a
mortgage (or any gain which would be realized if such property were sold on a
specified date) may be characterized as "shared appreciation provisions" under
section 856(j) of the Code. If the properties underlying such a provision are
primarily held for sale to customers in the ordinary course, any income derived
from such a provision would be treated as income from prohibited transactions.
Such income would not satisfy the 75 percent and 95 percent gross income tests
and would be subject to a 100 percent tax on "net income from prohibited
transactions."
<PAGE> 8
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 8
Any contingent interest payable under the terms of the mortgage in the
principal amount of $14.4 million secured by the Mira Vista Residential
Development Property (the "Mira Vista Mortgage") will qualify as interest on an
obligation secured by a mortgage on real property, rather than income derived
from a shared appreciation provision, because such contingent interest will be
based on a percentage of the gross receipts derived from any sale of portions
of the Mira Vista Residential Development Property, as opposed to a portion of
the gain realized on such sales. Similarly, any contingent interest payable
under the terms of the mortgages in the aggregate principal amount of $14.4
million secured by the Falcon Point Residential Development Property and the
Spring Lakes Residential Development Property (the "Houston Area Mortgages")
will qualify as interest on obligations secured by mortgages on real property,
rather than income derived from shared appreciation provisions, because such
contingent interest will be based on a percentage of the gross receipts derived
from any sale of portions of the Falcon Point and the Spring Lakes Residential
Development Properties, as opposed to a portion of the gain realized on such
sales.
The fact that the contingent interest provided for by the Mira Vista
Mortgage and the Houston Area Mortgages is based on gross receipts, rather than
gain, could have economic significance with respect to the return received by a
holder of such mortgages. For example, if the value of the Falcon Point
Residential Development Property were to increase, but few lots were sold, the
Operating Partnership, as holder of the Houston Area Mortgages would not accrue
any contingent interest. On the other hand, the Operating Partnership would
accrue contingent interest if numerous lot sales were made at the Falcon Point
Residential Development Property, even if such sales were made at a loss.
Based on the foregoing, it is our opinion that any contingent interest
derived from the Mira Vista Mortgage and the Houston Area Mortgages will be
treated as being based on a fixed percentage of sales and therefore such
interest will constitute interest received from real estate mortgages for
purposes of the 75 percent and 95 percent gross income tests, and that,
consequently, all amounts derived by the Operating Partnership from the
Residential Development Corporations under the terms of the Residential
Development Property Mortgages (other than the HBCLP Note) will be
characterized as interest or principal, as the case may be, paid on mortgages
on real property for purposes of the 75 percent and 95 percent gross income
tests. It is our opinion that all amounts derived by the Operating Partnership
from the HBCLP Note will be characterized as interest or principal, as the case
may be for purposes of the 95 percent gross income test.
<PAGE> 9
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 9
4. Characterization of the Leases of the Hotel Properties and the
Treatment of Amounts Paid Pursuant To Such Leases as "Rents From Real Property"
On January 3, 1995, we provided the Operating Partnership with a
memorandum (a copy of which is attached hereto) in which we expressed our
opinion that, based on certain assumptions, that the lease of the Hyatt Regency
Beaver Creek would be treated as a lease for federal income tax purposes and
that the rent payable thereunder would qualify as "rents from real property."
On April 1, 1996, we provided the Operating Partnership with a letter (a copy
of which is attached hereto) in which we updated the facts relating to the
lease of the Hyatt Regency Beaver Creek as expressed in our January 3, 1995
memorandum and affirmed the opinions expressed in that memorandum.
On June 30, 1995, we provided the Operating Partnership with a
memorandum (a copy of which is attached hereto) in which we expressed our
opinion that, based on certain assumptions, that the lease of the Denver
Marriott City Center would be treated as a lease for federal income tax
purposes and that the rent payable thereunder would qualify as "rents from real
property." On September 27, 1996, we provided the Operating Partnership with a
letter (a copy of which is attached hereto) in which we affirmed the opinions
expressed in our June 30, 1995 memorandum.
On December 19, 1995, we provided the Operating Partnership with a
memorandum (a copy of which is attached hereto) in which we expressed our
opinion that, based on certain assumptions, that the lease of the Hyatt Regency
Albuquerque Plaza would be treated as a lease for federal income tax purposes
and that the rent payable thereunder would qualify as "rents from real
property." On April 1, 1996, we provided the Operating Partnership with a
letter (a copy of which is attached hereto) in which we updated the facts
relating to the lease of the Hyatt Regency Albuquerque Plaza as expressed in
our December 19, 1995 memorandum and affirmed the opinions expressed in that
memorandum.
On July 26, 1996, we provided the Operating Partnership with a
memorandum (a copy of which is attached hereto) in which we expressed our
opinion that, based on certain assumptions, that the lease of the Canyon Ranch
resort would be treated as a lease for federal income tax purposes and that the
rent payable thereunder would qualify as "rents from real property."
We hereby affirm the opinions expressed in our January 3, 1995, June
30, 1995, December 19, 1995 and July 26, 1996 memoranda, as updated by our
letters dated April 1, 1996 and September 27, 1996, and authorize you to rely
upon those opinions in connection with the preparation of the Registration
Statement.
<PAGE> 10
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 10
5. Ownership of Residential Development Company Voting Stock
Section 856(c)(5) restricts the types of assets that can be held by an
entity seeking to qualify as a REIT. Specifically, section 856(c)(5)(B)
provides that at the close of each quarter of the taxable year, a REIT must
hold no more than 10 percent of the outstanding voting securities of any one
issuer.
The term "voting securities" as used in section 856(c)(5)(B) is not
defined in the Code. However, section 856(c)(6)(F) provides that terms not
defined in sections 856 through 859 shall have the same meaning as when used in
the Investment Company Act of 1940, as amended (the "ICA"). The ICA defines
"voting security" as "any security presently entitling the owner or holder
thereof to vote for the election of directors of a company."(4)
The Internal Revenue Service (the "Service") has not issued any
revenue rulings discussing what constitutes "voting securities" for purposes of
section 856(c)(5)(B). However, the Service has issued one revenue ruling
discussing what constitutes "voting securities" for the purposes of section
851(b), which provides rules for qualification as a regulated investment
company (a "RIC"). (The RIC qualification provisions, like section
856(c)(5)(B), incorporate the definition of "voting securities" found in the
ICA.(5)) In Rev. Rul. 66-339,(6) the Service held that a shareholders' voting
agreement was not a voting security for purposes of section 851(b)(4). The
taxpayer in the ruling was a small business investment company which had made a
loan to a corporation. Under the terms of the loan agreement, a shareholders'
agreement was executed, which required the election of one director designated
by the taxpayer during the term of the loan and, thereafter, as long as the
taxpayer owned or had the right to acquire at least 10 percent of the
outstanding stock of the corporation. The Service held that the shareholders'
agreement was not a voting security because the enforceability the taxpayer's
rights under the agreement depended upon the taxpayer's status as a party to
the agreement, rather than as a shareholder.
However, the Service has not been entirely comfortable with Rev. Rul.
66-339. In G.C.M. 36823,(7) which dealt with the definition of "voting
securities" for purposes of the REIT provisions, the Service recommended that
Rev. Rul. 66-339 be modified to reflect the interpretation of the term "voting
security" as expressed in an opinion of the chief counsel of the
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(4) ICA Section 2(a)(42).
(5) Section 851(c)(5).
(6) 1966-2 C.B. 274.
(7) 1976 IRS GCM Lexis 114 (Aug. 24, 1976).
<PAGE> 11
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 11
Securities and Exchange Commission ("SEC"). This opinion held that "unless
there are compelling considerations to the contrary in a particular case, the
definition of 'voting security' in the ICA should generally be interpreted to
include not only the formal legal right to vote for the election of directors
pursuant to the provisions of the law of the state of incorporation and the
corporation's charter and by-laws but also the de facto power, based on all the
surrounding facts and circumstances, to determine, or influence the
determination of, the identity of a corporation's directors."(8) Despite this
recommendation of G.C.M. 36823, however, Rev. Rul. 66-339 has never been
modified and would therefore continue to constitute good authority.
Since the issuance of G.C.M. 36823, the Service has issued several
private rulings in which it has not treated a REIT as owning "voting
securities" of other corporations for purposes of section 856(c)(5)(B), despite
the fact that such securities were actually owned either by officers or
shareholders of the REIT.(9) In each of these rulings, the REIT either
directly or indirectly held substantial amounts of the other corporation's
nonvoting stock. None of these rulings makes any mention of either Rev. Rul.
66-339 or the de facto voting power issue raised by the Service in G.C.M.
36823.
Although private rulings like those mentioned above were issued by the
Service until June 8, 1994, the Service subsequently announced that, for the
indefinite future, it would no longer issue private letter rulings with regard
to fact situations involving corporations whose voting stock is held by
relatives of principal REIT shareholders and/or REIT employees. The Service
has not provided an explanation for this "no ruling" policy. Nonetheless, it
could indicate that the Service is reconsidering its position on the treatment
of fact situations similar to those involving Crescent Equities and the
Residential Development Corporations.
Crescent Equities does not directly or indirectly own any of the
voting stock of any of the Residential Development Corporations. In the case
of MVDC, the voting stock is owned by James Bartlett, Nick Hackstock, Tom
Nezworski, John C. Goff and Gerald W. Haddock (together, the "MVDC Voting
Shareholders"). In the case of HADC, the voting stock is owned by Sam Yager,
John C. Goff and Gerald W. Haddock (together, the "HADC Voting Shareholders").
In the case of CDMC, the voting stock is owned by Harry Frampton, John C. Goff
and Gerald W. Haddock (together, the "CDMC Voting Shareholders"). In the case
of HBCLP, such stock is owned by K-Holdings Co. and David Lesser (together, the
"HBCLP Voting Shareholders" and together with the MVDC Voting Shareholders, the
HADC Voting Shareholders and the CDMC Voting Shareholders, the "Voting
Shareholders"). Moreover, the
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(8) Id.
(9) P.L.R. 8825112 (Mar. 30, 1988); P.L.R. 9340056 (July 13, 1993); P.L.R.
9428033 (April 20, 1994); P.L.R. 9436025 (June 8, 1994).
<PAGE> 12
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Page 12
voting stock of the Residential Development Corporations owned by the Voting
Shareholders is registered in the names of such Voting Shareholders, and all
dividends accruing on stock are delivered to the addresses of such Voting
Shareholders. Therefore, unless Crescent Equities is deemed to own some of the
shares of voting stock of the Residential Development Corporations actually
held by the Voting Shareholders, it will not own more than 10 percent of the
voting securities of any of the Residential Development Corporations in
violation of section 856(c)(5)(B).
The Service could argue that the ownership of some or all of the
voting stock actually held by the Voting Shareholders should be attributed to
Crescent Equities under two possible theories: (1) a "nominee" or "de facto
ownership" theory or (2) a constructive ownership theory. However, there is no
authority indicating that the Service could successfully assert either of these
theories in a fact situation similar to that involving Crescent Equities and
the Residential Development Corporations. Therefore, it is our opinion that
Crescent Equities will not be deemed to be the owner of the voting stock of the
Residential Development Corporations held by the Voting Shareholders for
purposes of section 856(c)(5)(B). In connection with this opinion we note that
both John C. Goff and Gerald W. Haddock are presently officers and directors of
Crescent Equities and officers of some of Crescent Equities' subsidiaries,
while David H. Lesser was an employee of Crescent Equities prior to his
acquiring voting stock in HBCLP.
a. "Nominee" or "De Facto Ownership" Theory. Under a
"nominee" or "de facto ownership" theory, the Service could attribute ownership
of the Residential Development Company voting stock from the Voting
Shareholders to Crescent Equities for tax purposes, based on the "effective
control" that Crescent Equities exercises over the Voting Shareholders.
However, the Service has only applied a "nominee" or "de facto ownership"
theory in situations where there was a written or oral agreement transferring
"effective control" of the stock away from the record owner. No such agreement
exists between Crescent Equities and the Voting Shareholders.
For example, in G.C.M. 36823, discussed above, the Service based its
determination that a taxpayer was the "true owner" of another corporation's
voting stock for purposes of section 856(c)(5)(B) on the fact that the actual
owner of such stock had executed a written agreement giving the taxpayer a
proxy to vote the stock in a number of key situations. Under the agreement,
the taxpayer was given a proxy to vote all of the borrower's voting stock in
the event the borrower proposed (1) a merger or reorganization, (2) a
liquidation and dissolution, (3) any substantial change in business, (4) a sale
or disposition of all or substantially all of its assets, (5) any amendment to
the certificate of incorporation, (6) the organization of any significant
subsidiary, or (7) any substantial investment in any other corporation,
partnership, or joint venture. However, the proxy did not give the taxpayer
the right to vote for the borrower's
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Page 13
directors. Nonetheless, the Service concluded that the taxpayer should be
deemed to own the borrower's voting stock for purposes of section 856(c)(5)(B),
because the agreement with the actual owner of the borrower's voting stock
provided the taxpayer "with the type of control over directors' decisions that
is usually reserved to those having the power to elect directors, that is, the
owners of voting stock."(10)
In contrast, the Service has never attributed ownership of voting
securities to a taxpayer for purposes of section 856(c)(5)(B) in situations
where there was no agreement between the taxpayer and the actual owners of the
securities regarding how such securities were to be voted. For example, in a
series of private letter rulings issued after the issuance of G.C.M. 36823, the
Service ignored the "effective control" that taxpayers might exercise over
voting stock in situations where such stock was held by the taxpayer's officers
and shareholders.(11)
Similarly, outside the context of section 856(c)(5)(B), the Service
has treated the actual owners of corporate stock as mere nominees only in
situations where there was a written or oral agreement that provided another
party with effective control over such stock. For example, in Rev. Rul.
84-79,(12) the Service found that the grantor and sole beneficiary of a
revocable voting trust "directly" owned stock for purposes of section 1504(a),
despite the fact that it had transferred the stock to the voting trust. The
Service reached this conclusion because the voting trust agreement effectively
allowed the grantor to retain control over the stock, permitting it to revoke
the trust or replace the trustee without cause at any time.(13) In contrast,
the Service has not found that corporations retained effective control of stock
for purposes of section 1504(a)(4) in situations where they transferred such
stock to their shareholders, in the absence of a voting trust agreement.(14)
The Service has also refused to treat purchasers of corporate stock as
mere nominees when applying the "solely for voting stock" requirement for
section 368(a)(1)(B) reorganizations. For example, in Rev. Rul. 68-562,(15)
the Service found that an acquisition of all the stock of one corporation ("Y")
by another corporation ("X"), in exchange for X corporation voting stock
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(10) G.C.M. 36823; 1976 IRS GCM Lexis 114.
(11) See footnote 7 supra.
(12) 1984-1 C.B., 190.
(13) See also, Rev. Rul. 70-469, 1970-2 C.B. 179; Miami National Bank v.
Commissioner, 67 T.C. 793 (1977).
(14) See, e.g., T.A.M. 9206005 (Oct. 24, 1991); T.A.M. 9137003 (May 20,
1991).
(15) 1968-2 C.B. 157.
<PAGE> 14
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Page 14
qualified as a section 368(a)(1)(B) reorganization. The Service reached this
conclusion despite the fact that an individual who owned 90 percent of X's
voting stock had purchased 50 percent of Y's stock for cash two months before
the such acquisition. The Service did not attribute this purchase of Y stock
to X, because the actual purchaser, even though he was X's principal
shareholder, was under no obligation to surrender such stock to X.(16) In
contrast, the Service has attributed third-party purchases of corporate stock
to the acquiring party in a 368(a)(1)(B) reorganization in situations where a
third-party purchaser had previously agreed to transfer the purchased stock to
the acquiring party.(17)
Moreover, under the three-factor test for nominee status set forth by
the Supreme Court in Commissioner v. Bollinger, none of the Voting Shareholders
qualifies as a nominee of Crescent with respect to the Residential Development
Corporation voting stock.(18) Bollinger involved partnerships that developed
apartment complexes in Kentucky. In order to avoid Kentucky's usury laws,
which limited the annual interest rate for noncorporate borrowers, the
partnerships entered into agreements with a corporation wholly owned by an
individual that was a partner in each of the partnerships. Pursuant to the
agreements, the corporation was to hold title to the apartment complexes as the
partnerships' nominee and agent solely to secure financing. The agreements
also provided that the partnerships were to have sole control of and
responsibility for the complexes, and the partnerships were to be the principal
and owner of the property during financing, construction, and operation. All
parties who had contact with the complexes, if they were aware of the
corporation at all, regarded the partnerships as the owners and knew the
corporation was merely the partnerships' agent. Income and losses from the
complexes were reported on the partnerships' tax returns, and the partners each
reported their distributive share of such income and losses on their individual
returns. The Service challenged the inclusion of the complexes' losses on the
partners' individual returns on the ground that the losses were attributable to
the corporation as the record owner of the complexes. The Service argued that
in order for the partners to demonstrate that the corporation was acting merely
as an agent or nominee, they must give evidence of arms-length dealing between
the partnerships and the corporation and the payment of an agency fee.
However, the Supreme Court held that only three factors needed to be present to
assure the genuineness of an agency relationship: (1) the corporation must
execute a written agreement at the time the asset is acquired setting forth the
corporation's agency with respect to the asset, (2) the corporation must
function as an agent and
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(16) Id. See also, Rev. Rul. 72-354, 1972-2 C.B. 216 (Acquiring
corporation satisfied "solely for voting stock" requirement for
a section 368(a)(1)(B) reorganization when it sold stock in the target
corporation that it had recently purchased for cash to a third party
with no commitment on the part of the third party to surrender such
stock in subsequent reorganization).
(17) See, e.g., G.C.M. 36041, 1974 IRS GCM Lexis 73.
(18) 485 U.S. 340 (1988).
<PAGE> 15
Crescent Real Estate Equities, Inc.
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Page 15
not as a principal with respect to the asset for all purposes, and (3) the
corporation must be held out to be an agent and not a principal in all dealings
with third parties relating to the asset.(19)
Although Bollinger expressly dealt with situations where corporations
were acting as nominees for their shareholders, its three-factor test appears
to be relevant in determining the genuineness of all purported agency
relationships for federal income tax purposes. Therefore, if the Service were
to assert that the Voting Shareholders are holding the voting stock of the
Residential Development Corporations as mere nominees of Crescent Equities,
Bollinger's three-factor test should apply in evaluating the relationship
between Crescent Equities and the Voting Shareholders.
When Bollinger's three-factor test is applied to Crescent Equities'
relationship to the Voting Shareholders, it becomes apparent that the Voting
Shareholders are not acting as Crescent Equities' nominees with respect to
their ownership of the voting stock of the Residential Development
Corporations. First, in contrast to the situation in Bollinger, where there
was a written agreement between the corporation and the partnerships setting
forth the corporation's rights and duties as agent, here there is and will be
no written (or oral) agreement between Crescent and the Voting Shareholders
regarding the Voting Shareholders' rights and duties with respect to the voting
stock of the Residential Development Corporations. Crescent Equities has no
control over the ability of the Voting Shareholders to alienate the voting
stock and vote such stock as they choose. Second, unlike the situation in
Bollinger, where the corporation functioned as an agent rather than a principal
with respect to the apartment complexes, here the Voting Shareholders function
as principals with respect to the voting stock. As noted above, the Voting
Shareholders make their own decisions about alienating the voting stock and how
to exercise their voting power, and they are independently obligated to make
their shares of any additional capital contributions. Third, unlike the
situation in Bollinger, where the corporation was clearly held out to all third
parties as a mere agent of the partnerships, here the Voting Shareholders have
been and will be held out to third parties as the true owners of the voting
stock in all respects. For example, the voting stock is registered in the name
of the Voting Shareholders, and all corporate notices and dividends (if any)
are delivered to the addresses of the Voting Shareholders.
b. Constructive Ownership Theory. Under a "constructive
ownership theory," the Service could attempt to attribute ownership of the
voting stock of the Residential Development Corporations from the Voting
Shareholders to Crescent Equities for purposes of applying section
856(c)(5)(B). However, the absence of any relevant constructive ownership
provision should defeat such a position.
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(19) Id.
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Crescent Real Estate Equities, Inc.
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Although the Code contains several constructive ownership
provisions,(20) section 318(a) is the only one that could possibly operate to
attribute ownership of the voting stock of the Residential Development
Corporations from the Voting Shareholders to Crescent. This is because section
318(a) is the only constructive ownership provision that provides for
attribution of stock ownership to corporations. All of the other constructive
ownership provisions provide only for attribution of stock ownership away from
corporations.
The Service should not be successful in attributing ownership of the
voting stock of the Residential Development Corporations to Crescent Equities
under section 318(a), because that section applies only to other Code sections
that expressly provide for its application. There is no indication anywhere in
the Code or Treasury regulations that taxpayers are to apply the constructive
ownership rules of section 318(a) in determining ownership of voting securities
for purposes of section 856(c)(5)(B).
Furthermore, the Service and the courts have rejected all attempts to
apply section 318(a) to Code sections other than those to which it is expressly
made applicable. Thus, for example, in Brams v. Commissioner,(21) the Sixth
Circuit affirmed a decision of the Tax Court holding that a transfer of
property by a taxpayer to a corporation did not qualify for nonrecognition
treatment under section 351. Section 351 offers nonrecognition treatment to
persons who transfer property to corporations in exchange for stock, only if
such persons are in control of the corporation immediately after the exchange.
Section 368(c) defines "control" for this purpose as ownership of 80 percent of
the total combined voting power of all classes of stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of stock.
In Brams, the Sixth Circuit determined that the taxpayer directly owned only
31.6 percent of the outstanding stock of the corporation immediately after the
transaction, and it refused to apply section 318(a) to attribute to the
taxpayer the ownership of an additional 52.6 percent of the outstanding stock
of the corporation held by the taxpayer's sons.(22)
Similarly, the Service has refused to apply any attribution rules in
interpreting "control" for the purposes of interpreting the reorganization
provisions of section 368. For example, in Rev. Rul. 56-613, the Service did
not treat a corporation as satisfying the control requirement of section
368(a)(1)(B) of the Code when it acquired 100 percent of one class of shares of
a target
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(20) See, e.g., Sections 267(c), 318(a), 544(a), 554(a) and 1563(e).
(21) 734 F.2d 290 (6 Cir. 1984).
(22) Id. See also Yamamoto v. Commissioner, 51 T.C.M. 1560 (1986) (Section
351 does not apply to a transfer where the taxpayer owned part
of the transferee's stock directly and owned 100% of the stock of
a second corporation which owned the balance of the transferee
corporation's stock).
<PAGE> 17
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 17
corporation, despite the fact that all the other shares of the target
corporation were owned by the acquiring corporation's wholly owned
subsidiary.(23)
Moreover, even if section 318(a) of the Code were applicable to the
determination of ownership of voting securities for purposes of section
856(c)(5)(B), it would not operate to attribute ownership of the voting stock
of the Residential Development Corporations from the Voting Shareholders to
Crescent Equities. Section 318(a)(3)(C) provides that stock ownership is to be
attributed from a shareholder to a corporation only if the shareholder owns,
directly or indirectly, 50 percent or more of the value of the stock of such
corporation. Crescent Equities' charter currently contains limitations on
stock ownership that will prevent any shareholder, other than Richard E.
Rainwater, from owning, actually or constructively, more than 8.0 percent of
the value of Crescent Equities common stock. Crescent Equities' charter also
prevents Richard E. Rainwater from owning, actually or constructively, more
than 17.9 percent of the value of Crescent Equities' common stock. Therefore,
unless these ownership limitations are waived, no person can possibly own,
actually or constructively, the 50 percent of the value Crescent Equities'
common stock required for the application of section 318(a)(3)(C).
Consequently, it is our opinion that Crescent Equities will not be treated for
federal income tax purposes as owning any of the voting stock of any of the
Residential Development Corporations.
6. Characterization of the Operating Partnership for U.S. Federal
Income Tax Purposes
a. In General. Section 301.7701-2(a) of the Treasury
Regulations provides that an entity which has associates and an objective to
carry on a business for joint profit will be treated as a partnership, and not
as an association taxable as a corporation, if it has not more than two of the
following four characteristics of a corporation: (i) continuity of life; (ii)
centralization of management; (iii) limited liability; and (iv) free
transferability of interests. The entity must also have no other
characteristics which are significant in determining its classification.
Generally, other factors are considered only insofar as they relate to the
determination of the presence or absence of the foregoing corporate
characteristics. See Rev. Rul. 79-106, 1979-1 C.B. 448.
The IRS has issued Rev. Proc. 89-12, 1989-1 C.B. 798, which specifies
the conditions which must be satisfied for an entity to receive a favorable
advanced ruling that it will be classified as a partnership for federal income
tax purposes. The Operating Partnership may not meet all of the requirements
necessary to obtain such a ruling. However, such requirements are applicable
only in determining whether rulings will be issued and are not intended as
substantive rules for the determination of partnership status.
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(23) Rev. Rul. 56-613, 1956-2 C.B. 212. See also Berghash v. Commissioner,
43 T.C. 743 (1965), aff'd, 361 F.2d 257 (2d Cir. 1966) (the
option attribution rules of section 318(a) do not apply in determining
whether the control requirement of section 368(a)(1)(D) is satisfied);
Rev. Rul. 76-36, 1976-1 C.B. 105 (section 318(a) has no application in
determining "changes in ownership" under pre-1987 section 382).
<PAGE> 18
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Page 18
b. Limited Liability. Under section 301.7701-2(d) of the
Treasury Regulations, an entity lacks the corporate characteristic of limited
liability if there is at least one member who is personally liable for the
debts of or claims against the partnership. In the case of a limited
partnership, a general partner of a limited partnership is personally liable
under the Treasury Regulations if (i) it has substantial assets other than its
interest in the partnership or (ii) it is not a dummy acting as the agent of
the limited partners. As general partner of the Operating Partnership,
Crescent Real Estate Equities, Ltd. ("CREE") is personally liable for all the
debts and obligations of the Operating Partnership and owns a general
partnership interest therein of approximately one percent. However, section
856(i) of the Code provides that qualified REIT subsidiaries are treated as the
same entity as their REIT parent for federal income tax purposes. Therefore,
Crescent Equities will be treated as directly owning CREE's one percent general
partnership interest in the Operating Partnership. Crescent Equities will
also be treated as directly owning a 82 percent limited partnership interest in
the Operating Partnership through its interest in CRE Limited Partner, Inc.
("CLP, Inc."). Furthermore, Crescent Equities and the Operating Partnership
have represented that CREE will act independently of the Operating
Partnership's limited partners other than CLP, Inc. Therefore, the Operating
Partnership may lack the corporate characteristic of limited liability.
c. Continuity of Life. Section 301.7701-2(b) of the Treasury
Regulations provides that if the bankruptcy, retirement, resignation,
expulsion, or other event of withdrawal of a general partner of a limited
partnership causes a dissolution of the partnership, continuity of life does
not exist, even if dissolution may be avoided by the remaining general partners
or by at least a majority in interest of all remaining partners agreeing to
continue the partnership. Under Section 13.1.B of the Operating Partnership
Agreement, the withdrawal of CREE. and the bankruptcy of Crescent Equities
cause the Operating Partnership to terminate, unless a majority in interest of
the remaining partners consent to continue the Partnership and appoint a new
general partner. Accordingly, the Operating Partnership will lack the
corporate characteristic of continuity of life.
d. Centralization of Management. Section 301.7701-2(c)(4) of
the Treasury Regulations provides that centralization of management ordinarily
will be found to exist in a limited partnership in which substantially all of
the partnership interests are held by the limited partners, and that it may
exist where the limited partners have a substantially unrestricted right to
remove the general partner. As noted above, under section 856(i) of the Code,
Crescent Equities will be treated as owning a one percent general partner
interest and an approximately 80 percent limited partnership interest in the
Operating Partnership. Furthermore, Section 7.1.A of the Operating Partnership
Agreement provides that the limited partners may not remove CREE as general
partner. Therefore, the Operating Partnership will lack the corporate
characteristic of centralization of management.
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Crescent Real Estate Equities, Inc.
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Page 19
e. Free Transferability of Interests. Section 301.7701-2(e)
of the Treasury Regulations provides that free transferability of interests
exists if the members owning all or substantially all of the interests in an
organization may substitute for themselves without the consent of the other
members a person who is not a member of the organization. Section 11.4.A of
the Operating Partnership Agreement provides that if a limited partner other
than CLP, Inc. transfers its interest in the Operating Partnership, the
transferee (unless it falls within certain enumerated categories of
transferees) will not become a substituted limited partner without the prior
consent of CREE. Accordingly, the Operating Partnership may lack the corporate
characteristic of free transferability of interests.
f. Summary. In sum, the Operating Partnership lacks
continuity of life and centralization of management and may lack limited
liability and free transferability. Based on the foregoing, it is our opinion
that the Operating Partnership will be treated as a partnership as defined in
sections 7701(a)(2) and 761(a) of the Code and not as an association taxable as
a corporation.
g. Publicly Traded Partnerships. Section 7704 of the Code
provides that certain publicly traded partnerships may be taxed as regular
corporations even though they otherwise meet all of the relevant tests for
treatment as a partnership for federal income tax purposes. A partnership is
considered to be a publicly traded partnership if interests in the partnership
are (or become) (i) traded on an established securities market or (ii) readily
tradable on a secondary market or the substantial equivalent thereof. In
Notice 88-75, 1988-2 C.B. 386, the IRS provided guidance as to the meaning of
"readily tradable on a secondary market or the substantial equivalent thereof."
Notice 88-75 states that interests in a partnership issued in a private
placement will not be treated as readily tradable on a secondary market or the
substantial equivalent thereof if all interests in the partnership were issued
in a transaction that was not registered under the Securities Act of 1933 and
either (i) the partnership does not have more than 500 partners or (ii)
interests in the partnership may not be sold in units whose initial offering
price would not have been at least $20,000.
On December 4, 1995, final regulations under section 7704(b) were
published in the Federal Register that modify the exclusion set forth in Notice
88-75 for partnership interests issued in a private placement. The relevant
modifications are as follows. First, under section 1.7704-1(h)(1)(ii) of the
Treasury Regulations, the exclusion will not apply if a partnership has more
than 100 partners at any time during the taxable year. Second, under section
1.7704-1(h)(3) of the Treasury Regulations, for purposes of determining whether
a partnership satisfies the 100 partner requirement, persons owning interests
in the partnership (the "lower-tier partnership") through another partnership,
an S corporation or a grantor trust (a "flow-through entity") will be treated
as partners in the lower-tier partnership if (i) substantially all the value of
the flow-through
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Crescent Real Estate Equities, Inc.
September 27, 1996
Page 20
entity is attributable to the lower-tier partnership, and (ii) a principal
purpose for the tiered arrangement is to permit the partnership to satisfy the
100 partner requirement. For partnerships that were actively engaging in an
activity before December 4, 1995 the final regulations will be effective for
taxable years beginning after December 31, 2005 (or such earlier date when the
partnership adds a substantial new line of business). Until such date, the
provisions of Notice 88-75 will continue to apply.
Based upon the structure and capitalization of the Operating
Partnership, representations of the Operating Partnership regarding its current
ownership, and Section 11.4.A of the Operating Partnership Agreement which
provides that if a limited partner other than CLP, Inc. transfers its interest
in the Operating Partnership, the transferee (unless it falls within certain
enumerated categories of transferees) will not become a substituted limited
partner without the prior consent of CREE, it is our opinion that the Operating
Partnership will qualify for the "private placement" exclusion contained in
Notice 88-75, and as a result, will not constitute a publicly traded
partnership for purposes of section 7704 for taxable years beginning before
January 1, 2006.
Moreover, based upon the structure and capitalization of the Operating
Partnership, representations of the Operating Partnership regarding its current
ownership, and Section 11.4.A of the Operating Partnership Agreement cited
above, it is our opinion that the Operating Partnership qualifies for the
"private placement" exclusion contained in section 1.7704-1(h) of the Treasury
Regulations, and as a result, the Operating Partnership will not constitute a
publicly traded partnership for purposes of section 7704 for taxable years
beginning after December 31, 2005.
7. Characterization of the Subsidiary Partnerships for U.S. Federal
Income Tax Purposes
a. Funding I. The Operating Partnership owns a 99.6 percent
interest in Funding I as a limited partner, while the remaining 0.4 percent
general partner's interest is owned by CRE Management I Corp., a wholly owned
subsidiary of CREE. (However, with respect to the Waterside Commons property,
which is held by Funding I, Waterside Commons Limited Partnership owns a 99
percent interest in Funding I as a limited partner, while the remaining 1
percent general partner's interest is owned by CRE Management I Corp.)
The Funding I Agreement provides in Sections 13.1.B and 13.1.D that
the dissolution, insolvency, bankruptcy or other event of withdrawal of the
general partner will cause the partnership to terminate, unless a majority in
interest of the remaining partners consent to continue the partnership and
appoint a new general partner. Accordingly, Funding I will lack the corporate
characteristic of continuity of life.
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Crescent Real Estate Equities, Inc.
September 27, 1996
Page 21
In addition, the Funding I Agreement provides in Section 11.1.B that
no partner may transfer all or any portion of its interest in the partnership.
Accordingly, Funding I will lack the corporate characteristic of free
transferability of interests.
Based on the continued organization and operation of Funding I in
accordance with its partnership agreement and the Delaware Revised Uniform
Limited Partnership Act (the "Act"), Funding I will lack the corporate
characteristics of continuity of life and free transferability of interests.
Accordingly, it is our opinion that Funding I will be treated as a partnership
as defined in sections 7701(a)(2) and 761(e) of the Code and not as an
association taxable as a corporation.
In addition, based upon the structure and capitalization of Funding I,
its current ownership, and Section 11.1.B of the Funding I Agreement which
provides that no partner may transfer all or any portion of its interest in
Funding I, it is our opinion that Funding I qualifies for (a) the "private
placement" exclusion contained in Notice 88-75 and (b) the "private placement"
exclusion contained in section 1.7704-1(h) of the Treasury Regulations.(24) As
a result, it is our opinion that Funding I will not constitute a publicly
traded partnership for purposes of section 7704.
b. Funding II. The Operating Partnership owns a 99.8 percent
interest in Funding II as a limited partner, while the remaining 0.2 percent
general partner's interest is owned by CRE Management II Corp., a wholly owned
subsidiary of CREE.
The Funding II Agreement provides in Sections 13.1.B and 13.1.D that
the dissolution, insolvency, bankruptcy or other event of withdrawal of the
general partner will cause Funding II to terminate, unless a majority in
interest of the remaining partners consent to continue the partnership and
appoint a new general partner. Accordingly, Funding II will lack the corporate
characteristic of continuity of life.
In addition, the Funding II Agreement provides in Section 11.1.B that
no partner may transfer all or any portion of its interest in the partnership.
Accordingly, Funding II will lack the corporate characteristic of free
transferability of interests.
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(24) For purposes of this opinion, we have assumed that Funding I will not
be treated as having more than four partners (CRE Management I,
Corp., the Operating Partnership, Gerald Haddock and CW #1 Limited
Partnership) for purposes of section 1.7704-1(h) of the Treasury
Regulations. Although the Operating Partnership and CW #1 Limited
Partnership are flow-through entities for purposes of section
1.7704-1(h)(3), we have assumed that the partners in the Operating
Partnership and CW #1 Limited Partnership will not be treated as
partners in Funding I for purposes of the 100 partner requirement,
based upon your representation that Funding I will not represent
substantially all of the assets of either the Operating Partnership or
CW #1 Limited Partnership.
<PAGE> 22
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 22
Based on the continued organization and operation of Funding II in
accordance with its partnership agreement and the Act, Funding II will lack the
corporate characteristics of continuity of life and free transferability of
interests. Accordingly, it is our opinion that Funding II will be treated as a
partnership as defined in sections 7701(a)(2) and 761(e) of the Code and not as
an association taxable as a corporation.
In addition, based upon the structure and capitalization of Funding
II, its current ownership, and Section 11.1.B of the Funding II Agreement which
provides that no partner may transfer all or any portion of its interest in
Funding II, it is our opinion that Funding II qualifies for (a) the "private
placement" exclusion contained in Notice 88-75 and (b) the "private placement"
exclusion contained in section 1.7704-1(h) of the Treasury Regulations.(25) As
a result, it is our opinion that Funding II will not constitute a publicly
traded partnership for purposes of section 7704.
c. Funding III, Funding IV and Funding V. The Operating
Partnership owns a 99 percent interest in each of Funding III, Funding IV and
Funding V as a limited partner. The remaining 1 percent general partner's
interest in Funding III is owned by CRE Management III Corp., CRE Management IV
Corp. owns a 1 percent general partner interest in Funding IV, and CRE
Management V Corp. owns a 1 percent general partner interest in Funding V. CRE
Management III Corp., CRE Management IV Corp. and CRE Management V Corp. are
each wholly owned subsidiaries of CREE. The Funding III Agreement, the
Funding IV Agreement and the Funding V Agreement (together, the "Funding
Agreements") are substantially identical with respect to the terms discussed
herein.
Each of the Funding Agreements provides in Paragraph 18 that the
partnership shall dissolve and be wound up upon the occurrence of any of the
following events: (i) the expiration of the term of the partnership on December
31, 2096 (unless terminated earlier); (ii) the sale or disposition of
substantially all of the assets of the partnership; (iii) the written election
of all of the partners to dissolve the partnership; and (iv) unless, the
limited partner elects within ninety days to continue the partnership, upon the
dissolution of the general partner or if the general partner (a) makes a
general assignment for the benefit of creditors, (b) is adjudicated bankrupt or
insolvent, or (c) files a voluntary petition in bankruptcy or in the event
there is an order for relief entered against the general partner under the
Federal Bankruptcy Code of 1978, as amended (or a similar
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(25) For purposes of this opinion, we have assumed that Funding II will
not be treated as having more than two partners (CRE Management II,
Corp. and the Operating Partnership) for purposes of section
1.7704-1(h) of the Treasury Regulations. Although the Operating
Partnership is a flow-through entity for purposes of section
1.7704-1(h)(3), we have assumed that the partners in the Operating
Partnership will not be treated as partners in Funding II for purposes
of the 100 partner requirement, based upon your representation that
Funding II will not represent substantially all of the assets of the
Operating Partnership.
<PAGE> 23
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 23
order under a successor statute). Accordingly, Funding III, Funding IV and
Funding V will each lack the corporate characteristic of continuity of life.
In addition, each of the Funding Agreements provides in Paragraph 14
that no partner may transfer all or any portion of its interest in the
partnership and that any purported transfer of a partnership interest will be
null and void. Accordingly, Funding III, Funding IV and Funding V will each
lack the corporate characteristic of free transferability of interests.
Based on the continued organization and operation of each of Funding
III, Funding IV and Funding V in accordance with its partnership agreement and
the Act, Funding III, Funding IV and Funding V will each lack the corporate
characteristics of continuity of life and free transferability of interests.
Accordingly, it is our opinion that Funding III, Funding IV and Funding V will
each be treated as a partnership as defined in sections 7701(a)(2) and 761(e)
of the Code and not as an association taxable as a corporation.
In addition, based upon the structure and capitalization of each of
Funding III, Funding IV and Funding V, the current ownership of Funding III,
Funding IV and Funding V, and Section 14 of each of the Funding Agreements,
which provides that no partner may transfer all or any portion of its interest
in the partnership, it is our opinion that each of Funding III, Funding IV, and
Funding V qualifies for (a) the "private placement" exclusion contained in
Notice 88-75 and (b) the "private placement" exclusion contained in section
1.7704-1(h) of the Treasury Regulations.(26) As a result, it is our opinion
that Funding III, Funding IV and Funding V will not constitute publicly traded
partnerships for purposes of section 7704.
d. Waterside. The Operating Partnership owns an 89 percent
interest in Waterside as a general partner, while the remaining 11 percent
limited partner's interest is owned by Associates (1 percent) and CW #1 Limited
Partnership (10 percent).
The Waterside Agreement provides in Section 7.1(c) that the bankruptcy
or other event of withdrawal of the general partner will cause the partnership
to terminate. Accordingly, Waterside will lack the corporate characteristic of
continuity of life.
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(26) For purposes of this opinion, we have assumed that each of Funding
III, Funding IV and Funding V will be treated as having no more than
two partners for purposes of section 1.7704-1(h) of the
Treasury Regulations. Although the Operating Partnership is a
flow-through entity for purposes of section 1.7704-1(h)(3), we have
assumed that the partners in the Operating Partnership will not be
treated as partners in Funding III, Funding IV or Funding V for
purposes of the 100 partner requirement, based upon your
representation that neither Funding III, Funding IV nor Funding V will
represent substantially all of the assets of the Operating
Partnership.
<PAGE> 24
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 24
As the general partner of Waterside, the Operating Partnership will be
personally liable for all the debts and obligations of Waterside and, as noted
above, the Operating Partnership will own an 89 percent interest in Waterside.
In addition, the Operating Partnership has represented that it will act
independently of CW #1 Limited Partnership in managing Waterside. Therefore,
Waterside will lack the corporate characteristics of limited liability and
centralization of management.
Based on the continued organization and operation of Waterside in
accordance with its partnership agreement and the Act, Waterside will lack the
corporate characteristics of continuity of life, limited liability and
centralization of management. Accordingly, it is our opinion that Waterside
will be treated as partnerships as defined in sections 7701(a)(2) and 761(e)
and not as an association taxable as a corporation.
In addition, based upon the structure and capitalization of Waterside,
its current ownership, and Article 6.1 of the Waterside Agreement prohibiting
all transfers of interests in Waterside by its limited partners without the
consent of the general partner, it is our opinion that Waterside qualifies for
(a) the "private placement" exclusion contained in Notice 88-75 and (b) the
"private placement" exclusion contained in section 1.7704-1(h) of the Treasury
Regulations.(27) As a result, it is our opinion that Funding II will not
constitute a publicly traded partnership for purposes of section 7704.
e. Associates. The Operating Partnership owns a 90 percent
interest in Associates, while the remaining 10 percent interest is owned by
CREE, Ltd.. The IRS has applied the same four-factor test, described above, in
determining whether limited liability companies, like Associates, which have
been formed under the Texas Limited Liability Company Act, are treated as
partnerships for federal income tax purposes.(28)
The IRS has issued Rev. Proc. 95-10, 1995-3 I.R.B. 20, which specifies
conditions which must be satisfied for a limited liability company to receive a
favorable advanced ruling that it will be classified as a partnership for
federal income tax purposes. Associates should satisfy these
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(27) For purposes of this opinion, we have assumed that Waterside will not
be treated as having more than three partners (CW #1 Limited
Partnership, CREE, Ltd. and the Operating Partnership) for purposes of
section 1.7704-1(h) of the Treasury Regulations. Although the
Operating Partnership and CW #1 Limited Partnership are flow-through
entities for purposes of section 1.7704-1(h)(3), we have assumed that
the partners in the Operating Partnership and CW #1 Limited
Partnership will not be treated as partners in Waterside for purposes
of the 100 partner requirement, based upon your representation that
Waterside will not represent substantially all of the assets of either
the Operating Partnership or CW #1 Limited Partnership.
(28) See, e.g., P.L.R. 9242025 (July 22, 1992) and P.L.R. 9218078 (January
31, 1992).
<PAGE> 25
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 25
conditions. However, such conditions are applicable only in determining
whether rulings will be issued and are not intended as substantive rules for
determination of partnership status.
Under section 301.7701-2(b)(3) of the Treasury Regulations, an
organization will be treated as possessing the corporate characteristic of
continuity of life, even if the agreement organizing an entity provides that it
is to continue only for a stated period, unless a member has the power to
dissolve the organization at an earlier time. Article 6.01 of the Texas
Limited Liability Company Act provides, in part, that except as otherwise
provided in the company's regulations, a limited liability company shall be
dissolved upon the death, retirement, resignation, expulsion, bankruptcy, or
dissolution of a member or the occurrence of any other event which terminates
the continued membership of a member in the limited liability company, unless
there is at least one remaining member and the business of the limited
liability company is continued by the consent by the number of members or class
thereof stated in the articles of organization or regulations of the limited
liability company or of not so stated, by all remaining members. Article 2 of
the Associates Articles provides that the duration of Associates is until the
close of business on December 31, 2014, or until its earlier dissolution in
accordance with the provisions of the Act or the Associates Regulations.
Article 10.2(a)(iii) of the Associates Regulations provides, in part, that
Associates shall be dissolved upon the withdrawal, death, retirement,
resignation, expulsion, bankruptcy, legal incapacity or dissolution of any
member, unless the business of Associates is continued by the consent of all
the remaining members within ninety days. Accordingly, Associates will lack
the corporate characteristic of continuity of life.
Article 4.05 of the Texas Limited Liability Company Act provides, in
part, that unless otherwise provided by the company's regulations, a membership
interest is assignable in whole or in part; an assignment of a member's
interest does not entitle the assignee to become, or to exercise rights or
powers of a member; and until the assignee becomes a member, the assignor
member continues to be a member and to have the power to exercise any rights or
powers of a member, except to the extent those rights or powers are assigned.
Article 4.07 of the Texas Limited Liability Company Act provides, in part, that
an assignee of a membership interest may become a member if and to the extent
that the company's regulations so provide, or all members consent. Article 9.1
of the Associates Regulations, as amended by the First Amendment to the
Associates Regulations, provides that no member shall have the right to
withdraw from Associates or transfer all or any portion of its interest in
Associates. Accordingly, Associates will lack the corporate characteristic of
free transferability of interests. Because Associates will lack the corporate
characteristics of continuity of life and free transferability of interests, it
will be treated as partnership for federal income tax purposes.
Based upon the structure and capitalization of Associates, its current
ownership, and the provision contained in Article 9.1 of the Associates
Regulations, as amended, that restricts the
<PAGE> 26
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 26
right of members of Associates to transfer interests in Associates without the
consent of the other members, it is our opinion that Associates qualifies for
(a) the "private placement" exclusion contained in Notice 88-75 and (b) the
"private placement" exclusion contained in section 1.7704-1(h) of the Treasury
Regulations.(29) As a result, it is our opinion that Associates will not
constitute a publicly traded partnership for purposes of section 7704.
f. Woodlands Partnership. The Operating Partnership owns a
75 percent interest in the Woodlands Partnership as a limited partner, while
the remaining 25 percent general partner's interest is owned by The Woodlands
Office Equities, Inc., a wholly owned subsidiary of The Woodlands Corporation
("TWC Sub").
The Woodlands Partnership Agreement provides in Articles 10.1 and 10.2
that the Woodlands Partnership will terminate upon any event affecting the
general partner that would cause the dissolution of a limited partnership under
the Texas Revised Limited Partnership Act, unless the limited partner consents
to continue the partnership and appoint a new general partner. Accordingly,
the Woodlands Partnership will lack the corporate characteristic of continuity
of life.
Article 7.2.1 of the Woodlands Partnership Agreement provides for
certain circumstances in which a partner may transfer their interest in the
Woodlands Partnership beginning after the eighth anniversary of the
Contribution Date. However, Article 7.2.2 of the Woodlands Partnership
Agreement provides that a person to whom an interest in the Woodlands
Partnership is transferred shall not be admitted to the Woodlands Partnership
without the prior written consent of the other partner, which consent may be
granted or withheld at the sole discretion of the other partner. Accordingly,
the Woodlands Partnership lacks the corporate characteristic of free
transferability of interests.
As noted above, the general partner of the Woodlands Partnership, TWC
Sub, owns a 25 percent interest in the Woodlands Partnership. Furthermore,
Article 9.3 of the Woodlands Partnership Agreement provides that the limited
partner may not remove TWC Sub as general partner, except upon the occurrence
of specified events of default. Accordingly, the Woodlands Partnership will
lack the corporate characteristic of centralization of management.
Based on the continued organization and operation of the Woodlands
Partnership in accordance with the Woodlands Partnership Agreement and the
Texas Revised Limited
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(29) For purposes of this opinion, we have assumed that Associates will
not be treated as having more than two partners for purposes of
section 1.7704-1(h) of the Treasury Regulations (CREE, Ltd. and the
Operating Partnership). Although the Operating Partnership is a
flow-through entity for purposes of section 1.7704-1(h)(3), we have
assumed that the partners in the Operating Partnership will not be
treated as partners in Associates for purposes of the 100 partner
requirement, based upon your representation that Associates will not
represent substantially all of the assets of the Operating
Partnership.
<PAGE> 27
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 27
Partnership Act, the Woodlands Partnership will lack the corporate
characteristics of continuity of life, free transferability of interests and
centralized management. Accordingly, it is our opinion that the Woodlands
Partnership will be treated as a partnership as defined in sections 7701(a)(2)
and 761(e) and not as an association taxable as a corporation.
Based upon the structure and capitalization of the Woodlands
Partnership, its current ownership, and the provisions contained in Article 7.2
of the Woodlands Partnership Agreement (i) prohibiting all transfers of
interests in the Woodlands Partnership by either partner for eight years
following the contribution of the Woodlands Properties, (ii) requiring written
consent of the other partner before the admission to the Woodlands Partnership
of any transferee of an interest in the Woodlands Partnership, and (iii)
requiring that each partner offer the other a right of first refusal with
respect to any proposed disposition of any portion of their interest in the
Woodlands Partnership, it is our opinion that the Woodlands Partnership
qualifies for (a) the "private placement" exclusion contained in Notice 88-75
and (b) the "private placement" exclusion contained in section 1.7704-1(h) of
the Treasury Regulations.(30) As a result, it is our opinion that the
Woodlands Partnership will not constitute a publicly traded partnership for
purposes of section 7704.
g. 301 Congress. The Operating Partnership owns a 49 percent
limited partner interest in 301 Congress, a Delaware limited partnership. The
one percent general partner interest in 301 Congress is owned by Crescent/301,
a Delaware limited liability company that is wholly owned by Operating
Partnership and CREE, Ltd., and the remaining 50 percent limited partner
interest in 301 Congress is owned by Aetna Life Insurance Company ("Aetna").
The 301 Congress Partnership Agreement provides in Section 2.6 that
301 Congress will terminate seven years from the effective date of the 301
Congress Partnership Agreement, unless dissolved earlier under Article X of
such agreement. Article X of the 301 Congress Partnership Agreement provides
that 301 Congress will be dissolved upon the first to occur of the following:
(1) the expiration of seven years from the effective date of the 301 Congress
Partnership Agreement; (2) the sale, transfer or other disposition of the 301
Congress assets; (3) the acquisition by one partner of all of the interests in
301 Congress; (4) the occurrence of any "Event of Withdrawal" with respect to
the general partner under the Delaware Limited Partnership Act, unless a
majority of the remaining partners consent within 90 days to continue the
partnership and
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(30) For purposes of this opinion, we have assumed that the Woodlands
Partnership will not be treated as having more than two
partners (TWC Sub and the Operating Partnership) for purposes of
section 1.7704-1(h) of the Treasury Regulations. Although the
Operating Partnership is a flow-through entity for purposes of section
1.7704-1(h)(3), we have assumed that the partners in the Operating
Partnership will not be treated as partners in the Woodlands
Partnership for purposes of the 100 partner requirement, based upon
your representation that the Woodlands Partnership will not represent
substantially all of the assets of the Operating Partnership.
<PAGE> 28
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 28
appoint a new general partner, effective as of the date of the Event of
Withdrawal; (5) the decision of all partners to dissolve 301 Congress; (6) the
election of a non-defaulting partner to dissolve 301 Congress upon a default of
another partner under Section 9.5 of the 301 Congress Partnership Agreement; or
(7) the entry of a judicial decree of dissolution. Accordingly, 301 Congress
will lack the corporate characteristic of continuity of life.
Section 9.2 of the 301 Congress Partnership Agreement provides that no
partner shall have the right, without the express written consent of each other
partner, to transfer an interest in 301 Congress Avenue, with the exception of
certain transfers between Aetna, Crescent/301 and the Operating Partnership and
their respective affiliates. However, in the case of transfers between Aetna,
Crescent/301 and the Operating Partnership and their respective affiliates,
Section 9.2 of the 301 Congress Partnership Agreement provides that the
transferee shall not be admitted as a substitute partner without the consent of
all other partners. Accordingly, 301 Congress lacks the corporate
characteristic of free transferability of interests.
Based on the continued organization and operation of 301 Congress
Avenue, L.P. in accordance with the 301 Congress Partnership Agreement and the
Delaware Revised Uniform Limited Partnership Act, 301 Congress will lack the
corporate characteristics of continuity of life and free transferability of
interests. Accordingly, it is our opinion that 301 Congress will be treated as
a partnership as defined in sections 7701(a)(2) and 761(e) and not as an
association taxable as a corporation.
Based upon the structure and capitalization of 301 Congress, its
current ownership, and the provisions contained in Section 9.2 of the 301
Congress Partnership Agreement requiring written consent of the other partners
before the admission to 301 Congress of any transferee of an interest in 301
Congress (other than certain transfers between Aetna, Crescent/301 and the
Operating Partnership and their respective affiliates), it is our opinion that
301 Congress qualifies for (a) the "private placement" exclusion contained in
Notice 88-75 and (b) the "private placement" exclusion contained in section
1.7704-1(h) of the Treasury Regulations.(31) As a result, it is our opinion
that 301 Congress will not constitute a publicly traded partnership for
purposes of section 7704.
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(31) For purposes of this opinion, we have assumed that 301 Congress will
not be treated as having more than three partners (CREE, Ltd.,
the Operating Partnership and Aetna) for purposes of section
1.7704-1(h) of the Treasury Regulations. Although the Crescent/301 is
a flow-through entity for purposes of section 1.7704-1(h)(3), we have
treated Crescent/301 as having only two members, CREE, Ltd. and the
Operating Partnership. The partners in the Operating Partnership will
not be treated as members of Crescent/301 for purposes of the 100
partner requirement, based upon your representation that the Operating
Partnership's investment in 301 Congress, through Crescent/301, will
not represent substantially all of the assets of the Operating
Partnership.
<PAGE> 29
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 29
h. Crescent/301. As noted above, the Operating Partnership
owns its general partner interest in 301 Congress through Crescent/301,
a Delaware limited liability company that is wholly owned by Operating
Partnership and CREE, Ltd. The IRS has applied the same four-factor test,
described above, in determining whether limited liability companies, like
Crescent/301, which have been formed under the Delaware Limited Liability
Company Act, are treated as partnerships for federal income tax purposes.(32)
As noted above, under section 301.7701-2(b)(3) of the Treasury
Regulations, an organization will be treated as possessing the corporate
characteristic of continuity of life, even if the agreement organizing an
entity provides that it is to continue only for a stated period, unless a
member has the power to dissolve the organization at an earlier time. Section
18-801 of the Delaware Limited Liability Company Act provides that a limited
liability company dissolves upon the first to occur of the following: (1) at
the time specified in an LLC agreement or 30 years from the date of formation
of the LLC if no time is set forth in the LLC agreement, (2) upon the happening
of events specified in an LLC agreement, (3) by the written consent of all
members, (4) by the death, retirement, resignation, expulsion, bankruptcy, or
dissolution of a member or the occurrence of any other event which terminates
the continued membership of a member in the LLC, unless the business of the LLC
is continued by the consent of all the remaining members within 90 days
following the occurrence of any terminating event or pursuant to a right to
continue stated in the LLC agreement, or (5) by the entry of a decree of
judicial dissolution under the Delaware Limited Liability Company Act. Section
1.04 of the Crescent/301 Agreement provides that the duration of Crescent/301
is until the close of business on December 31, 2050, or until its earlier
dissolution upon an "Event of Dissolution" in accordance with Section 12.01 of
the Crescent 301/Agreement. Section 12.01 of the Crescent/301 Agreement
provides that Crescent/301 shall be dissolved prior to December 31, 2050 upon
the following "Events of Dissolution": (1) the mutual consent of all members,
(2) the withdrawal, death, retirement, resignation, expulsion, bankruptcy,
legal incapacity or dissolution of any member, (3) a sale by Crescent/301 of
its assets, or (4) a decree of judicial dissolution. However, Section 12.05 of
the Crescent/301 Agreement provides that if any Event of Dissolution occurs
with respect to CREE, Ltd., the business of Crescent/301 will be continued if,
within ninety days, the remaining members unanimously decide to continue the
business and to approve the admission of a new member, effective immediately
before the dissolution event. Accordingly, Crescent/301 will lack the
corporate characteristic of continuity of life.
Section 18-702(a) of the Delaware Limited Liability Company Act
provides, in part, that unless otherwise provided by the company's LLC
agreement, a membership interest is assignable in whole or in part; an
assignment of a member's interest does not entitle the assignee to
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(32) See, e.g., Rev. Rul. 93-38, 1993-21 I.R.B. 4, P.L.R. 9602012 (October
6, 1995) and P.L.R. 9507004 (November 8, 1994).
<PAGE> 30
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 30
participate in the management of the business and affairs of the LLC. Section
18-704(a) of the Delaware Limited Liability Company Act provides, in part, that
an assignee of a membership interest may become a member if and to the extent
that the company's LLC agreement so provides, or all members consent. Section
10.02 of the Crescent/301 Agreement provides that no member may withdraw from
Crescent/301 or transfer all or any part of its interest in Crescent/301 and
that any purported transfer of an interest in Crescent/301 shall be null and
void. Accordingly, Crescent/301 will lack the corporate characteristic of free
transferability of interests. Because Crescent/301 will lack the corporate
characteristics of continuity of life and free transferability of interests, it
will be treated as a partnership for federal income tax purposes.
Based upon the structure and capitalization of Crescent/301, its
current ownership, and the provision contained in Section 10.02 of the
Crescent/301 Agreement that prevents members of Crescent/301 from transferring
interests in Crescent/301, it is our opinion that Crescent/301 qualifies for
(a) the "private placement" exclusion contained in Notice 88-75 and (b) the
"private placement" exclusion contained in section 1.7704-1(h) of the Treasury
Regulations.(33) As a result, it is our opinion that Crescent/301 will not
constitute a publicly traded partnership for purposes of section 7704.
i. SMA. The Operating Partnership owns an interest in
SMA as a general partner. Section 9.1 of the SMA Agreement provides that the
dissolution or adjudication of bankruptcy or any other occurrence which would
constitute an event of withdrawal by the Operating Partnership as general
partner (or, if there is more than one general partner, by the last remaining
general partner) causes a dissolution of SMA. Section 9.2 of the SMA Agreement
provides that in the event of a dissolution under section 9.1, SMA may be
reconstituted and its business continued only if Spectrum Dallas Associates,
L.P. ("SDA") and other limited partners with partnership interests totaling
more than 50% of the partnership interests of all limited partners
affirmatively elect to reconstitute SMA, agree on the identity of a new general
partner and execute an instrument affirming such facts. Accordingly, SMA will
lack the corporate characteristic of continuity of life.
The Operating Partnership, as general partner of SMA, owns a large
majority of the partnership interests in SMA and therefore should be viewed as
managing SMA on its own behalf. Moreover, section 7.1 of the SMA Agreement
provides that the limited partners have no power or authority with respect to
SMA except as specifically provided in the SMA Agreement, which
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(33) For purposes of this opinion, we have assumed that Crescent/301 will
not be treated as having more than two partners for purposes of
section 1.7704-1(h) of the Treasury Regulations (CREE, Ltd. and the
Operating Partnership). Although the Operating Partnership is a
flow-through entity for purposes of section 1.7704-1(h)(3), we have
assumed that the partners in the Operating Partnership will not be
treated as members of Crescent/301 for purposes of the 100 partner
requirement, based upon your representation that Crescent/301 will not
represent substantially all of the assets of the Operating
Partnership.
<PAGE> 31
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 31
does not provide the limited partners with the power to remove the general
partner of SMA. Therefore, SMA will lack the corporate characteristic of
centralization of management.
As the general partner of SMA, the Operating Partnership will be
personally liable for all the debts and obligations of SMA. Moreover, the
Operating Partnership has substantial assets other than its general partner
interest in SMA. Furthermore, Crescent Equities has represented that the
Operating Partnership will act independently of the limited partners in SMA.
Therefore, SMA will lack the corporate characteristic of limited liability.
In sum, SMA will lack the corporate characteristics of limited
liability, continuity of life and centralization of management. Based on the
foregoing, it is our opinion that SMA will be treated as a partnership as
defined in sections 7701(a)(2) and 761(a) of the Code and not as an association
taxable as a corporation.
In addition, we believe that SMA should not be classified as a
publicly traded partnership under section 7704, Notice 88-75 and the final
regulations. Interests in SMA are not listed or traded on any established
securities market. The Operating Partnership has represented that (i) it has
not and will not take, and is not aware of any person taking, any action that
could cause interests in SMA to be treated as "readily tradable" on a secondary
market or the substantial equivalent thereof under the standards set forth in
Treas. Reg. Section 1.7704-1(c), and (ii) if it becomes aware of any such
market (or the substantial equivalent thereof), then to the maximum extent
permitted under the SMA Agreement (including exercising the general partner's
right to withhold consent to a transfer of a limited partner interest under
section 7.5 of the SMA Agreement), it will cause SMA to not recognize transfers
made on such market (or the substantial equivalent thereof) within the meaning
of Treas. Reg. Section 1.7704-1(d). Furthermore, we believe that the option
arrangement set forth in section 7.9 of the SMA Agreement should not cause the
interests in SMA to be treated as "readily tradable on a secondary market or
the substantial equivalent thereof" because this arrangement (i) is available
only to the partners of SDA and not directly available to the partners of SMA,
(ii) is subject to a variety of significant conditions, (iii) is available on a
one-time basis only, and (iv) more closely resembles a redemption, put or other
contract right rather than trading on the equivalent of a secondary market. We
are aware of no other arrangements or understandings relating to changes in the
ownership of SMA.
Moreover, SMA may be able to avoid being classified as a publicly
traded partnership on the basis of the 500 person "safe harbor" set forth in
Notice 88-75 or the 100 person "safe harbor" in the final regulations. Under
the final regulations, SMA may rely on Notice 88-75 for ten years (assuming it
does not add a new line of business). Section 7.11 of the SMA Agreement
specifically provides that the general partner "shall operate the Partnership
so that in no event will the Partnership have more than 500 partners at any
time during a taxable year of the Partnership,
<PAGE> 32
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 32
within the meaning of Notice 88-75, 1988-2 C.B. 368." Currently, SMA has
approximately eighty partners, all but seven of whom are individuals. As noted
above, section 7.5 of the SMA Agreement provides in part that the general
partner's prior written consent is required for a limited partner to sell or
otherwise transfer an interest in SMA, giving the Operating Partnership the
ability to prohibit direct transfers in SMA that might increase the number of
partners in SMA. However, because in addition to the Operating Partnership
there are six other partnerships (including SDA) with partnership interests in
SMA, and the Operating Partnership does not have the ability to limit transfers
of interests in those partnerships, it is possible that there may be more than
five hundred holders of interests in SMA within the meaning of Notice 88-75.
For purposes of applying the 100 person "safe harbor" of the final
regulations, however, indirect beneficial owners are treated as partners only
if "substantially all" of the value of the indirect interest is attributable
the underlying partnership and "a principal purpose" of the arrangement is to
satisfy the 100 partner limit. Each of the partnerships owning interests in
SMA also own other assets. Moreover, the tiered ownership of SMA was
established before the final regulations were issued. Finally, all of the
partnerships have been in existence for years and should not be viewed as
having "a principal purpose" of satisfying the 100 partner rule. Thus, SMA may
be able to satisfy the 100 person "safe harbor" of the final regulations.
Based upon the above, section 7704 of the Code and the final
regulations, Notice 88-75, the representations of the Operating Partnership,
and the structure and ownership of SMA, it is our opinion that SMA will not be
treated as a publicly traded partnership subject to tax under section 7704(a)
of the Code.
8. Accuracy of the Matters Described under the Heading "Federal
Income Tax Considerations" in the Prospectus Supplement.
It is our opinion that the description of the federal income tax
considerations discussed under the heading "Federal Income Tax Considerations"
in the Prospectus Supplement is accurate and fairly summarizes the federal
income tax considerations that are likely to be material to a holder of Common
Stock.
III. Additional Limitations
The foregoing opinions are limited to the specific matters covered
thereby and should not be interpreted to imply that the undersigned has offered
its opinion on any other matter. Moreover, Crescent Equities' ability to
achieve and maintain qualification and taxation as a REIT depends upon Crescent
Equities' ability to meet certain diversity of stock ownership requirements
and, through actual annual operating results, certain requirements under the
Code regarding its
<PAGE> 33
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 33
income, assets and distribution levels. No assurance can be given that the
actual ownership of Crescent Equities' stock and its actual operating results
and distributions for any taxable year will satisfy the tests necessary to
achieve and maintain its status as a REIT.
IV. Consent to Filing
These opinions are furnished to you solely for use in connection with
the Registration Statement. We hereby consent to the incorporation by
reference of this letter as an exhibit to the Registration Statement and to
the use of our name under the captions "Tax Status" and "Federal Income Tax
Considerations" in the Prospectus Supplement.
Very truly yours,
SHAW, PITTMAN, POTTS & TROWBRIDGE
By: /s/ Charles B. Temkin, P.C.
-----------------------------------
Charles B. Temkin, P.C.
Attachments
<PAGE> 34
MEMORANDUM
TO: David Dean
FROM: Charles B. Temkin
Michael A. Jacobs
DATE: January 3, 1995
RE: Characterization of Income Derived from Hyatt Regency Beaver
Creek
I. OVERVIEW
Crescent Real Estate Equities Limited Partnership (the "Operating
Partnership") is about to purchase the Hyatt Regency Beaver Creek (the "Hotel
Property") from East West Properties (the "Current Owner"). Crescent Real
Estate Equities, Inc. (the "Company") is currently the sole shareholder of two
corporations, one of which is the sole general partner of and one of which is a
limited partner of the Operating Partnership. These two corporations
constitute qualified REIT subsidiaries within the meaning of section 856(i).(1)
This memorandum analyzes the impact that a purchase of the Hotel
Property will have on the ability of the Company to continue to qualify as a
real estate investment trust (a "REIT") under section 856(c). More
specifically, it analyzes whether the income the Operating Partnership will
derive from the Hotel Property will be treated as "qualifying income" for
purposes of the 75 percent and 95 percent gross income tests for REIT
qualification. This memorandum concludes that, subject to certain assumptions,
in our opinion (i) all of the income that the Operating Partnership derives
from the Hotel Property will be treated as "qualifying income" for purposes of
the 95 percent test and (ii) all of the income the Operating Partnership
derives from the Hotel Property, with the exception of certain interest income,
will be treated as "qualifying income" for purposes of the 75 percent test.
II. FACTS AND ASSUMPTIONS
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(1) All section references herein are to the Internal Revenue Code of 1986, as
amended (the "Code"), or to the regulations issued thereunder, unless otherwise
noted.
<PAGE> 35
The Current Owner has contracted with Hyatt Corporation ("Hyatt") to
operate the Hotel Property. Under the terms of the agreement between the
Current Owner and Hyatt dated December 11, 1987, as amended on September 12,
1988, February 15, 1990 and October 1, 1994 (the "Management Agreement"), Hyatt
is obligated to provide all services in relation to the operation of the Hotel
Property and collect all hotel receipts. In exchange for these services, Hyatt
is reimbursed for the costs of operating the Hotel Property and paid a
management fee. This fee is paid out of hotel receipts; it is based in part on
the gross hotel receipts and in part on the profits, if any, from operation of
the Hotel Property.
Section 15.2 of the Management Agreement requires that all
assignments of the Management Agreement be approved by Hyatt and that any
assignees expressly assume the obligations of the Current Owner under the
Management Agreement. Therefore, in connection with its purchase of the Hotel
Property, the Operating Partnership will assume all of the obligations of the
Current Owner under the Management Agreement.
When the Operating Partnership purchases the Hotel Property, it will
immediately lease it to Mogul Management LLC ("Mogul") pursuant to a Lease
Agreement dated January 3, 1995 (the "Lease"). Pursuant to Article 2 of the
Lease, the Operating Partnership will assign its interest in the Management
Agreement to Mogul; and pursuant to Section 15.2 of the Management Agreement,
Mogul will assume all of the Operating Partnership's obligations thereunder.
However, as a condition of its approval of the Lease, Hyatt will require that
the Operating Partnership remain liable for all obligations of the Operating
Partnership under the Management Agreement assumed by Mogul.
Currently, Walter P. Sprunt and Richard W. Adkisson each own a 45.5
percent interest in the assets and net profits of Mogul, while Gerald W.
Haddock and John C. Goff, the managers of Mogul, each own a 4.5 percent
interest in its assets and net profits.
For purposes of this memorandum, we have examined and relied upon (1)
the Management Agreement, (2) the Lease, (3) the Articles of Organization of
Mogul Management LLC (the "Mogul Articles"), (4) the Regulations of Mogul
Management LLC (the "Mogul Regulations"), (5) the First Amended and Restated
Articles of Incorporation of Crescent Real Estate Equities, Inc. (the "Crescent
Articles"), (6) the Contract of Sale between the Current Owner and the
Operating Partnership, (7) the Consent and Assumption Agreement between Hyatt
and the Operating Partnership, and (8) such other documents or information as
we deemed necessary for the opinions set forth below. In our examination, we
have assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified
or photostatic copies, and the authenticity of the originals of such copies.
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<PAGE> 36
This memorandum is based upon existing provisions of the Code,
Treasury regulations, and the reported interpretations thereof by the Internal
Revenue Service ("IRS") and by the courts in effect (or, in the case of certain
proposed regulations, proposed) as of the date hereof, all of which are subject
to change, both retroactively or prospectively, and to possibly different
interpretations. We assume no obligation to update the opinions set forth in
this memorandum. We believe that the conclusions expressed herein, if
challenged by the IRS, would be sustained in court. However, because our
opinions are not binding upon the IRS or the courts, there can be no assurance
that contrary positions may not be successfully asserted by the IRS.
In addition, this memorandum is based on various assumptions and is
conditioned upon certain representations made by the Operating Partnership and
its sole general partner, Crescent Real Estate Equities, Ltd., as to factual
and other matters as set forth in the attached letter.
III. LEGAL BACKGROUND
A. 75 Percent and 95 Percent Tests
In order to qualify as a REIT for tax purposes, the Company must
satisfy certain tests with respect to the composition of its gross income on an
annual basis. First, at least 75 percent of the Company's gross income
(excluding gross income from certain prohibited transactions) for each taxable
year must consist of temporary investment income or of certain defined
categories of income derived directly or indirectly from investments relating
to real property or mortgages on real property. These categories include,
subject to various limitations, rents from real property, interest on mortgages
on real property, gains from the sale or other disposition of real property
(including interests in real property and mortgages on real property) not
primarily held for sale to customers in the ordinary course of business, income
from foreclosure property, and amounts received as consideration for entering
into either loans secured by real property or purchases or leases of real
property.(2) Second, at least 95 percent of the Company's gross income
(excluding gross income from certain prohibited transactions) for each taxable
year must be derived from income qualifying under the 75 percent test and from
dividends, other types of interest and gain from the sale or disposition of
stock or securities, or from any combination of the foregoing.(3)
In applying these income tests, REITs that are partners in a
partnership are required to include in their gross income their proportionate
share of the partnership's gross income. In addition, such REITs are to treat
this partnership gross income as retaining the same character as the items of
gross income of the partnership for purposes of section 856.(4) Thus, the
character of any
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(2) Section 856(c)(3).
(3) Section 856(c)(2).
(4) Treas. Reg. Section 1.856-3(g).
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<PAGE> 37
income derived by the Operating Partnership from the Hotel Property will affect
the ability of the Company to qualify as a REIT.
B. Rents from Real Property
Rents from real property satisfy both the 75 percent and 95 percent
tests for REIT qualification only if several conditions are met. First, the
amount of rent must not be based in whole or in part on the income or profits
of any person. An amount received or accrued generally will not be excluded
from the term "rents from real property" solely by reason of being based on a
fixed percentage or percentages of receipts or sales.(5) Second, the Code
provides that rents received from a tenant will not qualify as "rents from real
property" if the REIT, or an owner of 10 percent or more of the REIT, directly
or constructively, owns 10 percent or more of such tenant (a "Related Party
Tenant").(6) Third, if rent attributable to personal property leased in
connection with a lease of real property is greater than 15 percent of the
total rent received under the lease, then the portion of rent attributable to
such personal property will not qualify as "rents from real property."(7)
Finally, for rents to qualify as "rents from real property," a REIT generally
must not operate or manage the property or furnish or render services to the
tenants of such property, other than through an independent contractor from
whom the REIT derives no revenue. However, rents will be qualified as "rents
from real property" if a REIT directly performs services in connection with the
lease of the property, if those services are "usually or customarily rendered"
in connection with the rental of space for occupancy, and such services are not
considered to be rendered to the occupant of the property.(8)
C. Income from Foreclosure Property
Income from foreclosure property is treated as "qualifying income" for
purposes of the 75 percent and 95 percent tests (although any net income from
foreclosure property is taxed at the maximum corporate rate). Foreclosure
property is any real property, and any personal property incident to such real
property, acquired by a REIT through default under a mortgage or a lease. A
REIT may elect to treat such property as foreclosure property for a grace
period of up to two years.(9) However, such property will cease to qualify as
foreclosure property if it is used by the REIT in a trade or business more than
90 days after it is acquired and it is not operated through
- ----------------------------------
(5) Section 856(d)(2)(A).
(6) Section 856(d)(2)(B).
(7) Section 856(d)(1)(C).
(8) Sections 856(d)(1)(B), 856(d)(2)(C).
(9) Section 856(e).
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<PAGE> 38
an independent contractor from whom the REIT does not derive or receive any
income.(10) Moreover, property is not eligible to be treated as foreclosure
property if the lease is entered into with an intent to evict or foreclose, or
if the REIT knows or has reason to know that default would occur.(11)
I. DISCUSSION
A. Lease Will be Treated as a Lease for Federal Income Tax Purposes
In order for any income derived by the Operating Partnership from the
Hotel Property to constitute either "rents from real property," or in the case
of a default under the Lease, "gross income from foreclosure property," the
Lease must be treated as a lease for federal income tax purposes and not be
treated as a service contract, management contract or other type of
arrangement. This determination depends on an analysis of all the surrounding
facts and circumstances. In making this determination, courts have considered
a variety of factors, including the following: (i) the intent of the parties,
(ii) the form of the agreement, (iii) the degree of control over the business
conducted at the property that is provided to the lessee (e.g., whether the
lessee has substantial rights of control over the operation of the property and
its business), (iv) the extent to which the lessee has the risk of loss from
operations of the business conducted as the property (e.g., whether the lessee
bears the risk of increases in operating expenses and of decreases in
revenues), and (v) the extent to which the lessee has the opportunity to
benefit from operations of the business conducted at the property (e.g.,
whether the lessee benefits from decreased operating expenses or increased
revenues).(12)
In addition, section 7701(e) provides that a contract that purports to
be a service contract, partnership agreement, or another type of arrangement
will be treated instead as a lease of property if the contract is properly
treated as such, taking into account all relevant factors, including whether or
not: (i) the service recipient is in physical possession of the property, (ii)
the service recipient controls the property, (iii) the service recipient has a
significant economic or possessory interest in the property (e.g., the
property's use is likely to be dedicated to the service recipient for a
substantial portion of the useful life of the property, the recipient shares
the risk that the property will decline in value, the recipient shares in any
appreciation in the value of the property, the recipient shares in any savings
in the property's operating costs or the recipient bears the risk of damage to
or loss of the property), (iv) the service provider does not bear any risk of
substantially diminished receipts or substantially increased expenditures if
there is nonperformance under the contract, (v) the service provider does not
use the property concurrently to provide significant
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(10) Section 856(e)(4).
(11) Treas. Reg. Section 1.856-6(b)(3).
(12) See, e.g., Xerox Corp. v. U.S., 80-2 USTC Paragraph 9530 (Ct. Cl. Tr. Div.
1980), aff'd per curiam, 656 F.2d 659 (Ct. Cl. 1981).
-5-
<PAGE> 39
services to entities unrelated to the service recipient and (vi) the total
contract price does not substantially exceed the rental value of the property
for the contract period. Since the determination of whether a service
contract, partnership agreement, or some other type of arrangement should be
treated as a lease is inherently factual, the presence or absence of any single
factor may not be dispositive in every case.(13)
We have concluded that the Lease will be treated as a lease for
Federal income tax purposes, rather than a service contract, management
contract or other type of arrangement. This conclusion is based, in part, on
the following facts: (i) the Operating Partnership and Mogul intend their
relationship to be that of lessor and lessee (as evidenced by the terms of the
Lease), (ii) Mogul will have the right to exclusive possession, use and quiet
enjoyment of the Hotel Property during the term of the Lease and the right to
uninterrupted control in the operation of and business conducted at the Hotel
Property (subject to its assumption of the Management Agreement), (iii) Mogul
will bear the cost of, and be responsible for, capital expenditures, including
maintenance and repair of the Hotel Property, and will dictate how the Hotel
Property is maintained and improved, (iv) Mogul will bear all the costs and
expenses of operating the Hotel Property, (v) Mogul will benefit from any
savings in the costs of operating the Hotel Property during the term of the
Lease, (vi) in the event of damage or destruction to the Hotel Property, Mogul
will be at economic risk because its obligation to make rental payments will
not abate, (vii) Mogul will indemnify the Operating Partnership against all
liabilities imposed on the Operating Partnership during the term of the Lease
by reason of injury to persons or damage to property occurring at the Hotel
Property or Mogul's use, management, maintenance or repair of the Hotel
Property, (viii) Mogul is obligated to pay substantial fixed rent for the
period of use of the Hotel Property, regardless of whether its revenues exceed
its costs and expenses, and (ix) Mogul stands to incur substantial losses (or
derive substantial profits) depending on how successfully it operates the Hotel
Property.
We do not believe that our conclusion that the Lease of the Hotel
Property will be treated as a lease for Federal income tax purposes is affected
by the fact that Mogul will enter the Lease subject to its assumption of the
Operating Partnership's obligations under the preexisting Management Agreement.
The Management Agreement gives Hyatt control over the day-to-day operation of
the Hotel Property and will allow Hyatt to share with Mogul in the benefits of
any increases in revenues or cost savings in the operation of the Hotel
Property. However, Hyatt's operation of the Hotel Property will not be
controlled by the Operating Partnership, and the Management Agreement does not
affect the fact that Mogul bears most of the risk of loss if the Hotel Property
is not successful. Moreover, the IRS has issued a private letter ruling in
which it treated leases of several hotel properties as producing "rents from
real property" in a situation where the lessees had contracted with a third
party to conduct the day-to-day operations of the hotels.(14) This ruling
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(13) P.L.R. 8918012 (January 24, 1989).
(14) See, P.L.R. 8117036 (January 27, 1981).
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<PAGE> 40
suggests that the IRS will respect a lease of a hotel for federal income tax
purposes even if the hotel is operated by an independent contractor rather than
by the lessee.
B. Percentage Rent Provision is not Profit-Based
Pursuant to the Lease, Mogul will be obligated to pay the Operating
Partnership base rent and percentage rent. Under the regulations, percentage
rent based on a percentage of gross receipts or sales in excess of a floor
amount, which is how the percentage rent is structured under the Lease, will
not qualify as "rents from real property" unless (i) such floor amount does
not depend in whole or in part on the income or profits of the lessee, (ii) the
percentage and the floor amount are fixed at the time the lease is entered
into, (iii) the percentage and the floor amount are not renegotiated during the
term of the lease in a manner that has the effect of basing the percentage rent
on income or profits, and (iv) the percentage and the floor amount conform with
normal business practice.(15)
Under the terms of Article 4.2 of the Lease, Mogul will pay percentage
rent equal on an annual basis to the sum of (i) 17.5 percent of the excess of
annual gross receipts from room rentals over $9,300,000 and (ii) 2.5 percent of
the excess of annual gross receipts from the food and beverage facilities at
the Hotel Property over $3,000,000. This formula will effectively reward Mogul
for any increases in gross receipts from rooms and from other sources over the
threshold amounts. This type of formula does not base the percentage rent on
Mogul's income or profits, and similar formulas have been treated by the IRS as
generating "rents from real property."(16) Moreover, the Operating Partnership
has represented that (i) the floor amounts used to compute the percentage rent
under the Lease will not depend in whole or in part on the income or profits of
any person, (ii) the percentage rent provision of the Lease will not be
renegotiated during the term of the Lease or at the expiration or earlier
termination of the Lease in a manner that has the effect of basing the rent on
income or profits, and (iii) the percentage rent provision of the Lease
conforms with normal business practice. In addition, based on our experience
and an examination of the Lease and the Hotel Property projections, the Lease
appears to conform with normal business practice.
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(15) Treas. Reg. Section 1.866-4(b)(3).
(16) See, e.g., P.L.R. 8803007 (September 23, 1987) (percentage rent based on
gross revenues in excess of gross revenues for a base year treated as "rents
from real property"); cf. P.L.R. 9104018 (October 26, 1990) (interest based on
gross revenues in excess of a floor amount treated as qualifying interest under
section 856(f)).
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<PAGE> 41
C. Mogul is not a "Related Party Tenant"
Rents received from Mogul will not qualify as "rents from real
property" if Mogul is a "related party tenant." Mogul will be a "related party
tenant" if the Company, or an owner of 10 percent or more of the Company,
directly or constructively owns 10 percent or more of the assets or net profits
of Mogul.(17) Constructive ownership is determined for purposes of this test
by applying the rules of section 318(a) as modified by section 856(d)(5).
Those rules generally provide that if 10 percent or more in value of the stock
of the Company is owned, directly or indirectly, by or for any person, the
Company is considered as owning the stock owned, directly or indirectly, by or
for such person.
Mogul will not be treated as a "related party tenant" because two
individuals, Walter P. Sprunt and Richard W. Adkisson, currently each own a
45.5 percent interest in its assets and net profits. In reaching this
conclusion we recognize that Mr. Sprunt and Mr. Adkisson are the owners of
Greenbriar Associates, Inc., which is a 10 percent member of G/C Waterside
Associates, LLC, which is a 1 percent partner of Waterside Commons Limited
Partnership, a partnership whose 89 percent partner is the Operating
Partnership.(18) The Operating Partnership has represented that (i) neither
Mr. Sprunt nor Mr. Adkisson owns more than 10 percent of the value of the
Company's stock, (ii) neither Mr. Sprunt nor Mr. Adkisson is expected to own
more than 10 percent of the value of the Company's stock in the future and
(iii) neither the Operating Partnership nor the Company intends to acquire,
directly or constructively, an interest of 10 percent or more in the assets or
net profits of Mogul at any time in the future. Moreover, Article 37.5 of the
Lease limits the ability of Mogul and its members and managers to acquire,
directly or constructively, a 10 percent stock interest in the Company, and
Section 6.4 of the First Amended and Restated Articles of Incorporation of the
Company prevents Mogul and its members and managers from acquiring more than 8
percent of the Company's stock.
The conclusion that Mogul will not be treated as a "related party
tenant" is based on the assumption that Mogul will be treated as a partnership
for federal income tax purposes. If Mogul is not treated as a partnership for
federal income tax purposes, but is instead treated as an association taxable
as a corporation, then it is likely that Mogul will be treated as a "related
party tenant" and the rents derived under the terms of the Lease will not be
treated as "rents from real property." This is because, if Mogul were treated
as a corporation for federal income tax purposes, Gerald W. Haddock and John C.
Goff would likely be deemed to own all of its voting stock, because of the
extensive powers that they are granted as managers under the Mogul
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(17) Section 856(d)(2)(B)(ii).
(18) See Rev. Rul. 73-194, 1973-1 C.B. 355 (management company treated as an
independent contractor with respect to a REIT, where an affiliate of the
management company and the REIT were partners).
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<PAGE> 42
Regulations. If this were the case, the ownership of such voting stock would
be attributed to the Company under the constructive ownership rules described
above.(19)
An entity which has associates and an objective to carry on a business
for joint profit will be treated as a partnership for federal income tax
purposes, and not as an association taxable as a corporation, if it has not
more than two of the following four characteristics of a corporation: (i)
continuity of life; (ii) centralization of management; (iii) limited liability;
and (iv) free transferability of interests.(20) The entity must also have no
other characteristics which are significant in determining its classification.
Generally, other factors are considered only insofar as they relate to the
determination of the presence or absence of the foregoing corporate
characteristics.(21) The IRS has applied this four-factor test in determining
whether limited liability companies formed under the Texas Limited Liability
Company Act (the "Act") are partnerships for federal income tax purposes.(22)
The IRS has issued Rev. Proc. 95-10, which specifies conditions which
must be satisfied for a limited liability company to receive a favorable
advanced ruling that it will be classified as a partnership for federal income
tax purposes.(23) Mogul should satisfy these conditions. However, such
conditions are applicable only in determining whether rulings will be issued
and are not intended as substantive rules for determination of partnership
status.
An organization will be treated as possessing the corporate
characteristic of continuity of life, even if the agreement organizing an
entity provides that it is to continue only for a stated period, unless a
member has the power to dissolve the organization at an earlier time.(24)
Article 6.01 of the Act provides, in part, that except as otherwise provided in
the company's regulations, a limited liability company shall be dissolved upon
the death, retirement, resignation, expulsion,
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(19) Richard Rainwater, Gerald Haddock and John Goff are each partners in
FW-Irving Partners, Ltd. (and apparently they are partners in other
partnerships as well). Richard Rainwater also owns more than 10 percent of the
value of the stock of the Company. Thus, assuming that the ownership interests
in Mogul held by Gerald Haddock and John Goff constitute stock, such interests,
along with Richard Rainwater's stock interest in the Company, will be
attributed to FW-Irving Partners, Ltd. pursuant to section 318(a)(3)(A), which
provides that stock owned, directly or indirectly, by or for a partners shall
be considered as owned by the partnership. Then, FW-Irving Partners, Ltd.'s
deemed interest in Mogul would be attributed to the Company pursuant to section
318(a)(3)(C) (as modified by section 856(d)(5)), which provides that stock
owned by any person that owns 10 percent or more of the value of the stock in a
corporation shall be considered owned by the corporation.
(20) Treas. Reg. Section 301.7701-2(a).
(21) See Rev. Rul. 79-106, 1979-1 C.B. 448.
(22) See, e.g., P.L.R. 9242025 (July 22, 1992) and P.L.R. 9218078 (January 31,
1992).
(23) 1995-3 I.R.B [ ] .
(24) Treas. Reg. Section 301.7701-2(b)(3).
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<PAGE> 43
bankruptcy, or dissolution of a member or the occurrence of any other event
which terminates the continued membership of a member in the limited liability
company, unless there is at least one remaining member and the business of the
limited liability company is continued by the consent by the number of members
or class thereof stated in the articles of organization or regulations of the
limited liability company or of not so stated, by all remaining members.
Article 2 of the Mogul Articles provides that the duration of Mogul is until
the close of business on December 31, 2015, or until its earlier dissolution in
accordance with the provisions of the Act or the Regulations. Article 10.2 of
the Mogul Regulations provides, in part, that Mogul shall be dissolved upon the
withdrawal, death, retirement, resignation, expulsion, bankruptcy, legal
incapacity or dissolution of any member, unless the business of Mogul is
continued by the consent of all the remaining members within ninety days.
Accordingly, Mogul will lack the corporate characteristic of continuity of
life.
An organization will be treated as possessing the corporate
characteristic of free transferability of interests if the members owning all
or substantially all of the interests in an organization may substitute for
themselves without the consent of the other members a person who is not a
member of the organization.(25) Article 4.05 of the Act provides, in part,
that unless otherwise provided by the company's regulations, a membership
interest is assignable in whole or in part; an assignment of a member's
interest does not entitle the assignee to become, or to exercise rights or
powers of a member; and until the assignee becomes a member, the assignor
member continues to be a member and to have the power to exercise any rights or
powers of a member, except to the extent those rights or powers are assigned.
Article 4.07 of the Act provides, in part, that an assignee of a membership
interest may become a member if and to the extent that the company's
regulations so provide, or all members consent. Article 9.3 of the Mogul
Regulations provides, in part, that no member shall have the right to
substitute in its place a transferee unless consent is given by the Managers
and a majority of the other members, which consent may be withheld in the
discretion of the Managers or the other members. Accordingly, Mogul will lack
the corporate characteristic of free transferability of interests. Because
Mogul will lack the corporate characteristics of continuity of life and free
transferability of interests, it will be treated as partnership for federal
income tax purposes.
D. Incidental Personal Property
1. Rents Attributable to Personal Property Will Be Treated as
"Rents from Real Property"
As noted above, the rents attributable to the Operating Partnership's
personal property leased under or in connection with the Lease must not be
greater than 15 percent of the rents received under the Lease. The rent
attributable to personal property leased under or in connection with a lease of
real property is the amount that bears the same ratio to total rent for the
taxable
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(25) Treas. Reg. Section 301.7701-2(e).
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<PAGE> 44
year as (i) the average of the adjusted bases of the personal property leased
under or in connection with a lease of real property at the beginning and at
the end of the taxable year bears to (ii) the average of the aggregate adjusted
bases of the real and personal property subject to the lease at the beginning
and at the end of such taxable year (the "Adjusted Basis Ratio").(26) The
Operating Partnership has represented that the adjusted tax basis of the
personal property leased under or in connection with the Lease will not
represent more than 15 percent of the aggregate adjusted tax basis of the Hotel
Property at any time.
2. Payments Attributable to Mogul's Acquisition of Certain
Personal Property Will Not Be Treated as "Rents from Real
Property"
Article 4.7 of the Lease provides that Mogul will be deemed to have
acquired all of the furniture, fixtures and operating equipment associated with
the Hotel Property (the "FF & E") with the proceeds of a loan from the
Operating Partnership. It further provides that Mogul is to make payments of
principal and interest on this deemed loan.
The payments that the Operating Partnership receives with regard to
the FF & E under the terms of Article 4.7 of the Lease will not qualify as
"rents from real property." Instead, such payments will be treated for federal
income tax purposes as payments of principal and interest resulting from the
Operating Partnership's deemed financing of Mogul's purchase of the FF & E. In
reaching this conclusion we have relied on the representations of the Operating
Partnership that (i) the useful life of the FF & E will be less than the term
of the Lease, (ii) the residual value of the FF & E at the end of the term of
the Lease will generally be less than 20 percent of the value of the FF & E at
the beginning of the term of the Lease, and (iii) the Operating Partnership and
Mogul will treat Mogul as the owner of the FF & E for federal income tax
purposes.
The payments pursuant to this "deemed financing," to the extent they
constitute interest, will be "qualifying income" for purposes of the 75 percent
test. However, because the deemed financing will be secured by personal,
rather than real property, such interest will not be qualifying income for
purposes of the 95 percent test.
E. Provision of Services by the Operating Partnership
1. Income Derived under the Terms of the Lease
Although the Operating Partnership may treat charges for services
customarily furnished or rendered in connection with the rental of the Hotel
Property as "rents from real property," any services rendered to the occupants
of the Hotel Property must be furnished or rendered by an
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(26) Section 856(d)(1)(C).
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<PAGE> 45
independent contractor from whom the Company does not derive or receive any
income.(27) Moreover, to the extent that any independent contractors provide
noncustomary services to the occupants of the Hotel Property, the cost of such
services must not be borne by the Operating Partnership.(28)
Under the terms of the Lease, the Operating Partnership will not be
required to provide any services, customary or noncustomary, in connection with
the rental of the Hotel Property. Instead, all services relating to the
operation of the Hotel Property will be provided by Hyatt under the terms of
the Management Agreement. The Operating Partnership has represented that Hyatt
is an independent contractor within the meaning of section 856(d)(3), from
which the Company and the Operating Partnership will not derive or receive any
income. The Operating Partnership will not bear the cost of any of the
services provided by Hyatt. Instead, such costs will be borne by Mogul when it
assumes the Operating Partnership's Obligations under the Management Agreement.
Based on the foregoing, we believe that the provision of any
noncustomary services to the occupants of the Hotel Property by Hyatt will have
no effect on the qualification of the income derived from the Hotel Property as
"rents from real property." In fact, the IRS has issued a private letter
ruling in which it has treated the income derived from several leases of hotel
properties as "rents from real property" in a situation where the lessees had
contracted with a third-party to conduct the day to day operations of the
hotels.(29) Our conclusion is not altered by the fact that the Operating
Partnership will remain liable for any obligations arising under the Management
Agreement, to the extent that they are not satisfied by the Tenant. The
Operating Partnership should not be treated as bearing the cost of the services
provided by Hyatt merely because it is liable for Mogul's obligations under the
Management Agreement. The Operating Partnership is not retaining this liability
in an attempt to provide services to Mogul. Instead, it is retaining this
liability only as an accommodation, in order to gain Hyatt's consent to its
purchase of the Hotel Property. Moreover, the Operating Partnership believes
that it is highly unlikely that it will ever be required to reimburse Hyatt for
the costs and expenses of operating the Hotel Property. This is because (i)
the Hotel Property is projected to generate enough gross income to cover the
payments to Hyatt under the Management Agreement, (ii) in connection with the
Lease, Mogul will represent that it has a net worth of at least $400,000 , and
(iii) in the view of the Operating Partnership, Mogul's capitalization is
adequate to allow Mogul to assume Mogul's obligations under the Lease.
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(27) Sections 856(d)(1), 856(d)(2)(C); Treas. Reg. Section 1.512(b)-1(c)(5).
(28) Treas. Reg. Section 1.856-4(b)(5).
(29) See, P.L.R. 8117036 (January 27, 1981).
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<PAGE> 46
2. Income Derived in the Case of a Default under the Lease
If the Operating Partnership were required to reimburse Hyatt for the
costs of operating the Hotel Property because of a default by Mogul under the
terms of the Management Agreement, we have concluded that the income derived by
the Operating Partnership from the Hotel Property would be treated as
"qualifying income" for purposes of the 75 percent and 95 percent tests. This
is because, if the Operating Partnership were required to reimburse Hyatt for
the cost of operating the Hotel Property, this would constitute an event of
default under Article 16.1(c) of the Lease, allowing the Operating Partnership
to terminate Mogul's leasehold interest in the Hotel Property. As a result of
such a termination of the Lease, any income derived by the Operating
Partnership from the Hotel Property after the default would be treated as
income from foreclosure property.
The Operating Partnership would be able to continue to operate the
Hotel Property after any default under the Lease, without affecting its status
as foreclosure property, because Hyatt, an independent contractor, from whom
the Company will not derive any income, will provide all services relating to
its operation. As noted above, a REIT can use foreclosure property in the
conduct of an active trade or business, as long as this is done through the use
of an independent contractor, from whom the REIT does not derive or receive any
income.(30)
As noted above, real property acquired upon default under a lease is
not eligible to be treated as foreclosure property if the lease is entered into
with an intent to evict or foreclose, or if the REIT knows or has reason to
know that default would occur.(31) This is not the case in the present
situation because (i) the Hotel Property is projected to generate enough gross
income to produce a profit for Mogul, (ii) in connection with the Lease, Mogul
will represent that it has a net worth of at $400,000, and (iii) in the view of
the Operating Partnership, Mogul's capitalization is adequate to allow Mogul to
assume Mogul's obligations under the Lease.
The Hotel Property would in any event qualify as foreclosure property
only for a period of up to two years, beginning of the date of its acquisition
by the Operating Partnership, unless the Operating Partnership obtains an
extension of the grace period from the IRS.(32) Therefore, in the event the
Operating Partnership takes possession of the Hotel Property as a result of a
default under the lease, presumably the Operating Partnership will sell the
Hotel Property or within two years rent it to another tenant under a lease
that will produce "rents from real property."
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(30) Section 856(e)(4)(C). (The IRS clearly intended for REITs to be able to
treat hotels operated by independent contractors as foreclosure property. For
instance, the Treasury regulations defining foreclosure property refer to hotel
properties twice. See, Treas. Reg. Sections 1.856-6(b)(2), 1.856-6(d)(2). In
addition, the IRS has also recently issued a private letter ruling in which it
treated income received from hotels acquired pursuant to a bankruptcy petition
as income from foreclosure property, where the hotels were operated by third
party managers. P.L.R. 9420013 (2/15/94).)
(31) Treas. Reg. Section 1.856-6(b)(3).
(32) Section 856(e)(2).
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<PAGE> 47
CONCLUSION
Based on the assumptions stated above, it is our opinion that (i) all
of the income that the Operating Partnership derives from the Hotel Property
will be treated as "qualifying income" for purposes of the 95 percent test and
(ii) all of the income the Operating Partnership derives from the Hotel
Property, with the exception of the interest income attributable to the deemed
financing of Mogul's acquisition of the FF & E, will be treated as "qualifying
income" for purposes of the 75 percent test.
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<PAGE> 48
April 1, 1996
Crescent Real Estate Equities, Inc.
900 Third Avenue, Suite 1800
New York New York 10022
Ladies and Gentlemen:
On January 3, 1995 we provided you with a memorandum analyzing the
impact of the purchase of the Hyatt Regency Beaver Creek (the "Hotel Property")
by Crescent Real Estate Equities Limited Partnership (the "Operating
Partnership") would have on the ability of Crescent Real Estate Equities, Inc.
(the "Company") to continue to qualify as a real estate investment trust (a
"REIT") under section 856(c).(1) That memorandum concluded that, subject to
certain assumptions, in our opinion (i) all of the income that the Operating
Partnership derived from the Hotel Property would be treated as "qualifying
income" for purposes of the 95 percent gross income test for REIT qualification
under section 856(c)(2) (the "95 percent test") and (ii) all of the income that
the Operating Partnership derived from the Hotel Property, with the exception
of certain interest income, would be treated as "qualifying income" for
purposes of the 75 percent gross income test for REIT qualification under
section 856(c)(3) (the "75 percent test"). The January 3, 1995 memorandum was
based upon, among other items, our review of a Lease Agreement between dated
January 3, 1995 between the Operating Partnership, as lessor, and Mogul
Management LLC ("Mogul"), as lessee, dated January 3, 1995 (the "Original
Lease").
On October 6, 1995, the Original Lease was amended to provide for the
subordination of the leasehold estate created by the Original Lease to any lien
or encumbrance placed against all or any part of the Hotel Property and to
provide for the approval by the Operating Partnership of a proposed merger of
Mogul into RoseStar Management, LLC, a Texas limited liability company
("RoseStar"). Currently, Sanjay Varma owns a 91 percent interest in the assets
and net profits of RoseStar, while Gerald W. Haddock and John C. Goff, the
managers of RoseStar, each own a 4.5 percent interest in its assets and net
profits.
Also on October 6, 1995, the Operating Partnership conveyed all of its
interest as lessor under the Original Lease to Crescent Real Estate Funding II,
L.P., a Delaware limited
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(1) All section references are to the Internal Revenue Code of 1986, as
amended (the "Code"), or to the regulations issued thereunder, unless
otherwise noted.
<PAGE> 49
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 2
Partnership ("Funding II"). Funding II assumed all of the Operating
Partnership's liabilities and obligations under the Original Lease.
On January 1, 1996, the Funding II, Mogul and Rose Star executed an
Amended and Restated Lease Agreement for the Hotel Property (hereinafter the
Original Lease as amended and restated is referred to as the "Lease").
On February 9, 1996, Mogul was merged with and into RoseStar and
RoseStar succeeded Mogul as lessee under the Lease.
On March 29, 1996, pursuant to an Assignment and Assumption of
Leasehold Estate, RoseStar sold and assigned all of its interest and estate as
lessee under the Lease to RoseStar Southwest, LLC, a Delaware limited liability
company ("Southwest"). RoseStar owns a 99 percent interest in Southwest, while
the remaining one percent interest is owned by RSSW Corp., a Delaware
corporation.
On April 1, 1996, the Lease was amended to provide that, among other
things, (1) at all times during the term of the Lease, Southwest and RoseStar
would maintain a cumulative net worth equal to $200,000; and (2) Southwest
would retain all of the income it earned with respect to the Hotel Property
(except distributions to its beneficial owners in an amount sufficient to pay
their federal and state income taxes on the income) until such time as
Southwest and any affiliate of Southwest (including RoseStar) which has entered
into a long-term lease of a hotel with Funding II or any affiliate of Funding
II (including the Operating Partnership) have accumulated and are holding in
reserve funds in the aggregate which are sufficient to enable Southwest and any
affiliated entities to pay at least one monthly payment of base rent under each
lease between Southwest (or any affiliated entities) and Funding II or an
affiliate of Funding II.
This letter is intended to update the opinions expressed in our
January 3, 1995 memorandum to reflect the changes in the Lease Agreement and
the substitution of new parties as lessor and lessee of the Hotel Property.
The opinions set forth herein are based upon the existing provisions of the
Code, and the reported interpretations thereof by the IRS and by the courts in
effect as of the date hereof, all of which are subject to change, both
retroactively or prospectively, and to possibly different interpretations. We
assume no obligation to update the opinions set forth in this letter. We
believe that the conclusions expressed herein, if challenged by the IRS, would
be sustained in court. However, because our opinions are not binding upon the
IRS or the courts, there can be no assurance that contrary positions may not be
successfully asserted by the IRS.
<PAGE> 50
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 3
I. Documents and Representations
For the purpose of rendering this opinion, we have examined
and relied on originals, or copies certified or otherwise identified to our
satisfaction, of the following: (1) the Original Lease; (2) the Amendment to
Lease Agreement between the Operating Partnership and Mogul dated October 6,
1995; (3) the Lease; (4) the Assignment and Assumption of Leasehold Estate by
and between RoseStar and Southwest dated March 29, 1996; (5) the First
Amendment to the Lease dated April 1, 1996; (6) the Limited Guaranty Agreement
by Gerald Haddock, John Goff and Sanjay Varma, as guarantors in favor of
Funding II (the "Guaranty); (7) the Articles of Organization of RoseStar
Management, LLC (the "RoseStar Articles"); (8) the Regulations of RoseStar
Management, LLC (the "RoseStar Regulations"); (9) the Operating Agreement of
RoseStar Southwest, LLC; (10) the First Amended and Restated Articles of
Incorporation of Crescent Real Estate Equities, Inc. (the "Crescent Articles");
and (11) such other documents or information as we have deemed necessary for
the opinion set forth below. In our examination, we have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of all documents submitted to us as certified or photostatic
copies, and the authenticity of the originals of such copies.
For the purpose of rendering this opinion, we have also assumed that
all statements of facts and assumptions described in our January 3, 1995
memorandum remain correct, unless otherwise noted.
II. Opinions
A. Lease Will be Treated as a Lease for Federal Income Tax Purposes
In order for any income derived by Funding II from the Hotel Property
to constitute either "rents from real property," or in the case of a default
under the Lease, "gross income from foreclosure property," the Lease must be
treated as a lease for federal income tax purposes and not be treated as a
service contract, management contract or other type of arrangement. This
determination depends on an analysis of all the surrounding facts and
circumstances. In making this determination, courts have considered a variety
of factors, including the following: (i) the intent of the parties, (ii) the
form of the agreement, (iii) the degree of control over the business conducted
at the property that is provided to the lessee (e.g., whether the lessee has
substantial rights of control over the operation of the property and its
business), (iv) the extent to which the lessee has the risk of loss from
operations of the business conducted as the property (e.g., whether the lessee
bears the risk of increases in operating expenses and of decreases in
revenues), and (v) the extent to which the lessee has
<PAGE> 51
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 4
the opportunity to benefit from operations of the business conducted at the
property (e.g., whether the lessee benefits from decreased operating expenses
or increased revenues).(2)
In addition, section 7701(e) provides that a contract that purports to
be a service contract, partnership agreement, or another type of arrangement
will be treated instead as a lease of property if the contract is properly
treated as such, taking into account all relevant factors, including whether or
not: (i) the service recipient is in physical possession of the property, (ii)
the service recipient controls the property, (iii) the service recipient has a
significant economic or possessory interest in the property (e.g., the
property's use is likely to be dedicated to the service recipient for a
substantial portion of the useful life of the property, the recipient shares
the risk that the property will decline in value, the recipient shares in any
appreciation in the value of the property, the recipient shares in any savings
in the property's operating costs or the recipient bears the risk of damage to
or loss of the property), (iv) the service provider does not bear any risk of
substantially diminished receipts or substantially increased expenditures if
there is nonperformance under the contract, (v) the service provider does not
use the property concurrently to provide significant services to entities
unrelated to the service recipient and (vi) the total contract price does not
substantially exceed the rental value of the property for the contract period.
Since the determination of whether a service contract, partnership agreement,
or some other type of arrangement should be treated as a lease is inherently
factual, the presence or absence of any single factor may not be dispositive in
every case.(3)
We have concluded that the Lease will be treated as a lease for
Federal income tax purposes, rather than a service contract, management
contract or other type of arrangement. This conclusion is based, in part, on
the following facts: (i) Funding II and Southwest intend their relationship to
be that of lessor and lessee (as evidenced by the terms of the Lease), (ii)
Southwest has the right to exclusive possession, use and quiet enjoyment of the
Hotel Property during the term of the Lease and the right to uninterrupted
control in the operation of and business conducted at the Hotel Property
(subject to its assumption of the Management Agreement), (iii) Southwest will
bear the cost of, and be responsible for, capital expenditures, including
maintenance and repair of the Hotel Property, and will dictate how the Hotel
Property is maintained and improved (with the exception that Funding II, as
lessor, is responsible for the cost of certain capital expenditures in
situations where the funds available to Southwest are insufficient for such
expenditures), (iv) Southwest will bear all the costs and expenses of operating
the Hotel Property (with the exception of the costs of replacing certain
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(2) See, e.g., Xerox Corp. v. U.S., 80-2 USTC Paragraph 9530 (Ct. Cl. Tr.
Div. 1980), aff'd per curiam, 656 F.2d 659 (Ct. Cl. 1981).
(3) P.L.R. 8918012 (January 24, 1989).
<PAGE> 52
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 5
FF & E associated with the Hotel Property, which is to be funded by Funding
II), (v) Southwest will benefit from any savings in the costs of operating the
Hotel Property during the term of the Lease, (vi) in the event of damage or
destruction to the Hotel Property, Southwest will be at economic risk because
its obligation to make rental payments will not abate, (vii) Southwest will
indemnify Funding II against all liabilities imposed on Funding II during the
term of the Lease by reason of injury to persons or damage to property
occurring at the Hotel Property or Southwest's use, management, maintenance or
repair of the Hotel Property, (viii) Southwest is obligated to pay substantial
fixed rent for the period of use of the Hotel Property, regardless of whether
its revenues exceed its costs and expenses, and (ix) Southwest stands to incur
substantial losses (or derive substantial profits) depending on how
successfully it operates the Hotel Property.
We do not believe that our conclusion that the Lease of the Hotel
Property will be treated as a lease for Federal income tax purposes is affected
by the fact that Southwest assumed RoseStar's rights and obligations as lessor
under the Lease subject to its assumption of Funding II's obligations under the
preexisting Management Agreement. The Management Agreement gives Hyatt control
over the day-to-day operation of the Hotel Property and will allow Hyatt to
share with Southwest in the benefits of any increases in revenues or cost
savings in the operation of the Hotel Property. However, Hyatt's operation of
the Hotel Property is not controlled by Funding II, and the Management
Agreement does not affect the fact that Southwest bears most of the risk of
loss if the Hotel Property is not successful. Moreover, the IRS has issued a
private letter ruling in which it treated leases of several hotel properties as
producing "rents from real property" in a situation where the lessees had
contracted with a third party to conduct the day-to-day operations of the
hotels.(4) This ruling suggests that the IRS will respect a lease of a hotel
for federal income tax purposes even if the hotel is operated by an independent
contractor rather than by the lessee.
The Lease is currently structured in form so that Funding II retains
ownership of all the personal property leased to Southwest in connection with
Southwest's lease of the Hotel Property (the "FF&E"). However, if the term of
the Lease equals or exceeds the useful life of some or all of the FF&E, it is
possible that the Lease could be treated for federal income tax purposes as a
financing arrangement. In such a case, Southwest would be treated as having
acquired ownership of the FF&E for federal income tax purposes in exchange for
an obligation to make future payments of principal and interest to Funding II.
Nonetheless, we do not believe that the recharacterization of the Lease as a
financing arrangement with respect to the FF&E would have a material effect on
the ability of the Company to satisfy the requirements for taxation as a REIT.
We reach this conclusion on the basis that, if a portion of the payments made
by Southwest under the Lease were characterized as interest on
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(4) See, P.L.R. 8117036 (January 27, 1981).
<PAGE> 53
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 6
indebtedness secured by the FF&E, rather than rents from real property, that
portion would still satisfy the 95 percent gross income test (although it would
not satisfy the 75% gross income test).(5)
B. Percentage Rent Provision is not Profit-Based
Pursuant to the Lease, Southwest will be obligated to pay Funding II
base rent and percentage rent. Under the regulations, percentage rent based on
a percentage of gross receipts or sales in excess of a floor amount, which is
how the percentage rent is structured under the Lease, will not qualify as
"rents from real property" unless (i) such floor amount does not depend in
whole or in part on the income or profits of the lessee, (ii) the percentage
and the floor amount are fixed at the time the lease is entered into, (iii) the
percentage and the floor amount are not renegotiated during the term of the
lease in a manner that has the effect of basing the percentage rent on income
or profits, and (iv) the percentage and the floor amount conform with normal
business practice.(6)
Under the terms of Article 4.2 of the Lease, Southwest will pay
percentage rent equal on an annual basis to the sum of (i) 17.5 percent of the
excess of annual gross receipts from room rentals over $9,300,000 and (ii) 2.5
percent of the excess of annual gross receipts from the food and beverage
facilities at the Hotel Property over $3,000,000. This formula is unchanged
from the formula in the Original Lease between the Operating Partnership and
Mogul. It will effectively reward Southwest for any increases in gross
receipts from rooms and from other sources over the threshold amounts. This
type of formula does not base the percentage rent on Southwest's income or
profits, and similar formulas have been treated by the IRS as generating "rents
from real property."(7) Moreover, Funding II has represented that (i) the floor
amounts used to compute the percentage rent under the Lease do not depend in
whole or in part on the income or profits of any person, (ii) the percentage
rent provision of the Lease has not been and will not be renegotiated during
the term of the Lease or at the expiration or earlier termination of the Lease
in a manner that has the effect of basing the rent
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(5) If the Lease were recharacterized as a financing arrangement with
respect to the FF&E, it also might result in some minor timing
differences with respect to the Company's recognition of
income. These differences would result from (a) the
recharacterization of a portion Soutwest's payments under the Lease as
a return of principal and (b) the Company's loss of any depreciation
deductions attributable to the FF&E.
(6) Treas. Reg. Section 1.866-4(b)(3).
(7) See, e.g., P.L.R. 8803007 (September 23, 1987) (percentage rent based
on gross revenues in excess of gross revenues for a base year
treated as "rents from real property"); cf. P.L.R. 9104018 (October
26, 1990) (interest based on gross revenues in excess of a floor
amount treated as qualifying interest under section 856(f)).
<PAGE> 54
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 7
on income or profits, and (iii) the percentage rent provision of the Lease
conforms with normal business practice. In addition, based on our experience
and an examination of the Lease and the Hotel Property projections, the Lease
appears to conform with normal business practice.
C. Southwest is not a "Related Party Tenant"
Rents received from Southwest will not qualify as "rents from real
property" if Southwest is a "related party tenant." Southwest will be a
"related party tenant" if the Company, or an owner of 10 percent or more of the
Company, directly or constructively owns 10 percent or more of the assets or
net profits of Southwest.(8) Constructive ownership is determined for purposes
of this test by applying the rules of section 318(a) as modified by section
856(d)(5). Those rules generally provide that if 10 percent or more in value
of the stock of the Company is owned, directly or indirectly, by or for any
person, the Company is considered as owning the stock owned, directly or
indirectly, by or for such person.
Southwest will not be treated as a "related party tenant" because a 99
percent interest in Southwest's assets and net profits will be owned by
RoseStar, with the remaining one percent interest owned by RSSW Corp. An
individual, Sanjay Varma, currently owns a 91 percent interest in the assets
and net profits of RoseStar and RSSW Corp. In reaching this conclusion, we
recognize that Sanjay Varma owns certain Units of the Operating Partnership.(9)
Funding II has represented that (i) Sanjay Varma does not own more than 10
percent of the value of the Company's stock, (ii) Sanjay Varma is not expected
to own more than 10 percent of the value of the Company's stock in the future,
and (iii) neither the Funding II nor the Company intends to acquire, directly
or constructively, an interest of 10 percent or more in the assets or net
profits of RoseStar at any time in the future. Moreover, Article 7.8 of the
Lease limits the ability of Southwest or any person owning an interest in
Southwest (including RoseStar) to acquire, directly or constructively, a 6
percent stock interest in the Company, and Section 6.4 of the First Amended and
Restated Articles of Incorporation of the Company prevents RoseStar and its
members and managers from acquiring more than 8 percent of the Company's stock.
The conclusion that Southwest will not be treated as a "related party
tenant" is based on the assumption that its member RoseStar will be treated as
a partnership for federal income tax purposes. If RoseStar is not treated as a
partnership for federal income tax purposes, but
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(8) Section 856(d)(2)(B)(ii).
(9) See Rev. Rul. 73-194, 1973-1 C.B. 355 (management company treated as
an independent contractor with respect to a REIT, where an
affiliate of the management company and the REIT were partners).
<PAGE> 55
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 8
is instead treated as an association taxable as a corporation, then it is
possible that Southwest would be treated as a "related party tenant" and the
rents derived under the terms of the Lease would not be treated as "rents from
real property." This is because, if RoseStar were treated as a corporation for
federal income tax purposes, Gerald W. Haddock and John C. Goff would likely be
deemed to own all of its voting stock, because of the extensive powers that
they are granted as managers under the RoseStar Regulations. If this were the
case, the ownership of such voting stock (and ownership of Southwest) might be
attributed to the Company under a literal reading of the constructive ownership
rules described above.(10)
An entity which has associates and an objective to carry on a business
for joint profit will be treated as a partnership for federal income tax
purposes, and not as an association taxable as a corporation, if it has not
more than two of the following four characteristics of a corporation: (i)
continuity of life; (ii) centralization of management; (iii) limited liability;
and (iv) free transferability of interests.(11) The entity must also have no
other characteristics which are significant in determining its classification.
Generally, other factors are considered only insofar as they relate to the
determination of the presence or absence of the foregoing corporate
characteristics.(12) The IRS has applied this four-factor test in determining
whether limited liability companies formed under the Texas Limited Liability
Company Act (the "Act") are partnerships for federal income tax purposes.(13)
The IRS has issued Rev. Proc. 95-10, which specifies conditions which must be
satisfied for a limited liability company to receive a favorable advanced
ruling that it will be classified as a partnership for federal income tax
purposes.(14) RoseStar should satisfy these conditions. However, such
conditions are
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(10) Richard Rainwater, Gerald Haddock and John Goff are each partners in
FW-Irving Partners, Ltd. (and apparently they are partners in
other partnerships as well). Richard Rainwater also owns more than 10
percent of the value of the stock of the Company. Thus, assuming that
the ownership interests in RoseStar held by Gerald Haddock and John
Goff constitute stock, such interests, along with Richard Rainwater's
stock interest in the Company, will be attributed to FW-Irving
Partners, Ltd. pursuant to section 318(a)(3)(A), which provides that
stock owned, directly or indirectly, by or for a partners shall be
considered as owned by the partnership. Then, FW-Irving Partners,
Ltd.'s deemed interest in RoseStar would be attributed to the Company
pursuant to section 318(a)(3)(C) (as modified by section 856(d)(5)),
which provides that stock owned by any person that owns 10 percent or
more of the value of the stock in a corporation shall be considered
owned by the corporation. As you are aware, however, we have opined
to you in a similar context that we do not believe that these
attribution rules should be read literally.
(11) Treas. Reg. Section 301.7701-2(a).
(12) See Rev. Rul. 79-106, 1979-1 C.B. 448.
(13) See, e.g., P.L.R. 9242025 (July 22, 1992) and P.L.R. 9218078 (January
31, 1992).
(14) 1995-3 I.R.B. 20.
<PAGE> 56
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 9
applicable only in determining whether rulings will be issued and are not
intended as substantive rules for determination of partnership status.
An organization will be treated as possessing the corporate
characteristic of continuity of life, even if the agreement organizing an
entity provides that it is to continue only for a stated period, unless a
member has the power to dissolve the organization at an earlier time.(15)
Article 6.01 of the Act provides, in part, that except as otherwise provided in
the company's regulations, a limited liability company shall be dissolved upon
the death, retirement, resignation, expulsion, bankruptcy, or dissolution of a
member or the occurrence of any other event which terminates the continued
membership of a member in the limited liability company, unless there is at
least one remaining member and the business of the limited liability company is
continued by the consent by the number of members or class thereof stated in
the articles of organization or regulations of the limited liability company or
of not so stated, by all remaining members. Article 2 of the RoseStar Articles
provides that the duration of RoseStar is until the close of business on
December 31, 2015, or until its earlier dissolution in accordance with the
provisions of the Act or the Regulations. Article 10.2 of the RoseStar
Regulations provides, in part, that RoseStar shall be dissolved upon the
withdrawal, death, retirement, resignation, expulsion, bankruptcy, legal
incapacity or dissolution of any member, unless the business of RoseStar is
continued by the consent of all the remaining members within ninety days.
Accordingly, RoseStar will lack the corporate characteristic of continuity of
life.
An organization will be treated as possessing the corporate
characteristic of free transferability of interests if the members owning all
or substantially all of the interests in an organization may substitute for
themselves without the consent of the other members a person who is not a
member of the organization.(16) Article 4.05 of the Act provides, in part,
that unless otherwise provided by the company's regulations, a membership
interest is assignable in whole or in part; an assignment of a member's
interest does not entitle the assignee to become, or to exercise rights or
powers of a member; and until the assignee becomes a member, the assignor
member continues to be a member and to have the power to exercise any rights or
powers of a member, except to the extent those rights or powers are assigned.
Article 4.07 of the Act provides, in part, that an assignee of a membership
interest may become a member if and to the extent that the company's
regulations so provide, or all members consent. Article 9.3 of the RoseStar
Regulations provides, in part, that no member shall have the right to
substitute in its place a transferee unless consent is given by the Managers
and a majority of the other members, which consent may be withheld in the
discretion of the Managers or the
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(15) Treas. Reg. Section 301.7701-2(b)(3).
(16) Treas. Reg. Section 301.7701-2(e).
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Crescent Real Estate Equities, Inc.
April 1, 1996
Page 10
other members. Accordingly, RoseStar will lack the corporate characteristic of
free transferability of interests. Because RoseStar will lack the corporate
characteristics of continuity of life and free transferability of interests, in
our opinion it will be treated as partnership for federal income tax purposes.
D. Incidental Personal Property
1. Rents Attributable to Personal Property Will Be Treated as
"Rents from Real Property"
The rents attributable to Funding II's personal property leased under
or in connection with the Lease must not be greater than 15 percent of the
rents received under the Lease. The rent attributable to personal property
leased under or in connection with a lease of real property is the amount that
bears the same ratio to total rent for the taxable year as (i) the average of
the adjusted bases of the personal property leased under or in connection with
a lease of real property at the beginning and at the end of the taxable year
bears to (ii) the average of the aggregate adjusted bases of the real and
personal property subject to the lease at the beginning and at the end of such
taxable year (the "Adjusted Basis Ratio").(17) Funding II has represented that
the adjusted tax basis of the personal property leased under or in connection
with the Lease (including, for the period beginning on January 1, 1996, any
furniture, fixtures or equipment formerly treated as owned by Mogul, as
described below) has not represented and will not represent more than 15
percent of the aggregate adjusted tax basis of the Hotel Property at any time.
2. Payments Attributable to Mogul's Deemed Acquisition of Certain
Personal Property Will Not Be Treated as "Rents from Real
Property"
Article 4.7 of the Original Lease provided that Mogul was to be deemed
to have acquired all of the furniture, fixtures and operating equipment
associated with the Hotel Property (the "FF & E") with the proceeds of a loan
from the Operating Partnership. It further provided that Mogul was to make
payments of principal and interest on this deemed loan. Pursuant to Funding
II's assumption of all of the Operating Partnership's liabilities and
obligations under the Original Lease, after October 6, 1995, all payments of
principal and interest on this deemed loan were accrued by Funding II. On
January 1, 1996, in connection with the execution of the Lease, Article 4.7 of
the Original Lease ceased to be effective and the parties ceased to treat the
FF & E as owned by Mogul. Instead, beginning on January 1, 1996, the FF & E
has been treated by all parties as if it had been conveyed by Mogul to
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(17) Section 856(d)(1)(C).
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Crescent Real Estate Equities, Inc.
April 1, 1996
Page 11
Funding II in exchange for the cancellation the balance owed by Mogul under the
deemed financing arrangement established under the Original Lease.
The payments that the Operating Partnership and Funding II received
with regard to the FF & E under the terms of Article 4.7 of the Original Lease
prior to January 1, 1996 did not qualify as "rents from real property."
Instead, such payments were treated for federal income tax purposes as payments
of principal and interest resulting from a deemed financing of Mogul's purchase
of the FF & E.
The payments pursuant to this "deemed financing," to the extent they
constituted interest, were "qualifying income" for purposes of the 75 percent
test. However, because the deemed financing was secured by personal, rather
than real property, such interest was not qualifying income for purposes of the
95 percent test.
E. Provision of Services by the Funding II
1. Income Derived under the Terms of the Lease
Although Funding II may treat charges for services customarily
furnished or rendered in connection with the rental of the Hotel Property as
"rents from real property," any services rendered to the occupants of the Hotel
Property must be furnished or rendered by an independent contractor from whom
the Company does not derive or receive any income.(18) Moreover, to the extent
that any independent contractors provide noncustomary services to the occupants
of the Hotel Property, the cost of such services must not be borne by Funding
II.(19)
Under the terms of the Lease, Funding II will not be required to
provide any services, customary or noncustomary, in connection with the rental
of the Hotel Property. Instead, all services relating to the operation of the
Hotel Property will be provided by Hyatt under the terms of the Management
Agreement. Funding II has represented that Hyatt is an independent contractor
within the meaning of section 856(d)(3), from which the Company and Funding II
will not derive or receive any income. Funding II will not bear the cost of
any of the services provided by Hyatt. Instead, such costs are borne by
Southwest, because it has assumed Funding II's obligations, as owner, under the
Management Agreement.
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(18) Sections 856(d)(1), 856(d)(2)(C); Treas. Reg. Section 1.512(b)-1(c)(5).
(19) Treas. Reg. Section 1.856-4(b)(5).
<PAGE> 59
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 12
Based on the foregoing, we believe that the provision of any
noncustomary services to the occupants of the Hotel Property by Hyatt will have
no effect on the qualification of the income derived from the Hotel Property as
"rents from real property." In fact, the IRS has issued a private letter
ruling in which it has treated the income derived from several leases of hotel
properties as "rents from real property" in a situation where the lessees had
contracted with a third-party to conduct the day to day operations of the
hotels.(20) Our conclusion is not altered by the fact that Funding II will
remain liable for any obligations arising under the Management Agreement, to
the extent that they are not satisfied by Southwest. Funding II should not be
treated as bearing the cost of the services provided by Hyatt merely because it
is liable for Southwest's obligations under the Management Agreement. Funding
II is not retaining this liability in an attempt to provide services to
Southwest. Instead, it is retaining this liability only as an accommodation to
Hyatt. Moreover, Funding II believes that it is highly unlikely that it will
ever be required to reimburse Hyatt for the costs and expenses of operating the
Hotel Property. This is because (i) the Hotel Property is projected to
generate enough gross income to cover the payments to Hyatt under the
Management Agreement, (ii) in connection with Section 7.7 the Lease, as
amended, Southwest has represented that it has a net worth of at least
$200,000, (iii) in connection with Section 7.9 of the Lease, as amended,
Southwest has agreed to retain all of the income it earns from the Hotel
Property (except distributions to its beneficial owners in an amount sufficient
to pay their federal and state income taxes on such income) until such time as
Southwest and any affiliate of Southwest (including RoseStar) which has entered
into a long-term lease of a hotel with Funding II or any affiliate of Funding
II (including the Operating Partnership) have accumulated and are holding in
reserve funds in the aggregate which are sufficient to enable Southwest and any
affiliated entities to pay at least one monthly payment of base rent under each
lease between Southwest and any such affiliated entities and Funding II or an
affiliate of Funding II, (iv) pursuant to the Guaranty, RoseStar's individual
members have guaranteed RoseStar's obligations under the Lease, and (v) in the
view of Funding II, Southwest's capitalization is adequate to allow Southwest
to assume its obligations as lessee under the Lease.
2. Income Derived in the Case of a Default under the Lease
If Funding II were required to reimburse Hyatt for the costs of
operating the Hotel Property because of a default by Southwest under the terms
of the Management Agreement, we have concluded that the income derived by
Funding II from the Hotel Property would be treated as "qualifying income" for
purposes of the 75 percent and 95 percent tests. This is because, if Funding
II were required to reimburse Hyatt for the cost of operating the Hotel
Property, this would constitute an event of default under Article 16.1(c) of
the Lease, allowing Funding II to terminate Southwest's leasehold interest in
the Hotel Property. As a
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(20) See, P.L.R. 8117036 (January 27, 1981).
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Crescent Real Estate Equities, Inc.
April 1, 1996
Page 13
result of such a termination of the Lease, any income derived by Funding II
from the Hotel Property after the default would be treated as income from
foreclosure property.
Funding II would be able to continue to operate the Hotel Property
after any default under the Lease, without affecting its status as foreclosure
property, because Hyatt, an independent contractor, from whom the Company will
not derive any income, will provide all services relating to its operation. A
REIT can use foreclosure property in the conduct of an active trade or
business, as long as this is done through the use of an independent contractor,
from whom the REIT does not derive or receive any income.(21)
Real property acquired upon default under a lease is not eligible to
be treated as foreclosure property if the lease is entered into with an intent
to evict or foreclose, or if the REIT knows or has reason to know that default
would occur.(22) This is not the case in the present situation because (i) the
Hotel Property is projected to generate enough gross income to cover the
payments to Hyatt under the Management Agreement, (ii) in connection with
Section 7.7 the Lease, as amended, Southwest has represented that it has a net
worth of at least $200,000, (iii) in connection with Section 7.9 of the Lease,
as amended, Southwest has agreed to retain all of the income it earns from the
Hotel Property (except distributions to its beneficial owners in an amount
sufficient to pay their federal and state income taxes on such income) until
such time as Southwest and any affiliate of Southwest (including RoseStar)
which has entered into a long-term lease of a hotel with Funding II or any
affiliate of Funding II (including the Operating Partnership) have accumulated
and are holding in reserve funds in the aggregate which are sufficient to
enable Southwest and any affiliated entities to pay at least one monthly
payment of base rent under each lease between Southwest and any such affiliated
entities and Funding II or an affiliate of Funding II, (iv) pursuant to the
Guaranty, RoseStar's individual members have guaranteed RoseStar's obligations
under the Lease, and (v) in the view of Funding II, Southwest's capitalization
is adequate to allow Southwest to assume its obligations as lessee under the
Lease.
The Hotel Property would in any event qualify as foreclosure property
only for a period of up to two years, beginning of the date of its acquisition
by Funding II, unless
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(21) Section 856(e)(4)(C). (The IRS clearly intended for REITs to be able
to treat hotels operated by independent contractors as
foreclosure property. For instance, the Treasury regulations defining
foreclosure property refer to hotel properties twice. See, Treas.
Reg. Sections 1.856-6(b)(2), 1.856-6(d)(2). In addition, the IRS has
also recently issued a private letter ruling in which it treated
income received from hotels acquired pursuant to a bankruptcy petition
as income from foreclosure property, where the hotels were operated by
third party managers. P.L.R. 9420013 (2/15/94).)
(22) Treas. Reg. Section 1.856-6(b)(3).
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Crescent Real Estate Equities, Inc.
April 1, 1996
Page 14
Funding II obtains an extension of the grace period from the IRS.(23)
Therefore, in the event Funding II takes possession of the Hotel Property as a
result of a default under the Lease, presumably Funding II will sell the Hotel
Property or, within two years, rent it to another tenant under a lease that
will produce "rents from real property."
F. Conclusions
Based on the assumptions and representations stated above, it is our
opinion that (i) all of the income that Funding II derives from the Hotel
Property will be treated as "qualifying income" for purposes of the 95 percent
test and (ii) all of the income that Funding II derives from the Hotel
Property, will be treated as "qualifying income" for purposes of the 75 percent
test. However, we note that certain interest income accrued prior to January
1, 1996 and attributable to the deemed financing of Mogul's acquisition of the
FF & E under Section 4.7 of the Original Lease has properly been treated by the
Operating Partnership and Funding II as qualifying income for purposes of the
95 percent test, but not for purposes of the 75 percent test.
III. Additional Limitations
The foregoing opinions are limited to the specific matters covered
thereby and should not be interpreted to imply that the undersigned has offered
its opinion on any other matter.
Very truly yours,
SHAW, PITTMAN, POTTS & TROWBRIDGE
By:
--------------------------------
Charles B. Temkin, P.C.
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(23) Section 856(e)(2).
<PAGE> 62
MEMORANDUM
TO: David Dean
FROM: Charles B. Temkin
Michael A. Jacobs
DATE: June 30, 1995
RE: Characterization of Income Derived from Denver Marriott City
Center
I. OVERVIEW
Crescent Real Estate Equities Limited Partnership (the "Operating
Partnership") is scheduled to purchase the Denver Marriott City Center (the
"Denver Marriott") from the Prudential Insurance Company of America
("Prudential"), the successor to the Denver Energy Center Hotel Partnership
(the "Original Owner"), on June 30, 1995. Crescent Real Estate Equities, Inc.
(the "Company") is currently the sole shareholder of two corporations, one of
which is the sole general partner of and one of which is a limited partner of
the Operating Partnership. These two corporations constitute qualified REIT
subsidiaries within the meaning of section 856(i).(1)
This memorandum analyzes the impact that the purchase of the Denver
Marriott will have on the ability of the Company to continue to qualify as a
real estate investment trust (a "REIT") under section 856(c). More
specifically, it analyzes whether the income the Operating Partnership will
derive from the Denver Marriott will be "qualifying income" for purposes of the
75 percent and 95 percent gross income tests for REIT qualification. This
memorandum concludes that, subject to certain assumptions, in our opinion (i)
all of the income that the Operating Partnership will derive from the Denver
Marriott will be treated as "qualifying income" for purposes of the 95 percent
test and (ii) all of the income the Operating Partnership will derive from the
Denver Marriott, with the exception of certain interest income, will be treated
as "qualifying income" for purposes of the 75 percent test.
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(1)All section references herein are to the Internal Revenue Code of 1986, as
amended (the "Code"), or to the regulations issued thereunder, unless otherwise
noted.
<PAGE> 63
II. FACTS AND ASSUMPTIONS
The Original Owner contracted with Marriott Corporation to operate
the Denver Marriott. Under the terms of the agreement between the Original
Owner and Marriott Corporation dated January 10, 1979, as amended on January
10, 1979, February 16, 1979, May 11, 1979, July 27, 1979, March 25, 1980,
December 18, 1980, July 15, 1981, January 4, 1982, and November 19, 1993. (the
"Management Agreement"), Marriott Corporation is obligated to provide all
services in relation to the operation of the Denver Marriott and collect all
hotel receipts. In exchange for these services, Marriott Corporation is to be
reimbursed for the costs of operating the Denver Marriott and paid a management
fee. This fee is paid out of hotel receipts; it is based on the profits, if
any, from operation of the Denver Marriott. Marriott International, Inc.
("Marriott") is currently operating the Denver Marriott as the successor to
Marriott Corporation.
Article 18.01 of the Management Agreement requires that all
assignments of the Management Agreement be approved by Marriott and that any
assignees expressly assume the obligations of the owner under the Management
Agreement. Therefore, in connection with its purchase of the Denver Marriott,
the Operating Partnership will assume all of the obligations of Prudential
under the Management Agreement.
When the Operating Partnership purchases the Denver Marriott, it will
lease it to RoseStar Management, LLC ("RoseStar") pursuant to a Lease Agreement
dated June 30, 1995, as amended and restated by an Amended and Restated Lease
Agreement dated June 30, 1995 (as amended and restated, the "Lease"). Pursuant
to Article 2 of the Lease, the Operating Partnership will assign its interest
in the Management Agreement to RoseStar; and pursuant to Article 18.01 of the
Management Agreement, RoseStar will assume all of the Operating Partnership's
obligations thereunder. However, as a condition of its approval of the Lease,
Marriott will require that the Operating Partnership remain liable for all
obligations of the Operating Partnership under the Management Agreement that
will be assumed by RoseStar.
Currently, Sanjay Varma owns a 91 percent interest in the assets and
net profits of RoseStar, while Gerald W. Haddock and John C. Goff, the
managers of RoseStar, each own a 4.5 percent interest in its assets and net
profits.
For purposes of this memorandum, we have examined and relied upon (1)
the Management Agreement, (2) the Lease, (3) the Articles of Organization of
RoseStar Management, LLC (the "RoseStar Articles"), (4) the Regulations of
RoseStar Management, LLC (the "RoseStar Regulations"), (5) the First Amended
and Restated Articles of Incorporation of Crescent Real Estate Equities, Inc.
(the "Crescent Articles"), (6) the Purchase and Sale Agreement between
Prudential and the Operating Partnership, (7) the Consent Agreement between
Marriott and the Operating Partnership, and (8) such other documents or
information as we deemed necessary for the opinions set forth below. In our
examination, we have assumed the genuineness of all
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<PAGE> 64
signatures, the legal capacity of natural persons, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified or photostatic copies, and the
authenticity of the originals of such copies.
This memorandum is based upon existing provisions of the Code,
Treasury regulations, and the reported interpretations thereof by the Internal
Revenue Service ("IRS") and by the courts in effect (or, in the case of certain
proposed regulations, proposed) as of the date hereof, all of which are subject
to change, both retroactively or prospectively, and to possibly different
interpretations. We assume no obligation to update the opinions set forth in
this memorandum. We believe that the conclusions expressed herein, if
challenged by the IRS, would be sustained in court. However, because our
opinions are not binding upon the IRS or the courts, there can be no assurance
that contrary positions may not be successfully asserted by the IRS.
In addition, this memorandum is based on various assumptions and is
conditioned upon certain representations made by the Operating Partnership and
its sole general partner, Crescent Real Estate Equities, Ltd., as to factual
and other matters as set forth in the attached letter.
III. LEGAL BACKGROUND
A. 75 Percent and 95 Percent Tests
In order to qualify as a REIT for tax purposes, the Company must
satisfy certain tests with respect to the composition of its gross income on an
annual basis. First, at least 75 percent of the Company's gross income
(excluding gross income from certain prohibited transactions) for each taxable
year must consist of temporary investment income or of certain defined
categories of income derived directly or indirectly from investments relating
to real property or mortgages on real property. These categories include,
subject to various limitations, rents from real property, interest on mortgages
on real property, gains from the sale or other disposition of real property
(including interests in real property and mortgages on real property) not
primarily held for sale to customers in the ordinary course of business, income
from foreclosure property, and amounts received as consideration for entering
into either loans secured by real property or purchases or leases of real
property.(2) Second, at least 95 percent of the Company's gross income
(excluding gross income from certain prohibited transactions) for each taxable
year must be derived from income qualifying under the 75 percent test and from
dividends, other types of interest and gain from the sale or disposition of
stock or securities, or from any combination of the foregoing.(3)
In applying these income tests, REITs that are partners in a
partnership are required to include in their gross income their proportionate
share of the partnership's gross income. In
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(2)Section 856(c)(3).
(3)Section 856(c)(2).
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<PAGE> 65
addition, such REITs are to treat this partnership gross income as retaining
the same character as the items of gross income of the partnership for purposes
of section 856.(4) Thus, the character of any income derived by the Operating
Partnership from the Denver Marriott will affect the ability of the Company to
qualify as a REIT.
B. Rents from Real Property
Rents from real property satisfy both the 75 percent and 95 percent
tests for REIT qualification only if several conditions are met. First, the
amount of rent must not be based in whole or in part on the income or profits
of any person. An amount received or accrued generally will not be excluded
from the term "rents from real property" solely by reason of being based on a
fixed percentage or percentages of receipts or sales.(5) Second, the Code
provides that rents received from a tenant will not qualify as "rents from real
property" if the REIT, or an owner of 10 percent or more of the REIT, directly
or constructively, owns 10 percent or more of such tenant (a "Related Party
Tenant").(6) Third, if rent attributable to personal property leased in
connection with a lease of real property is greater than 15 percent of the
total rent received under the lease, then the portion of rent attributable to
such personal property will not qualify as "rents from real property."(7)
Finally, for rents to qualify as "rents from real property," a REIT generally
must not operate or manage the property or furnish or render services to the
tenants of such property, other than through an independent contractor from
whom the REIT derives no revenue. However, rents will be qualified as "rents
from real property" if a REIT directly performs services in connection with the
lease of the property, if those services are "usually or customarily rendered"
in connection with the rental of space for occupancy, and such services are not
considered to be rendered to the occupant of the property.(8)
C. Income from Foreclosure Property
Income from foreclosure property is treated as "qualifying income" for
purposes of the 75 percent and 95 percent tests (although any net income from
foreclosure property is taxed at the maximum corporate rate). Foreclosure
property is any real property, and any personal property incident to such real
property, acquired by a REIT through default under a mortgage or a lease. A
REIT may elect to treat such property as foreclosure property for a grace
period of up to two
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(4)Treas. Reg. Section 1.856-3(g).
(5)Section 856(d)(2)(A).
(6)Section 856(d)(2)(B).
(7)Section 856(d)(1)(C).
(8)Sections 856(d)(1)(B), 856(d)(2)(C).
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<PAGE> 66
years.(9) However, such property will cease to qualify as foreclosure property
if it is used by the REIT in a trade or business more than 90 days after it is
acquired and it is not operated through an independent contractor from whom the
REIT does not derive or receive any income.(10) Moreover, property is not
eligible to be treated as foreclosure property if the lease is entered into
with an intent to evict or foreclose, or if the REIT knows or has reason to
know that default would occur.(11)
IV. DISCUSSION
A. Lease Will be Treated as a Lease for Federal Income Tax Purposes
In order for any income derived by the Operating Partnership from the
Denver Marriott to constitute either "rents from real property," or in the case
of a default under the Lease, "gross income from foreclosure property," the
Lease must be treated as a lease for federal income tax purposes and not be
treated as a service contract, management contract or other type of
arrangement. This determination depends on an analysis of all the surrounding
facts and circumstances. In making this determination, courts have considered
a variety of factors, including the following: (i) the intent of the parties,
(ii) the form of the agreement, (iii) the degree of control over the business
conducted at the property that is provided to the lessee (e.g., whether the
lessee has substantial rights of control over the operation of the property and
its business), (iv) the extent to which the lessee has the risk of loss from
operations of the business conducted as the property (e.g., whether the lessee
bears the risk of increases in operating expenses and of decreases in
revenues), and (v) the extent to which the lessee has the opportunity to
benefit from operations of the business conducted at the property (e.g.,
whether the lessee benefits from decreased operating expenses or increased
revenues).(12)
In addition, section 7701(e) provides that a contract that purports to
be a service contract, partnership agreement, or another type of arrangement
will be treated instead as a lease of property if the contract is properly
treated as such, taking into account all relevant factors, including whether or
not: (i) the service recipient is in physical possession of the property, (ii)
the service recipient controls the property, (iii) the service recipient has a
significant economic or possessory interest in the property (e.g., the
property's use is likely to be dedicated to the service recipient for a
substantial portion of the useful life of the property, the recipient shares
the risk that the property will decline in value, the recipient shares in any
appreciation in the value of the property, the
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(9)Section 856(e).
(10)Section 856(e)(4).
(11)Treas. Reg. Section 1.856-6(b)(3).
(12)See, e.g., Xerox Corp. v. U.S., 80-2 USTC Paragraph 9530 (Ct. Cl. Tr. Div.
1980), aff'd per curiam, 656 F.2d 659 (Ct. Cl. 1981).
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<PAGE> 67
recipient shares in any savings in the property's operating costs or the
recipient bears the risk of damage to or loss of the property), (iv) the
service provider does not bear any risk of substantially diminished receipts or
substantially increased expenditures if there is nonperformance under the
contract, (v) the service provider does not use the property concurrently to
provide significant services to entities unrelated to the service recipient and
(vi) the total contract price does not substantially exceed the rental value of
the property for the contract period. Since the determination of whether a
service contract, partnership agreement, or some other type of arrangement
should be treated as a lease is inherently factual, the presence or absence of
any single factor may not be dispositive in every case.(13)
We have concluded that the Lease will be treated as a lease for
Federal income tax purposes, rather than a service contract, management
contract or other type of arrangement. This conclusion is based, in part, on
the following facts: (i) the Operating Partnership and RoseStar intend their
relationship to be that of lessor and lessee (as evidenced by the terms of the
Lease), (ii) RoseStar will have the right to exclusive possession, use and
quiet enjoyment of the Denver Marriott during the term of the Lease and the
right to uninterrupted control in the operation of the business conducted at
the Denver Marriott (subject to its assumption of the Management Agreement),
(iii) RoseStar will dictate how the Denver Marriott is maintained and improved,
(iv) Rose-Star will bear all the costs and expenses of operating the Denver
Marriott (with the exception of the cost of replacing certain FF & E, which is
to be funded by the Operating Partnership pursuant to Article 7.5 of the
Lease), (v) RoseStar will benefit from any savings in the costs of operating
the Denver Marriott during the term of the Lease, (vi) in the event of damage
or destruction to the Denver Marriott, RoseStar will be at economic risk
because its obligation to make rental payments will not abate, (vii) RoseStar
will indemnify the Operating Partnership against all liabilities imposed on the
Operating Partnership during the term of the Lease by reason of injury to
persons or damage to property occurring at the Denver Marriott or RoseStar's
use, management, maintenance or repair of the Denver Marriott, (viii) RoseStar
is obligated to pay substantial fixed rent for the period of use of the Denver
Marriott, regardless of whether its revenues exceed its costs and expenses, and
(ix) RoseStar stands to incur substantial losses (or derive substantial
profits) depending on how successfully it operates the Denver Marriott.
We do not believe that our conclusion that the Lease of the Denver
Marriott will be treated as a lease for Federal income tax purposes is affected
by the fact that RoseStar entered the Lease subject to its assumption of the
Operating Partnership's obligations under the preexisting Management Agreement.
The Management Agreement gives Marriott control over the d ay-to-day operation
of the Denver Marriott and allows Marriott to share with RoseStar in the
benefits of any increases in revenues or cost savings in the operation of the
Denver Marriott. However, Marriott's operation of the Denver Marriott will not
be controlled by the Operating Partnership, and the Management Agreement does
not affect the fact that RoseStar bears most of the risk of loss if the Denver
Marriott is not successful. Moreover, the IRS has issued a private letter
ruling
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(13)P.L.R. 8918012 (January 24, 1989).
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in which it treated leases of several hotel properties as producing "rents from
real property" in a situation where the lessees had contracted with a third
party to conduct the d ay-to-day operations of the hotels.(14) This ruling
suggests that the IRS will respect a lease of a hotel for federal income tax
purposes even if the hotel is operated by an independent contractor rather than
by the lessee.
The Lease is structured in form so that the Operating Partnership
retains ownership of all the personal property leased to RoseStar in connection
with RoseStar's lease of the Denver Marriott (the "FF&E"). However, if the
term of the Lease equals or exceeds the useful life of some or all of the FF&E,
it is possible that the Lease could be treated for federal income tax purposes
as a financing arrangement. In such a case, RoseStar would be treated as
having acquired ownership of the FF&E for federal income tax purposes in
exchange for an obligation to make future payments of principal and interest to
the Operating Partnership. Nonetheless, we do not believe that the
recharacterization of the Lease as a financing arrangement with respect to the
FF&E would have a material effect on the ability of the Company to satisfy the
requirements for taxation as a REIT. This is because, if a portion the of the
payments made by RoseStar under the Lease were characterized as interest on
indebtedness secured by the FF&E, rather than rents from real property, that
portion would still satisfy the 95 percent gross income test (although it would
not satisfy the 75% gross income test).(15)
B. Percentage Rent Provision is not Profit-Based
Pursuant to the Lease, RoseStar will be obligated to pay the Operating
Partnership base rent and percentage rent. Under the regulations, percentage
rent based on a percentage of gross receipts or sales in excess of a floor
amount, which is how the percentage rent is structured under the Lease, will
not qualify as "rents from real property" unless (i) such floor amount does
not depend in whole or in part on the income or profits of the lessee, (ii) the
percentage and the floor amount are fixed at the time the lease is entered
into, (iii) the percentage and the floor amount are not renegotiated during the
term of the lease in a manner that has the effect of basing the percentage rent
on income or profits, and (iv) the percentage and the floor amount conform with
normal business practice.(16)
Under the terms of Article 4.2 of the Lease, RoseStar will pay
percentage rent equal on an annual basis to the sum of (i) 22.5 percent of the
excess of annual gross receipts from room rentals over $9,800,000 and (ii) 4.0
percent of the excess of annual gross receipts from the food and
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(14)See, P.L.R. 8117036 (January 27, 1981).
(15)If the Lease were recharacterized as a financing arrangement with respect
to the FF&E, it also might result in some minor timing differences with respect
to the Company's recognition of income. These differences would result from
(a) the recharacterization of a portion RoseStar's payments under the Lease as
a return of principal and (b) the Company's loss of any depreciation
deductions attributable to the FF&E.
(16)Treas. Reg. Section 1.856-4(b)(3).
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<PAGE> 69
beverage facilities at the Denver Marriott over $4,000,000. This formula
effectively rewards RoseStar for any increases in gross receipts from rooms
and from other sources over the threshold amounts. This type of formula does
not base the percentage rent on RoseStar's income or profits, and similar
formulas have been treated by the IRS as generating "rents from real
property."(17) Moreover, the Operating Partnership has represented that (i) the
floor amounts used to compute the percentage rent under the Lease do not depend
in whole or in part on the income or profits of any person, (ii) the percentage
rent provision of the Lease will not be renegotiated during the term of the
Lease or at the expiration or earlier termination of the Lease in a manner that
has the effect of basing the rent on income or profits, and (iii) the
percentage rent provision of the Lease conforms with normal business practice.
In addition, based on our experience and an examination of the Lease and the
Denver Marriott projections, the Lease appears to conform with normal business
practice.
C. RoseStar is not a "Related Party Tenant"
Rents received from RoseStar will not qualify as "rents from real
property" if RoseStar is a "related party tenant." RoseStar will be a "related
party tenant" if the Company, or an owner of 10 percent or more of the Company,
directly or constructively owns 10 percent or more of the assets or net profits
of RoseStar.(18) Constructive ownership is determined for purposes of this test
by applying the rules of section 318(a) as modified by section 856(d)(5).
Those rules generally provide that if 10 percent or more in value of the stock
of the Company is owned, directly or indirectly, by or for any person, the
Company is considered as owning the stock owned, directly or indirectly, by or
for such person.
RoseStar will not be treated as a "related party tenant" because an
individual, Sanjay Varma, currently owns a 91 percent interest in its assets
and net profits. In reaching this conclusion, we recognize that Sanjay Varma
owns certain Units of the Operating Partnership.(19) The Operating Partnership
has represented that (i) Sanjay Varma does not own more than 10 percent of the
value of the Company's stock, (ii) Sanjay Varma is not expected to own more
than 10 percent of the value of the Company's stock in the future, and (iii)
neither the Operating Partnership nor the Company intends to acquire, directly
or constructively, an interest of 10 percent or more in the assets or net
profits of RoseStar at any time in the future. Moreover, Article 7.8 of the
Lease limits the ability of RoseStar and its members and managers to acquire,
directly or constructively, a 6 percent stock interest in the Company, and
Section 6.4 of the First Amended and
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(17)See, e.g., P.L.R. 8803007 (September 23, 1987) (percentage rent based on
gross revenues in excess of gross revenues for a base year treated as "rents
from real property"); cf. P.L.R. 9104018 (October 26, 1990) (interest based on
gross revenues in excess of a floor amount treated as qualifying interest under
section 856(f)).
(18)Section 856(d)(2)(B)(ii).
(19)See Rev. Rul. 73-194, 1973-1 C.B. 355 (management company treated as an
independent contractor with respect to a REIT, where an affiliate of the
management company and the REIT were partners).
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Restated Articles of Incorporation of the Company prevents RoseStar and its
members and managers from acquiring more than 8 percent of the Company's stock.
In concluding that RoseStar will not be treated as a "related party
tenant," we have applied the definition of related party tenant set forth in
section 856(d)(2)(B)(ii), which applies to tenants which are not corporations.
If RoseStar is not treated as a partnership for federal income tax purposes,
but is instead treated as an association taxable as a corporation, then the
applicable definition of related party tenant is the one set forth in section
856(d)(2)(B)(i), which looks to control over voting securities. If RoseStar
were treated as a corporation for federal income tax purposes, Gerald W.
Haddock and John C. Goff would likely be deemed to own all of its voting stock,
because of the extensive powers that they are granted as managers under the
RoseStar Regulations. If this were the case, it would be necessary to consider
whether the ownership of such voting stock could possibly be attributed to the
Company under the constructive ownership rules described above or otherwise.
An entity which has associates and an objective to carry on a business
for joint profit will be treated as a partnership for federal income tax
purposes, and not as an association taxable as a corporation, if it has not
more than two of the following four characteristics of a corporation: (i)
continuity of life; (ii) centralization of management; (iii) limited liability;
and (iv) free transferability of interests.(20) The entity must also have no
other characteristics which are significant in determining its classification.
Generally, other factors are considered only insofar as they relate to the
determination of the presence or absence of the foregoing corporate
characteristics.(21) The IRS has applied this four-factor test in determining
whether limited liability companies formed under the Texas Limited Liability
Company Act (the "Act") are partnerships for federal income tax purposes.(22)
The IRS has issued Rev. Proc. 95-10, which specifies conditions which must be
satisfied for a limited liability company to receive a favorable advanced
ruling that it will be classified as a partnership for federal income tax
purposes.(23) RoseStar should satisfy these conditions. However, such
conditions are applicable only in determining whether rulings will be issued
and are not intended as substantive rules for determination of partnership
status.
An organization will be treated as possessing the corporate
characteristic of continuity of life, even if the agreement organizing an
entity provides that it is to continue only for a stated period, unless a
member has the power to dissolve the organization at an earlier time.(24)
Article 6.01
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(20)Treas. Reg. Section 301.7701-2(a).
(21)See Rev. Rul. 79-106, 1979-1 C.B. 448.
(22)See, e.g., P.L.R. 9242025 (July 22, 1992) and P.L.R. 9218078 (January 31,
1992).
(23)1995-3 I.R.B. 20.
(24)Treas. Reg. Section 301.7701-2(b)(3).
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of the Act provides, in part, that except as otherwise provided in the
company's regulations, a limited liability company shall be dissolved upon the
death, retirement, resignation, expulsion, bankruptcy, or dissolution of a
member or the occurrence of any other event which terminates the continued
membership of a member in the limited liability company, unless there is at
least one remaining member and the business of the limited liability company is
continued by the consent by the number of members or class thereof stated in
the articles of organization or regulations of the limited liability company or
of not so stated, by all remaining members. Article 2 of the RoseStar Articles
provides that the duration of RoseStar is until the close of business on
December 31, 2015, or until its earlier dissolution in accordance with the
provisions of the Act or the Regulations. Article 10.2 of the RoseStar
Regulations provides, in part, that RoseStar shall be dissolved upon the
withdrawal, death, retirement, resignation, expulsion, bankruptcy, legal
incapacity or dissolution of any member, unless the business of RoseStar is
continued by the consent of all the remaining members within ninety days.
Accordingly, RoseStar will lack the corporate characteristic of continuity of
life.
An organization will be treated as possessing the corporate
characteristic of free transferability of interests if the members owning all
or substantially all of the interests in an organization may substitute for
themselves without the consent of the other members a person who is not a
member of the organization.(25) Article 4.05 of the Act provides, in part, that
unless otherwise provided by the company's regulations, a membership interest
is assignable in whole or in part; an assignment of a member's interest does
not entitle the assignee to become, or to exercise rights or powers of a
member; and until the assignee becomes a member, the assignor member continues
to be a member and to have the power to exercise any rights or powers of a
member, except to the extent those rights or powers are assigned. Article 4.07
of the Act provides, in part, that an assignee of a membership interest may
become a member if and to the extent that the company's regulations so provide,
or all members consent. Article 9.3 of the RoseStar Regulations provides, in
part, that no member shall have the right to substitute in its place a
transferee unless consent is given by the Managers and a majority of the other
members, which consent may be withheld in the discretion of the Managers or the
other members. Accordingly, RoseStar will lack the corporate characteristic of
free transferability of interests. Because RoseStar will lack the corporate
characteristics of continuity of life and free transferability of interests, in
our opinion it will be treated as partnership for federal income tax purposes.
D. Incidental Personal Property
As noted above, in order for the rent under the Lease to be treated as
"rents from real property," the rents attributable to the Operating
Partnership's personal property leased under or in connection with the Lease
must not be greater than 15 percent of the rents received under the Lease. The
rent attributable to personal property leased under or in connection with a
lease of real property is the amount that bears the same ratio to total rent
for the taxable year as (i) the
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(25)Treas. Reg. Section 301.7701-2(e).
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<PAGE> 72
average of the adjusted bases of the personal property leased under or in
connection with a lease of real property at the beginning and at the end of the
taxable year bears to (ii) the average of the aggregate adjusted bases of the
real and personal property subject to the lease at the beginning and at the end
of such taxable year (the "Adjusted Basis Ratio").(26) The Operating
Partnership has represented that the adjusted tax basis of the personal
property leased under or in connection with the Lease will not represent more
than 15 percent of the aggregate adjusted tax basis of the Denver Marriott at
any time. Moreover, in Article 36.2 of the Lease, the parties agreed that the
adjusted tax basis of the personal property leased under or in connection with
the Lease will not represent more than 15 percent of the aggregate adjusted tax
basis of the Denver Marriott at any time.
E. Provision of Services by the Operating Partnership
1. Income Derived under the Terms of the Lease
Although the Operating Partnership may treat charges for services
customarily furnished or rendered in connection with the rental of the Denver
Marriott as "rents from real property," any services rendered to the occupants
of the Denver Marriott must be furnished or rendered by an independent
contractor from whom the Company does not derive or receive any income.(27)
Moreover, to the extent that any independent contractors provide noncustomary
services to the occupants of the Denver Marriott, the cost of such services
must not be borne by the Operating Partnership.(28) Under the terms of the
Lease, the Operating Partnership will not be required to provide any services,
customary or noncustomary, in connection with the rental of the Denver
Marriott. Instead, all services relating to the operation of the Denver
Marriott will be provided by Marriott to RoseStar under the terms of the
Management Agreement. The Operating Partnership will not bear the cost of any
of the services provided by Marriott to RoseStar. Instead, such costs will be
borne by RoseStar pursuant to its assumption of the Operating Partnership's
obligations under the Management Agreement.
Based on the foregoing, we believe that the provision of any
noncustomary services to the occupants of the Denver Marriott by Marriott will
have no effect on the qualification of the income derived from the Denver
Marriott as "rents from real property." In fact, the IRS has issued a private
letter ruling in which it has treated the income derived from several leases of
hotel properties as "rents from real property" in a situation where the lessees
had contracted with a third-party to conduct the day-to-day operations of the
hotels.(29) Our conclusion is not altered by the
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(26)Section 856(d)(1)(C).
(27)Sections 856(d)(1), 856(d)(2)(C); Treas. Reg. Section 1.512(b)-1(c)(5).
(28)Treas. Reg. Section 1.856-4(b)(5).
(29)See, P.L.R. 8117036 (January 27, 1981).
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<PAGE> 73
fact that the Operating Partnership will remain liable for any obligations
arising under the Management Agreement, to the extent that they are not
satisfied by the Tenant. The Operating Partnership should not be treated as
bearing the cost of the services provided by Marriott merely because it will be
liable for RoseStar's obligations under the Management Agreement. The Operating
Partnership will not be retaining this liability in an attempt to provide
services to RoseStar. Instead, it will be retaining this liability only as an
accommodation, in order to gain Marriott's consent to its purchase of the
Denver Marriott. Moreover, the Operating Partnership believes that it is
highly unlikely that it will ever be required to reimburse Marriott for the
costs and expenses of operating the Denver Marriott because of a default by
RoseStar under the Management Agreement. This is because (i) the Denver
Marriott is projected to generate enough gross income to cover the payments to
Marriott under the Management Agreement, (ii) in connection with Section 7.7 of
the Lease, RoseStar represents that it has a net worth of at least $200,000,
(iii) in connection with Section 7.9 of the Lease, RoseStar covenants that it
will retain all of the income it earns from the Denver Marriott and shall not
distribute any earnings to its beneficial owners, except as needed for federal
and state income taxes payable on taxable income from the Denver Marriott,
until it has accumulated and is holding in reserve funds which are sufficient
to pay at least one monthly payment of Base Rent under the Lease, plus at least
one monthly payment of Base Rent under all other leases between it and the
Operating Partnership, and (iv) in the view of the Operating Partnership,
RoseStar's capitalization is adequate to allow RoseStar to assume RoseStar's
obligations under the Lease.
2. Income Derived in the Case of a Default under the Lease
If the Operating Partnership were required to reimburse Marriott for
the costs of operating the Denver Marriott because of a default by RoseStar
under the terms of the Management Agreement, we have concluded that the income
derived by the Operating Partnership from the Denver Marriott would be treated
as "qualifying income" for purposes of the 75 percent and 95 percent tests,
assuming that such default does not occur before May 1, 1996. This is because,
if the Operating Partnership were required to reimburse Marriott for the cost
of operating the Denver Marriott, this would constitute an event of default
under Article 16.1 of the Lease, allowing the Operating Partnership to
terminate RoseStar's leasehold interest in the Denver Marriott. As a result of
such a termination of the Lease, any income derived by the Operating
Partnership from the Denver Marriott after the default would be treated as
income from foreclosure property.
The Operating Partnership would be able to continue to operate the
Denver Marriott after any default under the Lease, without affecting its status
as foreclosure property, assuming that any such default does not occur before
May 1, 1996. This is because Marriott will provide all services relating to
the operation of the Denver Marriott and starting on May 1, 1996, Marriott will
qualify as an independent contractor from whom the Company will not derive any
income . As noted above, a REIT can use foreclosure property in the conduct of
an active trade or business, as long
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<PAGE> 74
as this is done through the use of an independent contractor, from whom the
REIT does not derive or receive any income.(30)
As noted above, real property acquired upon default under a lease is
not eligible to be treated as foreclosure property if the lease is entered into
with an intent to evict or foreclose, or if the REIT knows or has reason to
know that default would occur.(31) This is not the case in the present
situation because (i) the Denver Marriott is projected to generate enough gross
income to produce a profit for RoseStar, (ii) in connection with Section 7.7 of
the Lease, RoseStar will represent that it has a net worth of at least
$200,000, (iii) in connection with Section 7.9 of the Lease, RoseStar covenants
that it will retain all of the income it earns from the Denver Marriott and
shall not distribute any earnings to its beneficial owners, except as needed
for federal and state income taxes payable on taxable income from the Denver
Marriott, until it has accumulated and is holding in reserve funds which are
sufficient to pay at least one monthly payment of Base Rent under the Lease,
plus at least one monthly payment of Base Rent under all other leases between
it and the Operating Partnership, and (iv) in the view of the Operating
Partnership, RoseStar's capitalization is adequate to allow RoseStar to assume
RoseStar's obligations under the Lease.
The Denver Marriott would in any event qualify as foreclosure property
only for a period of up to two years, beginning on the date of its acquisition
by the Operating Partnership, unless the Operating Partnership obtains an
extension of the grace period from the IRS.(32) Therefore, in the event the
Operating Partnership takes possession of the Denver Marriott as a result of a
default under the lease, presumably the Operating Partnership will sell the
Denver Marriott or within two years rent it to another tenant under a lease
that will produce "rents from real property."
Prior to May 1, 1996, Crescent may be treated as deriving income from
Marriott, because on April 24, 1995 the Operating Partnership received a
payment of $600,000 and a note in the principal amount of $1,800,000 from
Marriott in connection with its sale of certain contract rights and investments
rights to Marriott. The principal balance of the note and all accrued interest
thereon are to be paid by Marriott in a single payment on April 30, 1996. As a
consequence, prior to May 1, 1996 the Operating Partnership will be treated as
deriving interest income and capital
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(30)Section 856(e)(4)(C). The IRS clearly intended for REITs to be able to
treat hotels operated by independent contractors as foreclosure property. For
instance, the Treasury regulations defining foreclosure property refer to hotel
properties twice. See, Treas. Reg. Sections 1.856-6(b)(2), 1.856-6(d)(2). In
addition, the IRS has also recently issued a private letter ruling in which it
treated income received from hotels acquired pursuant to a bankruptcy petition
as income from foreclosure property, where the hotels were operated by third
party managers. P.L.R. 9420013 (2/15/94).
(31)Treas. Reg. Section 1.856-6(b)(3).
(32)Section 856(e)(2).
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<PAGE> 75
gains income from Marriott. Therefore, during the period prior to May 1, 1996,
Marriott will not qualify as an independent contractor from whom the Company
does not derive any income.(33)
V. CONCLUSION
Based on the assumptions stated above, it is our opinion that (i) all
of the income that the Operating Partnership derives from the Denver Marriott
will be treated as "qualifying income" for purposes of the 95 percent test and
(ii) all of the income the Operating Partnership derives from the Denver
Marriott, will be treated as "qualifying income" for purposes of the 75 percent
test.
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(33)The fact that the Operating Partnership will derive income from Marriott
at a time prior to any default under the Lease should not have any affect on
the treatment of any income that the Operating Partnership derives from the
Denver Marriott after any default under the Lease. See, Tax Management
Memorandum, p. 7 (November 7, 1975), as cited in Allen and Fisher, 107-5th
T.M., Real Estate Investment Trusts , p. A-77 (the IRS has ruled privately that
an entity should be treated as an independent contractor from whom a REIT
derived no income for the period such entity managed the REIT's rental
properties, despite the fact that the entity purchased foreclosure property
from the REIT immediately after the termination of its management contract).
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September 27, 1996
Crescent Real Estate Equities, Inc.
900 Third Avenue, Suite 1800
New York New York 10022
Ladies and Gentlemen:
On June 30, 1995 we provided you with a memorandum analyzing the
impact of the purchase of the Denver Marriott City Center (the "Hotel
Property") by Crescent Real Estate Equities Limited Partnership (the "Operating
Partnership") would have on the ability of Crescent Real Estate Equities, Inc.
(the "Company") to continue to qualify as a real estate investment trust (a
"REIT") under section 856(c).(1) That memorandum concluded that, subject to
certain assumptions, in our opinion (i) all of the income that the Operating
Partnership derived from the Hotel Property would be treated as "qualifying
income" for purposes of the 95 percent gross income test for REIT qualification
under section 856(c)(2) (the "95 percent test") and (ii) all of the income that
the Operating Partnership derived from the Hotel Property would be treated as
"qualifying income" for purposes of the 75 percent gross income test for REIT
qualification under section 856(c)(3) (the "75 percent test"). The June 30,
1995 memorandum was based upon, among other items, our review of an Amended and
Restated Lease Agreement between dated June 30, 1995 between the Operating
Partnership, as lessor, and RoseStar Management, LLC ("RoseStar"), as lessee
(the "Lease"). The ownership of RoseStar remains the same as described in our
June 30, 1995 memorandum.
This letter is intended to update the opinions expressed in our June
30, 1995 memorandum. The opinions set forth herein are based upon the existing
provisions of the Code, and the reported interpretations thereof by the IRS and
by the courts in effect as of the date hereof, all of which are subject to
change, both retroactively or prospectively, and to possibly different
interpretations. We assume no obligation to update the opinions set forth in
this letter. We believe that the conclusions expressed herein, if challenged
by the IRS, would be sustained in court. However, because our opinions are not
binding upon the IRS or the courts, there can be no assurance that contrary
positions may not be successfully asserted by the IRS.
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(1) All section references are to the Internal Revenue Code of 1986, as
amended (the "Code"), or to the regulations issued thereunder, unless
otherwise noted.
<PAGE> 77
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 2
I. Documents and Representations
For the purpose of rendering this opinion, we have examined and
relied on originals, or copies certified or otherwise identified to our
satisfaction, of the following: (1) the Lease; (2) the Limited Guaranty
Agreement by Gerald Haddock, John Goff and Sanjay Varma, as guarantors in favor
of the Operating Partnership (the "Guaranty); (3) the Articles of Organization
of RoseStar Management, LLC (the "RoseStar Articles"), (4) the Regulations of
RoseStar Management, LLC (the "RoseStar Regulations"), (5) the First Amended
and Restated Articles of Incorporation of Crescent Real Estate Equities, Inc.
(the "Crescent Articles"); and (6) such other documents or information as we
have deemed necessary for the opinion set forth below. In our examination, we
have assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified
or photostatic copies, and the authenticity of the originals of such copies.
For the purpose of rendering these opinions, we have also assumed
that all statements of facts and assumptions described in our June 30, 1995
memorandum remain correct, unless otherwise noted.
II. Opinions
Based on the foregoing, it is our opinion that (i) the Lease will be
treated as a lease for federal income tax purposes, (ii) all of the income that
the Operating Partnership derives from the Hotel Property will be treated as
"qualifying income" for purposes of the 95 percent test, and (iii) all of the
income that Operating Partnership derives from the Hotel Property will be
treated as "qualifying income" for purposes of the 75 percent test.
In giving these opinions, we note that Marriott International, Inc.
("Marriott") which operates the Hotel Property as successor to Marriott
Corporation under the terms of the agreement between the Original Owner and
Marriott Corporation dated January 10, 1979, as amended on January 10, 1979,
February 16, 1979, May 11, 1979, July 27, 1979, March 25, 1980, December 18,
1980, July 15, 1981, January 4, 1982, and November 19, 1993 (the "Management
Agreement") is currently subleasing space from Gaskins Real Estate Brokerage,
Inc. ("Gaskins"), a tenant at 301 Congress Avenue, a property in which the
Operating Partnership owns an indirect interest. Under the terms of Gaskins'
prime lease, Gaskins is required make a payment to the lessor (an "excess rent
payment") equal to the amount by which any rents under a sublease exceed the
amount that Gaskins is required to pay to the lessor under the terms of the
lease. Gaskins' sublease to Marriott was entered into before the Operating
Partnership acquired its interest in 301 Congress Avenue and it is scheduled to
<PAGE> 78
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 3
expire at the end of February 1997. Marriott has already vacated the premises
sublet from Gaskins at 301 Congress Avenue and the Operating Partnership will
use its best efforts to prevent any extension or renewal of this sublease. We
do not believe that the existence of the sublease of space in 301 Congress
Avenue by Gaskins to Marriott will affect the opinion expressed in our June 30,
1995 memorandum regarding the treatment of amounts derived from the Hotel
Property in the event of a default under the Lease, to the extent any such
default occurs after the termination of the sublease to Marriott. In our June
30, 1995 memorandum we indicated that amounts derived from the Hotel Property
in the event of a default under the Lease would qualify as income from
foreclosure property, if, among other things, at the time of the default,
Marriott qualifed as an independent contractor from whom the Company did not
derive any income. We do not believe that the Company will be treated as
indirectly deriving income from Marriott as a result of accruing any Excess
Rent Payments under the terms of Gaskins' lease at 301 Congress, and in any
event, even if the Company is treated as indirectly deriving income from
Marriott, it will cease to be treated as derivng such income from Marriott
after the end of February 1996, if Marriott's sublease terminates at that time.
III. Additional Limitations
The foregoing opinions are limited to the specific matters covered
thereby and should not be interpreted to imply that the undersigned has offered
its opinion on any other matter.
Very truly yours,
SHAW, PITTMAN, POTTS & TROWBRIDGE
By:
--------------------------------
Charles B. Temkin, P.C.
<PAGE> 79
MEMORANDUM
TO: David Dean
FROM: Charles B. Temkin
Michael A. Jacobs
DATE: December 19, 1995
RE: Characterization of Income Derived from the Hyatt Regency
Albuquerque Plaza
I. OVERVIEW
Crescent Real Estate Equities Limited Partnership (the "Operating
Partnership") purchased the Hyatt Regency Albuquerque Plaza (the "Albuquerque
Hyatt") from Albuquerque Plaza Partners (the "Prior Owner"), on December 19,
1995. Crescent Real Estate Equities, Inc. (the "Company") is currently the
sole shareholder of two corporations, one of which is the sole general partner
of and one of which is a limited partner of the Operating Partnership. These
two corporations constitute qualified REIT subsidiaries within the meaning of
section 856(i).(1)
This memorandum analyzes the impact that the purchase of the
Albuquerque Hyatt will have on the ability of the Company to continue to
qualify as a real estate investment trust (a "REIT") under section 856(c).
More specifically, it analyzes whether the income the Operating Partnership
derives from the Albuquerque Hyatt is "qualifying income" for purposes of the
75 percent and 95 percent gross income tests for REIT qualification. This
memorandum concludes that, subject to certain assumptions, in our opinion (i)
all of the income that the Operating Partnership derives from the Albuquerque
Hyatt will be treated as "qualifying income" for purposes of the 95 percent
test and (ii) all of the income the Operating Partnership derives from the
Albuquerque Hyatt will be treated as "qualifying income" for purposes of the 75
percent test.
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(1) All section references herein are to the Internal Revenue Code of 1986, as
amended (the "Code"), or to the regulations issued thereunder, unless otherwise
noted.
<PAGE> 80
II. FACTS AND ASSUMPTIONS
The Prior Owner contracted with Hyatt Corporation ("Hyatt") to operate
the Albuquerque Hyatt. Under the terms of the agreement between the Prior
Owner and Hyatt dated October 11, 1988, as amended on February 14, 1990, and
August 30, 1994 (the "Management Agreement"), Hyatt is obligated to provide all
services in relation to the operation of the Albuquerque Hyatt and collect all
hotel receipts. In exchange for these services, Hyatt is to be reimbursed for
the costs of operating the Albuquerque Hyatt and paid a management fee. This
fee is paid out of hotel receipts; it is based on the profits, if any, from
operation of the Albuquerque Hyatt. Article 15.2 of the Management Agreement
requires that all assignments of the Management Agreement be approved by Hyatt
and that any assignees expressly assume the obligations of the owner under the
Management Agreement. Therefore, in connection with its purchase of the
Albuquerque Hyatt, the Operating Partnership assumed all of the obligations of
the Prior Owner under the Management Agreement.
When the Operating Partnership purchased the Albuquerque Hyatt, it
immediately leased it to RoseStar Management, LLC ("RoseStar") pursuant to a
Lease Agreement dated December 19, 1995 (the "Lease"). Pursuant to Article 2
of the Lease, the Operating Partnership assigned its interest in the Management
Agreement to RoseStar; and pursuant to Article 15.2 of the Management
Agreement, RoseStar assumed all of the Operating Partnership's obligations
thereunder. However, as a condition of its approval of the Lease, Hyatt
required that the Operating Partnership remain liable for all obligations of
the Operating Partnership under the Management Agreement that was assumed by
RoseStar.
Currently, Sanjay Varma owns a 91 percent interest in the assets and
net profits of RoseStar, while Gerald W. Haddock and John C. Goff, the
managers of RoseStar, each own a 4.5 percent interest in its assets and net
profits. RoseStar currently leases another hotel, located in Denver, Colorado
(the "Denver Marriott"), from the Operating Partnership. We have provided you
with a memorandum dated June 30, 1995 regarding the characterization of income
derived by the Operating Partnership from the lease of the Denver Marriott to
RoseStar.
For purposes of this memorandum, we have examined and relied upon (1)
the Management Agreement, (2) the Lease, (3) the Articles of Organization of
RoseStar Management, LLC (the "RoseStar Articles"), (4) the Regulations of
RoseStar Management, LLC (the "RoseStar Regulations"), (5) the First Amended
and Restated Articles of Incorporation of Crescent Real Estate Equities, Inc.
(the "Crescent Articles"), and (6) such other documents or information as we
deemed necessary for the opinions set forth below. In our examination, we have
assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified
or photostatic copies, and the authenticity of the originals of such copies.
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<PAGE> 81
This memorandum is based upon existing provisions of the Code,
Treasury regulations, and the reported interpretations thereof by the Internal
Revenue Service ("IRS") and by the courts in effect as of the date hereof, all
of which are subject to change, both retroactively or prospectively, and to
possibly different interpretations. We assume no obligation to update the
opinions set forth in this memorandum. We believe that the conclusions
expressed herein, if challenged by the IRS, would be sustained in court.
However, because our opinions are not binding upon the IRS or the courts, there
can be no assurance that contrary positions may not be successfully asserted by
the IRS.
In addition, this memorandum is based on various assumptions and is
conditioned upon certain representations made by the Operating Partnership and
its sole general partner, Crescent Real Estate Equities, Ltd., as to factual
and other matters as set forth in the attached letter.
III. LEGAL BACKGROUND
A. 75 Percent and 95 Percent Tests
In order to qualify as a REIT for tax purposes, the Company must
satisfy certain tests with respect to the composition of its gross income on an
annual basis. First, at least 75 percent of the Company's gross income
(excluding gross income from certain prohibited transactions) for each taxable
year must consist of temporary investment income or of certain defined
categories of income derived directly or indirectly from investments relating
to real property or mortgages on real property. These categories include,
subject to various limitations, rents from real property, interest on mortgages
on real property, gains from the sale or other disposition of real property
(including interests in real property and mortgages on real property) not
primarily held for sale to customers in the ordinary course of business, income
from foreclosure property, and amounts received as consideration for entering
into either loans secured by real property or purchases or leases of real
property.(2) Second, at least 95 percent of the Company's gross income
(excluding gross income from certain prohibited transactions) for each taxable
year must be derived from income qualifying under the 75 percent test and from
dividends, other types of interest and gain from the sale or disposition of
stock or securities, or from any combination of the foregoing.(3)
In applying these income tests, REITs that are partners in a
partnership are required to include in their gross income their proportionate
share of the partnership's gross income. In addition, such REITs are to treat
this partnership gross income as retaining the same character as the items of
gross income of the partnership for purposes of section 856.(4) Thus, the
character of any
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(2)Section 856(c)(3).
(3)Section 856(c)(2).
(4)Treas. Reg. Section 1.856-3(g).
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<PAGE> 82
income derived by the Operating Partnership from the Albuquerque Hyatt will
affect the ability of the Company to qualify as a REIT.
B. Rents from Real Property
Rents from real property satisfy both the 75 percent and 95 percent
tests for REIT qualification only if several conditions are met. First, the
amount of rent must not be based in whole or in part on the income or profits
of any person. An amount received or accrued generally will not be excluded
from the term "rents from real property" solely by reason of being based on a
fixed percentage or percentages of receipts or sales.(5) Second, the Code
provides that rents received from a tenant will not qualify as "rents from real
property" if the REIT, or an owner of 10 percent or more of the REIT, directly
or constructively, owns 10 percent or more of such tenant (a "Related Party
Tenant").(6) Third, if rent attributable to personal property leased in
connection with a lease of real property is greater than 15 percent of the
total rent received under the lease, then the portion of rent attributable to
such personal property will not qualify as "rents from real property."(7)
Finally, for rents to qualify as "rents from real property," a REIT generally
must not operate or manage the property or furnish or render services to the
tenants of such property, other than through an independent contractor from
whom the REIT derives no revenue. However, rents will be qualified as "rents
from real property" if a REIT directly performs services in connection with the
lease of the property, if those services are "usually or customarily rendered"
in connection with the rental of space for occupancy, and such services are not
considered to be rendered to the occupant of the property.(8)
C. Income from Foreclosure Property
Income from foreclosure property is treated as "qualifying income" for
purposes of the 75 percent and 95 percent tests (although any net income from
foreclosure property is taxed at the maximum corporate rate). Foreclosure
property is any real property, and any personal property incident to such real
property, acquired by a REIT through default under a mortgage or a lease. A
REIT may elect to treat such property as foreclosure property for a grace
period of up to two years.(9) However, such property will cease to qualify as
foreclosure property if it is used by the REIT in a trade or business more than
90 days after it is acquired and it is not operated through
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(5)Section 856(d)(2)(A).
(6)Section 856(d)(2)(B).
(7)Section 856(d)(1)(C).
(8)Sections 856(d)(1)(B), 856(d)(2)(C).
(9)Section 856(e).
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<PAGE> 83
an independent contractor from whom the REIT does not derive or receive any
income.(10) Moreover, property is not eligible to be treated as foreclosure
property if the lease is entered into with an intent to evict or foreclose, or
if the REIT knows or has reason to know that default would occur.(11)
IV. DISCUSSION
A. Lease Will be Treated as a Lease for Federal Income Tax
Purposes
In order for any income derived by the Operating Partnership from the
Albuquerque Hyatt to constitute either "rents from real property," or in the
case of a default under the Lease, "gross income from foreclosure property,"
the Lease must be treated as a lease for federal income tax purposes and not be
treated as a service contract, management contract or other type of
arrangement. This determination depends on an analysis of all the surrounding
facts and circumstances. In making this determination, courts have considered
a variety of factors, including the following: (i) the intent of the parties,
(ii) the form of the agreement, (iii) the degree of control over the business
conducted at the property that is provided to the lessee (e.g., whether the
lessee has substantial rights of control over the operation of the property and
its business), (iv) the extent to which the lessee has the risk of loss from
operations of the business conducted as the property (e.g., whether the lessee
bears the risk of increases in operating expenses and of decreases in
revenues), and (v) the extent to which the lessee has the opportunity to
benefit from operations of the business conducted at the property (e.g.,
whether the lessee benefits from decreased operating expenses or increased
revenues).(12)
In addition, section 7701(e) provides that a contract that purports to
be a service contract, partnership agreement, or another type of arrangement
will be treated instead as a lease of property if the contract is properly
treated as such, taking into account all relevant factors, including whether or
not: (i) the service recipient is in physical possession of the property, (ii)
the service recipient controls the property, (iii) the service recipient has a
significant economic or possessory interest in the property (e.g., the
property's use is likely to be dedicated to the service recipient for a
substantial portion of the useful life of the property, the recipient shares
the risk that the property will decline in value, the recipient shares in any
appreciation in the value of the property, the recipient shares in any savings
in the property's operating costs or the recipient bears the risk of damage to
or loss of the property), (iv) the service provider does not bear any risk of
substantially diminished receipts or substantially increased expenditures if
there is nonperformance under the contract, (v) the service provider does not
use the property concurrently to provide significant
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(10)Section 856(e)(4).
(11)Treas. Reg. Section 1.856-6(b)(3).
(12)See, e.g., Xerox Corp. v. U.S., 80-2 USTC Paragraph 9530 (Ct. Cl. Tr. Div.
1980), aff'd per curiam, 656 F.2d 659 (Ct. Cl. 1981).
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<PAGE> 84
services to entities unrelated to the service recipient and (vi) the total
contract price does not substantially exceed the rental value of the property
for the contract period. Since the determination of whether a service
contract, partnership agreement, or some other type of arrangement should be
treated as a lease is inherently factual, the presence or absence of any single
factor may not be dispositive in every case.(13)
We have concluded that the Lease will be treated as a lease for
Federal income tax purposes, rather than a service contract, management
contract or other type of arrangement. This conclusion is based, in part, on
the following facts: (i) the Operating Partnership and RoseStar intend their
relationship to be that of lessor and lessee (as evidenced by the terms of the
Lease), (ii) RoseStar will have the right to exclusive possession, use and
quiet enjoyment of the Albuquerque Hyatt during the term of the Lease and the
right to uninterrupted control in the operation of the business conducted at
the Albuquerque Hyatt (subject to its assumption of the Management Agreement),
(iii) RoseStar will dictate how the Albuquerque Hyatt is maintained and
improved, (iv) RoseStar will bear all the costs and expenses of operating the
Albuquerque Hyatt other than the replacement of furniture, fixtures and
equipment, (v) RoseStar will benefit from any savings in the costs of operating
the Albuquerque Hyatt during the term of the Lease, (vi) in the event of damage
or destruction to the Albuquerque Hyatt, RoseStar will be at economic risk
because its obligation to make rental payments will not abate, (vii) RoseStar
will indemnify the Operating Partnership against all liabilities imposed on the
Operating Partnership during the term of the Lease by reason of injury to
persons or damage to property occurring at the Albuquerque Hyatt or RoseStar's
use, management, maintenance or repair of the Albuquerque Hyatt, (viii)
RoseStar is obligated to pay substantial fixed rent for the period of use of
the Albuquerque Hyatt, regardless of whether its revenues exceed its costs and
expenses, and (ix) RoseStar stands to incur substantial losses (or derive
substantial profits) depending on how successfully it operates the Albuquerque
Hyatt.
We do not believe that our conclusion that the Lease of the
Albuquerque Hyatt will be treated as a lease for Federal income tax purposes is
affected by the fact that RoseStar entered the Lease subject to its assumption
of the Operating Partnership's obligations under the preexisting Management
Agreement. The Management Agreement gives Hyatt control over the day-to-day
operation of the Albuquerque Hyatt and allows Hyatt to share with RoseStar in
the benefits of any increases in revenues or cost savings in the operation of
the Albuquerque Hyatt. However, Hyatt's operation of the Albuquerque Hyatt
will not be controlled by the Operating Partnership, and the Management
Agreement does not affect the fact that RoseStar bears most of the risk of loss
if the Albuquerque Hyatt is not successful. Moreover, the IRS has issued a
private letter ruling in which it treated leases of several hotel properties as
producing "rents from real property" in a situation where the lessees had
contracted with a third party to conduct the day-to-day
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(13)P.L.R. 8918012 (January 24, 1989).
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<PAGE> 85
operations of the hotels.(14) This ruling suggests that the IRS will respect a
lease of a hotel for federal income tax purposes even if the hotel is operated
by an independent contractor rather than by the lessee.
The Lease is structured in form so that the Operating Partnership
retains ownership of all the personal property leased to RoseStar in connection
with RoseStar's lease of the Albuquerque Hyatt (the "FF&E"). However, if the
term of the Lease equals or exceeds the useful life of some or all of the FF&E,
it is possible that the Lease could be treated for federal income tax purposes
as a financing arrangement. In such a case, RoseStar would be treated as
having acquired ownership of the FF&E for federal income tax purposes in
exchange for an obligation to make future payments of principal and interest to
the Operating Partnership. Nonetheless, we do not believe that the
recharacterization of the Lease as a financing arrangement with respect to the
FF&E would have a material effect on the ability of the Company to satisfy the
requirements for taxation as a REIT. This is because, if a portion the of the
payments made by RoseStar under the Lease were characterized as interest on
indebtedness secured by the FF&E, rather than rents from real property, that
portion would still satisfy the 95 percent gross income test (although it would
not satisfy the 75% gross income test).(15)
B. Percentage Rent Provision is not Profit-Based
Pursuant to the Lease, RoseStar will be obligated to pay the Operating
Partnership base rent and percentage rent. Under the regulations, percentage
rent based on a percentage of gross receipts or sales in excess of a floor
amount, which is how the percentage rent is structured under the Lease, will
not qualify as "rents from real property" unless (i) such floor amount does not
depend in whole or in part on the income or profits of the lessee, (ii) the
percentage and the floor amount are fixed at the time the lease is entered
into, (iii) the percentage and the floor amount are not renegotiated during the
term of the lease in a manner that has the effect of basing the percentage rent
on income or profits, and (iv) the percentage and the floor amount conform with
normal business practice.(16)
Under the terms of Article 4.2 of the Lease, RoseStar will pay
percentage rent equal on an annual basis to the sum of (i) 17.5 percent of the
excess of annual gross receipts from room rentals over $6,000,000 and (ii) 2.5
percent of the excess of annual gross receipts from the food and beverage
facilities at the Albuquerque Hyatt over $2,000,000. This formula effectively
rewards
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(14)See, P.L.R. 8117036 (January 27, 1981).
(15)If the Lease were recharacterized as a financing arrangement with respect
to the FF&E, it also might result in some minor timing differences with respect
to the Company's recognition of income. These differences would result from
(a) the recharacterization of a portion RoseStar's payments under the Lease as
a return of principal and (b) the Company's loss of any depreciation
deductions attributable to the FF&E.
(16)Treas. Reg. Section 1.866-4(b)(3).
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<PAGE> 86
RoseStar for any increases in gross receipts from rooms and from other sources
over the threshold amounts. This type of formula does not base the percentage
rent on RoseStar's income or profits, and similar formulas have been treated by
the IRS as generating "rents from real property."(17) Moreover, the Operating
Partnership has represented that (i) the floor amounts used to compute the
percentage rent under the Lease do not depend in whole or in part on the income
or profits of any person, (ii) the percentage rent provision of the Lease will
not be renegotiated during the term of the Lease or at the expiration or
earlier termination of the Lease in a manner that has the effect of basing the
rent on income or profits, and (iii) the percentage rent provision of the Lease
conforms with normal business practice. In addition, based on our experience
and an examination of the Lease and the Albuquerque Hyatt projections, the
Lease appears to conform with normal business practice.
C. RoseStar is not a "Related Party Tenant"
Rents received from RoseStar will not qualify as "rents from real
property" if RoseStar is a "related party tenant." RoseStar will be a "related
party tenant" if the Company, or an owner of 10 percent or more of the Company,
directly or constructively owns 10 percent or more of the assets or net profits
of RoseStar.(18) Constructive ownership is determined for purposes of this
test by applying the rules of section 318(a) as modified by section 856(d)(5).
Those rules generally provide that if 10 percent or more in value of the stock
of the Company is owned, directly or indirectly, by or for any person, the
Company is considered as owning the stock owned, directly or indirectly, by or
for such person.
RoseStar will not be treated as a "related party tenant" because an
individual, Sanjay Varma, currently owns a 91 percent interest in its assets
and net profits. In reaching this conclusion, we recognize that Sanjay Varma
owns certain Units of the Operating Partnership.(19) The Operating Partnership
has represented that (i) Sanjay Varma does not own more than 10 percent of the
value of the Company's stock, (ii) Sanjay Varma is not expected to own more
than 10 percent of the value of the Company's stock in the future, and (iii)
neither the Operating Partnership nor the Company intends to acquire, directly
or constructively, an interest of 10 percent or more in the assets or net
profits of RoseStar at any time in the future. Moreover, Article 7.8 of the
Lease limits the ability of RoseStar and its members and managers to acquire,
directly or constructively, a 6 percent stock interest in the Company, and
Section 6.4 of the First Amended and
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(17)See, e.g., P.L.R. 8803007 (September 23, 1987) (percentage rent based on
gross revenues in excess of gross revenues for a base year treated as "rents
from real property"); cf. P.L.R. 9104018 (October 26, 1990) (interest based on
gross revenues in excess of a floor amount treated as qualifying interest under
section 856(f)).
(18)Section 856(d)(2)(B)(ii).
(19)See Rev. Rul. 73-194, 1973-1 C.B. 355 (management company treated as an
independent contractor with respect to a REIT, where an affiliate of the
management company and the REIT were partners).
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<PAGE> 87
Restated Articles of Incorporation of the Company prevents RoseStar and its
members and managers from acquiring more than 8 percent of the Company's stock.
In concluding that RoseStar will not be treated as a "related party
tenant," we have applied the definition of related party tenant set forth in
section 856(d)(2)(B)(ii), which applies to tenants which are not corporations.
If RoseStar is not treated as a partnership for federal income tax purposes,
but is instead treated as an association taxable as a corporation, then the
applicable definition of related party tenant is the one set forth in section
856(d)(2)(B)(i), which looks to control over voting securities. If RoseStar
were treated as a corporation for federal income tax purposes, Gerald W.
Haddock and John C. Goff would likely be deemed to own all of its voting stock,
because of the extensive powers that they are granted as managers under the
RoseStar Regulations. If this were the case, it would be necessary to consider
whether the ownership of such voting stock could possibly be attributed to the
Company under the constructive ownership rules described above or otherwise.
An entity which has associates and an objective to carry on a business
for joint profit will be treated as a partnership for federal income tax
purposes, and not as an association taxable as a corporation, if it has not
more than two of the following four characteristics of a corporation: (i)
continuity of life; (ii) centralization of management; (iii) limited liability;
and (iv) free transferability of interests.(20) The entity must also have no
other characteristics which are significant in determining its classification.
Generally, other factors are considered only insofar as they relate to the
determination of the presence or absence of the foregoing corporate
characteristics.(21) The IRS has applied this four-factor test in determining
whether limited liability companies formed under the Texas Limited Liability
Company Act (the "Act") are partnerships for federal income tax purposes.(22)
The IRS has issued Rev. Proc. 95-10, which specifies conditions which must be
satisfied for a limited liability company to receive a favorable advanced
ruling that it will be classified as a partnership for federal income tax
purposes.(23) RoseStar should satisfy these conditions. However, such
conditions are applicable only in determining whether rulings will be issued
and are not intended as substantive rules for determination of partnership
status.
An organization will be treated as possessing the corporate
characteristic of continuity of life, even if the agreement organizing an
entity provides that it is to continue only for a stated period, unless a
member has the power to dissolve the organization at an earlier time.(24)
Article 6.01
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(20)Treas. Reg. Section 301.7701-2(a).
(21)See Rev. Rul. 79-106, 1979-1 C.B. 448.
(22)See, e.g., P.L.R. 9242025 (July 22, 1992) and P.L.R. 9218078 (January 31,
1992).
(23)1995-3 I.R.B. 20.
(24)Treas. Reg. Section 301.7701-2(b)(3).
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of the Act provides, in part, that except as otherwise provided in the
company's regulations, a limited liability company shall be dissolved upon the
death, retirement, resignation, expulsion, bankruptcy, or dissolution of a
member or the occurrence of any other event which terminates the continued
membership of a member in the limited liability company, unless there is at
least one remaining member and the business of the limited liability company is
continued by the consent by the number of members or class thereof stated in
the articles of organization or regulations of the limited liability company or
of not so stated, by all remaining members. Article 2 of the RoseStar Articles
provides that the duration of RoseStar is until the close of business on
December 31, 2015, or until its earlier dissolution in accordance with the
provisions of the Act or the Regulations. Article 10.2 of the RoseStar
Regulations provides, in part, that RoseStar shall be dissolved upon the
withdrawal, death, retirement, resignation, expulsion, bankruptcy, legal
incapacity or dissolution of any member, unless the business of RoseStar is
continued by the consent of all the remaining members within ninety days.
Accordingly, RoseStar will lack the corporate characteristic of continuity of
life.
An organization will be treated as possessing the corporate
characteristic of free transferability of interests if the members owning all
or substantially all of the interests in an organization may substitute for
themselves without the consent of the other members a person who is not a
member of the organization.(25) Article 4.05 of the Act provides, in part,
that unless otherwise provided by the company's regulations, a membership
interest is assignable in whole or in part; an assignment of a member's
interest does not entitle the assignee to become, or to exercise rights or
powers of a member; and until the assignee becomes a member, the assignor
member continues to be a member and to have the power to exercise any rights or
powers of a member, except to the extent those rights or powers are assigned.
Article 4.07 of the Act provides, in part, that an assignee of a membership
interest may become a member if and to the extent that the company's
regulations so provide, or all members consent. Article 9.3 of the RoseStar
Regulations provides, in part, that no member shall have the right to
substitute in its place a transferee unless consent is given by the Managers
and a majority of the other members, which consent may be withheld in the
discretion of the Managers or the other members. Accordingly, RoseStar will
lack the corporate characteristic of free transferability of interests. Because
RoseStar will lack the corporate characteristics of continuity of life and free
transferability of interests, in our opinion it will be treated as partnership
for federal income tax purposes.
D. Incidental Personal Property
As noted above, the rents attributable to the Operating Partnership's
personal property leased under or in connection with the Lease must not be
greater than 15 percent of the rents received under the Lease. The rent
attributable to personal property leased under or in connection with a lease of
real property is the amount that bears the same ratio to total rent for the
taxable year as (i) the average of the adjusted bases of the personal property
leased under or in connection
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(25) Treas. Reg. Section 301.7701-2(e).
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<PAGE> 89
with a lease of real property at the beginning and at the end of the taxable
year bears to (ii) the average of the aggregate adjusted bases of the real and
personal property subject to the lease at the beginning and at the end of such
taxable year (the "Adjusted Basis Ratio").(26) The Operating Partnership has
represented that, assuming that the Lease is not characterized as a financing
arrangement with respect to the FF&E, the adjusted tax basis of the FF&E will
not represent more than 15 percent of the aggregate adjusted tax basis of the
Albuquerque Hyatt at any time.
E. Provision of Services by the Operating Partnership
1. Income Derived under the Terms of the Lease
Although the Operating Partnership may treat charges for services
customarily furnished or rendered in connection with the rental of the
Albuquerque Hyatt as "rents from real property," any services rendered to the
occupants of the Albuquerque Hyatt must be furnished or rendered by an
independent contractor from whom the Company does not derive or receive any
income.(27) Moreover, to the extent that any independent contractors provide
noncustomary services to the occupants of the Albuquerque Hyatt, the cost of
such services must not be borne by the Operating Partnership.(28) Under the
terms of the Lease, the Operating Partnership will not be required to provide
any services, customary or noncustomary, in connection with the rental of the
Albuquerque Hyatt. Instead, all services relating to the operation of the
Albuquerque Hyatt will be provided by Hyatt to RoseStar under the terms of the
Management Agreement. The Operating Partnership will not bear the cost of any
of the services provided by Hyatt to RoseStar. Instead, such costs will be
borne by RoseStar pursuant to its assumption of the Operating Partnership's
obligations under the Management Agreement.
Based on the foregoing, we believe that the provision of any
noncustomary services to the occupants of the Albuquerque Hyatt by Hyatt will
have no effect on the qualification of the income derived from the Albuquerque
Hyatt as "rents from real property." In fact, the IRS has issued a private
letter ruling in which it has treated the income derived from several leases of
hotel properties as "rents from real property" in a situation where the lessees
had contracted with a third-party to conduct the day-to-day operations of the
hotels.(29) Our conclusion is not altered by the fact that the Operating
Partnership will remain liable for any obligations arising under the Management
Agreement, to the extent that they are not satisfied by the Tenant. The
Operating Partnership should not be treated as bearing the cost of the services
provided by Hyatt merely because it will be liable for RoseStar's obligations
under the Management Agreement. The Operating
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(26)Section 856(d)(1)(C).
(27)Sections 856(d)(1), 856(d)(2)(C); Treas. Reg. Section 1.512(b)-1(c)(5).
(28)Treas. Reg. Section 1.856-4(b)(5).
(29)See, P.L.R. 8117036 (January 27, 1981).
-11-
<PAGE> 90
Partnership will not be retaining this liability in an attempt to provide
services to RoseStar. Instead, it will be retaining this liability only as an
accommodation, in order to gain Hyatt's consent to its purchase of the
Albuquerque Hyatt. Moreover, the Operating Partnership believes that it is
highly unlikely that it will ever be required to reimburse Hyatt for the costs
and expenses of operating the Albuquerque Hyatt because of a default by
RoseStar under the Management Agreement. This is because (i) the Albuquerque
Hyatt is projected to generate enough gross income to cover the payments to
Hyatt under the Management Agreement, (ii) in the event that the Albuquerque
Hyatt does not generate enough gross income to cover the payments to Hyatt
under the Management Agreement, RoseStar may still be able to make such
payments out of gross income generated by the Denver Marriott, (iii) in
connection with the Lease, RoseStar has represented that it has a net worth of
at least $200,000, (iv) in the view of the Operating Partnership, RoseStar's
capitalization is adequate to allow RoseStar to assume RoseStar's obligations
under the Lease, and (v) in connection with the Lease, RoseStar has agreed to
limit distributions to its members to an amount necessary to pay federal and
state income taxes on income from the Albuquerque Hyatt until RoseStar is
holding sufficient reserves funds to enable it to pay at least one monthly
payment of base rent under the Lease and all other leases between RoseStar and
the Operating Partnership.
2. Income Derived in the Case of a Default under the Lease
If the Operating Partnership were required to reimburse Hyatt for the
costs of operating the Albuquerque Hyatt because of a default by RoseStar under
the terms of the Management Agreement, we have concluded that the income
derived by the Operating Partnership from the Albuquerque Hyatt would be
treated as "qualifying income" for purposes of the 75 percent and 95 percent
tests. This is because, if the Operating Partnership were required to
reimburse Hyatt for the cost of operating the Albuquerque Hyatt, this would
constitute an event of default under Article 16.1 of the Lease, allowing the
Operating Partnership to terminate RoseStar's leasehold interest in the
Albuquerque Hyatt. As a result of such a termination of the Lease, any income
derived by the Operating Partnership from the Albuquerque Hyatt after the
default would be treated as income from foreclosure property.
The Operating Partnership would be able to continue to operate the
Albuquerque Hyatt after any default under the Lease, without affecting its
status as foreclosure property. This is because Hyatt, which will provide all
services relating to the operation of the Albuquerque Hyatt, qualifies as an
independent contractor from whom the Company does not derive any income. As
noted above, a REIT can use foreclosure property in the conduct of an active
trade or business, as long as this is done through the use of an independent
contractor, from whom the REIT does not derive or receive any income.(30)
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(30)Section 856(e)(4)(C). The IRS clearly intended for REITs to be able to
treat hotels operated by independent contractors as foreclosure property. For
instance, the Treasury regulations defining foreclosure property refer to hotel
Footnote continued on next page
-12-
<PAGE> 91
As previously noted, real property acquired upon default under a lease
is not eligible to be treated as foreclosure property if the lease is entered
into with an intent to evict or foreclose, or if the REIT knows or has reason
to know that default would occur.(31) This is not the case in the present
situation because (i) the Albuquerque Hyatt is projected to generate enough
gross income to cover the payments to Hyatt under the Management Agreement,
(ii) in the event that the Albuquerque Hyatt does not generate enough gross
income to cover the payments to Hyatt under the Management Agreement, RoseStar
may still be able to make such payments out of gross income generated by the
Denver Marriott, (iii) in connection with the Lease, RoseStar has represented
that it has a net worth of at least $200,000, (iv) in the view of the Operating
Partnership, RoseStar's capitalization is adequate to allow RoseStar to assume
RoseStar's obligations under the Lease, and (v) in connection with the Lease,
RoseStar has agreed to limit distributions to its members to an amount
necessary to pay federal and state income taxes on income from the Albuquerque
Hyatt until RoseStar is holding sufficient reserves funds to enable it to pay
at least one monthly payment of base rent under the Lease and all other leases
between RoseStar and the Operating Partnership.
The Albuquerque Hyatt will in any event qualify as foreclosure
property only for a period of up to two years, beginning on the date of its
acquisition by the Operating Partnership, unless the Operating Partnership
obtains an extension of the grace period from the IRS.(32) Therefore, in the
event the Operating Partnership takes possession of the Albuquerque Hyatt as a
result of a default under the lease, presumably the Operating Partnership will
sell the Albuquerque Hyatt or within two years rent it to another tenant under
a lease that will produce "rents from real property."
V. CONCLUSION
Based on the assumptions stated above, it is our opinion that (i) all
of the income that the Operating Partnership derives from the Albuquerque Hyatt
will be treated as "qualifying income" for purposes of the 95 percent test and
(ii) all of the income the Operating Partnership derives from the Albuquerque
Hyatt will be treated as "qualifying income" for purposes of the 75 percent
test.
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Footnote continued from previous page
properties twice. See, Treas. Reg. Sections 1.856-6(b)(2), 1.856-6(d)(2). In
addition, the IRS has also recently issued a private letter ruling in which it
treated income received from hotels acquired pursuant to a bankruptcy petition
as income from foreclosure property, where the hotels were operated by
third-party managers. P.L.R. 9420013 (2/15/94).
(31)Treas. Reg. Section 1.856-6(b)(3).
(32)Section 856(e)(2).
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<PAGE> 92
April 1, 1996
Crescent Real Estate Equities, Inc.
900 Third Avenue, Suite 1800
New York New York 10022
Ladies and Gentlemen:
On December 19, 1995 we provided you with a memorandum analyzing the
impact that the purchase of the Hyatt Regency Albuquerque Plaza (the
"Albuquerque Hyatt") by Crescent Real Estate Equities Limited Partnership (the
"Operating Partnership") would have on the ability of Crescent Real Estate
Equities, Inc. (the "Company") to continue to qualify as a real estate
investment trust (a "REIT") under section 856(c).(1) That memorandum concluded
that, subject to certain assumptions, in our opinion (i) all of the income that
the Operating Partnership derived from the Albuquerque Hyatt would be treated
as "qualifying income" for purposes of the 95 percent gross income test for
REIT qualification and (ii) all of the income that the Operating Partnership
derived from the Albuquerque Hyatt would be treated as "qualifying income" for
purposes of the 75 percent gross income test for REIT qualification. The
December 19, 1995 memorandum was based upon, among other items, our review of a
Lease Agreement between the Operating Partnership, as lessor, and RoseStar
Management, LLC ("RoseStar"), as lessee, dated December 19, 1995 (the "Lease").
On March 11, 1996, the Operating Partnership conveyed all of its
interest as lessor under the Lease to Crescent Real Estate Funding II, L.P., a
Delaware limited Partnership ("Funding II"). Funding II assumed all of the
Operating Partnership's liabilities and obligations under the Original Lease.
On March 29, 1996, pursuant to an Assignment and Assumption of
Leasehold Estate, RoseStar sold and assigned all of its interest and estate as
lessee under the Lease to RoseStar Southwest, LLC, a Delaware limited liability
company ("Southwest"). RoseStar owns a 99 percent interest in Southwest, while
the remaining one percent interest is owned by RSSW Corp., a Delaware
corporation. The ownership of RoseStar is unchanged from December 19, 1995.
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(1) All section references are to the Internal Revenue Code of 1986, as
amended (the "Code"), or to the regulations issued thereunder, unless
otherwise noted.
<PAGE> 93
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 2
On April 1, 1996, the Lease was amended to provide that, among other
things, (1) at all times during the term of the Lease, Southwest and RoseStar
would maintain a cumulative net worth equal to $200,000; and (2) Southwest
would retain all of the income it earns from the Albuquerque Hyatt (except
distributions to its beneficial owners in an amount sufficient to pay their
federal and state income taxes on such income) until such time as Southwest and
any affiliate of Southwest (including RoseStar) which has entered into a
long-term lease of a hotel with Funding II or any affiliate of Funding II
(including the Operating Partnership) have accumulated and are holding in
reserve funds in the aggregate which are sufficient to enable Southwest and any
affiliated entities to pay at least one monthly payment of base rent under each
lease between Southwest and any such affiliated entities and Funding II or an
affiliate of Funding II.
This letter is intended to update the opinions expressed in our
December 19, 1995 memorandum to reflect the changes in the Lease and the
substitution of new parties as lessor and lessee of the Albuquerque Hyatt. The
opinions set forth herein are based upon the existing provisions of the Code,
and the reported interpretations thereof by the IRS and by the courts in effect
as of the date hereof, all of which are subject to change, both retroactively
or prospectively, and to possibly different interpretations. We assume no
obligation to update the opinions set forth in this letter. We believe that
the conclusions expressed herein, if challenged by the IRS, would be sustained
in court. However, because our opinions are not binding upon the IRS or the
courts, there can be no assurance that contrary positions may not be
successfully asserted by the IRS.
I. Documents and Representations
For the purpose of rendering this opinion, we have examined and
relied on originals, or copies certified or otherwise identified to our
satisfaction, of the following: (1) the Lease; (2) the Assignment and
Assumption of Leasehold Estate by and between RoseStar and Southwest dated
March 29, 1996; (3) the First Amendment to the Lease dated April 1, 1996; (4)
the Limited Guaranty Agreement by Gerald Haddock, John Goff and Sanjay Varma,
as guarantors in favor of Funding II (the "Guaranty); (5) the Articles of
Organization of RoseStar Management, LLC (the "RoseStar Articles"), (6) the
Regulations of RoseStar Management, LLC (the "RoseStar Regulations"), (7) the
First Amended and Restated Articles of Incorporation of Crescent Real Estate
Equities, Inc. (the "Crescent Articles"); and (8) such other documents or
information as we have deemed necessary for the opinion set forth below. In
our examination, we have assumed the genuineness of all signatures, the legal
capacity of natural persons, the authenticity of all documents submitted to us
as originals, the conformity to original documents of all documents submitted
to us as certified or photostatic copies, and the authenticity of the originals
of such copies.
<PAGE> 94
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 3
For the purpose of rendering this opinion, we have also assumed that
all statements of facts and assumptions described in our December 19, 1995
memorandum remain correct, unless otherwise noted.
II. Opinions
A. Lease Will be Treated as a Lease for Federal Income Tax Purposes
In order for any income derived by Funding II from the Albuquerque
Hyatt to constitute either "rents from real property," or in the case of a
default under the Lease, "gross income from foreclosure property," the Lease
must be treated as a lease for federal income tax purposes and not be treated
as a service contract, management contract or other type of arrangement. This
determination depends on an analysis of all the surrounding facts and
circumstances. In making this determination, courts have considered a variety
of factors, including the following: (i) the intent of the parties, (ii) the
form of the agreement, (iii) the degree of control over the business conducted
at the property that is provided to the lessee (e.g., whether the lessee has
substantial rights of control over the operation of the property and its
business), (iv) the extent to which the lessee has the risk of loss from
operations of the business conducted as the property (e.g., whether the lessee
bears the risk of increases in operating expenses and of decreases in
revenues), and (v) the extent to which the lessee has the opportunity to
benefit from operations of the business conducted at the property (e.g.,
whether the lessee benefits from decreased operating expenses or increased
revenues).(2)
In addition, section 7701(e) provides that a contract that purports
to be a service contract, partnership agreement, or another type of arrangement
will be treated instead as a lease of property if the contract is properly
treated as such, taking into account all relevant factors, including whether or
not: (i) the service recipient is in physical possession of the property, (ii)
the service recipient controls the property, (iii) the service recipient has a
significant economic or possessory interest in the property (e.g., the
property's use is likely to be dedicated to the service recipient for a
substantial portion of the useful life of the property, the recipient shares
the risk that the property will decline in value, the recipient shares in any
appreciation in the value of the property, the recipient shares in any savings
in the property's operating costs or the recipient bears the risk of damage to
or loss of the property), (iv) the service provider does not bear any risk of
substantially diminished receipts or substantially increased expenditures if
there is nonperformance under the contract, (v) the service provider does not
use the property concurrently to provide significant services to entities
unrelated to the service recipient and (vi) the total contract price does not
substantially exceed the rental
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(2) See, e.g., Xerox Corp. v. U.S., 80-2 USTC Paragraph 9530 (Ct. Cl. Tr.
Div. 1980), aff'd per curiam, 656 F.2d 659 (Ct. Cl. 1981).
<PAGE> 95
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 4
value of the property for the contract period. Since the determination of
whether a service contract, partnership agreement, or some other type of
arrangement should be treated as a lease is inherently factual, the presence or
absence of any single factor may not be dispositive in every case.(3)
We have concluded that the Lease will be treated as a lease for
Federal income tax purposes, rather than a service contract, management
contract or other type of arrangement. This conclusion is based, in part, on
the following facts: (i) Funding II and Southwest intend their relationship to
be that of lessor and lessee (as evidenced by the terms of the Lease), (ii)
Southwest has the right to exclusive possession, use and quiet enjoyment of the
Albuquerque Hyatt during the term of the Lease and the right to uninterrupted
control in the operation of and business conducted at the Albuquerque Hyatt
(subject to its assumption of the Management Agreement), (iii) Southwest will
bear the cost of, and be responsible for, capital expenditures, including
maintenance and repair of the Albuquerque Hyatt, and will dictate how the
Albuquerque Hyatt is maintained and improved (with the exception that Funding
II, as lessor, is responsible for the cost of certain capital expenditures in
situations where the funds available to Southwest are insufficient for such
expenditures), (iv) Southwest will bear all the costs and expenses of operating
the Albuquerque Hyatt (with the exception of the costs of replacing certain FF
& E associated with the Albuquerque Hyatt, which are to be funded by Funding
II), (v) Southwest will benefit from any savings in the costs of operating the
Albuquerque Hyatt during the term of the Lease, (vi) in the event of damage or
destruction to the Albuquerque Hyatt, Southwest will be at economic risk
because its obligation to make rental payments will not abate, (vii) Southwest
will indemnify Funding II against all liabilities imposed on Funding II during
the term of the Lease by reason of injury to persons or damage to property
occurring at the Albuquerque Hyatt or Southwest's use, management, maintenance
or repair of the Albuquerque Hyatt, (viii) Southwest is obligated to pay
substantial fixed rent for the period of use of the Albuquerque Hyatt,
regardless of whether its revenues exceed its costs and expenses, and (ix)
Southwest stands to incur substantial losses (or derive substantial profits)
depending on how successfully it operates the Albuquerque Hyatt.
We do not believe that our conclusion that the Lease of the
Albuquerque Hyatt will be treated as a lease for Federal income tax purposes is
affected by the fact that Southwest assumed RoseStar's rights and obligations
as lessor under the Lease subject to its assumption of Funding II's obligations
under the preexisting Management Agreement. The Management Agreement gives
Hyatt control over the day-to-day operation of the Albuquerque Hyatt and will
allow Hyatt to share with Southwest in the benefits of any increases in
revenues or cost savings in the operation of the Albuquerque Hyatt. However,
Hyatt's operation of the
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(3) P.L.R. 8918012 (January 24, 1989).
<PAGE> 96
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 5
Albuquerque Hyatt is not controlled by Funding II, and the Management Agreement
does not affect the fact that Southwest bears most of the risk of loss if the
Albuquerque Hyatt is not successful. Moreover, the IRS has issued a private
letter ruling in which it treated leases of several hotel properties as
producing "rents from real property" in a situation where the lessees had
contracted with a third party to conduct the day-to-day operations of the
hotels.(4) This ruling suggests that the IRS will respect a lease of a hotel
for federal income tax purposes even if the hotel is operated by an
independent contractor rather than by the lessee.
The Lease is structured in form so that Funding II retains ownership
of all the personal property leased to Southwest in connection with Southwest's
lease of the Albuquerque Hyatt (the "FF&E"). However, if the term of the Lease
equals or exceeds the useful life of some or all of the FF&E, it is possible
that the Lease could be treated for federal income tax purposes as a financing
arrangement. In such a case, Southwest would be treated as having acquired
ownership of the FF&E for federal income tax purposes in exchange for an
obligation to make future payments of principal and interest to Funding II.
Nonetheless, we do not believe that the recharacterization of the Lease as a
financing arrangement with respect to the FF&E would have a material effect on
the ability of the Company to satisfy the requirements for taxation as a REIT.
This is because, if a portion the of the payments made by Southwest under the
Lease were characterized as interest on indebtedness secured by the FF&E,
rather than rents from real property, that portion would still satisfy the 95
percent gross income test (although it would not satisfy the 75% gross income
test).(5)
B. Percentage Rent Provision is not Profit-Based
Pursuant to the Lease, Southwest will be obligated to pay Funding II
base rent and percentage rent. Under the regulations, percentage rent based on
a percentage of gross receipts or sales in excess of a floor amount, which is
how the percentage rent is structured under the Lease, will not qualify as
"rents from real property" unless (i) such floor amount does not depend in
whole or in part on the income or profits of the lessee, (ii) the percentage
and the floor amount are fixed at the time the lease is entered into, (iii) the
percentage and the floor amount are not renegotiated during the term of the
lease in a manner that has the effect
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(4) See, P.L.R. 8117036 (January 27, 1981).
(5) If the Lease were recharacterized as a financing arrangement with
respect to the FF&E, it also might result in some minor timing differences
with respect to the Company's recognition of income. These differences
would result from (a) the recharacterization of a portion Southwest's
payments under the Lease as a return of principal and (b) the Company's
loss of any depreciation deductions attributable to the FF&E.
<PAGE> 97
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 6
of basing the percentage rent on income or profits, and (iv) the percentage and
the floor amount conform with normal business practice.(6)
Under the terms of Article 4.2 of the Lease, Southwest will pay
percentage rent equal on an annual basis to the sum of (i) 17.5 percent of the
excess of annual gross receipts from room rentals over $6,000,000 and (ii) 2.5
percent of the excess of annual gross receipts from the food and beverage
facilities at the Albuquerque Hyatt over $2,000,000. It will effectively
reward Southwest for any increases in gross receipts from rooms and from other
sources over the threshold amounts. This type of formula does not base the
percentage rent on Southwest's income or profits, and similar formulas have
been treated by the IRS as generating "rents from real property."(7) Moreover,
Funding II has represented that (i) the floor amounts used to compute the
percentage rent under the Lease do not depend in whole or in part on the income
or profits of any person, (ii) the percentage rent provision of the Lease has
not been and will not be renegotiated during the term of the Lease or at the
expiration or earlier termination of the Lease in a manner that has the effect
of basing the rent on income or profits, and (iii) the percentage rent
provision of the Lease conforms with normal business practice. In addition,
based on our experience and an examination of the Lease and the Albuquerque
Hyatt projections, the Lease appears to conform with normal business practice.
C. Southwest is not a "Related Party Tenant"
Rents received from Southwest will not qualify as "rents from real
property" if Southwest is a "related party tenant." Southwest will be a
"related party tenant" if the Company, or an owner of 10 percent or more of the
Company, directly or constructively owns 10 percent or more of the assets or
net profits of Southwest.(8) Constructive ownership is determined for purposes
of this test by applying the rules of section 318(a) as modified by section
856(d)(5). Those rules generally provide that if 10 percent or more in value
of the stock of the Company is owned, directly or indirectly, by or for any
person, the Company is considered as owning the stock owned, directly or
indirectly, by or for such person.
Southwest will not be treated as a "related party tenant" because a
99 percent interest in Southwest's assets and net profits will be owned by
RoseStar, with the remaining one
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(6) Treas. Reg. Section 1.866-4(b)(3).
(7) See, e.g., P.L.R. 8803007 (September 23, 1987) (percentage rent based on
gross revenues in excess of gross revenues for a base year treated as
"rents from real property"); cf. P.L.R. 9104018 (October 26, 1990)
(interest based on gross revenues in excess of a floor amount treated as
qualifying interest under section 856(f)).
(8) Section 856(d)(2)(B)(ii).
<PAGE> 98
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 7
percent interest owned by RSSW, Corp. An individual, Sanjay Varma, currently
owns a 91 percent interest in the assets and net profits of RoseStar and RSSW,
Corp. In reaching this conclusion, we recognize that Sanjay Varma owns certain
Units of the Operating Partnership.(9) Funding II has represented that (i)
Sanjay Varma does not own more than 10 percent of the value of the Company's
stock, (ii) Sanjay Varma is not expected to own more than 10 percent of the
value of the Company's stock in the future, and (iii) neither Funding II nor
the Company intends to acquire, directly or constructively, an interest of 10
percent or more in the assets or net profits of RoseStar at any time in the
future. Moreover, Article 7.8 of the Lease limits the ability of Southwest or
any person owning an interest in Southwest (including RoseStar) to acquire,
directly or constructively, a 6 percent stock interest in the Company, and
Section 6.4 of the First Amended and Restated Articles of Incorporation of the
Company prevents RoseStar and its members and managers from acquiring more than
8 percent of the Company's stock.
The conclusion that Southwest will not be treated as a "related party
tenant" is based on the assumption that its member RoseStar will be treated as
a partnership for federal income tax purposes. If RoseStar is not treated as a
partnership for federal income tax purposes, but is instead treated as an
association taxable as a corporation, then it is possible that Southwest would
be treated as a "related party tenant" and the rents derived under the terms of
the Lease would not be treated as "rents from real property." This is because,
if RoseStar were treated as a corporation for federal income tax purposes,
Gerald W. Haddock and John C. Goff would likely be deemed to own all of its
voting stock, because of the extensive powers that they are granted as managers
under the RoseStar Regulations. If this were the case, the ownership of such
voting stock (and ownership of Southwest) might be attributed to the Company
under a literal reading of the constructive ownership rules described above.(10)
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(9) See Rev. Rul. 73-194, 1973-1 C.B. 355 (management company treated as an
independent contractor with respect to a REIT, where an affiliate of the
management company and the REIT were partners).
(10) Richard Rainwater, Gerald Haddock and John Goff are each partners in
FW-Irving Partners, Ltd. (and apparently they are partners in other
partnerships as well). Richard Rainwater also owns more than 10 percent
of the value of the stock of the Company. Thus, assuming that the
ownership interests in RoseStar held by Gerald Haddock and John Goff
constitute stock, such interests, along with Richard Rainwater's stock
interest in the Company, will be attributed to FW-Irving Partners, Ltd.
pursuant to section 318(a)(3)(A), which provides that stock owned,
directly or indirectly, by or for a partners shall be considered as owned
by the partnership. Then, FW-Irving Partners, Ltd.'s deemed interest in
RoseStar would be attributed to the Company pursuant to section
318(a)(3)(C) (as modified by section 856(d)(5)), which provides that stock
owned by any person that owns 10 percent or more of the value of the stock
in a corporation shall be considered owned by the corporation. As you are
aware, however, we have opined to you in a similar context that we do not
believe that these attribution rules should be read literally.
<PAGE> 99
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 8
An entity which has associates and an objective to carry on a
business for joint profit will be treated as a partnership for federal income
tax purposes, and not as an association taxable as a corporation, if it has not
more than two of the following four characteristics of a corporation: (i)
continuity of life; (ii) centralization of management; (iii) limited liability;
and (iv) free transferability of interests.(11) The entity must also have no
other characteristics which are significant in determining its classification.
Generally, other factors are considered only insofar as they relate to the
determination of the presence or absence of the foregoing corporate
characteristics.(12) The IRS has applied this four-factor test in determining
whether limited liability companies formed under the Texas Limited Liability
Company Act (the "Act") are partnerships for federal income tax purposes.(13)
The IRS has issued Rev. Proc. 95-10, which specifies conditions which must be
satisfied for a limited liability company to receive a favorable advanced
ruling that it will be classified as a partnership for federal income tax
purposes.(14) RoseStar should satisfy these conditions. However, such
conditions are applicable only in determining whether rulings will be issued
and are not intended as substantive rules for determination of partnership
status.
An organization will be treated as possessing the corporate
characteristic of continuity of life, even if the agreement organizing an
entity provides that it is to continue only for a stated period, unless a
member has the power to dissolve the organization at an earlier time.(15)
Article 6.01 of the Act provides, in part, that except as otherwise provided in
the company's regulations, a limited liability company shall be dissolved upon
the death, retirement, resignation, expulsion, bankruptcy, or dissolution of a
member or the occurrence of any other event which terminates the continued
membership of a member in the limited liability company, unless there is at
least one remaining member and the business of the limited liability company is
continued by the consent by the number of members or class thereof stated in
the articles of organization or regulations of the limited liability company or
of not so stated, by all remaining members. Article 2 of the RoseStar Articles
provides that the duration of RoseStar is until the close of business on
December 31, 2015, or until its earlier dissolution in accordance with the
provisions of the Act or the Regulations. Article 10.2 of the RoseStar
Regulations provides, in part, that RoseStar shall be dissolved upon the
withdrawal, death, retirement, resignation, expulsion, bankruptcy, legal
incapacity or dissolution of any member, unless the business of RoseStar is
continued by the consent of all the remaining members
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(11) Treas. Reg. Section 301.7701-2(a).
(12) See Rev. Rul. 79-106, 1979-1 C.B. 448.
(13) See, e.g., P.L.R. 9242025 (July 22, 1992) and P.L.R. 9218078 (January
31, 1992).
(14) 1995-3 I.R.B. 20.
(15) Treas. Reg. Section 301.7701-2(b)(3).
<PAGE> 100
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 9
within ninety days. Accordingly, RoseStar will lack the corporate
characteristic of continuity of life.
An organization will be treated as possessing the corporate
characteristic of free transferability of interests if the members owning all
or substantially all of the interests in an organization may substitute for
themselves without the consent of the other members a person who is not a
member of the organization.(16) Article 4.05 of the Act provides, in part, that
unless otherwise provided by the company's regulations, a membership interest
is assignable in whole or in part; an assignment of a member's interest does
not entitle the assignee to become, or to exercise rights or powers of a
member; and until the assignee becomes a member, the assignor member continues
to be a member and to have the power to exercise any rights or powers of a
member, except to the extent those rights or powers are assigned. Article 4.07
of the Act provides, in part, that an assignee of a membership interest may
become a member if and to the extent that the company's regulations so provide,
or all members consent. Article 9.3 of the RoseStar Regulations provides, in
part, that no member shall have the right to substitute in its place a
transferee unless consent is given by the Managers and a majority of the other
members, which consent may be withheld in the discretion of the Managers or the
other members. Accordingly, RoseStar will lack the corporate characteristic of
free transferability of interests. Because RoseStar will lack the corporate
characteristics of continuity of life and free transferability of interests, in
our opinion it will be treated as partnership for federal income tax purposes.
D. Incidental Personal Property
As noted in the December 19, 1995 memorandum, in order for the rent
under the Lease to be treated as "rents from real property," the rents
attributable to personal property leased under or in connection with the Lease
must not be greater than 15 percent of the rents received under the Lease. The
rent attributable to personal property leased under or in connection with a
lease of real property is the amount that bears the same ratio to total rent
for the taxable year as (i) the average of the adjusted bases of the personal
property leased under or in connection with a lease of real property at the
beginning and at the end of the taxable year bears to (ii) the average of the
aggregate adjusted bases of the real and personal property subject to the lease
at the beginning and at the end of such taxable year (the "Adjusted Basis
Ratio").(17) Funding II has represented that the adjusted tax basis of the
personal property leased under or in connection with the Lease has not
represented and will not represent more than 15 percent of the aggregate
adjusted tax basis of the Albuquerque
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(16) Treas. Reg. Section 301.7701-2(e).
(17) Section 856(d)(1)(C).
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Page 10
Hyatt at any time. Moreover, in Article 36.2 of the Lease, the parties agreed
that the adjusted tax basis of the personal property leased under or in
connection with the Lease will not represent more than 15 percent of the
aggregate adjusted tax basis of the Albuquerque Hyatt at any time.
E. Provision of Services by the Funding II
1. Income Derived under the Terms of the Lease
Although Funding II may treat charges for services customarily
furnished or rendered in connection with the rental of the Albuquerque Hyatt as
"rents from real property," any services rendered to the occupants of the
Albuquerque Hyatt must be furnished or rendered by an independent contractor
from whom the Company does not derive or receive any income.(18) Moreover, to
the extent that any independent contractors provide noncustomary services to
the occupants of the Albuquerque Hyatt, the cost of such services must not be
borne by the Funding II.(19)
Under the terms of the Lease, Funding II will not be required to
provide any services, customary or noncustomary, in connection with the rental
of the Albuquerque Hyatt. Instead, all services relating to the operation of
the Albuquerque Hyatt will be provided by Hyatt under the terms of the
Management Agreement. Funding II has represented that Hyatt is an independent
contractor within the meaning of section 856(d)(3), from which the Company and
Funding II will not derive or receive any income. Funding II will not bear the
cost of any of the services provided by Hyatt. Instead, such costs are borne
by Southwest, because it has assumed Funding II's obligations, as owner, under
the Management Agreement.
Based on the foregoing, we believe that the provision of any
noncustomary services to the occupants of the Albuquerque Hyatt by Hyatt will
have no effect on the qualification of the income derived from the Albuquerque
Hyatt as "rents from real property." In fact, the IRS has issued a private
letter ruling in which it has treated the income derived from several leases of
hotel properties as "rents from real property" in a situation where the lessees
had contracted with a third-party to conduct the day to day operations of the
hotels.(20) Our conclusion is not altered by the fact that Funding II will
remain liable for any obligations arising under the Management Agreement, to
the extent that they are not satisfied by Southwest. Funding II should not be
treated as bearing the cost of the services provided by
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(18) Sections 856(d)(1), 856(d)(2)(C); Treas. Reg. Section 1.512(b)-1(c)(5).
(19) Treas. Reg. Section 1.856-4(b)(5).
(20) See, P.L.R. 8117036 (January 27, 1981).
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Crescent Real Estate Equities, Inc.
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Page 11
Hyatt merely because it is liable for Southwest's obligations under the
Management Agreement. Funding II is not retaining this liability in an attempt
to provide services to Southwest. Instead, it is retaining this liability only
as an accommodation to Hyatt. Moreover, Funding II believes that it is highly
unlikely that it will ever be required to reimburse Hyatt for the costs and
expenses of operating the Albuquerque Hyatt. This is because (i) the
Albuquerque Hyatt is projected to generate enough gross income to cover the
payments to Hyatt under the Management Agreement, (ii) in connection with
Section 7.7 the Lease, as amended, Southwest has represented that it has a net
worth of at least $200,000, (iii) in connection with Section 7.9 of the Lease,
as amended, Southwest has agreed to retain all of the income it earns from the
Albuquerque Hyatt (except distributions to its beneficial owners in an amount
sufficient to pay their federal and state income taxes on such income) until
such time as Southwest and any affiliate of Southwest (including RoseStar)
which has entered into a long-term lease of a hotel with Funding II or any
affiliate of Funding II (including the Operating Partnership) have accumulated
and are holding in reserve funds in the aggregate which are sufficient to
enable Southwest and any affiliated entities to pay at least one monthly
payment of base rent under each lease between Southwest and any such affiliated
entities and Funding II or an affiliate of Funding II, (iv) pursuant to the
Guaranty, RoseStar's individual members have guaranteed RoseStar's obligations
under the Lease, and (v) in the view of Funding II, Southwest's capitalization
is adequate to allow Southwest to assume its obligations as lessee under the
Lease.
2. Income Derived in the Case of a Default under the Lease
If Funding II were required to reimburse Hyatt for the costs of
operating the Albuquerque Hyatt because of a default by Southwest under the
terms of the Management Agreement, we have concluded that the income derived by
Funding II from the Albuquerque Hyatt would be treated as "qualifying income"
for purposes of the 75 percent and 95 percent tests. This is because, if
Funding II were required to reimburse Hyatt for the cost of operating the
Albuquerque Hyatt, this would constitute an event of default under Article
16.1(c) of the Lease, allowing Funding II to terminate Southwest's leasehold
interest in the Albuquerque Hyatt. As a result of such a termination of the
Lease, any income derived by Funding II from the Albuquerque Hyatt after the
default would be treated as income from foreclosure property.
Funding II would be able to continue to operate the Albuquerque Hyatt
after any default under the Lease, without affecting its status as foreclosure
property, because Hyatt, an independent contractor, from whom the Company will
not derive any income, will provide all services relating to its operation. A
REIT can use foreclosure property in the conduct of an
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Page 12
active trade or business, as long as this is done through the use of an
independent contractor, from whom the REIT does not derive or receive any
income.(21)
Real property acquired upon default under a lease is not eligible to
be treated as foreclosure property if the lease is entered into with an intent
to evict or foreclose, or if the REIT knows or has reason to know that default
would occur.(22) This is not the case in the present situation because (i) the
Albuquerque Hyatt is projected to generate enough gross income to cover the
payments to Hyatt under the Management Agreement, (ii) in connection with
Section 7.7 the Lease, as amended, Southwest has represented that it has a net
worth of at least $200,000, (iii) in connection with Section 7.9 of the Lease,
as amended, Southwest has agreed to retain all of the income it earns from the
Albuquerque Hyatt (except distributions to its beneficial owners in an amount
sufficient to pay their federal and state income taxes on such income) until
such time as Southwest and any affiliate of Southwest (including RoseStar)
which has entered into a long-term lease of a hotel with Funding II or any
affiliate of Funding II (including the Operating Partnership) have accumulated
and are holding in reserve funds in the aggregate which are sufficient to
enable Southwest and any affiliated entities to pay at least one monthly
payment of base rent under each lease between Southwest and any such affiliated
entities and Funding II or an affiliate of Funding II, (iv) pursuant to the
Guaranty, RoseStar's individual members have guaranteed RoseStar's obligations
under the Lease, and (v) in the view of Funding II, Southwest's capitalization
is adequate to allow Southwest to assume its obligations as lessee under the
Lease.
The Albuquerque Hyatt would in any event qualify as foreclosure
property only for a period of up to two years, beginning of the date of its
acquisition by Funding II, unless Funding II obtains an extension of the grace
period from the IRS.(23) Therefore, in the event Funding II takes possession
of the Albuquerque Hyatt as a result of a default under the Lease, presumably
Funding II will sell the Albuquerque Hyatt or, within two years, rent it to
another tenant under a lease that will produce "rents from real property."
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(21) Section 856(e)(4)(C). (The IRS clearly intended for REITs to be able to
treat hotels operated by independent contractors as foreclosure property.
For instance, the Treasury regulations defining foreclosure property
refer to hotel properties twice. See, Treas. Reg. Sections 1.856-6(b)(2),
1.856-6(d)(2). In addition, the IRS has also recently issued a private
letter ruling in which it treated income received from hotels acquired
pursuant to a bankruptcy petition as income from foreclosure property,
where the hotels were operated by third party managers. P.L.R.
9420013 (2/15/94).)
(22) Treas. Reg. Section 1.856-6(b)(3).
(23) Section 856(e)(2).
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Crescent Real Estate Equities, Inc.
April 1, 1996
Page 13
F. Conclusions
Based on the assumptions and representations stated above, it is our
opinion that (i) all of the income that Funding II derives from the Albuquerque
Hyatt will be treated as "qualifying income" for purposes of the 95 percent
test and (ii) all of the income that Funding II derives from the Albuquerque
Hyatt, will be treated as "qualifying income" for purposes of the 75 percent
test.
III. Additional Limitations
The foregoing opinions are limited to the specific matters covered
thereby and should not be interpreted to imply that the undersigned has offered
its opinion on any other matter.
Very truly yours,
SHAW, PITTMAN, POTTS & TROWBRIDGE
By:
---------------------------------
Charles B. Temkin, P.C.
<PAGE> 105
July 26, 1996
Crescent Real Estate Equities, Inc.
900 Third Avenue
Suite 1800
New York, New York 10022
Re: Canyon Ranch
Ladies and Gentlemen:
You have requested certain opinions regarding the application of U.S.
federal income tax laws to Crescent Real Estate Equities, Inc. (the "Company")
and Crescent Real Estate Equities Limited Partnership (the "Operating
Partnership") in connection with the acquisition of Canyon Ranch, a health and
fitness resort located in Tucson, Arizona from Canyon Ranch, Inc. ("CRI").
I. TRANSACTION DOCUMENTS
In rendering the opinions expressed below, we have examined and relied
upon the following documents (collectively, the "Transaction Documents"):
(i) the Contribution Agreement between CRI and the Operating
Partnership, dated July 26, 1996 ("the Contribution
Agreement");
(ii) the Lease Agreement between CRI and Canyon Ranch Leasing,
L.L.C. ("CRL"), dated July 26, 1996 (the "Lease");
(iii) the Management Agreement between CRI and Canyon Ranch
Management, L.L.C. ("CRM"), dated July 26, 1996 (the
"Management Agreement");
(iv) the Assignment and Assumption of Management Agreement between
CRI and the Operating Partnership, dated July 26, 1996 (the
"Assignment and Assumption Agreement");
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Crescent Real Estate Equities, Inc.
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Page 2
(v) the Assignment and Assumption of Master Lease between CRI and
the Operating Partnership, dated July 26, 1996;
(vi) the Assignment and Assumption of Contracts between CRI and
the Operating Partnership, dated July 26, 1996;
(vii) the Assignment and Assumption of Store Leases between CRI and
the Operating Partnership, dated July 26, 1996;
(viii) the Asset Purchase Agreement between CRL, CRI and the
Operating Partnership, dated July 26, 1996 (the "FF & E
Purchase Agreement");
(ix) the Contract of Sale between CRI and CRL, dated July 26, 1996
(the "Life Share Contract");
(x) the Promissory Note for $2,400,000 with CRL as maker and the
Operating Partnership as payee bearing interest at the rate
of 10.75 percent, dated July 26, 1996 (the "Crescent FF & E
Note");
(xi) the Promissory Note in the amount of $648,360 with CRL as
maker and the Operating Partnership as payee bearing interest
at the rate of 10.75 percent per annum, dated July 26, 1996
(the "Life Share Note");
(xii) the Security Agreement between CRL and the Operating
Partnership, dated July 26, 1996 (the "Security Agreement");
(xiii) the Promissory Note in the amount of $162,090 with CRL as
maker and RoseStar Management, L.L.C. ("RoseStar") as payee
bearing interest at the rate of 10.75 percent per annum,
dated July 26, 1996 ("RoseStar Life Share Note");
(xiv) the Guaranty Agreement between RoseStar as GUARANTOR and the
Operating Partnership, dated July 26, 1996 (the "Guaranty");
(xv) the Limited Guaranty Agreement between Gerald Haddock, John
C. Goff and Sanjay Varma, together, as guarantors and the
Operating Partnership, dated July 26, 1996 (the "Limited
Guaranty");
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Crescent Real Estate Equities, Inc.
July 26, 1996
Page 3
(xvi) the Agreement Between CRI as Lessee and the Operating
Partnership as Substitute Lessor, dated July 26, 1996;
(xvii) the Option Agreement between Melvin Zuckerman ("Zuckerman")
and RoseStar, dated July 26, 1996 (the "Zuckerman Option
Agreement");
(xviii) the Option Agreement between Jerry Cohen ("Cohen") and RSCR
Arizona Corp., a Delaware Corporation ("RSCR"), dated July
26, 1996 (the "Cohen Option Agreement");
(xix) the Option Agreement between CRL and the Operating
Partnership, dated July 26, 1996 (the "Life Share Option
Agreement");
(xx) the Articles of Organization of RoseStar (the "RoseStar
Articles");
(xxi) the Regulations of RoseStar (the "RoseStar Regulations");
(xxii) the Articles of Organization of CRL (the "CRL Articles");
(xxiii) the Regulations of CRL (the "CRL Regulations");
(xxiv) the Articles of Incorporation of RSCR;
(xxv) the Bylaws of RSCR;
(xxvi) the First Amended and Restated Articles of Incorporation of
Crescent Real Estate Equities, Inc. (the "Crescent
Articles"); and
(xxvii) such other documents or information as we deemed necessary
for the opinions set forth below.
II. BACKGROUND OF TRANSACTION
A. The Management Agreement: Under the Management Agreement, CRI,
as owner of Canyon Ranch, has contracted with CRM to manage and operate Canyon
Ranch, to collect all Canyon Ranch receipts, and to manage certain related
properties and time share programs (as described more fully below). In
addition, CRM has also agreed to honor resort memberships issued to various
persons by CRI. CRM was also granted the right to issue
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Crescent Real Estate Equities, Inc.
July 26, 1996
Page 4
additional memberships in the resort in the future. In exchange for these
services, CRM is to be paid a profits-based management fee collected from the
gross receipts of the resort.
Under the Management Agreement, CRI, as owner, is obligated to
establish a capital improvement reserve to be funded from gross receipts from
the resort. CRM, as manager, is entitled to withdraw funds from this reserve
to pay for capital improvements and additions to the furniture, fixtures and
equipment used in connection with the resort.
Section 15.2 of the Management Agreement requires that all assignments
of the Management Agreement (other than certain assignments to permitted
transferees) be approved by CRM and under Section 15.3 of the Management
Agreement any assignees are bound by the obligations of the owner under the
Management Agreement.
B. The Lease: Under the terms of the Lease, CRL leased the
following property (the "Leased Property") from CRI: (i) the land, buildings,
fixtures and other improvements commonly known as Canyon Ranch; (ii) various
contracts entitling persons to use the guest rooms and/or the resort
facilities; (iii) various contracts (excluding employment contracts) relating
to the operation of the resort; (iv) CRI's interest as owner under the
Management Agreement (including the obligation to fund the capital improvement
reserve); (v) CRI's interest under certain Individual Unit Management
Agreements and a Common Element Management Agreement relating to the Canyon
Ranch Casitas (described more fully below); (vi) CRI's interest under certain
Individual Unit Management Agreements relating to the Canyon Ranch Estates
(described more fully below); (vii) CRI's interest under all existing leases of
the resort property; and (viii) certain personal property used in connection
with the resort. The Leased Property does not include certain machinery,
equipment, fixtures, furniture, vehicles, artwork, signage and other decorative
items located in or used in connection with the operation of the resort (the
"FF & E"), which was sold by CRI to CRL (as described more fully below).
C. The Zuckerman and Cohen Option Agreements: Under the
Zuckerman Option Agreement, Zuckerman granted to RoseStar, a Texas limited
liability company, the exclusive option to purchase, on or after December 15,
1996, but not after December 31, 1996, his 99 percent interest in CRL, the
Delaware limited liability company that is lessee under the Lease. In order to
exercise this option, RoseStar must give notice to Zuckerman and pay him $1.00.
In addition, under the Zuckerman Option Agreement, Zuckerman has the right to
require RoseStar to purchase his 99 percent interest in CRL for $1.00 at any
time on or after December 15, 1996, but not after December 31, 1996.
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Crescent Real Estate Equities, Inc.
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Page 5
Currently, Sanjay Varma owns a 91 percent interest in the assets and
net profits of RoseStar, while Gerald W. Haddock and John C. Goff, the managers
of RoseStar, each own a 4.5 percent interest in its assets and net profits.
Under the Cohen Option Agreement, Cohen granted to RSCR the exclusive
option to purchase, on or after December 15, 1996, but not after December 31,
1996, his one percent interest in CRL. In order to exercise this option, RSCR
must give notice to Cohen and pay him $1.00. In addition, under the Cohen
Option Agreement, Cohen has the right to require RSCR to purchase his one
percent interest in CRL for $1.00 at any time on or afterDecember 15, 1996, but
not after December 31, 1996.
Sanjay Varma owns 91 percent of the stock of RSCR. Gerald W. Haddock
and John C. Goff each own 4.5 percent of the stock of RSCR.
D. The Contribution Agreement and the Assignment and Assumption
Agreement: Under the Contribution Agreement, CRI contributed the land,
buildings, fixtures and other improvements commonly known as Canyon Ranch, as
well as certain personal property used in connection with the operation of the
resort to the Operating Partnership, subject to the Lease and the Management
Agreement, in exchange for Units in the Operating Partnership. Under the
Contribution Agreement, the Operating Partnership also acquired CRI's interest
as owner under the Management Agreement and as lessor under the Lease.
Under the Assignment and Assumption Agreement, the Operating
Partnership assumed and agreed to perform all obligations of CRI as owner under
the Management Agreement to the extent that such obligations are not performed
by CRL as lessee under the Lease.
E. FF & E: As noted above, the Operating Partnership did not
acquire any of the FF & E. Instead, CRL purchased the FF & E from CRI under
the Asset Purchase Agreement with the proceeds of a loan. The loan, in the
principal amount of $2,400,000, was made to CRL by the Operating Partnership,
is evidenced by the Crescent FF & E Note, and is secured by the FF & E under
the terms of the Security Agreement.
F. Canyon Ranch Casitas: Adjacent to Canyon Ranch is the Canyon
Ranch Casitas Subdivision, consisting of 47 platted lots. Immediately prior to
the execution of the Contribution Agreement and the Life Share Property
Contract, CRI owned interests in 19 of these lots. The interests owned by CRI
consisted of: (a) the fee interest in 10 developed lots, which are used for
accommodations just like other rooms contained in Canyon Ranch proper, (b) the
fee interest in 6 unimproved lots, and (c) the fee interest in three improved
lots (the
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Crescent Real Estate Equities, Inc.
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"Casitas Time Share Lots") dedicated to the Canyon Ranch Casitas time share
program (described more fully below). Under the terms of the Contribution
Agreement, CRI's fee interest in the 10 developed and 6 undeveloped lots in
the Casitas Subdivision was contributed to the Operating Partnership subject to
the Lease and the Management Agreement. As a consequence, CRM will be
responsible for operating these lots for CRL. CRI sold its interest in the
Casitas Time Share Lots to CRL under the terms of the Life Share Property
Contract. CRL borrowed funds pursuant to the Life Share Note to acquire these
lots.
The other 28 lots in the Canyon Ranch Casitas subdivision are not
owned by CRI (one is owned by Zuckerman and the other 27 are owned by third
parties) and have not been contributed to the Operating Partnership. However,
under the terms of the Management Agreement, CRM has assumed the obligation to
manage approximately 20 of these lots under the terms of certain Individual
Unit Management Agreements between CRI and the owners of these lots. CRM has
also assumed CRI's obligation to maintain certain common areas in the Canyon
Ranch Casitas subdivision under the terms of a Common Element Management
Agreement. Under prior agreements, CRI granted third parties using the Casitas
units the right to use the resort facilities in exchange for an additional fee.
Under the terms of the Management Agreement, CRM has assumed CRI's obligations
under these prior agreements.
G. Canyon Ranch Estates: Also adjacent to Canyon Ranch is the
Canyon Ranch Estates Subdivision. Immediately prior to the execution of the
Contribution Agreement, CRI owned interests in five units in the Canyon Ranch
Estates Subdivision. The interests owned by CRI consisted of: (a) the fee
interest in one house in the Canyon Ranch Estates Subdivision used for
accommodations just like other rooms contained in Canyon Ranch proper, and (b)
the fee interest in three improved lots (the "EstatesTime Share Lots")
dedicated to the Canyon Ranch Hacienda time share program (described more fully
below). Under the terms of the Contribution Agreement, CRI's fee interest in
the house in the Canyon Ranch Estates subdivision was contributed to the
Operating Partnership subject to the Lease and the Management Agreement. As a
consequence, CRM will be responsible for operating this unit for CRL. CRI sold
its interest in the Estates Time Share Lots to CRL under the terms of the Life
Share Property Contract. CRL borrowed funds pursuant to the Life Share Note to
acquire these lots.
The other units in the Canyon Ranch Estates Subdivision were not
contributed to the Operating Partnership.
H. Time Share Arrangements: Time share arrangements exist with
respect to the Casitas Time Share Lots and the Estates Time Share Lots.
Purchasers of time share interests
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Crescent Real Estate Equities, Inc.
July 26, 1996
Page 7
in these properties ("Interval Owners") entered into agreements with CRI that
allow the Interval Owners to (i) become members of Canyon Ranch, (ii) use the
time share accommodations for a certain period of time each year, and (iii)
receive certain personal health benefits. However, an Interval Owner must pay
to CRI additional fees for use of the spa, for meals and any special services
utilized. Interval Owners must also pay an annual maintenance fee to their
life share association (described more fully below). Under the Management
Agreement, CRM has agreed to perform all duties of CRI, as owner, under these
time share arrangements, to the extent such duties do not arise after the
termination of the Management Agreement. CRM has also agreed not to sell any
more time share interests under any of the above described programs.
III. REQUESTED OPINIONS
You have asked for our opinion concerning the impact that the purchase
of Canyon Ranch will have on the ability of the Company to continue to qualify
as a real estate investment trust (a "REIT") under section 856.(1)
Specifically, you have requested that we render opinions addressing the
following:
1. whether the Lease will be treated as a lease for federal
income tax purposes;
2. whether the income that the Operating Partnership derives from
the Lease will be treated as "qualifying income" for purposes
of the 95 percent and 75 percent gross income tests for REIT
qualification under section 856(c); and
3. whether the income that the Operating Partnership derives from
the Crescent FF & E Note and the Life Share Note will be
treated as "qualifying income" for purposes of the 75 percent
gross income test for REIT qualification under section
856(c)(3).
IV. LEGAL BACKGROUND
A. 75 Percent and 95 Percent Tests
In order to qualify as a REIT for tax purposes, the Company must
satisfy certain tests with respect to the composition of its gross income on an
annual basis. First, at least 75 percent of the Company's gross income
(excluding gross income from certain prohibited
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(1) All section references herein are to the Internal Revenue Code of 1986,
as amended (the "Code"), or to the regulations issued thereunder, unless
otherwise noted.
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Crescent Real Estate Equities, Inc.
July 26, 1996
Page 8
transactions) for each taxable year must consist of temporary investment income
or of certain defined categories of income derived directly or indirectly from
investments relating to real property or mortgages on real property. These
categories include, subject to various limitations, rents from real property,
interest on mortgages on real property, gains from the sale or other
disposition of real property (including interests in real property and
mortgages on real property) not primarily held for sale to customers in the
ordinary course of business, income from foreclosure property, and amounts
received as consideration for entering into either loans secured by real
property or purchases or leases of real property.(2) Second, at least 95
percent of the Company's gross income (excluding gross income from certain
prohibited transactions) for each taxable year must be derived from income
qualifying under the 75 percent test and from dividends, other types of
interest and gain from the sale or disposition of stock or securities, or from
any combination of the foregoing.(3)
In applying these income tests, REITs that are partners in a
partnership are required to include in their gross income their proportionate
share of the partnership's gross income. In addition, such REITs are to treat
this partnership gross income as retaining the same character as the items of
gross income of the partnership for purposes of section 856.(4) Thus, the
character of any income derived by the Operating Partnership from Canyon Ranch
will affect the ability of the Company to qualify as a REIT.
B. Rents from Real Property
Rents from real property satisfy both the 75 percent and 95 percent
tests for REIT qualification only if several conditions are met. First, the
amount of rent must not be based in whole or in part on the income or profits
of any person. An amount received or accrued generally will not be excluded
from the term "rents from real property" solely by reason of being based on a
fixed percentage or percentages of receipts or sales.(5) Second, the Code
provides that rents received from a tenant will not qualify as "rents from real
property" if the REIT, or an owner of 10 percent or more of the REIT, directly
or constructively, owns 10 percent or more of such tenant (a "Related Party
Tenant").(6) Third, if rent attributable to personal property leased in
connection with a lease of real property is greater than 15 percent of the
total rent received under the lease, then the portion of rent attributable to
such personal
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(2) Section 856(c)(3).
(3) Section 856(c)(2).
(4) Treas. Reg. Section 1.856-3(g).
(5) Section 856(d)(2)(A).
(6) Section 856(d)(2)(B).
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Crescent Real Estate Equities, Inc.
July 26, 1996
Page 9
property will not qualify as "rents from real property."(7) Finally, for rents
to qualify as "rents from real property," a REIT generally must not operate or
manage the property or furnish or render services to the tenants of such
property, other than through an independent contractor from whom the REIT
derives no revenue. However, rents will be qualified as "rents from real
property" if a REIT directly performs services in connection with the lease of
the property, if those services are "usually or customarily rendered" in
connection with the rental of space for occupancy, and such services are not
considered to be rendered to the occupant of the property.(8)
C. Income from Foreclosure Property
Income from foreclosure property is treated as "qualifying income" for
purposes of the 75 percent and 95 percent tests (although any net income from
foreclosure property is taxed at the maximum corporate rate). Foreclosure
property is any real property, and any personal property incident to such real
property, acquired by a REIT through default under a mortgage or a lease. A
REIT may elect to treat such property as foreclosure property for a grace
period of up to two years.(9) However, such property will cease to qualify as
foreclosure property if it is used by the REIT in a trade or business more than
90 days after it is acquired and it is not operated through an independent
contractor from whom the REIT does not derive or receive any income.(10)
Moreover, property is not eligible to be treated as foreclosure property if the
lease is entered into with an intent to evict or foreclose, or if the REIT
knows or has reason to know that default would occur.(11)
V. OPINIONS
A. Lease Will be Treated as a Lease for Federal Income Tax
Purposes
In order for any income derived by the Operating Partnership from
Canyon Ranch to constitute either "rents from real property," or in the case of
a default under the Lease, "gross income from foreclosure property," the Lease
must be treated as a lease for federal income tax
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(7) Section 856(d)(1)(C).
(8) Sections 856(d)(1)(B), 856(d)(2)(C).
(9) Section 856(e).
(10) Section 856(e)(4).
(11) Treas. Reg. Section 1.856-6(b)(3).
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Crescent Real Estate Equities, Inc.
July 26, 1996
Page 10
purposes and not be treated as a service contract, management contract or other
type of arrangement. This determination depends on an analysis of all the
surrounding facts and circumstances. In making this determination, courts have
considered a variety of factors, including the following: (i) the intent of the
parties, (ii) the form of the agreement, (iii) the degree of control over the
business conducted at the property that is provided to the lessee (e.g.,
whether the lessee has substantial rights of control over the operation of the
property and its business), (iv) the extent to which the lessee has the risk of
loss from operations of the business conducted at the property (e.g., whether
the lessee bears the risk of increases in operating expenses and of decreases
in revenues), and (v) the extent to which the lessee has the opportunity to
benefit from operations of the business conducted at the property (e.g.,
whether the lessee benefits from decreased operating expenses or increased
revenues).(12)
In addition, section 7701(e) provides that a contract that purports to
be a service contract, partnership agreement, or another type of arrangement
will be treated instead as a lease of property if the contract is properly
treated as such, taking into account all relevant factors, including whether or
not: (i) the service recipient is in physical possession of the property, (ii)
the service recipient controls the property, (iii) the service recipient has a
significant economic or possessory interest in the property (e.g., the
property's use is likely to be dedicated to the service recipient for a
substantial portion of the useful life of the property, the recipient shares
the risk that the property will decline in value, the recipient shares in any
appreciation in the value of the property, the recipient shares in any savings
in the property's operating costs or the recipient bears the risk of damage to
or loss of the property), (iv) the service provider does not bear any risk of
substantially diminished receipts or substantially increased expenditures if
there is nonperformance under the contract, (v) the service provider does not
use the property concurrently to provide significant services to entities
unrelated to the service recipient and (vi) the total contract price does not
substantially exceed the rental value of the property for the contract period.
Since the determination of whether a service contract, partnership agreement,
or some other type of arrangement should be treated as a lease is inherently
factual, the presence or absence of any single factor may not be dispositive in
every case.(13)
We have concluded that the Lease will be treated as a lease for
Federal income tax purposes, rather than a service contract, management
contract or other type of arrangement. This conclusion is based, in part, on
the following facts: (i) the Operating Partnership and CRL intend their
relationship to be that of lessor and lessee (as evidenced by the terms of the
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(12) See, e.g., Xerox Corp. v. U.S., 80-2 USTC Paragraph 9530 (Ct. Cl. Tr.
Div. 1980), aff'd per curiam, 656 F.2d 659 (Ct. Cl. 1981).
(13) P.L.R. 8918012 (January 24, 1989).
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Crescent Real Estate Equities, Inc.
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Page 11
Lease), (ii) CRL, as tenant under the Lease, will have the right to exclusive
possession, use and quiet enjoyment of Canyon Ranch during the term of the
Lease and the right to uninterrupted control in the operation of the business
conducted at Canyon Ranch (subject to its assumption of the Management
Agreement), (iii) CRL will dictate how Canyon Ranch is maintained and improved,
(iv) CRL will bear all the costs and expenses of operating Canyon Ranch, (v)
CRL will benefit from any savings in the costs of operating Canyon Ranch during
the term of the Lease, (vi) in the event of damage or destruction to Canyon
Ranch, CRL will be at economic risk because its obligation to make rental
payments will not abate, (vii) CRL will indemnify the Operating Partnership
against all liabilities imposed on the Operating Partnership during the term of
the Lease by reason of injury to persons or damage to property occurring at
Canyon Ranch or CRL's use, management, maintenance or repair of Canyon Ranch,
(viii) CRL is obligated to pay substantial fixed rent for the period of use of
Canyon Ranch, regardless of whether its revenues exceed its costs and expenses,
and (ix) CRL stands to incur substantial losses (or derive substantial profits)
depending on how successfully it operates Canyon Ranch.
We do not believe that our conclusion that the Lease of Canyon Ranch
will be treated as a lease for Federal income tax purposes is affected by the
fact that CRL entered the Lease subject to its assumption of CRI's obligations
under the preexisting Management Agreement. The Management Agreement gives CRM
control over the day-to-day operation of Canyon Ranch and allows CRM to share
with CRL in the benefits of any increases in revenues or cost savings in the
operation of Canyon Ranch. However, CRM's operation of Canyon Ranch will not
be controlled by the Operating Partnership, and the Management Agreement does
not affect the fact that CRL bears most of the risk of loss if Canyon Ranch is
not successful. Moreover, the IRS has issued a private letter ruling in which
it treated leases of several hotel properties as producing "rents from real
property" in a situation where the lessees had contracted with a third party to
conduct the day-to-day operations of the hotels.(14) This ruling suggests that
the IRS will respect a lease of a hotel for federal income tax purposes even if
the hotel is operated by an independent contractor rather than by the lessee.
B. Percentage Rent Provision is not Profit-Based
Pursuant to the Lease, CRL will be obligated to pay the Operating
Partnership base rent and percentage rent. Under the regulations, percentage
rent based on a percentage of gross receipts or sales in excess of a floor
amount, which is how the percentage rent is structured under the Lease, will
not qualify as "rents from real property" unless (i) such floor amount does not
depend in whole or in part on the income or profits of the lessee, (ii) the
percentage and the floor amount are fixed at the time the lease is entered
into, (iii) the
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(14) See, P.L.R. 8117036 (January 27, 1981).
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Crescent Real Estate Equities, Inc.
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Page 12
percentage and the floor amount are not renegotiated during the term of the
lease in a manner that has the effect of basing the percentage rent on income
or profits, and (iv) the percentage and the floor amount conform with normal
business practice.(15)
Under the terms of Article 4.2 of the Lease, the Lessee will pay
percentage rent during the first seven years of the Lease on an annual basis
equal to the sum of (i) 15 percent of the amount by which gross receipts from
the Leased Property exceed $29,000,000 (with such amount not exceeding
$4,000,000), (ii) 11 percent of the amount by which gross receipts from the
Leased Property exceed $33,000,000 (with such amount not exceeding $7,000,000),
and (iii) 8.5 percent of the amount by which gross receipts from the Leased
Property exceed $40,000,000. During years eight through ten of the Lease the
Lessee will pay percentage rent equal to the sum of (i) 20 percent of the
amount by which gross receipts from the Leased Property exceed $29,000,000
(with such amount not exceeding $4,000,000), (ii) 16 percent of the amount by
which the gross receipts from the Leased Property exceed $33,000,000 (with such
amounts not exceeding $7,000,000) and (iii) 15 percent of the amount by which
gross receipts from the Leased Property exceed $40,000,000. This formula
effectively rewards the tenant for any increases in gross receipts over the
threshold amounts. This type of formula does not base the percentage rent on
the tenant's income or profits, and similar formulas have been treated by the
IRS as generating "rents from real property."(16) Moreover, the Operating
Partnership has represented that (i) the floor amounts used to compute the
percentage rent under the Lease do not depend in whole or in part on the income
or profits of any person, (ii) the percentage rent provision of the Lease will
not be renegotiated during the term of the Lease or at the expiration or
earlier termination of the Lease in a manner that has the effect of basing the
rent on income or profits, and (iii) the percentage rent provision of the Lease
conforms with normal business practice. In addition, based on our experience
and an examination of the Lease and certain projections regarding Canyon
Ranch's expected future performance, the Lease appears to conform with normal
business practice.
C. CRL is not a "Related Party Tenant"
Rents derived under the Lease will not qualify as "rents from real
property" if CRL is treated as a "related party tenant." CRL will be treated
as a "related party tenant" if the Company, or an owner of 10 percent or more
of the Company, directly or constructively owns
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(15) Treas. Reg. Section 1.866-4(b)(3).
(16) See, e.g., P.L.R. 8803007 (September 23, 1987) (percentage rent based on
gross revenues in excess of gross revenues for a base year treated as
"rents from real property"); cf. P.L.R. 9104018 (October 26, 1990)
(interest based on gross revenues in excess of a floor amount treated as
qualifying interest under section 856(f)).
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Crescent Real Estate Equities, Inc.
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Page 13
10 percent or more of the entity's assets or net profits.(17) Constructive
ownership is determined for purposes of this test by applying the rules of
section 318(a) as modified by section 856(d)(5). Those rules generally provide
that if 10 percent or more in value of the stock of the Company is owned,
directly or indirectly, by or for any person, the Company is considered as
owning the stock owned, directly or indirectly, by or for such person. In
determining whether CRL is a "related party tenant" it is necessary to consider
not only CRL's current ownership, but also its potential ownership after the
exercise of the Zuckerman and Cohen Options. This is because, for federal
income tax purposes, the Zuckerman and Cohen Options are likely to be treated
as currently exercised. These options are likely to be treated as currently
exercised, because each is composed of a matching put and call option for CRL
stock with a nominal exercise price.
1. CRL's Current Ownership
CRL will not be treated as a "related party tenant" under its current
ownership because two individuals, Zuckerman and Cohen, collectively own a 100
percent interest in CRL's assets and net profits. In reaching this conclusion,
we recognize that Zuckerman and Cohen each own certain Units of the Operating
Partnership as a result of the Acquisition Transaction.(18) We also recognize
that the Operating Partnership has an option to acquire a 30 percent interest
in a management company that will also be owned by Zuckerman. The Operating
Partnership has represented that (i) Zuckerman and Cohen do not individually,
or as a group, own more than 10 percent of the value of the Company's stock,
(ii) in the future Zuckerman and Cohen are not expected to own more than 10
percent of the value of the Company's stock individually, or as a group, and
(iii) neither the Operating Partnership nor the Company intends to acquire,
directly or constructively, an interest of 10 percent or more in the assets or
net profits of CRL at any time in the future. Moreover, Article 7.8 of the
Lease will prevent CRL and its members and managers from acquiring, directly or
constructively, a greater than six percent stock interest in the Company
without the Operating Partnership's prior written consent, and Section 6.4 of
the First Amended and Restated Articles of Incorporation of the Company
prevents CRL and its members and managers from acquiring more than 8 percent of
the Company's stock.
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(17) Section 856(d)(2)(B)(ii).
(18) See Rev. Rul. 73-194, 1973-1 C.B. 355 (management company treated as an
independent contractor with respect to a REIT, where an affiliate of the
management company and the REIT were partners).
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Crescent Real Estate Equities, Inc.
July 26, 1996
Page 14
2. CRL's Ownership-Treating the Zuckerman and Cohen
Options as Exercised
CRL will not be treated as a "related party tenant" if the Zuckerman
and Cohen Options are treated as exercised because after exercise of these
options a 99 percent interest in CRL's assets and net profits will be owned by
RoseStar, with the remaining one percent interest owned by RSCR. An
individual, Sanjay Varma, currently owns a 91 percent interest in the assets
and net profits of RoseStar and 91 percent of the stock of RSCR. In reaching
this conclusion, we recognize that Sanjay Varma owns certain Units of the
Operating Partnership.(19) The Operating Partnership has represented that (i)
Sanjay Varma does not own more than 10 percent of the value of the Company's
stock, (ii) Sanjay Varma is not expected to own more than 10 percent of the
value of the Company's stock in the future, and (iii) neither the Operating
Partnership nor the Company intends to acquire, directly or constructively, an
interest of 10 percent or more in the assets or net profits of RoseStar at any
time in the future. In concluding that CRL will not be treated as a "related
party tenant" if the Zuckerman and Cohen Options are treated as exercised, we
have applied the definition of related party tenant set forth in section
856(d)(2)(B)(ii), which applies to tenants which are not corporations. If CRL
is not treated as a partnership for federal income tax purposes, but is instead
treated as an association taxable as a corporation, then the applicable
definition of related party tenant is the one set forth in section
856(d)(2)(B)(i), which looks to control over voting securities. If CRL were
treated as a corporation for federal income tax purposes, Gerald W. Haddock and
John C. Goff could possibly be deemed to control all of its voting stock,
because of the extensive powers that they are granted as managers of RoseStar
under the RoseStar Regulations. If this were the case, it would be necessary
to consider whether the ownership of such voting stock could possibly be
attributed to the Company under the constructive ownership rules described
above or otherwise.
An entity which has associates and an objective to carry on a business
for joint profit will be treated as a partnership for federal income tax
purposes, and not as an association taxable as a corporation, if it has not
more than two of the following four characteristics of a corporation: (i)
continuity of life; (ii) centralization of management; (iii) limited liability;
and (iv) free transferability of interests.(20) The entity must also have no
other characteristics which are significant in determining its classification.
Generally, other factors are considered only insofar as they relate to the
determination of the presence or absence of the foregoing corporate
characteristics.(21) The IRS has applied this four-factor test in determining
whether
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(19) See Rev. Rul. 73-194, 1973-1 C.B. 355 (described above).
(20) Treas. Reg. Section 301.7701-2(a).
(21) See Rev. Rul. 79-106, 1979-1 C.B. 448.
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Crescent Real Estate Equities, Inc.
July 26, 1996
Page 15
limited liability companies formed under the ArizonaLimited Liability Company
Act (Ariz. Rev. Stat. Ann., Title 29, Chapter 4, sections 29-601 through 29-857
(1992), referred to herein as the "Act") are partnerships for federal income
tax purposes.(22) The IRS has issued Rev. Proc. 95-10, which specifies
conditions which must be satisfied for a limited liability company to receive a
favorable advanced ruling that it will be classified as a partnership for
federal income tax purposes.(23) CRL should satisfy these conditions.
However, such conditions are applicable only in determining whether rulings
will be issued and are not intended as substantive rules for determination of
partnership status.
An organization will be treated as possessing the corporate
characteristic of continuity of life, even if the agreement organizing an
entity provides that it is to continue only for a stated period, unless a
member has the power to dissolve the organization at an earlier time.(24)
Section 29-781.A of the Act provides that an LLC organized under the Act is
dissolved on the occurrence of the first of the following: (1) at the time or
on the happening of the events specified for dissolution in the articles of
organization or an operating agreement; (2) the written consent to dissolve by
all members; (3) an event of withdrawal of a member under section 29-733 of the
Act, unless the business of the LLC is continued by one or more managers or
members pursuant to a right to continue stated in an operating agreement or, if
an operating agreement does not provide a right to continue, by agreement or
consent of all of the remaining members within 90 days after the event of
withdrawal; (4) entry of a judgment of dissolution under section 29-785 of the
Act; or (5) acquisition by a single person of all outstanding interests in the
LLC. Section 29-733 of the Act provides that, except as approved by the
written consent of all members at the time, a person ceases to be a member of
an LLC on the occurrence of any of the following events of withdrawal: (1) the
member withdraws from the LLC as provided in section 29-734; (2) on assignment
of all the member's interest and admission of one or more of the assignees as a
member; (3) the member is expelled as a member pursuant to the articles of
organization or a operating agreement; (4) unless otherwise provided in an
operating agreement, the member does any of the following: (a) makes an
assignment for the benefit of creditors, (b) files a voluntary petition in
bankruptcy, (c) is adjudicated as bankrupt or insolvent, (d) files a petition
or answer seeking for himself any reorganization, arrangement, composition,
readjustment, liquidation or similar relief under any statute, law or rule, (e)
files an answer or other pleading admitting or failing to contest the material
allegations of a petition filed against him in a bankruptcy, insolvency,
reorganization or similar proceeding, (f) seeks, consents to or acquiesces in
the appointment of a trustee, receiver or liquidator of the member or of all or
any substantial part of the
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(22) See, e.g., Rev. Rul. 93-93, 1993-42 I.R.B. 13; and P.L.R. 9321047
(February 25, 1993).
(23) 1995-3 I.R.B. 20.
(24) Treas. Reg. Section 301.7701-2(b)(3).
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Crescent Real Estate Equities, Inc.
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Page 16
member's property; or (5) if a member is a natural person, the member's death,
or the entry of an order or judgment by a court of competent jurisdiction
adjudicating the member incompetent to manage the member's person or the
member's estate. Section 7.1.1 of the CRL Articles provides that CRL shall be
dissolved upon any withdrawal event, as defined in Section 29-733 of the Act,
unless a majority in interest of the remaining members consent to continue CRL
(and CRL has a least two remaining members). Accordingly, CRL will lack the
corporate characteristic of continuity of life.An organization will be treated
as possessing the corporate characteristic of free transferability of interests
if the members owning all or substantially all of the interests in an
organization may substitute for themselves without the consent of the other
members a person who is not a member of the organization.(25) Section 29-732.A
of the Act provides that an interest in an LLC is personal property and, is
assignable in whole or in part; an assignment of an interest in an LLC does not
dissolve the LLC or entitle the assignee to participate in the management of
the business and affairs of the LLC or to become a member or to exercise the
rights of a member, unless the assignee is admitted as a member as provided in
section 29-731 of the Act. Section 29-731.B.2 of the Act provides that after
an LLC's initial articles of organization are filed, a person who is an
assignee of all or part of a member's interest in an LLC may become a member on
the approval or consent of all members or of any one or more members who have
the right under an operating agreement to admit additional members. Section
29-731.B.3 provides that if the person is an assignee of an interest in the LLC
of a member who has the power under an operating agreement to grant the
assignee the right to become a member, the assignee may become a member on the
exercise of the power in compliance with all conditions limiting the member's
exercise of the power. Article 5 of the CRL Articles provides, in part, that
no member shall have the right to substitute in its place a transferee.
Accordingly, CRL will lack the corporate characteristic of free transferability
of interests.
An organization will be treated as lacking the corporate
characteristic of centralization of management if management decisions are made
by a vote of the majority of beneficial owners.(26) Section 3.1 of the CRL
Articles provides that CRL's management is vested in its members. Accordingly,
CRL will lack the corporate characteristic of centralization of management.
Because CRL will lack the corporate characteristics of continuity of life ,
free transferability of interests and centralization of management, in our
opinion it will be treated as partnership for federal income tax purposes.
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(25) Treas. Reg. Section 301.7701-2(e).
(26) Treas. Reg. Section 301.7701-2(g), Ex. (7).
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Crescent Real Estate Equities, Inc.
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Page 17
D. Incidental Personal Property
1. Rents Attributable to Personal Property Will Be
Treated as "Rents from Real Property"
As noted above, the rents attributable to the Operating Partnership's
personal property leased under or in connection with the Lease must not be
greater than 15 percent of the rents received under the Lease. The rent
attributable to personal property leased under or in connection with a lease of
real property is the amount that bears the same ratio to total rent for the
taxable year as (i) the average of the adjusted bases of the personal property
leased under or in connection with a lease of real property at the beginning
and at the end of the taxable year bears to (ii) the average of the aggregate
adjusted bases of the real and personal property subject to the lease at the
beginning and at the end of such taxable year (the "Adjusted Basis Ratio").(27)
Section 36.2 of the Lease provides that the average of the adjusted bases of
the personal property leased to the lessee under the Lease at the beginning and
end of any calendar year shall not exceed 15 percent of the average of the
adjusted tax bases of the Leased Property at the beginning and at the end of
each such calendar year. In addition, the Operating Partnership has
represented that the adjusted tax basis of the personal property leased under
or in connection with the Lease will not represent more than 15 percent of the
aggregate adjusted tax basis of Canyon Ranch at any time.
2. Payments Attributable to RoseStar's Acquisition of Certain
Personal Property Will Not Be Treated as "Rents from Real
Property"
Pursuant to Article I of the Contribution Agreement, the conveyance to
the Operating Partnership did not include the FF & E. Instead, the FF & E was
sold by CRI to CRL in exchange for the proceeds of loans from the Operating
Partnership. Under the terms of Article 7.5 of the Lease, however, the lessee
is obligated to transfer and assign the FF & E upon termination of the Lease to
a person designated by the lessor at a price equal to the then existing fair
market value of the FF & E.
The Operating Partnership will not be treated as the tax owner of the
FF & E. The FF & E is owned by CRL. The payments that the Operating
Partnership will receive under the Crescent FF & E Note will not qualify as
"rents from real property." Instead, such payments will be treated for federal
income tax purposes as payments of principal and interest resulting from the
Operating Partnership's financing of CRL's purchase of the FF & E. The
payments pursuant to this financing, to the extent they constitute interest,
will be "qualifying income" for
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(27) Section 856(d)(1)(C).
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Crescent Real Estate Equities, Inc.
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Page 18
purposes of the 75 percent test. However, because the financing will be
secured by personal property under the terms of the Security Agreement, rather
than real property, such interest will not be "qualifying income" for purposes
of the 95 percent test. Similarly , interest accruing under the Life Share
Note, which is also secured by the FF & E under the terms of the Security
Agreement, will also be treated as "qualifying income" for purposes of the 75
percent test, but not for purposes of the 95 percent test.
E. Provision of Services by the Operating Partnership
1. Income Derived under the Terms of the Lease
Although the Operating Partnership may treat charges for services
customarily furnished or rendered in connection with the rental of Canyon Ranch
as "rents from real property," any services rendered to the occupants of Canyon
Ranch must be furnished or rendered by an independent contractor from whom the
Company does not derive or receive any income.(28) Moreover, to the extent
that any independent contractors provide noncustomary services to the occupants
of Canyon Ranch, the cost of such services must not be borne by the Operating
Partnership.(29) Under the terms of the Lease, the Operating Partnership will
not be required to provide any services, customary or noncustomary, in
connection with the rental of Canyon Ranch. Instead, all services relating to
the operation of Canyon Ranch will be provided by CRM under the terms of the
Management Agreement. The Operating Partnership will not bear the cost of any
of the services provided by CRM. Instead, such costs will be borne by CRL,
which as lessee under the Lease has assumed the obligations of the owner under
the Management Agreement.
Based on the foregoing, we believe that the provision of any
noncustomary services to the occupants of Canyon Ranch by CRM will have no
effect on the qualification of the income derived from Canyon Ranch as "rents
from real property." In fact, the IRS has issued a private letter ruling in
which it has treated the income derived from several leases of hotel properties
as "rents from real property" in a situation where the lessees had contracted
with a third-party to conduct the day-to-day operations of the hotels.(30) Our
conclusion is not altered by the fact that the Operating Partnership will
remain liable for any obligations arising under the Management Agreement, to
the extent that they are not satisfied by CRL, as lessee under the Lease. The
Operating Partnership should not be treated as bearing the cost of the services
provided by CRM merely because it could possibly be held liable for CRL's
obligations under
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(28) Sections 856(d)(1), 856(d)(2)(C); Treas. Reg. Section 1.512(b)-1(c)(5).
(29) Treas. Reg. Section 1.856-4(b)(5).
(30) See, P.L.R. 8117036 (January 27, 1981).
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Crescent Real Estate Equities, Inc.
July 26, 1996
Page 19
the Management Agreement. The Operating Partnership is not retaining this
liability in an attempt to provide services to CRL. Instead, it is retaining
this liability only as an accommodation, in order to gain CRM's consent to its
purchase of Canyon Ranch. Moreover, the Operating Partnership believes that it
is highly unlikely that it will ever be required to reimburse CRM for the costs
and expenses of operating Canyon Ranch because of a default by CRL in its
obligations as owner under the Management Agreement. This is because (i)
Canyon Ranch is projected to generate enough gross income to cover the payments
to CRM under the Management Agreement, (ii) in connection with Section 7.7 of
the Lease, CRL represents that it has a net worth of at least $200,000, (iii)
in connection with Section 7.9 of the Lease, CRL covenants that it will retain
all income generated by the Leased Property and shall not distribute any
earnings to its beneficial owners, except as needed for federal and state
income taxes payable on taxable income from the Leased Property, until the
tenant has accumulated and is holding in reserve funds which are sufficient to
pay at least one monthly payment of Base Rent under the Lease, plus at least
one monthly payment of Base Rent under all other leases between lessor and
lessee, (iv) RoseStar has guaranteed CRL's obligations under the Lease and its
individual members have guaranteed CRL's obligations under the Lease (as well
as the Crescent FF & E Note and the Life Share Note) up to $200,000, and (v) in
the view of the Operating Partnership, RoseStar's capitalization is adequate to
allow RoseStar to assume its obligations as guarantor under the Guaranty.
2. Income Derived in the Case of a Default under the Lease
If the Operating Partnership were required to reimburse CRM for the
costs of operating Canyon Ranch because of a default by the Tenant under the
terms of the Management Agreement, we have concluded that the income derived by
the Operating Partnership from Canyon Ranch would be treated as "qualifying
income" for purposes of the 75 percent and 95 percent tests. This is because,
if the Operating Partnership were required to reimburse CRM for the cost of
operating Canyon Ranch, this would constitute an event of default under Article
16.1(c) of the Lease, allowing the Operating Partnership to terminate the
lessee's leasehold interest in Canyon Ranch. As a result of such a termination
of the Lease, any income derived by the Operating Partnership from Canyon Ranch
after the default would be treated as income from foreclosure property.
The Operating Partnership would be able to continue to operate Canyon
Ranch after any default under the Lease, without affecting its status as
foreclosure property. This is because CRM will provide all services relating
to the operation of Canyon Ranch and CRM will qualify as an independent
contractor from whom the Company will not derive any income. As noted above, a
REIT can use foreclosure property in the conduct of an active trade or
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Crescent Real Estate Equities, Inc.
July 26, 1996
Page 20
business, as long as this is done through the use of an independent
contractor, from whom the REIT does not derive or receive any income.(31)
As noted above, real property acquired upon default under a lease is
not eligible to be treated as foreclosure property if the lease is entered into
with an intent to evict or foreclose, or if the REIT knows or has reason to
know that default would occur.(32) This is not the case in the present
situation because (i) Canyon Ranch is projected to generate enough gross income
to produce a profit for CRL, (ii) in connection with Section 7.7 of the Lease,
the Tenant represents that it has a net worth of at least $200,000, (iii) in
connection with Section 7.9 of the Lease, the tenant covenants that it will
retain all income generated by the Leased Property and shall not distribute any
earnings to its beneficial owners, except as needed for federal and state
income taxes payable on taxable income from the Leased Property, until the
tenant has accumulated and is holding in reserve funds which are sufficient to
pay at least one monthly payment of Base Rent under the Lease, plus at least
one monthly payment of Base Rent under all other leases between lessor and
lessee, (iv) RoseStar has guaranteed CRL's obligations under the Lease and its
individual members have guaranteed CRL's obligations under the Lease (as well
as the Crescent FF & E Note and the Life Share Note) up to $200,000, and (v) in
the view of the Operating Partnership, RoseStar's capitalization is adequate to
allow RoseStar to assume its obligations as guarantor under the Guaranty.
Canyon Ranch would qualify as foreclosure property only for a period
of up to two years, beginning on the date of its acquisition by the Operating
Partnership, unless the Operating Partnership obtains an extension of the grace
period from the IRS.(33) Therefore, in the event the Operating Partnership
takes possession of Canyon Ranch as a result of a default under the Lease,
presumably the Operating Partnership will sell Canyon Ranch or within two years
rent it to another tenant under a lease that will produce "rents from real
property."
VI. ASSUMPTIONS AND REPRESENTATIONS
In providing these opinions, we have with your permission assumed the
following: (i) the due authorization, execution and delivery by all parties
thereto of the Transaction
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(31) Section 856(e)(4)(C). The IRS clearly intended for REITs to be able to
treat hotels operated by independent contractors as foreclosure property. For
instance, the Treasury regulations defining foreclosure property refer to hotel
properties twice. See, Treas. Reg. Sections 1.856-6(b)(2), 1.856-6(d)(2). In
addition, the IRS has also recently issued a private letter ruling in which it
treated income received from hotels acquired pursuant to a bankruptcy petition
as income from foreclosure property, where the hotels were operated by third
party managers. P.L.R. 9420013 (2/15/94).
(32) Treas. Reg. Section 1.856-6(b)(3).
(33) Section 856(e)(2).
<PAGE> 125
Crescent Real Estate Equities, Inc.
July 26, 1996
Page 21
Documents, (ii) the authenticity of the originals of the Transaction Documents
and the genuineness of all signatures; (iii) the conformity to the original of
all documents submitted to us as copies; (iv) the absence of any evidence
extrinsic to the provisions of the written agreements between the parties that
the parties intended a meaning contrary to that expressed by those provisions;
(v) that each party to the Transaction Documents has the power and authority to
enter into and perform all of its obligations thereunder; (vi) that each of the
Transaction Documents is a legal, valid and binding obligation, enforceable in
accordance with its terms; and (vii) that each legal entity that is a party to
the Transaction Documents validly existing and in good standing under the laws
of the United States of America or one of the States thereof or the District of
Columbia. As to questions of fact material to such opinions, we have with your
permission, when relevant facts were not independently established. relied
upon, and assumed the truth, accuracy and completeness of, written and oral
statements and representations made by or on behalf of the parties to the
Transaction Documents by their respective officers or agents. With your
permission, we have further assumed that each of the parties to each of the
Transaction Documents fully complies with its obligations thereunder.
In addition, these opinions are conditioned upon certain
representations made by the Company and the Operating Partnership as to factual
and other matters as set forth in the attached letter. Unless facts material
to the opinions expressed herein are specifically stated to have been
independently established or verified by us, we have relied as to such facts
solely upon the representations made by the Company and the Operating
Partnership. We are not, however, aware of any facts or circumstances contrary
to or inconsistent with the representations. To the extent the representations
are with respect to matters set forth in the Code or Treasury Regulations, we
have reviewed with the individuals making such representations the relevant
provisions of the Code, the Treasury Regulations and published administrative
interpretations.
Our opinions contained herein are based in part upon our conclusion
that the U.S. federal income tax treatment of the transactions contemplated by
the Transaction Documents will be determined based on their economic substance.
Although there can be no assurance that the IRS will not take one or more
contrary positions, it is our opinion that none of those positions, if asserted
by the IRS, would prevail. However, because our opinions are not binding on
the IRS or the courts, there can be no assurance that contrary positions may
not be successfully asserted by the IRS. Our opinions are based upon the
present provisions of the Code, the regulations promulgated thereunder,
administrative rulings, judicial decisions, and any other applicable
authorities published and in effect on the date hereof (all of which are
subject to change, both prospectively and retroactively).
<PAGE> 126
Crescent Real Estate Equities, Inc.
July 26, 1996
Page 22
This letter and the opinions contained herein are based solely upon
our knowledge of the relevant facts. In this opinion, the words "our
knowledge" or words to similar effect signify that, in the course of our
representation of the Company or the Operating Partnership, in matters with
respect to which we have been engaged as counsel by such entity, no information
has come to the attention of those attorneys in our firm having detailed
knowledge of this transaction and the substance of this opinion that gives such
attorneys current, actual knowledge that any such opinions are not accurate.
In rendering this opinion, we have undertaken no investigation with respect to
such matters and we have not undertaken to communicate the details of this
transaction to all members or employees of our firm who may have performed, and
are currently performing, services for the Company or the Operating
Partnership, or any other person or entity.
The opinions contained herein are issued, and our opinions herein are
expressed, as of the date hereof. These opinions and this letter are limited
to the matters expressly set forth herein, and no statements or opinions may be
inferred beyond such matters. We do not assume any responsibility to update
these opinions or advise you of changes resulting from events (whether or note
they come to our attention) that may occur after the date hereof, including,
without limitation, future transactions or other actions under the Transaction
Documents, or any inaccuracy in any of the representations or warranties upon
which we have relied in rendering these opinions.
VII. CONCLUSION
Based on the assumptions stated above, it is our opinion that (i) the
Lease will be treated as a lease for federal income tax purposes, (ii) all of
the income that the Operating Partnership derives under the Lease will be
treated as "qualifying income" for purposes of the 95 percent test, and (iii)
all of the income the Operating Partnership derives under the Crescent FF & E
Note and the Life Share Note will be treated as "qualifying income" for
purposes of the 75 percent test.
Very Truly Yours,
SHAW, PITTMAN, POTTS & TROWBRIDGE
<PAGE> 1
EXHIBIT 8.02
[LOCKE PURNELL RAIN HARRELL LETTERHEAD]
September 27, 1996
Crescent Real Estate Equities, Inc.
900 Third Avenue, Suite 1800
New York, New York 10022
Gentlemen:
We have acted as special tax counsel to Crescent Real Estate Equities,
Inc. ("Crescent Equities") in connection with the registration statement on
Form S-3, No. 33-97794, which was originally filed with the Securities and
Exchange Commission on October 14, 1995, and which, as amended, was declared
effective on June 18, 1996. Such registration statement (the "Registration
Statement") includes a prospectus supplement filed on September 30, 1996 (the
"Prospectus Supplement") to the prospectus (the "Prospectus") contained in the
Registration Statement. Capitalized terms used hereunder but not defined have
the meaning ascribed to them in the Registration Statement.
In rendering this opinion we have examined such documents as we have
deemed relevant or necessary, including the Prospectus and Prospectus
Supplement, and our conclusions are based upon the facts contained in the
Prospectus and Prospectus Supplement. The initial and continuing accuracy of
these facts constitutes an integral basis for the opinion expressed herein.
In our opinion, the discussion contained in the final Prospectus
Supplement filed as part of the final Registration Statement in the subsection
entitled "Federal Income Tax Considerations - State and Local Taxes" accurately
summarizes the Texas franchise tax matters that are likely to be material to a
holder of common stock of Crescent Equities. The foregoing opinion is limited
to the specific matter covered hereby and does not apply to any other matters
discussed under the heading "Federal Income Tax Considerations." This opinion
is based upon existing State of Texas statutes and regulations and positions of
the Texas State Comptroller of Public Accounts as of the date hereof, all of
which are subject to change, both retroactively or prospectively.
This opinion is furnished to you solely for use in connection with the
Registration Statement. We hereby consent to the incorporation by reference of
this opinion as an exhibit to the Registration Statement and to the reference
to our Firm in the Registration Statement under the caption "Federal Income Tax
<PAGE> 2
Crescent Real Estate Equities, Inc.
April __, 1995
Page 2
Considerations - State and Local Taxes" and "Legal Matters." In giving this
consent we do not thereby admit that we come within the category of persons
whose consent is required under the Securities Act of 1933, as amended, or the
rules and regulations of the Securities and Exchange Commission promulgated
thereunder.
Very truly yours,
LOCKE PURNELL RAIN HARRELL
(A Professional Corporation)
By: /s/ C. RONALD KALTEYER
-------------------------
C. RONALD KALTEYER
<PAGE> 1
EXHIBIT 10.01
1996 CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
UNIT INCENTIVE PLAN
ARTICLE I
THE PLAN
1.1 NAME. This plan will be known as the "1996 Crescent Real
Estate Equities Limited Partnership Unit Incentive Plan." Capitalized terms
used herein are defined in Article VI hereof.
1.2 PURPOSE. The purpose of the Plan is to promote the growth and
general prosperity of the Partnership by permitting the General Partner to
grant Options to its Employees. The Plan is designed to help the Partnership
and its General Partner attract and retain superior personnel for positions of
substantial responsibility and to provide Employees (including officers) with
an additional incentive to contribute to the success of the Partnership and its
General Partner. The General Partner intends that the Options granted pursuant
to Article III will be non-statutory options. With respect to Reporting
Participants, transactions under the Plan are intended to comply with all
applicable conditions of Section 162(m) of the Code and, to the extent
applicable, Rule 16b-3 or its successors under the Exchange Act. To the extent
that any provision of the Plan or action by the Committee fails to so comply,
it will be deemed null and void to the extent permitted by law and deemed
advisable by the Committee.
1.3 EFFECTIVE DATE. The Plan will become effective upon the
Effective Date.
1.4 ELIGIBILITY TO PARTICIPATE. The Employees eligible to
participate in the Plan shall be John C. Goff and Gerald W. Haddock, who shall
each be awarded an Option for one million (1,000,000) Units.
1.5 DETERMINATION OF PARTNERSHIP UNITS AND INTEREST. Units
granted hereunder are expressed on a Common Stock equivalent basis on the date
of grant. Accordingly, at the Exchange Date, the number of Units to be
associated with the Limited Partnership Interest of an Employee who is admitted
to the Partnership as a Limited Partner as a result of having exercised an
Option awarded under this Plan shall be equal to the number of Units granted as
an Award under this Plan. The Limited Partnership Interest of an Employee who
is admitted to the Partnership as a Limited Partner as a result of having
exercised an Option shall be calculated in accordance with the provisions of
the Partnership Agreement based upon the number of Units, determined as set
forth in the preceding sentence, to be associated with such Limited Partnership
Interest.
<PAGE> 2
1.6 MAXIMUM NUMBER OF UNITS SUBJECT TO AWARDS. The Units subject
to Awards pursuant to the Plan may be either authorized and unissued Units or
Units issued and thereafter acquired by the Partnership. Subject to adjustment
pursuant to the provisions of Section 4.2, and subject to any additional
restrictions elsewhere in the Plan, the maximum aggregate number of Units that
may be issued from time to time pursuant to the Plan shall be 2,000,000. The
maximum number of Units with respect to which Awards may be granted to any
Reporting Participant during any calendar year shall be one million (1,000,000)
Units. If an Option expires or terminates for any reason without having been
exercised in full, the required Units and/or the Units not purchased or
distributed will again be available for issuance under the Plan.
1.7 CONDITIONS PRECEDENT TO ADMISSION OF EMPLOYEE LIMITED
PARTNERS. The Partnership will not admit the Employee as a Limited Partner
prior to the fulfillment of all of the following conditions:
(a) The receipt of the purchase price for the Units as to
which the Option is being exercised;
(b) The receipt of such instruments executed by the
Employee as the Partnership or its counsel deem necessary to comply
with all relevant provisions of federal and state law, including,
without limitation, the Securities Act, the rules and regulations
promulgated thereunder and the terms and conditions of the Partnership
Agreement.
1.8 CONDITIONS PRECEDENT TO ISSUANCE OF COMMON STOCK. The Company
will not issue or deliver any certificate for Common Stock pursuant to the Plan
prior to fulfillment of all of the following conditions:
(a) The obtaining of approval from the shareholders of the
Company of the Exchange Rights applicable to the Units that may be
acquired upon exercise of the Option awarded hereunder;
(b) The admission of the Common Stock to listing on all stock
exchanges on which the Common Stock is then listed, unless the
Committee determines in its sole discretion that such listing is
neither necessary nor advisable;
(c) The completion of any registration or other qualification
of the sale of the Common Stock under any federal or state law or
under the rulings or regulations of the Securities and Exchange
Commission or any other governmental regulatory body that the
Committee in its sole discretion deems necessary or advisable; and
(d) The obtaining of any approval or other clearance from any
federal or state governmental agency that the Committee in its sole
discretion determines to be necessary or advisable.
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1.9 RESERVATION OF SHARES OF COMMON STOCK. Following the approval
by shareholders of the Company of Exchange Rights with respect to the Units
subject to Options under this Plan and during the remaining term of the Plan,
the Company will at all times reserve and keep available such number of shares
of Common Stock as may be necessary to satisfy the requirements of the Plan and
the number of Units as to which Options are granted hereunder. In addition,
the Company will from time to time, as is necessary to accomplish the purposes
of the Plan, use its best efforts to obtain from any regulatory agency having
jurisdiction any requisite authority necessary to issue Common Stock upon the
exercise of Exchange Rights related to the Units as to which Options are
granted hereunder. The inability of the Company to obtain from any regulatory
agency having jurisdiction the authority deemed by the Company's counsel to be
necessary for the lawful issuance of any Common Stock will relieve the Company
of any liability in respect of the nonissuance of Common Stock as to which the
requisite authority has not been obtained.
1.10 TAX WITHHOLDING.
(a) Condition Precedent. The issuance of Units upon the
exercise of an Option awarded under the Plan is subject to the
condition that if at any time the General Partner determines, in its
discretion, that the satisfaction of withholding tax or other
withholding liabilities under any federal, state or local law is
necessary or desirable as a condition of, or in connection with such
issuances, then the issuances will not be effective unless the
withholding has been effected or obtained in a manner acceptable to
the General Partner. Each Option granted to a Reporting Participant
shall contain a provision in the related Option Agreement making any
required withholding tax or other withholding liability mandatory, and
specifying that the General Partner may withhold a portion of the
Units as specified in clause (iv) of paragraph (b) below.
(b) Manner of Satisfying Withholding Obligation. When an
Optionee is required to pay to the Partnership or the General Partner
an amount required to be withheld under applicable income tax laws in
connection with the exercise of an Option, such payment may be made
(i) in cash, (ii) by check, (iii) by delivery to the Partnership or
the General Partner of Units already owned by the Participant having a
Fair Market Value on the date the amount of tax to be withheld is to
be determined (the "Tax Date") equal to the amount required to be
withheld, (iv) through the withholding by the Partnership
("Partnership Withholding") of a portion of the Units acquired upon
the exercise of the Options or (v) in any other form of valid
consideration, as permitted by the Committee in its discretion.
1.11 ACCELERATION IN CERTAIN EVENTS. The Committee may accelerate
the exercisability of any Option in whole or in part at any time.
Notwithstanding the provisions of any Option Agreement, the following
provisions will apply:
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<PAGE> 4
(a) Mergers and Reorganizations. If the Company or its
shareholders enter into an agreement to dispose of all or
substantially all of the assets of the Company by means of a sale,
merger or other reorganization, liquidation or otherwise in a
transaction in which the Company is not the surviving corporation, any
Option will become immediately exercisable with respect to the full
number of Units subject to that Option during the period commencing as
of the date of the agreement to dispose of all or substantially all of
the assets of the Company and ending when the disposition of assets
contemplated by that agreement is consummated or the Award is
otherwise terminated in accordance with its provisions or the
provisions of the Plan, whichever occurs first; provided that no
Reporting Participant may exercise an Option unless at least six
months have elapsed since the grant of such Option or Award; provided,
further, that no Option will be immediately exercisable under this
Section on account of any agreement of merger or other reorganization
when the shareholders of the Company immediately before the
consummation of the transaction will own at least fifty percent of the
total combined voting power of all classes of stock entitled to vote
of the surviving entity immediately after the consummation of the
transaction. An Option will not become immediately exercisable if the
transaction contemplated in the agreement is a merger or
reorganization in which the Company will survive.
(b) Change in Control. In the event of either (i) the
involuntary termination of employment of the Employee (other than for
Cause) or (ii) the voluntary termination of the Employee for Good
Reason, within twenty-four (24) months following a change in control
of the Company, all Options granted prior to the change in control or
threatened change in control will become immediately exercisable,
provided that no Reporting Participant may exercise an Option unless
at least six months have elapsed since the grant of such Option or
Award. The term "change in control" for purposes of this Section
refers to the acquisition of 15% or more of the voting securities of
the Company by any person or by persons acting as a group within the
meaning of Section 13(d)(3) of the Exchange Act (other than an
acquisition by (i) a person or group meeting the requirements of
clauses (i) and (ii) of Rule 13d-1(b)(1) promulgated under the
Exchange Act, (ii) or any employee pension benefit plan (within the
meaning of Section 3(2) of ERISA) of the Company or of its
Subsidiaries, including a trust established pursuant to such plan);
provided that no change in control or threatened change in control
will be deemed to have occurred (i) if prior to the acquisition of, or
offer to acquire, 15% or more of the voting securities of the Company,
the full Board has adopted by not less than two-thirds vote a
resolution specifically approving such acquisition or offer or (ii)
from (A) a transfer of the Company's voting securities by Richard E.
Rainwater ("Rainwater") to (i) a member of Rainwater's immediate
family (within the meaning of Rule 16a-1(e) of the Exchange Act)
either during Rainwater's lifetime or by will or the laws of descent
and distribution; (ii) any trust as to which Rainwater or a member (or
members) of his immediate family (within the meaning of Rule 16a-1(e)
of the Exchange Act) is the beneficiary; (iii) any trust as to which
Rainwater is the settlor with sole power
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<PAGE> 5
to revoke; (iv) any entity over which Rainwater has the power,
directly or indirectly, to direct or cause the direction of the
management and policies of the entity, whether through the ownership
of voting securities, by contract or otherwise; or (v) any charitable
trust, foundation or corporation under Section 501(c)(3) of the Code
that is funded by Rainwater; or (B) the acquisition of voting
securities of the Company by either (i) Rainwater or (ii) a person,
trust or other entity described in the foregoing clauses (A)(i)-(v) of
this subsection. The term "person" for purposes of this Section
refers to an individual or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship,
unincorporated organization or any other form of entity not
specifically listed herein.
1.12 COMPLIANCE WITH SECURITIES LAWS. Units will not be
issued with respect to any Award unless the issuance and delivery of
the Units (and the exercise of the Option) complies with all relevant
provisions of federal and state law, including without limitation the
Securities Act, the rules and regulations promulgated thereunder and
the requirements of any stock exchange upon which the Common Stock may
then be listed, and will be further subject to the approval of counsel
for the Company with respect to such compliance. The General Partner
may also require a Participant to furnish evidence satisfactory to the
Partnership and the Company, including, without limitation, a written
and signed representation letter and consent to be bound by any
transfer restrictions imposed by law, legend, condition or otherwise,
and a representation that the Units are being acquired only for
investment and without any present intention to sell or distribute the
Units in violation of any federal or state law, rule or regulation.
Further, each Participant will consent to the imposition of a legend
on the certificate representing the Units issued pursuant to an Award
and shares of Common Stock issued upon the exchange therefore
restricting their transferability as required by law or by this
Section.
1.13 COMPLIANCE WITH PARTNERSHIP AGREEMENT. All Units and
Exchange Rights issued upon the exercise of an Option awarded
hereunder are governed by, and subject to each of the terms and
conditions of, the Partnership Agreement. Upon exercising an Option
hereunder, each Participant shall be deemed to have accepted and
agreed to be bound by each of the terms and conditions of the
Partnership Agreement for all purposes. The General Partner, in its
sole and absolute discretion, may as part of an Award hereunder, make
any such Award subject to such further terms and conditions,
including, without limitation, such additional terms and conditions
for admission to the Partnership or the exercise of Exchange Rights,
as the General Partner may deem necessary, advisable or appropriate at
the time of the Award. Such additional terms and conditions may be
set forth in the Option Agreement related to any such award, the
resolutions adopted by the Board of Directors of the General Partner
and/or the Company, or in such other manner or document as the General
Partner, in its sole and absolute discretion, deems necessary,
advisable or appropriate.
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<PAGE> 6
1.14 EMPLOYMENT OF PARTICIPANT. Nothing in the Plan or in
any Award granted hereunder will confer upon any Participant any right
to continued employment by the Partnership or the General Partner or
limit in any way the right of the Partnership or the General Partner
at any time to terminate or alter the terms of that employment.
1.15 INFORMATION TO PARTICIPANTS. The General Partner
will furnish to each Participant copies of annual reports, proxy
statements and all other reports sent to the Company's shareholders.
Upon written request, the General Partner will furnish to each
Participant a copy of its most recent Annual Report on Form 10-K and
each quarterly report to shareholders issued since the end of the
Company's most recent fiscal year.
ARTICLE II
ADMINISTRATION
2.1 COMMITTEE. The Plan will be administered by the
General Partner or by a Compensation Committee to be appointed by the
General Partner. As used herein, "Committee" shall mean a committee
consisting of two or more Directors, each of whom shall be an "outside
director" as defined in Section 162(m) of the Code. Subject to the
provisions of the Plan, the Committee will have the sole discretion
and authority to determine from time to time the Employees whom Awards
will be granted and the number of Units subject to each Award, to
interpret the Plan, to prescribe, amend and rescind any rules and
regulations necessary or appropriate for the administration of the
Plan, to determine and interpret the details and provisions of each
Option Agreement, to modify or amend any Option Agreement or waive any
conditions or restrictions applicable to any Option (or the exercise
thereof), and to make all other determinations or advisable for the
administration of the Plan.
2.2 MAJORITY RULE; UNANIMOUS WRITTEN CONSENT. A majority
of the members of the Committee will constitute a quorum, and any
action taken by a majority present at a meeting at which a quorum is
present or any action taken without a meeting evidenced by a writing
executed by all members of the Committee will constitute the action of
the Committee. Meetings of the Committee may take place by telephone
conference call.
2.3 ASSISTANCE. The Partnership will supply full and
timely information to the General Partner and the Committee on all
matters relating to Employees, their employment, death, Retirement,
Disability or other termination of employment, and such other
pertinent facts as the General Partner or the Committee may require.
The Partnership will furnish the General Partner and the Committee
with such clerical and other assistance as is necessary to the
performance of its duties.
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ARTICLE III
OPTIONS
3.1 METHOD OF EXERCISE. Each Option will be exercisable
at any time and from time in whole or in part in accordance with the
terms of the Option Agreement pursuant to which the Option was granted
to the extent vested. No Option may be exercised for a fraction of a
Unit.
3.2 VESTING OF OPTION. Except as provided in Section
1.11 and this Section 3.2, one-seventh of each Option shall vest on
the first, second, third, fourth, fifth, sixth and seventh
anniversaries of the date of grant, provided that the Employee is
employed by the Partnership or the General Partner on such date or is
an Executive Officer on such date. If the fair market value of the
Common Stock equals or exceeds $50.00 for each of ten (10) consecutive
trading days (determined based on the closing price on each lsuch
day), an additional 250,000 Units (or such lesser number as may then
be unvested) of each Option shall become fully vested and exercisable,
that provided the Employee is employed by the Partnership or the
General Partner on such date or is an Executive Officer on such date.
In the event that vesting of the Option is accelerated pursuant to the
preceding sentence, the remaining unvested portion of the Option shall
vest ratably on each subsequent anniversary of the date of grant
following such acceleration through the seventh anniversary of the
original date of grant of the Option.
3.3 PAYMENT OF PURCHASE PRICE. The purchase price of any
Units purchased will be paid at the time of exercise of the Option
either (i) in cash, (ii) by certified or cashier's check, (iii) by
Units held by the Participant at the time of exercise, (iv) by a
recourse promissory note, such note to provide for the right to repay
the note partially or wholly with Units, or (v) by delivery of a copy
of irrevocable instructions from the Optionee to a broker or dealer,
reasonably acceptable to the General Partner, to sell certain of the
Common Stock acquired upon exercise of the Option and the
exercise of Exchange Rights or to pledge them as collateral for a loan
and promptly deliver to the Company the amount of sale or loan
proceeds necessary to pay such purchase price. If any portion of the
purchase price or a note given at the time of exercise is paid in
Units, those Units will be valued at the then Fair Market Value.
3.4 WRITTEN NOTICE REQUIRED. Any Option will be deemed
to be exercised for purposes of the Plan when written notice of
exercise has been received by the Partnership at its principal office
from the person entitled to exercise the Option and payment for the
Units with respect to which the Option is exercised has been received
by the Partnership in accordance with Section 3.2.
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<PAGE> 8
3.5 RIGHTS OF OPTIONEES UPON TERMINATION OF EMPLOYMENT
OR SERVICE
(a) In the event an Optionee ceases to be an
Employee, and does not continue to be an Executive Officer, for any
reason other than death, Retirement, Disability or for Cause, (i) the
Committee shall have the ability to accelerate the vesting of the
Optionee's Option in its sole discretion, and (ii) such Optionee's
Option shall be exercisable (to the extent exercisable on the date of
termination of employment or service as an Employee, or, if the
Committee, in its discretion, has accelerated the vesting of such
Option, to the extent exercisable following such acceleration) at any
time during the remaining initial term of the Option. Notwithstanding
any provision in this Plan to the contrary, no Option granted to a
Reporting Participant may be exercised unless at least six months have
elapsed since the grant of such Option.
(b) In addition, unless the Committee agrees, in
its sole discretion, to extend the term of a Nonqualified Stock Option
granted to an Employee (provided that the term of any such Option
shall not be extended beyond its initial term), an Optionee's Option
may be exercised as follows in the event such Optionee ceases to serve
as an Employer, due to death, Disability, Retirement or for Cause:
(i) Death. If an Optionee dies while serving as
an Employee, or within three months after ceasing to be an
Employee, his option shall become fully exercisable on the
date of his death and shall expire at the end of the initial
term of the Option. During such period, the Option may be
fully exercised, to the extent that it remains unexercised on
the date of death, by the Optionee's personal representative
or by the distributees to whom the Optionee's rights under the
Option shall pass by will or by the laws of descent and
distribution.
(ii) Retirement. If an Optionee ceases to
serve as an Employee, as a result of Retirement, (i) his
Option shall become fully exercised on the date of his
Retirement and such Option will be exercisable at any time
during the remaining initial term of the Option.
(iii) Disability. If an Optionee ceases to serve
as an Employee as a result of Disability, the Optionee's
Option shall become fully exercisable and shall expire at any
time during the remaining initial term of the Option.
(iv) Cause. If an Optionee ceases to serve as an
Employee because the Optionee is terminated for Cause, further
vesting under the Option shall cease and the Option shall
expire at the end of its initial term. Notwithstanding the
foregoing, if an Optionee is an Employee employed
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<PAGE> 9
pursuant to a written employment agreement, the Optionee's
relationship with the Partnership or the General Partner will
be deemed terminated for Cause for purposes of the Plan only
if the Optionee is considered under the circumstances to have
been terminated for cause for purposes of such written
agreement.
3.6 TRANSFERABILITY OF OPTIONS. Options shall not be
transferable other than by will or by the laws of descent and
distribution and may be exercised during the lifetime of an Optionee
only by that Optionee or by his legally authorized.
3.7 OPTION TERMS AND CONDITIONS. The terms and
conditions of Options granted under this Plan may differ from one
another as the Committee may, in its discretion, determine, as long as
all Options granted under this Article satisfy the requirements of
this Article.
3.8 DURATION OF OPTIONS. Each Option granted under this
Article and all rights thereunder will expire ten years after the date
on which the Option is granted. In addition, each Option will be
subject to early termination as provided elsewhere in the Plan.
3.9 PURCHASE PRICE. The purchase price for Units
acquired pursuant to the exercise, in whole or in part, of any Option
granted under this Article shall be the Fair Market Value of the Plan
Shares at the time of the grant of the Option.
3.10 INDIVIDUAL OPTION AGREEMENTS. Each Employee
receiving Options under this Article will be required to enter into a
written Option Agreement with the Company. In such Option Agreement,
the Employee will agree to be bound by the terms and conditions of the
Plan and such other matters as the Committee deem appropriate.
ARTICLE IV
TERMINATION, AMENDMENT AND ADJUSTMENT
4.1 TERMINATION AND AMENDMENT. The Plan will terminate
on July 16, 2006. No Awards will be granted under the Plan after that
date of termination, although Awards granted prior to such date shall
remain outstanding in accordance with their terms. Subject to the
limitations contained in this Section 4.1, the Committee may at any
time amend or revise the terms of the Plan, including the form and
substance of the Option Agreements to be used in connection herewith;
provided that, without approval by the shareholders of the Company, no
amendment or revision may (i) increase the maximum aggregate number of
Units or the number of shares of Common Stock as to which Exchange
Rights may be exercised, except as permitted under Section 1.5 and
Section 4.2, (ii) change the minimum purchase price for Units under
Article III or (iii) permit
9
<PAGE> 10
the granting of an Award to anyone other than as provided in the Plan;
and provided further that, without approval by the shareholders of the
Company, no amendment to the Plan will be effective that materially
increases the benefits accruing to Participants, materially increases
the number of securities that may be issued under the Plan or
otherwise materially modifies the requirements as to eligibility for
participation in the Plan, all within the meaning of Rule 16b-3 of the
Exchange Act. In addition, if and to the extent required by Rule
16b-3 of the Exchange Act, the provisions of the Plan may not be
amended more frequently than once every six months unless otherwise
required by law and permitted by Rule 16b-3 of the Exchange Act. No
amendment, suspension or termination of the Plan may, without the
consent of the Optionee who has received an Award hereunder, alter or
impair any of that Participant's rights or obligations under any Award
granted under the Plan prior to that amendment, suspension or
termination.
4.2 ADJUSTMENT. If the outstanding Common Stock is
increased, decreased, changed into or exchanged for a different number
or kind of shares or securities through merger, consolidation,
combination, exchange or shares, other reorganization,
recapitalization, reclassification, stock dividend, stock split or
reverse stock split, an appropriate and proportionate adjustment will
be made in the maximum number of Units and in the shares of Common
Stock as to which Exchange Rights may be granted under the Plan. A
corresponding adjustment will be made in the number or kind of shares
allocated to and purchasable under unexercised Options. Any such
adjustment in outstanding Options will be made without change in the
aggregate purchase price applicable to the unexercised portion of the
Option, but with a corresponding adjustment in the price for each Unit
purchasable under the Option. The foregoing adjustments and the
manner of application of the foregoing provisions will be determined
solely by the Committee, and any such adjustment may provide for the
elimination of fractional share interests.
ARTICLE V
MISCELLANEOUS
5.1 OTHER COMPENSATION PLANS. The adoption of the Plan
will not affect any other stock option or incentive or other
compensation plans in effect for the Company, the Partnership, or the
General Partner, nor will the Plan preclude the Company, the
Partnership or the General Partner from establishing any other forms
of incentive or other compensation for Employees.
5.2 PLAN BINDING ON SUCCESSORS. The Plan will be binding
upon the successors and assigns of the Partnership and the General
Partner that adopt the Plan.
10
<PAGE> 11
5.3 NUMBER AND GENDER. Whenever used herein, nouns in
the singular will include the plan where appropriate, and the
masculine pronoun will include the feminine gender.
5.4 HEADINGS. Headings of articles and sections hereof
are inserted for convenience of reference and constitute no part of
the Plan.
ARTICLE VI
DEFINITIONS
As used herein with initial capital letters, the following
terms have the meanings set forth unless the context clearly indicates
to the contrary:
6.1 "AWARD" means a grant of Options under Article III of
the Plan.
6.2 "BOARD" means the Board of Directors of the Company.
6.3 "CAUSE" will mean an act or acts involving a felony,
fraud, willful misconduct, commission of any act that causes or
reasonably may be expected to cause substantial injury to the
Partnership or the General Partner or other good cause. The term
"OTHER GOOD CAUSE" as used in this Section will include, but shall not
be limited to, habitual impertinence, a pattern of conduct that tends
to hold the Partnership or the General Partner up to ridicule in the
community, conduct disloyal to the Partnership or the General Partner,
conviction of any crime of moral turpitude and substantial dependence,
as judged by the Committee, on alcohol or any controlled substance.
"CONTROLLED SUBSTANCE" means a drug, immediate precursor or other
substance listed in Schedule I-V of the Federal Comprehensive Drug
Abuse Prevention Control Act of 1970, as amended.
6.4 "CODE" means the Internal Revenue Code of 1986, as
amended.
6.5 "COMMITTEE" shall have the meaning set forth in
Section 2.1.
6.6 "COMMON STOCK" means the common stock, par value $.01
per share, of the Company or, in the event that the outstanding shares
of such common stock are hereafter changed into or exchanged for
shares of a different stock or security of the Company or some other
corporation, such other stock or security.
6.7 "COMPANY" means Crescent Real Estate Equities, Inc.,
a Maryland corporation, and any successor thereto.
6.8 "DIRECTOR" means a member of the Board of Directors
of the Company.
11
<PAGE> 12
6.9 "DISABILITY" of a Participant shall be deemed to
occur whenever a Participant is rendered unable to engage in any
substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death
or which has lasted or can be expected to last for a continuing period
of not less than 12 months.
6.10 "EFFECTIVE DATE" means July 16, 1996.
6.11 "EMPLOYEE" means an officer or other employee of the
General Partner, the Partnership or of any of its subsidiaries that
adopt the Plan.
6.12 "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
6.13 "EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended.
6.14 "EXCHANGE DATE" means the date or dates on which
Units granted hereunder shall have Exchange Rights, which date or
dates shall be no earlier than one year from the date of grant
hereunder and shall be subject to, and conditioned upon, the approval
of the shareholders of the Company.
6.15 "EXCHANGE RIGHT" shall have the meaning set forth in
the Partnership Agreement.
6.16 "EXECUTIVE OFFICER" means an "officer" as defined in
accordance with Rule 16a-1(F) of the Exchange Act.
6.17 "FAIR MARKET VALUE" means the value of the Units as
determined by the Committee on the basis of such factors as it deems
appropriate; provided that it the Common Stock is traded on a national
securities exchange, such value will be determined by the Committee on
the basis of the last sale price for the Common Stock on the date for
which such determination is relevant, as reported on the New York
Stock Exchange. If the Common Stock is traded on more than one
exchange, such value will be determined on the basis of the exchange
trading the greatest volume of shares on such date. In no event shall
"Fair Market Value" be less than the par value of the Common Stock.
6.18 "GENERAL PARTNER" means Crescent Real Estate
Equities, Ltd., a Delaware corporation.
6.19 "GOOD REASON" means a change in control of the
Company, as well as, and following such change in control of the
Company: (a) a reduction in the amount of the Employee's aggregate
cash compensation (including base salary and any bonus) payable within
any twelve-month period following such change in
12
<PAGE> 13
control below the amount of such aggregate cash compensation paid to,
or accrued by the General Partner with respect to, the Employee in the
twelve-month period immediately preceding the change in control; (b)
the assignment of such Employee to any employment status other than a
position as an Executive Officer and having duties comparable to those
exercised by the Employee immediately prior to the change in duties
comparable to those exercised by the Employee immediately prior to the
change in control, or (c) a geographical relocation or attempted
relocation of the Employee to an officer more than fifty (50) miles
distance from Fort Worth, Texas, without the Employee's consent.
6.20 "LIMITED PARTNER" shall have the meaning set forth
in the Partnership Agreement.
6.21 "LIMITED PARTNERSHIP INTEREST" shall have the meaning
set forth in the Partnership Agreement.
6.22 "OPTION" means a nonqualifed option to acquire Units
granted under the Plan.
6.23 "OPTION AGREEMENT" means the written agreement by and
among the Partnership, the General Partner, and a Participant with
respect to an Option awarded under this Plan.
6.24 "PARTICIPANT" means an Employee to whom an Award has
been granted hereunder.
6.25 "PARTNERSHIP" means Crescent Real Estate Equities
Limited Partnership, a Delaware limited partnership.
6.26 "PARTNERSHIP AGREEMENT" means the First Amended and
Restated Agreement of Limited Partnership of Crescent Real Estate
Equities Limited Partnership, dated as of May 5, 1994, as amended from
time to time.
6.27 "PLAN" means the 1996 Crescent Real Estate Equities
Limited Partnership Unit Incentive Plan, as amended from time to time.
6.28 "REPORTING PARTICIPANT" means a Participant who is
subject to the reporting requirements of Section 16 of the Exchange
Act as to the Company's Common Stock.
6.29 "RETIREMENT" means termination of employment as an
Employee or as a Director on or after the date on which a Participant
attains age 70.
6.30 "SECURITIES ACT" means the Securities Act of 1933, as
amended.
13
<PAGE> 14
6.31 "SUBSIDIARY" means a subsidiary corporation of the
Partnership or the General Partner, as defined in Section 424(F) of
the Code.
6.32 "UNIT" means a unit of ownership interest in the
Company's operating partnership, which is or may be exchangeable on a
one-for-one basis for shares of Common Stock, or, at the option of the
Company, the cash equivalent thereof.
14
<PAGE> 1
EXHIBIT 10.02
AGREEMENT
ENTERED INTO AS OF AUGUST 15, 1996
BETWEEN AND AMONG
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CRE MANAGEMENT III CORP.
CRESCENT REAL ESTATE EQUITIES, INC.
GREENWAY PLAZA, LTD.
NINE GREENWAY, LTD.
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NW GREENWAY #1, INC.
NW GREENWAY #9, INC.
K-P GREENWAY PLAZA LIMITED PARTNERSHIP
J/K - G/P #1, LTD.
EDLOE DEVCO, CORP.
MELVIN A. DOW
J/K - G/P #9, LTD.
KEMPER INVESTORS LIFE INSURANCE COMPANY
KILICO REALTY CORPORATION
KEMPER PORTFOLIO CORPORATION
K-P GREENWAY, INC.
THE PRIME GROUP, INC.
PRIME/SCHNITZER GREENWAY PARTNERS
GREENWAY PLAZA ACQUISITION CORPORATION
FEDERAL KEMPER LIFE ASSURANCE COMPANY
AND
KFC PORTFOLIO CORPORATION
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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<S> <C> <C>
I. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1. The Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2. The Greenway Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3. The Partnership Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.4. The NML Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.5. The K-P Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.6. The Kemper Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.7. Other Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.8. Individual Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.9. Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
II. CONTRIBUTIONS OF LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.1. Contribution of K-P Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2. Second Amendment of Partnership Agreements . . . . . . . . . . . . . . . . . . . . . 5
2.3. Redemption of K-P's Partnership Interests . . . . . . . . . . . . . . . . . . . . . 5
2.4. Third Amendment of Partnership Agreements . . . . . . . . . . . . . . . . . . . . . 6
2.5. Contribution of NML Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.6. Contribution of Kemper Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.7. Fourth Amendment of Partnership Agreements . . . . . . . . . . . . . . . . . . . . . 7
III. MERGER OF PARTNERSHIPS; REDEMPTION OF PARTNERSHIP INTERESTS . . . . . . . . . . . . . . . . . 8
3.1. Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.2. Conveyance and Releases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.3. Sixth Amendment of Partnership Agreement . . . . . . . . . . . . . . . . . . . . . . 8
3.4. Redemption of Partnership Interests . . . . . . . . . . . . . . . . . . . . . . . . 8
3.5. Seventh Amendment of Partnership Agreement . . . . . . . . . . . . . . . . . . . . . 9
IV. CONTRIBUTION TO NEWCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.1. Contribution of Greenway Assets to Newco . . . . . . . . . . . . . . . . . . . . . . 9
4.2. Closing Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
V. REDEMPTION OR SURRENDER OF PARTNERSHIP INTERESTS . . . . . . . . . . . . . . . . . . . . . . . 36
5.1. Redemption or Surrender of Partnership Interests . . . . . . . . . . . . . . . . . . 36
5.2. Continuation of 9 Greenway . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
VI. PAYMENT OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
6.1. Payment of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
VII. TERMINATION AND RELEASE AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
7.1. Affected Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
7.2. Releases and Agreements Concerning Affected Agreements . . . . . . . . . . . . . . . 39
7.3. Releases and Agreements by Certain Partners or Former Partners . . . . . . . . . . . 40
VIII. PURCHASE OF REIT STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
8.1. Purchase of Stock by NML . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
8.2. Purchase of Stock by Kemper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
</TABLE>
i
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8.3. Lock-up Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
8.4. Registration Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
8.5. Purchase Price Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
8.6. Issuance of Additional Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . 45
IX. EARNEST MONEY; INSPECTION PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
9.1. Earnest Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
9.2. Inspection Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
9.3. Inspection and Due Diligence Rights . . . . . . . . . . . . . . . . . . . . . . . . . 50
9.4. Tenant Estoppel Letters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
9.5. Information as to Existing Leases . . . . . . . . . . . . . . . . . . . . . . . . . . 53
X. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
10.1. Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
10.2. Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
10.3. Closing Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
XI. REPRESENTATIONS AND WARRANTIES OF CRESCENT PARTIES . . . . . . . . . . . . . . . . . . . . . . 56
11.1. Representations and Warranties of Crescent Parties . . . . . . . . . . . . . . . . . 56
11.2. Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . 58
XII. REPRESENTATIONS AND WARRANTIES OF ACTING GREENWAY PARTIES . . . . . . . . . . . . . . . . . . . 58
12.1. Representations and Warranties of Acting Greenway Parties . . . . . . . . . . . . . . 58
12.2. Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . 65
12.3. Liability of Century and Dow . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
XIII. CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
13.1. Conditions to Obligations of Crescent Parties . . . . . . . . . . . . . . . . . . . . 66
13.2. Conditions to Obligations of Acting Greenway Parties . . . . . . . . . . . . . . . . 71
13.3. Qualification to Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
13.4. Failure of Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
13.5. Sharing of Partnership Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
XIV. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
14.1. Assumed Obligations; Cross-Indemnity Agreements . . . . . . . . . . . . . . . . . . . 81
14.2. Covenants of Certain Greenway Parties . . . . . . . . . . . . . . . . . . . . . . . . 86
14.3. Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
14.4. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
14.5. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
14.6. Survival of Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
14.7. Modification; Waiver; Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
14.8. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
14.9. Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
14.10. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
14.11. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
14.12. Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
14.13. Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
</TABLE>
ii
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14.14. Partial Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
14.15. Time of the Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
14.16. Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
14.17. Dow Intention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
14.18. Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
</TABLE>
iii
<PAGE> 5
SCHEDULES
<TABLE>
<CAPTION>
Schedule Description Reference*
- -------- ----------- ---------
<S> <C> <C>
I Description of Partnership Agreements 1.3
II Description of NML Loans, K-P Loans, and Kemper Loans 1.4; 1.5; 1.6; 12.1(n);
12.1(o); 12.1(p)
III Form of Second Amendment of Amended and Restated Agreement of Limited Partnership 2.2(a)
of Greenway
IV Form of Second Amendment of Agreement of Limited Partnership of 9 Greenway 2.2(b)
V Form of Third Amendment of Amended and Restated Agreement of Limited Partnership of 2.4
Greenway
VI Form of Amendment of Certificate of Limited Partnership of Greenway Reflecting the 2.4
Withdrawal of K-P Greenway Plaza Limited Partnership
VII Form of Third Amendment of Agreement of Limited Partnership of 9 Greenway 2.4
VIII Form of Amendment of Certificate of Limited Partnership of 9 Greenway Reflecting the 2.4
Withdrawal of K-P Greenway Plaza Limited Partnership
IX Form of Fourth Amendment of Amended and Restated Agreement of Limited Partnership 2.7(a); 12.1(f)
of Greenway
X Form of Fourth Amendment of Agreement of Limited Partnership of 9 Greenway 2.7(b); 12.1(f)
XI Form of Fifth Amendment of Amended and Restated Agreement of Limited Partnership 3.1
of Greenway
XII Form of Fifth Amendment of Agreement of Limited Partnership of 9 Greenway 3.1
XIII Form of Plan of Merger 3.1
XIV Form of Certificate of Merger 3.1
XV Form of Conveyance and Assignment 3.2
XVI Form of Sixth Amendment of Agreement of Limited Partnership of 9 Greenway 3.3
XVII Form of Seventh Amendment of Agreement of Limited Partnership of 9 Greenway 3.5
XVIII Form of Amendment of Certificate of Limited Partnership of 9 Greenway 3.5
</TABLE>
iv
<PAGE> 6
<TABLE>
<CAPTION>
Schedule Description Reference*
- -------- ----------- ---------
<S> <C> <C>
XIX Form of Conveyance and Assignment of Greenway Assets to Newco 4.1(a); 4.1(c);
4.2(a)(iii)(b); 4.2(c)(III);
12.1(r); 12.1(s)
XX Form of Newco Partnership Agreement 4.1(a); 4.1(b); 10.3(a)
XXI Form of Certificate of Limited Partnership of Newco 4.1(b); 10.3(a)
XXII Form of Guaranty of Payment of Nomura Note 4.1(e); 10.3(a)
XXIII Aim Lease Amendments 4.2(a)(vi)
XXIV 1996 Capital Budget for Greenway 4.2(a)(vii); 4.2(b)(i);
4.2(b)(IV)
XXV 1996 Capital Budget for 9 Greenway 4.2(a)(VII); 4.2(b)(i);
4.2(b)(IV)
XXVI Form of Redemption Agreement 5.1(a)
XXVII Form of Registration Agreement 8.4
XXVIII Form of Escrow Agreement 9.1
XXIX Form of Tenant Estoppel Letter 9.4
XXX Schedule of Major Tenants 9.4
XXXI Form of Substitute Certificate 9.4(a)
XXXII Schedule of Existing Leases 4.2(a)(vi); 9.4(a); 9.5;
12.1(r); 12.1(s)
XXXIII Required Consents and Approvals; Conflicts With Agreements of Crescent Parties 10.3(a); 11.1(e); 11.1(f)
XXXIV Required Consents and Approvals; Conflicts With Agreements of Warranting Parties 12.1(j); 12.1(k)
XXXV Agreements Affecting NML Loans 12.1(n)
XXXVI Agreements Affecting K-P Loans 12.1(o)
XXXVII Agreements Affecting Kemper Loans 12.1(p)
XXXVIII Schedule of Contracts 12.1(s), 14.2(c); 14.2(c)(iii)
XXXIX Required Consents and Approvals; Conflicts With Agreements of J/K#1, J/K#9, 12.1(x); 12.1(y)
Century, or Dow
XL Title Commitment 13.1(f)
XLI Form of Assumption and Indemnity Agreement 13.2(j)
XLII Existing Environmental Reports 14.1(a)(iii)
</TABLE>
- ---------------
*Reference in bolded italic type indicates where defined.
v
<PAGE> 7
AGREEMENT
This AGREEMENT ("AGREEMENT") is made and entered into effective as of
the 15th day of August 1996, between and among CRESCENT REAL ESTATE EQUITIES
LIMITED PARTNERSHIP, a Delaware limited partnership ("CRE"), CRE MANAGEMENT III
CORP., a Delaware corporation ("SPC"), CRESCENT REAL ESTATE EQUITIES, INC., a
Maryland corporation ("REIT"), GREENWAY PLAZA, LTD., a Texas limited
partnership ("GREENWAY"), NINE GREENWAY, LTD., a Texas limited partnership ("9
GREENWAY"), THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, a Wisconsin
corporation ("NML"), NW GREENWAY #1, INC., a Texas corporation ("GP#1"), NW
GREENWAY #9, INC., a Texas corporation ("GP#9"), K-P GREENWAY PLAZA LIMITED
PARTNERSHIP, an Illinois limited partnership ("K-P"), J/K - G/P #1, LTD., a
Texas limited partnership ("J/K#1"), EDLOE DEVCO, CORP., a Nevada corporation
doing business in Texas under the name Century Devco, Inc. ("CENTURY"), MELVIN
A. DOW, a resident of Harris County, Texas ("DOW"), J/K - G/P #9, LTD., a Texas
limited partnership ("J/K#9"), KEMPER INVESTORS LIFE INSURANCE COMPANY, an
Illinois corporation ("KEMPER"), and the other parties listed below in Section
1.7,
WITNESSETH:
I.
GENERAL
1.1. The Partnerships. GP#1, K-P and J/K#1 are the general
partners and NML, Century, and Dow are the limited partners of Greenway. GP#9,
K-P and J/K#9 are the general partners and NML is the sole limited partner of 9
Greenway. Greenway and 9 Greenway are sometimes hereinafter individually
referred to as a "PARTNERSHIP" or collectively as the "PARTNERSHIPS."
1.2. The Greenway Properties. The Partnerships are the owners
(in separate portions) of a mixed-use development located in Houston, Texas,
consisting of ten (10) office buildings, retail and storage space, a hotel,
private athletic club, central heated and chilled water plant, and six (6)
parking garages and commonly known as "Greenway Plaza" (the "GREENWAY
PROPERTIES").
1.3. The Partnership Agreements. The limited partnership
agreements relating to the Partnerships, with all amendments thereto, are
described in Schedule I attached hereto and incorporated herein, and, as so
amended, are herein sometimes individually referred to as a "PARTNERSHIP
AGREEMENT" or collectively as the "PARTNERSHIP AGREEMENTS." For convenience,
the partnership interest of a partner in a Partnership is herein sometimes
called the "PARTNERSHIP INTEREST" of such partner in said Partnership.
1.4. The NML Loans. NML has made certain loans to the
respective Partnerships which are described in Schedule II attached hereto and
incorporated herein and are herein collectively called the "NML LOANS." The
NML Loans include (a) loans (herein collectively called "NML GREENWAY PARTNER
LOANS") from NML to Greenway described in Schedule II as Category I Existing
Loans, Category II Existing Loans, Category III Existing Loans, Committed
Partner Loans, Class B Shared Excess Partner Loans, and Class A Shared Excess
Partner Loans; (b) loans (herein collectively called "NML 9 GREENWAY PARTNER
LOANS") from NML to 9 Greenway described in Schedule II as Existing Loans,
Committed Partner
<PAGE> 8
Loans, Class B Shared Excess Partner Loans, and Class A Shared Excess Partner
Loans; (c) the loan from NML to 9 Greenway described in Schedule II as, and
herein sometimes called, the "NML RENEWAL NOTE"; and (d) the loan from NML to 9
Greenway described in Schedule II as, and herein sometimes called, the "NML
NOTE." The NML Renewal Note is more fully described as the "NML Renewal Note"
in the First Amendment of Agreement of Limited Partnership of Nine Greenway,
Ltd., dated as of June 30, 1994; and the NML Note is the August 21, 1989,
promissory note from 9 Greenway to NML described in and secured by the "NG
Second Deed of Trust" and "NG Second Lease Assignment" described in said First
Amendment of Agreement of Limited Partnership of Nine Greenway, Ltd. In the
event that at any time or times prior to the Closing Date NML makes any
additional "Class A Shared Excess Partner Loan" or any "Single Excess Partner
Loan" (as defined in the Greenway Partnership Agreement) to Greenway, each such
additional Class A Shared Excess Partner Loan and Single Excess Partner Loan
remaining unpaid as of the Closing Date will be included in the "NML Greenway
Partner Loans" for all purposes of this Agreement. Likewise, in the event that
at any time or times prior to the Closing Date NML makes any additional "Class
A Shared Excess Partner Loan" or any "Single Excess Partner Loan" (as defined
in the 9 Greenway Partnership Agreement) to 9 Greenway, each such additional
Class A Shared Excess Partner Loan and Single Excess Partner Loan remaining
unpaid as of the Closing Date will be included in the "NML 9 Greenway Partner
Loans" for all purposes of this Agreement.
1.5. The K-P Loans. K-P is the owner and holder (as assignee of
The Equitable Life Assurance Society of the United States) of certain loans
owing by the respective Partnerships which are described in Schedule II
attached hereto and incorporated herein and are herein collectively called the
"K-P LOANS." The K-P Loans include (a) loans (herein collectively called "K-P
GREENWAY PARTNER LOANS") owing from Greenway to K-P described in Schedule II as
Category I Existing Loans, Category II Existing Loans, and Category III
Existing Loans; and (b) loans (herein collectively called "K-P 9 GREENWAY
PARTNER LOANS") owing from 9 Greenway to K-P described in Schedule II as
Existing Loans.
1.6. The Kemper Loans. Kemper has made certain loans to the
respective Partnerships which are described in Schedule II attached hereto and
incorporated herein and are herein collectively called the "KEMPER LOANS." The
Kemper Loans include (a) loans (herein collectively called "KEMPER GREENWAY
PARTNER LOANS") from Kemper to Greenway described in Schedule II as Committed
Partner Loans, Class B Shared Excess Partner Loans, and Class A Shared Excess
Partner Loans; (b) loans (herein collectively called "KEMPER 9 GREENWAY PARTNER
LOANS") from Kemper to 9 Greenway described in Schedule II as Committed Partner
Loans, Class B Shared Excess Partner Loans, and Class A Shared Excess Partner
Loans; and (c) the loan from Kemper to 9 Greenway described in Schedule II as,
and herein sometimes called, the "KEMPER NOTE," being the August 21, 1989,
promissory note from 9 Greenway to Kemper described in and secured by the "NG
Second Deed of Trust" and "NG Second Lease Assignment" described in said First
Amendment of Agreement of Limited Partnership of Nine Greenway, Ltd. In the
event that at any time or times prior to the Closing Date Kemper makes any
additional "Class A Shared Excess Partner Loan" or any "Single Excess Partner
Loan" (as defined in the Greenway Partnership Agreement) to Greenway, each such
additional Class A Shared Excess Partner Loan and Single Excess Partner Loan
remaining unpaid as of the Closing Date will be included in the "Kemper
Greenway Partner Loans" for all purposes of this Agreement. Likewise, in the
event that at any time or times prior to the Closing Date Kemper makes any
additional "Class A Shared Excess Partner Loan" or any "Single Excess Partner
Loan" (as defined in the 9 Greenway Partnership Agreement) to 9 Greenway, each
such additional Class A Shared Excess Partner Loan and Single Excess Partner
Loan remaining unpaid as of the Closing Date will be included in the "Kemper 9
Greenway Partner Loans" for all purposes of this Agreement
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<PAGE> 9
1.7. Other Parties.
(a) In addition to the parties to this Agreement named hereinabove,
the following parties, who are parties to agreements affected by this Agreement
or have interests, directly or indirectly, in K-P or in the K-P Loans or Kemper
Loans, are joining in execution of this Agreement to evidence their consent and
agreement to this Agreement and the consummation of the transactions
contemplated hereby, insofar as their respective interests are concerned,
namely:
(i) KILICO Realty Corporation, an Illinois corporation ("KILICO
REALTY"), a shareholder of K-P Inc.;
(ii) Kemper Portfolio Corporation, a Delaware corporation ("KEMPER
PORTFOLIO"), a holder of interests in certain K-P Loans or
Kemper Loans under participation or other agreements with K-P or
Kemper;
(iii) K-P Greenway, Inc., an Illinois corporation ("K-P INC."), the
general partner of K-P;
(iv) The Prime Group, Inc., an Illinois corporation ("PRIME"), a
shareholder of K-P Inc. and a general partner of P/S;
(v) Prime/Schnitzer Greenway Partners, a Texas general partnership
("P/S"), a limited partner in K-P;
(vi) Greenway Plaza Acquisition Corporation, a Nevada corporation
("GP ACQUISITION"), a general partner in P/S, a limited partner
in K-P, and a holder of an interest in a Kemper Loan under a
participation agreement with Kemper;
(vii) Federal Kemper Life Assurance Company, an Illinois corporation
("FEDERAL KEMPER"), a holder of interests in certain K-P Loans
or Kemper Loans under participation or other agreements with K-P
or Kemper; and
(viii) KFC Portfolio Corporation, a Delaware corporation ("KFC"), a
holder of interests in certain K-P Loans or Kemper Loans under
participation or other agreements with K-P or Kemper.
KILICO Realty, Kemper Portfolio, K-P Inc., Prime, P/S, GP Acquisition, Federal
Kemper, and KFC are referred to herein as the "NON-ACTING GREENWAY PARTIES."
(b) Each of the Non-Acting Greenway Parties (severally, a
"WARRANTING PARTY") severally warrants and represents that (i) the execution,
delivery, and performance of this Agreement by such Warranting Party has been
duly and validly authorized by all necessary corporate or partnership action of
such Warranting Party; (ii) this Agreement has been duly executed and delivered
by an officer, partner or authorized representative or agent of such Warranting
Party; (iii) this Agreement constitutes a legal, valid and binding obligation
of such Warranting Party, enforceable against it in accordance with the terms
hereof, subject to applicable bankruptcy, insolvency, reorganization,
receivership, moratorium or other similar laws or judicial decisions affecting
the rights and remedies of creditors generally, and general principles of
equity, including, without limitation, requirements of good faith, fair dealing
and reasonableness, the possible unavailability of particular equitable
remedies, the possible availability of equitable defenses, and concepts of
materiality, unconscionable conduct of an
3
<PAGE> 10
enforcing party or impracticability or impossibility of performance; (iv) such
Warranting Party is not a debtor party to any bankruptcy, reorganization,
insolvency or similar proceedings; and (v) such Warranting Party has not relied
upon or engaged any real estate broker or other finder in connection with or to
assist such Warranting Party in entering into or consummating the transactions
contemplated by this Agreement, except only that K-P Inc., acting in its
capacity as general partner of K-P, has executed the Eastdil Agreement
described in paragraph 12.1(bb) on behalf of and as the act and deed of K-P.
(c) It is expressly stipulated and provided, however, that:
(i) none of the Non-Acting Greenway Parties shall have any corporate
or personal liability whatsoever under this Agreement or in
connection with any of the transactions contemplated by this
Agreement, except for liability for obligations of such
Non-Acting Greenway Parties for their respective agreements,
representations and warranties which are provided for in this
Section 1.7, and except for liability of K-P Inc. in its
capacity as general partner of K-P for the agreements,
representations and warranties of K-P contained elsewhere in
this Agreement;
(ii) the agreements, representations and warranties of each
Non-Acting Greenway Party provided for in this Section 1.7 (and
any liabilities or obligations resulting from a breach or
default thereof or thereunder) are and shall be several
agreements, representations, warranties, liabilities and
obligations of such Non-Acting Greenway Party, and no other
Non-Acting Greenway Party shall be responsible therefor; and
(iii) without limiting the generality of the foregoing, none of the
Non-Acting Greenway Parties shall have any corporate or personal
liability for the performance of any of the agreements or
undertakings of GP#1, GP#9, NML, Kemper, CRE, REIT, SPC,
Greenway, 9 Greenway, or Newco under or in connection with or
pursuant to this Agreement, nor shall any of the Non-Acting
Greenway Parties other than K-P Inc. have corporate or personal
liability for the performance of any of the agreements or
undertakings of K-P under or in connection with or pursuant to
this Agreement.
(d) It is expressly stipulated and provided that all of the
undertakings, agreements, representations, warranties and other provisions
of this Agreement under which any of the Non-Acting Greenway Parties
(other than K-P Inc. in its capacity as general partner of K-P) could be
charged with liability are contained in this Section 1.7, and neither CRE,
REIT, SPC, any other party to this Agreement, or any person claiming through
any of them shall assert any liability or claim against any of the Non-Acting
Greenway Parties (other than liability of or claims against K-P Inc. in its
capacity as general partner of K-P) under any provision of this Agreement which
is not contained in this Section 1.7.
1.8. Individual Guaranties. Incident to the execution and
delivery of this Agreement and to induce the Crescent Parties (as defined in
Section 11.1) to enter into and deliver this Agreement, each of Century, Dow,
J/K#1, J/K#9, J/K Holdings, Inc., Kenneth Schnitzer, and Joan Weingarten Levy
is executing and delivering an individual conditional limited guaranty or
amendment of limited guaranty (collectively, the "INDIVIDUAL GUARANTIES") of a
portion of the indebtedness represented by the Nomura Note (as defined in
subparagraph 4.2(b)(vi)) to become effective on the Closing Date (as defined in
paragraph 10.1(a)) if the Closing (as defined in Section 7.2) occurs,
immediately prior to the transactions and actions
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<PAGE> 11
described and provided for in Article II below. CRE acknowledges receipt of
executed original counterparts of each of the Individual Guaranties.
1.9. Agreement. Subject to the terms and conditions and in
consideration of the mutual covenants and agreements set forth herein, the
parties to this Agreement hereby agree to effect and consummate the
transactions described hereinafter.
II.
CONTRIBUTIONS OF LOANS; REDEMPTION OF PARTNERSHIP INTERESTS OF K-P
2.1. Contribution of K-P Loans. Upon and subject to the terms
and conditions hereinafter set forth, on the Closing Date (as defined in
paragraph 10.1(a)):
(a) K-P agrees to contribute to the capital of Greenway all of the K-P
Greenway Partner Loans as to the unpaid principal and interest
remaining unpaid thereon as of the Closing Date; and
(b) K-P agrees to contribute to the capital of 9 Greenway all of the K-P
9 Greenway Partner Loans as to the unpaid principal and interest
remaining unpaid thereon as of the Closing Date.
2.2. Second Amendment of Partnership Agreements. Upon and
subject to the terms and conditions hereinafter set forth, on the Closing Date
and incident to the contributions of the K-P Loans to the respective
Partnerships pursuant to Section 2.1:
(a) GP#1, K-P, J/K#1, NML, Century, and Dow shall execute and deliver a
Second Amendment of Amended and Restated Agreement of Limited
Partnership of Greenway Plaza, Ltd., in substantially the form of
Schedule III attached hereto and incorporated herein; and
(b) GP#9, K-P, J/K#9, and NML shall execute and deliver a Second
Amendment of Agreement of Limited Partnership of Nine Greenway, Ltd.,
in substantially the form of Schedule IV attached hereto and
incorporated herein.
2.3. Redemption of K-P's Partnership Interests. Upon and
subject to the terms and conditions hereinafter set forth, on the Closing Date
and immediately following consummation of the transactions and actions
described and provided for in Sections 2.1 and 2.2, the following shall occur:
(a) The Partnership Interest of K-P in Greenway shall be redeemed, and
K-P shall surrender its Partnership Interest in Greenway. No
consideration (other than the mutual agreements of the parties to
this Agreement) shall be paid or payable to K-P for the redemption or
surrender of K-P's Partnership Interest in Greenway.
(b) The Partnership Interest of K-P in 9 Greenway shall be redeemed, and
K-P shall surrender its Partnership Interest in 9 Greenway. No
consideration (other than the mutual agreements of the parties to
this Agreement) shall be paid or payable to K-P for the redemption or
surrender of K-P's Partnership Interest in 9 Greenway.
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<PAGE> 12
2.4. Third Amendment of Partnership Agreements. If the Closing
occurs, GP#1, J/K#1, NML, Century, and Dow consent to the redemption of the
Partnership Interest of K-P in Greenway as provided for in paragraph 2.3(a) and
stipulate and agree that Greenway shall not be dissolved by reason of the
redemption of such Partnership Interest. Rather, Greenway shall continue in
existence as a Texas limited partnership with GP#1 and J/K#1 as the general
partners and NML, Century, and Dow as the limited partners of such limited
partnership. Further, if the Closing occurs, to effect the redemption of the
Partnership Interest of K-P in Greenway provided for in paragraph 2.3(a) and to
reflect the agreement for continuation of Greenway as a Texas limited
partnership as provided for herein, on the Closing Date and immediately
following consummation of the transactions and actions described and provided
for in Sections 2.1, 2.2, and 2.3, each of GP#1, K-P, J/K#1, NML, Century, and
Dow shall execute and deliver a Third Amendment of Amended and Restated
Agreement of Limited Partnership of Greenway Plaza, Ltd., in substantially the
form of Schedule V attached hereto and incorporated herein and each of GP#1,
K-P, and J/K#1 shall execute, deliver and file in the office of the Secretary
of State of the State of Texas an Amendment of the Certificate of Limited
Partnership of Greenway in the form of Schedule VI attached hereto and
incorporated herein. If the Closing occurs, GP#9, J/K#9 and NML consent to the
redemption of the Partnership Interest of K-P in 9 Greenway as provided for in
paragraph 2.3(b) and stipulate and agree that 9 Greenway shall not be dissolved
by reason of the redemption of such Partnership Interest. Rather, 9 Greenway
shall continue in existence as a Texas limited partnership with GP#9 and J/K#9
as the general partners and NML as the limited partner of such limited
partnership. Further, if the Closing occurs, to effect the redemption of the
Partnership Interest of K-P in 9 Greenway provided for in paragraph 2.3(b) and
to reflect the agreement for continuation of 9 Greenway as a Texas limited
partnership as provided for herein, on the Closing Date and immediately
following consummation of the transactions and actions described and provided
for in Sections 2.1, 2.2, and 2.3, each of GP#9, K-P, J/K#9, and NML shall
execute and deliver a Third Amendment of Agreement of Limited Partnership of
Nine Greenway, Ltd., in substantially the form of Schedule VII attached hereto
and incorporated herein and each of GP#9, K-P, and J/K#9 shall execute, deliver
and file in the office of the Secretary of State of the State of Texas an
Amendment of the Certificate of Limited Partnership of 9 Greenway in the form
of Schedule VIII attached hereto and incorporated herein.
2.5. Contribution of NML Loans. Upon and subject to the terms
and conditions hereinafter set forth, on the Closing Date and immediately
following consummation of the transactions and actions described and provided
for in Sections 2.1, 2.2, 2.3, and 2.4:
(a) NML agrees to contribute to the capital of Greenway all of the NML
Greenway Partner Loans as to the unpaid principal and interest
remaining unpaid thereon as of the Closing Date;
(b) NML agrees to contribute to the capital of 9 Greenway all of the NML
9 Greenway Partner Loans as to the unpaid principal and interest
remaining unpaid thereon as of the Closing Date; and
(c) NML agrees to contribute to the capital of 9 Greenway an amount of
the unpaid principal remaining unpaid on the NML Note as of the
Closing Date equal to the excess of "A" over "B" determined as
follows as of the Closing Date, with:
"A" being equal to the total unpaid principal and accrued unpaid
interest owing on the NML Note on the Closing Date; and
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<PAGE> 13
"B" being equal to (i) the remainder of "x" minus "y" determined as
of the Closing Date, divided by (ii) 2, with:
"x" being $91,000,000; and
"y" being equal to the total unpaid principal and accrued
unpaid interest owing on the NML Renewal Note on the
Closing Date.
2.6. Contribution of Kemper Loans. Upon and subject to the
terms and conditions hereinafter set forth, on the Closing Date and immediately
following consummation of the transactions and actions described and provided
for in Sections 2.1, 2.2, 2.3, and 2.4, Kemper shall be admitted as a limited
partner in each of Greenway and 9 Greenway, and, incident thereto:
(a) Kemper agrees to contribute to the capital of Greenway all of the
Kemper Greenway Partner Loans as to the unpaid principal and interest
remaining unpaid thereon as of the Closing Date;
(b) Kemper agrees to contribute to the capital of 9 Greenway all of the
Kemper 9 Greenway Partner Loans as to the unpaid principal and
interest remaining unpaid thereon as of the Closing Date; and
(c) Kemper agrees to contribute to the capital of 9 Greenway an amount of
the unpaid principal remaining unpaid on the Kemper Note as of the
Closing Date equal to the excess of "A" over "B" determined as
follows as of the Closing Date, with:
"A" being equal to the total unpaid principal and accrued unpaid
interest owing on the Kemper Note on the Closing Date; and
"B" being equal to (i) the remainder of "x" minus "y" determined as
of the Closing Date, divided by (ii) 2, with:
"x" being $91,000,000; and
"y" being equal to the total unpaid principal and accrued
unpaid interest owing on the NML Renewal Note on the
Closing Date.
2.7. Fourth Amendment of Partnership Agreements. Upon and
subject to the terms and conditions hereinafter set forth, on the Closing Date
and incident to the contributions of certain of the NML Loans and certain of
the Kemper Loans to the respective Partnerships and the admission of Kemper as
a limited partner in each of the Partnerships pursuant to Sections 2.5 and 2.6:
(a) GP#1, J/K#1, NML, Century, Dow and Kemper shall execute and deliver a
Fourth Amendment of Amended and Restated Agreement of Limited
Partnership of Greenway Plaza, Ltd., in substantially the form of
Schedule IX attached hereto and incorporated herein; and
(b) GP#9, J/K#9, NML and Kemper shall execute and deliver a Fourth
Amendment of Agreement of Limited Partnership of Nine Greenway, Ltd.,
in substantially the form of Schedule X attached hereto and
incorporated herein.
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<PAGE> 14
III.
MERGER OF PARTNERSHIPS; REDEMPTION OF PARTNERSHIP INTERESTS
3.1. Merger. Upon and subject to the terms and conditions
hereinafter set forth, on the Closing Date and immediately following
consummation of the transactions and actions described and provided for in
Article II, Greenway shall be merged into 9 Greenway. To effect such merger,
(a) the General Partners and Limited Partners of Greenway shall execute and
deliver a Fifth Amendment of Amended and Restated Agreement of Limited
Partnership of Greenway Plaza, Ltd., authorizing the merger, in substantially
the form of Schedule XI attached hereto and incorporated herein, (b) the
General Partners and Limited Partners of 9 Greenway shall execute and deliver a
Fifth Amendment of Agreement of Limited Partnership of Nine Greenway, Ltd.,
authorizing the merger, in substantially the form of Schedule XII attached
hereto and incorporated herein, (c) each of GP#1, J/K#1, NML, Century, Dow,
GP#9, J/K#9, and Kemper shall execute and deliver a Plan of Merger in
substantially the form of Schedule XIII attached hereto and incorporated
herein, and (d) Greenway (acting by its General Partners) and 9 Greenway
(acting by its General Partners) shall execute and file a Certificate of Merger
in substantially the form of Schedule XIV attached hereto and incorporated
herein.
3.2. Conveyance and Releases. To evidence the merger of
Greenway into 9 Greenway, Greenway shall execute, acknowledge and file for
record a deed conveying record title to all its interests in the Greenway
Properties to 9 Greenway by executing and delivering a Conveyance and
Assignment in substantially the form attached hereto and incorporated herein as
Schedule XV, incident to execution and delivery of the Plan of Merger provided
for in Section 3.1. Additionally, to reflect of record the termination and
extinguishment of the liens, security interests and assignments securing
payment of the NML Greenway Partner Loans, the NML 9 Greenway Partner Loans,
the Kemper Greenway Partner Loans, the Kemper 9 Greenway Partner Loans, and the
"Intercreditor Loans" between Greenway and 9 Greenway provided for in the
Collateral Agreement, NML, Kemper, Greenway and 9 Greenway shall execute,
acknowledge, and file for record full releases of all such liens, security
interests, and assignments, so as to release all liens, security interests or
assignments covering or affecting the Greenway Properties held by any of NML,
Kemper, or the respective Partnerships except to the extent that such liens,
security interests or assignments secure payment of the NML Renewal Note, the
NML Note and the Kemper Note.
3.3. Sixth Amendment of Partnership Agreement. Immediately
following execution and delivery of the Plan of Merger and Conveyance and
Assignment provided for in Sections 3.1 and 3.2, each of GP#1, GP#9, J/K#1,
J/K#9, NML, Century, Dow, and Kemper shall execute and deliver a Sixth
Amendment of Agreement of Limited Partnership of Nine Greenway, Ltd., in
substantially the form of Schedule XVI attached hereto and incorporated herein.
3.4. Redemption of Partnership Interests. Upon and subject to
the terms and conditions hereinafter set forth, on the Closing Date and
immediately following consummation of the transactions and actions described
and provided for in Sections 3.1, 3.2, and 3.3, the following shall occur:
(a) The Partnership Interest of GP#1 in 9 Greenway shall be redeemed, and
GP#1 shall surrender its Partnership Interest in 9 Greenway. No
consideration (other than the mutual agreements of the parties to
this Agreement) shall be paid or
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<PAGE> 15
payable to GP#1 for the redemption or surrender of GP#1's Partnership
Interest in 9 Greenway.
(b) The Partnership Interest of GP#9 in 9 Greenway shall be redeemed, and
GP#9 shall surrender its Partnership Interest in 9 Greenway. No
consideration (other than the mutual agreements of the parties to
this Agreement) shall be paid or payable to GP#9 for the redemption
or surrender of GP#9's Partnership Interest in 9 Greenway.
(c) The Partnership Interest of Century in 9 Greenway shall be redeemed,
and Century shall surrender its Partnership Interest in 9 Greenway.
No consideration (other than the mutual agreements of the parties to
this Agreement) shall be paid or payable to Century for the
redemption or surrender of its Partnership Interest in 9 Greenway.
3.5. Seventh Amendment of Partnership Agreement. If the Closing
occurs, J/K#1, J/K#9, NML, Kemper, and Dow consent to the redemption of the
Partnership Interests of GP#1, GP#9 and Century as provided for in Section 3.4
and stipulate and agree that 9 Greenway shall not be dissolved by reason of the
redemption of such Partnership Interests. Rather, 9 Greenway shall continue in
existence as a Texas limited partnership with J/K#1 and J/K#9 as the general
partners and NML, Kemper, and Dow as the limited partners of such limited
partnership. Further, if the Closing occurs, to effect the redemption of the
Partnership Interests of GP#1, GP#9 and Century provided for in Section 3.4 and
to reflect the agreement for continuation of 9 Greenway as a Texas limited
partnership as provided for herein, on the Closing Date and immediately
following consummation of the transactions and actions described and provided
for in Sections 3.1, 3.2, and 3.3, each of GP#1, GP#9, J/K#1, J/K#9, NML,
Kemper, Century, and Dow shall execute and deliver a Seventh Amendment of
Agreement of Limited Partnership of Nine Greenway, Ltd., in substantially the
form of Schedule XVII attached hereto and incorporated herein and each of GP#1,
GP#9, J/K#1, and J/K#9 shall execute, deliver and file in the office of the
Secretary of State of the State of Texas an Amendment of the Certificate of
Limited Partnership of 9 Greenway in the form of Schedule XVIII attached hereto
and incorporated herein.
IV.
CONTRIBUTION TO NEWCO
4.1. Contribution of Greenway Assets to Newco. Upon and subject
to the terms and conditions hereinafter set forth, on the Closing Date and
immediately following consummation of the transactions and actions described
and provided for in Article III:
(a) 9 Greenway shall contribute, convey and assign to a newly formed
limited partnership to be named Crescent Real Estate Funding III,
L.P. (herein called "NEWCO"), of which SPC shall be the sole general
partner and CRE and 9 Greenway shall be the limited partners, the
Greenway Properties and other assets of 9 Greenway described in and
provided to be assigned and conveyed to Newco pursuant to the form of
Conveyance and Assignment to Newco (herein called the "NEWCO
CONVEYANCE") attached hereto and incorporated herein as Schedule XIX,
but excluding the assets or properties of 9 Greenway which are to be
reserved and retained by 9 Greenway as provided in the Newco
Conveyance (collectively, the "GREENWAY ASSETS"), subject to the
liens, assignments and security interests securing payment of the
Nomura Note
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described in subparagraph 4.2(b)(vi), the liens, assignments and
security interests securing payment of the NML Renewal Note, NML Note
and Kemper Note, respectively, and security interests securing
payment of amounts owing or to become owing under and in connection
with "Equipment Leases" (as defined in the Newco Conveyance), in
consideration for the issuance and grant to 9 Greenway of a limited
partnership interest in Newco as described in Schedule XX and the
agreement of Newco to effect, and to make such payments (if any) to
NML and Kemper (as assignees of 9 Greenway pursuant to Section 5.1)
as are required to be made by Newco to effect, the closing
adjustments as of the Proration Time provided for in Section 4.2; and
Newco shall assume the Assumed Obligations as described in paragraph
14.1(a) and in the Newco Conveyance and as more fully provided in the
Newco Conveyance, but not including the Retained Obligations defined
in subparagraph 4.2(c)(III); provided that:
(i) If requested by Newco at least five (5) "Business Days" (a
"BUSINESS DAY" being a date which is not a Saturday or
Sunday or a legal holiday on which National Banks in either
the City of Houston, Texas, or the City of Chicago,
Illinois, are authorized by law to remain closed) before
the Closing Date, 9 Greenway will convey any of the
Greenway Assets designated by Newco to another person or
persons designated by Newco (each, a "NEWCO DESIGNEE"), in
accordance with and subject to the applicable terms and
provisions of the Newco Conveyance, as if such Newco
Designee were "Newco" insofar as concerns such specific
assets to be conveyed to such Newco Designee; provided that
each such Newco Designee shall be required to assume joint
and several liability and responsibility with Newco for
performance of Newco's agreements and undertakings under
and pursuant to the Newco Conveyance, solely with respect
to any agreements, undertakings or liabilities relating to
the assets being conveyed to such Newco Designee.
Accordingly, to the extent applicable, references herein to
"Newco" shall include Crescent Real Estate Funding III,
L.P. and each Newco Designee referred to in this
subparagraph 4.1(a)(i) who is designated by Crescent Real
Estate Funding III, L.P. pursuant to and as authorized in
this subparagraph 4.2(a)(i).
(ii) Newco's agreement to assume the Assumed Obligations shall
inure to the benefit of and be enforceable by 9 Greenway
and each of the other Greenway Parties and their heirs,
legal representatives, successors and assigns but shall not
otherwise inure to the benefit of or be enforceable by any
other person or persons (including, without limitation, any
person or persons to whom such Assumed Obligations are owed
or claimed to be owed). Further, Newco shall have no
obligation or duty to any of the Greenway Parties to pay
any amount of Outstanding Indebtedness included in the
Assumed Obligations at any time after the Account
Termination Date if and to the extent that the making of
such payment by Newco would require making of a debit entry
in a corresponding amount to the Post-Closing Adjustment
Account pursuant to paragraph 4.2(e) if the Account
Termination Date had not theretofore occurred.
(b) SPC, as general partner, and CRE and 9 Greenway, as limited partners,
shall execute and deliver a First Amended and Restated Agreement of
Limited
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Partnership of Crescent Real Estate Funding III, L.P. (the "NEWCO
PARTNERSHIP AGREEMENT") in substantially the form of Schedule XX
attached hereto and incorporated herein and a Certificate of Limited
Partnership of Crescent Real Estate Funding III, L.P. in
substantially the form of Schedule XXI attached hereto and
incorporated herein, so as to create Newco and grant to 9 Greenway a
limited partnership interest in Newco as consideration for the
Greenway Assets as provided for in paragraph 4.1(a); provided that
SPC, CRE and 9 Greenway shall have the right to modify the form of
the Newco Partnership Agreement attached hereto as Schedule XX or the
form of Certificate of Limited Partnership attached hereto as
Schedule XXI as may be required by Nomura or by the "Servicer" or the
"Rating Agencies" as defined in the Nomura Deed of Trust incident to
CRE's obtaining the consent to this Agreement required to satisfy the
condition to the obligation of the Acting Greenway Parties specified
in paragraph 13.2(h) or as otherwise agreed by SPC, CRE and 9
Greenway; provided that no such amendment shall relieve CRE of the
obligation to make an initial cash capital contribution to Newco at
least equal to the Newco Contribution as provided for in paragraph
4.1(d) or shall relieve CRE of the obligation to contribute funds to
Newco to enable Newco to make all payments becoming due to NML and
Kemper (as assignees of 9 Greenway) pursuant to paragraph 4.2(c) and
paragraph 4.2(f).
(c) 9 Greenway shall execute and deliver, and SPC shall cause Newco to
execute and accept, the Newco Conveyance; and, as provided for in the
Newco Conveyance, 9 Greenway shall execute, acknowledge and deliver
to Newco a deed conveying record title to the Greenway Properties in
substantially the form of Exhibit A attached to Schedule XIX hereto
(which Exhibit A and the Attachments thereto are also incorporated
herein by reference).
(d) SPC shall make an initial capital contribution of $549,900 (in the
form of a promissory note) to Newco; and CRE shall make an initial
cash capital contribution to Newco as provided for in the Newco
Partnership Agreement in an amount (the "NEWCO CONTRIBUTION") equal
to $91,000,000 less such amounts, if any, as are actually paid by all
Newco Designees (if any) to NML and Kemper on the Closing Date
pursuant to paragraphs 6.1(a) and 6.1(b).
(e) 9 Greenway shall execute and deliver a guaranty of payment of a
portion of the indebtedness represented by the Nomura Note, in
substantially the form of Schedule XXII attached hereto and
incorporated herein. Said guaranty shall expressly provide that none
of the partners of 9 Greenway shall have personal or corporate
liability under or in connection with such guaranty, even for payment
or return of amounts paid to redeem the Partnership Interests of NML
and Kemper as provided for in Section 5.1.
4.2. Closing Adjustments. All parties to this Agreement
contemplate (but it is not a condition of Closing) that all "Available Cash,"
if any, (as defined in the respective Partnership Agreements) of the
Partnerships will be applied or distributed as provided in the applicable
Partnership Agreement from time to time from the date hereof to the Closing
Date (if the Closing Date occurs), that all regularly accruing installments of
interest or principal becoming due on the NML Renewal Note, NML Note, or Kemper
Note will be timely paid by 9 Greenway during that period, and that during that
period NML and Kemper will advance such Excess Partner Loans (as defined in the
Partnership Agreements), if any, to the respective Partnerships as may be
required by the Funding Commitment (as defined in subparagraph
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<PAGE> 18
7.1(a)) between Kemper, NML, and Nomura (as defined hereinafter) or by the
Collateral Agreement (as defined hereinafter) or as they may respectively elect
to make as authorized by the respective Partnership Agreements. If the
transactions and actions described and provided for in Section 4.1 occur, the
books of the Partnerships shall be closed as of midnight on the day immediately
preceding the Closing Date (the "PRORATION TIME"), and the closing adjustments
provided for hereinafter shall be effected between 9 Greenway and Newco as of
such Proration Time. To calculate such adjustments, an "ADJUSTMENT ACCOUNT" and
a "POST-CLOSING ADJUSTMENT ACCOUNT" shall be established into which there shall
be credited or debited amounts determined as follows:
(a) The following amounts shall be credited to the Adjustment Account:
(i) The Adjustment Account shall be credited for all amounts,
if any, of cash and cash equivalents of the Partnerships on
hand or deposited to the accounts of the respective
Partnerships in any bank as of the Proration Time,
regardless of whether such cash or cash equivalents would
constitute "Available Cash" (as defined in the Partnership
Agreements) at such time, less, however, outstanding checks
or drafts drawn by the Partnerships (or either of them) on
any of such bank accounts prior to the Closing Date which
have not cleared (or had a stop payment order issued with
respect thereto) at the Proration Time and checks or drafts
drawn by 9 Greenway on any of such bank accounts on or
within five (5) Business Days after the Closing Date to pay
Closing Expenses as provided for in subparagraph
4.2(c)(ii).
(ii) Without duplication of any amount to be credited to the
Adjustment Account pursuant to subparagraph 4.2(a)(i), the
Adjustment Account shall be credited with all amounts
remaining on deposit as of the Proration Time in all
accounts and sub-accounts maintained by LaSalle National
Bank (the "CUSTODIAN BANK") pursuant to the Cash Collateral
Account Agreement dated effective June 30, 1994, between
the Partnerships and the Custodian Bank (including, without
limitation, the Cash Collateral Account and the Debt
Service Payment Sub-Account, the Basic Carrying Costs
Sub-Account, the Releasing Sub-Account, and the Rent
Payment Sub-Account provided for in said Cash Collateral
Account Agreement) and in all accounts and sub-accounts
maintained by Texas Commerce Bank N.A. Houston (the
"COLLECTION BANK") pursuant to a Letter of Instructions
from the Partnerships to the Collection Bank dated
effective June 30, 1994 (including, without limitation, the
Collection Account and Security Deposit Account provided
for in said Letter of Instructions).
(iii) The Adjustment Account shall be credited for all amounts of
accrued, unpaid rent (including, without limitation,
expense reimbursement payable by tenants or licensees) and
other charges for services or materials provided or work
performed owing as of the Proration Time by tenants and
licensees (collectively, "EXISTING TENANTS") under then
existing leases and licenses (collectively, "EXISTING
LEASES") covering space or facilities in the Greenway
Properties at the Proration Time; provided that:
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<PAGE> 19
(a) No credit shall be made to the Adjustment Account for
any amounts of unpaid rent or expense reimbursement or
other amounts (whether represented by promissory
notes, open account, or otherwise) owing to the
Partnerships at the Proration Time from former tenants
or licensees ("FORMER TENANTS") under or in connection
with leases or licenses (collectively, "FORMER
LEASES") which have terminated prior to the Proration
Time.
(b) If the Partnerships (or either of them) hold any
promissory notes at the Proration Time from Existing
Tenants representing indebtedness for past-due rental
or license payments under Existing Leases or
representing indebtedness for advances made to such
tenants or licensees to pay for leasehold improvements
or other services or facilities in connection with
Existing Leases, all such promissory notes shall be
assigned from 9 Greenway to Newco, without recourse,
to the extent of the unpaid balance, if any, of
principal or accrued interest owing thereon on the
Closing Date. No credit to the Adjustment Account or
Post-Closing Adjustment Account shall be made for
amounts, if any, collected by Newco on those
promissory notes from Existing Tenants described in
Part I of Exhibit E to the Conveyance and Assignment
attached hereto as Schedule XIX (representing
promissory notes from Existing Tenants payable in
installments over all or part of the remaining term of
an Existing Lease to effect repayment for expenses of
tenant improvements or other expenses or charges
incurred or imposed by the applicable Partnership in
connection with such Existing Lease, in accordance
with the schedule of payment for such expenses or
charges agreed upon by the applicable Partnership and
said Existing Tenant incident to incurrence of such
expenses or imposition of such charges). However,
amounts owing at the Proration Time or becoming owing
after the Proration Time under and in connection with
those promissory notes from Existing Tenants described
in Part II of Exhibit E to such Schedule XIX
(representing indebtedness of such Existing Tenants
for past due amounts of rental or expenses or other
charges which have heretofore become due and payable
in connection with such Existing Leases) and any
additional promissory notes taken by the Partnerships
(and either of them) from Existing Tenants after the
date of this Agreement and prior to the Closing Date
for past due amounts of rental or expenses or other
charges which have theretofore become due and payable
in connection with Existing Leases (such promissory
notes described in this sentence only being herein
collectively called "TENANT PROMISSORY NOTES") shall
be credited to the Adjustment Account to the extent
they are paid to Newco and applied (as provided for in
subparagraph 4.2(a)(iii)(d)) toward payment of such
Tenant Promissory Notes within sixty (60) days after
the Proration Time or, to the extent not thus paid to
Newco within said 60-day period, shall be treated and
handled as "Past-Due Rentals" owing from Existing
Tenants in connection with the Post-Closing Adjustment
Account. It is understood, however, that the
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<PAGE> 20
Partnerships may endeavor to collect (at a discount,
if required) any or all of the Tenant Promissory Notes
held by the Partnerships prior to the Closing Date.
(c) The Parking Facilities Agreement ("SUMMIT PARKING
LICENSE") entered into effective as of December 1,
1973, between Greenway, Lamar Plaza, Greenway Plaza
Two, Ltd., and Arena Operating Co. ("ARENA") provides
for reimbursement of expenses and payment of license
fees to Greenway for parking in connection with events
held at the Summit. Under the Summit Parking License,
Arena makes monthly payments in arrears to Greenway
for estimated reimbursable expenses incurred by
Greenway in connection with parking at events held at
the Summit during the preceding month and pays
additional license fees on an annual basis for each
contract year calculated with respect to the number of
tickets issued for events conducted at the Summit
during the entire contract year, but the precise
amount of such reimbursable expenses and annual
license fees is not determined until the end of each
contract year. The current contract year under the
Summit Parking License commenced on December 23, 1995,
and will end on a date in December 1996 to be
established by the Bond Trustee for the City of
Houston bonds issued to finance the Summit and is
herein called the "CURRENT CONTRACT YEAR."
Accordingly, it is agreed that for purposes of this
subparagraph (iii):
(i) The amount of the reimbursable expenses
incurred by Greenway during the Current
Contract Year shall initially be estimated
to equal the estimated expense reimbursement
payments payable by Arena for the Current
Contract Year, and the Adjustment Account
shall initially be credited (the "INITIAL
PARKING EXPENSE CREDIT") for any accrued
unpaid estimated expense reimbursement
payments owing by Arena at the Proration Time
(regardless of whether such payments are
then due) with respect to events held at the
Summit during the Current Contract Year prior
to the Proration Time.
(ii) Additionally, the amount of license fees
which have accrued during the Current
Contract Year prior to the Proration Time
shall initially be estimated at the Closing
based on the information available on the
Closing Date as to tickets issued for Summit
events held at the Summit during the Current
Contract Year prior to the Proration Time,
and the Adjustment Account shall initially be
credited (the "INITIAL LICENSE FEE CREDIT")
for the estimated amount of such accrued
license fees for the Current Contract Year.
(d) All amounts paid to Newco from or for the account of
an Existing Tenant under or in connection with an
Existing Lease during the first sixty (60) days after
the Proration Time shall be applied first
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<PAGE> 21
toward payment of expenses of collection thereof (if
any) incurred by Newco and next toward payment of
amounts, if any, of rentals, expense reimbursement and
charges (but excluding any late charges or default
interest charged under Existing Leases with respect to
past-due rentals, expense reimbursement or charges
owing pursuant to such Existing Leases) owing by such
Existing Tenant under and in connection with such
Existing Lease as of the Proration Time (including,
without limitation, interest and principal owing on
any Tenant Promissory Note from such Existing Tenant
held by the Partnerships at the Proration Time), in
the order in which such indebtedness was incurred by
such Existing Tenant, before applying any amount of
such payment toward payment of rentals, expense
reimbursement or charges accrued or becoming owing by
such Existing Tenant to Newco after the Proration
Time. A credit shall be made to the Adjustment
Account for all amounts, if any, of accrued, unpaid
rent, expense reimbursement and other charges for
services or materials provided or work performed owing
by such Existing Tenant at the Proration Time to the
Partnerships (and either of them) which are thus paid
to Newco (less any deduction for expenses of
collection incurred by Newco) during such 60-day
period (including, without limitation, payments of
interest and principal on any Tenant Promissory Note
owing by such Existing Tenant at the Proration Time).
Amounts of rentals, expense reimbursement or charges
owing by any Existing Tenant under or in connection
with an Existing Lease as of the Proration Time
(including, without limitation, interest and principal
owing on any Tenant Promissory Note from such Existing
Tenant held by the Partnerships at the Proration Time)
which are not paid to Newco (after deducting any
expenses of collection incurred by Newco) during the
first sixty (60) days after the Proration Time are
herein collectively called "PAST-DUE RENTALS" and
shall not be credited to the Adjustment Account, but
shall be dealt with in the Post-Closing Adjustment
Account as hereinafter provided.
(iv) The Adjustment Account shall be credited for all amounts of
unpaid accrued payments owing to Greenway for heated and
chilled water sold from its central heated and chilled
water plant to other persons (excluding sales to 9
Greenway) as of the Proration Time (whether or not then
due). To calculate this credit with respect to deliveries
of heated or chilled water during the then current billing
period including the Proration Time, Greenway shall read
the meters through which the volumes and heat content of
heated or chilled water delivered to such persons are
measured at (or as near as practicable to) the Proration
Time.
(v) The Adjustment Account shall be credited with amounts equal
to all prepaid insurance premiums paid prior to the
Proration Time under all policies of insurance maintained
by the Partnerships (and either of them) attributable to
any period after the Proration Time, calculated by
allocating such prepaid insurance premiums on an equal
per-day basis over the period covered by the applicable
premium prepayment, so as to
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<PAGE> 22
include only the amounts of such prepaid insurance premiums
which are attributable to periods of time after the
Proration Time.
(vi) Amounts expended or becoming payable during the years 1996
and 1997 for costs or expenses of tenant improvements
(which have not been and are not required to be paid
directly by the tenant and are not directly reimbursable by
the tenant other than through payment of rental or
additional rental or in installments over all or
substantially all the remaining term of the applicable
lease, but including, without limitation, amounts required
to be loaned or advanced from the Landlord to any Existing
Tenant under an Existing Lease to pay or reimburse such
Existing Tenant for costs or expenses of tenant
improvements and which are repayable, with or without
interest, in installments or as additional rent over all or
substantially all the remaining term of such Existing
Lease) under or in connection with Existing Leases and
leasing commissions (including, without limitation,
"Primary Marketing Fees" or "Secondary Marketing Fees" as
defined in and which become payable pursuant to the
Marketing Agreements included in the Senterra Agreements
and, if such Senterra Agreements are terminated on the
Closing Date, also including any of such "Primary Marketing
Fees" included in the Senterra Termination Payment) and
other tenant acquisition costs (such as, for example,
moving or relocation expenses or allowances, space planning
allowances, construction documentation or planning
allowances, costs of relocating other Existing Tenants to
make space available for a new tenant, and lease buy-out or
assumption expenses associated with buying out or assuming
other leases held by a new tenant) expended or becoming
payable by the Partnerships or Newco during the years 1996
and 1997 in connection with Existing Leases are herein
called "TI AND COMMISSION EXPENSES." The Adjustment
Account shall be credited with the amount, if any, of
amounts actually expended by the Partnerships
(collectively) prior to or within five (5) Business Days
after the Closing Date for payment of TI and Commission
Expenses in connection with (a) New Leases, as hereinafter
defined, and (b) the last eighteen (18) line items relating
to amendments to the lease from 9 Greenway to Aim
Management Group (the "AIM LEASE") which are listed in
Schedule XXIII attached hereto and incorporated herein
(herein called the "AIM LEASE AMENDMENTS,"), to the extent,
if any, that such amounts expended by the Partnerships
prior to or on or within five (5) Business Days after the
Closing Date in connection with any such New Lease or Aim
Lease Amendment, as applicable, exceed the "Partnership
Share" (as hereinafter defined) of such TI and Commission
Expenses. It is stipulated that the "Aim Lease
Amendments," as used herein, shall not include the first
twelve (12) line items relating to amendments to the Aim
Lease which are listed in Schedule XXIII or the commissions
or tenant improvement costs with respect thereto. It is
further stipulated that the numbers shown in Schedule XXIII
as to commissions or tenant improvement costs with respect
to the last eighteen (18) line items relating to amendments
to the Aim Lease are, in numerous instances, merely
estimates subject to change or correction. "NEW LEASES,"
as used herein, means, collectively, those new leases or
licenses or amendments or extensions of existing leases or
licenses covering property in the Greenway Properties
executed after April 19, 1996, and prior to the date
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<PAGE> 23
of this Agreement which are described in Schedule XXXII
hereto and any additional new leases or licenses or
amendments or extensions of existing leases or licenses
covering property in the Greenway Properties which are
executed by the Partnerships (and either of them) after the
date of this Agreement and prior to the Closing Date with
the prior written approval of CRE. The "PARTNERSHIP
SHARE," if any, of TI and Commission Expenses under a
particular New Lease or particular Aim Lease Amendment, as
applicable, shall be a fractional share (if any) of the
total TI and Commission Expenses required to be expended
under and in connection with such New Lease or Aim Lease
Amendment determined by multiplying such total TI and
Commission Expenses by a fraction having as its denominator
the amount of rental which is provided to accrue under such
New Lease or Aim Lease Amendment attributable to the total
days remaining in the term of such New Lease or in the term
of the Aim Lease Amendment as to the premises covered by
such New Lease or such Aim Lease Amendment (excluding any
optional renewal term) as of the date (the "RENTAL
COMMENCEMENT DATE") when the tenant is required to commence
payment of rental for such premises covered by such New
Lease or by such Aim Lease Amendment, as applicable (which
"Rental Commencement Date" shall be deemed to be the date
of commencement of an extension of the term of the lease as
it previously existed, in the case of a New Lease which
amends an existing lease by extending the term thereof),
and having as its numerator the amount (if any) of rental
which is provided to accrue under such New Lease or Aim
Lease Amendment attributable to the days, if any, ensuing
after the Rental Commencement Date down to the Proration
Time. Accordingly, if the Rental Commencement Date under a
New Lease or Aim Lease Amendment occurs on or after the
Proration Time, the "Partnership Share" of TI and
Commission Expenses in connection with such particular New
Lease or Aim Lease Amendment will be zero (0). If the
exact amount of the total TI and Commission Expenses
required to be expended in connection with a particular New
Lease or Aim Lease Amendment cannot be determined within
sixty (60) days after the Proration Date, and if the
Partnership Share of such TI and Commission Expenses is
more than zero (0), the credit (if any) to be made to the
Adjustment Account pursuant to this subparagraph shall be
based on Newco's good faith estimate of such total TI and
Commission Expenses and is herein called the "ESTIMATED TI
AND COMMISSION EXPENSES CREDIT."
(vii) If any such excess exists, the Adjustment Account shall be
credited with the amount, if any, of the excess above a
total of $4,959,180 which is actually expended by the
Partnerships (collectively) during the period from January
1, 1996, to the Proration Time in payment of costs and
expenses of capital improvements described in the 1996
Capital Budgets of Greenway and 9 Greenway attached hereto
and incorporated herein as Schedule XXIV and Schedule XXV
(excluding tenant improvements made by the Partnerships
pursuant to leases and excluding leasing commissions paid
by the Partnerships in connection with leases) and costs
and expenses of any other capital improvements to the
Greenway Properties made during such period which are
required to be capitalized in accordance with generally
accepted accounting principles (excluding tenant
improvements made by the Partnerships pursuant to leases,
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<PAGE> 24
leasing commissions paid by the Partnerships in connection
with leases, and costs and expenses of repairing, restoring
or replacing the damage caused by any Casualty Loss
occurring on or after the date of this Agreement and prior
to the Proration Time).
(viii) If any such prepayments exist, the Adjustment Account shall
be credited with amounts equal to all prepaid fees or
expenses paid by the Partnerships as of the Proration Time
to (a) the "Servicer" pursuant to the "Pooling and
Servicing Agreement" provided for in the Nomura Deed of
Trust (b) the "Beneficiary" pursuant to Section 6.5 of the
Nomura Deed of Trust, (c) LaSalle National Bank pursuant to
the Cash Collateral Account Agreement provided for in the
Nomura Deed of Trust, and (d) the "Property Collection
Account Bank" pursuant to or in connection with the "Letter
of Instructions" provided for in the Nomura Deed of Trust,
allocated on an equal per-day basis, if applicable, with
respect to any such prepayments which cover services to be
provided or performed over a fixed period including and
extending beyond the Proration Time, so as to include only
the amounts of such prepayments which are attributable to
periods of time after the Proration Time.
(ix) The Adjustment Account shall be credited (without
duplication of any of the foregoing credits) with amounts
equal to all prepaid expenses and charges paid by the
respective Partnerships prior to the Proration Time for
services or materials to be provided or work to be
performed after the Proration Time pursuant to the
"Assigned Contracts" (as defined in the Newco Conveyance to
be delivered on the Closing Date), allocated on an equal
per-day basis, if applicable, with respect to any such
prepayments which cover services or materials or work to be
provided or performed over a fixed period including and
extending beyond the Proration Time, so as to include only
the amounts of such prepayments which are attributable to
periods of time after the Proration Time.
(x) In each instance, if a Casualty Loss (as defined in
paragraph 13.1(d)) occurs between the date of this
Agreement and the Closing Date, and the Closing occurs, a
credit shall be entered in the Adjustment Account in an
amount (if any) equal to the proceeds (if any) of fire and
casualty insurance covering such Casualty Loss which are
received by Newco after the Closing pursuant to the
assignment of the right to receive such insurance proceeds
under the Newco Conveyance, to the extent of the lesser of
(a) the amount (if any) of such insurance proceeds received
by Newco less any costs of collection thereof incurred by
Newco and not paid or reimbursed to Newco by the insurer or
underwriter under such insurance policy or policies, or (b)
an amount (if any) equal to (I) the actual costs and
expenses of repairing, restoring or replacing the damage
caused by such Casualty Loss which have been paid or
incurred by the Partnerships (or either of them) prior to
the Proration Time (if any), minus (II) the deductible or
retention amount of the damages from such Casualty Loss
which is excluded from coverage under the terms of the fire
and casualty insurance policy or policies maintained by the
Partnership or Partnerships who owned the buildings or
improvements which were damaged or destroyed by such
Casualty Loss. If the exact amount of the credit, if any,
required to be made to the Adjustment
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<PAGE> 25
Account pursuant to this subparagraph 4.2(a)(x) cannot be
determined at the time of completion of the Adjustment
Account, the amount of the credit, if any, to be made to
the Adjustment Account pursuant to this subparagraph
4.2(a)(x) shall be based on the good faith estimate of
Newco as to costs and expenses of repairing, restoring or
replacing the damage covered by the applicable Casualty
Loss, and a corrective credit or debit entry shall be made
in the Post-Closing Adjustment Account (pursuant to
subparagraph 4.2(d)(vi) or 4.2(e)(vi), as applicable) when
the exact amount, if any, of the credit provided for in
this subparagraph 4.2(a)(x) is determined.
(b) The following amounts shall be debited to the Adjustment Account (as
defined in Section 4.2):
(i) If any such excess exists, the Adjustment Account shall be
debited with the amount, if any, of the excess of (a)
$4,959,180, above (b) the total amount which is actually
expended by the Partnerships (collectively) during the
period from January 1, 1996, to the Proration Time in
payment of costs and expenses of capital improvements
described in the 1996 Capital Budgets of Greenway and 9
Greenway attached hereto and incorporated herein as
Schedule XXIV and Schedule XXV (excluding tenant
improvements made by the Partnerships pursuant to leases
and excluding leasing commissions paid by the Partnerships
in connection with leases) and costs and expenses of any
other capital improvements to the Greenway Properties made
during such period which are required to be capitalized in
accordance with generally accepted accounting principles
(excluding tenant improvements made by the Partnerships
pursuant to leases, leasing commissions paid by the
Partnerships in connection with leases, and costs and
expenses of repairing, restoring or replacing the damage
caused by any Casualty Loss occurring on or after the date
of this Agreement and prior to the Proration Time).
(ii) The Adjustment Account shall be debited for all amounts of
prepaid rent or license payments (including also and
without limitation, refundable security deposits and
prepayments or overpayments of expense reimbursement
acknowledged by the Partnerships to be repayable to the
tenant) made by Existing Tenants under Existing Leases as
of the Proration Time, calculated, if applicable, on a
per-day basis with respect to the period covered by any
such prepayment so as to include only the amounts of such
prepayments which are attributable to periods of time after
the Proration Time, and for all amounts of refundable
security deposits or similar refundable amounts paid to the
Partnerships for building access cards, garage access
cards, or parking permits in the parking garages included
in the Greenway Properties which remain outstanding at the
Proration Time.
(iii) The Adjustment Account shall be debited for all amounts of
unpaid real estate, personal property, and ad valorem taxes
(collectively, "AD VALOREM TAXES") imposed upon the
Greenway Properties owned or leased by the respective
Partnerships which have accrued to the Proration Time;
provided in this regard that Ad Valorem Taxes for the year
1996 shall initially be estimated on the basis of the same
tax rates per $100
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<PAGE> 26
valuation imposed on the Greenway Properties by the various
Ad Valorem Tax authorities for the year 1995 applied to the
appraised value of the Greenway Properties for Ad Valorem
Tax purposes which has been established by the Harris
County Appraisal District for the year 1996, and a debit
(the "INITIAL TAX DEBIT") shall initially be made in the
Adjustment Account for a pro rata share (calculated on a
per-day basis) of such estimated Ad Valorem Taxes for the
year 1996 which have accrued to the Proration Time.
(iv) The Adjustment Account shall be debited for all amounts of
accrued unpaid charges for water, electricity, sewer
service, gas, telephone and other utilities for the
Greenway Properties normally billed to and paid by the
Partnerships (and not directly billed to or directly paid
by tenants) which have accrued to the Proration Time,
calculated on a per-day basis with respect to any
applicable then current billing period during which the
Proration Time occurs so as to include only the amounts of
such accrued utility charges for such current billing
period which are attributable to the days of such billing
period which have elapsed down to the Proration Time, but
not including charges for heated and chilled water owing
from 9 Greenway to Greenway.
(v) The Adjustment Account shall be debited for all amounts of
accrued unpaid charges for management and services with
respect to the Greenway Properties under management or
service contracts of the Partnerships which have accrued to
the Proration Time pursuant to "Assigned Contracts" (as
defined in the Newco Conveyance to be delivered on the
Closing Date). Unless such management or services
contracts are terminated at the Proration Time, the unpaid
charges accrued thereunder to the Proration Time shall be
calculated on a per-day basis with respect to any
applicable then current billing period during which the
Proration Time occurs so as to include only the amounts of
such accrued charges for management and services for such
current billing period which are attributable to the days
of such billing period which have elapsed down to the
Proration Time.
(vi) The Adjustment Account shall be debited for all amounts of
accrued unpaid interest and all other amounts, if any
(except principal and those amounts covered by subparagraph
4.2(b)(vii)) owing on the June 30, 1994, promissory note
from the Partnerships to Nomura Asset Capital Corporation
("NOMURA") in the original principal amount of $115,000,000
(described in each of the Partnership Agreements as, and
herein called, the "NOMURA NOTE") at the Proration Time,
calculated down to the Proration Time.
(vii) If applicable, the Adjustment Account shall be debited with
amounts equal to all accrued unpaid fees or expenses owing
by the Partnerships as of the Proration Time to (a) the
"Servicer" pursuant to the "Pooling and Servicing
Agreement" provided for in the Nomura Deed of Trust (b) the
"Beneficiary" pursuant to Section 6.5 of the Nomura Deed of
Trust, (c) LaSalle National Bank pursuant to the Cash
Collateral Account Agreement provided for in the Nomura
Deed of Trust, and (d) the "Property Collection Account
Bank" pursuant to or in connection with
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<PAGE> 27
the "Letter of Instructions" provided for in the Nomura
Deed of Trust, allocated on an equal per-day basis, if
applicable, with respect to any such fees which cover
services to be provided or performed over a fixed period
including the Proration Time, so as to include only the
amounts of such accrued unpaid fees which are attributable
to periods of time prior to the Proration Time.
(viii) The Adjustment Account shall be debited for amounts of TI
and Commission Expenses paid by Newco in connection with
any New Lease or Aim Lease Amendment during the first sixty
(60) days after the Proration Time to the extent, if any,
that such amounts, when added to the TI and Commission
Expenses (if any) paid by the Partnerships prior to or
within five (5) Business Days after the Closing Date in
connection with such New Lease or Aim Lease Amendment, are
less than the Partnership Share of the total TI and
Commission Expenses required to be expended under and in
connection with such particular Aim Lease Amendment or New
Lease, as applicable. However, if the total amount of the
TI and Commission Expenses required to be expended in
connection with a particular New Lease or Aim Lease
Amendment cannot be determined or is not paid within sixty
(60) days after the Proration Date, and if the Partnership
Share of such TI and Commission Expenses is more than zero
(0), the debit (if any) to be made to the Adjustment
Account pursuant to this subparagraph shall be based on
Newco's good faith estimate of such total TI and Commission
Expenses and is herein called the "ESTIMATED TI AND
COMMISSION EXPENSES DEBIT." All amounts of TI and
Commission Expenses in connection with New Leases and the
Aim Lease Amendments in excess of the Partnership Share
thereof, all amounts of TI and Commission Expenses becoming
due and payable after the Proration Time in connection with
all other Existing Leases other than Incurred Marketing
Fees and "Initial Tenant Improvement Expenses" (as
hereinafter defined), and all other costs or expenses of
tenant improvements (which have not been and are not
required to be paid directly by the tenant and are not
directly reimbursable by the tenant) under or in connection
with Existing Leases becoming payable after December 31,
1997, and all leasing commissions becoming payable after
December 31, 1997, in connection with Existing Leases shall
be included in the Assumed Obligations and shall not be
debited to the Adjustment Account or Post-Closing
Adjustment Account. The term "INITIAL TENANT IMPROVEMENT
EXPENSES" means and includes costs and expenses of tenant
improvements (which have not been and are not required to
be paid directly by the tenant and are not directly
reimbursable by the tenant) which the Partnerships (and
either of them) are obligated to provide under and in
connection with Existing Leases other than New Leases or
Aim Lease Amendments in order to prepare the leased
premises for initial occupancy or use by the Existing
Tenant, but does not include costs or expenses of
additional tenant improvements or replacement or
refurbishment of tenant improvements which the Partnerships
(or either of them) may become obligated to provide in the
future after the leased premises have been prepared for
initial occupancy or use by the Existing Tenant.
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<PAGE> 28
(ix) If the Senterra Agreements are terminated on the Closing
Date as provided for in paragraph 14.2(e), then (a) a debit
in the amount of $70,000 shall be entered in the Adjustment
Account (representing an agreed allowance to Newco with
respect to "Primary Marketing Fees" which would have become
payable after the Proration Time pursuant to the Marketing
Agreements included in the Senterra Agreements by virtue of
the execution and delivery by all parties thereto prior to
the Proration Time of "Recasting Agreements" [as defined in
said respective Marketing Agreements], no amount of which
"Primary Marketing Fees" are included in the Senterra
Termination Payment), and (b) a debit shall be entered in
the Adjustment Account equal to the future cost to Senterra
(based on annual salaries of the applicable employees as of
the Closing Date) of accrued unused vacation time and sick
leave at the Proration Time of employees of Senterra who
are assigned full time to the management of the Greenway
Properties (the "SUBJECT SENTERRA EMPLOYEES"), less the
cost (based on annual salaries of the applicable employees
as of the Closing Date) of vacation time or sick leave
taken by Subject Senterra Employees during the year 1996
prior to the Proration Time in excess of the vacation time
or sick leave accrued to such Subject Senterra Employees
down to the Proration Time.
(x) In each instance, if a Casualty Loss (as defined in
paragraph 13.1(d) occurs between the date of this Agreement
and the Closing Date and the Closing occurs, a debit shall
be entered in the Adjustment Account in an amount (if any)
equal to the lesser of (i) the actual costs and expenses of
repairing, restoring or replacing the damage caused by such
Casualty Loss which have not been paid or incurred by the
Partnerships (or either of them) prior to the Proration
Time (if any), or (ii) an amount (but not less than zero)
equal to (a) the deductible or retention amount of the
damages from such Casualty Loss which is excluded from
coverage under the terms of the fire and casualty insurance
policy or policies maintained by the Partnership or
Partnerships who owned the buildings or improvements which
were damaged or destroyed by such Casualty Loss, minus (b)
the costs and expenses of repairing, restoring or replacing
the damage caused by such Casualty Loss which have been
paid or incurred by the Partnerships (or either of them)
prior to the Proration Time. If the exact amount of the
debit, if any, required to be made to the Adjustment
Account pursuant to this subparagraph 4.2(b)(x) cannot be
determined at the time of completion of the Adjustment
Account, the amount of the debit, if any, to be made to the
Adjustment Account pursuant to this subparagraph 4.2(b)(x)
shall be based on the good faith estimate of Newco as to
costs and expenses of repairing, restoring or replacing the
damage covered by the applicable Casualty Loss, and a
corrective credit or debit entry shall be made in the
Post-Closing Adjustment Account (pursuant to subparagraph
4.2(d)(vi) or 4.2(e)(vi), as applicable) when the exact
amount, if any, of the credit provided for in this
subparagraph 4.2(a)(x) is determined.
(xi) Without duplication of any amount provided to be debited to
the Adjustment Account pursuant to any of the foregoing
subparagraphs of this paragraph 4.2(b), the Adjustment
Account shall be debited for (a) all unpaid operating
expenses (such as accounting and legal fees), equipment
22
<PAGE> 29
rental and other amounts owing under "Equipment Leases" (as
defined in the Newco Conveyance), leasing commissions, and
expenses of repair, construction, maintenance or operation
of the Greenway Properties (including only such expenses
for services performed or materials or equipment or other
goods delivered prior to the Proration Time) owing by the
Partnerships or either of them pursuant to "Assigned
Contracts" (as defined in the Newco Conveyance to be
delivered on the Closing Date) and which have accrued to
the Proration Time, (b) any refunds of excess rental
payments or expense reimbursement payments or charges made
by Existing Tenants which are acknowledged by the
Partnerships to be owing by the Partnerships (and either of
them) at the Proration Time, (c) any Senterra Operating
Charges (as defined in paragraph 14.2(e)) remaining unpaid
at the Proration Time and which are not paid by 9 Greenway
on or within five (5) Business Days after the Closing Date
as provided for in subparagraph 4.2(c)(ii), and (d) any
other "Outstanding Indebtedness" (as hereinafter defined)
to third persons owing by the Partnerships (and either of
them) at the Proration Time;
provided, however, that none of the following amounts shall be
debited to the Adjustment Account (nor shall any of the Greenway
Parties [as defined in Section 11.1] have any liability to Newco for
payment thereof):
(I) $115,000,000 of unpaid principal owing on the Nomura Note
and $91,000,000 of unpaid principal and accrued unpaid
interest owing on the NML Renewal Note, the NML Note, and
the Kemper Note at the Proration Time;
(II) any unpaid TI and Commission Expenses owing at the
Proration Time in connection with an Aim Lease Amendment or
a New Lease, to the extent, if any, that such unpaid TI and
Commission Expenses, when added to the TI and Commission
Expenses (if any) paid by the Partnerships prior to the
Proration Time or on or within five (5) Business Days after
the Closing Date in connection with such Aim Lease
Amendment or New Lease, exceed the Partnership Share (if
any) of the total TI and Commission Expenses required to be
expended under and in connection with such particular Aim
Lease Amendment or New Lease, as applicable; provided that
if the exact amount of the total TI and Commission Expenses
required to be expended in connection with a particular New
Lease or Aim Lease Amendment cannot be determined within
sixty (60) days after the Proration Date, and if an
Estimated TI and Commission Expenses Debit is made to the
Adjustment Account pursuant to subparagraph 4.2(b)(viii),
any excess of such Estimated TI and Commission Expenses
Debit above the limitation specified in this subparagraph
shall be corrected by a credit to the Post-Closing
Adjustment Account pursuant to subparagraph 4.2(d)(i);
(III) any unpaid TI and Commission Expenses which have not become
due and payable prior to the Proration Time in connection
with any Existing Leases other than and except New Leases
or the Aim Lease Amendments, and any costs or expenses of
tenant improvements to be made under or in connection with
Existing Leases which are not due and payable during the
year 1996 or during the year 1997 or any leasing
commissions to
23
<PAGE> 30
become payable in connection with Existing Leases which are
not due and payable during the year 1996 or during the year
1997; provided that:
(A) any "Primary Marketing Fees" (as defined in the two
respective Marketing Agreements included in the
Senterra Agreements), if any, which are not paid by 9
Greenway on or during the five (5) Business Days next
following the Closing Date as provided for in
subparagraph 4.2(c)(ii) and which are included in the
Senterra Termination Payment (as hereinafter defined),
except and excluding any such "Primary Marketing Fees"
payable with respect to any New Leases or Aim Lease
Amendments, are herein called "INCURRED MARKETING
FEES" and shall be included in the Outstanding
Indebtedness of the Partnerships to the extent, if
any, that such Incurred Marketing Fees become due and
payable and are paid by Newco during the sixty (60)
days next following the Closing Date and shall be
debited to the Post-Closing Adjustment Account as
provided for in subparagraph 4.2(e)(viii) to the
extent, if any, that such Incurred Marketing Fees
become due and payable and are paid by Newco after
expiration of the sixty (60) days next following the
Closing Date; and
(B) any Initial Tenant Improvement Expenses which are not
paid by 9 Greenway on or during the five (5) Business
Days next following the Closing Date as provided for
in subparagraph 4.2(c)(ii) shall be included in the
Outstanding Indebtedness of the Partnerships to the
extent, if any, that such Initial Tenant Improvement
Expenses become due and payable and are paid by Newco
during the sixty (60) days next following the Closing
Date and shall be debited to the Post-Closing
Adjustment Account as provided for in subparagraph
4.2(e)(ix) to the extent, if any, that such Initial
Tenant Improvement Expenses become due and payable and
are paid by Newco after expiration of the sixty (60)
days next following the Closing Date;
(IV) any unpaid (at the Proration Time) costs or expenses of
capital improvements (other than tenant improvements or
leasing commissions) provided for in the 1996 Capital
Budgets attached hereto as Schedule XXIV and Schedule XXV
or otherwise required to be capitalized in accordance with
generally accepted accounting principles made to the
Greenway Properties by either of the Partnerships after
January 1, 1996 (but not including costs and expenses of
repairing, restoring or replacing the damage caused by any
Casualty Loss occurring on or after the date of this
Agreement and prior to the Proration Time);
(V) any liability or obligation of the Partnerships (or either
of them) under applicable statutes, ordinances or
regulations to effect, perform or complete remediation,
removal or other curative action with respect to hazardous
or toxic substances or environmental hazards or conditions
present in or around or existing in connection with the
Greenway Properties as of the Proration Time;
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<PAGE> 31
(VI) any liability or obligation of the Partnerships (or either
of them) under applicable statutes, ordinances or
regulations to make changes, repairs or additions with
respect to the Greenway Properties or any improvements
thereon in order to comply with requirements of such
statutes, ordinances or regulations as of the Proration
Time;
(VII) any "Disputed Claim" (as hereinafter defined in paragraph
4.2(c)); and
(VIII) any obligation, indebtedness or liability of the
Partnerships (and either of them) which is included in the
"Retained Obligations" (as hereinafter defined in
subparagraph 4.2(c)(III)).
(c) As promptly as practicable after the Closing Date, and in any event
within seventy-five (75) days thereafter, SPC, as general partner of
Newco, will cause Newco to complete preparation of the Adjustment
Account and to provide a detailed statement of the Adjustment Account
including all credits and debits to such Adjustment Account to NML
and Kemper (as assignees of 9 Greenway as provided for in Section
5.1). NML and Kemper and their representatives shall be provided
access, at the expense of NML and Kemper, upon request at any time
upon reasonable notice during normal business hours to all books and
records of Greenway, 9 Greenway and Newco relevant to credits or
debits in the Adjustment Account. NML and Kemper shall endeavor in
good faith to minimize any disruption to the business and operations
of Newco and its property manager incident to NML's and Kemper's
inspections of such books and records. The "OUTSTANDING
INDEBTEDNESS" of the Partnerships (and each of them) as of the
Proration Time shall include:
(i) the obligations and liabilities specifically described in
subparagraphs (ii) through (viii), both inclusive, and
subparagraph (xi) of paragraph 4.2(b) as of the Proration
Time;
(ii) any Closing Expenses remaining unpaid at the Proration
Time; provided that, to the extent 9 Greenway has funds
available on the Closing Date in bank checking accounts of
the Partnerships which are permitted to be expended for
such purpose under the terms of the Nomura Deed of Trust, 9
Greenway will issue (and shall be entitled to issue) checks
or drafts drawn on such bank checking accounts on and
during a period of five (5) Business Days after the Closing
Date to pay Closing Expenses, TI and Commission Expenses in
connection with New Leases and Aim Lease Amendments which
are or become due and payable within five (5) Business Days
after the Closing Date, any amounts of the Senterra
Termination Payment which are or become due and payable
within five (5) Business Days after the Closing Date, and
Initial Tenant Improvement Expenses which are or become due
and payable within five (5) Business Days after the Closing
Date (to the extent that the amount of such Closing
Expenses, TI and Commission Expenses, Senterra Termination
Payment, or Initial Tenant Improvement Expenses can be
determined during such period); and the amounts of Closing
Expenses, TI and Commission Expenses, Senterra Termination
Payment and Initial Tenant Improvement Expenses thus paid
by 9 Greenway shall not be included in the "Outstanding
Indebtedness" of the Partnerships;
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<PAGE> 32
(iii) Incurred Marketing Fees and Initial Tenant Improvement
Expenses to the extent provided in subparagraphs (III)(A)
and (III)(B), respectively, of the proviso at the end of
paragraph 4.2(b); and
(iv) all other unpaid liabilities and indebtedness of the
Partnerships and either of them incurred or accrued prior
to the Proration Time and owing to (a) tenants and
licensees under and in connection with "Assigned Leases"
covering Greenway Properties (as defined in the Newco
Conveyance) and (b) third party contractors under and in
connection with "Assigned Contracts" (as defined in the
Newco Conveyance);
provided that "Outstanding Indebtedness" shall not include:
(I) any of the obligations or liabilities specifically
described in subparagraphs (I) through (VI), both
inclusive, of the proviso at the end of paragraph 4.2(b),
except as otherwise expressly provided in such
subparagraphs;
(II) any obligations or liabilities of the Partnerships (and
either of them) arising under "Assigned Leases" or
"Assigned Contracts" (as defined in the Newco Conveyance)
which are attributable to or payable with respect to any
period after the Proration Time or are or become payable
for services to be rendered or goods to be provided after
the Proration Time; or
(III) any obligations, indebtedness or liabilities (herein
collectively called "RETAINED OBLIGATIONS") of the
Partnerships (and either of them) to any person or persons
(a) for tort claims for damage to or destruction of the
property of any person or persons or injury to or death of
any person or persons occurring prior to the Proration Time
or any other tort claims for alleged wrongdoing or acts or
omissions occurring prior to the Proration Time (whether
known or unknown or asserted or unasserted at or prior to
the Proration Time), (b) arising under or in connection
with any contract or agreement of the Partnerships (and
either of them) which is not an "Assigned Contract" or
"Assigned Lease"(as defined in the Newco Conveyance), (c)
arising under or in connection with any Former Lease, (d)
for sales or use taxes owing with respect to transactions
occurring prior to the Proration Time to the extent that
such sales or use taxes are not a part of costs, expenses
or charges for goods or services which are required to be
credited or debited to the Adjustment Account or
Post-Closing Adjustment Account pursuant to paragraph
4.2(a), paragraph 4.2(b), paragraph 4.2(d), or paragraph
4.2(e), and (e) any other obligation, indebtedness or
liability of the Partnerships (and either of them) which is
not included in the definition of "Assumed Obligations" set
forth in subparagraphs 3.2(a) through 3.2(k), both
inclusive, of the Newco Conveyance attached hereto as
Schedule XIX.
NML and Kemper and the general partners of 9 Greenway shall in good
faith direct Senterra to provide SPC, NML and Kemper all information
known to Senterra with respect to all Outstanding Indebtedness to
assist in preparation of the Adjustment Account, including
information as to any claims of third persons against either
Partnership which are disputed by the Partnership but would be
"Outstanding Indebtedness" if such disputed claim were valid. NML
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<PAGE> 33
and Kemper shall specify those claims (or amounts of claims) of third
parties which are disclosed to SPC which, if valid, would constitute
Outstanding Indebtedness but which are disputed by Greenway or 9
Greenway; and the claims, or amounts of claims, thus specified by NML
and Kemper shall constitute "DISPUTED CLAIMS" or a "DISPUTED CLAIM"
and shall not be debited to the Adjustment Account. Additionally,
any amount or claim of Outstanding Indebtedness existing as of the
Proration Time (whether or not theretofore asserted) which is unknown
or is otherwise not disclosed to SPC and not debited to the
Adjustment Account shall be deemed to be a "Disputed Claim." Within
five (5) Business Days after completion of the Adjustment Account,
SPC, as general partner, will cause Newco to pay to NML and Kemper
(one-half each), as assignees of 9 Greenway, by wire transfer of
immediately available funds to such account or accounts as may be
directed by NML and Kemper, the amount, if any, by which the total of
the credits to the Adjustment Account exceeds the total of the debits
to the Adjustment Account, plus an amount equal to interest on such
excess calculated at the rate of 6% per annum from the Closing Date
to the date of payment thereof and, if payment is not made on or
before the date when such payment is due under the foregoing
provisions hereof, plus an additional amount equal to additional
interest on such excess calculated at the rate of 6% per annum from
the date when such payment is due under the foregoing provisions
hereof to the date of payment thereof; or, if applicable, 9 Greenway
will, within five (5) Business Days after receipt of the statement of
the Adjustment Account by NML and Kemper, pay (with funds to be
provided by NML and Kemper, one-half each, pursuant to Section 5.1)
to Newco, by wire transfer of immediately available funds to such
account as may be directed by Newco, the amount, if any, by which the
total of the debits to the Adjustment Account exceeds the total of
the credits to the Adjustment Account, plus an amount equal to
interest on such excess calculated at the rate of 6% per annum from
the Closing Date to the date of payment thereof and, if payment is
not made on or before the date when such payment is due under the
foregoing provisions hereof, plus an additional amount equal to
additional interest on such excess calculated at the rate of 6% per
annum from the date when such payment is due under the foregoing
provisions hereof to the date of payment thereof; provided that if
one only of NML or Kemper fails to pay or provide funds to 9 Greenway
to pay its one-half share of such excess by the date on which payment
thereof is due, then only the one of NML or Kemper who thus fails to
pay or provide its one-half share of such payment shall be
responsible for payment of additional interest accruing by reason of
failure to make such payment by the due date; and provided further
that if disagreement exists between Newco, on the one hand, and NML
and Kemper, on the other hand, as to the amount (or propriety) of any
credit or debit to the Adjustment Account, the payment to be made
pursuant to this sentence shall be calculated without inclusion of
the disputed amount of the applicable credit or debit (whether one or
more). Within five (5) Business Days after final resolution of any
dispute as to the amount (or propriety) of any credit or debit to the
Adjustment Account, 9 Greenway (with funds provided one-half each by
NML and Kemper) or Newco, as applicable, shall pay such amount as is
determined to be owing by virtue of resolution of such dispute, plus
interest thereon calculated at the rate of 6% per annum from the
Closing Date to the date of payment thereof and, if payment is not
made on or before the date when such payment is due under the
foregoing provisions hereof, plus an additional amount equal to
additional interest on such amount calculated at the rate of 6%
per annum from the date when such
27
<PAGE> 34
payment is due under the foregoing provisions hereof to the date of
payment thereof; provided that if one only of NML or Kemper fails to
pay or provide funds to 9 Greenway to pay its one-half share of an
amount determined to be owing to Newco by the date on which payment
thereof is due, then only the one of NML or Kemper who thus fails to
pay or provide its one-half share of such payment shall be
responsible for payment of interest accruing by reason of failure to
make such payment by the due date. As provided in the Newco
Partnership Agreement, CRE shall contribute to Newco such amounts as
are required to provide funds to enable Newco to make any payment
becoming due to NML and Kemper (as assignees of 9 Greenway) pursuant
to this paragraph; and CRE's agreement to provide such funds shall
inure to the benefit of and be enforceable by NML and Kemper.
Likewise, as provided in the Redemption Agreement, NML and Kemper
(severally and to the extent of one-half each) shall provide funds to
enable 9 Greenway to make any payment becoming due to Newco pursuant
to this paragraph, or at their election shall make any such payment
directly to Newco; and the agreement of NML and Kemper to provide or
pay such funds shall inure to the benefit of and be enforceable by
Newco.
(d) The following amounts shall be credited to the Post-Closing
Adjustment Account:
(i) If an Estimated TI and Commission Expenses Debit is made to
the Adjustment Account in connection with any New Lease
or Aim Lease Amendment pursuant to subparagraph
4.2(b)(viii), and if the amount of such Estimated TI
and Commission Expenses Debit exceeds the debit to
the Adjustment Account which would have been required
to be made under subparagraph 4.2(b)(viii) if the actual
total TI and Commission Expenses required to be expended
in connection with the applicable New Lease or Aim Lease
Amendment had been paid within sixty (60) days after the
Closing Date and known at the time of preparation of the
Adjustment Account, a credit shall be entered in the
Post-Closing Adjustment Account for the amount
of such excess during the month in which the total
amount of such TI and Commission Expenses is first
determined. Conversely, if an Estimated TI and
Commission Expenses Credit is made to the Adjustment
Account in connection with any New Lease or Aim Lease
Amendment pursuant to subparagraph 4.2(a)(vi), and if the
amount of such Estimated TI and Commission Expenses
Credit is less than the credit to the Adjustment Account
which would have been required to be made under
subparagraph 4.2(a)(vi) if the actual total TI and
Commission Expenses required to be expended in connection
with the applicable New Lease or Aim Lease Amendment had
been paid within sixty (60) days after the Closing Date
and known at the time of preparation of the Adjustment
Account, a credit shall be entered in the Post-Closing
Adjustment Account for the amount of such deficiency
during the month in which the total amount of such TI
and Commission Expenses is first determined.
(ii) Promptly after the end of the Current Contract Year under
the Summit Parking License, Newco shall calculate the
exact reimbursable expenses for parking at Summit
events conducted prior to the Proration Time during
the Current Contract Year (the "FINAL PARKING EXPENSE
CREDIT"). Newco will promptly provide such information to
NML and Kemper. If
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<PAGE> 35
the Final Parking Expense Credit exceeds the Initial
Parking Expense Credit entered in the Adjustment Account
pursuant to subparagraph 4.2(a)(iii)(c)(i), the amount of
such excess shall be credited to the Post-Closing
Adjustment Account.
(iii) Promptly after Newco receives the information from
Arena required to calculate the total license fees accrued
under the Summit Parking License for the Current Contract
Year, Newco shall calculate the pro rata share of such
license fees for the entire Current Contract Year allocated
on an equal per-day basis attributable to the days of the
Current Contract Year elapsed to the Proration Time (the
"FINAL LICENSE FEE CREDIT") and will provide such
information to NML and Kemper. If the Final License Fee
Credit exceeds the Initial License Fee Credit entered in
the Adjustment Account pursuant to subparagraph
4.2(a)(iii)(b)(iii), the amount of such excess shall be
credited to the Post-Closing Adjustment Account.
(iv) If, as and when payments are received by Newco which are
required (as hereinafter provided in this subparagraph
(iv)) to be applied toward payment of any of the Past-Due
Rentals referred to in subparagraph 4.2(a)(iii)(d), such
amounts, less any direct expenses of collection incurred by
Newco, shall be credited to the Post-Closing Adjustment
Account. Upon request of NML and Kemper at any time after
the termination of a particular Existing Lease, if any
amount of Past-Due Rentals remain owing in connection with
such Existing Lease, Newco shall assign to NML and Kemper
(one-half each) or their designee or designees, without
recourse, all of Newco's interest in all unpaid amounts, if
any, of such Past-Due Rentals claim then remaining
outstanding and shall, if applicable, endorse without
recourse and deliver to NML or Kemper or their designee as
specified by NML and Kemper any promissory note
representing any amount of such Past-Due Rentals claim.
Newco shall have no duty to undertake to collect and no
liability to 9 Greenway (or NML or Kemper as assignees of 9
Greenway) for failure to collect any amount of any Past-Due
Rentals; and Newco shall be entitled to apply amounts
received from an Existing Tenant under an Existing Lease
later than sixty (60) days after the Proration Time toward
payment of amounts then due and owing under or in
connection with such Existing Lease other than Past-Due
Rentals, so that payments received from or for the account
of an Existing Tenant under an Existing Lease after the
expiration of sixty (60) days after the Proration Time
shall be applied toward payment of Past-Due Rentals owing
by such Existing Tenant only to the extent, if any, that
such payments exceed amounts of rental or other charges
then due and owing from such Existing Tenant to Newco in
connection with such Existing Lease which do not constitute
Past-Due Rentals and amounts required to reimburse any
expenses of collection incurred by Newco.
(v) Promptly after Newco receives all information required to
calculate the exact amount of the total Ad Valorem Taxes
actually imposed upon the Greenway Properties and paid by
Newco for the year 1996, Newco shall calculate the pro rata
share of such Ad Valorem Taxes for the entire 1996 year
allocated on an equal per-day basis attributable to the
days of
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the 1996 year elapsed to the Proration Time (the "FINAL
TAX DEBIT") and will provide such information to NML and
Kemper. If the Final Tax Debit is less than the Initial
Tax Debit entered in the Adjustment Account pursuant to
subparagraph 4.2(b)(ii), the amount of such deficiency
shall be credited to the Post-Closing Adjustment Account.
(vi) If an estimated debit is made to the Adjustment Account in
connection with any Casualty Loss pursuant to subparagraph
4.2(b)(x), and if the amount of such estimated debit
exceeds the debit to the Adjustment Account which would
have been required to be made under subparagraph 4.2(b)(x)
if the actual total costs and expenses of repairing,
restoring or replacing the damage caused by the applicable
Casualty Loss had been known at the time of preparation of
the Adjustment Account, a credit shall be entered in the
Post-Closing Adjustment Account for the amount of such
excess during the month in which the total amount of such
costs and expenses is first determined. Conversely, if an
estimated credit is made to the Adjustment Account in
connection with any Casualty Loss pursuant to subparagraph
4.2(a)(x), and if the amount of such estimated credit is
less than the credit to the Adjustment Account which would
have been required to be made under subparagraph 4.2(a)(x)
if the actual total costs and expenses of repairing,
restoring or replacing the damage caused by the applicable
Casualty Loss had been known at the time of preparation of
the Adjustment Account, a credit shall be entered in the
Post-Closing Adjustment Account for the amount of such
deficiency during the month in which the total amount
of such costs and expenses is first determined.
(vii) If it shall be finally determined that an error has been
made in preparation of the Adjustment Account, resulting in
the making of a debit in the Adjustment Account in excess
of the amount of the debit which should properly have been
made or resulting in the making of a credit in the
Adjustment Account less than the amount of the credit which
should properly have been made, a corrective credit shall
be made in the Post-Closing Adjustment Account to correct
such error during the month in which a final determination
is made as to the amount of such error (including final
resolution of any dispute between Newco and NML and Kemper
concerning the existence or amount of such error); provided
that none of Newco, NML or Kemper shall have the right to
make or require making of a corrective credit to the
Post-Closing Adjustment Account pursuant to this
subparagraph to correct any error in the Adjustment Account
unless it shall have given written notice of a claim that
such error was made to Newco (in the case of a notice from
NML or Kemper) or to NML and Kemper (in the case of a
notice from Newco) within one (1) year after the
Proration Time.
(viii) Credits shall be entered in the Post-Closing Adjustment
Account for the principal amount of payments made by 9
Greenway (or by NML and Kemper for the account of 9
Greenway) to Newco by reason of debit balances in the
Post-Closing Adjustment Account as provided for in
paragraph 4.2(f).
(e) The following amounts shall be debited to the Post-Closing Adjustment
Account:
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(i) If the Final Parking Expense Credit (calculated as provided in
subparagraph 4.2(d)(ii)) is less than the Initial Parking
Expense Credit entered in the Adjustment Account pursuant to
subparagraph 4.2(a)(iii)(c)(i), the amount of such deficiency
shall be debited to the Post-Closing Adjustment Account.
(ii) If the Final License Fee Credit (calculated as provided in
subparagraph 4.2(d)(iii)) is less than the Initial License Fee
Credit entered in the Adjustment Account pursuant to
subparagraph 4.2(a)(iii)(c)(ii), the amount of such deficiency
shall be debited to the Post-Closing Adjustment Account.
(iii) If the Final Tax Debit (calculated as provided in subparagraph
4.2(d)(v)) exceeds the Initial Tax Debit entered in the
Adjustment Account pursuant to subparagraph 4.2(b)(iii), the
amount of such excess shall be debited to the Post-Closing
Adjustment Account.
(iv) Subject to the provisions set out hereinafter in this
subparagraph, all amounts expended by Newco to pay or to
compromise or settle Disputed Claims described in subparagraph
4.2(c), and all attorneys' fees and direct expenses incurred by
Newco in investigating, defending, settling or compromising
Disputed Claims, less any amounts of such payments or expenses
which are paid or reimbursed to Newco under insurance policies
held by Newco, 9 Greenway or Greenway, shall be debited to the
Post-Closing Adjustment Account; provided that in no event shall
Newco be obligated to defend any Disputed Claim; and provided
further that, even if a Disputed Claim is not known or disclosed
to CRE prior to completion of the statement of the Adjustment
Account pursuant to paragraph 4(c), no amount of such Disputed
Claim or attorneys' fees or expenses incurred by Newco in
investigating, defending, settling or compromising such Disputed
Claim shall be debited by Newco to the Post-Closing Adjustment
Account at any time after the Account Termination Date provided
for in subparagraph 4.2(f). Nothing contained in this
subparagraph or elsewhere in this Agreement is intended or shall
be construed to waive or relinquish or in anywise impair or
prejudice any defense which may be or become available to Newco,
Greenway or 9 Greenway with respect to any Disputed Claim,
including, without limitation, any defense based on any statute
of limitations which may be or hereafter become applicable to
any such Disputed Claim, nor shall this Agreement be construed
to require, or constitute an agreement of, NML or Kemper to pay
or provide funds to pay any amount of a Disputed Claim as to
which a valid defense of Newco, Greenway or 9 Greenway, as
applicable, is asserted and sustained. Further, at the election
of NML and Kemper, NML and Kemper shall be entitled to take over
and control the defense of any Disputed Claim through
representatives or attorneys selected by NML and Kemper and at
their expense, in which event NML and Kemper (one-half each)
shall bear and pay the expenses of defending such Disputed Claim
and any amount required to pay or compromise and settle such
Disputed Claim; provided that NML and Kemper (one-half each)
shall be entitled to the benefit of any insurance held by Newco,
9 Greenway or Greenway providing for payment or reimbursement of
such expenses or
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payment. Newco shall cooperate with NML and Kemper, at the
expense of NML and Kemper (one-half each), in connection with
the defense of any Disputed Claim which has been taken over by
NML and Kemper. Newco shall not settle or compromise any
Disputed Claim without the prior written consent of NML and
Kemper; provided that:
(a) if Newco receives a settlement offer with respect to a
Disputed Claim which Newco desires to accept and NML or
Kemper refuses to approve such settlement, Newco shall have
the right to require that NML and Kemper take over the
defense of such Disputed Claim at their expense as provided
for hereinabove in this subparagraph; and
(b) Newco shall have the right, without obtaining the consent
of NML or Kemper, to settle and compromise not more than a
total of five (5) separate Disputed Claims, if the total
amount paid by Newco to settle and compromise and obtain a
full release of each such Disputed Claim is an amount
which will result in the total debits to the Post-Closing
Adjustment Account in connection with such Disputed Claim
(including also attorneys' fees and expenses incurred by
Newco in investigating, defending and settling such
Disputed Claim) being less than $10,000 (determined
separately as to each such Disputed Claim) and if such
settlement and compromise will not impose any liability or
obligation whatsoever on 9 Greenway, NML or Kemper to any
person or persons (other than the obligation to provide
funds to 9 Greenway to pay or to pay Newco any amount
becoming due pursuant to Section 4.2 by reason of any such
debits to the Post-Closing Adjustment Account).
(v) If an Estimated TI and Commission Expenses Debit is made to the
Adjustment Account in connection with any New Lease or Aim Lease
Amendment pursuant to subparagraph 4.2(b)(viii), and if the
amount of such Estimated TI and Commission Expenses Debit is
less than the debit to the Adjustment Account which would have
been required to be made under subparagraph 4.2(b)(viii) if the
actual total TI and Commission Expenses required to be expended
in connection with the applicable New Lease or Aim Lease
Amendment had been paid within sixty (60) days after the Closing
Date and known at the time of preparation of the Adjustment
Account, a debit shall be entered in the Post-Closing
Adjustment Account for the amount of such deficiency during the
month in which the total amount of such TI and Commission
Expenses is first determined. Conversely, if an Estimated TI
and Commission Expenses Credit is made to the Adjustment Account
in connection with any New Lease or Aim Lease Amendment pursuant
to subparagraph 4.2(a)(vi), and if the amount of such Estimated
TI and Commission Expenses Credit is greater than the credit to
the Adjustment Account which would have been required to be made
under subparagraph 4.2(a)(vi) if the actual total TI and
Commission Expenses required to be expended in connection with
the applicable New Lease or Aim Lease Amendment had been paid
within sixty (60) days after the Closing Date and known at the
time of preparation of the Adjustment Account, a debit shall be
entered in the
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Post-Closing Adjustment Account for the amount of such excess
during the month in which the total amount of such TI and
Commission Expenses is first determined.
(vi) If an estimated debit is made to the Adjustment Account in
connection with any Casualty Loss pursuant to subparagraph
4.2(b)(x), and if the amount of such estimated debit is less
than the debit to the Adjustment Account which would have been
required to be made under subparagraph 4.2(b)(x) if the actual
total costs and expenses of repairing, restoring or replacing
the damage caused by the applicable Casualty Loss had been known
at the time of preparation of the Adjustment Account, a debit
shall be entered in the Post-Closing Adjustment Account for the
amount of such deficiency during the month in which the total
amount of such costs and expenses is first determined.
Conversely, if an estimated credit is made to the Adjustment
Account in connection with any Casualty Loss pursuant to
subparagraph 4.2(a)(x), and if the amount of such estimated
credit exceeds the credit to the Adjustment Account which would
have been required to be made under subparagraph 4.2(a)(x) if
the actual total costs and expenses of repairing, restoring or
replacing the damage caused by the applicable Casualty Loss had
been known at the time of preparation of the Adjustment Account,
a debit shall be entered in the Post-Closing Adjustment Account
for the amount of such excess during the month in which the
total amount of such costs and expenses is first determined.
(vii) If it shall be finally determined that an error has been made in
preparation of the Adjustment Account, resulting in the making
of a credit in the Adjustment Account in excess of the amount of
the credit which should properly have been made or resulting in
the making of a debit in the Adjustment Account less than the
amount of the debit which should properly have been made, a
corrective debit shall be made in the Post-Closing Adjustment
Account to correct such error during the month in which a final
determination is made as to the amount of such error (including
final resolution of any dispute between Newco and NML and Kemper
concerning the existence or amount of such error); provided that
none of Newco, NML or Kemper shall have the right to make or
require making of a corrective debit to the Post-Closing
Adjustment Account pursuant to this subparagraph to correct any
error in the Adjustment Account unless it shall have given
written notice of a claim that such error was made to Newco (in
the case of a notice from NML or Kemper) or to NML and Kemper
(in the case of a notice from Newco) within one (1) year after
the Proration Time.
(viii) Debits shall be entered in the Post-Closing Adjustment account
for the amounts, if any, of Incurred Marketing Fees which become
due and payable and are paid by Newco to Senterra after the
expiration of sixty (60) days after the Closing Date.
(ix) Debits shall be entered in the Post-Closing Adjustment account
for the amounts, if any, of Initial Tenant Improvement Expenses
which become due and payable and are paid by Newco after the
expiration of sixty (60) days after the Closing Date.
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(x) Debits shall be entered in the Post-Closing Adjustment Account
for the principal amount of payments made by Newco to NML and
Kemper by reason of credit balances in the Post-Closing
Adjustment Account as provided for in paragraph 4.2(f).
(f) SPC, as general partner of Newco, will cause Newco to maintain the
Post-Closing Adjustment Account and to provide a detailed statement of the
Post-Closing Adjustment Account including all credits and debits to such
Post-Closing Adjustment Account to NML and Kemper (as assignees of 9
Greenway as provided for in Section 5.1) within twenty (20) days after the
end of each month during which any credit or debit is provided herein to
be entered in the Post-Closing Adjustment Account; provided that,
notwithstanding any contrary provision elsewhere contained herein:
(i) unless and except to the extent that written demand upon Newco
that such credit or debit entry be made in the Post-Closing
Adjustment Account has theretofore been made by 9 Greenway, NML
or Kemper, no credit or debit entry shall be made to the
Post-Closing Adjustment Account and none of Newco, 9 Greenway,
NML or Kemper shall have any right to make or require the making
of a debit or credit to such Post-Closing Adjustment Account at
any time after the first to occur (herein called the "ACCOUNT
TERMINATION DATE") of:
(a) the expiration of ten (10) years after the Proration Time;
or
(b) the last to occur of (I) the expiration of two (2) years
after the Proration Time or (II) the date when Newco or a
"CRE AFFILIATE" (being any person owning, owned by, or
under common ownership with CRE to the extent [directly or
indirectly] of at least fifty percent [50%] of the equity
in such affiliated person) ceases to own all or
substantially all of the Greenway Properties, it being
stipulated that Newco and any CRE Affiliate shall be deemed
to have ceased to own the Greenway Properties when such
Greenway Properties are conveyed by Newco or such CRE
Affiliate to another person other than Newco or another CRE
Affiliate (either by voluntary conveyance or by involuntary
conveyance such as foreclosure sale, bankruptcy sale, or
execution sale) or when CRE ceases to own and hold
(directly or directly), and it being further stipulated
that Newco and any CRE Affiliate owning the Greenway
Properties shall be deemed for purposes of this
subparagraph (b) to have ceased to own the Greenway
Properties when CRE ceases to own and hold (either
directly, or indirectly through one or more CRE Affiliates)
at least fifty percent (50%) of the partnership equity in
Newco or such CRE Affiliate, as applicable; provided that
solely for purposes of this subparagraph the "Greenway
Properties" shall not be deemed to include the central
heated and chilled water plant now owned by Greenway;
(ii) after the Account Termination Date, none of Newco, 9 Greenway,
NML or Kemper shall have any liability to the other based on any
action, fact or circumstance (whether known or unknown) which
would require
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making of a credit or debit entry in the Post-Closing Adjustment
Account under the provisions of paragraph 4.2(d) or paragraph
4.2(e) unless and except to the extent that such credit or debit
entry was actually made by Newco in the Post-Closing Adjustment
Account prior to the Account Termination Date or written demand
upon Newco that such credit or debit entry be made in the
Post-Closing Adjustment Account was made by 9 Greenway, NML or
Kemper prior to the Account Termination Date; and
(iii) Newco shall retain or direct Senterra and any successor
management company engaged by Newco to manage the Greenway
Properties to retain all books and records and files concerning
the Greenway Properties and the operation thereof and "Assigned
Contracts" and "Existing Leases" assigned to Newco pursuant to
the Newco Conveyance which are in the possession of Senterra on
the Closing Date for a period of at least ten (10) years after
the Closing Date.
NML and Kemper and their representatives shall be provided access, at the
expense of NML and Kemper, upon request at any time upon reasonable notice
during normal business hours to all books and records of Greenway, 9
Greenway and Newco relevant to credits or debits in the Post-Closing
Adjustment Account. NML and Kemper shall endeavor in good faith to
minimize any disruption to the business and operations of Newco and its
property manager incident to NML's and Kemper's inspections of such books
and records. If any statement of the Post-Closing Adjustment Account
provided for hereinabove reflects that the total of the credits
theretofore entered in the Post-Closing Adjustment Account exceeds the
total of the debits theretofore entered in the Post-Closing Adjustment
Account, SPC, as general partner, will cause Newco to pay to NML and
Kemper (one-half each), as assignees of 9 Greenway, by wire transfer of
immediately available funds to such account or accounts as may be directed
by NML and Kemper, the amount, if any, by which the total of the credits
to the Post-Closing Adjustment Account exceeds the total of the debits to
the Post-Closing Adjustment Account within five (5) Business Days after
the date on which such statement is required to be provided to NML and
Kemper under the foregoing provisions hereof, plus, if such payment is not
made when due, an amount equal to interest on such excess calculated at
the rate of 12% per annum from the date when such payment was due to the
date of payment thereof; or, if applicable, 9 Greenway will pay (with
funds to be provided by NML and Kemper, one-half each, pursuant to Section
5.1) to Newco, by wire transfer of immediately available funds to such
account as may be directed by Newco, the amount, if any, by which such
statement reflects that the total of the debits to the Post-Closing
Adjustment Account exceeds the total of the credits to the Post-Closing
Adjustment Account within five (5) Business Days after receipt by NML and
Kemper of such statement, plus, if such payment is not made when due, an
amount equal to interest on such excess calculated at the rate of 12% per
annum from the date when such payment was due to the date of payment
thereof; provided that if one only of NML or Kemper fails to pay or
provide funds to 9 Greenway to pay its one-half share of such excess by
the date on which payment thereof is due, then only the one of NML or
Kemper who thus fails to pay or provide its one-half share of such payment
shall be responsible for payment of interest accruing by reason of failure
to make such payment by the due date; and provided further that if
disagreement exists between Newco, on
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the one hand, and NML and Kemper, on the other hand, as to the amount (or
propriety) of any credit or debit to the Post-Closing Adjustment Account
reflected in any such statement, the payment to be made pursuant to this
sentence shall be calculated without inclusion of the disputed amount of
the applicable credit or debit (whether one or more). Upon resolution of
any dispute as to the amount (or propriety) of any credit or debit to the
Post-Closing Adjustment Account, 9 Greenway (with funds provided one-half
each by NML and Kemper) or Newco, as applicable, shall, within five (5)
Business Days after final resolution of such dispute, pay such amount as
is determined to be owing by virtue of resolution of such dispute, plus,
if such payment is not made when due, an amount equal to interest on such
amount calculated at the rate of 12% per annum from the date when such
payment was due to the date of payment thereof; provided that if one only
of NML or Kemper fails to pay or provide funds to 9 Greenway to pay its
one-half share of an amount determined to be owing to Newco by the date on
which payment thereof is due, then only the one of NML or Kemper who thus
fails to pay or provide its one-half share of such payment shall be
responsible for payment of interest accruing by reason of failure to make
such payment by the due date. As provided in the Newco Partnership
Agreement, CRE shall contribute to Newco such amounts as are required to
provide funds to enable Newco to make any payment becoming due to NML and
Kemper (as assignees of 9 Greenway) pursuant to this paragraph; and CRE's
agreement to provide such funds shall inure to the benefit of and be
enforceable by NML and Kemper. Likewise, as provided in the Redemption
Agreement, NML and Kemper (severally and to the extent of one-half each)
shall provide funds to enable 9 Greenway to make any payment becoming due
to Newco pursuant to this paragraph, or at their election shall make any
such payment directly to Newco; and the agreement of NML and Kemper to
provide such funds shall inure to the benefit of and be enforceable by
Newco. In each event when Newco makes a payment to NML and Kemper by
reason of a credit balance in the Post-Closing Adjustment Account as
provided for in this paragraph, a debit shall be entered in the
Post-Closing Adjustment Account for the principal amount (not including
interest) of such payment. Likewise, in each event when 9 Greenway (or
NML and Kemper for the account of 9 Greenway) makes a payment to Newco by
reason of a debit balance in the Post-Closing Adjustment Account as
provided for in this paragraph, a credit shall be entered in the
Post-Closing Adjustment Account for the principal amount (not including
interest) of such payment.
V.
REDEMPTION OR SURRENDER OF PARTNERSHIP INTERESTS
5.1. Redemption or Surrender of Partnership Interests. Upon and
subject to the terms and conditions hereinafter set forth, on the Closing Date
and immediately following consummation of the transactions and actions
described and provided for in Article IV:
(a) The Partnership Interest of NML in 9 Greenway shall be redeemed; and
to effect payment of the consideration payable for such redemption, 9
Greenway and NML shall join in executing and delivering a Redemption
Agreement (the "REDEMPTION AGREEMENT") in substantially the form of
Schedule XXVI attached hereto and incorporated herein, pursuant to
which 9 Greenway shall assign to NML the right to receive one-half
(1/2) of all payments and amounts which
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9 Greenway is or becomes entitled to receive from Newco pursuant to
Section 4.2, and NML will agree to pay or provide funds to 9 Greenway
to pay one-half (1/2) of all amounts which 9 Greenway is or becomes
obligated to pay to Newco pursuant to Section 4.2.
(b) The Partnership Interest of Kemper in 9 Greenway shall be redeemed;
and to effect payment of the consideration payable for such
redemption, 9 Greenway and Kemper shall join in executing and
delivering the Redemption Agreement, pursuant to which 9 Greenway
shall assign to Kemper the right to receive one-half (1/2) of all
payments and amounts which 9 Greenway is or becomes entitled to
receive from Newco pursuant to Section 4.2, and Kemper will agree to
pay or provide funds to 9 Greenway to pay one-half (1/2) of all
amounts which 9 Greenway is or becomes obligated to pay to Newco
pursuant to Section 4.2.
5.2. Continuation of 9 Greenway. If the Closing occurs, J/K#1,
J/K#9, and Dow consent to the redemption of the Partnership Interests of NML
and Kemper in 9 Greenway as provided for in Section 5.1 and the Redemption
Agreement and stipulate and agree that 9 Greenway shall not be dissolved by
reason of the redemption of such Partnership Interests. Rather, 9 Greenway
shall continue in existence as a Texas limited partnership with J/K#1 and J/K#9
as the general partners and with Dow as the limited partner of such limited
partnership.
VI.
PAYMENT OF NOTES
6.1. Payment of Notes. Upon and subject to the terms and
conditions hereinafter set forth, on the Closing Date and immediately following
consummation of the transactions and actions described and provided for in
Article V:
(a) SPC, as general partner of Newco, shall cause Newco and any
applicable Newco Designees (if any, and whether one or more) to pay
to NML, by wire transfer of immediately available funds to such
account as shall be designated by NML, the entire unpaid principal
balance and all accrued unpaid interest owing on each of the NML
Renewal Note and NML Note (not including, of course, the amount of
the unpaid principal of the NML Note which was contributed to 9
Greenway pursuant to Section 2.1); and NML shall execute, acknowledge
and deliver full releases of all liens, assignments and security
interests securing payment of the NML Renewal Note and NML Note.
(b) SPC, as general partner of Newco, shall cause Newco and any
applicable Newco Designees (if any, and whether one or more) to pay
to Kemper, by wire transfer of immediately available funds to such
account as shall be designated by Kemper, the entire unpaid principal
balance and all accrued unpaid interest owing on the Kemper Note (not
including, of course, the amount of the unpaid principal of the
Kemper Note which was contributed to 9 Greenway pursuant to Section
2.3); and Kemper shall execute, acknowledge and deliver full releases
of all liens, assignments and security interests securing payment of
the Kemper Note.
(c) CRE shall provide the funds required to enable Newco to make the
payments provided for in paragraphs 6.1(a) and 6.1(b) (which shall be
exactly $91,000,000
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less such amounts, if any, as are actually paid by all Newco
Designees (if any) to NML and Kemper on the Closing Date pursuant to
said paragraphs 6.1(a) and 6.1(b)) by making the cash capital
contribution to Newco provided for in paragraph 4.1(d).
VII.
TERMINATION AND RELEASE AGREEMENTS
7.1. Affected Agreements. Upon and subject to the terms and
conditions hereinafter set forth, effective as of the Closing Date and
conditioned upon consummation of the transactions and actions described and
provided for in Articles II, III, IV, V, and VI, the applicable parties
specified hereinafter desire to make certain agreements or grant certain mutual
releases with respect to the following agreements:
(a) Funding Commitment ("FUNDING COMMITMENT") dated June 30, 1994,
between Kemper, NML, and Nomura providing for certain commitments,
agreements and undertakings of Kemper and NML in connection with the
loan of $115,000,000 made by Nomura to Greenway and 9 Greenway
effective as of June 30, 1994;
(b) Buy-Sell Agreement (as amended, the "BUY-SELL AGREEMENT") among NML,
GP#1, GP#9, K-P and Kemper dated August 21, 1989, as amended by
Supplement to Buy-Sell Agreement among said parties dated June 30,
1994;
(c) Collateral Agreement ("COLLATERAL AGREEMENT") among NML, GP#1, GP#9,
Kemper, Kemper Realty Corporation, Lumbermens Mutual Casualty
Company, Kemper Federal, K-P, K-P Inc., GP Acquisition, P/S, Prime,
Greenway and 9 Greenway dated June 30, 1994 (the rights, interests
and obligations of Kemper Realty Corporation and Lumbermens Mutual
Casualty Company in connection with the Collateral Agreement having
been acquired and assumed by KILICO Realty and GP Acquisition);
(d) Intercreditor Agreement ("INTERCREDITOR AGREEMENT") among Nomura,
NML, Kemper, Greenway and 9 Greenway dated June 30, 1994;
(e) Loan Agreement ("GREENWAY LOAN AGREEMENT") among NML, Kemper, and
Greenway dated August 21, 1989, as supplemented or amended;
(f) Participation Agreement ("GREENWAY PARTICIPATION AGREEMENT") among
NML, Kemper, and Greenway dated August 21, 1989, as supplemented or
amended;
(g) Loan Agreement ("9 GREENWAY LOAN AGREEMENT") among NML, Kemper, and
9 Greenway dated August 21, 1989, as supplemented or amended; and
(h) Participation Agreement ("9 GREENWAY PARTICIPATION AGREEMENT") among
NML, Kemper, and 9 Greenway dated August 21, 1989, as supplemented or
amended.
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7.2. Releases and Agreements Concerning Affected Agreements. If
the transactions provided for in Articles II, III, IV, V, and VI are
consummated (said transactions being herein collectively called the "CLOSING"),
then it is agreed and stipulated that:
(a) As of and from and after the Closing, each of NML and Kemper fully
releases the other from any and all obligations, liabilities, duties,
commitments, undertakings and agreements to or in favor of the other,
and NML and Kemper shall each be fully released and relieved of and
from any and all obligations, liabilities, duties, commitments,
undertakings and agreements to or in favor of any of Greenway, 9
Greenway or Newco under and in connection with or pursuant to the
Funding Commitment; provided that, solely as between NML and Kemper,
each of NML and Kemper shall remain severally responsible, each for
its own actions, to comply with and observe any agreements of such
party with or for the benefit of Nomura (or the "Lender," "Deed of
Trust Trustee," "Servicer," or "Trustee" as defined in the Funding
Commitment) under the terms of the Funding Commitment which continue
in effect or from which NML or Kemper are not released after the
Closing and shall indemnify the other from and against any loss,
claim, liability or expense resulting from any failure of such
first-mentioned party to observe and perform any such agreements; and
provided further that Newco, SPC, and CRE, jointly and severally,
shall indemnify and save and hold harmless NML and Kemper from and
against and reimburse NML or Kemper, as applicable, for any loss,
cost, expense or liability incurred or payment required to be made by
NML or Kemper after the Closing under or pursuant to any provision of
the Funding Commitment.
(b) Each of NML, GP#1, GP#9, K-P and Kemper agrees that effective as of
the Closing the Buy-Sell Agreement shall be terminated and of no
further force or effect whatsoever, and NML, GP#1 and GP#9, on the
one hand, and K-P and Kemper, on the other hand, each fully release
the other parties from any and all obligations, liabilities, duties,
commitments, undertakings and agreements under and in connection with
and pursuant to the Buy-Sell Agreement.
(c) As of the Closing, the Collateral Agreement shall terminate and be of
no further force or effect whatsoever, and each of the parties to the
Collateral Agreement fully releases the other parties thereto from
any and all obligations, liabilities, duties, commitments,
undertakings and agreements under and in connection with the
Collateral Agreement at and from and after the Closing.
(d) As of and from and after the Closing and as between and among NML,
Kemper, Greenway and 9 Greenway, each of such parties shall be fully
released from any and all obligations, liabilities, duties,
commitments, undertakings and agreements to or in favor of any other
of such parties under and in connection with the Inter-Creditor
Agreement; and the Inter-Creditor Agreement shall be terminated and
released of record and of no further force or effect whatsoever by
virtue of the requirement of paragraph 13.2(i) that as a condition to
the obligation of NML and Kemper to effect the Closing Nomura must
agree to terminate the Intercreditor Agreement and release NML,
Kemper, Greenway and 9 Greenway from any further obligation, duty or
liability thereunder effective as of the Closing Date.
(e) As of and from and after the Closing, the Greenway Loan Agreement
shall be terminated and of no further force or effect whatsoever, and
each of NML and
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Kemper fully releases the other from any and all obligations,
liabilities, duties, commitments, undertakings and agreements under
and in connection with and pursuant to the Greenway Loan Agreement,
and neither NML nor Kemper have or shall have any obligation to make
any additional loan of any amount to Greenway (or to 9 Greenway or
Newco as successors in interest to Greenway) pursuant to the Greenway
Loan Agreement.
(f) Effective as of the Closing, the Greenway Participation Agreement
shall be terminated and of no further force or effect whatsoever, and
NML, Kemper and Greenway each fully releases the other parties from
any and all obligations, liabilities, duties, commitments,
undertakings and agreements under and in connection with and pursuant
to the Greenway Participation Agreement; provided, of course, that
this agreement does not effect forgiveness of the loans made pursuant
to the Greenway Loan Agreement, all of which loans are to be
contributed to the capital of Greenway incident to the Closing as
provided for in Article II above.
(g) As of and from and after the Closing, the 9 Greenway Loan Agreement
shall be terminated and of no further force or effect whatsoever, and
each of NML and Kemper fully releases the other from any and all
obligations, liabilities, duties, commitments, undertakings and
agreements under and in connection with and pursuant to the 9
Greenway Loan Agreement, and neither NML nor Kemper have or shall
have any obligation to make any additional loan of any amount to 9
Greenway (or Newco as successor in interest to 9 Greenway) pursuant
to the 9 Greenway Loan Agreement.
(h) Effective as of the Closing, the 9 Greenway Participation Agreement
shall be terminated and of no further force or effect whatsoever, and
NML, Kemper and 9 Greenway each fully releases the other parties from
any and all obligations, liabilities, duties, commitments,
undertakings and agreements under and in connection with and pursuant
to the 9 Greenway Participation Agreement; provided, of course, that
this Agreement does not effect forgiveness of the loans made pursuant
to the 9 Greenway Loan Agreement, all of which loans are to be
contributed to the capital of 9 Greenway incident to the Closing as
provided for in Article II above.
7.3. Releases and Agreements by Certain Partners or Former
Partners. If the Closing occurs, then each of J/K#1, Century, Dow, and J/K#9
(herein collectively and severally called the "RELEASING PARTNERS") releases
NML, GP#1, GP#9, K-P and Kemper from any further obligations, liabilities, or
duties to any of the Releasing Partners under the Greenway Partnership
Agreement or 9 Greenway Partnership Agreement or any contract or agreement of
Greenway or 9 Greenway (including, without limitation, any obligation to pay
any amounts to any of the partners or former partners of Greenway at any time
under Section 9.7(g) of the Amended and Restated Agreement of Limited
Partnership of Greenway Plaza, Ltd., dated August 21, 1989, or any obligation
to pay any amounts to J/K#9 at any time under Section 9.7(g) of the Agreement
of Limited Partnership of Nine Greenway, Ltd., dated August 21, 1989).
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VIII.
PURCHASE OF REIT STOCK
8.1. Purchase of Stock by NML. If the Closing occurs, then upon
and subject to the terms and conditions hereinafter set forth, on the Closing
Date and immediately following consummation of the transactions and actions
described and provided for in Article VI, NML shall purchase for $12,500,000
and REIT shall issue and sell to NML a number of shares of fully paid,
nonassessable common stock of REIT, par value $0.01 per share ("COMMON STOCK,"
which term shall include any equity securities of REIT or any corporate
successor of REIT into or for which shares of Common Stock are converted or
exchanged, and, if REIT is merged into or with or conveys its assets to or
otherwise is converted into and becomes a real estate investment trust under
the Texas Real Estate Investment Trust Act, the term "Common Stock" shall mean
fully paid, duly issued and nonassessable shares in said real estate investment
trust into or for which shares of Common Stock of REIT are converted or
exchanged and references in this Agreement to the Common Stock as "stock" shall
be deemed to refer to such shares in said real estate investment trust), equal
to $12,500,000 divided by the Per Share Closing Value (as hereinafter defined).
The "PER SHARE CLOSING VALUE" shall be the average of the closing prices per
share of the Common Stock as reported on the New York Stock Exchange for the
ten (10) trading days last preceding the Closing Date. REIT shall issue and
deliver certificates evidencing ownership by NML of the number of shares of
Common Stock to be purchased by NML pursuant to this Section on the Closing
Date; and NML shall simultaneously deliver to REIT NML's check made payable to
REIT for the $12,500,000 purchase price for said shares of Common Stock. Upon
request by REIT at any time within ten (10) days prior to the Closing Date, NML
shall inform REIT of the name of the bank on which NML's check shall be drawn.
8.2. Purchase of Stock by Kemper. If the Closing occurs, then
upon and subject to the terms and conditions hereinafter set forth, on the
Closing Date and immediately following consummation of the transactions and
actions described and provided for in Article VI, Kemper shall purchase for
$12,500,000 and REIT shall issue and sell to Kemper a number of shares of fully
paid, nonassessable Common Stock of REIT equal to $12,500,000 divided by the
Per Share Closing Value. REIT shall issue and deliver certificates evidencing
ownership by Kemper of the number of shares of Common Stock to be purchased by
Kemper pursuant to this Section on the Closing Date; and Kemper shall
simultaneously deliver to REIT Kemper's check made payable to REIT for the
$12,500,000 purchase price for said shares of Common Stock. Upon request by
REIT at any time within ten (10) days prior to the Closing Date, Kemper shall
inform REIT of the name of the bank on which Kemper's check shall be drawn.
8.3. Lock-up Period. Each of NML and Kemper, severally,
covenant and agree with REIT that NML or Kemper, as applicable, shall not sell
or distribute to any person any of the shares of Common Stock purchased by NML
or Kemper, as applicable, under this Article VIII during the one-year period
("LOCK-UP PERIOD") ending on the first anniversary of the Closing Date;
provided that:
(a) Kemper may transfer and assign Common Stock purchased by Kemper to
one or more persons who are a "KEMPER AFFILIATE" (being a person who
is controlled by, controls or is under common control with Kemper,
with "control" meaning the power to control the policies or actions
of a person through ownership, directly or indirectly, of corporate
stock or other equity interests in such person); provided that each
such Kemper Affiliate to whom Common Stock is
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transferred or assigned must agree to be bound by the terms and
provisions of this Article VIII with respect to such Common Stock to
the same extent and in the same manner as if such Kemper Affiliate
were "Kemper." In the event that Kemper transfers or assigns any of
the Common Stock purchased by it to a Kemper Affiliate, all
references in this Section 8.3 and in Sections 8.4, 8.5, and 8.6 to
"Kemper" shall be deemed also to refer to such Kemper Affiliate
insofar as to the Common Stock transferred or assigned to such Kemper
Affiliate, and Kemper shall remain jointly and severally liable with
such Kemper Affiliate for the performance and observance by such
Kemper Affiliate of all covenants, undertakings and agreements of
Kemper under this Article VIII with reference to the Common Stock
thus transferred or assigned to such Kemper Affiliate.
(b) NML may transfer and assign Common Stock purchased by NML to one or
more persons who are an "NML AFFILIATE" (being a person who is
controlled by, controls or is under common control with NML, with
"control" meaning the power to control the policies or actions of a
person through ownership, directly or indirectly, of corporate stock
or other equity interests in such person); provided that each such
NML Affiliate to whom Common Stock is transferred or assigned must
agree to be bound by the terms and provisions of this Article VIII
with respect to such Common Stock to the same extent and in the same
manner as if such NML Affiliate were "NML." In the event that NML
transfers or assigns any of the Common Stock purchased by it to an
NML Affiliate, all references in this Section 8.3 and in Sections
8.4, 8.5, and 8.6 to "NML" shall be deemed also to refer to such NML
Affiliate insofar as to the Common Stock transferred or assigned to
such NML Affiliate, and NML shall remain jointly and severally liable
with such NML Affiliate for the performance and observance by such
NML Affiliate of all covenants, undertakings and agreements of NML
under this Article VIII with reference to the Common Stock thus
transferred or assigned to such NML Affiliate.
No restriction shall exist on sale or distribution of such Common Stock by NML
or Kemper after expiration of the Lock-up Period; provided that the issuance of
such Common Stock to NML and Kemper shall not be registered under the
Securities Exchange Act of 1933 ("SECURITIES ACT") and that NML and Kemper each
severally agrees that it will not sell or distribute any of the shares of
Common Stock purchased by it pursuant to this Article VIII except pursuant to a
registration statement under the Securities Act to be provided by REIT pursuant
to Section 8.4 or in a transaction which is, in the opinion of counsel to NML
or Kemper (as applicable), exempt from registration under the Securities Act.
8.4. Registration Agreement. If the Closing occurs, then on the
Closing Date REIT shall execute and deliver to each of NML and Kemper a
Registration Agreement ("REGISTRATION AGREEMENT") in substantially the form of
Schedule XXVII attached hereto and incorporated herein, pursuant to which REIT
will covenant and agree, at its expense, to prepare and file and exercise its
best efforts to cause to become and remain effective a registration statement
under the Securities Act and all filings required under applicable State
securities or blue-sky laws to register the sale by NML or Kemper of the shares
of Common Stock purchased by NML or Kemper, as applicable, under this Article
VIII, which registration statement and filings will be maintained effective by
REIT in accordance with the Registration Agreement at all times after the
expiration of the Lock-up Period until NML and Kemper shall have sold and
disposed of all shares of Common Stock purchased by either of them pursuant to
this Article VIII. Said registration statement shall specifically reserve to
NML and Kemper the right, at their election, to sell or distribute shares of
Common Stock pursuant to any
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applicable exemption from registration under the Securities Act, in lieu of
selling or distributing such Common Stock pursuant to the registration
statement. If REIT is merged into or with or conveys its assets to or
otherwise becomes a real estate investment trust under the Texas Real Estate
Investment Trust Act, the form of Registration Agreement attached hereto as
Schedule XXVII shall be appropriately amended or changed in such manner as
shall reasonably be required by NML and Kemper to refer to and describe the
fully paid, duly issued and nonassessable shares in said real estate investment
trust into or for which shares of Common Stock of REIT are converted or
exchanged, in lieu of describing the shares of Common Stock of REIT described
in said Schedule XXVII and to make such other changes therein as are reasonably
required by NML and Kemper by reason of or to reflect the nature of REIT as a
real estate investment trust under said Texas Real Estate Investment Trust Act.
8.5. Purchase Price Adjustment.
(a) In the event that NML or Kemper (a "SELLING PARTY") sells any or
all of the shares of Common Stock purchased by it pursuant to this Article VIII
during the 30-day period immediately following expiration of the Lock-up Period
(the shares of Common Stock thus sold by a Selling Party during such 30-day
period being herein called the "SALE SHARES"), including, without limitation, a
sale of such shares of Common Stock to REIT pursuant to the provisions of
Section 9 of the Registration Agreement during such 30-day period, then:
(i) If the average "PER SHARE NET PROCEEDS" (being the net proceeds
received by a Selling Party from the sale of one Sale Share,
less and determined after deducting an amount equal to the
quotient of (a) all costs of sale of Sale Shares incurred by
such Selling Party (subject, if applicable, to the limitation
provided in subparagraph 8.5(a)(iii)), divided by (b) the number
of Sale Shares sold by such Selling Party) are less than 90% of
the Per Share Closing Value, then REIT shall promptly pay or
cause to be paid to such Selling Party, upon demand and by wire
transfer of immediately available funds to such account as shall
be designated by such Selling Party, an amount equal to the
product of (x) the amount by which 90% of the Per Share Closing
Value exceeds the average Per Share Net Proceeds for all Sale
Shares sold by such Selling Party, multiplied by (y) the total
number of Sale Shares sold by such Selling Party; or
(ii) If the average Per Share Net Proceeds received by the Selling
Party for all Sale Shares sold by such Selling Party are greater
than 105% of the Per Share Closing Value, then such Selling
Party shall promptly pay to REIT, by wire transfer of
immediately available funds to such account as shall be
designated by REIT, an amount equal to the product of (x) the
amount by which the average Per Share Net Proceeds for all Sale
Shares sold by such Selling Party exceeds 105% of the Per Share
Closing Value, multiplied by (y) the total number of Sale Shares
sold by such Selling Party.
(iii) For purposes of calculating the Per Share Net Proceeds, it is
stipulated and agreed that if one or more Selling Parties who
sell Sale Shares conduct or cause to be conducted any due
diligence investigation with respect to REIT and any
registration statement pursuant to which Sale Shares are sold by
any such Selling Party, and/or if one or more Selling Parties
who sell Sale Shares engage an underwriter in connection with
the sale of Sale Shares by any such Selling Party, the maximum
amount of costs or expenses of all such due diligence
investigations and of fees, charges or expenses paid to all such
underwriters by such Selling Parties (collectively, if more than
one, and herein called "DUE
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DILIGENCE AND UNDERWRITING EXPENSES") incident to sale of all
Sale Shares sold by all Selling Parties which may be deducted in
calculating the Per Share Net Proceeds of the sale of Sale
Shares by all such Selling Parties shall be limited to and shall
not exceed a total aggregate amount of $75,000 (herein called
the "MAXIMUM DUE DILIGENCE AND UNDERWRITING EXPENSES"). In this
regard, any Selling Party shall be entitled to deduct (to the
extent actually incurred) the entire amount of the Maximum Due
Diligence and Underwriting Expenses in calculating the Per Share
Net Proceeds with respect to the Sale Shares sold by such
Selling Party; provided that if two or more Selling Parties sell
Sale Shares and two or more Selling Parties incur any Due
Diligence and Underwriting Expenses, then the maximum amount of
Due Diligence and Underwriting Expenses which any one such
Selling Party shall be entitled to deduct in calculating the Per
Share Net Proceeds with respect to the Sale Shares sold by such
one Selling Party shall be limited to the lesser of:
(a) the actual amount of Due Diligence and Underwriting
Expenses incurred by such one Selling Party (the "ACTUAL
EXPENSES"), or
(b) an amount (the "ALLOCATED EXPENSES") equal to $75,000,
divided by the total number of Sale Shares sold by all
Selling Parties, and multiplied by the number of Sale
Shares sold by such one Selling Party;
provided that if the application of the foregoing limitation to
each of such Selling Parties results in limiting the aggregate
Due Diligence and Underwriting Expenses allocated to all such
Selling Parties to an amount less than the Maximum Due Diligence
and Underwriting Expenses, the excess ("UNALLOCATED EXCESS
AMOUNT") of such Maximum Due Diligence and Underwriting Expenses
not thus allocated to such Selling Parties may also be deducted
by any such Selling Party in calculating the Per Share Net
Proceeds with respect to the Sale Shares sold by such Selling
Party to the extent of the least of: (I) the excess of the
Actual Expenses of such Selling Party above the Allocated
Expenses of such Selling Party, (II) the Unallocated Excess
Amount, or (III) if the Actual Expenses of two or more Selling
Parties exceed the Allocated Expenses of such respective Selling
Parties, a pro rata share of the Unallocated Excess Amount
determined on the basis of the ratio of such excess amount of
Actual Expenses of such Selling Party as compared to the total
of such excess amounts of Actual Expenses of all such Selling
Parties.
(b) The "PER SHARE SETTLE UP VALUE" shall be the average of the
closing prices per share of the Common Stock as reported on the New York Stock
Exchange for the last ten (10) trading days of the 30-day period next following
expiration of the Lock-up Period. If NML or Kemper (a "RETAINING PARTY") does
not sell all of the shares of Common Stock purchased by it under this Article
VIII during the 30-day period next following expiration of the Lock-up Period,
then:
(i) REIT will, if applicable, promptly pay to such Retaining Party,
upon demand and by wire transfer of immediately available funds
to such account as shall be designated by such Retaining Party,
an amount, if any, equal to the product of (x) the amount, if
any, by which 90% of the Per Share Closing Value exceeds the Per
Share Settle Up Value, multiplied by (y) the total number of
such shares of Common Stock which were not sold by such
Retaining Party during such 30-day period; or
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(ii) Such Retaining Party will, if applicable, promptly pay to REIT,
by wire transfer of immediately available funds to such account
as shall be designated by REIT, an amount, if any, equal to the
product of (x) the amount, if any, by which the Per Share Settle
Up Value exceeds 105% of the Per Share Closing Value, multiplied
by (y) the total number of such shares of Common Stock which
were not sold by such Retaining Party during such 30-day period.
(c) In the event that any stock split, reverse stock split or
recombination, reclassification, or stock exchange with respect to Common Stock
occurs between the Closing Date and (i) any date during the 30-day period next
following expiration of the Lock-Up Period on which any shares of Common Stock
are sold by a Selling Party as described in Section 8.5(a) or (ii) the
expiration of the 30-day period next following expiration of the Lock-Up
Period, then for purposes of Section 8.5(a) and Section 8.5(b), as applicable,
the "Per Share Closing Value" shall be adjusted appropriately (by dividing the
Per Share Closing Value determined under Section 8.1 by the number (or
fractional number) of shares into or for which one share of Common Stock was
divided, converted or exchanged incident to such stock split, reverse stock
split or recombination, reclassification or exchange, or such other adjustment
as shall be necessary) in order to result in comparison of such adjusted "Per
Share Closing Value" with the Per Share Net Proceeds under Section 8.5(a) or
with the Per Share Settle-Up Value under Section 8.5(b) on a comparable and
equivalent share for share basis.
8.6. Issuance of Additional Common Stock. If the Closing
occurs, then to induce NML and Kemper to purchase shares of Common Stock of
REIT pursuant to this Article VIII, CRE and REIT covenant and agree with NML
and Kemper that neither CRE nor REIT will issue any shares of Common Stock or
any securities convertible into Common Stock to any person at any time on or
after the Closing Date and prior to the expiration of thirty (30) days after
the expiration of the Lock-up Period other than:
(a) Common Stock issued to NML and Kemper pursuant to this Article VIII;
(b) shares of Common Stock, Common Stock warrants, or securities
convertible into Common Stock which are issued to any person or
persons pursuant to an underwritten registered public offering;
(c) shares of Common Stock or securities convertible into Common Stock
issued to any person or persons if the person or persons to whom such
Common Stock or securities convertible into Common Stock are issued
are contractually unconditionally prohibited and restricted from
reselling or distributing such Common Stock or securities at any time
or times prior to the expiration of thirty (30) days after the
expiration of the Lock-up Period (each such person, a "RESTRICTED
PERSON"), except for a sale or distribution in an offering exempt
from and not registered under the Securities Act to a person who
likewise agrees to become a Restricted Person subject to the same
restrictions as such initial Restricted Person;
(d) whether issued under a registration statement or otherwise, (i)
shares of Common Stock issued by REIT as restricted stock under the
1995 Crescent Real Estate Equities, Inc. Stock Incentive Plan, as
amended (the "1995 PLAN"); (ii) shares of Common Stock issued by REIT
pursuant to the exercise of options granted on or before the Closing
Date pursuant to the 1994 Crescent Real Estate Equities, Inc. Stock
Option Plan or the 1995 Plan; (iii) options on, or stock appreciation
rights relating to, Common Stock issued by REIT under the
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1995 Plan; and (iv) shares of Common Stock, or options thereon or
stock appreciation rights relating thereto, or other securities
convertible into Common Stock, in each case issued as incentive
compensation (and not in exchange or as consideration for property or
other assets, either directly or indirectly) to directors, officers,
employees or advisors of REIT, CRE or the general partner of CRE;
(e) shares of Common Stock, Common Stock warrants, or securities
convertible into Common Stock issued to Richard E. Rainwater or
entities owned by him ("RAINWATER") in connection with the issuance
of shares of Common Stock, Common Stock warrants, or securities
convertible into Common Stock under REIT's existing registration
statement on Form S-3, No. 33-97794, if offered to and purchased by
Rainwater on substantially the same terms as then being offered to
the public pursuant to such registration statement in an underwritten
public offering;
(f) shares of Common Stock, Common Stock warrants, or securities
convertible into Common Stock issued pursuant to REIT's existing
registration statement on Form S-3, No. 33-97794, that are not issued
pursuant to an underwritten public offering, if (i) the consideration
paid for such shares or securities consists solely of cash and (ii)
neither the purchaser of such shares or securities nor any other
person or persons have transferred or have agreed to transfer, or
shall thereafter agree to transfer, assets or other property (other
than money) to REIT, CRE, or any person directly or indirectly owned
or controlled by or otherwise affiliated with REIT or CRE in the same
transaction as, or in a transaction which is directly related to, the
transaction in which such shares or securities were issued to and
purchased by such purchaser;
(g) shares of Common Stock, Common Stock warrants, or securities
convertible into Common Stock issued in a transaction exempt from,
and not registered under, the Securities Act, if (i) the
consideration paid for such shares or securities consists solely of
cash and (ii) neither the purchaser of such shares or securities nor
any other person or persons have transferred or have agreed to
transfer, or shall thereafter agree to transfer, assets or other
property (other than money) to REIT, CRE, or any person directly or
indirectly owned or controlled by or otherwise affiliated with REIT
or CRE in the same transaction as, or in a transaction which is
directly related to, the transaction in which such shares or
securities were issued to and purchased by such purchaser;
(h) shares of Common Stock issued by REIT pursuant to the exercise of
conversion rights associated with partnership Units in CRE which are
issued by CRE prior to the Closing Date; provided that shares of
Common Stock permitted to be issued by REIT pursuant to this
paragraph 8.6(h) shall not be issued pursuant to or covered by a
registration statement unless and except to the extent that REIT is
contractually required to do so pursuant to binding contractual
commitments undertaken by REIT with the holders of partnership Units
prior to the Closing Date;
(i) shares of Common Stock, Common Stock warrants, or securities
convertible into Common Stock issued by REIT in connection with any
merger, combination, reorganization, recapitalization or other
transaction to which REIT or any entity controlling, controlled by or
under common control with REIT is a party,
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pursuant to which REIT or an entity controlling, controlled by or
under common control with REIT acquires all or substantially all the
assets of an entity the equity securities of which are publicly held
and registered under the Securities Exchange Act of 1934, as amended;
or
(j) shares of a Texas real estate investment trust, warrants for or
options to purchase shares of such Texas real estate investment
trust, or securities convertible into shares of such Texas real
estate investment trust which are issued by such Texas real estate
investment trust in exchange or as consideration for corresponding
outstanding shares of common stock, warrants for or options to
purchase shares of common stock, or securities convertible into
shares of common stock of Crescent Real Estate Equities, Inc.
incident to the conversion of Crescent Real Estate Equities, Inc.
into such Texas real estate investment trust by merger, consolidation
or other combination or transaction pursuant to which the shares of
such Texas real estate investment trust become "Common Stock" and
such Texas real estate trust becomes "REIT" as such terms are defined
in this Agreement.
IX.
EARNEST MONEY; INSPECTION PERIOD
9.1. Earnest Money. To induce NML and Kemper to enter into this
Agreement, CRE shall, on or within one (1) Business Day after the date of this
Agreement, deposit or cause to be deposited with Lawyers Title Company in
Houston, Texas ("ESCROWEE"), the sum of $5,000,000 (said sum, together with any
additional amounts deposited with the Escrowee by CRE pursuant to paragraph
10.1(b) and paragraph 10.1(c), being herein called the "EARNEST MONEY") to be
held by Escrowee and invested pursuant to an Escrow Agreement ("ESCROW
AGREEMENT") in substantially the form of Schedule XXVIII attached hereto and
incorporated herein. Interest earned on investments of the Earnest Money
deposited with Escrowee pursuant to the Escrow Agreement is herein called
"EARNEST MONEY INTEREST." A portion of the Earnest Money in the amount of ONE
HUNDRED DOLLARS ($100) (the "INDEPENDENT CONTRACT CONSIDERATION") has been
bargained for and agreed to as consideration for the execution of this
Agreement by all parties other than CRE, SPC, and REIT. The Independent
Contract Consideration is in addition to and independent of all other
consideration provided in this Agreement and shall be paid by the Escrowee to
NML and Kemper (one-half each) regardless of whether the Closing occurs and
shall not, under any circumstances, be refunded by the Escrowee to CRE
notwithstanding anything to the contrary otherwise contained herein. If (i)
the Earnest Money has not been received by the Escrowee on or within one (1)
Business Day after the date of this Agreement or (ii) copies of the Escrow
Agreement signed by Escrowee and reflecting the receipt by Escrowee of the
Earnest Money on or within one (1) Business Day after the date of this
Agreement are not delivered by CRE to each of NML and Kemper within five (5)
Business Days after the date of this Agreement, this Agreement will immediately
and automatically terminate and be of no further force or effect whatsoever and
no party hereto shall have any liability or responsibility to any other party
hereunder; provided that the agreements of CRE, SPC, and REIT pursuant to
Section 9.3, the agreements of the Crescent Parties pursuant to paragraph
11.1(h), and the agreements of the Acting Greenway Parties pursuant to
paragraph 12.1(bb) shall continue in effect and shall not be terminated.
(a) If this Agreement is not terminated pursuant to the foregoing
provisions of this Section 9.1, and if on or prior to the thirtieth
day after the date of this
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Agreement ("30TH DAY") CRE shall notify NML and Kemper in writing
pursuant to Section 9.2 that CRE has elected to terminate this
Agreement, CRE shall be entitled to give written notice to the
Escrowee pursuant to Subsection 4(a) of the Escrow Agreement
requiring the Escrowee to pay the Independent Contract Consideration
to NML and Kemper (one-half each) and to refund and pay all of the
remainder of the Earnest Money and the Earnest Money Interest to CRE;
provided that if CRE gives notice on or prior to the 30th Day to the
Escrowee pursuant to Subsection 4(a) of the Escrow Agreement
requiring the Escrowee to pay the Independent Contract Consideration
to NML and Kemper (one-half each) and to refund and pay all of the
remainder of the Earnest Money and the Earnest Money Interest to CRE
it shall be conclusively deemed that CRE has simultaneously given
written notice to NML and Kemper pursuant to Section 9.2 that CRE has
elected to terminate this Agreement.
(b) If the Closing occurs, then on the Closing Date NML and Kemper shall
join with CRE in executing instructions to the Escrowee to pay the
Independent Contract Consideration to NML and Kemper (one-half each)
and to refund and pay all of the remainder of the Earnest Money and
the Earnest Money Interest to CRE.
(c) If this Agreement is not terminated pursuant to the foregoing
provisions of this Section 9.1 and CRE does not give notice of
termination of this Agreement pursuant to Section 9.2 on or before
the 30th Day, and if:
(i) Each of the warranties and representations set forth in
paragraphs 12.1(a) through 12.1(q) and in paragraph 12.1(t)
shall be true and correct in all material respects as of
the Closing Date; and
(ii) The certified updated list of all Existing Leases to be
delivered to CRE pursuant to Section 9.5 shall be true and
correct in all material respects as of the date of delivery
thereof to CRE; and
(iii) Each of the warranties and representations set forth in
paragraphs 12.1(r), 12.1(s) and 12.1(t) shall be true and
correct in all material respects as of the date of this
Agreement; and
(iv) Each of NML, GP#1, GP#9, K-P and Kemper shall have
performed and complied with all agreements, covenants and
undertakings to be performed or complied with by it under
the terms of this Agreement on or prior to the Closing Date
or shall tender performance of such agreements, covenants
and undertakings on the Closing Date conditioned only upon
satisfaction of the conditions to its obligation to perform
such agreements, covenants and undertakings on the Closing
Date as specified in Section 13.2; and
(v) The conditions to the obligation of the Crescent Parties
(as defined in Section 11.1) specified in paragraphs
13.1(d), 13.1(e) and 13.1(i) shall have been satisfied (or
waived) on the Closing Date; and
(vi) Delivery of the Owner's Title Policy and UCC Search
Certificates in satisfaction of the conditions to the
obligation of the Crescent Parties specified in paragraphs
13.1(f) and 13.1(g) is tendered on the Closing
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Date subject only to consummation of the Closing on the
Closing Date; and
(vii) Notice of termination of this Agreement is given by any of
the Crescent Parties or any of NML, GP#1, GP#9, K-P or
Kemper as authorized by and pursuant to paragraph 13.4(a)
or paragraph 13.4(b), as applicable, or any of the Crescent
Parties shall default in performing any of its agreements,
covenants and undertakings which are required by this
Agreement to be performed by such Crescent Party on the
Closing Date,
then CRE shall promptly join with NML and Kemper in executing
instructions to the Escrowee to pay the Earnest Money to NML and
Kemper, one-half each, as agreed consideration for their having
entered into this Agreement, and directing the Escrowee to pay the
Earnest Money Interest to CRE.
(d) If this Agreement is not terminated pursuant to the foregoing
provisions of this Section 9.1 and CRE does not give notice of
termination of this Agreement pursuant to Section 9.2 on or before
the 30th Day, and if:
(i) Any of the warranties and representations set forth in
paragraphs 12.1(a) through 12.1(q) or in paragraph 12.1(t)
shall not be true and correct in any material respect as of
the Closing Date; or
(ii) Any of the warranties and representations set forth in
paragraph 12.1(r), 12.1(s) or 12.1(t) shall not be true and
correct in any material respect as of the date of this
Agreement; or
(iii) The certified updated list of all Existing Leases to be
delivered to CRE pursuant to Section 9.5 shall not be true
and correct in all material respects as of the date of
delivery thereof to CRE; or
(iv) Any of NML, GP#1, GP#9, K-P and Kemper shall not have
performed and complied with all agreements, covenants and
undertakings to be performed or complied with by it under
the terms of this Agreement prior to the Closing Date or
shall not tender performance on the Closing Date of all
agreements, covenants and undertakings to be performed or
complied with by it under the terms of this Agreement on
the Closing Date conditioned only upon satisfaction of the
conditions to its obligation to perform such agreements,
covenants and undertakings on the Closing Date as specified
in Section 13.2; or
(v) Any of the conditions to the obligation of the Crescent
Parties specified in paragraphs 13.1(d), 13.1(e) and
13.1(i) shall not have been satisfied (or waived) on the
Closing Date; or
(vi) Delivery of either or both the Owner's Title Policy or the
UCC Search Certificates in satisfaction of the conditions
to the obligation of the Crescent Parties specified in
paragraphs 13.1(f) and 13.1(g) shall not be tendered on the
Closing Date subject only to consummation of the Closing on
the Closing Date; and
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(vii) Notice of termination of this Agreement is given by any of
the Crescent Parties as authorized by and pursuant to
paragraph 13.4(a), or any of NML, GP#1, GP#9, K-P or Kemper
shall default in performing any of its agreements,
covenants and undertakings which are required by this
Agreement to be performed by it on or prior to the Closing
Date,
then NML and Kemper shall promptly join with CRE in executing
instructions to the Escrowee to pay the Independent Contract
Consideration to NML and Kemper (one-half each) and to refund and pay
all of the remainder of the Earnest Money and the Earnest Money
Interest to CRE; provided that if the Crescent Parties are then
entitled to elect whether to enforce specific performance of this
Agreement pursuant to subparagraph 13.4(a)(iii) or to recover
liquidated damages pursuant to subparagraph 13.4(a)(ii), NML and
Kemper shall not be required to join with CRE in executing
instructions to the Escrowee until the Crescent Parties have
exercised such election or the time for exercise thereof shall have
expired, and if the Crescent Parties timely elect to enforce specific
performance of this Agreement pursuant to subparagraph 13.4(a)(iii),
CRE shall not be entitled to require that the Earnest Money (less the
Independent Contract Consideration) and Earnest Money Interest be
refunded and paid to CRE pursuant to this paragraph 9.1(d).
9.2. Inspection Period. The obligation of CRE, SPC, and REIT to
perform their agreements under this Agreement are contingent upon the
satisfactory inspection by CRE of the Greenway Properties and all other due
diligence and preparatory matters relating to the transactions contemplated
hereby, all in CRE's sole and absolute discretion and judgment, during the
period ending on the 30th Day (the "INSPECTION PERIOD"). If CRE, in its sole
and absolute discretion, gives written notice (which may be given on behalf of
CRE by its counsel, Wendelin A. White of Shaw, Pittman, Potts & Trowbridge) to
NML and Kemper on or prior to the 30th Day that CRE has elected to terminate
this Agreement pursuant to this Section 9.2, this Agreement will immediately
and automatically terminate and be of no further force or effect whatsoever and
no party hereto shall have any liability or responsibility to any other party
hereunder; provided that the agreements of CRE, SPC, and REIT pursuant to
Section 9.3, the agreements of the Crescent Parties pursuant to paragraph
11.1(h), and the agreements of the Acting Greenway Parties pursuant to
paragraph 12.1(bb) shall continue in effect and shall not be terminated.
9.3. Inspection and Due Diligence Rights. Prior to the date of
this Agreement CRE has been provided substantial information concerning the
Greenway Properties and the books and records of the Partnerships and has
conducted inspections of the Greenway Properties. Additionally, during the
Inspection Period, and (if this Agreement is not terminated pursuant to Section
9.2) thereafter until the Closing Date, CRE shall have the right, at its
expense and risk, subject to the rights of the tenants of the Greenway
Properties, to physically inspect the Greenway Properties to determine, among
other things, the structural integrity of all improvements, to review the books
and records maintained for the Partnerships and the Greenway Properties, to
conduct engineering studies and tests with respect to the Greenway Properties,
including, but not limited to, soil tests and environmental and hazardous
substances and toxic waste tests, and to conduct such other tests, studies and
reviews as deemed necessary or appropriate by CRE. If the Closing does not
occur, CRE shall, at its expense, repair or cause the repair of any physical
damage caused to any of the Greenway Properties by or incident to the conduct
of such inspections, tests, surveys, and studies; and CRE agrees to indemnify
and save and hold harmless the respective Partnerships from and against any
loss, cost, claim, expense (including, without limitation, reasonable
attorneys' fees
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and expenses) and liability whatsoever with respect to or resulting from damage
to or destruction of the property of any tenant or other person or personal
injury or death of any person proximately caused by or resulting from the
conduct of any such inspections, tests, surveys, or studies. Neither the
Partnerships nor any of GP#1, GP#9, K-P, NML, Kemper or any of the Remaining
Partners have made or will make any representations or warranties, express or
implied, with respect to the Greenway Properties or the title thereto or the
condition, state of repair, fitness for use for any purpose, or latent or
patent defects in or with respect to the Greenway Properties or any
improvements or fixtures included therein or any personal property or goods
included in the assets of the Partnerships which are to be sold to Newco
pursuant to Article IV or with respect to the Partnerships and their business,
assets, liabilities, obligations, or commitments with respect to the Greenway
Properties or otherwise, except only the specific representations or warranties
made by the parties specified in and as set forth in Article XII and in the
Substitute Certificates (as defined in Section 9.4), if any. During the
Inspection Period, and (if this Agreement is not terminated pursuant to Section
9.2) thereafter until the Closing Date, CRE shall have the right to direct
Senterra Development LLC ("SENTERRA"), which manages the operation,
maintenance, and leasing of the Greenway Properties and maintains the books and
records pertaining thereto and to the Partnerships pursuant to management and
marketing agreements with the Partnerships, to provide access to CRE and its
agents, employees, and representatives to the books, files, and records
maintained by Senterra with respect to the Greenway Properties and the
Partnerships and any information possessed by Senterra with respect thereto and
to permit such parties to inspect, audit and copy the books and records, rent
rolls, contracts, agreements, leases and all other instruments of any nature
maintained by Senterra or the Partnerships in connection with the ownership,
management, or operation of the Greenway Properties; provided that:
(a) CRE acknowledges that the books, records, files, rent rolls and other
materials and data pertaining to the Greenway Properties or the
Partnerships which are maintained by Senterra are not the product of
the Partnerships or their partners; and it is expressly agreed and
stipulated that neither the Partnerships nor any of the other
Greenway Parties shall have any liability or responsibility
whatsoever to CRE, REIT, SPC, or Newco for any errors or omissions or
inaccuracies with respect to any books, files, rent rolls, records,
contracts, agreements, leases, instruments, information or data
maintained or provided by Senterra and have not made and will not
make any representations or warranties whatsoever, express or
implied, with respect thereto (except only for the representations
and warranties of the parties specified in and as specifically set
forth in Article XII, the representations to be made in Substitute
Certificates, if any, provided to CRE pursuant to paragraph 9.4(a),
and the representations to be made in the updated list of Existing
Leases to be provided to CRE pursuant to Section 9.5);
(b) None of CRE, SPC, or REIT shall, without prior written consent of the
general partners of the applicable Partnership, unilaterally (as
distinguished from actions taken through K-P, in conjunction with
GP#1 or GP#9, acting in their capacities as general partners of the
respective Partnerships) endeavor to negotiate with any of the
tenants of the Greenway Properties prior to the Closing Date for
amendments of any leases of the Greenway Properties, regardless of
whether such amendments are proposed to be or become effective
conditioned upon the Closing pursuant to this Agreement; provided
only that CRE may endeavor to negotiate with any of the tenants of
the Greenway Properties prior to the Closing Date for amendments of
any leases of the Greenway Properties to become effective conditioned
upon the Closing so as to
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amend or delete provisions of such leases to the extent deemed
necessary by CRE to cause all amounts received or accrued thereunder
to qualify as "rents from real property" as such term is defined in
section 856(d) of the Code;
(c) None of CRE, SPC, or REIT shall at any time prior to the Closing
Date, without prior written consent of the general partners of both
Partnerships, distribute to any person other than Senterra or solicit
responses or bids from any person other than Senterra pursuant to any
request for proposals or other solicitation of bids or proposals to
operate or lease any of the parking facilities owned by the
Partnerships in the Greenway Properties or to operate or manage or
serve as leasing agent for any of the Greenway Properties of the
Partnerships; and
(d) If this Agreement is terminated by CRE pursuant to Section 9.2 or if
for any reason the Closing does not occur on the Closing Date, CRE
will not thereafter make further disclosure to any person of
information concerning the Partnerships or the Greenway Properties or
copies of books, files, records, rent rolls, contracts, agreements,
leases, test and engineering reports, financial reports, analyses,
studies or other instruments of or pertaining to the Partnerships or
the Greenway Properties which have been provided to or obtained by
CRE or prepared by CRE or other persons for CRE and will require that
third persons to whom any such information or instruments have been
provided or made available by CRE or at the direction of CRE agree
that such persons will not thereafter make further disclosure to any
other person of any such information, and CRE will return and direct
that such third person return or destroy all such copies of books,
files, records, rent rolls, contracts, agreements, leases, test and
engineering reports, financial reports, analyses, studies or other
instruments of or pertaining to the Partnerships or the Greenway
Properties to Senterra for disposition as directed by the
Partnerships; provided that CRE and any such third person shall be
entitled to make such disclosures as CRE or such third person shall
determine in good faith are required by law or applicable
governmental regulations or regulations of the New York Stock
Exchange or any other exchange on or through which securities of CRE
or such third person are listed or traded.
9.4. Tenant Estoppel Letters. If CRE has not theretofore given
notice of termination of this Agreement pursuant to Section 9.2, the
Partnerships agree that on or prior to one (1) Business Day before the 30th Day
the Partnerships shall, at the Partnerships' expense, cause to be delivered to
CRE, with reasonable promptness after receipt thereof, estoppel letters in
substantially the form attached hereto and incorporated herein as Schedule XXIX
("TENANT ESTOPPEL LETTERS"), dated on or after June 17, 1996, and executed by
Existing Tenants holding Existing Leases covering not less than eighty percent
(80%) of the total rentable square feet of office space in the Greenway
Properties covered by Existing Leases as of the date of this Agreement and
including Tenant Estoppel Letters signed by each of the major tenants listed in
Schedule XXX attached hereto and incorporated herein (being all the Existing
Tenants holding Existing Leases covering more than 40,000 rentable square feet
of office space in the Greenway Properties as of the date of this Agreement,
together with the Existing Tenants holding Existing Leases covering the Houston
City Club and the hotel included in the Greenway Properties); provided that:
(a) if and to the extent, if any, that the Partnerships have not obtained
any Tenant Estoppel Letter or Tenant Estoppel Letters as to any
Existing Lease or Existing Leases required to be delivered to CRE
pursuant to the foregoing provisions of
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this Section on or prior to one (1) Business Day before the 30th Day,
the Partnerships shall not be required to deliver same to CRE, but,
in lieu thereof, NML and Kemper shall execute and deliver to CRE on
or prior to one (1) Business Day before the 30th Day a written
certificate (a "SUBSTITUTE CERTIFICATE") in substantially the form of
Schedule XXXI attached hereto and incorporated herein setting forth
the information called for in the form of Tenant Estoppel Letter with
respect to such Existing Lease or Existing Leases as shall be
required to provide to CRE a combination of Tenant Estoppel Letters
and Substitute Certificates with respect to Existing Leases covering
not less than eighty percent (80%) of the total rentable square feet
of office space in the Greenway Properties covered by Existing Leases
as of the date of this Agreement and including each of the Existing
Leases listed in Schedule XXXII attached hereto; provided that if at
any time prior to the Closing Date the Partnerships obtain a Tenant
Estoppel Letter from any Existing Tenant with respect to an Existing
Lease as to which NML and Kemper have provided a Substitute
Certificate to CRE, the Partnerships shall provide such Tenant
Estoppel Letter to CRE and the corresponding Substitute Certificate
shall be returned to NML and Kemper and shall be of no force or
effect whatsoever: and
(b) for purposes of this Section 9.4, the lease dated August 2, 1984,
from Greenway to Sanus Corp. Health Systems (now known as NylCare),
as amended by amendments dated February 11, 1987, September 9, 1987,
February 9, 1989, March 7, 1990, May 9, 1990, November 8, 1990, April
13, 1993, and November 29, 1993, covering space in the building known
as the 3800 Buffalo Speedway Building (which lease is in effect but
which space has been vacated by the tenant) shall not be deemed to be
an "Existing Lease," nor shall the office space covered by such
lease, as amended, be deemed to be covered by an Existing Lease as of
the date of this Agreement.
9.5. Information as to Existing Leases. If this Agreement is
not terminated pursuant to Section 9.1 and CRE has not theretofore given notice
of termination of this Agreement pursuant to Section 9.2, NML and Kemper agree
that on the third Business Day last preceding the 30th Day NML and Kemper will
execute and deliver to CRE a certified updated list of all Existing Leases
covering Greenway Properties as of that date (not including parking permits or
licenses issued by or on behalf of the respective Partnerships for contract
parking in the parking garages included in the Greenway Assets), reflecting the
name of the tenant, the date of the lease, and describing by date or otherwise
all amendments, extensions or modifications of such lease in the general format
of Schedule XXXII hereto, together with copies of all notices of termination or
material default given by any Existing Tenant to the Partnerships (or either of
them, or to Senterra as manager for the Partnerships) or given by the
Partnerships (or either of them, or by Senterra on behalf of either of them) to
any of the Existing Tenants after the date of this Agreement and prior to the
fifth (5) Business Day last preceding the 30th Day.
X.
CLOSING
10.1. Closing Date.
(a) Subject to paragraphs 10.1(b), 10.1(c), 10.1(d), and 10.1(e),
the Closing Date shall be the sixteenth (16th) Business Day after the 30th Day
("CLOSING DATE"), or such
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other date as shall hereafter be established as the Closing Date by mutual
agreement of CRE, NML and Kemper. In this regard, it is expressly stipulated
that NML and Kemper shall have no obligation to agree to extend the Closing
Date beyond the sixteenth (16th) Business Day after the 30th Day without
requiring changes in the terms and conditions of this Agreement, inasmuch as
the terms and conditions of this Agreement have been negotiated and agreed upon
based on the assumption by NML and Kemper that the Closing Date will occur on
or before the sixteenth (16th) Business Day after the 30th Day.
(b) Notwithstanding the provisions of paragraph 10.1(a), if on the
Closing Date established pursuant to paragraph 10.1(a) the Crescent Parties
shall have satisfied or tendered satisfaction of all of the conditions to the
obligations of the Acting Greenway Parties specified in Section 13.2 other than
the condition specified in any one or more or all of paragraphs 13.2(h),
13.2(i), 13.2(k) and 13.2(l) because of the failure or refusal of Nomura or any
other person who has succeeded to the rights and interests of Nomura with
respect to the Nomura Note, Nomura Deed of Trust or "Security Documents"
described in the Nomura Deed of Trust to take such action as is required to
satisfy such condition or conditions, CRE shall have the right to extend the
Closing Date to the fifteenth (15th) day after the Closing Date established
pursuant to paragraph 10.1(a) (or to the next ensuing Business Day if such day
is not a Business Day) by depositing with the Escrowee under the Escrow
Agreement on or prior to the Closing Date established under paragraph 10.1(a)
the sum of $100,000 to be added to the Earnest Money to paid to NML and Kemper
or refunded to CRE as provided in Section 9.1;
(c) Notwithstanding the provisions of paragraphs 10.1(a) and
10.1(b), if the Closing Date is extended pursuant to paragraph 10.1(b) and on
the extended Closing Date established pursuant to paragraph 10.1(b) the
Crescent Parties shall have satisfied or tendered satisfaction of all of the
conditions to the obligations of the Acting Greenway Parties specified in
Section 13.2 other than the condition specified in any one or more or all of
paragraphs 13.2(h), 13.2(i), 13.2(k) and 13.2(l) because of the failure or
refusal of Nomura or any other person who has succeeded to the rights and
interests of Nomura with respect to the Nomura Note, Nomura Deed of Trust or
"Security Documents" described in the Nomura Deed of Trust to take such action
as is required to satisfy such condition or conditions, CRE shall have the
right to extend the Closing Date to the thirtieth (30th) day after the Closing
Date established pursuant to paragraph 10.1(b) (or to the next ensuing Business
Day if such day is not a Business Day) by depositing with the Escrowee under
the Escrow Agreement on or prior to the Closing Date established under
paragraph 10.1(b) the additional sum of $250,000 to be added to the Earnest
Money to paid to NML and Kemper or refunded to CRE as provided in Section 9.1;
provided that if the Closing Date is extended pursuant to this paragraph
10.1(c) and if the Closing occurs and the Earnest Money (less the Independent
Contract Consideration) is required to be refunded to CRE pursuant to paragraph
9.1(b), CRE shall pay the sum of $250,000 to NML and Kemper (one-half each) on
the Closing Date, in cash or by wire transfer of immediately available funds to
such accounts as shall be designated by NML and Kemper, respectively;
(d) Notwithstanding the provisions of paragraphs 10.1(a), 10.1(b),
10.1(c), and 10.1(e) if, on the last Closing Date finally established pursuant
to paragraph 10.1(a), 10.1(b), 10.1(c), or 10.1(e) (as applicable) any of the
Crescent Parties shall exercise a right (pursuant to paragraphs 13.1(c) and
13.4(a)) to refuse to perform the actions herein provided to be performed by it
on such Closing Date by reason of the fact that (i) one or more of the
representations or warranties of the Greenway Parties set forth in Article XII
are not true and correct as of the Closing Date in all material respects, (ii)
one or more of the covenants or obligations of the Greenway Parties to be
performed on or prior to the Closing Date pursuant to this Agreement has not
been performed, or (iii) a notice of default from Nomura or the
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"Servicer" (as defined in the Nomura Deed of Trust) in connection with the
Nomura Note or Nomura Deed of Trust has been received by one or both of the
Partnerships and has not been cured on or prior to the Closing Date, then in
any such event NML and Kemper shall have the right, at their election and by
giving written notice to CRE on such Closing date, to require that said Closing
Date established pursuant to paragraph 10.1(a), 10.1(b) or 10.1(c) (as
applicable) be extended to the fifth (5th) Business Day next following such
date, in order to provide an opportunity to remedy or cure such condition so as
to cause such representation or warranty to be true and correct on such
extended Closing Date or cause such covenants or obligations of such Greenway
Parties to be performed on or prior to such extended Closing Date or cause such
default (or alleged default) in connection with the Nomura Note or Nomura Deed
of Trust to be cured on or prior to such extended Closing Date; and
(e) Notwithstanding the provisions of paragraphs 10.1(a), 10.1(b),
10.1(c) and 10.1(d), if on any Closing Date established pursuant to any of said
paragraphs 10.1(a), 10.1(b), 10.1(c) or 10.1(d) all of the conditions to the
obligations of all of the Crescent Parties and Acting Greenway Parties
specified in Sections 13.1 and 13.2 have been satisfied (or waived) except only
that Dow has died and no executor, administrator or temporary administrator of
Dow's estate has been appointed and qualified who can perform the agreements of
Dow on such Closing Date, then any of the Crescent Parties or Acting Greenway
Parties shall have the right at its election and by giving written notice to
the remaining Acting Greenway Parties and Crescent Parties on such Closing
Date, to require that said Closing Date established pursuant to paragraph
10.1(a), 10.1(b), 10.1(c) or 10.1(d) (as applicable), be extended to the
fifteenth (15th) Business Day next following such date, in order to provide
time for the appointment and qualification of a temporary administrator of the
estate of Dow who can perform the agreements of Dow on such extended Closing
Date.
10.2. Closing. If this Agreement is not terminated pursuant to
Section 9.1, Section 9.2 or Section 13.4, the Closing shall take place at 9:00
a.m. on the Closing Date at the offices of Fulbright & Jaworski L.L.P, 1301
McKinney Street, Suite 5100, Houston, Texas 77010-3095, or at such other place
as shall be mutually agreed by CRE, NML and Kemper.
10.3. Closing Expenses. Each party to this Agreement shall pay
the fees, charges and expenses of attorneys, accountants, consultants and other
professionals engaged by such party in connection with this Agreement and the
transactions contemplated hereby, unless otherwise agreed solely as between or
among one or more of such parties. The Partnerships shall be responsible for
payment of the following costs and expenses (herein called "CLOSING EXPENSES")
regardless of whether the Closing occurs:
(a) costs of obtaining or compiling the information contained in all the
schedules attached hereto, except Schedule XX, Schedule XXI, Schedule
XXII and Schedule XXXIII;
(b) costs of filing the Certificate of Merger provided for in Section 3.1
in the office of the Secretary of State of the State of Texas;
(c) costs of recording the Conveyance and Assignment from Greenway to 9
Greenway provided for in Section 3.2 in the office of the County
Clerk of Harris County, Texas;
(d) costs of filing the Amendment of Certificate of Limited Partnership
of 9 Greenway provided for in Section 3.5 in the office of the
Secretary of State of the State of Texas;
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(e) costs of recording or filing the releases of liens, security
interests and assignments provided for in Section 3.2 in the office
of the County Clerk of Harris County, Texas, and office of the
Secretary of State of the State of Texas (as applicable);
(f) premiums, fees and other charges, if any, of the Title Company and
Other Title Companies (if any) for or in connection with issuance of
the Title Commitment and the Owner's Title Policy (subject to the
provisions of subparagraph 13.1(f)(ii)); and
(g) costs of obtaining the UCC Search Certificates.
CRE shall be responsible for payment of (or for causing Newco to pay) the costs
and expenses of recording the deed from 9 Greenway to Newco provided for in the
Newco Conveyance, costs and expenses of forming Newco and qualifying Newco to
do business in Texas, costs and expenses of recording the releases of the
liens, security interests and assignments securing the NML Renewal Note, NML
Note and Kemper Note provided for in paragraphs 6.1(a) and 6.1(b), and any
costs and expenses required to be paid by Newco pursuant to subparagraph
13.1(f)(ii). Otherwise, unless specifically otherwise provided in this
Agreement or in a schedule attached hereto (or unless otherwise agreed solely
as between or among two or more, but less than all, of the parties to this
Agreement), each party to this Agreement shall be responsible for payment of
the costs and expenses of taking and performing each action, covenant and
agreement provided to be taken or performed by such particular party under the
terms of this Agreement or any schedule hereto and no party to this Agreement
shall be responsible for payment of costs or expenses incurred or to be
incurred by any other party to this Agreement in taking or performing any
action, covenant or agreement provided to be taken or performed by such latter
party under the terms of this Agreement.
XI.
REPRESENTATIONS AND WARRANTIES OF CRESCENT PARTIES
11.1. Representations and Warranties of Crescent Parties. For
convenience, CRE, SPC, and REIT are herein sometimes severally called a
"CRESCENT PARTY" and collectively called the "CRESCENT PARTIES," and Greenway,
9 Greenway, NML, GP#1, GP#9, K-P, J/K#1, Century, Dow, J/K#9, Kemper,
Lumbermens, Kemper Realty, K-P Inc., Prime, P/S, GP Acquisition and Federal
Kemper are herein sometimes severally called a "GREENWAY PARTY" and
collectively called the "GREENWAY PARTIES." In order to induce the Greenway
Parties to enter into this Agreement, the Crescent Parties jointly and
severally represent and warrant to the Greenway Parties that on the date of
this Agreement and on the Closing Date:
(a) CRE is a limited partnership duly formed and validly existing under
the laws of the State of Delaware and, if required under the laws of
the State of Texas to be so qualified, shall be qualified on the
Closing Date to do business in the State of Texas. CRE has the
requisite authority to enter into and perform its obligations under
this Agreement.
(b) At the date of this Agreement, REIT is a corporation duly formed,
validly existing and in good standing under the laws of the State of
Maryland. At the Closing Date, REIT shall either continue to be a
corporation duly formed, validly existing and in good standing under
the laws of the State of Maryland or shall have been merged into or
transferred all its assets to or otherwise have become
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and be a real estate investment trust duly formed and existing and in
good standing under the Texas Real Estate Investment Trust Act
(Article 6138A, TEX. REV. CIV. STAT.) and, in any event, if required
under the laws of the State of Texas to be so qualified, shall be
qualified on the Closing Date to do business and in good standing in
the State of Texas. REIT has the requisite authority to enter into
and perform its obligations under this Agreement.
(c) SPC is a corporation duly formed, validly existing and in good
standing under the laws of the State of Delaware and, if required
under the laws of the State of Texas to be so qualified, shall be
qualified on the Closing Date to do business and in good standing in
the State of Texas. SPC has the requisite authority to enter into
and perform its obligations under this Agreement.
(d) The execution, delivery, and performance of this Agreement by each of
the Crescent Parties, respectively, has been duly and validly
authorized by all necessary corporate or partnership action of the
respective Crescent Parties. This Agreement has been duly executed
and delivered by an authorized officer, partner or representative of
the respective Crescent Parties, and constitutes a legal, valid and
binding obligation of each of the Crescent Parties, enforceable
against the Crescent Parties in accordance with the terms hereof,
subject to applicable bankruptcy, insolvency, reorganization,
receivership, moratorium or other similar laws or judicial decisions
affecting the rights and remedies of creditors generally, and general
principles of equity, including, without limitation, requirements of
good faith, fair dealing and reasonableness, the possible
unavailability of particular equitable remedies, the possible
availability of equitable defenses, and concepts of materiality,
unconscionable conduct of an enforcing party or impracticability or
impossibility of performance.
(e) No consent, waiver, approval or authorization of, or notice to, any
governmental unit or any other person is required to be made,
obtained, or given by any Crescent Party in connection with the
execution, delivery and performance by such Crescent Party of its
obligations under this Agreement, except as set forth on Schedule
XXXIII attached hereto and incorporated herein.
(f) None of the execution, delivery, or performance of this Agreement by
any of the Crescent Parties does or will, with or without the giving
of notice, lapse of time, or both, violate, conflict with or
constitute a default under any term or condition of (i) the
organizational documents of such Crescent Party or any material
agreement to which such Crescent Party is a party or by which it is
bound or which is applicable to its properties or assets, or (ii) any
term or provision of any judgment, decree, order, statute,
injunction, rule or regulation of a governmental unit applicable to
such Crescent Party or any of its assets or properties, except as set
forth on Schedule XXXIII attached hereto and incorporated herein.
(g) Each Crescent Party is and Newco, when formed, shall be a "United
States Person" as defined in section 1445 and section 7701 of the
Internal Revenue Code of 1986, as amended (the "CODE").
(h) The Crescent Parties have not relied upon or engaged any real estate
broker or other finder in connection with or to assist the Crescent
Parties in entering into or consummating the transactions
contemplated by this Agreement. The
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Crescent Parties shall jointly and severally indemnify, defend and
hold the Greenway Parties harmless from and against any and all
losses, damages, costs and expenses (including, without limitation,
reasonable attorneys' fees and expenses) suffered or incurred by any
of Greenway Parties in connection with any claims asserted by any
real estate broker or finder based on any agreement or alleged
agreement with any of the Crescent Parties in connection with this
Agreement or the transactions contemplated by this Agreement.
11.2. Survival of Representations and Warranties. All
representations and warranties made in Section 11.1 shall survive the Closing;
provided, however, that no claim for a breach of any representation or warranty
of a Crescent Party contained in Section 11.1 may be maintained by Greenway
Parties unless one or more of Greenway Parties shall have given written notice
to such Crescent Party of such breach on or before the second (2nd) anniversary
of the Closing Date.
XII.
REPRESENTATIONS AND WARRANTIES OF ACTING GREENWAY PARTIES
12.1. Representations and Warranties of Acting Greenway Parties.
In order to induce the Crescent Parties and the other Greenway Parties to enter
into this Agreement, each of the respective Acting Greenway Parties (as
hereinafter defined in Section 13.2), severally and not jointly unless and
except as specifically otherwise hereinafter provided, makes the
representations and warranties of such Acting Greenway Party specifically set
out hereinafter to the Crescent Parties and to the other Greenway Parties as of
the date of execution and delivery of this Agreement by such Acting Greenway
Party and on the Closing Date:
(a) NML, GP#1 and GP#9 jointly and severally warrant and represent that
NML is a corporation duly formed and validly existing and in good
standing under the laws of the State of Wisconsin and is qualified to
do business and in good standing under the laws of the State of
Texas; that each of GP#1 and GP#9 is a corporation duly formed and
validly existing and in good standing under the laws of the State of
Texas; and that each of NML, GP#1 and GP#9 has the requisite
authority to enter into and perform its obligations under this
Agreement.
(b) NML, GP#1 and GP#9 jointly and severally warrant and represent that
the execution, delivery, and performance of this Agreement by each of
NML, GP#1 and GP#9 has been duly and validly authorized by all
necessary corporate action; and that this Agreement has been duly
executed and delivered by an authorized officer or agent of each of
NML, GP#1 and GP#9, and constitutes a legal, valid and binding
obligation of each of NML, GP#1 and GP#9, enforceable against it in
accordance with the terms hereof, subject to applicable bankruptcy,
insolvency, reorganization, receivership, moratorium or other similar
laws or judicial decisions affecting the rights and remedies of
creditors generally, and general principles of equity, including,
without limitation, requirements of good faith, fair dealing and
reasonableness, the possible unavailability of particular equitable
remedies, the possible availability of equitable defenses, and
concepts of materiality, unconscionable conduct of an enforcing party
or impracticability or impossibility of performance.
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(c) NML, GP#1 and GP#9 jointly and severally warrant and represent that
NML is the sole owner and holder of the Partnership Interests of NML
as a limited partner in each of the Partnerships as described in the
respective Partnership Agreements and has good title thereto, free
and clear of any liens, claims, pledges, encumbrances, or security
interests of any person or party; that GP#1 is the sole owner and
holder of the Partnership Interest of GP#1 as a general partner in
Greenway as described in the Partnership Agreement of Greenway and
has good title thereto, free and clear of any liens, claims,
encumbrances, or security interests of any person or party; and that
GP#9 is the sole owner and holder of the Partnership Interest of GP#9
as a general partner in 9 Greenway as described in the Partnership
Agreement of 9 Greenway and has good title thereto, free and clear of
any liens, claims, encumbrances, or security interests of any person
or party.
(d) Kemper and warrants and represents that Kemper is an Illinois
insurance corporation duly formed and validly existing and authorized
to transact the business of life insurance in the State of Illinois;
that Kemper is licensed by the State of Texas Department of Insurance
to transact the business of insurance in the State of Texas; and that
Kemper has the requisite authority to enter into and perform its
obligations under this Agreement.
(e) Kemper warrants and represents that the execution, delivery, and
performance of this Agreement by Kemper has been duly and validly
authorized by all necessary corporate action; and that this Agreement
has been duly executed and delivered by an authorized officer or
agent of Kemper, and constitutes a legal, valid and binding
obligation of Kemper, enforceable against it in accordance with the
terms hereof, subject to applicable bankruptcy, insolvency,
reorganization, receivership, moratorium or other similar laws or
judicial decisions affecting the rights and remedies of creditors
generally, and general principles of equity, including, without
limitation, requirements of good faith, fair dealing and
reasonableness, the possible unavailability of particular equitable
remedies, the possible availability of equitable defenses, and
concepts of materiality, unconscionable conduct of an enforcing party
or impracticability or impossibility of performance.
(f) Kemper warrants and represents that, if the Closing occurs, following
consummation of the transactions provided for in Article II Kemper
shall be the sole owner and holder of the Partnership Interests of
Kemper as a limited partner in each of the Partnerships as described
in the amendments of the respective Partnership Agreements attached
hereto as Schedule IX and Schedule X and will have good title
thereto, free and clear of any liens, claims, pledges, encumbrances,
or security interests of any person or party, subject only to the
rights and interests of Federal Kemper, Kemper Portfolio and KFC (the
"KEMPER PARTICIPANTS"), Non-Acting Greenway Parties which hold
participation interests in the Kemper Loans and for whom Kemper will
act with respect to any and all matters under this Agreement; and
Kemper warrants and represents that Kemper has all necessary
authority from the Kemper Participants to perform the obligations of
Kemper under this Agreement.
(g) K-P warrants and represents that K-P is a limited partnership duly
formed and validly existing under the laws of the State of Illinois
and is qualified to do
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business under the laws of the State of Texas; and that K-P has the
requisite authority to enter into and perform its obligations under
this Agreement.
(h) K-P warrants and represents that the execution, delivery, and
performance of this Agreement by K-P has been duly and validly
authorized by all necessary partnership action; and that this
Agreement has been duly executed and delivered by a partner or
authorized representative or agent of K-P, and constitutes a legal,
valid and binding obligation of K-P, enforceable against it in
accordance with the terms hereof, subject to applicable bankruptcy,
insolvency, reorganization, receivership, moratorium or other similar
laws or judicial decisions affecting the rights and remedies of
creditors generally, and general principles of equity, including,
without limitation, requirements of good faith, fair dealing and
reasonableness, the possible unavailability of particular equitable
remedies, the possible availability of equitable defenses, and
concepts of materiality, unconscionable conduct of an enforcing party
or impracticability or impossibility of performance.
(i) K-P warrants and represents that K-P is the sole owner and holder of
the Partnership Interests of K-P as a general partner in each of the
Partnerships as described in the respective Partnership Agreements
and has good title thereto, free and clear of any liens, claims,
pledges, encumbrances, or security interests of any person or party.
(j) Each of Greenway, 9 Greenway, NML, GP#1, GP#9, Kemper and K-P
(severally, a "WARRANTING PARTY") severally warrants and represents
that no consent, waiver, approval or authorization of, or notice to,
any governmental unit or any other person is required to be made,
obtained, or given by such Warranting Party in connection with the
execution, delivery and performance by such Warranting Party of its
obligations under this Agreement, except as set forth on Schedule
XXXIV attached hereto and incorporated herein.
(k) Each of Greenway, 9 Greenway, NML, GP#1, GP#9, Kemper and K-P
(severally, a "WARRANTING PARTY") severally warrants and represents
that none of the execution, delivery, or performance of this
Agreement by such Warranting Party does or will, with or without the
giving of notice, lapse of time, or both, violate, conflict with or
constitute a default under any term or condition of (i) the
organizational documents of such Warranting Party or any material
agreement to which such Warranting Party is a party or by which it is
bound or which is applicable to its properties or assets, except as
set forth on Schedule XXXIV hereto, or (ii) any term or provision of
any judgment, decree, order, statute, injunction, rule or regulation
of a governmental unit applicable to such Warranting Party or any of
its assets or properties.
(l) Each of Greenway and 9 Greenway (severally, a "WARRANTING PARTY")
severally warrants and represents that such Warranting Party is a
limited partnership duly formed and validly existing under the laws
of the State of Texas; that such Warranting Party has the requisite
authority to enter into and perform its obligations under this
Agreement; that the execution, delivery, and performance of this
Agreement by such Warranting Party has been duly and validly
authorized by all necessary corporate or partnership action of such
Warranting Party; and that this Agreement has been duly executed and
delivered by an officer, partner or authorized representative or
agent of such Warranting Party,
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and constitutes a legal, valid and binding obligation of such
Warranting Party, enforceable against it in accordance with the terms
hereof, subject to applicable bankruptcy, insolvency, reorganization,
receivership, moratorium or other similar laws or judicial decisions
affecting the rights and remedies of creditors generally, and general
principles of equity, including, without limitation, requirements of
good faith, fair dealing and reasonableness, the possible
unavailability of particular equitable remedies, the possible
availability of equitable defenses, and concepts of materiality,
unconscionable conduct of an enforcing party or impracticability or
impossibility of performance.
(m) Each of Greenway, 9 Greenway, NML, GP#1, GP#9, K-P, and Kemper
(severally, a "WARRANTING PARTY") severally warrants and represents
that such Warranting Party is not a debtor party to any bankruptcy,
reorganization, insolvency or similar proceedings.
(n) NML warrants and represents that NML is the sole owner and holder of
the NML Loans as described in Section 1.4 and Schedule II attached
hereto and has good title thereto, free and clear of any liens,
claims, encumbrances, or security interests of any person or party,
and has full power and authority to contribute the NML Greenway
Partner Loans to the capital of Greenway, and to contribute the NML 9
Greenway Partner Loans and the principal amount of the NML Note
described in paragraph 2.1(c) to the capital of 9 Greenway as
provided for in Section 2.1, subject to the matters described in
Schedule XXXV attached hereto and incorporated herein.
(o) K-P warrants and represents that K-P is the sole owner and holder of
the K-P Loans as described in Section 1.5 and Schedule II attached
hereto and has good title thereto, free and clear of any liens,
claims, encumbrances, or security interests of any person or party,
and has full power and authority to contribute the K-P Greenway
Partner Loans to the capital of Greenway, and to contribute the K-P 9
Greenway Partner Loans to the capital of 9 Greenway as provided for
in Section 2.2, subject to the matters described in Schedule XXXVI
attached hereto and incorporated herein.
(p) Kemper warrants and represents that Kemper is the sole owner and
holder of the Kemper Loans as described in Section 1.6 and Schedule
II attached hereto and has good title thereto, free and clear of any
liens, claims, encumbrances, or security interests of any person or
party, and has full power and authority to contribute the Kemper
Greenway Partner Loans to the capital of Greenway, and to contribute
the Kemper 9 Greenway Partner Loans and the principal amount of the
Kemper Note described in paragraph 2.3(c) to the capital of 9
Greenway as provided for in Section 2.3, subject to the matters
described in Schedule XXXVII attached hereto and incorporated herein.
(q) Each of Greenway, 9 Greenway, NML, GP#1, GP#9, Kemper and K-P
(severally, a "WARRANTING PARTY") severally warrants and represents
that such Warranting Party is a "United States Person" as defined in
section 1445 and section 7701 of the Code, and that Newco is not
required to withhold any amount of any payments provided to be made
by Newco to such Warranting Party pursuant to Section 4.2. 9
Greenway warrants and represents that its U.S. taxpayer
identification number is 74-1909959. NML warrants and represents
that its U.S. taxpayer identification number is 39-0509570. Kemper
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warrants and represents that its U.S. taxpayer identification number
is 36-3050975.
(r) NML and Kemper severally warrant and represent that Schedule XXXII
attached hereto and incorporated herein contains a complete list of
all leases from either of the Partnerships to any person or persons
which are in effect as of the date of this Agreement covering space
in any of the buildings included in the Greenway Assets, together
with a description of all written amendments, modifications and
extensions of such respective leases executed by (or by an authorized
agent or representative of) either of the Partnerships prior to the
date of this Agreement; provided that Schedule XXXII does not include
a list of parking permits or licenses issued by or on behalf of the
respective Partnerships for contract parking in the parking garages
included in the Greenway Assets; and provided further that NML and
Kemper do not warrant or represent that any particular one or more or
all of the leases listed in Schedule XXXII are now in force or effect
or will be in force or effect on the Closing Date. NML and Kemper
further severally warrant and represent that one or both of the
Partnerships own the automotive vehicles described in Exhibit B
attached to Schedule XIX attached hereto, free of liens or security
interests other than liens or security interests securing the Nomura
Note, NML Loans, K-P Loans, Kemper Loans or "Intercreditor Loans" (as
defined in the Collateral Agreement). Liability for breach of the
warranties and representations made in this paragraph shall be
several and shall be borne one-half by NML and one-half by Kemper.
(s) NML and Kemper severally warrant and represent that Schedule XXXVIII
attached hereto and incorporated herein contains a complete list of
all contracts to which either of the Partnerships is a party which
are in effect as of the date of this Agreement and will not have
terminated on or prior to the Closing Date, except and excluding:
(i) the leases and amendments, modifications and extensions thereof
listed in Schedule XXXII hereto, (ii) parking permits or licenses
issued by or on behalf of the respective Partnerships for contract
parking in the parking garages included in the Greenway Assets, (iii)
"Warranties" as described and defined in Schedule XIX hereto, (iv)
contracts between the Partnerships, (v) contracts relating to the NML
Loans, the Kemper Loans, and/or the K-P Loans, and (vi) contracts
(herein referred to as "NONMATERIAL CONTRACTS") which (i) are subject
to termination by any Partnership which is a party thereto at any
time by giving of not more than either thirty (30) days or one (1)
month, or (ii) do not require expenditure by either Partnership (or
by the Partnerships collectively) of an aggregate amount (determined
separately as to each such contract) in excess of $10,000; provided,
however, that NML and Kemper do not warrant or represent that any
particular one or more or all of the contracts listed in Schedule
XXXVIII are now in force or effect or will be in force or effect on
the Closing Date. Liability for breach of the warranty and
representation made in this paragraph shall be several and shall be
borne one-half by NML and one-half by Kemper.
(t) NML and Kemper severally warrant and represent that no notice of
default has been received by the Partnerships (or either of them)
from Nomura or the "Servicer" (as defined in the Nomura Deed of
Trust) in connection with the Nomura Note or Nomura Deed of Trust at
any time prior to the date of this Agreement and that, unless
otherwise stated in a written notice given to CRE
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by NML or Kemper on or prior to the Closing Date, no such notice of
default from Nomura or said "Servicer" shall have been received by
the Partnerships (or either of them) at any time prior to the Closing
Date. Liability for breach of the foregoing warranty and
representation made in this paragraph shall be several and shall be
borne one-half by NML and one-half by Kemper. Further, NML warrants
and represents that to the best of the knowledge of NML, NML has
funded at least $3,235,000 of NML's total $20,000,000 "Commitment
Amount" under the Funding Agreement prior to the date of this
Agreement, and Kemper warrants and represents that to the best of the
knowledge of Kemper, Kemper has funded at least $3,235,000 of
Kemper's total $20,000,000 "Commitment Amount" under the Funding
Agreement prior to the date of this Agreement; provided that none of
Nomura nor the "Lender," "Deed of Trust Trustee," "Servicer," or
"Trustee" (as defined in the Funding Agreement and Nomura Deed of
Trust) has acknowledged or agreed that the aforesaid amounts loaned
by NML and Kemper, respectively, to the respective Partnerships
qualified to effect funding of the "Commitment Amount" of NML or
Kemper, respectively, under the Funding Agreement; and neither NML
nor Kemper warrant or represent that any of such parties will so
acknowledge or agree, nor do NML or Kemper warrant or represent that,
if any of such parties disagree with NML and Kemper as to the amounts
which have been funded against such "Commitment Amounts" to the date
of this Agreement, it will ultimately be determined that the amounts
specified above loaned to the Partnerships by NML and Kemper,
respectively, have, in fact, qualified to effect funding of the
"Commitment Amount" of NML and Kemper, respectively, under the
Funding Agreement.
(u) J/K#1 and J/K#9 jointly and severally warrant and represent that each
of J/K#1 and J/K#9 is a limited partnership duly formed and validly
existing under the laws of the State of Texas; and that each of J/K#1
and J/K#9 has the requisite authority to enter into and perform its
obligations under this Agreement.
(v) J/K#1 and J/K#9 jointly and severally warrant and represent that the
execution, delivery, and performance of this Agreement by each of
J/K#1 and J/K#9 has been duly and validly authorized by all necessary
partnership action; and that this Agreement has been duly executed
and delivered by a partner or authorized representative or agent of
each of J/K#1 and J/K#9, and constitutes a legal, valid and binding
obligation of each of J/K#1 and J/K#9, enforceable against it in
accordance with the terms hereof, subject to applicable bankruptcy,
insolvency, reorganization, receivership, moratorium or other similar
laws or judicial decisions affecting the rights and remedies of
creditors generally, and general principles of equity, including,
without limitation, requirements of good faith, fair dealing and
reasonableness, the possible unavailability of particular equitable
remedies, the possible availability of equitable defenses, and
concepts of materiality, unconscionable conduct of an enforcing party
or impracticability or impossibility of performance.
(w) J/K#1 and J/K#9 jointly and severally warrant and represent that
J/K#1 is the sole owner and holder of the Partnership Interest of
J/K#1 as a general partner in Greenway as described in the
Partnership Agreement of Greenway and has good title thereto, free
and clear of any liens, claims, encumbrances, or security interests
of any person or party; and that J/K#9 is the sole owner and holder
of the Partnership Interest of J/K#9 as a general partner in 9
Greenway as
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described in the Partnership Agreement of 9 Greenway and has good
title thereto, free and clear of any liens, claims, encumbrances, or
security interests of any person or party.
(x) Each of J/K#1 and J/K#9 (severally, a "WARRANTING PARTY") severally
warrants and represents that none of the execution, delivery, or
performance of this Agreement by such Warranting Party does or will,
with or without the giving of notice, lapse of time, or both,
violate, conflict with or constitute a default under any term or
condition of (i) the organizational documents of such Warranting
Party or any material agreement to which such Warranting Party is a
party or by which it is bound or which is applicable to its
properties or assets, except as set forth on Schedule XXXIX hereto,
or (ii) any term or provision of any judgment, decree, order,
statute, injunction, rule or regulation of a governmental unit
applicable to such Warranting Party or any of its assets or
properties.
(y) Each of Century and Dow (severally, a "WARRANTING PARTY") severally
warrants and represents that this Agreement constitutes a legal,
valid and binding obligation of such Warranting Party, enforceable
against such Warranting Party in accordance with the terms hereof,
subject to applicable bankruptcy, insolvency, reorganization,
receivership, moratorium or other similar laws or judicial decisions
affecting the rights and remedies of creditors generally, and general
principles of equity, including, without limitation, requirements of
good faith, fair dealing and reasonableness, the possible
unavailability of particular equitable remedies, the possible
availability of equitable defenses, and concepts of materiality,
unconscionable conduct of an enforcing party or impracticability or
impossibility of performance; that such Warranting Party is the sole
owner and holder of the Partnership Interest of such Warranting Party
as a limited partner in Greenway as described in the Partnership
Agreement of Greenway and has good title thereto, free and clear of
any liens, claims, encumbrances, or security interests of any person
or party; that none of the execution, delivery, or performance of
this Agreement by such Warranting Party does or will, with or without
the giving of notice, lapse of time, or both, violate, conflict with
or constitute a default under any term or condition of (i) the
organizational documents of such Warranting Party (as to Century) or
any material agreement to which such Warranting Party is a party or
by which such Warranting Party is bound or which is applicable to
such Warranting Party's properties or assets, except as set forth on
Schedule XXXIX hereto, or (ii) any term or provision of any judgment,
decree, order, statute, injunction, rule or regulation of a
governmental unit applicable to such Warranting Party or any of such
Warranting Party's assets or properties.
(z) Century warrants and represents that Century is a corporation duly
formed and validly existing and in good standing under the laws of
the State of Nevada and is qualified to do business and in good
standing under the laws of the State of Texas; that Century has the
requisite authority to enter into and perform its obligations under
this Agreement; that the execution, delivery, and performance of this
Agreement by Century has been duly and validly authorized by all
necessary corporate action; that this Agreement has been duly
executed and delivered by an officer or authorized representative or
agent of Century; and that Century is the sole owner and holder of
(i) the Partnership Interest of Century as a limited partner in
Greenway as described in the Partnership
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Agreement of Greenway, (ii) the Partnership Interest formerly owned
by Darden Deviney as a limited partner in Greenway as described in
the Partnership Agreement of Greenway, and (iii) the Partnership
Interest formerly owned by Lloyd Jones as a limited partner in
Greenway as described in the Partnership Agreement of Greenway, and
has good title to all such Partnership Interests, free and clear of
any liens, claims, pledges, encumbrances, or security interests of
any person or party.
(aa) Each of J/K#1, J/K#9, Century, and Dow (severally, a "WARRANTING
PARTY") severally warrants and represents that such Warranting Party
is not a debtor party to any bankruptcy, reorganization, insolvency
or similar proceedings; and that such Warranting Party is a "United
States Person" as defined in section 1445 and section 7701 of the
Code. J/K#1 warrants and represents that its U.S. taxpayer
identification number is 74-2065165. J/K#9 warrants and represents
that its U.S. taxpayer identification number is 74-2065163. Century
warrants and represents that its U.S. taxpayer identification number
is 74-1661906. Dow warrants and represents that his Social Security
Number is ###-##-####.
(bb) Each of the Acting Greenway Parties (severally, a "WARRANTING PARTY")
warrants and represents that such Acting Greenway Party has not
relied upon or engaged any real estate broker or other finder in
connection with or to assist such Acting Greenway Party in entering
into or consummating the transactions contemplated by this Agreement,
except that NML, GP#1, GP#9, K-P and Kemper warrant and represent
that they have entered into an "Exclusive Right to Sell" agreement
(the "EASTDIL AGREEMENT") dated May 10, 1996, with Eastdil Realty
Company, L.L.C. ("EASTDIL"). NML and Kemper shall severally
(one-half each) pay all charges, fees and expenses, if any, becoming
due to Eastdil under or pursuant to the Eastdil Agreement and shall
indemnify, defend and hold the Crescent Parties and all other
Greenway Parties harmless from and against any and all losses,
damages, costs and expenses (including, without limitation,
reasonable attorneys' fees and expenses) suffered or incurred by any
of such Crescent Parties or other Greenway Parties in connection with
any claims asserted by Eastdil in connection with this Agreement or
the transactions contemplated by this Agreement (regardless of
whether the Closing occurs). Further, except as provided in the last
preceding sentence with regard to the Eastdil Agreement, each
Warranting Party shall severally indemnify, defend and hold harmless
each Crescent Party and each other Warranting Party (each, a
"BENEFICIARY") from and against any and all losses, damages, costs
and expenses (including, without limitation, reasonable attorneys'
fees and expenses) suffered or incurred by such Beneficiary in
connection with any claims asserted by any real estate broker or
finder based upon any agreement or alleged agreement with such
first-mentioned Warranting Party in connection with this Agreement or
the transactions contemplated by this Agreement.
12.2. Survival of Representations and Warranties. All
representations and warranties made in paragraph 1.7(b) or in Section 12.1
shall survive the Closing; provided, however, that no claim for a breach of any
representation or warranty of a Greenway Party contained in paragraph 1.7(b) or
Section 12.1 may be maintained by any person unless such person shall have
given written notice to such Greenway Party of such breach on or before the
second (2nd) anniversary of the Closing Date.
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12.3. Liability of Century and Dow. It is expressly stipulated
and provided that neither Century nor Dow (each a "DESIGNATED PARTY") shall
have any corporate or personal liability for the performance of any of the
agreements of CRE, SPC, REIT, Greenway, 9 Greenway, NML, GP#1, GP#9, K-P,
Kemper, Newco, J/K#1, J/K#9 or the other Designated Party under or in
connection with or pursuant to this Agreement. It is further expressly
stipulated and provided that all of the undertakings, agreements,
representations, warranties and other provisions of this Agreement under which
Century could be charged with liability are contained in Sections 2.4, 3.1, 3.3
and 3.5 and paragraphs 2.2(a), 2.7(a), 12.1(y), 12.1(z), 12.1(aa) and 12.1(bb),
and no other party, or any person claiming through any other party, shall
assert any liability or claim against Century under any provision of this
Agreement which is not contained in Section 2.4, 3.1, 3.3 or 3.5 or in
paragraph 2.2(a), 2.7(a), 12.1(y), 12.1(z), 12.1(aa) or 12.1(bb). It is
further expressly stipulated and provided that all of the undertakings,
agreements, representations, warranties and other provisions of this Agreement
under which Dow could be charged with liability are contained in Sections 2.4,
3.1, 3.3 and 3.5 and paragraphs 2.2(a), 2.7(a), 12.1(y), 12.1(aa) and 12.1(bb),
and no other party, or any person claiming through any other party, shall
assert any liability or claim against Dow under any provision of this Agreement
which is not contained in Section 2.4, 3.1, 3.3 or 3.5 or in paragraph 2.2(a),
2.7(a), 12.1(y), 12.1(aa) or 12.1(bb).
XIII.
CONDITIONS
13.1. Conditions to Obligations of Crescent Parties. The
obligation of the respective Crescent Parties to perform the actions herein
provided to be performed by the respective Crescent Parties on the Closing Date
pursuant to this Agreement is conditioned upon and subject to the satisfaction
on or before the Closing Date (or waiver by the applicable Crescent Party in
its sole discretion), of each of the following conditions:
(a) On or before the Closing Date each of the Acting Greenway Parties (as
defined in Section 13.2) shall have performed and complied with all
agreements, covenants, and undertakings to be performed or complied
with by such Acting Greenway Party under the terms of this Agreement
on or prior to the Closing Date;
(b) On the Closing Date NML and Kemper, respectively, shall have each
issued and delivered their respective checks payable to REIT for the
consideration payable by each of NML and Kemper for the shares of
Common Stock of REIT to be purchased by NML and Kemper, respectively,
on the Closing Date pursuant to Article VIII, conditioned, however,
upon simultaneous issuance and delivery by REIT of certificates
evidencing ownership by NML and Kemper, respectively, of such shares
of Common Stock and execution and delivery by REIT of the
Registration Agreement on the Closing Date as provided for in said
Article VIII;
(c) All representations and warranties of the Greenway Parties set forth
in Article XII (other than the representations and warranties in
paragraphs 12.1(r) and 12.1(s) which are required to be true and
correct in all material respects as of the date of this Agreement,
rather than as of the Closing Date) shall be true and correct as of
the Closing Date in all material respects;
(d) None of the buildings or improvements owned by the Partnerships in
the Greenway Properties shall have suffered damage or destruction by
fire or other
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casualty (a "CASUALTY LOSS") after the date of this Agreement and
prior to the Closing Date which, as to any one event, will reasonably
cost in excess of THREE MILLION DOLLARS ($3,000,000) to repair,
restore or replace such Casualty Loss as reasonably estimated by CRE
based on estimates obtained by CRE from an independent architect or
contractor of recognized standing in the Houston, Texas, area
selected by CRE and approved by NML and Kemper (which approval shall
not unreasonably be withheld or delayed); provided that in the event
of occurrence of a Casualty Loss which CRE thus reasonably estimates
will reasonably cost in excess of THREE MILLION DOLLARS ($3,000,000)
to repair, restore, or replace, CRE must give written notice to the
Greenway Parties of such determination stating that the Crescent
Parties will not waive the condition set forth in this paragraph (d)
with reference to such Casualty Loss on or before the Closing Date
and not later than thirty (30) days after actual notice to CRE of
occurrence of such Casualty Loss, or the Crescent Parties shall be
conclusively deemed to have waived the condition set forth in this
paragraph (d) with reference to that particular Casualty Loss; and
provided further that if a Casualty Loss occurs within thirty (30)
days prior to the Closing Date which CRE reasonably believes may cost
in excess of THREE MILLION DOLLARS ($3,000,000) to repair, restore,
or replace, CRE may, by giving written notice to the Greenway Parties
on or prior to the Closing Date, require that the Closing Date be
extended to the fifth (5th) Business Day next following the thirtieth
(30th) day after CRE receives actual notice of the occurrence of such
Casualty Loss in order to afford CRE thirty (30) days within which to
estimate the cost of such repair, restoration, or replacement as
provided for hereinabove and to determine whether the Crescent
Parties will waive the condition set forth in this paragraph (d) if
applicable as to such Casualty Loss;
(e) Neither of the Partnerships shall have received at any time after the
date of this Agreement and prior to the Closing Date a written notice
("CONDEMNATION NOTICE") that condemnation or eminent domain
proceedings are threatened or have been initiated which might result
in the taking of a part of or interest in the Greenway Properties
owned by the Partnerships having a fair market value in excess of
THREE MILLION DOLLARS ($3,000,000) as then reasonably estimated by
CRE based on an appraisal obtained by CRE from an appraiser of
recognized standing in the Houston, Texas, area selected by CRE and
approved by NML and Kemper (which approval shall not unreasonably be
withheld or delayed); provided that if a Partnership receives a
Condemnation Notice such Partnership shall promptly give written
notice thereof to CRE and that in the event of receipt of a
Condemnation Notice which CRE thus reasonably estimates may result in
taking a part of or interest in the Greenway Properties having a fair
market value in excess of THREE MILLION DOLLARS ($3,000,000), CRE
must give written notice to the Greenway Parties of such
determination stating that the Crescent Parties will not waive the
condition set forth in this paragraph (e) with reference to such
Condemnation Notice on or before the Closing Date and not later than
thirty (30) days after receipt by CRE of written notice of such
Condemnation Notice, or the Crescent Parties shall be conclusively
deemed to have waived the condition set forth in this paragraph (e)
with reference to that particular Condemnation Notice; and provided
further that if CRE first receives notice that a Condemnation Notice
has been received by a Partnership within thirty (30) days prior to
the Closing Date which CRE reasonably believes may result in taking a
part of or interest in the Greenway
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Properties having a fair market value in excess of THREE MILLION
DOLLARS ($3,000,000), CRE may, by giving written notice to the
Greenway Parties on or prior to the Closing Date, require that the
Closing Date be extended to the fifth (5th) Business Day next
following the thirtieth (30th) day after receipt by CRE of written
notice of such Condemnation Notice in order to afford CRE thirty (30)
days within which to estimate the fair market value of the applicable
part of or interest in the Greenway Properties as provided for
hereinabove and to determine whether the Crescent Parties will waive
the condition set forth in this paragraph (e) if applicable as to
such Condemnation Notice;
(f) 9 Greenway shall have caused (at 9 Greenway's expense, except as
hereinafter provided) to be delivered to Newco one or more Owner's
Title Policies (collectively, the "OWNER'S TITLE POLICY," whether one
or more) issued by or through Lawyers Title Insurance Corporation
(the "TITLE COMPANY") and (subject to the provisions set out
hereinafter in this paragraph) (1) Chicago Title Insurance Company
(issued through Charter Title Company of Houston, Texas), (2)
Commonwealth Land Title Insurance Company, and (3) First American
Title Insurance Company (issued through Republic Title of Texas, Inc.
of Dallas, Texas) (herein severally and collectively called the
"OTHER TITLE COMPANIES"), insuring title to the real property
portions of the Greenway Assets (through policies of coinsurance, if
two or more Owner's Title Policies are required by CRE to be
delivered as the "Owner's Title Policy," and, in any event, with such
reinsurance agreements and direct access endorsements as are
reasonably requested by CRE) in the aggregate amount of $206,000,000
dated the Closing Date, in the form approved by the Texas Department
of Insurance at the date of issuance, and subject to no liens,
encumbrances or exceptions other than (i) liens, encumbrances or
exceptions created or granted by the Partnerships (and either of
them) incident to the Closing at the written direction or with the
written approval of CRE, (ii) a schedule of leases or licenses or
amendments or extensions of leases or licenses granted or entered
into by the respective Partnerships prior to the Closing Date, which
schedule shall conform to the updated list of Existing Leases
delivered to CRE pursuant to Section 9.5 with such changes as are
required to reflect New Leases entered into by the respective
Partnerships after the date of such updated list of Existing Leases,
(iii) liens for ad valorem and property taxes for the current tax
year not due as of the Closing Date, (iv) liens, security interests
and assignments securing payment of the Nomura Note as described in
paragraph 11 of Schedule C to the Title Commitment (as defined
below), (v) liens, easements, encumbrances or exceptions described in
paragraphs 1, 2 and 9 of Schedule B to the Title Commitment, and in
paragraphs 6, 12, 13, 14, 15, 16, 17, 18 and 19 of Schedule C to the
Commitment for Title Insurance (the "TITLE COMMITMENT") issued by
Lawyers Title Insurance Company dated effective as of July 30, 1996,
at 8:00 a.m., a copy of which is attached hereto and incorporated
herein as Schedule XL (provided that (I) if Newco pays the unpaid
principal and interest owing on the NML Renewal Note, NML Note and
Kemper Note on the Closing Date as provided for in Article VI, the
Owner's Title Policy shall not be made subject to the liens, security
interests or assignments described in paragraphs 12, 13, 14, 15, 16,
17, and 18 of Schedule C to the Title Commitment, (II) if CRE causes
Nomura and any other person who has succeeded to the rights or
interests of Nomura under the Intercreditor Agreement to join with
NML, Kemper and the Partnerships in executing, acknowledging and
delivering a recordable agreement terminating and releasing the
Intercreditor Agreement on
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the Closing Date, the Owner's Title Policy shall not be made subject
to the Intercreditor Agreement described in paragraph 19 of Schedule
C to the Title Commitment, and (III) the exception with reference to
"all tenant leases" in item ar in paragraph 9 of Schedule B to the
Title Commitment shall consist of the schedule of leases and licenses
provided for in clause (ii) of this sentence, and (IV) to the extent,
if any, that any liens, encumbrances or exceptions are deleted from
the Title Commitment pursuant to subparagraph (vi) of the proviso to
this paragraph, the Owner's Title Policy shall not include such
deleted matters), (vi) liens, easements, encumbrances or exceptions,
if any, created or granted by the Partnerships (and either of them)
after the date of this Agreement with the written approval or deemed
approval of CRE as provided for in paragraph 14.2(j), (vii)
exceptions, if any, resulting from the taking, or the institution of
a lawsuit or condemnation proceeding for the taking, by condemnation
or exercise of the power of eminent domain of any of the Greenway
Assets or any interest therein prior to the Closing Date (which do
not result in exercise by CRE of a right to terminate this Agreement
pursuant to paragraphs 13.1(e) and 13.4(a)), and (viii) such other
matters or exceptions as shall be accepted in writing by Newco;
provided that:
(i) CRE shall cause each of the Other Title Companies to deliver to
NML and Kemper prior to the 30th Day a Commitment for Title
Insurance (collectively and severally, the "ADDITIONAL TITLE
COMMITMENTS") with respect to the real property included in the
Greenway Assets; and any Other Title Company which does not
deliver such an Additional Title Commitment to NML and Kemper
prior to the 30th Day shall not be a co-insurer participating in
issuance of the Owner's Title Policy and shall not thereafter be
deemed to be an "Other Title Company";
(ii) CRE shall bear and pay any charges made by the Other Title
Companies for preparation or issuance of the Additional Title
Commitments; and the total premium and charges to be borne and
paid by 9 Greenway for the Title Commitment and Owner's Title
Policy shall be limited to and shall not exceed the premium and
charges which would have been required to be paid had the
Owner's Title Policy been issued solely by or through the Title
Company (with such reinsurance agreements and direct access
endorsements as reasonably requested by CRE) and any additional
premium or charges incurred by reason of the participation by
the Other Insurance Companies as co-insurers in issuing the
Owner's Title Policy shall be borne and paid by CRE;
(iii) if the Title Company or any Other Title Company participating in
issuance of the Owner's Title Policy as a co-insurer is
unwilling to issue the Owner's Title Policy without making same
subject to liens, easements, encumbrances or exceptions other
than those permitted under the foregoing provisions of this
paragraph 13.1(f), then, except only as specifically provided
hereinafter, none of the Greenway Parties shall have any
obligation or duty (unless such Greenway Party so elects) to
have any such liens, encumbrances or exceptions corrected,
cured, removed or otherwise waived, and Newco may either accept
the Owner's Title Policy subject to such matters or the Crescent
Parties may exercise their right to terminate this Agreement,
receive the return of the Earnest Money (less the Independent
Contract Consideration) and the
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Earnest Money Interest, and not take and perform the actions
provided in this Agreement to be taken and performed by them on
the Closing Date; provided that if the Title Company proposes to
issue the Owner's Title Policy subject to any liens or lien
claims securing or claimed to secure any indebtedness owing or
claimed to be owing by either of the Partnerships to any person
other than liens to which the Owner's Title Policy is permitted
to be made subject under the foregoing provisions of this
paragraph 13.1(f) (such as, for example and without limitation,
judgment liens or mechanics' or materialmen's liens for services
performed or materials provided to either of the Partnerships
for improvements or fixtures on the Greenway Properties of which
notice is filed of record in Harris County, Texas, on or prior
to the Closing Date), 9 Greenway shall, at its expense, obtain
and deliver on the Closing Date a release of such liens or lien
claims or otherwise take such action as shall be required to
cause the Owner's Title Policy not to be made subject to such
liens or lien claims;
(iv) if (a) any Other Title Company (an "OBJECTING TITLE COMPANY,"
whether one or more) shall be unwilling to participate as a
co-insurer in issuing the Owner's Title Policy subject only to
liens, encumbrances or exceptions permitted under the foregoing
provisions of this paragraph 13.1(f) or (b) any Other Title
Company (an "OBJECTING TITLE COMPANY," whether one or more)
shall be unwilling to participate as a co-insurer in issuing the
Owner's Title Policy subject only to liens, encumbrances or
exceptions permitted under the foregoing provisions of this
paragraph 13.1(f) without imposing requirements for
indemnification, posting of bonds or other action on the part of
9 Greenway, NML or Kemper which are deemed by 9 Greenway, NML or
Kemper to be more onerous than any such requirements imposed by
the Title Company for issuance of such Owner's Title Policy, and
(c) the Title Company is willing to issue the Owner's Title
Policy subject only to liens, encumbrances or exceptions
permitted under the foregoing provisions of this paragraph
13.1(f) without imposing requirements for indemnification,
posting of bonds or other action on the part of 9 Greenway, NML
or Kemper which are unacceptable to 9 Greenway, NML or Kemper,
then 9 Greenway, NML or Kemper shall have the right to exclude
such Objecting Title Company from the "Other Title Companies"
and to cause the Owner's Title Policy to be issued by or through
the Title Company and such other (if any) of the Other Title
Companies who are not an Objecting Title Company;
(v) if one or more of the Other Title Companies participate as
co-insurers with the Title Company in issuance of the Owner's
Title Policy, the share of the aggregate amount of the Owner's
Title Policy to be allocated to and covered by the title policy
to be issued by or through the Title Company shall be not less
than the greater of (a) $75,000,000 (with such reinsurance
agreements and direct access endorsements as are reasonably
requested by CRE) or (b) a pro rata share of the $206,000,000
aggregate amount of the Owner's Title Policy determined on the
basis of the number of co-insurers participating in issuance of
the Owner's Title Policy as provided for herein; and
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(vi) the Partnerships agree to cooperate with CRE to endeavor to
cause the Title Company and any applicable Other Title Companies
to approve the deletion from the Title Commitment of any lien,
encumbrance or exception requested by CRE by written notice to
NML and Kemper prior to the 30th Day; provided that neither the
Partnerships nor NML or Kemper shall have any obligation to
incur or expend any out-of-pocket third party costs in
connection with such cooperation, nor shall the Partnerships or
NML or Kemper be obligated to incur any obligation or liability
to induce or cause the Title Company or any Other Title Company
to agree to any such deletion, except as otherwise expressly
provided in this paragraph 13.1(f);
(g) 9 Greenway shall have caused (at 9 Greenway's expense) to be
delivered to Newco, reasonably promptly after receipt thereof, search
certificates (the "UCC SEARCH CERTIFICATES") dated no more than
fourteen (14) days prior to the Closing Date reflecting that no
Uniform Commercial Code financing statements are on file in the
Office of the Secretary of State of the State of Texas or the office
of the County Clerk of Harris County, Texas, against either of the
Partnerships with respect to the Greenway Properties, except
financing statements with respect to security interests granted by
the Partnerships to secure the Nomura Note and loan indebtedness, the
NML Renewal Note, the NML Note, the Kemper Note, Partner Loans (as
defined in the respective Partnership Agreements), and Intercreditor
Loans (as defined in the Collateral Agreement) owing or to become
owing from the respective Partnerships to each other pursuant to the
Collateral Agreement, and any financing statements executed by the
Partnerships (or either of them) in the ordinary course of business
in connection with lease-purchase transactions or like transactions
in connection with the acquisition of miscellaneous items of
equipment; provided that if the UCC Search Certificates reflect any
financing statements filed against either of the Partnerships other
than as described above, 9 Greenway shall obtain and deliver on the
Closing Date a release of any security interest evidenced thereby;
(h) Nomura and any other persons who have succeeded to the rights and
interests of Nomura under the Nomura Note, Nomura Deed of Trust or
the "Security Documents" as defined in the Nomura Deed of Trust shall
have taken such actions on or prior to the Closing Date as shall be
required to satisfy each of the conditions to the obligations of
Acting Greenway Parties set out in paragraphs 13.2(h), 13.2(i),
13.2(k), and 13.2(l); and
(i) Neither of the Partnerships shall have received a notice of default
from Nomura or the "Servicer" (as defined in the Nomura Deed of
Trust) in connection with the Nomura Note or Nomura Deed of Trust
which default remains uncured at the Closing Date.
13.2. Conditions to Obligations of Acting Greenway Parties. No
actions are required to be taken on the Closing Date by any of the Non-Acting
Greenway Parties (other than actions to be taken by K-P Inc. in its capacity as
a general partner as the act and deed of and on behalf of K-P). The remaining
Greenway Parties (Greenway, 9 Greenway, NML, GP#1, GP#9, K-P, J/K#1, J/K#9,
K-P, Century, Dow, and Kemper) are herein called "ACTING GREENWAY PARTIES."
The obligation of the respective Acting Greenway Parties to perform the actions
herein provided to be performed by the respective Acting Greenway Parties on
the Closing Date and pursuant to this Agreement is conditioned upon and subject
to the
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satisfaction on or before the Closing Date (or waiver by the applicable Acting
Greenway Party in such Acting Greenway Party's sole discretion), of those of
the following conditions which are hereinafter stated to be applicable as to
such particular Acting Greenway Party:
(a) As to each of the Acting Greenway Parties, a condition to such Acting
Greenway Party's obligation shall be that on or before the Closing
Date each of the Crescent Parties shall have performed and complied
with all agreements, covenants, and undertakings (if any) to be
performed or complied with by such Crescent Party under the terms of
this Agreement on or prior to the Closing Date;
(b) A condition to the obligation of each of NML and Kemper to purchase
and pay for shares of Common Stock of REIT on the Closing Date
pursuant to Article VIII shall be that REIT shall simultaneously
issue and deliver certificates evidencing ownership by NML and
Kemper, respectively, of such shares of Common Stock and execute and
deliver the Registration Agreement on the Closing Date as provided
for in said Article VIII;
(c) As to each of the Acting Greenway Parties, a condition to such Acting
Greenway Party's obligation shall be that all representations and
warranties of the Crescent Parties set forth in Article XI shall be
true and correct as of the Closing Date in all material respects;
(d) As to NML, GP#1 and GP#9, a condition to their obligation shall be
that on or before the Closing Date each of the remaining Acting
Greenway Parties (other than NML, GP#1 or GP#9) shall have performed
and complied with all agreements, covenants, and undertakings to be
performed or complied with by such remaining Acting Greenway Party
under the terms of this Agreement on or prior to the Closing Date;
(e) As to K-P and Kemper, a condition to their obligation shall be that
on or before the Closing Date each of the remaining Acting Greenway
Parties (other than K-P or Kemper) shall have performed and complied
with all agreements, covenants, and undertakings to be performed or
complied with by such remaining Acting Greenway Party under the terms
of this Agreement on or prior to the Closing Date;
(f) As to J/K#1, J/K#9 and Century, a condition to their obligation shall
be that on or before the Closing Date each of the remaining Acting
Greenway Parties (other than J/K#1, J/K#9 or Century) shall have
performed and complied with all agreements, covenants, and
undertakings to be performed or complied with by such remaining
Acting Greenway Party under the terms of this Agreement on or prior
to the Closing Date;
(g) As to Dow, a condition to his obligation shall be that on or before
the Closing Date each of the other Acting Greenway Parties shall have
performed and complied with all agreements, covenants, and
undertakings to be performed or complied with by such other Acting
Greenway Party under the terms of this Agreement on or prior to the
Closing Date;
(h) As to each of the Acting Greenway Parties, a condition to such Acting
Greenway Party's obligation shall be that on or before the Closing
Date the Crescent
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Parties shall have obtained and delivered one or more written
agreements in form and substance reasonably acceptable to NML and
Kemper effectively granting consent to this Agreement and the taking
and performance of all actions herein provided to be taken or
performed by the Acting Greenway Parties and Crescent Parties and
Newco by and on behalf of Nomura and any other persons who have
succeeded to the rights or interests of Nomura under the Nomura Note
or the June 30, 1994, Deed of Trust with Security Agreement,
Financing Statement and Assignment of Leases and Cash Collateral from
the Partnerships to P. G. Eckels, Trustee, for the benefit of Nomura
covering the Greenway Properties (and other assets of the
Partnerships) and securing the Nomura Note (as amended or modified by
Modification of Deed of Trust with Security Agreement, Financing
Statement and Assignment of Leases and Cash Collateral dated as of
July 29 1994, between the Partnerships and Nomura, and as thus
amended or modified herein called the "NOMURA DEED OF TRUST") or any
of the other "Security Documents" as defined in the Nomura Deed of
Trust and waiving any term, provision, covenant or condition of the
Nomura Note, Nomura Deed of Trust or any such "Security Document"
which would prohibit making or performance of this Agreement by any
of the Greenway Parties, Crescent Parties or Newco;
(i) As to each of the Partnerships, NML and Kemper, a condition to its
obligation shall be that on or before the Closing Date the Crescent
Parties shall have obtained and delivered an agreement in form and
substance reasonably acceptable to NML and Kemper effectively
agreeing on behalf of Nomura and any other persons who have succeeded
to the rights or interests of Nomura under the Nomura Note, Nomura
Deed of Trust or "Security Documents" referred to therein to release
and terminate all obligations, agreements and duties of NML, Kemper,
Greenway and 9 Greenway under and in connection with the
Intercreditor Agreement and to terminate the Intercreditor Agreement
effective as of the Closing Date, conditioned upon and if the Closing
occurs;
(j) As to each of NML and Kemper, a condition to their obligation shall
be that on or before the Closing Date the Crescent Parties shall have
obtained and delivered an agreement in form and substance reasonably
acceptable to NML and Kemper effectively agreeing on behalf of Nomura
and any other persons who are entitled to enforce the covenants and
agreements of NML and Kemper under the Funding Commitment (including,
if applicable and without limitation, the "Lender," "Deed of Trust
Trustee," "Servicer," or "Trustee" as defined in the Funding
Commitment) to fully and finally release each of NML and Kemper from
any further obligations, agreements or duties under or in connection
with the Funding Commitment, including, without limitation, any
further obligation to provide or pay funds to the Partnerships or
Newco or the "Lender," "Deed of Trust Trustee," "Servicer" or
"Trustee" up to the "Commitment Amount" of NML or Kemper pursuant to
any term or provision of the Funding Commitment; or, alternatively,
if such release is not obtained and delivered to NML and Kemper on
the Closing Date, CRE, SPC, and Newco shall have executed and
delivered to NML and Kemper on the Closing Date a full assumption and
indemnity agreement with respect to the Funding Commitment in the
form of Schedule XLI attached hereto and incorporated herein and
shall have funded, paid or deposited all amounts, if any, required to
be funded, paid or deposited by NML or Kemper pursuant to or in
connection with the Funding Commitment or Nomura Deed of Trust as a
consequence of or incident to the transactions
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herein provided to be performed on the Closing Date, including,
without limitation, the redemption of the Partnership Interests of
K-P pursuant to Section 2.3, the redemption of the Partnership
Interests of GP#1, GP#9 and Century pursuant to Section 3.4 and the
redemption of the Partnership Interests of NML and Kemper pursuant to
Article V.
(k) As to GP#1, a condition to its obligation shall be that on or before
the Closing Date the Crescent Parties shall have obtained and
delivered an agreement in form and substance reasonably acceptable to
GP#1 effectively agreeing on behalf of Nomura to consent to the
amendment of the Articles of Incorporation of GP#1 to eliminate and
rescind all of the amendments to the Articles of Incorporation of
GP#1 which were made in the Articles of Amendment to the Articles of
Incorporation of NW Greenway #1, Inc., filed in the Office of the
Secretary of State of the State of Texas on June 30, 1994, together
with a written resignation of Thomas A. Myers as a Director of GP#1,
in each case effective as of the Closing Date and conditioned upon
and effective only if the Closing occurs.
(l) As to GP#9, a condition to its obligation shall be that on or before
the Closing Date the Crescent Parties shall have obtained and
delivered an agreement in form and substance reasonably acceptable to
GP#9 effectively agreeing on behalf of Nomura to consent to the
amendment of the Articles of Incorporation of GP#9 to eliminate and
rescind all of the amendments to the Articles of Incorporation of
GP#9 which were made in the Articles of Amendment to the Articles of
Incorporation of NW Greenway #9, Inc., filed in the Office of the
Secretary of State of the State of Texas on June 30, 1994, together
with a written resignation of Thomas A. Myers as a Director of GP#9,
in each case effective as of the Closing Date and conditioned upon
and effective only if the Closing occurs.
(m) As to K-P, a condition to its obligation shall be that on or before
the Closing Date the Crescent Parties shall have obtained and
delivered an agreement in form and substance reasonably acceptable to
K-P Inc. effectively agreeing on behalf of Nomura to consent to the
amendment of the Articles of Incorporation of K-P Inc. to eliminate
and rescind all of the amendments to the Articles of Incorporation of
K-P Inc. which were made in the Articles of Amendment to the Articles
of Incorporation of K-P Greenway, Inc., filed in the Office of the
Secretary of State of the State of Illinois on June 30, 1994,
together with a written resignation of Collin Alpert as a Director of
K-P Inc., in each case effective as of the Closing Date and
conditioned upon and effective only if the Closing occurs.
13.3. Qualification to Conditions. Notwithstanding the
provisions of Sections 13.1 and 13.2, it is stipulated that if a
Crescent Party or Acting Greenway Party (a "PERFORMING PARTY") shall have
performed and complied with the agreements, covenants and undertakings to be
performed or complied with by such Performing Party prior to the Closing Date
and shall be ready, willing and able to take and perform all actions herein
provided to be taken or performed by such Performing Party on the Closing Date
but shall exercise a right to refuse to do so because of failure of any other
party (a "NON-PERFORMING PARTY") to take an action required to satisfy a
condition to the obligation of such Performing Party set forth in Section 13.1
or Section 13.2, then such Performing Party shall be deemed to have taken and
performed all actions required to be taken or performed by such Performing
Party on the
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Closing Date solely for purposes of determining whether the conditions
to the obligation of the Non-Performing Party set out in Section 13.1 or
Section 13.2, as applicable, have been satisfied.
13.4. Failure of Conditions. Subject to Section 13.3 and Section
9.1:
(a) If any of the conditions to the obligation of the Crescent Parties
set forth in Section 13.1 (other than paragraph 13.1(b)) shall not be
satisfied (or waived) on or prior to the Closing Date, the Crescent
Parties shall be entitled to give notice to the Greenway Parties on
the Closing Date terminating this Agreement, in which event this
Agreement shall terminate on the Closing Date and no party shall have
any further obligation, duty, liability, or right hereunder; provided
that:
(i) The provisions of Section 9.1, paragraph 9.3(d), paragraph
11.1(h), and paragraph 12.1(bb) shall remain in effect
notwithstanding termination of this Agreement by the
Crescent Parties pursuant to this paragraph 13.4(a).
(ii) If the conditions to the obligations of each of the Acting
Greenway Parties set forth in Section 13.2 have been
satisfied or waived, and if any one or more of GP#1, GP#9,
NML, Kemper or K-P (a "DEFAULTING PARTY") shall default in
performing any of its agreements, covenants and
undertakings which are required by this Agreement to be
performed by it or them on the Closing Date, and the
Crescent Parties shall give notice of termination to the
Greenway Parties on the Closing Date pursuant to this
paragraph 13.4(a), CRE shall be entitled, at its election
and in lieu of electing to enforce specific performance of
this Agreement against such Defaulting Party or Defaulting
Parties pursuant to subparagraph 13.4(a)(iii), to recover
agreed, liquidated damages in the total amount of
$1,000,000 from such Defaulting Party or Defaulting Parties
(collectively, if more than one); provided that if one or
more or all of NML, GP#1 and GP#9 (the "NML PARTIES") is a
Defaulting Party and either or both of Kemper or K-P (the
"KEMPER/K-P PARTIES") is also a Defaulting Party, NML (on
behalf of all the NML Parties who are Defaulting Parties)
shall be responsible for payment of only $500,000 of such
total $1,000,000 of liquidated damages, and the one or both
of the Kemper/K-P Parties who is a Defaulting Party
(jointly and severally, if both) shall be responsible for
payment of only $500,000 of such total $1,000,000
liquidated damages. If either or both of GP#1 or GP#9 is a
Defaulting Party, NML shall be responsible for payment of
the amount of liquidated damages which GP#1 or GP#9 (or
both, if applicable) become obligated to pay to CRE
pursuant to this subparagraph. If K-P is a Defaulting
Party but Kemper is not a Defaulting Party, Kemper shall
not be liable or responsible for payment of any amount of
liquidated damages which K-P becomes liable to pay pursuant
to this subparagraph; but, in such event, Kemper agrees
that if K-P does not pay in full the liquidated damages for
which K-P becomes liable pursuant to this subparagraph
within five (5) Business Days after demand, Kemper will,
upon demand from CRE, purchase from CRE an assignment,
without recourse, of CRE's claim against K-P for payment of
liquidated damages pursuant to this subparagraph and will
pay therefor (in cash or by wire transfer of
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immediately available funds to an account designated by
CRE) an amount equal to the unpaid amount of the liquidated
damages owing by K-P to CRE pursuant to this subparagraph.
In order to be entitled to elect to recover liquidated
damages from any Defaulting Party or Defaulting Parties
pursuant to this subparagraph, CRE must give written notice
of such election to said Defaulting Party or Defaulting
Parties within ten (10) Business Days after the Closing
Date.
(iii) Alternatively, if the conditions to the obligations of each
of the Acting Greenway Parties set forth in Section 13.2
have been satisfied (or waived), then at the election of
the Crescent Parties, in lieu of terminating this Agreement
and in lieu of recovering liquidated damages from any
Defaulting Party or Defaulting Parties pursuant to
subparagraph 13.4(a)(ii) (if applicable), the Crescent
Parties shall be entitled to enforce specific performance
of this Agreement, in which event the Crescent Parties'
sole remedy shall be to require specific performance of the
Acting Greenway Parties' agreement to take and perform the
actions to be taken and performed by the Acting Greenway
Parties on the Closing Date, it being expressly stipulated,
acknowledged and agreed that in the circumstances described
above in this subparagraph, legal remedies would not
constitute adequate or appropriate remedies for Crescent
Parties and that Crescent Parties shall be entitled, as
their sole remedy (if Crescent Parties have elected to
enforce specific performance of this Agreement pursuant to
this subparagraph), to the equitable remedy of requiring
specific performance of this Agreement by the Acting
Greenway Parties, and that if the Crescent Parties elect to
enforce specific performance of this Agreement against the
Acting Greenway Parties pursuant to this subparagraph the
Crescent Parties shall not be entitled to recover monetary
damages from Greenway Parties, or any of them, for failure
or refusal by any of the Acting Greenway Parties to take or
perform any action herein required to be taken or performed
by such Acting Greenway Party on the Closing Date; provided
that if the Closing occurs, nothing in this subparagraph
13.4(a)(iii) shall bar or impair any right of the Crescent
Parties to recover damages or enforce any other remedy
available at law or in equity against any of the Acting
Greenway Parties for breach of any warranty or
representation made by such Acting Greenway Party pursuant
to this Agreement which survives the Closing or for default
in performing the agreements of NML or default in
performing the agreements of Kemper pursuant to this
Agreement, subject, however, to the provisions of paragraph
13.4(c) and paragraph 13.4(d), if and to the extent
applicable. In order for the Crescent Parties to be
entitled to elect to enforce specific performance of this
Agreement against the Acting Greenway Parties pursuant to
this subparagraph, CRE must give written notice of such
election to the Acting Greenway Parties within ten (10)
Business Days after the Closing Date. In this regard, it
is further agreed and stipulated that:
(a) if NML, GP#1 or GP#9 is a Non-Performing Party, and if
the Crescent Parties are otherwise entitled to and do
elect to enforce specific performance of this
Agreement by NML, GP#1 and GP#9 and give written
notice of such election to the Acting Greenway
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Parties within ten (10) Business Days after the
Closing Date, then solely for purposes of this
subparagraph 13.4(a)(iii) and paragraph 13.4(b)
it shall be conclusively deemed that each of NML, GP#1
and GP#9 is a Performing Party for purposes of (A)
determining whether the condition to the obligation of
K-P and Kemper set forth in paragraph 13.2(e) has been
satisfied on the Closing Date, (B) determining whether
the condition to the obligation of J/K#1, J/K#9 and
Century set forth in paragraph 13.2(f) has been
satisfied on the Closing Date, and (C) determining
whether the condition to the obligation of Dow set
forth in paragraph 13.2(g) has been satisfied on the
Closing Date, in which event none of K-P, Kemper,
J/K#1, J/K#9, Century, or Dow will be entitled to
terminate this Agreement pursuant to paragraph 13.4(b)
solely by reason of the fact that NML, GP#1 or GP#9
was a Non-Performing Party;
(b) if K-P or Kemper is a Non-Performing Party, and if the
Crescent Parties are otherwise entitled to and do
elect to enforce specific performance of this
Agreement by K-P and Kemper and give written notice of
such election to the Acting Greenway Parties
within ten (10) Business Days after the Closing Date,
then solely for purposes of this subparagraph
13.4(a)(iii) and paragraph 13.4(b) it shall be
conclusively deemed that each of K-P and Kemper is a
Performing Party for purposes of (A) determining
whether the condition to the obligation of NML, GP#1
and GP#9 set forth in paragraph 13.2(d) has been
satisfied on the Closing Date, (B) determining whether
the condition to the obligation of J/K#1, J/K#9 and
Century set forth in paragraph 13.2(f) has been
satisfied on the Closing Date, and (C) determining
whether the condition to the obligation of Dow set
forth in paragraph 13.2(g) has been satisfied on the
Closing Date, in which event none of NML, GP#1, GP#9,
J/K#1, J/K#9, Century, or Dow will be entitled to
terminate this Agreement pursuant to paragraph 13.4(b)
solely by reason of the fact that K-P or Kemper was a
Non-Performing Party; and
(c) if the Crescent Parties elect to enforce specific
performance of this Agreement pursuant to this
subparagraph 13.4(a)(iii) and the Closing occurs, the
date on which the Closing occurs shall thereafter be
deemed to be the "Closing Date" for all purposes under
this Agreement.
(iv) If the conditions to the obligations of each of the Acting
Greenway Parties set forth in Section 13.2 have been
satisfied or waived, and if Dow shall default in performing
any of his agreements, covenants and undertakings which are
required by this Agreement to be performed by Dow on the
Closing Date, the Crescent Parties shall be entitled, after
having given at least five (5) Business Days' notice of
such default to Dow, as their sole and exclusive remedy,
either (a) to enforce specific performance of this
Agreement against Dow (if no other Acting Greenway Party
has exercised a right to terminate this Agreement pursuant
to paragraph 13.4(b)), or (b) to recover liquidated damages
in
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the amount of $50,000 from Dow; it being expressly
understood and agreed that in the circumstances described
in this subparagraph 13.4(a)(iv), the Crescent Parties
shall be entitled to exercise their remedies under clause
(a) above (if no other Acting Greenway Party has exercised
a right to terminate this Agreement pursuant to paragraph
13.4(b)) or under clause (b) above, but not under both
clauses (a) and (b), and shall not be entitled to exercise
any other remedy at law or in equity as against Dow.
(b) Subject to subparagraphs 13.4(a)(iii)(a) and 13.4(a)(iii)(b), if any
of the conditions to the obligation of any Acting Greenway Party set
forth in Section 13.2 shall not be satisfied (or waived) on or prior
to the Closing Date, such Acting Greenway Party shall be entitled to
give notice to the Crescent Parties and remaining Greenway Parties on
the Closing Date terminating this Agreement, in which event this
Agreement shall terminate on the Closing Date and no party shall have
any further obligation, duty, liability, or right hereunder; provided
that the provisions of Section 9.1, paragraph 9.3(d), paragraph
11.1(h), and paragraph 12.1(bb) shall remain in effect
notwithstanding termination of this Agreement by an Acting Greenway
Party pursuant to this paragraph 13.4(b). No Acting Greenway Party
shall be entitled to require specific performance of this Agreement
by the Crescent Parties, nor shall any Greenway Party be entitled to
recover damages from any Crescent Party for breach of or failure to
perform this Agreement, provided that nothing in this paragraph 13(b)
shall prejudice or release the right, if applicable, of NML and
Kemper to receive and retain payment of the Earnest Money pursuant to
and as provided in Section 9.1, if applicable.
(c) It is expressly agreed that if (i) any one or more of the
representations or warranties of any of the Greenway Parties set out
in paragraph 1.7(b) or in Section 12.1 shall not be true and correct
as of the date of this Agreement or as of the Closing Date, (ii) any
Substitute Certificate delivered by NML and Kemper to CRE pursuant to
paragraph 9.4(a) shall not be true and correct as of the date of
delivery thereof or as of the Closing Date, or (iii) the updated list
of Existing Leases delivered by NML and Kemper to CRE pursuant to
Section 9.5 shall not be true, correct or complete as of the date of
delivery thereof or as of the Closing Date, and if the Crescent
Parties, with actual knowledge that such representation, warranty,
Substitute Certificate or updated list of Existing Leases was not or
is not true, correct, or complete, as applicable, shall nevertheless
elect to and do consummate the Closing, each such untrue or incorrect
or incomplete warranty, representation, Substitute Certificate or
updated list of Existing Leases, as applicable, thus actually known
to the Crescent Parties to have been or to be untrue, incorrect, or
incomplete shall have been waived by the Crescent Parties and neither
Newco nor any of the Crescent Parties shall have any right to assert
or recover any claim for damages or any other relief or remedy
against any of the Greenway Parties based on the breach of any such
warranty or representation which was actually known by the Crescent
Parties at the time of the Closing to have been or to be false or
inaccurate or incorrect or based on any error, omission, misstatement
or inaccuracy in any Substitute Certificate or in such updated list
of Existing Leases of which the Crescent Parties have actual
knowledge at the time of the Closing.
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(d) It is further expressly agreed that if any Acting Greenway Party (a
"DEFAULTING PARTY") shall fail or refuse to perform or observe any
agreement, covenant or undertaking provided in this Agreement to be
performed or observed by such Acting Greenway Party at any time or
times prior to the Closing Date (a "PRE-CLOSING OBLIGATION"), and if
the Crescent Parties, with actual knowledge that such Defaulting
Party has thus failed or refused to perform or observe such
Pre-Closing Obligation (a "KNOWN PRE-CLOSING BREACH"), shall
nevertheless elect to and do consummate the Closing, then neither
Newco nor any of the Crescent Parties shall thereafter be entitled to
rescind the Closing based on such Known Pre-Closing Breach and the
maximum amount of damages which Newco and the Crescent Parties
(collectively) shall be entitled to recover against such Defaulting
Party for such Known Pre-Closing Breach shall be limited to the
lesser of (i) the actual amount of damages ("ACTUAL DAMAGES"), if
any, suffered by Newco and the Crescent Parties as a proximate result
of such Known Pre-Closing Breach, not including, however, indirect or
consequential damages (including, without limitation, lost profits),
or (ii) the "Damages Limitation Amount" as hereinafter defined
applicable to such Defaulting Party. The provisions of this
paragraph 13.4(d) shall have no application to a failure or refusal
to perform or observe a Pre-Closing Obligation which is not a Known
Pre-Closing Breach. Neither Century nor Dow has undertaken or is
obligated to perform or observe any Pre-Closing Obligation under this
Agreement; and the "Damages Limitation Amount" as to each of Century
and Dow is thus Zero Dollars ($0). Likewise, neither J/K#1 nor J/K#9
has undertaken or is obligated to perform or observe any Pre-Closing
Obligation under this Agreement except only as they are committed to
act or refrain from acting on behalf of the respective Partnerships
in their respective capacities as a general partner of a Partnership
with respect to the Pre-Closing Obligations of such Partnership; and
the "Damages Limitation Amount" as to each of J/K#1 and J/K#9 is thus
Zero Dollars ($0), subject, however, to the provisions of
subparagraph 13.4(d)(iii) below. The "DAMAGES LIMITATION AMOUNT" as
to the respective remaining Acting Greenway Parties shall constitute
the maximum aggregate amount of damages recoverable against the
applicable Acting Greenway Party who is or is deemed to be a
Defaulting Party (either in its individual or corporate capacity or
in its capacity as a partner of either or both of the Partnerships)
for or on account of all Known Pre-Closing Breaches as to which such
Acting Greenway Party is or is deemed to be a Defaulting Party
(collectively, and regardless of the number of instances in which
such Acting Greenway Party is or is deemed to be a Defaulting Party
with respect to any number of Known Pre-Closing Breaches) and shall
be determined as follows:
(i) As to the NML Parties, the Damages Limitation Amount shall be
determined as follows:
(a) If any one or more of the NML Parties is a Defaulting Party
or if either or both of the Partnerships is a Defaulting
Party, each of the NML Parties shall be deemed to be a
"Defaulting Party"; the Damages Limitation Amount shall be
a single sum as specified hereinafter applicable to the NML
Parties collectively (and not separately); and the NML
Parties shall be jointly and severally liable for the
lesser of the Actual Damages or the applicable Damages
Limitation Amount specified in subparagraph 13.4(d)(i)(b)
or 13.4(d)(i)(c) below.
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(b) If any of the NML Parties is a Defaulting Party and if
neither of the Partnerships and none of the Kemper/K-P
Parties is a Defaulting Party, the Damages Limitation
Amount as to the NML Parties (collectively) shall be One
Million Dollars ($1,000,000).
(c) If any of the NML Parties is a Defaulting Party, and if any
one or more of the Partnerships or the Kemper/K-P Parties
are also a Defaulting Party, the Damages Limitation Amount
as to the NML Parties (collectively) shall be the lesser of
Five Hundred Thousand Dollars ($500,000) or one-half (1/2)
of the Actual Damages.
(ii) As to the Kemper/K-P Parties, the Damages Limitation Amount shall be
determined as follows:
(a) If both of the Kemper/K-P Parties are Defaulting Parties or
if either or both of the Partnerships is a Defaulting
Party, each of the Kemper/K-P Parties shall be deemed to be
a "Defaulting Party"; the Damages Limitation Amount shall
be a single sum as specified hereinafter applicable to the
Kemper/K-P Parties collectively (and not separately); and
the Kemper/K-P Parties shall be jointly and severally
liable for the lesser of the Actual Damages or the
applicable Damages Limitation Amount specified in
subparagraph 13.4(d)(ii)(b) or 13.4(d)(ii)(c) below. If one
only of the Kemper/K-P Parties is a Defaulting Party and
neither of the Partnerships is a Defaulting Party, the
Damages Limitation Amount shall be the sum specified
hereinafter (in subparagraph 13.4(d)(ii)(c) or subparagraph
13.4(d)(ii)(d), as applicable) applicable to such one of
the Kemper/K-P Parties which is a Defaulting Party, and the
other of the Kemper/K-P Parties shall not be liable for
Actual Damages or such Damages Limitation Amount; provided
that if K-P is a Defaulting Party but Kemper is not a
Defaulting Party, Kemper agrees that if K-P does not pay in
full the lesser of the Actual Damages (if any) or the
Damages Limitation Amount for which K-P becomes liable by
reason of K-P's Known Pre-Closing Breach (whether one or
more) within five (5) Business Days after final
determination of the amount thereof by final judgment or
arbitration award not subject to further appeal or by
agreement of K-P, Kemper will, upon demand from CRE,
purchase from Newco and the Crescent Parties an assignment,
without recourse, of the claims of Newco and the Crescent
Parties against K-P for payment of the lesser of the Actual
Damages or the Damages Limitation Amount for which K-P has
become liable as thus finally determined and will pay
therefor (in cash or by wire transfer of immediately
available funds to an account designated by CRE) an amount
equal to the unpaid amount of the Actual Damages or the
Damages Limitation Amount for which K-P has become liable
as thus finally determined.
(b) If both of the Kemper/K-P Parties are Defaulting Parties
and if neither of the Partnerships and none of the
NML-Parties is a
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Defaulting Party, the Damages Limitation Amount as to the
Kemper/K-P Parties (collectively) shall be One Million
Dollars ($1,000,000).
(c) If both of the Kemper/K-P Parties are Defaulting Parties,
and if any one or more of the Partnerships or the NML
Parties are also a Defaulting Party, the Damages Limitation
Amount as to the Kemper/K-P Parties (collectively) shall be
the lesser of Five Hundred Thousand Dollars ($500,000) or
one-half (1/2) of the Actual Damages.
(d) If one only of the Kemper/K-P Parties is a Defaulting Party
and if neither of the Partnerships and none of the NML
Parties is a Defaulting Party, the Damages Limitation
Amount as to such one Kemper/K-P Party shall be One Million
Dollars ($1,000,000).
(e) If one only of the Kemper/K-P Parties is a Defaulting
Party, and if any one or more of the NML Parties are also a
Defaulting Party, the Damages Limitation Amount as to such
one Kemper/K-P Party shall be the lesser of Five Hundred
Thousand Dollars ($500,000) or one-half (1/2) of the Actual
Damages.
(iii) As to the Partnerships, if either or both of the Partnerships is
a Defaulting Party, the Damages Limitation Amount as to such
Partnership or Partnerships shall be Zero Dollars ($0) as to
Newco and the Crescent Parties; provided that if a Partnership
becomes a Defaulting Party by reason of an act or omission of
J/K#1 or J/K#9 acting on behalf of such Partnership in its
capacity as a general partner of the Partnership without the
approval or consent of NML and Kemper, then J/K#1 or J/K#9, as
applicable, shall be liable to the NML Parties and Kemper/K-P
Parties for all amounts, if any, of damages which are required
to be paid by said NML Parties or Kemper/K-P Parties to Newco or
any of the Crescent Parties by reason of such Known Pre-Closing
Breach (whether one or more) of such Partnership.
13.5. Sharing of Partnership Expenses. If this Agreement is
terminated pursuant to Section 9.2 or Section 13.4, the Partnerships shall
share the expenses incurred by the respective Partnerships in connection with
this Agreement in the ratio of 49% by Greenway and 51% by 9 Greenway; and
either Partnership which has paid less than its aforesaid share of such
expenses shall promptly reimburse the other Partnership for such deficiency.
XIV.
MISCELLANEOUS
14.1. Assumed Obligations; Cross-Indemnity Agreements.
(a) If the Closing occurs, Newco shall have assumed all the
obligations, duties, and liabilities of Greenway and 9 Greenway with respect to
all "Assigned Contracts" and "Assigned Leases" (as defined in the Newco
Conveyance), all unpaid amounts of the Senterra Termination Payment and TI and
Commission Expenses and Closing Expenses which are not
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paid by 9 Greenway on or within five (5) Business Days after the
Closing Date and all other costs or expenses of tenant improvements (which
have not been and are not required to be paid directly by the tenant and are
not directly reimbursable by the tenant other than through payment of rental or
additional rental or in installments over all or substantially all the
remaining term of the applicable lease, but including, without limitation,
amounts required to be loaned or advanced from the Landlord to any Existing
Tenant under an Existing Lease to pay or reimburse such Existing Tenant for
costs or expenses of tenant improvements and which are repayable, with or
without interest, in installments or as additional rent over all or
substantially all the remaining term of such Existing Lease) and leasing
commissions payable under or in connection with Existing Leases becoming
payable after December 31, 1997, and all other obligations, duties, debts and
liabilities of the Partnerships (and either of them) which are provided to be
assumed by Newco pursuant to the Newco Conveyance (collectively, the "ASSUMED
OBLIGATIONS"), and Newco, SPC, and CRE (herein severally and collectively
called the "INDEMNIFYING PARTIES") shall jointly and severally indemnify and
save and hold harmless the Greenway Parties (each an "INDEMNIFIED PARTY" and
collectively the "INDEMNIFIED PARTIES") from and against any loss, cost, claim,
expense (including, without limitation, attorneys' fees and expenses) and
liability whatsoever incurred or suffered by any of the Indemnified Parties or
asserted against any of the Indemnified Parties at any time or times by any
person or persons with respect to the Assumed Obligations and any and all
claims, demands and causes of action asserted against any of the Indemnified
Parties at any time or times by any person or persons in connection with or
arising out of the ownership, maintenance or operation of the Greenway Assets
and attributable to events, acts or omissions occurring on or after the Closing
and at any time or times during Newco's ownership of such Greenway Properties,
to the extent, and only to the extent (if any) that any such loss, cost, claim,
expense or liability is not paid by, or required to be reimbursed to an
Indemnified Party by, an insurer under any insurance policy or policies
maintained by such Indemnified Party or under which such Indemnified Party is
an insured; provided that:
(i) The Indemnifying Parties' indemnity obligations under this paragraph
14.1(a) will not extend to claims arising out of the negligence or
wilful misconduct of an Indemnified Party; provided only that, except
as otherwise provided in subparagraphs 14.1(a)(ii), 14.1(a)(iv) or
14.1(a)(v), the Indemnifying Parties' indemnity obligations under
this paragraph 14.1(a) will extend to and cover claims against an
Indemnified Party resulting from accidents, events or occurrences
occurring after the Closing resulting in injury to or death of any
person or damage to or destruction of the property of any person
notwithstanding the fact that such injury, death, damage or
destruction is caused by the design or condition of the Greenway
Assets existing at the Closing (including, without limitation,
conditions resulting from violations, if any, by either of the
Partnerships of Environmental Laws (as defined in subparagraph
14.1(a)(ix)) or requirements of any statute, ordinance, or
governmental regulation concerning the design or condition of the
Greenway Assets), even if such design or condition resulted from the
NEGLIGENCE OF SUCH INDEMNIFIED PARTY or any other Indemnified Party
occurring prior to the Closing or gives rise to STRICT LIABILITY OF
SUCH INDEMNIFIED PARTY or any other Indemnified Party for such
injury, death, damage or destruction.
(ii) Notwithstanding the provisions of subparagraph 14.1(a)(i), the
Indemnifying Parties indemnity obligations under this paragraph
14.1(a) will not extend to or include, and the Assumed Obligations do
not include, claims for personal injury or death of any person or
persons allegedly resulting from exposure to or contact with
allegedly toxic or hazardous substances in, on or about the Greenway
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Properties to the extent that such claims are based on exposure to
or contact with such substances which occurred prior to the Closing
Date.
(iii) CRE has engaged Law Engineering and Environmental Services, Inc.
("LAW ENGINEERING") with instructions to conduct a Phase I
environmental survey of the Greenway Properties meeting or exceeding
the standards prescribed in ASTM E1527-94 "Standard Practice for
Environmental Site Assessments," excluding sampling for lead in
drinking water or for radon. CRE shall promptly provide NML and
Kemper with copies of each report (the "LAW REPORTS") made by Law
Engineering reflecting results or findings or information obtained in
connection with such Phase I environmental survey and any additional
testing or sampling performed or caused to be performed by Law
Engineering with respect to the Greenway Properties. CRE shall bear
and pay the charges and expenses of Law Engineering for and in
connection with said Phase I environmental survey and any other
testing or sampling conducted by Law Engineering at the request of
CRE. Senterra has provided CRE with copies of the reports of
environmental surveys and tests heretofore obtained by the
Partnerships which are listed or described in Schedule XLII attached
hereto and incorporated herein (the "EXISTING ENVIRONMENTAL
REPORTS"); and the Partnerships may at their election and expense
conduct or cause to be conducted additional environmental surveys,
tests or sampling with respect to the Greenway Properties and provide
the results thereof (the "ADDITIONAL ENVIRONMENTAL REPORTS") to CRE
prior to the 30th Day. Except only as otherwise provided in
subparagraphs 14.1(a)(ii) and 14.1(a)(v), the Assumed Obligations
shall include, and the indemnity obligations of the Indemnifying
Parties under this paragraph 14.1(a) shall extend to and include
indemnification of the Indemnified Parties against and with respect
to all costs, expenses, claims and liability associated with
remediation, removal, treatment or other curative or preventative
actions which may at any time be required under applicable
Environmental Laws with respect to any toxic or environmentally
hazardous substance or condition in, on, under or about the Greenway
Properties which is now classified as toxic or environmentally
hazardous under existing applicable Environmental Laws, (I) if the
existence or presence of such substance or condition (a "DISCLOSED
ENVIRONMENTAL HAZARD") is disclosed in the Law Reports, the Existing
Environmental Reports or the Additional Environmental Reports (if
any), or (II) as to drinking water and radon, if tests or samples to
detect the existence of lead or other contaminants in drinking water
or to detect the existence of radon are not conducted by Law
Engineering, and if it is determined after the 30th Day that lead or
other contaminants in drinking water or radon, as applicable, are
present in, on, under or about the Greenway Properties (in which
event, the existence of lead or other contaminants in drinking water
or radon, as applicable, in, on, under or about the Greenway
Properties shall be deemed to be a "Disclosed Environmental Hazard").
(iv) Notwithstanding the provisions of subparagraph 14.1(a)(i), the
Indemnifying Parties indemnity obligations under this paragraph
14.1(a) will not extend to or include, and the Assumed Obligations do
not include, liability, if any (including, without limitation,
liability, if any, for contribution toward payment of or
reimbursement of costs or expenses incurred by any person or costs or
expenses, including attorneys' fees, of defending any claim of such
liability by any person), of any Indemnified Party for costs or
expenses associated with remediation, removal, treatment or other
curative or preventative actions which may at any
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time be required under applicable Environmental Laws with respect to
toxic or environmentally hazardous substances or conditions in, on,
under or about the Greenway Properties which (I) are not now
classified as toxic or environmentally hazardous under existing
applicable Environmental Laws, or (II) are now classified as toxic or
environmentally hazardous under existing applicable Environmental
Laws but are not a Disclosed Environmental Hazard or deemed to be a
Disclosed Environmental Hazard, in each case if and to the extent, if
any, that such liability is now or may hereafter be imposed upon such
Indemnified Party under applicable Environmental Laws.
(v) In no event shall such indemnification cover any indirect or
consequential damages of an Indemnified Party, including, without
limitation, lost profits.
(vi) The indemnity agreement of the Indemnifying Parties under this
paragraph 14.1(a) shall be enforceable by and inure to the benefit of
the Indemnified Parties and their successors and assigns but shall
not be enforceable by or inure to the benefit of any other person or
persons.
(vii) None of the Indemnifying Parties shall have any obligation to any
Indemnified Party under this paragraph 14.1(a) after the Account
Termination Date in connection with or with respect to any loss,
cost, claim, expense (including, without limitation, attorneys' fees
and expenses) or liability suffered by or asserted against such
Indemnified Party based on any of the Assumed Obligations to the
extent that amounts expended by any Indemnifying Party after the
Account Termination Date to pay or reimburse such Indemnified Party
for such loss, cost, claim, expense or liability would have required
the making of a debit entry in a corresponding amount in the
Post-Closing Adjustment Account under the provisions of paragraph
4.2(e) if the Account Termination Date had not theretofore occurred.
(viii) Notwithstanding any contrary provision of this paragraph 14.1(a),
none of the Indemnifying Parties shall have any obligation under this
paragraph 14.1(a) to any Indemnified Party for any loss, cost, claim,
expense (including, without limitation, attorneys' fees and expenses)
or liability in connection with a Disputed Claim which such
Indemnified Party is required to bear and pay under the provisions of
subparagraph 4.2(e)(iv), nor shall the Indemnifying Parties be
obligated to reimburse an Indemnified Party pursuant to this
paragraph 14.1(a) for any loss, cost, claim, expense (including,
without limitation, attorneys' fees and expenses) or liability paid
or incurred by such Indemnified Party if and to the extent that the
payment of such reimbursement to such Indemnified Party by any
Indemnifying Party would require the making of a debit entry in a
corresponding amount in the Post-Closing Adjustment Account pursuant
to paragraph 4.2(e).
(ix) "ENVIRONMENTAL LAWS," as used herein, means any federal, state, or
local law, statute, ordinance, or regulation, as existing as of the
Closing Date and as may thereafter be enacted or adopted, relating to
(a) the control of any pollutant or potential pollutant or protection
of the air, water, land or the environment, (b) solid, gaseous or
liquid waste generation, handling, treatment, storage, disposal or
transportation, or (c) exposure to, or remediation, removal or
treatment of, or other curative or preventative actions with respect
to, hazardous, toxic, explosive, corrosive or other substances
alleged to be harmful. "Environmental
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Laws" shall include, but not be limited to, the Clean Air Act,
42 U.S.C. Section 7401 et seq., the Resource Conservation and
Recovery Act, as amended by the Hazardous and Solid Waste Amendments
Act, 42 U.S.C. Section 6901 et seq., the Federal Water Pollution
Control Act, 33 U.S.C. Section 1251 et seq., the Safe Drinking Water
Act, 42 U.S.C. Section 300f et seq., the Comprehensive Environmental
Response, Compensation, and Liability Act, as amended by the
Superfund Amendments and Reauthorization Act, 42 U.S.C. Section 9601
et seq.; the Toxic Substances Control Act, as amended, 15 U.S.C.
Section 2601 et seq.; the Hazardous Materials Transportation Act, as
amended, 49 U.S.C. Section 1801 et seq.; the Oil Pollution Act of
1990, 33 U.S.C. Section 2701 et seq.; and any laws of the State of
Texas implementing the foregoing federal laws. "Environmental Laws"
does not include the Occupational Safety and Health Act or any other
federal, state, foreign or local law, statute, ordinance, or
regulation governing worker safety or work place conditions.
Nothing set forth in this paragraph 14.1(a) shall affect in any way the
provisions of Section 4.2.
(b) If the Closing occurs, NML and Kemper (herein severally called
the "INDEMNIFYING PARTIES") shall severally, to the extent only of one-half
each by NML and Kemper, respectively, indemnify and save and hold harmless
Newco, CRE, and SPC (each an "INDEMNIFIED PARTY" and collectively the
"INDEMNIFIED PARTIES") from and against any loss, cost, claim, expense
(including, without limitation, attorneys' fees and expenses) and liability
whatsoever incurred or suffered by any of the Indemnified Parties or asserted
against any of the Indemnified Parties by any person or persons with respect to
the Retained Obligations at any time or times, to the extent, and only to the
extent (if any) that such loss, cost, claim, expense or liability is not paid
by, or required to be reimbursed to an Indemnified Party by, an insurer under
any insurance policy or policies maintained by such Indemnified Party or under
which such Indemnified Party is an insured; provided that (i) the Indemnifying
Parties' indemnity obligations under this paragraph will not extend to claims
arising out of the negligence or wilful misconduct of an Indemnified Party, and
(ii) in no event shall such indemnification cover any indirect or consequential
damages of an Indemnified Party, including, without limitation, lost profits.
(c) An Indemnified Party shall promptly notify the Indemnifying
Parties of any claim or action of a third party against such Indemnified Party
for which such Indemnified Party seeks indemnification under paragraph 14.1(a),
paragraph 14.1(b) or paragraph 14.1(c), as applicable; provided that failure or
delay in giving any such notice shall not deprive an Indemnified Party of its
right to indemnity hereunder except to the extent that the Indemnifying Parties
are actually prejudiced by such failure or delay. Upon receipt of such a
notice, the Indemnifying Parties shall have the right, at their expense, to
participate in and assume the defense of such claim or action. If the
Indemnifying Parties do assume the defense of such claim or action, the
Indemnified Parties shall cooperate fully with the Indemnifying Parties in the
defense of such claim or action, and any Indemnified Party may at its election
continue to participate in the defense and may retain its own counsel at such
Indemnified Party's expense. An Indemnified Party shall not settle or
compromise any claim or action against such Indemnified Party for which an
indemnity claim is made or is expected to be made under this Section 14.1
without the consent of the Indemnifying Parties, which consent shall not
unreasonably be delayed or withheld; but if an Indemnified Party receives an
offer of settlement of any such claim which such Indemnified Party desires to
accept and the Indemnifying Parties refuse to approve such settlement, the
Indemnified Party shall have the
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right, at its election, to require that the Indemnifying Parties take over and
assume the defense of such claim as provided for above in this paragraph.
14.2. Covenants of Certain Greenway Parties. Each of Greenway, 9
Greenway, NML and Kemper severally covenants and agrees with and for the
benefit of the Crescent Parties as follows:
(a) Between the date of this Agreement and the Closing or termination of
this Agreement, and except as otherwise required under the terms of
this Agreement, each of Greenway and 9 Greenway shall operate and
maintain the respective portions of the Greenway Properties owned by
it in such manner as is determined by its "Financial Partners" (as
defined in the respective Partnership Agreements) in the exercise of
their good faith judgment to be in the best interest of such
Partnership as the owner of such Greenway Properties without regard
to the existence of this Agreement.
(b) Between the date of this Agreement and the Closing or termination of
this Agreement, neither Greenway nor 9 Greenway will enter into or
contract to enter into any New Lease (other than parking permits or
licenses issued by or for the respective Partnerships in the ordinary
course of business for contract parking in the parking garages
included in the Greenway Assets) or terminate any Existing Lease
after the date of this Agreement without the prior written approval
of CRE; provided that:
(i) except as permitted under subparagraph 14.2(b)(iii), if
applicable, such approval shall not be unreasonably
withheld by CRE;
(ii) if either Partnership desires to sign a New Lease (other
than parking permits or licenses issued by or for the
respective Partnerships in the ordinary course of business
for contract parking in the parking garages included in the
Greenway Assets) or to terminate an Existing Lease after
the date of this Agreement, such Partnership shall give
written notice to CRE (directed to the attention of James
M. Eidson, Jr. or Terri Black) describing the proposed New
Lease or describing the Existing Lease and the
Partnership's reason for desiring to terminate it (as
applicable); and, subject to subparagraph 14.2(b)(iii), if
applicable, if CRE shall fail to give written notice to
such Partnership specifying its objections, if any, to such
proposed New Lease or to termination of such Existing Lease
(as applicable) within five (5) Business Days after giving
of such notice to CRE, then CRE shall be conclusively
deemed to have given prior written approval for the signing
of such New Lease or termination of such Existing Lease (as
applicable) by such Partnership; and
(iii) notwithstanding the provisions of subparagraphs 14.2(b)(i)
and 14.2(b)(ii), if this Agreement is not terminated
pursuant to the provisions of Section 9.1 and CRE does not
give notice of termination of this Agreement pursuant to
Section 9.2 on or before the 30th Day, then, if and while
this Agreement remains in effect during the period from the
30th Day through and including the earlier of the Closing
Date or the date (the "EXTENDED DATE") which is the
fifteenth (15th) consecutive day next following the
expiration of sixteen (16) Business Days after the 30th
Day, CRE may withhold its approval of any proposed New
Lease or
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termination of any Existing Lease without any requirement
that such withholding be reasonable and shall not be
required to specify any reason for withholding such
approval in responding to a request for such approval under
subparagraph 14.2(b)(ii); provided that if, for any reason,
the Closing does not occur on or prior to the Extended Date
and if, for any reason, this Agreement remains in force and
effect after the Extended Date, the provisions of this
subparagraph 14.2(b)(iii) shall be of no force or effect
whatsoever after the Extended Date and CRE shall be
required to comply with the requirements of subparagraphs
14.2(b)(i) and 14.2(b)(ii) without regard to the provisions
of this subparagraph 14.2(b)(iii).
(c) Between the date of this Agreement and the Closing or termination of
this Agreement, neither Greenway nor 9 Greenway will, without the
written consent of CRE, enter into or amend any contract which will
be included in the "Assigned Contracts" (as defined in the Newco
Conveyance) to be assigned to and assumed by Newco pursuant to the
Newco Conveyance or terminate any contract listed in Schedule XXXVIII
hereto (other than as a result of termination of the term thereof
under the terms of such contract); provided that:
(i) Either or both of the Partnerships may, without the consent
of CRE, terminate Nonmaterial Contracts or enter into or
amend Nonmaterial Contracts which will be included in such
"Assigned Contracts"; provided that a Nonmaterial Contract
which is entered into or amended by either of the
Partnerships after the date of this Agreement without the
consent of CRE shall not be included in the "Assigned
Contracts" if such Nonmaterial Contract provides for
furnishing or rendering services to Existing Tenants under
Existing Leases (as described in Section 1.856-4(b)(5)
of the Income Tax Regulations promulgated pursuant to the
Code) and if such Nonmaterial Contract is with a contractor
who is not an independent contractor from whom REIT does
not derive or receive any income (within the meaning of and
as described in Section 1.856-4(b)(5) of said Income Tax
Regulations). To assist the Partnerships in avoiding
entering into or amending a Nonmaterial Contract which
would not be included in the "Assigned Contracts," CRE
shall furnish to Senterra a computer disk or disks
containing the list of contractors maintained by REIT to
identify contractors with whom the Partnerships could not
enter into or amend a Nonmaterial Contract to be included
in the "Assigned Contracts." Further, CRE agrees that if
Senterra or any other representative of the Partnerships
makes inquiry by telephone (or by telecopy or other
communication actually received by such person or persons)
of CRE's representatives, Terri Black (at 818-878-0427) or
James M. Eidson, Jr. (at 817-878-0407), as to whether a
particular Nonmaterial Contract will qualify as an
"Assigned Contract" if it is amended or entered into with a
specified contractor, CRE will respond to such inquiry
within seventy-two (72) hours and will allow such
Nonmaterial Contract to be included in the "Assigned
Contracts" if (i) approval by either such representative is
communicated to Senterra or such other representative of
the Partnerships by telephone, telecopy or otherwise, or
(ii) CRE (through such representatives or otherwise) does
not advise Senterra or such other representative of the
Partnerships
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by telephone, telecopy or otherwise within such seventy-two
(72) hours' period that such Nonmaterial Contract will not
qualify as an "Assigned Contract" if amended or entered
into with such specified contractor.
(ii) If either Partnership desires to enter into or amend a
contract (other than a Nonmaterial Contract) which will be
included in such "Assigned Contracts," such Partnership
shall give written notice thereof to CRE, and CRE shall not
unreasonably withhold its consent to the making or
amendment of such contract. If CRE does not give written
notice to such Partnership of an objection to any such
proposed contract or proposed amendment of a contract
within five (5) Business Days after CRE's receipt of notice
of the Partnership's desire to enter into or amend such
contract, CRE shall be conclusively deemed to have
consented to the making of such contract or amendment of
such contract (as applicable) by such Partnership and to
its inclusion (as thus amended, if applicable) in the
"Assigned Contracts" under the Newco Conveyance if the
Closing occurs.
(iii) If either Partnership desires to terminate a contract
listed in Schedule XXXVIII (other than a Nonmaterial
Contract), such Partnership shall give written notice to
CRE, and CRE shall not unreasonably withhold its consent to
the termination of such contract. If CRE does not give
written notice to such Partnership of an objection to
termination of a contract within five (5) Business Days
after CRE's receipt of notice of the Partnership's desire
to terminate such contract, CRE shall be conclusively
deemed to have consented to the termination of such
contract by such Partnership.
(iv) In case of an emergency when delay in entering into or
amending a contract by a Partnership might endanger human
life, might damage or expose portions of the Greenway
Properties to damage or material risk of damage, might
expose the Partnership to liability or risk of liability to
third persons, or might result in a breach by the
Partnership of its obligations under Existing Leases or the
Nomura Deed of Trust or the "Security Documents" referred
to therein, such Partnership will give such notice of such
contract or amendment to CRE as the Partnership's Financial
Partners determine in their good faith judgment is
practicable consistent with the nature of such emergency,
but the Partnership shall be entitled to enter into or
amend a contract as deemed reasonably appropriate by the
Financial Partners of such Partnership to deal with the
emergency without the consent of CRE; and if the Closing
occurs such contract (as amended, if applicable) shall be
included in the "Assigned Contracts" under the Newco
Conveyance.
(d) If the Closing occurs, 9 Greenway shall give written notice to The
Coastal Corporation on the Closing Date pursuant to Article XXIII of
that certain Fifteenth Amendment and Amended and Restated Lease
Contract by and between 9 Greenway, as "Landlord," and The Coastal
Corporation, as "Tenant," dated November 14, 1989 (said Article XXIII
of said lease being herein called the "COASTAL LEASE PROFIT SHARING
AGREEMENT"), of the conveyance of the Coastal Tower building and
adjacent South Garage from 9 Greenway to Newco pursuant to this
Agreement and shall inform The Coastal Corporation that the portion
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of the consideration paid by Newco for the Greenway Assets fairly
allocable to the Coastal Tower building, together with the entirety
of the South Garage and including all fixtures, equipment, and
personalty of 9 Greenway situated in and used in the operation of the
Coastal Tower Building or South Garage (but excluding the Houston
City Club on the roof of such garage) is the sum of $85,300,000
(being the amount of such consideration which CRE, 9 Greenway, NML
and Kemper have agreed is fairly allocable to the Coastal Tower
building, together with the entirety of the South Garage and
including all fixtures, equipment, and personalty of 9 Greenway
situated in and used in the operation of the Coastal Tower Building
or South Garage [but excluding the Houston City Club]). 9 Greenway
does not believe that any amount is now owing or will be owing from 9
Greenway to The Coastal Corporation on the Closing Date pursuant to
the Coastal Lease Profit Sharing Agreement, or that the conveyance of
the Coastal Tower building and South Garage to Newco from 9 Greenway
pursuant to the Newco Conveyance on the Closing Date will give rise
to any liability of 9 Greenway to The Coastal Corporation pursuant to
the Coastal Lease Profit Sharing Agreement. However, NML and Kemper,
severally and to the extent only of one-half each, shall pay, and
shall indemnify and defend Newco against any cost, claim, expense,
loss, or liability (including, without limitation, attorneys' fees
and expenses) in connection with, (i) any amount (if any there be)
owing or claimed to be owing by 9 Greenway to The Coastal Corporation
pursuant to the Coastal Lease Profit Sharing Agreement on or before
the Closing Date (whether or not then due and payable) or (ii) which
becomes owing from 9 Greenway to The Coastal Corporation pursuant to
the Coastal Lease Profit Sharing Agreement by reason of the
conveyance of the Coastal Tower building and South Garage from 9
Greenway to Newco pursuant to the Newco Conveyance on the Closing
Date.
(e) As used herein, the term "SENTERRA AGREEMENTS" means and includes (i)
the Management Agreement dated November 16, 1989, between Senterra
and Greenway, as heretofore amended, (ii) the Marketing Agreement
dated November 16, 1989, between Senterra and Greenway, as heretofore
amended, (iii) the Management Agreement dated November 16, 1989,
between Senterra and 9 Greenway, as heretofore amended, and (iv) the
Amended and Restated Marketing Agreement dated October 26, 1989,
between Senterra and 9 Greenway, as heretofore amended. If the
Closing occurs, then subject to the condition set out hereinafter in
this paragraph, 9 Greenway will enter into an agreement with Senterra
on the Closing Date terminating the Senterra Agreements and releasing
the Partnerships from all liability under or in connection with the
Senterra Agreements other than for payment of the Senterra
Termination Payment defined hereinafter, if, and only if, Newco
enters into an agreement with Senterra pursuant to which Senterra
agrees to the termination of, and release of the Partnerships from
all liability under or in connection with, the Senterra Agreements on
the Closing Date without payment by the Partnerships of any amount to
Senterra other than amounts (collectively, the "SENTERRA TERMINATION
PAYMENT") equal to:
(i) the reimbursable costs and expenses and fees accrued to the
Proration Time and owing to Senterra pursuant to the
Senterra Agreements as of the Proration Time (whether or
not then due, but not including any amounts of "Secondary
Marketing Fees" or "Primary Marketing Fees" [as defined in
the Marketing Agreements included in the Senterra
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Agreements] which have not actually become due and payable
to Senterra prior to the Proration Time under the terms of
such respective Marketing Agreements, except only amounts
of such "Primary Marketing Fees" described in clause (ii)
immediately following), which costs, expenses and fees
described in this clause (i) (not including amounts of
"Primary Marketing Fees" described in clause (ii)
immediately following) are herein called "SENTERRA
OPERATING CHARGES" and are to be payable to Senterra on or
within five (5) Business Days after the Closing Date or as
soon thereafter as the amount thereof is determined; plus
(ii) all amounts, if any, of "Primary Marketing Fees" (as
defined in the respective Marketing Agreements included in
the Senterra Agreements) remaining unpaid at the Proration
Time which would become payable after the Proration Time
pursuant to such Marketing Agreements by virtue of (a)
execution and delivery by all parties thereto prior to the
Proration Time of any "New Lease" or "Voluntary Expansion
Agreement" (as defined in said respective Marketing
Agreements), but not including any "Recasting Agreement"
(as defined in said respective Marketing Agreements), (b)
execution and delivery by all parties thereto prior to the
Proration Time of any "Renewal Lease" (as defined in said
respective Marketing Agreements) other than as described in
clause (c) or (d) immediately below, (c) receipt by a
Partnership prior to the Proration Time of an irrevocable
notice of exercise by an Existing Tenant of a "Firm Option"
to enter into a "Renewal Lease" or "Option Expansion
Agreement" (as defined in said respective Marketing
Agreements), or (d) expiration prior to the Proration Time
of the date when an Existing Tenant is deemed to have
exercised an "Extension Option" (as defined in said
respective Marketing Agreements) by virtue of expiration of
the period during which such Existing Tenant could have
exercised an option to terminate such Existing Lease by
making a "Termination Payment" (as defined in said
respective Marketing Agreements), without the Existing
Tenant having exercised such termination option, which
amounts of "Primary Marketing Fees" described in this
clause (ii) are to be payable to Senterra as and when such
amounts of "Primary Marketing Fees" would have become due
and payable under the terms of said Marketing Agreements.
If Senterra does not agree to the termination of the Senterra
Agreements and release of the Partnerships from all liability under
or in connection with the Senterra Agreements on the Closing Date in
return for payment of the Senterra Termination Payment as hereinabove
provided, 9 Greenway shall not be obligated to terminate the Senterra
Agreements, and such Senterra Agreements shall be included in the
"Assigned Contracts" pursuant to the Newco Conveyance. To the extent
that the Senterra Termination Payment includes amounts which are
required to be credited or debited to the Adjustment Account or
Post-Closing Adjustment Account pursuant to Section 4.2, nothing in
this paragraph is intended or shall be construed to waive or alter or
affect the right of 9 Greenway and NML and Kemper or Newco, as
applicable, to require that such credits or debits be made in the
Adjustment Account or Post-Closing Adjustment Account or to receive
payment of any amount becoming due to such person pursuant to Section
4.2 by reason of a credit or debit balance in the Adjustment Account
or Post-Closing Adjustment Account, as applicable.
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(f) Between the date of this Agreement and the Closing or termination of
this Agreement, neither Greenway nor 9 Greenway will cast votes to
take any action proposed to be taken by any property owners'
association of which the Greenway Properties (or any of them) are a
part, without the written consent of CRE, which consent shall not be
unreasonably withheld or delayed.
(g) Between the date of this Agreement and the Closing or termination of
this Agreement, the Partnerships will maintain in effect fire and
casualty insurance covering the Greenway Assets providing coverage
for the same risks and with the same limits as is provided by the
fire and casualty insurance policies in effect at the date of this
Agreement.
(h) Between the date of this Agreement and the Closing or termination of
this Agreement, the Partnerships will give written notice to CRE with
reasonable promptness after the Partnerships (or either of them) are
served with citation or other official notice of the filing or
institution against either Partnership of litigation filed by any
person or administrative proceedings in any governmental agency or
bureau initiated by any person, in each case pertaining to or
involving the Greenway Assets or any lease or contract which would be
an "Assigned Lease" or "Assigned Contract" as defined in the Newco
Conveyance.
(i) Between the date of this Agreement and the Closing or termination of
this Agreement, the Partnerships will cooperate reasonably with CRE
in CRE's endeavors to (a) obtain any required governmental permits
relating to ownership or operation of the Greenway Assets after the
Closing, (b) obtain required consents or approvals for the Closing by
Nomura or other persons who have succeeded to the rights or interests
of Nomura in connection with the Nomura Note or Nomura Deed of Trust
or other "Security Documents" referred to therein, and (c) obtain
agreement of Existing Tenants under Existing Leases to amendments
thereof or agreement of parties to service contracts with the
Partnerships to amend or terminate such service contracts (in each
case contingent upon and to be or become effective on the Closing
date only if the Closing occurs) to the extent necessary, in the
opinion of CRE, to avoid causing amounts received or accrued under
Existing Leases or under leases of other properties owned by CRE or
any affiliate of CRE not to qualify as "rents from real property" as
defined in section 856(d) of the Code; provided that the Partnerships
shall not be required to incur or expend any third-party costs or
expenses in providing such cooperation or to incur any liability or
obligation to any person in connection therewith.
(j) Between the date of this Agreement and the Closing or termination of
this Agreement, neither of the Partnerships will voluntarily sell or
dispose of any material item of tangible personal property owned by
such Partnership (being an item of tangible personal property having
a fair market value in excess of $1,000) or will voluntarily grant or
convey to any person any lien, easement, encumbrance or interest in
the real property or personal property included in the Greenway
Assets (other than parking permits and licenses issued by or on
behalf of the respective Partnerships in the ordinary course of
business for contract parking in the parking garages included in the
Greenway Assets, and other than sales or dispositions of individual
items of tangible personal property having a fair market value of
$1,000 or less) without, in each instance, the prior written approval
of CRE, which approval shall not unreasonably be withheld or
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delayed and may, if applicable, be deemed to have been granted
pursuant to subparagraph 4.2(a)(vi) or 14.2(c)(ii). If CRE grants or
is deemed to grant approval to the grant or conveyance by either
Partnership of any lien, easement, encumbrance or interest in the
real property included in the Greenway Assets, the Owner's Title
Policy, the Newco Conveyance and the deed from 9 Greenway to Newco
provided for in the Newco Conveyance shall be made subject to such
matter.
(k) The Partnerships shall direct Senterra to request that each
contractor performing asbestos abatement services in any of the
buildings included in the Greenway Assets mail to CRE a copy of each
Certificate of Completion with respect to such asbestos abatement
services which is provided by such contractor to Senterra or either
of the Partnerships at any time after the date of this Agreement and
until the Closing or termination of this Agreement, at the same time
when such Certificate of Completion is provided by such contractor to
Senterra or either of the Partnerships. The Partnerships shall also
direct Senterra to endeavor to submit requests to each contractor who
has heretofore provided a Certificate of Completion to Senterra or
the Partnerships with respect to the performance of asbestos
abatement services in any of the buildings included in the Greenway
Assets, or who provides such a Certificate of Completion to Senterra
or the Partnerships after the date of this Agreement and prior to the
Closing Date, to reissue or issue each such Certificate of Completion
in favor of Newco (in addition to the applicable Partnership or
Partnerships). It is understood, however, that any or all of such
contractors may decline to issue or reissue any such Certificates of
Completion in favor of Newco. Further, it is understood that some of
the contractors who have heretofore performed asbestos abatement
services in such buildings may no longer be in existence or that
Senterra may not have readily available information as to addresses
at which to contact such contractors, and the Partnerships shall have
no obligation to require Senterra to endeavor to locate or provide
requests for reissuance of Certificates of Completion by any
contractor for whom Senterra does not have readily available
information as to the address at which to contact such contractor. It
is further expressly understood that the failure, for any reason, of
Senterra to submit a request to any contractor for issuance or
reissuance of any such Certificates of Completion in favor of Newco
or to deliver a copy of any such Certificate of Completion to Newco,
or the failure or refusal of any contractor to issue or reissue any
such Certificate of Completion naming Newco or to deliver a copy of
any such Certificate of Completion to Newco shall not be deemed to be
a default by the Partnerships or any other Greenway Party in
performing its or his obligations, undertakings or agreements under
or in connection with this Agreement.
If the Closing occurs, NML and Kemper, severally and to the extent only of
one-half each, shall be liable for damages (if any) suffered by Newco which
proximately result from breach by either of the Partnerships of any of the
covenants set forth in this Section 14.2, not including, however, indirect or
consequential damages (including, without limitation, lost profits), and
subject, if applicable, to the limitation set forth in paragraph 13.4(d).
14.3. Arbitration. It is agreed that all disputes and
disagreements between Newco, on the one hand, and 9 Greenway, NML or Kemper, on
the other hand, arising under or in connection with Section 4.2 concerning the
interpretation, application or effect of Section 4.2 or concerning credits or
debits made or proposed to be made to the Adjustment Account or
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Post-Closing Adjustment Account (herein called a "SUBJECT DISPUTE") shall be
submitted to final and binding arbitration. This arbitration agreement is
expressly made pursuant to and shall be governed by the Federal Arbitration
Act, 9 U.S.C. Sections 1, et seq. (the "ARBITRATION ACT"). It is further
expressly agreed that, pursuant to Section 9 of the Arbitration Act, a judgment
of the United States District Court for the Southern District of Texas, Houston
Division, shall be entered upon any award made pursuant to an arbitration
hereunder, upon request of any party involved in the applicable Subject
Dispute. All Subject Disputes shall be resolved by arbitration in accordance
with the American Arbitration Association's Commercial Arbitration Rules, as
amended and effective on November 1, 1993 (the "RULES"), except as mutually
agreed to the contrary by the parties to the Subject Dispute which is to be
arbitrated, and except as specified below:
(a) Regardless of the amount in dispute, the Expedited Procedures of the
Rules shall not be utilized without the agreement of all parties to
the Subject Dispute which is to be arbitrated.
(b) In the absence of agreement by all parties to the Subject Dispute
which is to be arbitrated to another locale, the arbitration shall be
held in Houston, Texas. In no event will the American Arbitration
Association (the "AAA") have the power to decide the locale of the
arbitration.
(c) Arbitration shall be initiated by formal written notice from any
party to a Subject Dispute to the other parties involved in such
Subject Dispute describing in reasonable detail the Subject Dispute
and naming three persons that the party giving such notice (herein
called the "INITIATING PARTY," whether one or more) will accept as an
arbitrator to resolve the matter. Within ten (10) days of receipt of
said notice, the party or parties receiving the notice (herein called
the "RECEIVING PARTY," whether one or more) shall either agree to one
of the three proposed arbitrators, or the Initiating Party and the
Receiving Party will confer and attempt to agree upon another person
to arbitrate the Subject Dispute. If these steps do not result in
the selection of an arbitrator, then either the Initiating Party or
the Receiving Party may request that the AAA provide to both the
Initiating Party and the Receiving Party, in writing, a panel of
seven names from the AAA's National Panel of Commercial Arbitrators.
All members of the panel submitted by the AAA shall be United States
nationals who are attorneys licensed to practice in the highest court
of one or more states of the United States of America or the District
of Columbia. Within five (5) days of receipt of this panel, the
Initiating Party shall strike three names from the panel and forward
it to the Receiving Party. The Receiving Party shall then strike
three additional names from the panel and forward the remaining name
to the AAA (with a copy to the Initiating Party) within five (5) days
of receipt of the stricken panel. The name forwarded to the AAA
shall be the neutral arbitrator appointed to hear the Subject
Dispute. Either the Initiating Party or Receiving Party may object
to an entire panel and request that the AAA provide a new panel by
giving written notice of the request and the reason therefor to the
AAA and the other party within three (3) days after receipt of such
panel. Such notice may be given by telecopy, by delivery in hand, or
by depositing same in the United States Postal Service, properly
addressed and stamped, as certified mail. In no event may the AAA
appoint an arbitrator.
(d) The decision of the arbitrator shall be final and binding on the
Initiating Party and the Receiving Party.
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(e) If for any reason, the selected arbitrator is unable to perform his
or her duties, the AAA may, on proof satisfactory to it or based on
the agreement of the Initiating Party and Receiving Party, declare
the position vacant. In the event of such a vacancy, the provisions
of paragraph 14.3(c) shall be followed to select a new arbitrator.
(f) The arbitrator shall set the date and time of each hearing hereunder.
The AAA shall give thirty (30) days' notice to the Initiating Party
and Receiving Party of such hearing unless otherwise agreed.
(g) Either the Initiating Party or the Receiving Party may request a
stenographic record be made of all hearings hereunder. The cost of
such stenographic record shall be shared equally by the Initiating
Party and the Receiving Party.
(h) The arbitrator will insure the privacy of the hearings hereunder to
the maximum extent allowed by law. Both the Initiating Party and the
Receiving Party shall be entitled to attend all hearings. At the
request of either the Initiating Party or the Receiving Party, all
persons who are not parties involved in the Subject Dispute shall be
excluded from the hearings, except for the attorneys for the
Initiating Party and Receiving Party, the stenographer (if any), and
persons who are witnesses when actually called to testify.
(i) The Initiating Party and Receiving Party shall share equally the
arbitrator's fee and expenses and any charges of the AAA. Otherwise,
except for the cost of the stenographic record, each of the
Initiating Party and the Receiving Party shall bear their own costs.
14.4. Governing Law. The validity, meaning and effect of this
Agreement shall be determined in accordance with the laws of the State of Texas
applicable to contracts made and to be performed in the State of Texas.
14.5. Successors and Assigns. The terms and provisions of this
Agreement shall be binding upon and shall inure to the benefit of the
respective parties hereto and the legal representatives, personal
representatives, heirs, executors, administrators, successors and assigns of
such parties; provided that neither any of the Greenway Parties nor any of the
Crescent Parties may assign or transfer its or their rights or obligations
under this Agreement to any other person without the prior written consent of
the other, except as specifically provided in subparagraph 4.1(a)(i) and except
as provided in the Redemption Agreement. This Agreement shall not inure to the
benefit of or be enforceable by any person other than the parties hereto and
their respective legal representatives, personal representatives, heirs,
executors, administrators, successors or assigns and Newco and its legal
representatives, successors or assigns.
14.6. Survival of Agreements. Subject to the provisions of
Sections 11.2 and 12.2 as to the representations and warranties made in
Sections 11.1 and 12.1, respectively, and to the provisions of paragraph 4.2(f)
as to the time within which debit or credit entries may be made in the Post
Closing Adjustment Account, the warranties, representations, covenants,
undertakings and agreements of the parties set forth in this Agreement shall
survive the Closing (if the Closing occurs) and shall not be deemed to have
been merged into or superseded by the terms and provisions of the documents to
be executed and delivered at Closing as provided for in this Agreement, and the
respective parties hereto shall have all rights and remedies available at law
or in equity for any breach or violation of any such warranty,
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representation, covenant, undertaking or agreement by any other party (subject
to the provisions of Section 13.4 (if and to the extent applicable).
14.7. Modification; Waiver; Etc. No waiver of any condition
under, and no modification, amendment, discharge, or change of or to this
Agreement shall be valid unless the same is in writing and signed by the party
against which the enforcement of such waiver, modification, amendment,
discharge or change is sought. No waiver of or failure to enforce any term,
condition, provision or requirement of this Agreement by any party on any one
occasion shall operate to waive such term, condition, provision or requirement
of this Agreement on any other occasion or under any other circumstances and
shall not in anywise waive, alter or affect any other term, condition,
provision or requirement of this Agreement.
14.8. Entire Agreement. This Agreement, with the schedules
attached hereto and incorporated herein, contains the entire agreement between
the parties relating to the transactions contemplated hereby, and all prior or
contemporaneous agreements, understandings, representations and statements,
oral or written, are merged herein; provided that the Individual Guaranties
shall be and continue in force and effect in accordance with and subject to the
terms and conditions thereof.
14.9. Reliance. Each party to this Agreement acknowledges and
stipulates that such party has relied upon the advice of attorneys and/or
accountants engaged by such party in connection with entering into this
Agreement regarding the legal effect and interpretation of this Agreement and
the income tax consequences and impact of this Agreement and the transactions
contemplated hereby upon such party; and no party has relied or shall be
entitled to rely upon any other party or the attorneys or accountants of such
other party with respect to any such matters.
14.10. Notices. Any notice provided for by this Agreement and any
other notice, demand or communication which any party may wish to send to
another (a "NOTICE") shall be in writing and shall be (a) personally delivered,
(b) sent by registered or certified mail, postage prepaid, return receipt
requested, (c) sent by an overnight express service that provides proof of
delivery, or (d) sent by facsimile provided receipt thereof by the intended
recipient is confirmed, in each case addressed to the party for which such
Notice is intended at such party's address as set forth below:
A. If intended for GP#1, GP#9, or NML, to:
The Northwestern Mutual Life Insurance Company
720 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Attention: Donald L. O'Dell
Tel: 414-299-4111
Fax: 414-299-1557
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and:
The Northwestern Mutual Life Insurance Company
Five Greenway Plaza, Suite 2910
Houston, Texas 77046
Attention: Michael R. Buchholz
Tel: 713-623-0061
Fax: 713-623-2821
with a copy to:
Fulbright & Jaworski L.L.P.
1301 McKinney, Suite 5100
Houston, Texas 77010-3095
Attention: Uriel E. Dutton
Tel: 713-651-3712
Fax: 713-651-5246
B. If intended for Kemper, Federal Kemper, KILICO Realty, Kemper
Portfolio, or KFC, to:
c/o Kemper Investors Life Insurance Company
225 West Washington Street, Suite 1450
Chicago, Illinois 60606
Tel: 312-236-1513
Fax: 312-236-1549
with a copy to:
Timothy R. Verrilli
Senior Counsel
Zurich/Kemper Life
225 West Washington Street, Suite 1450
Chicago, Illinois 60606
Tel: 312-236-1513, Ext. 383
Fax: 312-236-1549
with a copy to:
Rudnick & Wolfe
203 North LaSalle Street
Chicago, Illinois 60601-1293
Attention: Kenneth Hartman, Esq.
Tel: 312-368-4034
Fax: 312-236-7516
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C. If intended for K-P or K-P Inc., to:
c/o Kemper Investors Life Insurance Company
225 West Washington Street, Suite 1450
Chicago, Illinois 60606
Tel: 312-236-1513
Fax: 312-236-1549
with a copy to:
Timothy R. Verrilli
Senior Counsel
Zurich/Kemper Life
225 West Washington Street, Suite 1450
Chicago, Illinois 60606
Tel: 312-236-1513, Ext. 383
Fax: 312-236-1549
and:
The Prime Group, Inc.
77 West Wacker Drive, Suite 3900
Chicago, Illinois 60601
Attention: Jeffrey A. Patterson, Executive Vice President
Tel: 312-917-4234
Fax: 312-782-5867
with a copy to:
The Prime Group, Inc.
77 West Wacker Drive, Suite 3900
Chicago, Illinois 60601
Attention: Robert J. Rudnik, Executive Vice President and
General Counsel
Tel: 312-917-4234
Fax: 312-917-1684
with a copy to:
Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60601-9703
Attention: Wayne D. Boberg
Tel: 312-558-5882
Fax: 312-558-5700
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D. If intended for Prime, to:
The Prime Group, Inc.
77 West Wacker Drive, Suite 3900
Chicago, Illinois 60601
Attention: Jeffrey A. Patterson, Executive Vice President
Tel: 312-917-4234
Fax: 312-782-5867
with a copy to:
The Prime Group, Inc.
77 West Wacker Drive, Suite 3900
Chicago, Illinois 60601
Attention: Robert J. Rudnik,
Executive Vice President and General Counsel
Tel: 312-917-4234
Fax: 312-917-1684
with a copy to:
Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60601-9703
Attention: Wayne D. Boberg
Tel: 312-558-5882
Fax: 312-558-5700
E. If intended for P/S or GP Acquisition, to:
The Prime Group, Inc.
77 West Wacker Drive, Suite 3900
Chicago, Illinois 60601
Attention: Jeffrey A. Patterson, Executive Vice President
Tel: 312-917-4234
Fax: 312-782-5867
with a copy to:
The Prime Group, Inc.
77 West Wacker Drive, Suite 3900
Chicago, Illinois 60601
Attention: Robert J. Rudnik,
Executive Vice President and General Counsel
Tel: 312-917-4234
Fax: 312-917-1684
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with a copy to:
Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60601-9703
Attention: Wayne D. Boberg
Tel: 312-558-5882
Fax: 312-558-5700
and:
c/o Kenneth Schnitzer
Twelve Greenway Plaza, Suite 1310
Houston, Texas 77046
Tel: 713-965-2922
Fax: 713-965-2961
with a copy to:
Larry E. Jacobs
Norton, Jacobs, Kuhn & McTopy, L.L.P.
1111 Bagby, Suite 2450
Houston, Texas 77002
Tel: 713-659-1131
Fax: 713-659-7341
F. If intended for J/K#1, J/K#9, or Century, to:
c/o Kenneth Schnitzer
Twelve Greenway Plaza, Suite 1310
Houston, Texas 77046
Tel: 713-965-2922
Fax: 713-965-2961
with a copy to:
Larry E. Jacobs
Norton, Jacobs, Kuhn & McTopy, L.L.P.
1111 Bagby, Suite 2450
Houston, Texas 77002
Tel: 713-659-1131
Fax: 713-659-7341
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G. If intended for Dow, to:
Melvin A. Dow
Dow, Cogburn & Friedman, P.C.
Nine Greenway Plaza, Suite 2300
Houston, Texas 77046
Tel: 713-626-5800
Fax: 713-940-6099
H. If intended for SPC, CRE, REIT, or Newco, to:
Crescent Real Estate Equities, Inc.
777 Main Street, Suite 2100
Fort Worth, Texas 76102
Attention: Gerald W. Haddock
Tel: 817-878-0444
Fax: 817-878-0429
and:
Crescent Real Estate Equities, Inc.
777 Main Street, Suite 2100
Fort Worth, Texas 76102
Attention: David M. Dean
Tel: 817-878-0442
Fax: 817-878-0429
and:
Crescent Real Estate Equities, Inc.
777 Main Street, Suite 2100
Fort Worth, Texas 76102
Attention: James M. Eidson, Jr.
Tel: 817-878-0407
Fax: 818-878-0429
with a copy to:
Shaw, Pittman, Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037-1128
Attention: Wendelin A. White
Tel: 202-663-8360
Fax: 202-663-8007
I. If intended for Greenway or 9 Greenway, to each of NML, Kemper,
Prime, J/K#1, and J/K#9 at the addresses specified above.
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Any party may change its, his or her address for delivery of Notice hereunder
by giving Notice of such changed address to the other parties in the manner
herein provided. Any Notice shall be deemed given and effective as of the date
of receipt thereof, as evidenced by the return receipt or other acknowledgment
of the delivery thereof. The inability to deliver a Notice because of a change
of address of which no Notice has been given, or any rejection or refusal to
accept any Notice, shall be deemed to be the receipt of such Notice as of the
date of such inability to deliver, rejection or refusal to accept delivery.
14.11. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. It shall not be
necessary that any single counterpart of this Agreement be executed by all the
parties to this Agreement, so long as each of such parties shall have executed
the same or any other separate counterpart hereof.
14.12. Captions. The captions of the Articles and Sections of
this Agreement are inserted for convenience of reference only and in no way
define, describe or limit the scope or intent or meaning of this Agreement or
any of the provisions hereof.
14.13. Construction. As used herein, the terms (i) "PERSON" shall
mean an individual, a corporation, a partnership, a joint venture, a limited
liability company, an unincorporated organization, or a governmental entity or
any agency or political subdivision thereof, (ii) "INCLUDING" shall mean
including, without limiting the generality of the foregoing, (iii) the use of
any gender shall include all genders, and (iv) the singular shall include the
plural, and vice versa.
14.14. Partial Invalidity. If any provision or provisions, or any
portion of any provision or provisions, of this Agreement are found by a court
of competent jurisdiction to be in violation of any applicable constitutional
provision or local, state or federal ordinance, statute, law, administrative
rule or order, or public policy, and if such court should declare such portion,
provision or provisions of this Agreement to be illegal, invalid, unlawful,
void, or unenforceable as written, then it is the intent of all parties that
any such portion, provision or provisions shall be given force to the fullest
possible extent that they are legal, valid and enforceable, that the remainder
of this Agreement shall be construed and enforced as if such illegal, invalid,
unlawful, void, or unenforceable portion, provision or provisions were not
contained herein, and that the rights, obligations, and interests of the
parties under the remainder of this Agreement shall continue in full force and
effect.
14.15. Time of the Essence. Time is of the essence in this
Agreement.
14.16. Attorneys' Fees. In the event of any litigation arising
hereunder, the prevailing party or parties shall be entitled to recover its or
their reasonable attorneys' fees and expenses from any other party or parties
to such litigation who are determined by final judgment (not subject to further
appeal) in such litigation to have defaulted in performing or observing the
agreements or undertakings of such other party or parties hereunder or who made
a false representation or warranty in or pursuant to this Agreement which
default or false representation or warranty was the subject of such litigation,
was not waived, and (if the Closing has occurred) survived the Closing.
14.17. Dow Intention. It is Dow's express intention that his
family members, heirs and personal representatives be bound by this Agreement
and cooperate fully, in the event of his death prior to the Closing, in an
application to secure the appointment of a
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temporary administrator for his estate, if necessary, for the purpose of
performing his obligations hereunder.
14.18. Defined Terms. For convenience, the following is an
alphabetical list of the defined terms used in this Agreement and the Sections
or paragraphs in which such terms are defined:
<TABLE>
<S> <C>
9 Greenway . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introductory paragraph
9 Greenway Loan Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1(g)
9 Greenway Participation Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 7.1(h)
30th Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1(a)
AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.3(b)
Account Termination Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(f)(i)
Acting Greenway Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.2
Actual Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4(d)
Actual Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5(a)(iii)(a)
Ad Valorem Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(b)(iii)
Additional Environmental Reports . . . . . . . . . . . . . . . . . . . . . . . 14.1(a)(iii)
Additional Title Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . 13.1(f)(i)
Adjustment Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introductory paragraph
Aim Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(a)(vi)
Aim Lease Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(a)(vi)
Allocated Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5(a)(iii)(b)
Arbitration Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.3
Arena . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(a)(iii)(c)
Assumed Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.1(a)
Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1(bb)
Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1(a)(i)
Buy-Sell Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1(b)
Casualty Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.1(d)
Century . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introductory paragraph
Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1(a)
Closing Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3
Coastal Lease Profit Sharing Agreement . . . . . . . . . . . . . . . . . . . . . . . 14.2(d)
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1(g)
Collateral Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1(c)
Collection Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(a)(ii)
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1
Condemnation Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.1(e)
Crescent Party and Crescent Parties . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1
CRE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introductory paragraph
CRE Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(f)(i)(b)
Current Contract Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(a)(iii)(c)
Custodian Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(a)(ii)
Damages Limitation Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4(d)
Defaulting Party . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4(a)(ii); 13.4(d)
Designated Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.3
Disclosed Environmental Hazard . . . . . . . . . . . . . . . . . . . . . . . . 14.1(a)(iii)
Disputed Claim or Disputed Claims . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(c)
Dow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introductory paragraph
</TABLE>
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<TABLE>
<S> <C>
Due Diligence and Underwriting Expenses . . . . . . . . . . . . . . . . . . . . . 8.5(a)(iii)
Earnest Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1
Earnest Money Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1
Eastdil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1(bb)
Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.1(a)(ix)
Escrow Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1
Escrowee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1
Eastdil Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1(bb)
Estimated TI and Commission Expenses Credit . . . . . . . . . . . . . . . . . . . 4.2(a)(vi)
Estimated TI and Commission Expenses Debit . . . . . . . . . . . . . . . . . . 4.2(b)(viii)
Existing Environmental Reports . . . . . . . . . . . . . . . . . . . . . . . . 14.1(a)(iii)
Existing Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(a)(iii)
Existing Tenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(a)(iii)
Extended Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.2(b)(iii)
Federal Kemper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7(g)
Final License Fee Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(d)(iii)
Final Parking Expense Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(d)(ii)
Final Tax Debit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(d)(v)
Former Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(a)(iii)(a)
Former Tenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(a)(iii)(a)
Funding Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1(a)
GP#1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introductory paragraph
GP#9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introductory paragraph
GP Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7(f)
Greenway . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introductory paragraph
Greenway Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1(a)
Greenway Loan Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1(e)
Greenway Participation Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1(f)
Greenway Party and Greenway Parties . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1
Greenway Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2
including . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.13
Incurred Marketing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(b)(III)
Indemnified Party and Indemnified Parties . . . . . . . . . . . . . . . . . 14.1(a), (b), (c)
Indemnifying Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.1(a), (b), (c)
Independent Contract Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1
Individual Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8
Initial License Fee Credit . . . . . . . . . . . . . . . . . . . . . . . 4.2(a)(iii)(c)(ii)
Initial Parking Expense Credit . . . . . . . . . . . . . . . . . . . . . . 4.2(a)(iii)(c)(i)
Initial Tax Debit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(b)(iii)
Initial Tenant Improvement Expenses . . . . . . . . . . . . . . . . . . . . . . 4.2(b)(viii)
Initiating Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.3(c)
Inspection Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2
Intercreditor Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1(d)
J/K#1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introductory paragraph
J/K#9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introductory paragraph
Kemper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introductory paragraph
Kemper 9 Greenway Partner Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6
Kemper Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3(a)
Kemper Greenway Partner Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6
Kemper/K-P Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4(a)(ii)
Kemper Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6
Kemper Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6
</TABLE>
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<TABLE>
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Kemper Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1(f)
Kemper Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7(a)(ii)
KFC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7(a)(viii)
KILICO Realty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7(a)(i)
Known Pre-Closing Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4(d)
K-P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introductory paragraph
K-P 9 Greenway Partner Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5
K-P Greenway Partner Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5
K-P Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7(c)
K-P Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5
Law Engineering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.1(a)(iii)
Law Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.1(a)(iii)
Lock-up Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3
Maximum Due Diligence and Underwriting Expenses . . . . . . . . . . . . . . . . . 8.5(a)(iii)
Newco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1(a)
Newco Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1(d)
Newco Conveyance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1(a)
Newco Designee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1(a)(i)
Newco Partnership Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1(b)
New Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(a)(vi)
NML . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introductory paragraph
NML 9 Greenway Partner Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4
NML Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3(b)
NML Greenway Partner Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4
NML Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4
NML Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4
NML Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4(a)(ii)
NML Renewal Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4
Nomura . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(b)(vi)
Nomura Deed of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.2(h)
Nomura Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(b)(vi)
Non-Acting Greenway Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7(a)
Nonmaterial Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1(s)
Non-Performing Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.3
Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.10
Outstanding Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(c)
Objecting Title Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.1(f)(iv)
Other Title Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.1(f)
Owner's Title Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.1(f)
Partnership or Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1
Partnership Agreement or Partnership Agreements . . . . . . . . . . . . . . . . . . . . . 1.3
Partnership Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3
Partnership Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(a)(vi)
Past-Due Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(a)(iii)(d)
Per Share Closing Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1
Per Share Net Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5(a)(i)
Per Share Settle Up Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5(b)
Performing Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.3
person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.13
Post-Closing Adjustment Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2
Pre-Closing Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4(d)
Prime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7(d)
</TABLE>
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Proration Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2
P/S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7(e)
Rainwater . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6(e)
Receiving Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.3(c)
Redemption Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1(a)
Registration Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4
REIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introductory paragraph
Releasing Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3
Rental Commencement Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(a)(vi)
Restricted Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6(c)
Retained Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(c)(III)
Retaining Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5(b)
Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.3
Sale Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5(a)
Securities Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3
Selling Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5(a)
Senterra . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3
Senterra Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.2(e)
Senterra Operating Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.2(e)
Senterra Termination Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.2(e)
SPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introductory paragraph
Subject Dispute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.3
Subject Senterra Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(b)(ix)
Substitute Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4(a)
Summit Parking License . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(a)(iii)(c)
Tenant Estoppel Letters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4
Tenant Promissory Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(a)(iii)(b)
TI and Commission Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2(a)(vi)
Title Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.1(f)
Title Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.1(f)
UCC Search Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.1(g)
Unallocated Excess Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5(a)(iii)
Warranting Party . . . . . . . . . 1.7(b), 12.1(j), (k), (l), (m), (q), (x), (y), (aa), (bb)
</TABLE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the parties hereto effective as of the date first written above.
<TABLE>
<S> <C>
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP,
a Delaware limited partnership, by its
sole general partner
BY: CRESCENT REAL ESTATE EQUITIES, LTD.,
a Delaware corporation
By /s/ Gerald W. Haddock
---------------------------------------------
Gerald W. Haddock
President and Chief Operating Officer
</TABLE>
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CRE MANAGEMENT III CORP., a Delaware
corporation
By /s/ Gerald W. Haddock
-----------------------------------------------------------
Gerald W. Haddock
President and Chief Operating Officer
CRESCENT REAL ESTATE EQUITIES, INC., a
Maryland corporation
By /s/ Gerald W. Haddock
-----------------------------------------------------------
Gerald W. Haddock
President and Chief Operating Officer
GREENWAY PLAZA, LTD., a Texas limited
partnership, by its undersigned general partners
BY: NW GREENWAY #1, INC., a Texas corporation
By /s/ Michael R. Buchholz
-----------------------------------------------------
Michael R. Buchholz
Vice President
BY: K-P GREENWAY PLAZA LIMITED
PARTNERSHIP, an Illinois limited partners
By: K-P Greenway, Inc., an Illinois corporation,
its sole general partner
By /s/ R. Kaislin
-----------------------------------------------
Name: R. Kaislin
---------------------------------------
Title: Authorized Signatory
--------------------------------------
BY: J/K - G/P #1, LTD., a Texas limited partnership
By: J/K Holdings, Inc., a Texas corporation,
its sole general partner
By /s/ Kenneth Schnitzer
-----------------------------------------------
Kenneth Schnitzer
Chairman
NINE GREENWAY, LTD., a Texas limited partnership,
by its undersigned general partners
BY: NW GREENWAY #9, INC., a Texas corporation
By /s/ Michael R. Buchholz
-----------------------------------------------------
Michael R. Buchholz
Vice President
</TABLE>
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<TABLE>
<S> <C>
BY: K-P GREENWAY PLAZA LIMITED PARTNERSHIP,
an Illinois limited partners
By: K-P Greenway, Inc., an Illinois
corporation, its sole general partner
By /s/ Robert Kaislin
----------------------------------------------
Name: Robert Kaislin
---------------------------------------
Title: Authorized Signatory
--------------------------------------
BY: J/K - G/P #9, LTD., a Texas limited partnership
By: J/K Holdings, Inc., a Texas corporation,
its sole general partner
By /s/ Kenneth Schnitzer
----------------------------------------------
Kenneth Schnitzer
Chairman
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY,
a Wisconsin corporation
By /s/ Donald L. O'Dell
-----------------------------------------------------------
Donald L. O'Dell
Vice President, Asset Management
NW GREENWAY #1, INC., a Texas corporation
By /s/ Michael R. Buchholz
-----------------------------------------------------------
Michael R. Buchholz
Vice President
NW GREENWAY #9, INC., a Texas corporation
By /s/ Michael R. Buchholz
-----------------------------------------------------------
Michael R. Buchholz
Vice President
K-P GREENWAY PLAZA LIMITED PARTNERSHIP,
an Illinois limited partnership, by its sole general
partner
BY: K-P GREENWAY, INC., an Illinois corporation
By /s/ Robert Kaislin
----------------------------------------------------
Name: Robert Kaislin
--------------------------------------------
Title: Authorized Signatory
-------------------------------------------
</TABLE>
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<TABLE>
<S> <C>
J/K - G/P #1, LTD., a Texas limited partnership,
by its sole general partner
BY: J/K HOLDINGS, INC., a Texas corporation
By /s/ Kenneth Schnitzer
----------------------------------------------------
Kenneth Schnitzer
Chairman
EDLOE DEVCO, CORP., a Nevada corporation doing
business in Texas under the name Century Devco, Inc.
By /s/ Neil H. Tofsky
-----------------------------------------------------------
Neil H. Tofsky
Vice President
/s/ MELVIN A. DOW
-------------------------------------------------------------
MELVIN A. DOW, a resident of Harris County, Texas
J/K - G/P #9, LTD., a Texas limited partnership,
by its sole general partner
BY: J/K HOLDINGS, INC., a Texas corporation
By /s/ Kenneth Schnitzer
----------------------------------------------------
Kenneth Schnitzer
Chairman
KEMPER INVESTORS LIFE INSURANCE COMPANY,
an Illinois corporation
By /s/ Robert Kaislin
-----------------------------------------------------------
Name: Robert Kaislin
-------------------------------------------------
Its Authorized Signatory
AND
By /s/ William Murray
----------------------------------------------------------
Name: William Murray
-----------------------------------------------
Its Authorized Signatory
KILICO REALTY CORPORATION, an Illinois
corporation, a shareholder of K-P Inc.
By /s/ Robert Kaislin
----------------------------------------------------------
Name: Robert Kaislin
------------------------------------------------
Its Authorized Signatory
</TABLE>
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<TABLE>
<S> <C>
KEMPER PORTFOLIO CORP., a Delaware
corporation, as holder of interests in certain K-P Loans
or Kemper Loans
By /s/ Beth Schlief
-----------------------------------------------------------
Name: Beth Schlief
-------------------------------------------------
Its Authorized Signatory
AND
By /s/ Robert Kaislin
-----------------------------------------------------------
Name: Robert Kaislin
Its Authorized Signatory
K-P GREENWAY, INC., an Illinois corporation, the
general partner of K-P
By /s/ Robert Kaislin
-----------------------------------------------------------
Name: Robert Kaislin
------------------------------------------------
Title: Authorized Signatory
-----------------------------------------------
THE PRIME GROUP, INC., an Illinois corporation,
a shareholder of K-P Inc. and a general partner of P/S
By /s/ Jeffrey A. Patterson
-----------------------------------------------------------
Name: Jeffrey A. Patterson
-------------------------------------------------
Title: Executive Vice President
------------------------------------------------
PRIME/SCHNITZER GREENWAY PARTNERS, a
Texas general partnership, a limited partner in K-P
BY: THE PRIME GROUP, INC., an Illinois corporation
By /s/ Jeffrey A. Patterson
----------------------------------------------------
Name: Jeffrey A. Patterson
-----------------------------------------
Title: Executive Vice President
-----------------------------------------
By
Name:
Title:
BY: GREENWAY PLAZA ACQUISITION
CORPORATION, a Nevada corporation
By /s/ Kenneth Schnitzer
----------------------------------------------------
Name: Kenneth Schnitzer
-------------------------------------------
Title: Vice President
------------------------------------------
</TABLE>
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<TABLE>
<S> <C>
GREENWAY PLAZA ACQUISITION CORPORATION,
Nevada corporation, a general partner in P/S, a limited
partner in K-P, and a holder of an interest in a Kemper Loan
By /s/ Kenneth Schnitzer
----------------------------------------------------------
Name: Kenneth Schnitzer
------------------------------------------------
Title:
-----------------------------------------------
FEDERAL KEMPER LIFE ASSURANCE COMPANY,
an Illinois corporation, as holder of interests in certain
K-P Loans or Kemper Loans
By /s/ Robert Kaislin
----------------------------------------------------------
Name: Robert Kaislin
-------------------------------------------------
Its Authorized Signatory
AND
By /s/ William E. Murray
----------------------------------------------------------
Name: William E. Murray
-------------------------------------------------
Its Authorized Signatory
KFC PORTFOLIO CORP., a Delaware
corporation, as holder of interests in certain K-P Loans
or Kemper Loans
By /s/ Beth Schlief
-----------------------------------------------------------
Name: Beth Schlief
-------------------------------------------------
Its Authorized Signatory
AND
By /s/ R.J. Kaislin
-----------------------------------------------------------
Name: R.J. Kaislin
--------------------------------------------------
Its Authorized Signatory
</TABLE>
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