-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q+GAUdTWDXr/YSzqXOHZXxaE8woqj0MulYHSewkG6Hz+IA9t7xTfuUxoteh8D3hL bkZuLQrbJ131ouQAHkPbZg== 0000950123-97-008562.txt : 19971016 0000950123-97-008562.hdr.sgml : 19971016 ACCESSION NUMBER: 0000950123-97-008562 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 62 FILED AS OF DATE: 19971015 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAREY DIVERSIFIED PROPERTIES LLC CENTRAL INDEX KEY: 0001025378 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-37901 FILM NUMBER: 97695628 BUSINESS ADDRESS: STREET 1: 50 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10020 MAIL ADDRESS: STREET 2: 50 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10020 S-4 1 FORM S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1997 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ CAREY DIVERSIFIED LLC (EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENT) DELAWARE 6798 (PENDING) (STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER IDENTIFICATION ORGANIZATION OR INCORPORATION) CLASSIFICATION CODE NUMBER) NUMBER)
50 ROCKEFELLER PLAZA NEW YORK, NEW YORK 10020 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ------------------------ FRANCIS J. CAREY CAREY DIVERSIFIED LLC 50 ROCKEFELLER PLAZA NEW YORK, NEW YORK 10020 (NAME AND ADDRESS OF AGENT FOR SERVICE) ------------------------ COPY TO: MICHAEL B. POLLACK, ESQUIRE REED SMITH SHAW & MCCLAY LLP 2500 ONE LIBERTY PLACE PHILADELPHIA, PENNSYLVANIA 19103 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of the Registration Statement. If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box: [ ] ================================================================================ 2 CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING REGISTRATION BEING REGISTERED REGISTERED(1) PER SHARE(2) PRICE FEE(3) - ------------------- ------------------ ------------------- ------------------- ------------------ Listed Shares 23,654,898 $20.00 $473,097,960 $143,363
- --------------- (1) Represents the maximum number of Shares issuable upon consummation of the transactions described herein. (2) $20 is an arbitrary amount chosen for the sole purpose of allocating Listed Shares and is not intended to imply that the Listed Shares will trade at a price of $20 per Share. (3) The registration fee has been calculated using the maximum number of shares that can be issued in this offering. Each Partnership Unit elected will reduce the number of Listed Shares that can be issued allowing for a maximum total issuance in this offering of 23,654,898 shares. The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ii 3 CONSENT SOLICITATION STATEMENT/PROSPECTUS CAREY DIVERSIFIED LLC UP TO 23,654,898 LIMITED LIABILITY COMPANY LISTED SHARES As described in this Consent Solicitation Statement/Prospectus ("Consent Solicitation Statement" or "Prospectus"), William P. Carey, W.P. Carey & Co., Inc., Carey Corporate Property, Inc., Seventh Carey Corporate Property, Inc., Eighth Carey Corporate Property, Inc. and Ninth Carey Corporate Property, Inc. (collectively, the "General Partners") are proposing a consolidation by merger (the "Consolidation") of nine public limited partnerships in the Corporate Property Associates series of limited partnerships (the "CPA(R) Partnerships") with the subsidiary limited partnerships of Carey Diversified LLC, a newly organized Delaware limited liability company (the "Company"). The CPA(R) Partnerships are Delaware and California limited partnerships which own net leased commercial and industrial real estate. The CPA(R) Partnerships currently own 198 properties (the "Properties") located in 37 states and net leased to 76 tenants. Limited Partners in the CPA(R) Partnerships (the "Unitholders") are being asked to approve the Consolidation as described in this Prospectus. Upon completion of the Consolidation, the CPA(R) Partnerships participating in the Consolidation (the "Participating Partnerships") will each be merged with a Subsidiary Partnership, and their Unitholders (the "Participating Investors") at their election will receive a limited liability company interest in the Company representing an interest in the income, loss and capital of the Company (a "Listed Share") or will retain a limited partnership interest (a "Subsidiary Partnership Unit") in the CPA(R)Partnership in which they are a Limited Partner. Each CPA(R) Partnership will vote on whether to participate in the Consolidation. If holders of a majority of the outstanding Units of a CPA(R) Partnership vote in favor of the Consolidation, that Partnership's assets will be combined with the assets of all other CPA(R) Partnerships which approve the Consolidation. The Consolidation will not occur unless the CPA(R) Partnerships approving the Consolidation represent at least $200 million in Total Exchange Value. Additionally, if holders of a majority of the outstanding Units of a Partnership vote against participation in the Consolidation, each Unitholder in that Partnership will retain his interest currently held and that CPA(R) Partnership will not participate in the Consolidation. The Company has applied to list the Listed Shares on the New York Stock Exchange ("NYSE") under the symbol "CDC". See "GLOSSARY OF TERMS" for definitions of certain key terms used in this Prospectus. The Listed Shares allow Unitholders to participate in the risks and rewards of the Company's future plans for growth, while the Subsidiary Partnership Units allow Unitholders to retain an investment that provides substantially the same economic interests and legal rights as his investment in CPA(R) Partnership interests (but will not be listed on a securities exchange). If the Consolidation is consummated, the General Partners and their Affiliates will contribute a portion of their General Partner interests in exchange for Listed Shares. The General Partners or their Affiliates will retain the remainder of their General Partner interests which will be converted into Limited Partner interests in the Subsidiary Partnerships. See "DESCRIPTION OF SHARES AND SUBSIDIARY PARTNERSHIP UNITS" for a description of Listed Shares and Subsidiary Partnership Units. THIS CONSOLIDATION INVOLVES CERTAIN RISKS, ADVERSE EFFECTS AND CONFLICTS OF INTEREST THAT SHOULD BE CONSIDERED BY THE UNITHOLDERS. SEE "RISK FACTORS" BEGINNING ON PAGE 20 OF THIS PROSPECTUS. IN PARTICULAR, THE UNITHOLDERS SHOULD CONSIDER THE FOLLOWING: - Fundamental changes in rights and in the nature of investment for holders of Listed Shares, including reduction of relative voting power. - Unitholders cannot be certain of the value of the Listed Shares they will receive. Listed Shares may trade at prices substantially below Total Exchange Value per Share or historic book value. - Because the ultimate composition of the Company cannot be determined, Unitholders must vote without knowing the exact composition of the Company. - The potential change in the nature and amount of leverage may increase the risk of default and may reduce cash flow available for distribution. - The Board of Directors can change investment, financing and certain other policies without Shareholder approval. - Unitholders are likely to be unable to resell or dispose of Subsidiary Partnership Units except at a substantial discount from the Total Exchange Value per Share. 4 - Conflicts of interest of General Partners in structuring the Consolidation. - Lack of independent representation of Unitholders resulting in terms of the Consolidation which may be more favorable to the General Partners. - Because there are no appraisal or similar rights for nonconsenting Unitholders, Unitholders must accept Listed Shares or Subsidiary Partnership Units if the Consolidation is approved. The General Partners believe that there are a number of reasons for and benefits of the Consolidation, which are discussed at greater length in "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Expected Benefits of Consolidation." These reasons include: - Stock Exchange listing of Listed Shares and resulting liquidity. - Growth potential of Listed Shares which may be realized. - Increased diversification of tenants, location and building type. - Shareholders' ability to borrow using Listed Shares as collateral. - Increased Shareholder rights through annual election of Directors. - Unitholders' choice of investment -- Listed Shares or Subsidiary Partnership Units. - Tax-free nature of Consolidation and preservation of pass-through tax status. - Unitholders who elect to receive Subsidiary Partnership Units will receive an interest with substantially the same economic interests and legal rights as the interest they currently hold. Limited Partners who object to the Consolidation have the following rights: - Limited Partners may vote against the Consolidation. If the holders of a majority of the outstanding Units in the CPA(R) Partnerships representing the Minimum Participation Amount do not approve the Consolidation, the Consolidation will not be completed. Even if the Consolidation is completed, a particular CPA(R) Partnership will not participate in the Consolidation if the holders of at least a majority of the outstanding Units in that Partnership do not approve the Consolidation. As a result, these Unitholders will retain their current interest in their CPA(R) Partnership. - Limited Partners may elect to receive Subsidiary Partnership Units. Subsidiary Partnership Units have been structured so that the economic results and legal rights realized by holders thereof are substantially the same as the results which would be realized by holders of limited partner interests in a CPA(R) Partnership were the Consolidation not effected. See "DESCRIPTION OF SHARES AND SUBSIDIARY PARTNERSHIP UNITS -- Subsidiary Partnership Units" for a more detailed description of the Subsidiary Partnership Units. This Prospectus and the related form of consent are first being sent to Unitholders on or about October 22, 1997. Each Unitholder may elect to receive all Listed Shares or all Subsidiary Partnership Units as indicated on the enclosed Consent Card. IF A UNITHOLDER VOTES FOR OR AGAINST OR ABSTAIN WITH RESPECT TO THE CONSOLIDATION AND FAILS TO MAKE AN ELECTION BETWEEN LISTED SHARES AND SUBSIDIARY PARTNERSHIP UNITS ON THE ENCLOSED CONSENT CARD, SUCH UNITHOLDER WILL RECEIVE LISTED SHARES IF THE CONSOLIDATION IS CONSUMMATED. IF A UNITHOLDER FAILS TO RETURN THE ENCLOSED CONSENT CARD, SUCH UNITHOLDER WILL RECEIVE LISTED SHARES IF THE CONSOLIDATION IS CONSUMMATED. THE GENERAL PARTNERS MAY DECIDE NOT TO PURSUE THE CONSOLIDATION WITH RESPECT TO ANY CPA(R) PARTNERSHIP FOR ANY REASON AND AT ANY TIME BEFORE IT BECOMES EFFECTIVE, WHETHER BEFORE OR AFTER APPROVAL BY THE UNITHOLDERS. THE GENERAL PARTNERS STRONGLY RECOMMEND THAT ALL UNITHOLDERS VOTE FOR THE CONSOLIDATION AND ELECT TO RECEIVE LISTED SHARES. EACH UNITHOLDER SHOULD MAKE A DETERMINATION AS TO WHICH TYPE OF SECURITIES TO RECEIVE BASED UPON SUCH UNITHOLDER'S PERSONAL SITUATION, AND SUCH DECISION SHOULD BE BASED UPON A CAREFUL EXAMINATION OF THE UNITHOLDER'S PERSONAL FINANCES, INVESTMENT OBJECTIVES, LIQUIDITY NEEDS, TAX SITUATION AND EXPECTATIONS AS TO THE COMPANY'S FUTURE GROWTH. THIS SOLICITATION OF CONSENTS EXPIRES AT 5:00 P.M., NEW YORK TIME ON DECEMBER 16, 1997 UNLESS EXTENDED. 5 NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS PASSED UPON THE FAIRNESS OR MERITS OF THIS TRANSACTION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. ------------------------ ALL QUESTIONS AND INQUIRIES SHOULD BE DIRECTED TO SHAREHOLDER COMMUNICATION SERVICES, INC., INFORMATION AGENT, BY TELEPHONE AT (800) 773-8481, extension CPA. The date of this Prospectus is October 15, 1997. 6 TABLE OF CONTENTS AVAILABLE INFORMATION.................................................................. 1 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................................ 2 PROSPECTUS SUMMARY..................................................................... 3 Overview............................................................................. 3 Organizational Chart................................................................. 4 Risks and Other Adverse Factors...................................................... 5 Benefits of the Consolidation and Listed Shares...................................... 6 Options Available and Duties Owed to Limited Partners who Object to the Consolidation..................................................................... 7 Fairness............................................................................. 8 Independent Appraisals and Fairness Opinion.......................................... 8 The Consent Solicitation............................................................. 9 The Company.......................................................................... 10 Recommendation of the General Partners............................................... 10 Alternatives to the Consolidation.................................................... 11 Consequences if the Consolidation Is Not Approved.................................... 11 Tables Regarding Total Exchange Value................................................ 12 No Dissenters' Rights................................................................ 13 Comparison of the CPA(R) Partnerships and the Company................................ 14 Summary of Federal Tax Consequences.................................................. 15 Conflicts of Interest Related to the Consolidation................................... 15 Conditions to the Consolidation...................................................... 17 Delivery of the Certificates for Units............................................... 17 Voting Procedures.................................................................... 17 Summary Selected Combined Financial Information...................................... 18 RISK FACTORS........................................................................... 20 Change in Nature of Investment from Finite-Life to Perpetual Existence............... 20 Uncertainty Regarding Trading Price for the Listed Shares............................ 20 Risk Associated with Greater Diversity and Growth.................................... 20 Conflicts of Interest in Structuring the Consolidation............................... 21 Distributions Paid to Holders of Subsidiary Partnership Units Before Holders of Listed Shares..................................................................... 21 No Market for the Subsidiary Partnership Units....................................... 22 Potential Differences Between Total Exchange Value and Realizable Value.............. 22 Board of Directors' Ability to Effect Changes in Investment, Financing and Certain Other Policies.................................................................... 22 Loss of Relative Voting Power........................................................ 22 No Appraisal or Similar Rights for Nonconsenting Unitholders......................... 22 Opinions of Counsel.................................................................. 22 No IRS Ruling with Respect to Partnership Status..................................... 23 Other Potential Tax Risks............................................................ 23 Tax Risks of Trading of Listed Shares................................................ 24 Uncertain Composition of the Company................................................. 24 Consolidation Expenses Will Reduce the Cash of the Company........................... 24 Combination of Real Estate Assets; Change in Geographic, Industry, Building-Type and Tenant Diversity.................................................................. 25 Risk of Lower Distributions.......................................................... 25 Potential Loss of Future Appreciation................................................ 25 Restrictions on Changes in Control................................................... 25 Limitation of Director Liability..................................................... 26
i 7 Reduction in Value From Contingent or Undisclosed Liabilities........................ 26 General Risks Related to Investments in Real Estate.................................. 27 Risk of Leverage..................................................................... 27 Rent Income Dependent Upon Creditworthiness of Tenants............................... 27 Losses From Uninsured Liabilities or Casualty........................................ 28 Losses From Casualty and Condemnation Related Lease Terminations..................... 28 Risks of Joint Ventures.............................................................. 28 Competition with Affiliates May Reduce Available Properties, Tenants and Purchasers of Properties..................................................................... 28 Growth of Company Dependent on Borrowing Capacity and Ability to Raise Capital....... 29 Possible Environmental Liabilities................................................... 29 Risk of Investment in Real Property Located Outside the United States................ 30 Potential Claims Against Title to Properties......................................... 30 Dependence on Key Personnel.......................................................... 31 Competition for Investments.......................................................... 31 Status of the Company under ERISA.................................................... 31 BACKGROUND AND REASONS FOR THE CONSOLIDATION........................................... 31 General.............................................................................. 31 Background of the CPA(R) Partnerships and the General Partners....................... 32 Efforts to Dispose of Properties..................................................... 32 Terms of the Consolidation........................................................... 34 Total Exchange Value and Allocation of Listed Shares and Subsidiary Partnership Units............................................................................. 36 Determination of Total Exchange Value................................................ 37 Allocation of Listed Shares to Unitholders and General Partners...................... 39 Allocation of Listed Shares Among CPA(R) Partnerships................................ 41 Allocation of Listed Shares and Total of Cumulative Distributions and Assigned Total Exchange Value Per $1,000 Original Investment..................................... 41 Expected Benefits of Consolidation................................................... 41 Alternatives to the Consolidation.................................................... 43 Comparison of Alternatives........................................................... 45 Conditions to the Consolidation...................................................... 51 Recommendation of the General Partners and Fairness Determination.................... 51 Material Factors Underlying Belief as to Fairness.................................... 52 Relative Weight Assigned to Material Factors......................................... 54 Fairness to Unitholders Receiving Listed Shares in the Consolidation................. 54 Fairness to Unitholders Receiving Subsidiary Partnership Units in the Consolidation..................................................................... 54 Fairness in View of Conflicts of Interest............................................ 55 Consequences if the Consolidation is Not Approved.................................... 55 Unitholder Elections................................................................. 55 Accounting Treatment................................................................. 56 Costs and Expenses................................................................... 56 No Fractional Listed Shares.......................................................... 56 Effect of the Consolidation on Dissenting Investors.................................. 56 Effect of Consolidation on Nonparticipating Partnerships............................. 57 Effective Time....................................................................... 57 Title Insurance...................................................................... 57 Environmental Matters................................................................ 57 Legal Proceedings.................................................................... 58
ii 8 Amendment, Termination and Waiver.................................................... 58 Appraisals and Fairness Opinions..................................................... 58 DISTRIBUTION POLICY.................................................................... 58 Listed Shares........................................................................ 58 Subsidiary Partnership Units......................................................... 61 Minimum Participation................................................................ 62 COMPARISON OF UNITS, LISTED SHARES AND SUBSIDIARY PARTNERSHIP UNITS.................... 63 Issuance in Series................................................................... 63 General Business..................................................................... 63 Distributions and Dividends.......................................................... 63 Management and Fiduciary Duties...................................................... 64 Voting Rights........................................................................ 64 Special Meetings..................................................................... 65 Redemption........................................................................... 66 Liquidation Rights................................................................... 67 Right to Compel Dissolution.......................................................... 67 Expenses of the Consolidation........................................................ 67 Limited Liability.................................................................... 67 Liquidity and Marketability.......................................................... 67 Restrictions on Transfer............................................................. 67 Continuity of Existence.............................................................. 68 Financial Reports.................................................................... 68 Payments to the General Partners and their Affiliates................................ 68 Certain Legal Rights................................................................. 68 Inspection of Books and Records...................................................... 69 COMPARISONS OF CPA(R) PARTNERSHIPS AND COMPANY......................................... 70 Form of Organization................................................................. 70 Length of Investment................................................................. 70 Nature of Investment................................................................. 71 Properties and Diversification....................................................... 71 Permitted Investments................................................................ 71 Additional Equity.................................................................... 72 Borrowing Policies................................................................... 73 Restrictions Upon Related Party Transactions......................................... 73 Management Control and Responsibility................................................ 74 Management Liability and Indemnification............................................. 75 Antitakeover Provisions.............................................................. 76 Voting Rights........................................................................ 76 Limited Liability of Investors....................................................... 77 Liquidity............................................................................ 77 VOTING PROCEDURES...................................................................... 78 Time of Voting....................................................................... 78 Record Date and Outstanding Units.................................................... 78 Approval Date........................................................................ 78 Consent Card and Vote Required....................................................... 78 Revocability of Consent.............................................................. 79 Solicitation of Votes; Solicitation Expenses......................................... 80 Alternatives Available to Unitholders who Object to the Consolidation................ 80 Unitholder Names and Addresses....................................................... 81
iii 9 No Right of Appraisal................................................................ 81 Amendments to Partnership Agreements................................................. 81 Issuance of Certificates............................................................. 81 INTERESTS OF CERTAIN PERSONS IN THE CONSOLIDATION AND CONFLICTS OF INTEREST............ 82 Substantial Benefits to General Partners............................................. 82 Common General Partners.............................................................. 83 Lack of Independent Representation of Unitholders.................................... 83 Fiduciary Duties of General Partners................................................. 83 Features Discouraging Potential Takeovers............................................ 84 Allocation of Services and Expenses.................................................. 84 Non-Arm's-Length Agreements.......................................................... 84 Competition with the Company from Affiliates of the Manager in the Purchase, Sale, Lease and Operation of Properties................................................. 84 Adjacent Properties.................................................................. 85 FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION........................................... 85 Fiduciary Responsibility of the General Partners..................................... 85 Indemnification of Directors and Officers of the Company............................. 86 Directors and Officers Insurance..................................................... 86 BUSINESS AND PROPERTIES................................................................ 87 The Company's Business............................................................... 87 Management of the Company............................................................ 87 Acquisition Strategies............................................................... 87 Financing Strategies................................................................. 88 Transaction Origination.............................................................. 88 Acquisition and Underwriting Process................................................. 89 Asset Management..................................................................... 90 Properties........................................................................... 91 Description of Most Significant Tenants.............................................. 95 Mortgage Debt........................................................................ 98 Environmental Matters................................................................ 99 Competition.......................................................................... 99 Employees............................................................................ 100 Insurance............................................................................ 100 Legal Proceedings.................................................................... 100 POLICIES WITH RESPECT TO CERTAIN ACTIVITIES............................................ 100 Investment Policies.................................................................. 100 Financing Policies................................................................... 101 Miscellaneous Policies............................................................... 101 Working Capital Reserves............................................................. 102 SELECTED COMBINED FINANCIAL INFORMATION................................................ 102 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................................................... 114 Overview............................................................................. 114 Results of Operations................................................................ 114 Comparison of the Six Months Ended June 30, 1997 and 1996......................... 114 Comparison of the Years Ended December 31, 1996 and 1995.......................... 115 Comparison of the Years Ended December 31, 1995 and 1994.......................... 116 Liquidity and Capital Resources...................................................... 116
iv 10 MANAGEMENT FOLLOWING THE CONSOLIDATION................................................. 118 Directors and Executive Officers of the Company...................................... 118 Directors and Principal Officers of the Manager...................................... 121 Terms of Directors of the Company.................................................... 122 Committees of the Board of Directors of the Company.................................. 122 Compensation of the Board of Directors............................................... 123 Executive Compensation............................................................... 123 1997 Listed Share Incentive Plan..................................................... 123 Incentive Compensation............................................................... 124 The Non-Employee Director Plan....................................................... 124 The Manager.......................................................................... 125 Shareholdings........................................................................ 125 Management Decisions................................................................. 126 Limitations on Liability of Directors and Officers of the Company.................... 126 Indemnification of Directors and Officers............................................ 126 Management Services Provided by Manager.............................................. 126 SECONDARY MARKET AND OWNERSHIP OF CPA(R) PARTNERSHIP UNITS............................. 128 Sale Prices of Units................................................................. 128 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................... 129 DESCRIPTION OF SHARES AND SUBSIDIARY PARTNERSHIP UNITS................................. 130 Listed Shares........................................................................ 130 Subsidiary Partnership Units......................................................... 131 Restricting Changes in Control and Business Combination Provisions................... 132 Additional Classes and Series of Shares........................................... 132 Staggered Board of Directors...................................................... 132 Number of Directors; Removal; Filling Vacancies................................... 132 Business Combination Provisions................................................... 133 Amendments to Business Combination Provisions..................................... 136 Control Share Acquisition Provisions.............................................. 137 Voting Rights of Control Shares................................................... 137 Redemption of Control Shares...................................................... 137 Advantages and Disadvantages of Control Share Acquisition Provisions.............. 138 Amendments to Control Share Acquisition Provisions................................ 138 Shareholder Rights Plan........................................................... 138 Distribution Date................................................................. 138 Adjustments to Purchase Plan...................................................... 139 Exercise of Rights................................................................ 139 Redemption of Rights.............................................................. 139 Amendment of Rights Plan.......................................................... 139 Effect of the Rights Plan......................................................... 139 Resale of Shares.................................................................. 139 Transfer Agent and Registrar...................................................... 140 COMPENSATION, REIMBURSEMENT AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGER...... 140 Compensation Payable by the CPA(R) Partnerships...................................... 140 Amounts Payable to the Manager after the Consolidation............................... 142 Fees Payable Over Past Three Years................................................... 143 General Partners' Preferred Return................................................... 144 Investment Banking Fee............................................................... 145
v 11 APPRAISALS AND FAIRNESS OPINION........................................................ 146 General.............................................................................. 146 Experience of Independent Appraiser.................................................. 146 Independent Appraisal................................................................ 146 Fairness Opinion..................................................................... 149 INCOME TAX CONSEQUENCES................................................................ 152 New Tax Law Provisions............................................................... 153 Classification as "Partnerships"..................................................... 154 Tax Consequences of the Consolidation................................................ 155 Tax Consequences of Consolidation to Subsidiary Partnership Unitholders.............. 156 Shareholders or Subsidiary Partnership Unitholders, Not Partnership, Subject to Tax............................................................................... 156 Allocations of Profits and Losses.................................................... 157 Passive Activity Loss Limitations.................................................... 158 Deductibility of Fees................................................................ 158 Organization and Consolidation Expenses.............................................. 159 Start-up Expenditures................................................................ 159 Tax and "At Risk" Basis of Shares.................................................... 160 Treatment of Cash Distributions From the Company..................................... 160 Treatment of Gain or Loss on Disposition of Units.................................... 161 Treatment of Gifts of Shares......................................................... 162 Issuance of Additional Shares........................................................ 162 Treatment of Gain or Loss on Sale of Property........................................ 162 Sale-Leaseback Transactions.......................................................... 163 Acquisition of Stock, Options and Warrants........................................... 164 Tax Elections........................................................................ 164 Depreciation......................................................................... 165 Depreciation Recapture............................................................... 165 Alternative Minimum Tax.............................................................. 166 Installment Sales-Imputed Interest................................................... 166 Accrual of Original Issue Discount................................................... 167 Construction Expenses................................................................ 168 Investment by Qualified Pension and Profit-Sharing Plans (Including Keoghs), Stock Bonus Plans and Individual Retirement Accounts.................................... 168 Certain Federal Estate Tax Matters................................................... 169 Tax Penalties and Interest........................................................... 169 Termination of the Company for Tax Purposes.......................................... 169 State and Local Tax Consequences..................................................... 170 Necessity of Prospective Shareholders Obtaining Professional Advice.................. 170 LEGAL MATTERS.......................................................................... 171 EXPERTS................................................................................ 171 GLOSSARY OF TERMS...................................................................... 171 INDEX TO FINANCIAL STATEMENTS.......................................................... F-1 Fairness Opinion............................................................... Appendix A Appraisal...................................................................... Appendix B Consent Card and Election Form with Instructions............................... Appendix C
vi 12 No person is authorized to give any information or to make any representation not contained in this Prospectus, and any information or representation not contained herein must not be relied upon as having been authorized by the CPA(R) Partnerships, the General Partners or the Company. This Prospectus does not constitute an offer of any securities other than the registered securities to which it relates or an offer to any person in any jurisdiction where such offer would be unlawful. Neither the delivery of this Prospectus nor any sales made thereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the CPA(R) Partnerships or the Company since the date hereof; however, in the event of any material change during the period when this Prospectus must be delivered, the Prospectus will be supplemented accordingly. AVAILABLE INFORMATION The CPA(R) Partnerships subject to this Consolidation are Corporate Property Associates (a California limited partnership) ("CPA(R):1"), Corporate Property Associates 2 (a California limited partnership) ("CPA(R):2"), Corporate Property Associates 3 (a California limited partnership) ("CPA(R):3"), Corporate Property Associates 4, a California limited partnership ("CPA(R):4"), Corporate Property Associates 5 (a California limited partnership) ("CPA(R):5"), Corporate Property Associates 6 -- a California limited partnership ("CPA(R):6"), Corporate Property Associates 7 -- a California limited partnership ("CPA(R):7"), Corporate Property Associates 8, L.P., a Delaware limited partnership ("CPA(R):8") and Corporate Property Associates 9, L.P. (a Delaware limited partnership) ("CPA(R):9"). The CPA(R) Partnerships are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith, must file reports and other information with the Securities and Exchange Commission (the "Commission"), 450 Fifth Street N.W., Washington, D.C. 20549. In addition, the Company has filed a Registration Statement on Form S-4 under the Securities Act of 1933, as amended (the "Securities Act") and the rules and regulations promulgated thereunder, with respect to the Listed Shares and the Subsidiary Partnership Units offered pursuant to this Prospectus. This Prospectus, which is part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and financial schedules thereto. For further information with respect to the CPA(R) Partnerships and the Company, reference is made to the reports of the CPA(R) Partnerships filed under the Exchange Act and the Company's Registration Statement and such exhibits and schedules, copies of which may be examined without charge at, or obtained upon payment of prescribed fees from, the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, which will also be available for inspection and copying at the regional offices of the Commission located at Seven World Trade Center, New York, New York 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. In addition, information may be obtained from the Commission's internet site at http://www.sec.gov. This site contains reports, proxy and information statements, and other information regarding registrants that file electronically with the Commission. Statements contained in this Prospectus as to the contents of any contract or other document which is filed as an exhibit to the Registration Statement are not necessarily complete, and each such statement is qualified in its entirety by reference to the full text of such contract or document. Upon consummation of the Consolidation, the Company will be required to file reports and other information with the Commission pursuant to the Exchange Act. In addition to applicable legal NYSE requirements, if any, holders of the Listed Shares and the Subsidiary Partnership Units will receive annual reports containing audited financial statements, with a report thereon by the Company's independent public accountants, and quarterly reports containing unaudited financial information for each of the first three quarters of each fiscal year. If a CPA(R) Partnership does not participate in the Consolidation, such CPA(R) Partnership will continue to file reports and other information with the Commission as required by law. 1 13 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE This Consent Solicitation Statement incorporates documents by reference which are not presented herein or delivered herewith. These documents (without exhibits, unless such exhibits are specifically incorporated by reference herein) are available without charge to each person to whom a copy of this Prospectus is delivered, upon written or oral request addressed to: W.P. Carey & Co., Inc., 50 Rockefeller Plaza, New York, NY 10020, Attention: Investor Relations, telephone number 1-800-733-8481 ext. CPA. In order to ensure timely delivery of the documents, any request should be made by December 1, 1997. The following documents of the CPA(R) Partnerships have been filed with the Commission and are incorporated herein by reference: Annual Report on Form 10-K of CPA(R):1 for the year ended December 31, 1996. Annual Report on Form 10-K of CPA(R):2 for the year ended December 31, 1996. Annual Report on Form 10-K of CPA(R):3 for the year ended December 31, 1996. Annual Report on Form 10-K of CPA(R):4 for the year ended December 31, 1996. Annual Report on Form 10-K of CPA(R):5 for the year ended December 31, 1996. Annual Report on Form 10-K of CPA(R):6 for the year ended December 31, 1996. Annual Report on Form 10-K of CPA(R):7 for the year ended December 31, 1996. Annual Report on Form 10-K of CPA(R):8 for the year ended December 31, 1996. Annual Report on Form 10-K of CPA(R):9 for the year ended December 31, 1996. Quarterly Report on Form 10-Q of CPA(R):1 for the six months ended June 30, 1997. Quarterly Report on Form 10-Q of CPA(R):2 for the six months ended June 30, 1997. Quarterly Report on Form 10-Q of CPA(R):3 for the six months ended June 30, 1997. Quarterly Report on Form 10-Q of CPA(R):4 for the six months ended June 30, 1997. Quarterly Report on Form 10-Q of CPA(R):5 for the six months ended June 30, 1997. Quarterly Report on Form 10-Q of CPA(R):6 for the six months ended June 30, 1997. Quarterly Report on Form 10-Q of CPA(R):7 for the six months ended June 30, 1997. Quarterly Report on Form 10-Q of CPA(R):8 for the six months ended June 30, 1997. Quarterly Report on Form 10-Q of CPA(R):9 for the six months ended June 30, 1997. All documents filed by the CPA(R) Partnerships pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Consent Solicitation Statement and prior to the date on which the Consolidation is consummated shall be deemed to be incorporated by reference into this Consent Solicitation Statement and to be a part hereof from the date of filing of such documents. Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for purposes hereof to the extent that a statement obtained herein (or in any other subsequently filed document which also is incorporated herein) modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed to constitute a part hereof except as so modified or superseded. 2 14 PROSPECTUS SUMMARY The following Summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus and supplements thereto. Capitalized terms not otherwise defined in this Summary shall have the meanings set forth in the "GLOSSARY OF TERMS." OVERVIEW As described in this Prospectus, William P. Carey, W.P. Carey & Co., Inc. ("W.P. Carey & Co."), Carey Corporate Property, Inc. ("CCP"), Seventh Carey Corporate Property, Inc. ("Seventh Carey"), Eighth Carey Corporate Property, Inc. ("Eighth Carey") and Ninth Carey Corporate Property, Inc. ("Ninth Carey" and collectively, the "General Partners") are proposing a consolidation by merger (the "Consolidation") of nine subsidiary limited partnerships (the "Subsidiary Partnerships") of Carey Diversified LLC, a newly organized Delaware limited liability company (the "Company" or "CD") with and into nine public limited partnerships in the Corporate Property Associates series of limited partnerships (the "CPA(R) Partnerships"). The CPA(R) Partnerships currently own, in the aggregate, 198 properties in 37 states. The Company's objective is to increase shareholder value and its Funds from Operations through prudent management of its real estate assets and through opportunistic investments. The Company intends to capitalize on its status as a publicly-traded real estate investment company to take immediate advantage of the significant opportunities to make net lease and other investments at attractive returns. The sources of capital for additional investments may include internally generated cash flow and the issuance of debt or equity securities by the Company. The General Partners are soliciting consents in connection with the Consolidation because they believe it is in the best interests of the Unitholders to restructure the CPA(R) Partnerships. They believe that the Consolidation offers Unitholders the opportunity to control better the timing of the liquidation of their investments (and the resulting taxation of such liquidation) and to participate in the growth opportunities and additional diversification provided by the Company while deferring the tax on approximately $336 million of capital gain (assuming the Properties are all sold for their appraised value). The General Partners believe that an aggregation of all the CPA(R) Partnerships' Properties will likely result in higher values over the long term for more Unitholders than if the real estate were sold and the CPA(R) Partnerships were liquidated in accordance with the Partnership Agreements. Participating Investors holding Listed Shares will be able to sell their Listed Shares on the NYSE if they want to liquidate their interest or may borrow funds using the Listed Shares as collateral. At the same time, the General Partners recognize that some Unitholders may wish to retain a security that reflects the rights and interests represented by the Units. The Company is offering the Subsidiary Partnership Units to those Unitholders who wish to retain a security that provides substantially the same economic interests and legal rights as a Unit. Subsidiary Partnership Units will entitle holders to share in the economic performance of the assets held by the CPA(R) Partnership in which such holder held an interest. The Subsidiary Partnership Units will also entitle holders to vote on certain matters relating to those Subsidiary Partnerships and will entitle holders to have their Subsidiary Partnership Units redeemed within the same time period that the corresponding CPA(R) Partnerships were expected to liquidate (or within which they could reasonably be liquidated as of the date hereof). If the Consolidation is approved by the holders of a majority of the outstanding Units in CPA(R) Partnerships owning assets with a Total Exchange Value in excess of $200 million, and certain other conditions are satisfied, the Consolidation will be completed. A CPA(R) Partnership will participate in the Consolidation with the approval of Unitholders holding at least a majority of the outstanding Units of such CPA(R) Partnership and the satisfaction of certain other conditions. Each Unitholder may elect to receive all Listed Shares (which represent an economic interest in all of the assets of the Company) or all Subsidiary Partnership Units (which represent an interest in the particular CPA(R) Subsidiary Partnership). See "DESCRIPTION OF SHARES AND SUBSIDIARY PARTNERSHIP UNITS." If the Consolidation is consummated, the General Partners and their Affiliates will contribute a portion of their General Partner interest in exchange for Listed Shares and will retain the remainder of their General Partner interests which 3 15 will be converted into Limited Partner interests in the Subsidiary Partnerships. See COMPENSATION, REIMBURSEMENT AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGER. If Unitholders of a CPA(R) Partnership do not approve the Consolidation, the CPA(R) Partnership (a "Nonparticipating Partnership") will continue to operate as a separate legal entity with its own assets and liabilities, and its investment objectives, policies and restrictions will not change. As a result, Unitholders will retain their current interest in the Nonparticipating Partnership. A Nonparticipating Partnership will continue to be operated in accordance with the terms of its Partnership Agreement. The management of the Nonparticipating Partnerships will be substantially the same. See "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Effect of Consolidation on Nonparticipating Partnerships." A vote in favor of the Consolidation also constitutes a vote in favor of the related amendment of a Partnership Agreement (collectively, the "Partnership Agreement Amendments"), the form of which is attached to this Prospectus as Appendix C. The proposed Partnership Agreement Amendments expressly authorize all actions necessary to successfully complete the Consolidation and the distribution of the Listed Shares and Subsidiary Partnership Units to Participating Investors. See "VOTING PROCEDURES -- Amendments to Partnership Agreements." ORGANIZATIONAL CHART The following organizational chart illustrates the organizational structure of the Company assuming the Consolidation is consummated. [ORGANIZATIONAL CHART] (1) Affiliates include CCP, Seventh Carey, Eighth Carey and Ninth Carey (2) Carey Management LLC will own 661,718 Listed Shares and will be a Limited Partner of each Subsidiary Partnership. See "COMPENSATION, REIMBURSEMENT AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGER" for the interest retained by Carey Management LLC in each Subsidiary Partnership. (3) Carey Diversified LLC will serve as the General Partner of all of the Subsidiary Partnerships that participate in the Consolidation. 4 16 RISKS AND OTHER ADVERSE FACTORS The following is a summary of the potential disadvantages, adverse consequences and risks of the Consolidation. This summary is qualified in its entirety by the more detailed discussion in the section entitled "RISK FACTORS" contained in this Prospectus beginning on page 20. Fundamental Change in the Nature of Investment for Holders of Listed Shares. If the Consolidation is completed, there will be a change in the nature of the investment of each Participating Investor that elects to receive Listed Shares from holding an interest in a specified portfolio of net leased commercial and industrial properties to holding an interest in an ongoing company, the investment portfolio of which may be changed from time to time without approval of Shareholders. If the Consolidation is completed, holders of Listed Shares will be able to liquidate their investments only by selling their Listed Shares on the NYSE or in private transactions, and they will not receive a return of their investment in the form of liquidation proceeds through property sales. If the Consolidation is completed, former Unitholders who elect to receive Listed Shares will have an investment in an entity that is larger than each of the CPA(R) Partnerships and will thus lose relative voting power. Potential Differences Between Total Exchange Value and Realizable Value. Unitholders are subject to the risk that the Total Exchange Value of the CPA(R)Partnerships, which is based primarily on independent appraisals of each CPA(R) Partnership's portfolio of Properties, does not reflect the realizable value of the CPA(R) Partnerships' assets in an actual transaction. Were this to be the case as to a CPA(R) Partnership, the consideration received by a Unitholder of that CPA(R) Partnership may be understated or overstated. Unitholders should recognize that appraisals are opinions as of the date specified and are subject to certain assumptions and may not represent the true worth or realizable value of the Properties. There can be no assurance that another appraiser would assign the same appraised values to the Properties, or, that if the Properties were sold, they would actually be sold at appraised values; the sale prices might be higher or lower than the appraised values. Uncertainty Regarding Trading Price for the Listed Shares. Listed Shares may trade at prices substantially below Total Exchange Value per Share or historical book value of the Company's assets. The price of Listed Shares after the Consolidation may decrease below the Total Exchange Value per Share of $20 due to the potentially large number of Listed Shares that may be sold immediately after the Consolidation by Participating Investors. Uncertainty as to Ultimate Composition of the Company. Due to uncertainty at the time of voting as to which CPA(R) Partnerships will participate in the Consolidation, Unitholders may not be able to fully evaluate the Company's potential financial strength or asset base when making the decision to participate in Consolidation. Potential Change in the Nature and Amount of Leverage. All but one of the CPA(R) Partnerships own properties subject to limited recourse debt. The Board of Directors could authorize additional borrowing by the Company. The Company could become more highly leveraged and, thereby, increase its debt service, which may adversely affect the Company's ability to make distributions to Shareholders. In addition, the Company may incur full recourse debt which exposes all of the assets of the Company to repayment instead of the mostly limited recourse debt incurred by the CPA(R) Partnerships, which debt generally exposes specific properties for the repayment of debt. Board of Directors' Ability Unilaterally to Effect Changes in Investment, Financing and Certain Other Policies. Although the Board of Directors of the Company intends to implement the business plan set forth herein, the Board will have the ability to change investment, financing and other policies of the Company without the consent of Shareholders. See "BUSINESS AND PROPERTIES." No changes can be made which affect the fundamental rights, preferences and privileges of the holders of Subsidiary Partnership Units. The Board of Directors will also have the ability to change the Company's distribution policy with respect to the Listed Shares without the consent of the holders of Listed Shares. No Market for the Subsidiary Partnership Units. Holders of Subsidiary Partnership Units may not be able to sell their Subsidiary Partnership Units because no organized market for the Subsidiary Partnership 5 17 Units is expected to develop. If Subsidiary Partnership Units are sold, it is likely that they will be sold at a substantial discount to the Total Exchange Value per Subsidiary Partnership Unit. Conflicts of Interest in Structuring the Consolidation. The General Partners initiated and structured the Consolidation and will realize substantial economic benefits, and, therefore, the General Partners are subject to conflicts of interest with respect to the Consolidation. See "INTERESTS OF CERTAIN PERSONS IN THE CONSOLIDATION AND CONFLICTS OF INTEREST -- Common General Partners." Lack of Independent Representation of Unitholders. No independent party was retained by the CPA(R) Partnerships to negotiate on behalf of the Unitholders. Therefore, terms of the Consolidation may be less favorable to Unitholders and more favorable to General Partners than if the Consolidation had been subject to arm's-length negotiation. Had an independent party negotiated on behalf of each CPA(R) Partnership, the terms of the Consolidation may have been more favorable to certain or all CPA(R) Partnerships and fewer Listed Shares may have been allocated to the General Partners. Consolidation Expenses will Reduce the Cash of the Company. The Consolidation Expenses are estimated to be approximately $2,997,000, or approximately 0.6% of the Total Exchange Value (assuming 100 percent Partnership Participation). Such expenses will reduce the cash available to the Company. See "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Fees and Expenses." No Appraisal or Similar Rights for Nonconsenting Unitholders. Unitholders will have no appraisal or similar rights in connection with the Consolidation. Therefore, Unitholders will not be entitled to receive cash payment for the fair value of their Units if they do not vote in favor of the Consolidation and the Consolidation is approved and consummated. Potential Reduction in Cash Distributions to Certain Investors. Aggregate cash distributions to Participating Investors may be lower after the Consolidation than the aggregate distributions to Unitholders before the Consolidation. Holders of Majority of Units Bind Partnership. Approval of the Consolidation by Unitholders holding a majority of outstanding Units of a CPA(R) Partnership will cause such CPA(R) Partnership to be merged with a Subsidiary Partnership and such approval will bind all of that CPA(R) Partnership's Unitholders, including Unitholders who vote against or abstain from voting with respect to the Consolidation. Additional and Unknown Liabilities. Combining assets and liabilities of the Participating Partnerships in the Consolidation may subject holders of Listed Shares to liabilities of Participating Partnerships in which they did not previously own an interest. The Company also has potential liability for unknown, undisclosed or contingent liabilities of Participating Partnerships, including, but not limited to, claims for indemnification by General Partners, environmental liabilities and title defects, which could adversely affect the liquidity of the Company and its ability to make expected distributions to holders of Listed Shares. BENEFITS OF THE CONSOLIDATION AND LISTED SHARES From 1979 through 1991, the CPA(R) Partnerships raised approximately $400 million through public offerings of Units, and each CPA(R) Partnership invested in net leased industrial and commercial real estate. When the CPA(R) Partnerships were formed, Unitholders anticipated a return of their investment over the finite lives of the CPA(R) Partnerships, with a disposition strategy that included the sale of assets and liquidation of the CPA(R) Partnerships. The General Partners believe that the Consolidation is the best way for Limited Partners to achieve the original investment goals for the following reasons: - - LIQUIDITY THROUGH STOCK EXCHANGE LISTING. The Company has applied for listing of the Listed Shares on the NYSE. Accordingly, the Consolidation offers liquidity to those Limited Partners who receive Listed Shares in the Consolidation. Holders of Listed Shares may also be able to borrow by using the Listed Shares as collateral. The Subsidiary Partnership Units will not be listed on any national securities exchange, and no public market is expected to develop for the Subsidiary Partnership Units. 6 18 - - INCREASED DIVERSIFICATION. The Consolidation permits holders of Listed Shares to participate in a company substantially larger and more diversified than any of the individual CPA(R) Partnerships. The Company will have increased tenant, building type, industry sector and geographic diversity. The size and diversity of the Company spreads the risk of an investment in the Company over a broader group of assets and reduces the dependence of the investment upon the performance of any particular asset or group of assets. - - GREATER CONTROL OF TIMING OF RECOGNITION OF TAXABLE INCOME. As a perpetual life entity, the Company will be able to continue to manage the Properties instead of being forced to sell them over the next several years. Holders of Listed Shares will be able to control better the recognition of taxable income by holding or selling the Listed Shares and recognizing taxable income at the time of the sale of such Shares, instead of being forced to recognize taxable income resulting from the sale of Properties by the CPA(R) Partnerships as the CPA(R) Partnerships are liquidated. If the CPA(R) Partnerships were to sell the Properties at their appraised value, the Unitholders would recognize capital gains of approximately $336 million. In addition, the sale of these Properties may result in the recognition of taxable income in an amount in excess of the cash received by the CPA(R) Partnership selling the Properties at the time Properties are sold. Holders of Listed Shares will still recognize income if the Company sells these Properties for a gain, but the Company expects to sell significantly fewer Properties than if the CPA(R) Partnerships were being liquidated. - - GREATER INVESTMENT OPPORTUNITY. The General Partners believe that the Company will maximize economic value for those Unitholders who receive Listed Shares in connection with the Consolidation. Although there can be no assurances, the General Partners believe that investment opportunities exist for investment in net leased real estate and other assets which provide attractive investment yields relative to their risk. - - UNITHOLDERS' CHOICE OF INVESTMENT -- LISTED SHARES OR SUBSIDIARY PARTNERSHIP UNITS. Those Unitholders who do not want the risks and opportunities afforded by the Listed Shares can elect to receive Subsidiary Partnership Units in connection with the Consolidation. The Subsidiary Partnership Units have been structured so that their economic interests and legal rights are substantially the same as the economic interests and legal rights of the Units. The performance of, and distributions to the holders of, Subsidiary Partnership Units will depend on the performance of the Properties of the corresponding Subsidiary Partnerships. OPTIONS AVAILABLE AND DUTIES OWED TO LIMITED PARTNERS WHO OBJECT TO THE CONSOLIDATION - - LIMITED PARTNERS MAY VOTE AGAINST THE CONSOLIDATION. If the holders of a majority of the outstanding Units in the CPA(R) Partnerships representing the Minimum Participation Amount do not approve the Consolidation, the Consolidation will not be completed. Even if the Consolidation is completed, a particular CPA(R) Partnership will not participate in the Consolidation if the holders of at least a majority of the outstanding Units in that CPA(R) Partnership do not approve the Consolidation. Rather, that CPA(R) Partnership will continue to operate as a separate legal entity with its own assets and liabilities, its investment objectives, policies and restrictions will not change, and those Limited Partners will retain their interests currently held. - - LIMITED PARTNERS MAY ELECT TO RECEIVE SUBSIDIARY PARTNERSHIP UNITS. The economic interests and legal rights of holders of Subsidiary Partnership Units are substantially the same as those of holders of Limited Partner interests in a CPA(R) Partnership. 7 19 - - LIMITED PARTNERS OWED A FIDUCIARY DUTY. The common law of both Delaware and California imposes fiduciary duties of care, loyalty, good faith and fair dealing on the General Partners in connection with effecting or attempting to effect the Consolidation. FAIRNESS The General Partners believe the terms of the Consolidation are fair as a whole and to the Unitholders in each of the CPA(R) Partnerships, regardless of which combination of CPA(R) Partnerships is included in the Consolidation. The General Partners have based their determination on a variety of factors, including, but not limited to (i) the form, allocation and amount of consideration offered to Unitholders, including Unitholders who vote against the Consolidation ("Dissenting Investors") and to the General Partners, (ii) the tax-free nature of the transaction, (iii) the lack of material differences among the CPA(R) Partnerships, (iv) the opportunity for each Unitholder to vote in favor of, or against, the Consolidation, and to elect to receive either Listed Shares or Subsidiary Partnership Units that are valued based on the same methodology, (v) the appraisals rendered by the Independent Appraiser with respect to the value of the CPA(R) Partnerships and (vi) the Fairness Opinion rendered by the Independent Appraiser. See "BACKGROUND AND REASONS FOR THE CONSOLIDATION." The General Partners reviewed the allocation and estimated value of the consideration to be received by Unitholders in connection with the Consolidation and compared this estimated consideration to the estimated consideration that may have been received by Unitholders if any of the alternatives to the Consolidation had been recommended by the General Partners. The General Partners concluded that the likely market value of the Listed Shares of the Company, based upon the trading range of real estate securities, would be higher in the long run than the estimated value of the consideration Unitholders would have received if the General Partners had recommended any of the alternatives to the Consolidation. See "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Comparison of Alternative Considerations." Based upon this review and comparison, the General Partners concluded that the Consolidation is fair and that the terms of the Subsidiary Partnership Units are fair to Unitholders from a financial point of view. INDEPENDENT APPRAISALS AND FAIRNESS OPINION Each CPA(R) Partnership has obtained from the Independent Appraiser an appraisal of the fair market value of its real estate portfolio as of March 31, 1997 based solely on the income approach to valuation (the "Independent Appraisal"). Due to the type of real estate assets held by the CPA(R) Partnerships and the nature of lease terms, the General Partners concluded after consultation with the Independent Appraiser that the use of the income approach to valuation was the most appropriate way of assessing the value of the CPA(R) Partnerships' real estate portfolios. The Independent Appraiser concluded that use of the income approach was reasonable and appropriate. The same method was used for each CPA(R) Partnership. In performing such appraisals, the Independent Appraiser conducted such investigations and inquiries as it deemed necessary in establishing the valuations and made such assumptions and identified such qualifications and limitations as it deemed necessary in its findings. See "APPRAISALS AND FAIRNESS OPINION -- Independent Appraisal." The Independent Appraiser has rendered its opinion (the "Fairness Opinion"), subject to the assumptions, limitations and qualifications contained therein, that the allocation of Listed Shares among the CPA(R) Partnerships is fair to the Unitholders from a financial point of view. The Independent Appraiser, in arriving at its opinion, performed the Independent Appraisal of each CPA(R) Partnership's portfolio of properties reviewed, among other things, a draft of this Prospectus in substantially the form filed with the SEC and provided to Unitholders, financial and other information regarding the CPA(R) Partnerships provided to it by the General Partners and conducted such other inquiries as it deemed appropriate and discussed the allocation methodology, analysis and conclusions with the General Partners. The Fairness Opinion does not address (i) the fairness of any terms of the Consolidation (other than the fairness of the allocations of the Listed Shares for the maximum and minimum participation levels as defined herein) or the amounts or allocations of Consolidation Expenses or the amounts of Consolidation Expenses 8 20 borne by Limited Partners at various levels of participation in the Consolidation, (ii) the relative value of the Listed Shares and the Subsidiary Partnership Units to be issued in the Consolidation, (iii) the prices at which the Listed Shares or Subsidiary Partnership Units may trade following the Consolidation or the trading value of the Listed Shares or Subsidiary Partnership Units to be received compared with the current fair market value of the CPA(R) Partnership's portfolio or other assets if liquidated in real estate markets or (iv) alternatives to the Consolidation. The Fairness Opinion and the Independent Appraisal, each of which contains a description of the assumptions and qualifications made, matters considered and limitations on the review and analysis, are set forth as Appendices A and B, respectively, and should be read in their entirety. THE CONSENT SOLICITATION The Consent Solicitation... Consent Cards must be received by December 16, 1997 (unless extended by the General Partners) to be counted in the vote on the Consolidation. Voting..................... Each Unit entitles the holder thereof on the record date to one vote. Only Unitholders on the record date are entitled to vote on the Consolidation. October 7, 1997 is the record date for determination of Unitholders entitled to vote on the Consolidation. Units Outstanding.......... On the record date, the following number of Units were outstanding for each CPA(R) Partnership:
UNITS CPA(R): OUTSTANDING ------------------------------------- ----------- 1................................... 40,000 2................................... 54,900 3................................... 66,000 4................................... 85,528 5................................... 113,200 6................................... 47,930 7................................... 45,209 8................................... 67,582 9................................... 59,918
Vote Required.............. Participation in the Consolidation by a CPA(R) Partnership will require the approval of the holders of a majority of the outstanding Units of that CPA(R) Partnership. Each Unitholder votes FOR or AGAINST or ABSTAIN on the Consolidation and may elect to receive all Listed Shares or all Subsidiary Partnership Units. If a Unitholder fails to return a Consent Card or returns a Consent Card and fails to elect to receive Listed Shares or Subsidiary Partnership Units in connection with the Consolidation and the Consolidation is consummated, such Unitholder will receive all Listed Shares. Failure to submit a written Consent Card is the functional equivalent of a vote AGAINST the Consolidation for purposes of tallying the vote. Abstentions and broker non-votes (if any) will not count toward the number of consents required for approval and have the effect of a vote AGAINST the Consolidation for purposes of tallying the vote. 9 21 THE COMPANY General The Company was formed as a Delaware limited liability company under the laws of the State of Delaware on October 15, 1996 for the initial purpose of participating in the Consolidation. The current Shareholders of the Company are Carey Management LLC (the "Manager") and Carey Property Advisors LP (the "Initial Member"). The Company is expected to be treated as a partnership for tax purposes. See "INCOME TAX CONSEQUENCES -- Classification as 'Partnerships'." The Company currently has no significant assets or liabilities. The Company's principal executive offices are located at 50 Rockefeller Plaza, New York, New York 10020. Business Plan of the Company The Company's objective is to increase shareholder value and its Funds from Operations through prudent management of its real estate assets and opportunistic investments. The Company intends to capitalize on its status as a publicly-traded real estate investment company to take immediate advantage of the significant opportunities to make net lease and other real estate investments at attractive returns. The Company expects to evaluate a number of different opportunities and to pursue the most attractive based upon its analysis of the risk/return tradeoffs. The Company's business plan is a significant expansion of the business plans of the CPA(R) Partnerships. The Company intends to be a dynamic, growth-oriented organization rather than a closed-end portfolio of real estate investments. In addition to acquiring additional net leased properties, the Company intends to seek additional opportunistic investments utilizing the core competencies of Company's management (which include in-depth credit analysis, asset valuation and creative structuring), optimizing the Company's existing portfolio through the expansion of existing properties and strategic property sales and increasing the Company's access to capital at a lower cost. As a perpetual life, growth-oriented company, the Company will continue to own Properties as long as it believes ownership helps attain the Company's objectives. The Board of Directors of the Company will have the ability to change investment, financing, distribution and other policies of the Company without the consent of the Shareholders. See "BUSINESS AND PROPERTIES." Management of the Company The Manager will provide both strategic and day-to-day management for the Company, including research, investment analysis, acquisition and development services, asset management, capital funding services, disposition of assets and administrative services. The Manager has dedicated senior executives in each area of its organization so that the Company will function as a fully integrated operating company. The Board of Directors will monitor the performance of the Manager. Initially the Board will consist of ten members, including five directors who are not employees of the Company or the Manager. Initially, the Directors will be appointed by the Manager and thereafter will be elected by holders of Listed Shares. For the background of the individuals responsible for the management of the Company and a more detailed description of the responsibilities of the Manager, please see the "MANAGEMENT FOLLOWING THE CONSOLIDATION" section of this Prospectus. For more information on fees payable to the Manager or its Affiliates, please see the "COMPENSATION, REIMBURSEMENT AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGER" section of this Prospectus. RECOMMENDATION OF THE GENERAL PARTNERS The General Partners, including all of the Directors of the corporate General Partners, have unanimously approved the Consolidation and believe the Consolidation is fair as to each CPA(R) Partnership and any combination of CPA(R) Partnerships. THE GENERAL PARTNERS STRONGLY RECOMMEND THAT THE UNITHOLDERS IN EACH CPA(R) PARTNERSHIP VOTE FOR THE CONSOLIDATION AND ELECT TO RECEIVE LISTED SHARES. See "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Recommendations of the General Partners and Fairness Determination." 10 22 The General Partners believe the Consolidation has the greatest potential to maximize investment returns, while offering significantly enhanced liquidity. This belief is based, in part, upon a comparison of the after-tax consideration to be received in the Consolidation to the after-tax consideration which may have been received if any of the alternatives to the Consolidation had been approved. See "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Recommendations of the General Partner and Fairness Opinion" and "-- Alternatives to the Consolidation." ALTERNATIVES TO THE CONSOLIDATION The General Partners are proposing the Consolidation because they believe that it is the best available alternative to maximize Unitholder value over the long-term. The alternatives to the Consolidation which were considered by the General Partners include continuing the existence of each CPA(R) Partnership as a limited partnership, listing of the Units on a national securities exchange or the Nasdaq National Market System and liquidating each CPA(R) Partnership. The General Partners do not believe that any of these alternatives would be more beneficial to the Unitholders than the Consolidation. See "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Alternatives to the Consolidation." CONSEQUENCES IF THE CONSOLIDATION IS NOT APPROVED If the Consolidation is not consummated for any reason with respect to a particular CPA(R) Partnership, the General Partners presently intend to continue to operate such CPA(R) Partnership in its current form and the limited partners will retain their Units. In managing the business of the CPA(R) Partnership, the General Partners will take whatever actions they deem are appropriate in satisfying their fiduciary obligations to the Limited Partners and the CPA(R) Partnership. The General Partners will consider various options relating to the termination of the CPA(R) Partnership. No other transaction is currently being considered by the CPA(R) Partnerships as an alternative to the Consolidation, although the CPA(R) Partnerships may from time to time explore other alternatives. See "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Consequences if the Consolidation is Not Approved." 11 23 TABLES REGARDING TOTAL EXCHANGE VALUE Total Exchange Value Allocated to Unitholders. The following table sets forth the allocation of Listed Shares among the CPA(R) Partnerships in connection with the Consolidation. This table also sets forth the Total Exchange Value and number of Listed Shares allocated to Unitholders per $1,000 originally invested. TOTAL EXCHANGE VALUES ALLOCATED TO UNITHOLDERS(1)
PER $1,000 ORIGINAL INVESTMENT TOTAL -------------------- EXCHANGE VALUE TOTAL NUMBER PERCENT OF TOTAL NUMBER OF ALLOCATED TO OF LISTED TOTAL EXCHANGE LISTED UNITHOLDERS(2) SHARES(3) LISTED SHARES VALUE(4) SHARES(5) -------------- ------------ ------------- -------- --------- CPA(R):1............................. $ 21,036,720 1,051,836 4.45% $1,052 52.59 CPA(R):2............................. 30,693,620 1,534,681 6.49% 1,118 55.91 CPA(R):3............................. 50,062,060 2,503,103 10.58% 1,517 75.85 CPA(R):4............................. 56,388,180 2,819,409 11.92% 1,319 65.93 CPA(R):5............................. 41,586,398 2,079,320 8.79% 735 36.74 CPA(R):6............................. 66,168,400 3,308,420 13.99% 1,381 69.03 CPA(R):7............................. 50,079,940 2,503,997 10.58% 1,108 55.39 CPA(R):8............................. 94,010,240 4,700,512 19.87% 1,391 69.55 CPA(R):9............................. 63,072,402 3,153,620 13.33% 1,053 52.63 ------------ ---------- ------ TOTAL................................ $ 473,097,960 23,654,898 100.00% ============ ========== ======
- --------------- (1) This table presents the Total Exchange Value allocated to the Unitholders and assumes 100 percent Partnership Participation in the Consolidation and that no Subsidiary Partnership Units are issued. (2) See "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Determination of Total Exchange Value" for a determination of the Total Exchange Value for the Unitholders and the General Partners. (3) The total number of Listed Shares was calculated by dividing the Total Exchange Value Allocated to Unitholders by $20, an arbitrary figure. (4) A capital contribution of $500 was required for each Unit in CPA(R):5. The capital contribution for each Unit of the remaining CPA(R) Partnerships was $1,000. This column was calculated based on an original investment of $1,000 to facilitate a comparison among the CPA(R) Partnerships. (5) The number of Listed Shares to be issued per $1,000 original investment was calculated by dividing the Total Exchange Value allocated to Unitholders per $1,000 original investment by $20. No fractional Listed Shares will be issued in connection with the Consolidation. See "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- No Fractional Shares." Historical Cash Distributions and Total Exchange Value Allocated to Unitholders. The following table sets forth selected information per $1,000 original investment in a CPA(R) Partnership. The Total Exchange Value of the CPA(R) Partnerships as of June 30, 1997 is based on the appraised market value of their properties, net of adjustments for Net Other Assets and Liabilities, mortgage debt and certain other adjustments and does not necessarily reflect the aggregate price at which Listed Shares or Subsidiary Partnership Units may be sold. See "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Total Exchange Value and Allocation of Listed Shares and Subsidiary Partnership Units." 12 24 HISTORICAL CASH DISTRIBUTIONS AND TOTAL EXCHANGE VALUE ALLOCATED TO UNITHOLDERS PER $1,000 ORIGINAL INVESTMENT
TOTAL OF CUMULATIVE TOTAL DISTRIBUTIONS AND PERCENT OF CUMULATIVE DISTRIBUTIONS EXCHANGE VALUE(2) ASSIGNED ORIGINAL PARTNERSHIP TO UNITHOLDERS(1) ALLOCATED TO UNITHOLDERS EXCHANGE VALUE INVESTMENT - ---------------------------- ------------------------ ------------------------ ------------------- ---------- CPA(R):1.................... $1,208 $1,052 $ 2,260 226% CPA(R):2.................... 2,456 1,118 3,574 357% CPA(R):3.................... 2,423 1,517 3,940 394% CPA(R):4.................... 1,630 1,319 2,949 295% CPA(R):5.................... 1,292 735 2,027 203% CPA(R):6.................... 1,110 1,381 2,491 249% CPA(R):7.................... 954 1,108 2,062 206% CPA(R):8.................... 778 1,391 2,169 217% CPA(R):9.................... 688 1,053 1,741 174%
- --------------- (1) Represents cash distributions from operations and return of capital from inception through October 1997. (2) The assigned Total Exchange Value is based on the appraised value of the Properties, net of certain adjustments, and does not necessarily reflect the aggregate price at which Listed Shares or Subsidiary Partnership Units may be sold. Distribution Comparison. The following table sets forth the distributions currently paid by the CPA(R) Partnerships per $1,000 original investment in a CPA(R) Partnership and the distributions expected to be paid by the Company if distributions are paid at an annual rate of $1.65 per Listed Share.
DISTRIBUTIONS FROM DIVIDENDS FROM LISTED SHARES CPA(R) PARTNERSHIP ISSUED IN THE CONSOLIDATION PARTNERSHIP PER $1,000 INVESTMENT(1) PER $1,000 INVESTMENT(2) ------------------------------- ------------------------ ---------------------------- CPA(R):1....................... $70.56 $ 86.78 CPA(R):2....................... 51.12 92.25 CPA(R):3....................... 99.36 125.15 CPA(R):4....................... 98.40 108.78 CPA(R):5....................... 66.72 60.62 CPA(R):6....................... 97.16 113.89 CPA(R):7....................... 73.28 91.39 CPA(R):8....................... 88.16 114.76 CPA(R):9....................... 84.96 86.84
- --------------- (1) Annualized rate based on distributions paid in October 1997. (2) Assuming an annual distribution rate of $1.65 per Listed Share. NO DISSENTERS' RIGHTS If a Unitholder in a Participating Partnership votes AGAINST the Consolidation, he will not be entitled to dissenters' or appraisal rights under the Partnership Agreements or Delaware or California Partnership Law, nor will such rights be provided by the CPA(R) Partnerships or the Company. See "VOTING PROCEDURES -- No Right of Appraisal." 13 25 COMPARISON OF THE CPA(R) PARTNERSHIPS AND THE COMPANY The summary information below highlights a number of significant differences between the CPA(R) Partnerships and the Company. See "COMPARISONS OF CPA(R) PARTNERSHIPS AND COMPANY." Form of Organization. The CPA(R) Partnerships and the Company are each vehicles appropriate for holding real estate investments and afford passive investors, such as Unitholders and Shareholders, certain benefits, including limited liability, a professionally managed portfolio and the avoidance of double-level taxation. The CPA(R) Partnerships are under the control of their General Partners, while the Company is under the control of the Directors. Length of Investment. Unitholders in each of the CPA(R) Partnerships expect liquidation of their investments when the assets of the CPA(R) Partnership are liquidated. In contrast, the Company does not expect to dispose of its assets within any prescribed period and, in any event, plans to retain the net sales proceeds for future investments. Holders of Listed Shares are expected to achieve liquidity for their investments by trading Listed Shares in the public market and not through the liquidation of the Company's assets. Properties and Diversification. The real estate portfolio of each CPA(R) Partnership was limited to the assets raised in its initial equity offering and debt financing. The Company will be larger, have a more diversified portfolio than any of the CPA(R) Partnerships and has the potential for future growth. An investment in the Company should not be viewed as an investment in a specific pool of assets, but instead as an investment in an ongoing Company, subject to the risks normally related to its business. Additional Equity. As the CPA(R) Partnerships are not authorized to issue additional Units or other equity interests, the Units generally are not subject to dilution. In contrast, the Company has substantial flexibility to raise equity capital to finance its business through the sale of equity securities, market conditions permitting. The Company, through the issuance of new equity securities, may substantially expand its capital base to make new investments. The issuance of additional equity securities by the Company may dilute the interests of holders of Listed Shares. The Company may issue limited liability company interests with priorities or preferences over Listed Shares with respect to dividends and liquidation proceeds ("Preferred Shares"). Borrowing Policies. In conducting its business, the Company, like the CPA(R) Partnerships, may borrow funds. Borrowing funds may allow the Company to substantially expand its asset base, but may also increase the Company's risk from leveraged investments. The Partnership Agreements include limitations on borrowing, while the Company's Organization Documents include no such limitations. Restrictions on Related Party Transactions. Except for transactions specifically approved in the Partnership Agreements (and which were disclosed in the disclosure documents prepared for the offering and sale of the Units), the CPA(R) Partnerships are not authorized to enter into transactions with the General Partners or their Affiliates unless the transactions are approved in advance by a vote of the Unitholders. The Limited Liability Company agreement of the Company (the "Operating Agreement") contains similar restrictions, but the Company may enter into a transaction with its Directors, officers and significant Shareholders if the transaction is approved by a majority of the Directors not interested in the matter following a determination that the transaction is fair, competitive and commercially reasonable. Transactions with interested parties do not require the approval of Shareholders. Compensation, Fees and Distributions. Under the Partnership Agreements and certain management agreements, each of the CPA(R) Partnerships pays compensation to its General Partner. After the Consolidation, the Manager will own Listed Shares and receive fees for certain services. The General Partners will continue to receive certain distributions after the Consolidation as limited partners of the Subsidiary Partnerships and leasing fees which will be credited against fees payable to the Manager. Additionally, if the Consolidation is completed, W.P. Carey & Co. will receive compensation for investment banking services in the form of warrants to purchase Listed Shares. If all the CPA(R) Partnerships participate in the Consolidation, W.P. Carey & Co. will receive warrants to purchase 2,284,800 Listed Shares at $21 per Share and 725,930 14 26 Listed Shares at $23 per Share. The warrants will generally be exercisable for ten years beginning one year after the date the Consolidation is completed. Management Control and Responsibilities. Holders of Listed Shares have greater control over management of the Company than the Unitholders have over the CPA(R) Partnerships because the members of the Company's Board of Directors are elected for three-year terms, with a portion of the Board of Directors elected at each annual meeting of holders of Listed Shares. The General Partners do not need to seek re-election, but instead serve unless removed by an affirmative vote of Unitholders owning a majority of the Units entitled to vote, which is generally an extraordinary event. As passive investors, Unitholders and holders of Listed Shares must rely upon management of the CPA(R) Partnerships and Company, respectively, for the prudent administration of their investments. Management Liability and Indemnification. The General Partner of each of the CPA(R) Partnerships has, under most circumstances, no liability to its CPA(R) Partnership for acts or omissions it undertakes when performed in good faith, in a manner reasonably believed to be within the scope of its authority and in the best interests of the CPA(R) Partnership. Each General Partner also has, under specified circumstances, a right to be reimbursed by its CPA(R) Partnership for liability, loss, damage, costs and expenses it incurs by virtue of serving as General Partner. Although the standards are expressed somewhat differently, there are similar protections from liability available to the Manager, Directors and officers for exculpation from liability and to seek indemnification from the Company. In the Consolidation, the Company will be assuming all of the existing and contingent liabilities of the Participating Partnerships, including their obligations to indemnify the General Partners. Voting Rights. Holders of Listed Shares have the right to elect Directors and vote on other matters on a periodic basis, while Unitholders may vote only on matters related to their CPA(R) Partnership. Liquidity. The Units constitute illiquid investments and Unitholders may find it difficult to dispose of their Units, if they wish to do so, or may be forced to sell the Units at substantial discounts to facilitate the sale. The Subsidiary Partnership Units are expected to have similar liquidity characteristics to the Units, while the Listed Shares are expected to be listed on the NYSE and freely tradable. Taxation of Taxable Investors. The CPA(R) Partnerships allow full pass-through of tax benefits resulting in taxable income or loss at the partner level only. Unitholders are taxed on their allocable share of partnership income regardless of the amount of cash distributions. The Company is expected to be treated as a partnership for tax purposes and will have similar tax characteristics. SUMMARY OF FEDERAL TAX CONSEQUENCES Unitholders and the Company will not recognize any gain or loss in connection with the Consolidation, subject to the assumptions and other matters discussed in this Prospectus under "INCOME TAX CONSEQUENCES." CONFLICTS OF INTEREST RELATED TO THE CONSOLIDATION The following is a summary of the potential conflicts of interest relating to the Consolidation. This summary is qualified in its entirety by the more detailed discussion in the Section entitled "INTERESTS OF CERTAIN PERSONS IN THE CONSOLIDATION AND CONFLICTS OF INTEREST" contained in this prospectus beginning on page 82. General. A number of conflicts of interest are inherent in the relationships among the CPA(R)Partnerships, the General Partners and the Unitholders. As a result, the General Partners engaged the Independent Appraiser to render the Fairness Opinion and to independently determine the fair value of the Properties. Certain conflicts of interest are summarized below. General Partners. The General Partners have participated in the initiation and structuring of the Consolidation and, in exchange for transferring certain interests to the Company, will realize substantial 15 27 economic benefits if the Company is able to proceed with and consummate the Consolidation as to some or all of the CPA(R) Partnerships. A transaction involving the purchase, financing, lease and sale of any Property by the Company may result in the immediate realization by the Manager and its Affiliates of substantial commissions, fees, compensation and other income. Potential conflicts may arise in connection with the determination by the Manager (on behalf of the Company) whether to hold or to sell a Property, as such determination could impact the timing and amount of fees payable to the Manager. Common General Partners. W.P. Carey & Co. serves as the corporate general partner of CPA(R):1, CPA(R):2 and CPA(R):3; CCP serves as the corporate general partner of CPA(R):4, CPA(R):5 and CPA(R):6; Seventh Carey serves as the corporate general partner of CPA(R):7; Eighth Carey serves as the corporate general partner of CPA(R):8; and Ninth Carey serves as the corporate general partner of CPA(R):9. William P. Carey serves as a general partner of all of the CPA(R) Partnerships. The Boards of Directors of W.P. Carey & Co., CCP, Seventh Carey, Eighth Carey and Ninth Carey are comprised of the same persons, except that Stephen H. Hamrick serves as a Director of only Seventh Carey, Eighth Carey and Ninth Carey. The General Partners of each CPA(R) Partnership have an independent obligation to ensure that such CPA(R) Partnership's participation in the Consolidation is fair and equitable. The General Partners have sought to discharge faithfully this obligation to each of the CPA(R) Partnerships, but it should be borne in mind that each of the General Partners or their Affiliates serves in a similar capacity with respect to the other CPA(R) Partnerships. Lack of Independent Representation. While the Independent Appraiser has provided the Fairness Opinion, the CPA(R) Partnerships have not retained any outside representatives to act on behalf of or represent the interests of the Unitholders in negotiating the terms and conditions of the Consolidation. Additionally, no group of Unitholders was empowered to negotiate the terms and conditions of the Consolidation or to determine what procedures should be in place to safeguard the rights and interests of the Unitholders. Fiduciary Duties of General Partners. The General Partners have fiduciary duties to the CPA(R) Partnerships and the Unitholders. Under these fiduciary duties, the General Partners are obligated to ensure that the CPA(R) Partnerships are treated fairly and equitably in transactions with third parties, especially where consummation of such transactions may result in the interests of General Partners being opposed to, or not totally consistent with, the interests of the Limited Partners. Allocation of Services. If the Consolidation is consummated, employees of the Manager will provide services related to the operation of the Company, any Nonparticipating Partnerships and the other entities described above. As a result, possible conflicts of interest may arise regarding allocation of these services between the Company, any Nonparticipating Partnerships and these other entities. Non-Arm's-Length Agreements. All agreements and arrangements, including those relating to compensation, between the Company and the Manager or any of its Affiliates will not be the result of arm's-length negotiations. Competition with the Company from Affiliates of the Manager. W.P. Carey & Co. and its Affiliates specialize in providing lease financing services to major corporations and, therefore, may be in competition with the Company with respect to properties, potential purchasers, sellers and lessees of properties and mortgage financing for the Properties. W.P. Carey & Co., its subsidiaries and Affiliates and William P. Carey currently manage or advise public and private real estate investment entities, including the CPA(R) Partnerships and CPA(R) REITs, whose investment and rate of return objectives are similar to those of the Company. In addition, they expect to manage or advise, directly or through Affiliates, additional REITs, public and private investment partnerships and other investment entities. Investment Banking Fees Paid to W.P. Carey & Co. in the form of Warrants. If the Consolidation is completed, W.P. Carey & Co. will receive compensation for investment banking services in the form of warrants to purchase Listed Shares. If all the CPA Partnerships participate in the Consolidation, W.P. Carey & Co. will receive warrants to purchase 2,284,800 Listed Shares at $21 per Share and 725,930 Listed Shares 16 28 at $23 per Share. The warrants generally will be exercisable for 10 years beginning one year after the date the Consolidation is completed. See "COMPENSATION, REIMBURSEMENT AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGER -- Investment Banking Fee." CONDITIONS TO THE CONSOLIDATION The principal conditions to the Consolidation are: (i) approval of the Consolidation by CPA(R) Partnerships representing the Minimum Participation Amount and (ii) approval of the Listed Shares for listing on the NYSE (which requires that certain minimum share distribution requirements be met, including (A) 1.1 million Listed Shares and (B) 2,000 public holders thereof, each holding at least 100 Shares). No federal or state regulatory requirements must be complied with or approval must be obtained in connection with the Consolidation. The General Partners may decide not to pursue the Consolidation at any time before it becomes effective, whether before or after approval by the Unitholders. DELIVERY OF THE CERTIFICATES FOR UNITS Promptly after the effective time of the Consolidation, the Company will cause to be mailed to all Unitholders in CPA(R) Partnerships participating in the Consolidation certificates representing the Listed Shares. UNITHOLDERS SHOULD NOT SEND ANY CERTIFICATES WITH THE ENCLOSED CONSENT CARD AND ELECTION FORM. VOTING PROCEDURES This Consent Solicitation Statement contains detailed procedures to be followed by Unitholders in voting on the Consolidation. These procedures must be strictly followed in order for the vote of the Unitholders to be effective. The following is a summary of certain of these procedures: A Unitholder may make his or her election on the Consent Card only during the Solicitation Period commencing upon the date of delivery of this Consent Solicitation Statement and continuing until the later of (i) December 16, 1997 or (ii) such later date as may be selected by the General Partners. A Unitholder must return a properly completed and executed Consent Card to ChaseMellon Shareholder Services ("ChaseMellon") (which has been engaged to tabulate the votes of the Unitholders) on or prior to the expiration of the Solicitation Period. Certain CPA(R) Partnerships may, at their option, solicit votes by telephone. A Consent Card delivered by a Unitholder may be withdrawn or changed prior to the expiration of the Solicitation Period by delivering to ChaseMellon a substitute Consent Card, properly completed and executed, together with a writing signed by the Unitholder indicating that such Unitholder's prior consent has been revoked. A Unitholder submitting a signed but unmarked Consent Card will be deemed to have voted FOR a CPA(R) Partnership's participation in the Consolidation. A Unitholder submitting an unsigned Consent Card, whether marked or unmarked, will be deemed to have voted ABSTAIN. Approval of the Consolidation requires the affirmative vote of a majority in interest of the Unitholders in each CPA(R) Partnership. Consent Cards marked ABSTAIN and Consent Cards that are not submitted (including broker non-votes) will be deemed to have voted AGAINST their CPA(R) Partnership's participation in the Consolidation. 17 29 SUMMARY SELECTED COMBINED FINANCIAL INFORMATION The following table sets forth summary selected combined operating and balance sheet information on a consolidated pro forma basis for the Company and on a combined historical basis, assuming 100 percent participation and Minimum Participation for the CPA(R) Partnerships. The following information should be read in conjunction with the financial statements and notes thereto for the Company and the CPA(R) Partnerships included elsewhere in this Consent Solicitation Statement. The combined historical operating and balance sheet information of the CPA(R) Partnerships as of December 31, 1995 and 1996 and for the years ended December 31, 1994, 1995 and 1996 has been derived from the historical Combined Financial Statements audited by Coopers & Lybrand L.L.P., independent accountants, whose report with respect thereto is included elsewhere in this Consent Solicitation Statement. The combined historical operating information for the six months ended June 30, 1996 and 1997 and the years ended December 31, 1992 and 1993 and the historical balance sheet information as of June 30, 1997 and December 31, 1992, 1993 and 1994 have been derived from the unaudited combined financial statements of the CPA(R) Partnerships. In the opinion of management, the combined historical operating information for the six months ended June 30, 1996 and 1997 and the historical balance sheet information as of June 30, 1997 include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information set forth therein. The unaudited pro forma consolidated operating and balance sheet information is presented as if the Consolidation and the related issuance of Listed Shares occurred on June 30, 1997 for the consolidated balance sheet and January 1, 1996 for the consolidated statements of income. The pro forma financial information is not necessarily indicative of what the actual financial position and results of operations of the Company would have been as of and for the periods indicated, nor does it purport to represent the Company's future financial position and results of operations. 18 30 CPA(R) PARTNERSHIPS SELECTED COMBINED FINANCIAL INFORMATION
AS OF AND FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------- 1996 (PRO FORMA(2)) ------------------------ 100% PARTICIPATION(3) ------------------------ NO 5% HISTORICAL(1) SUBSIDIARY SUBSIDIARY ------------------------------------------------- PARTNERSHIP PARTNERSHIP 1992 1993 1994 1995 1996 UNITS(5) UNITS(6) -------- -------- -------- --------- -------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING DATA: Revenues.................................... $102,936 $109,027 $109,137 $ 107,946 $102,731 $ 102,731 $ 102,731 Income before extraordinary items, attributable to Listed Shares(7)........... 32,245 33,790 38,456 49,363 45,547 44,220 41,933 Pro forma income before extraordinary items per Listed Share(8)........................ 1.81 1.80 Distributions............................... $ 41,363 $ 50,638 $ 35,589 $ 57,216 $ 34,173 OTHER DATA: Cash provided by operating activities....... 43,706 45,673 45,131 63,276 50,983 Cash provided by (used in) investing activities................................. 6,098 21,051 37,136 24,327 19,545 Cash used in financing activities........... (46,444) (66,071) (70,045) (105,578) (69,686) BALANCE SHEET DATA: Real estate, net(9)......................... $342,641 $345,199 $330,671 $ 301,505 $271,660 Investment in direct financing leases....... 302,181 260,663 244,746 218,922 215,310 Total assets................................ 706,767 679,284 659,047 582,324 544,728 Mortgages and notes payable................. 373,549 358,768 325,886 274,737 227,548 AS OF AND FOR THE YEAR ENDED DECEMBER 31, AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, ----------------------- -------------------------------------------------------- 1997 (PRO FORMA(2)) ------------------------------------- MINIMUM MINIMUM PARTICIPATION(4) 100% PARTICIPATION(3) PARTICIPATION(4) -------------------------- --------------------- ---------------- NO NO 5% NO SUBSIDIARY 5% SUBSIDIARY HISTORICAL SUBSIDIARY SUBSIDIARY SUBSIDIARY PARTNERSHIP PARTNERSHIP ------------------ PARTNERSHIP PARTNERSHIP PARTNERSHIP UNITS(5) UNITS(6) 1996 1997 UNITS(5) UNITS(6) UNITS(5) ----------- ------------- -------- -------- ----------- ----------- ----------- OPERATING DATA: Revenues.................................... $40,717 $40,717 $ 51,446 $ 50,985 $ 50,985 $ 50,985 $ 21,083 Income before extraordinary items, attributable to Listed Shares(7)........... 18,858 17,927 22,545 21,022 20,327 19,271 8,876 Pro forma income before extraordinary items per Listed Share(8)........................ 1.85 1.84 .83 .82 .86 Distributions............................... $ 17,666 $ 17,336 OTHER DATA: Cash provided by operating activities....... 23,360 25,406 Cash provided by (used in) investing activities................................. 15,309 (1,354) Cash used in financing activities........... (32,660) (25,526) BALANCE SHEET DATA: Real estate, net(9)......................... $249,030 $ 377,707 $ 377,707 $ 118,657 Investment in direct financing leases....... 216,403 268,142 268,142 117,843 Total assets................................ 540,508 752,046 752,046 273,333 Mortgages and notes payable................. 219,356 219,356 219,356 55,401 AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, ------------------------------------------- 1997 PRO FORMA(2) ------------ MINIMUM PARTICIPATION(4) ---------------- 5% SUBSIDIARY PARTNERSHIP UNITS(6) ----------- OPERATING DATA: Revenues.................................... $ 21,083 Income before extraordinary items, attributable to Listed Shares(7)........... 8,439 Pro forma income before extraordinary items per Listed Share(8)........................ .86 Distributions............................... OTHER DATA: Cash provided by operating activities....... Cash provided by (used in) investing activities................................. BALANCE SHEET DATA: Real estate, net(9)......................... $ 118,657 Investment in direct financing leases....... 117,843 Total assets................................ 273,333 Mortgages and notes payable................. 55,401
- --------------- Notes: (1) See the Combined Financial Statements of the CPA(R) Partnerships included elsewhere herein. (2) See pro forma Condensed Consolidated Financial Statements of the Company included elsewhere herein. (3) Reflects pro forma results if all the CPA(R) Partnerships participate in the Consolidation. (4) Reflects pro forma results if only CPA(R): 1, CPA(R): 2, CPA(R): 3, CPA(R): 5 and CPA(R): 7 participate in the Consolidation. This combination of CPA(R) Partnerships has the lowest combined Total Exchange Value in excess of the $200 million and lowest cash flow necessary for the Consolidation to be completed. (5) Reflects pro forma results if the Company issues only Listed Shares and no Subsidiary Partnership Units. (6) Reflects pro forma results if the Company issues 95 percent Listed Shares and five percent Subsidiary Partnership Units. (7) See Note 13 to the Combined Financial Statements of the CPA(R) Partnerships included elsewhere herein. (8) Computed based on a weighted average number of shares outstanding of: 24,484,170 Listed Shares assuming 100 percent participation without the issuance of Subsidiary Partnership Units; 23,301,425 Listed Shares assuming 100 percent participation with the issuance of Subsidiary Partnership Units; 10,210,682 Listed Shares assuming minimum participation without the issuance of Subsidiary Partnership Units; 9,727,035 Listed Shares assuming minimum participation with the issuance of Subsidiary Partnership Units by the Company as if the Consolidation transaction had been consummated as of January 1, 1996. (9) Real estate includes assets leased under operating leases and operating real estate. 19 31 RISK FACTORS The Consolidation involves certain risks. Listed below are the material risks associated with the Consolidation and operation of the Company. Unitholders should read this entire Prospectus, including all appendices and supplements hereto, and consider carefully the following factors in evaluating the Consolidation, the Company and its business before completing the accompanying Consent Card and Election Form. The risks described below are materially the same for the Unitholders of each of the CPA(R) Partnerships. Except for the historical information contained in this Prospectus, matters discussed herein may constitute "forward-looking statements" (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act). Such forward-looking information reflects the Company's current best estimates regarding its future operations. The Company's actual results could differ materially from those estimated in the forward-looking statements as a result of several factors, including those discussed below and elsewhere in this Prospectus. A variety of factors may materially impact estimates of future operations. Many of such factors are outside the Company's control and cannot be accurately predicted. Important factors include, but are not limited to, general economic conditions, interest rate levels, financial market performance, financial performance of tenants, competition impacting availability and price of investments and changes in tax and other legislation. Change in Nature of Investment from Finite-Life to Perpetual Existence. The CPA(R) Partnerships have a finite life. Upon liquidation of a CPA(R) Partnership, the Unitholders of the CPA(R) Partnership would realize the market value of the CPA(R) Partnership's investments, less expenses of liquidation and liquidation fees, if any, payable to the General Partners. By contrast, the Company has no specific intention to liquidate or to sell its assets at a given point in time, and it plans to continue operations indefinitely. Therefore, holders of Listed Shares will have to rely on their being able to sell their Listed Shares in order to realize the value of their investment instead of waiting for the Company to be liquidated. The market value of the Listed Shares may or may not reflect the full fair market value of the Company's assets, and, consequently, Shareholders may or may not realize the full fair market value of such assets by selling their Listed Shares at prices obtained on the NYSE or in a private transaction. Uncertainty Regarding Trading Price for the Listed Shares. There has been no prior market for the Listed Shares, and it is possible that the Listed Shares will trade at prices substantially below the Total Exchange Value per Listed Shares or the historical book value of the assets of the Company. The Listed Shares have been approved for listing on the NYSE, subject to official notice of issuance. The market price of the Listed Shares may be subject to significant volatility after the Consolidation and could substantially decrease as a result of increased selling activity following issuance of the Listed Shares, the interest level of investors in purchasing the Listed Shares after the Consolidation, the amount of distributions to be paid by the Company and the acceptance by the securities markets of a limited liability company as an investment vehicle. Risk Associated with Greater Diversity and Growth. The real estate portfolio of each CPA(R) Partnership is limited to the assets acquired with its initial equity offering and debt financing. By contrast, the holders of the Listed Shares will be investors in an entity which has a more diverse investment strategy with greater opportunity for growth than do the CPA(R) Partnerships. This opportunity for diversity and growth is accompanied by greater risks than those posed by an investment in the CPA(R) Partnerships, such as: - While the Company will initially emphasize equity real estate investments in properties, it may, in its discretion, invest in: (i) mortgages (including first mortgages and junior mortgages, regardless of whether such mortgages are insured by a governmental agency), (ii) securities of entities engaged in real estate activities, (iii) securities of other issuers, including investments in securities for the purpose of exercising control and (iv) other assets. See "POLICIES WITH RESPECT TO CERTAIN ACTIVITIES -- Investment Policies." - Consistent with its investment policies, the Company intends to incur debt to acquire additional properties when such transactions can be entered into on favorable terms. While borrowing funds may allow the Company to expand its asset base, it may also increase the Company's risk from leverage. See "RISK FACTORS -- Risk of Leverage." 20 32 Conflicts of Interest in Structuring the Consolidation. The General Partners are proposing the Consolidation because they believe that it is in the best interests of the CPA(R) Partnerships and the Unitholders. The General Partners may, however, be viewed as having a potential conflict of interest with the Unitholders with respect to the determination of the number of Listed Shares Affiliates of the General Partners will receive in the Consolidation in exchange for a portion of their general partner interests in the CPA(R) Partnerships, with respect to their retained interest in the Subsidiary Partnerships and with respect to the compensation of the Manager. Compensation payable to the Manager under the terms of the Consolidation is likely to increase when compared to compensation payable to the General Partners under the existing Partnership Agreements. After completion of the Consolidation, the Manager may receive fees on the refinancing of Company debt and an increase in management fees. Additionally, if the Consolidation is completed, W.P. Carey & Co. will receive compensation for investment banking services in the form of warrants to purchase Listed Shares. If all the CPA(R) Partnerships participate in the Consolidation, W.P. Carey & Co. will receive warrants to purchase 2,284,800 Listed Shares at $21 per Share and 725,930 Listed Shares at $23 per Share. The warrants generally will be exercisable for ten years beginning one year after the date the Consolidation is completed. Historical compensation paid to the General Partners, consisting of partnership leasing fees and distributions of cash from operations, for the years ended December 31, 1994, 1995 and 1996 amount to $3,734,923, $4,338,947 and $2,951,441, respectively. If the Consolidation had been completed as of January 1, 1994, the Manager would have received additional management fees in cash of $415,077 and $743,559 for the years ended December 31, 1994 and 1996 respectively. The Manager would also have received performance fees in the form of restricted Listed Shares of the Company. The Manager's interest in Listed Shares vested in each of the years ended December 31, 1994, 1995 and 1996 would have been $830,000, $1,618,000 and $2,357,000, respectively, assuming the Company's Total Capitalization had been equal to the asset base of the CPA(R) Partnerships at the time the restricted Listed Shares were issued. Under the terms of the Consolidation, such management and performance fees are based on the Company's Total Capitalization which may increase or decrease depending on the Company's operating performance and market conditions affecting the market value per share of Listed Shares; management and performance fees actually paid would increase or decrease accordingly. Assuming the Company had utilized leverage of 67 percent, additional cash management fees of $613,000, $686,000 and $748,000 and the vested portion of performance fees, paid in restricted Listed Shares, of $340,000, $1,192,000 and $2,018,000 for the years ended December 31, 1994, 1995 and 1996 respectively would have been paid. Achievement of this level of leverage would have resulted in an increase in average outstanding debt, and corresponding assets, of $132,000,000 in 1994, $142,000,000 in 1995 and $168,000,000 in 1996. Furthermore, the General Partners will not have any personal liability for Company obligations and liabilities which occur after the Consolidation and certain pre-Consolidation liabilities. Unitholders were not separately represented in establishing the terms of the Consolidation. Such representation might have caused the terms of the Consolidation to be different, and perhaps more favorable to the Unitholders, in some respects from those described herein. The General Partners did, however, obtain a Fairness Opinion that the allocation of the Listed Shares among the CPA(R) Partnerships is fair to the Unitholder from a financial point of view. The General Partners do not believe that this lack of independent representation for the Unitholders affects their conclusion that the Consolidation is fair to the Unitholders. For additional information concerning the potential conflicts of interest between the General Partners and the Unitholders in the Consolidation and the procedures adopted by the General Partners to prevent these conflicts from having an impact on the terms of the Consolidation (including the receipt of a fairness opinion), see "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Recommendation of the General Partners and Fairness Determination" and "-- Terms of the Consolidation." Distributions Paid to Holders of Subsidiary Partnership Units Before Holders of Listed Shares. In the CPA(R) Partnerships, all Unitholders in a particular CPA(R) Partnership are treated equally. By contrast, the holders of Subsidiary Partnership Units will be paid any distributions paid by the Subsidiary Partnerships at the same time the Company receives its pro rata share of such distribution. Holders of Listed Shares will receive their share of such distributions if and only after the Company pays a distribution which includes the funds distributed by the Subsidiary Partnerships. 21 33 No Market for the Subsidiary Partnership Units. The Subsidiary Partnership Units will not be listed on any national securities exchange or the Nasdaq National Market System, and no public market is expected to develop for the Subsidiary Partnership Units. Holders of Subsidiary Partnership Units may not be able to liquidate their investment promptly at a reasonable price. In order to give holders of the Subsidiary Partnership Units some level of liquidity, they will be redeemed for cash in accordance with a schedule that approximates the scheduled liquidation date of each CPA(R)Partnership. See "DESCRIPTION OF SHARES AND SUBSIDIARY PARTNERSHIP UNITS -- Subsidiary Partnership Units." The value of the Subsidiary Partnership Units for purposes of the redemption will be determined based on the then appraised value of the Properties and any other net assets remaining in the Subsidiary Partnership in which the Unitholders own an interest. Potential Differences Between Total Exchange Value and Realizable Value. Unitholders are subject to the risk that the Total Exchange Value allocated to each CPA(R)Partnership, which is based primarily on independent appraisals of each CPA(R)Partnership's portfolio of Properties, do not reflect the realizable value of the CPA(R) Partnership's assets in an actual transaction. Were this to be the case as to a CPA(R) Partnership, the consideration received by a Unitholder of that CPA(R) Partnership may be understated or overstated and the number of Listed Shares received by the Manager may also be overstated or understated. The Independent Appraiser was engaged to evaluate each CPA(R) Partnership's portfolio of real estate on a limited scope basis utilizing the income approach to valuation. The cost approach and the sales comparison approach, other approaches typically used by appraisers in valuing real property, were not utilized by the Independent Appraiser. To the extent that the cost approach or the sales comparison approach would have produced different values for the portfolios, the Appraised Values may have varied. The General Partners and the Independent Appraiser considered the cost approach and the sales comparison approach to be less reliable than the income approach, given that the income generated by a net leased property is the primary criterion used by buyers of the type of property appraised in the appraisals. The Independent Appraisal reflects the Independent Appraiser's valuation of the real estate portfolios of the CPA(R) Partnerships as of March 31, 1997, in the context of the information available on such date. Events occurring after March 31, 1997, and before the Closing Date could affect the properties or assumptions used in preparing the Independent Appraisal. The Independent Appraiser has no obligation to update the Independent Appraisal on the basis of such subsequent events. Board of Directors' Ability to Effect Changes in Investment, Financing and Certain Other Policies. The major policies of the Company, including its policies with respect to acquisitions, financing, growth, debt, capitalization and distributions will be determined by the Company's Board of Directors. Although the Board of Directors of the Company intends to implement the business plan set forth herein and has no present intention to change such business plan, the Board may amend or revise these and other policies from time to time without a vote of the Shareholders. Accordingly, the Shareholders will have no direct control over changes in the policies of the Company, and changes in the Company's policies may not fully serve the interests of all of the Shareholders. See "BUSINESS AND PROPERTIES" and "POLICIES WITH RESPECT TO CERTAIN ACTIVITIES." Loss of Relative Voting Power. Unitholders may currently vote on certain partnership matters in proportion to their interests in their CPA(R) Partnership. If the Consolidation is completed, holders of Listed Shares will have an investment in an entity larger than each of the CPA(R) Partnerships and will thus lose relative voting power. See "COMPARISON OF UNITS, LISTED SHARES AND SUBSIDIARY PARTNERSHIP UNITS." No Appraisal or Similar Rights for Nonconsenting Unitholders. Unitholders will have no appraisal or similar rights in connection with the Consolidation. Therefore, Dissenting Investors will not be entitled to receive cash payment for the fair value of their Units if the Consolidation is consummated. See "VOTING PROCEDURES -- No Right of Appraisal." Opinions of Counsel. The Company has received an opinion from its counsel Reed Smith Shaw & McClay LLP (i) that the Company and each Participating Partnership will be classified as partnerships for federal tax purposes, provided, (a) that each Participating Partnership is not a publicly traded partnership for 22 34 federal income tax purposes or 90 percent or more of its gross income consists of qualifying income as defined in Code Section 7704(d) and 90 percent or more of the Company's gross income consists of qualifying income as described in Code Section 7704(d), and (b) the Company and each Participating Partnership is organized as described in and operates in compliance with its governing agreements and, (ii) that the Consolidation will be a non-taxable transaction with respect to Unitholders who become holders of Listed Shares except for any amount by which (a) the excess of (1) a Unitholder's share of his Participating Partnership's liabilities immediately before the Consolidation over (2) that Unitholder's share of the liabilities of the Company immediately after the Consolidation exceeds (b) the Unitholder's basis in his CPA(R) Partnership interest immediately before the Consolidation, (iii) that the Consolidation will be a non-taxable transaction with respect to Subsidiary Partnership Unitholders except for any amount by which (a) the excess of (1) a Subsidiary Partnership Unitholder's share of his Participating Partnership's liabilities immediately before the Consolidation over (2) that Subsidiary Partnership Unitholder's share of the liabilities of his Participating Partnership immediately after the Consolidation exceeds (b) the Subsidiary Partnership Unitholder's basis in his CPA(R) Partnership interest immediately before the Consolidation, (iv) which confirms the opinions attributed to it in this Prospectus, and (v) which concludes that, in the aggregate, the remaining federal income tax consequences of owning Listed Shares referred to in this Prospectus will occur or be realized by the holders of Listed Shares. No rulings have been sought from the IRS with respect to any of the tax matters described in this Prospectus. The opinions of counsel are dependent upon the present provisions of the Code, regulations and existing administrative and judicial interpretations thereof, all of which are subject to change. An opinion of counsel is not, however, binding upon the IRS or the courts. In addition, such opinion is subject to certain assumptions. See "INCOME TAX CONSEQUENCES." No IRS Ruling with Respect to Partnership Status. Neither the Company nor any of the Subsidiary Partnerships will apply for an IRS ruling that they will be classified as partnerships rather than associations taxable as corporations for federal income tax purposes. The Company and each Subsidiary Partnership have received the opinion of Reed Smith Shaw & McClay LLP that they will be classified as partnerships for federal income tax purposes. An opinion of counsel is not, however, binding upon the IRS or the courts. In addition, such opinion is subject to certain conditions. See "INCOME TAX CONSEQUENCES -- Classification as 'Partnerships'." The treatment of the Company as a partnership is also dependent upon the present provisions of the Code, the regulations thereunder and existing administrative and judicial interpretations thereof, all of which are subject to change. The Manager intends to operate the Company and the Subsidiary Partnerships so that they will be taxed as partnerships. If the Company were treated as a corporation: (i) the income, deductions and losses of the Company would not pass through to the holders of Listed Shares; (ii) the Company would be required to pay federal income taxes on its taxable income, thereby substantially reducing the amount of cash available to be distributed to holders of Listed Shares; (iii) state and local taxes could be imposed on the Company; and (iv) any distributions to holders of Listed Shares would be taxable to them as dividends to the extent of current and accumulated earnings and profits of the Company. Finally, the change from treatment as a partnership to treatment as a corporation for federal income tax purposes could be treated as a taxable event in which case holders of Listed Shares could have a tax liability without receiving a distribution from the Company. Similar tax consequences would result with respect to any Subsidiary Partnership found to be an association taxable as a corporation. Other Potential Tax Risks. In evaluating the Consolidation, a Unitholder should consider the tax consequences of owning Listed Shares which include, among others, the following (some or all of which may presently exist for some or all of the CPA(R) Partnerships): (i) the possibility that taxable income or gain allocable to a holder of Listed Shares will exceed the cash distributed by the Company to the holder of Listed Shares, resulting in tax payments being required from individual assets of a holder of Listed Shares; (ii) the possibility that the IRS will not give effect to the allocation of profits and losses provided by the Operating Agreement or the Subsidiary Partnerships' Partnership Agreements and reallocate profits and losses so as to cause a holder of Listed Shares or Subsidiary Partnership Units' taxable income or loss to be different from that reported by the Company or the Subsidiary Partnership; (iii) the possibility that the IRS will disallow as current deductions certain payments made for management and other services in connection with the Company's or Subsidiary Partnerships' Properties, especially where such payments are made to the Manager, the General Partners or their Affiliates, and, thereby, increase the Company's taxable income or decrease the 23 35 Company's tax loss; (iv) the possibility that the IRS will challenge the allocations of acquisition costs of real property between land and depreciable improvements, the characterization and purpose of various payments made to sellers of properties or Affiliates of the Manager or the General Partners or the legal characterization of the Company's or Subsidiary Partnerships' interest in a Property and, thereby, increase the Company's taxable income or decrease the Company's tax loss; (v) the fact that all of the Company's loss will be classified as passive activity loss and the Company's net income will probably be classified as portfolio income thereby limiting the ability of a holder of Listed Shares to offset tax losses allocated to him from the Company against taxable income allocated to him; (vi) the possibility that the "at risk" rules could limit the deductibility of Company losses, if any; (vii) the possibility that an audit of the Company's or a Subsidiary Partnership's information return may result in an audit of an individual tax return; (viii) the possibility of adverse changes in the tax law; and (ix) the possibility that an IRA or a qualified pension or profit-sharing plan (including a Keogh) or stock bonus plan which invests in Shares may receive "unrelated business taxable income" and could become subject to federal income tax. See "INCOME TAX CONSEQUENCES" for further details with respect to the above and other possible tax consequences of the ownership of Shares. Holders of Listed Shares and Subsidiary Partnership Units should be aware that federal income taxation rules are constantly under review by the IRS, resulting in revised interpretations of established concepts. The IRS pays close attention to the proper application of tax laws to partnerships. The present federal income tax treatment of an investment in the Company may be modified by legislative or judicial action at any time, and any such action may affect investments and commitments previously made. The Operating Agreement and the Subsidiary Partnerships' Partnership Agreements permit the Manager or the General Partner, as the case may be, to modify the Operating Agreement from time to time, without the consent of the holders of Listed Shares or the Subsidiary Partnership Units, in order to achieve compliance with certain changes in federal income tax regulations and legislation. In some circumstances, such revisions could have an adverse impact on some or all of the holders of Listed Shares or Subsidiary Partnership Units. Tax Risks of Trading of Listed Shares. Since the Listed Shares will be traded on an established securities market, the Company will be a publicly traded partnership as defined in the Code. See "INCOME TAX CONSEQUENCES -- Classification as 'Partnerships'." As a publicly traded partnership, passive activity losses from the Company, if any, allocable to the holders of Listed Shares will be deductible only against passive income from the Company, if any, allocable to the holders of Listed Shares. Net passive income from the Company allocable to the holders of Listed Shares will probably be treated as portfolio income, except that passive activity losses from the Company may offset such income. See "INCOME TAX CONSEQUENCES -- Passive Activity Loss Limitations." Additionally, if less than 90 percent of its gross income consists of, among other things, interest, dividends, real property rents and gain from the sale or exchange of real property, the Company will be treated as a corporation for federal income tax purposes. It is anticipated that the Company will not be treated as a corporation for federal income tax purposes. Uncertain Composition of the Company. Because participation in the Consolidation by each CPA(R) Partnership requires the approval of Unitholders holding a majority of the outstanding Units of the CPA(R) Partnership, which approval is outside the Company's control, no assurance can be given as to which or how many of the CPA(R) Partnerships will participate in the Consolidation, nor can any assurance be given as to the actual composition and capitalization of the Company upon consummation of the Consolidation. If fewer than all of the CPA(R) Partnerships participate in the Consolidation, the Company's ability to provide diversification in its asset base will decrease, thereby reducing the benefits realized from the Company's greater size and limiting the investment flexibility that would be realized if all CPA(R) Partnerships participate. The Consolidation may occur if CPA(R) Partnerships participating in the Consolidation represent at least $200 million in Total Exchange Value, which constitutes approximately 41 percent of the Total Exchange Value of the CPA(R) Partnerships. Therefore, the Consolidation may occur if approved by as few as three CPA(R) Partnerships. Consolidation Expenses Will Reduce the Cash of the Company. The Company will bear certain costs of the Consolidation if it is completed, thereby reducing the cash of the Company following the Consolidation. The Consolidation Expenses and Solicitation/Communications Costs related to the Consolidation are estimated to be approximately $2,872,000 and $125,000, respectively, or approximately 0.6 percent of the 24 36 Total Exchange Value, assuming 100 percent Partnership Participation. If the Consolidation is consummated with 100 percent Partnership Participation, all of the Consolidation Expenses and Solicitation/Communications Expenses will be paid by the Company. If the Consolidation is not consummated, the Consolidation Expenses will be allocated among all of the CPA(R) Partnerships in proportion to their respective Total Exchange Values. Certain of the expenses are payable to W.P. Carey & Co. See "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Fees and Expenses." Combination of Real Estate Assets; Change in Geographic, Industry, Building-Type and Tenant Diversity. As a result of the Consolidation, the diversity of the properties in which the Unitholders will own an interest will change. The change will increase geographic, tenant, building-type and industry sector diversification. However, because the market for real estate may vary widely from one region of the country to another and the financial success of tenants in different industries may change from time to time, the change in diversity may expose Unitholders to different and greater risks than those to which they are presently exposed. For geographic and industry information regarding the CPA(R) Partnership Properties, see "BUSINESS AND PROPERTIES -- Properties." Risk of Lower Distributions. After the Consolidation, holders of Listed Shares may receive distributions at a rate lower than that received as Unitholders. Because CPA(R):5 has been paying a higher rate of distributions relative to the value of its assets, the initial distribution rate for Unitholders of CPA(R):5 will be lower by approximately nine percent immediately after the Consolidation. In addition, the Board of Directors may lower the distribution rate in the future to account for changes in economic conditions or the performance of the Company, to allow the Company to accumulate cash for acquisitions or other uses or for other reasons. The performance of, and distributions to holders with respect to, each series of Subsidiary Partnership Units will be measured by reference to the performance of the CPA(R) Partnership relating to that series as they existed prior to the Consolidation. The Board of Directors of the Company, as General Partner of the Subsidiary Partnership, will determine the distribution payable to holders of Subsidiary Partnership Units. Potential Loss of Future Appreciation. The Properties may appreciate in value and might be able to be liquidated at a later date by a CPA(R) Partnership for a price which would yield Unitholders more consideration than they would receive in the Consolidation. Restrictions on Changes in Control. Certain provisions of the Organizational Documents and the Shareholder Rights Plan may restrict changes in control of the Company's management. These provisions include: - Additional Classes and Series of Shares. The Organizational Documents authorize the Board of Directors (subject to certain restrictions) to issue shares in other classes or series, to establish the number of shares in each class or series and to fix the rights, powers and limitations associated with such shares. Although the Board of Directors has no present intention of doing so, it could issue a class or series that could, depending on its terms, impede a merger, tender offer or other transaction that holders of Listed Shares might believe is in their best interest or in which the holders of Listed Shares might receive a premium for their Listed Shares over the then current market price. See "DESCRIPTION OF SHARES AND SUBSIDIARY PARTNERSHIP UNITS -- Restricting Changes in Control and Business Combination Provisions -- Additional Classes and Series of Shares." - Staggered Board of Directors. Pursuant to the Organizational Documents, the Board of Directors is divided into three classes serving staggered three-year terms. This arrangement may affect the ability of the holders of Listed Shares to change control of the Company, even if such holders of Listed Shares believe such a change to be in their interests. See "DESCRIPTION OF SHARES AND SUBSIDIARY PARTNERSHIP UNITS -- Restricting Changes in Control and Business Combination Provisions -- Staggered Board of Directors." - Restrictions on Certain Business Combinations. The Organizational Documents provide that certain transactions that involve an Interested Party are permitted no earlier than five years following the most recent date on which an Interested Party became an Interested Party (the "Determination Date") unless the Interested Party obtains the approval of (i) the Board of Directors before the Determination 25 37 Date or (ii) two-thirds of the Board of Directors and two-thirds in interest of the holders of Listed Shares (excluding the vote of the Interested Party). Moreover, after this five-year period expires, such transactions are subject to Fair Price and Procedural Requirements unless the holders of Listed Shares recommend the transaction to the Board of Directors and the Interested Party can obtain affirmative votes of at least (i) 80% in interest of all Shareholders and (ii) and two-thirds in interest of the holders of Listed Shares (excluding the vote of the Interested Party). These restrictions on certain business combinations may deter potential purchasers who seek control of the Company. See "DESCRIPTION OF SHARES AND SUBSIDIARY PARTNERSHIP UNITS -- Restricting Changes in Control and Business Combination Provisions -- Business Combination Provisions." - Control Share Acquisition Provision. The Organizational Documents provide that any person or entity that acquires one-fifth or more of the outstanding Shares of any class or series acquires voting rights with respect to the acquired Shares only to the extent approved by the affirmative vote of two-thirds in interest of the Shareholders, but excluding any votes cast with respect to Shares for which the acquirer is entitled to exercise or direct the exercise of the voting power. These provisions may make it more difficult or costly for another party to acquire and exercise control of the Company or to remove the existing management of the Company, even if such removal would be beneficial to the Shareholders. See "DESCRIPTION OF SHARES AND SUBSIDIARY PARTNERSHIP UNITS -- Restricting Changes in Control and Business Combination Provisions -- Control Share Acquisition Provisions." - Shareholder Rights Plan. The Company intends to enter into a Shareholder Rights Plan that will provide for the issuance of one Right for each outstanding Listed Share to the Company's Shareholders of record as of a date to be determined. Each Right will entitle the holder thereof to buy one Listed Share at a specified price, subject to adjustment. Although the Rights will not prevent a takeover of the Company, the Rights may have certain anti-takeover effects, such as causing substantial dilution to a person or group that attempts to acquire the Company in a manner or on terms not approved by the Board of Directors. See "DESCRIPTION OF SHARES AND SUBSIDIARY PARTNERSHIP UNITS -- Restricting Changes in Control and Business Combination Provisions -- Shareholder Rights Plan." - Termination Fee Payable to Manager. The Company will be required to pay a termination fee to the Manager in the event the Manager is terminated in connection with a Change of Control. This termination fee will make it more costly to acquire control of the Company and may discourage third parties from seeking control of the Company. See "COMPENSATION, REIMBURSEMENT AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGER -- Amounts Payable to the Manager after the Consolidation." Limitation of Director Liability. The Delaware Limited Liability Company Act (the "LLCA"), as well as the Organizational Documents, limit the liability of Directors and officers to Shareholders. In addition, the Organizational Documents generally provide for (i) greater indemnification of Directors and officers than is available to the General Partners under the Partnership Agreements and (ii) the ability to relieve Directors and officers of certain monetary liabilities not available to the General Partners under the Partnership Agreements. See "FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION -- Limitation on Liability of Directors and Officers of the Company." Reduction in Value From Contingent or Undisclosed Liabilities. Under the Agreement of Merger executed by the Subsidiary Partnerships and the Participating Partnerships in connection with the Consolidation (the "Partnership Merger Agreement" or "Merger Agreement"), the Company, through the Subsidiary Partnerships, will, as of the Closing Date, acquire all assets and liabilities of the Participating Partnerships. Each of the Participating Partnerships will deliver to the Company financial statements for such entity disclosing all known material liabilities and reserves, if any, set aside for contingent liabilities as of the Closing Date. The General Partners will represent and warrant that, to the best of their knowledge, the financial statements fairly present the financial position of each Participating Partnership based upon generally accepted accounting principles. The accuracy and completeness of these representations are conditions to the closing of 26 38 the Consolidation and if, on or prior to the Closing Date, these representations and warranties are shown to be inaccurate, there may be adjustments to the consideration paid by the Company or the Company may elect not to proceed to close the acquisition with the CPA(R) Partnership that failed to fully and accurately disclose its financial position. See "-- Possible Environmental Liabilities" below as to the possibility of undisclosed environmental conditions potentially affecting the value of the CPA(R) Partnerships' properties. If the Company is subject to liabilities of the CPA(R) Partnerships after the merger that were not disclosed, the value of the Listed Shares would be reduced. General Risks Related to Investments in Real Estate. Real property investments are subject to varying degrees of risk. Values of commercial and industrial properties are affected by changes in the general economic climate, local conditions such as an oversupply of space or reduction in demand for real estate in the area and competition from other available commercial and industrial space. Real estate values are also affected by such factors as government regulations and changes in zoning or tax laws, interest rate levels, the availability of financing and potential liability under environmental and other laws. The yields available on equity investments in commercial and industrial real estate of the kind that will be owned by the Company depend in part upon the amount of net income generated from the property. Upon the termination of a tenant lease, the Company may not be able to re-lease the property at comparable rents. If the property is leased at a lower rent, the income of the Company will be reduced. Risk of Leverage. All but one of the CPA(R)Partnerships own properties subject to limited recourse debt, and certain CPA(R) Partnerships have recourse debt outstanding. The Board of Directors may authorize additional borrowing by the Company. The Company may become more highly leveraged and, thereby, increase its debt service, which may adversely affect the Company's ability to make distributions to holders of Listed Shares and increase the Company's risk of default on its obligations. If the Company incurs substantial debt, it will be subject to the following risks: (i) the Company could lose its interests in Properties given as collateral for secured borrowing if the required principal and interest payments are not made when due; (ii) depending upon the number of Subsidiary Partnership Units issued, the Company's cash flow from operations may not be sufficient to retire these obligations upon their maturity, making it necessary for the Company to raise additional debt and/or equity for the Company or dispose of some of the Company's assets to retire the obligations; (iii) the Company's ability to borrow additional funds (except for the purpose of refinancing existing indebtedness) may be restricted; and (iv) no assurance can be given as to the availability, or the terms and conditions, of any financing needed by the Company to redeem the Subsidiary Partnership Units or other borrowings. Rent Income Dependent Upon Creditworthiness of Tenants. Substantially all of the Properties are single tenant properties. The financial failure of a tenant could result in the termination of its lease with the Company which, in turn, might cause a reduction of the cash flow of the Company and/or decrease the value of the Property leased to such tenant. If a tenant defaults on its lease payments to the Company, the Company would lose not only the net cash flow from such tenant, but also might use cash generated from other Properties to meet expenses, including the mortgage payments, if any, on such Property in order to maintain ownership and prevent a foreclosure. If a lease is terminated, there can be no assurance that the Company will be able to re-lease the Property for the same amount of rent previously received or will be able to sell the Property without incurring a loss. The Company could also experience delays in enforcing its rights against tenants. In addition, the Company may enter into or acquire net leases with tenants for properties that are specially suited to the particular needs of a tenant as is the case with certain of the Properties. Such a property may require renovations or lease payment concessions in order to re-lease it to another tenant upon the expiration or termination of the current lease. The Company may also have difficulty selling a special purpose property to a party other than the tenant for which the property was designed. The financial failure of a tenant could cause the tenant to become the subject of bankruptcy proceedings. Under bankruptcy law, a tenant has the option of continuing or terminating an unexpired lease. If the tenant continues its lease with the Company, the tenant must cure all defaults under the lease and provide the Company with adequate assurance of its future performance under the lease. If the tenant terminates the 27 39 lease, the Company's claim for breach of the lease would (absent collateral securing the claim) be treated as a general unsecured claim. The amount of the claim would be capped at the amount owed for unpaid pre-petition lease payments unrelated to the termination plus the greater of one year's lease payments or 15 percent of the remaining lease payments payable under the lease (but not to exceed three years' lease payments). Although the Company believes that each of its net lease transactions is a "true lease" for purposes of bankruptcy law, depending on the terms of the lease transaction, including the length of the lease and terms providing for the repurchase of a property by the tenant, it is possible that a bankruptcy court could recharacterize a net lease transaction as a secured lending transaction. If a transaction were recharacterized as a secured lending transaction, the Company would not be treated as the owner of the property and could lose certain rights as the owner in the bankruptcy proceeding. Losses From Uninsured Liabilities or Casualty. The Company requires tenants to maintain liability and casualty insurance of the kind that is customarily obtained for similar properties. However, certain disaster-type insurance (covering events of a catastrophic nature, such as earthquakes) may not be available or may only be available at rates that, in the opinion of the Company, are prohibitive. In the event that an uninsured disaster occurs or a tenant does not maintain the required insurance and a loss occurs, the Company could suffer a loss of the capital invested in, as well as anticipated profits from, the damaged or destroyed Property. If the loss involves a liability claim, the loss may extend to the other assets of the Company. Losses From Casualty and Condemnation related Lease Terminations. The Company's leases may permit the tenant to terminate its lease in the event of a substantial casualty or a taking by eminent domain of a substantial portion of a Property. Should these events occur, the Company generally will be compensated by insurance proceeds in the case of insured casualties or a condemnation award in the case of a taking by eminent domain. There can be no assurance that any such insurance proceeds or condemnation award will equal the value of the Property or the Company's investment in the Property. Any such lease termination could adversely affect the Company's income and cash flow. Risks of Joint Ventures. The Company may participate in joint ventures. See "BUSINESS AND PROPERTIES." An investment by the Company in a joint venture which owns properties, rather than the Company investing directly in such properties, may involve certain risks, including the possibility that the Company's joint venture partner may become bankrupt, may have economic or business interests or goals which are inconsistent with the business interests or goals of the Company or may be in a position to take action contrary to the instructions or the requests of the Company or contrary to the Company's policies or objectives. Actions by the Company's joint venture partner might, among other things, result in subjecting property owned by the joint venture to liabilities in excess of those contemplated by the terms of the joint venture agreement, exposing the Company to liabilities of the joint venture in excess of its proportionate share of such liabilities or having other adverse consequences for the Company. In a case where the joint venturers each own a 50 percent interest in a venture, they may not be able to agree on matters relating to the properties owned by the venture. Although each joint venturer may have a right of first refusal to purchase the other venturer's interest in a property if a sale thereof is desired, the joint venturer may not have sufficient resources to exercise its right of first refusal. The Company may from time to time participate jointly with publicly-registered investment programs or other entities sponsored by the Manager or one of its Affiliates in investments as tenants-in-common or in some other joint venture arrangement. The risks of such joint ownership may be similar to those mentioned above for joint ventures and, in the case of a tenancy-in-common, each co-tenant normally has the right, if an unresolvable dispute arises, to seek partition of the property, which partition might decrease the value of each portion of the divided property. The Company or the Manager may also experience difficulty in enforcing the rights of the Company in a joint venture with an Affiliate due to the fiduciary obligation the Manager or the Board may owe to the other partner in such joint venture. Competition with Affiliates May Reduce Available Properties, Tenants and Purchasers of Properties. The CPA(R) REITS have investment policies similar to those of the Company. The CPA(R) REITs, therefore, may be in competition with the Company for properties, purchasers and sellers of properties, tenants and 28 40 financing. Affiliates of the General Partners and the Manager may sponsor additional REITs or other investment entities, public and/or private or may provide acquisition or management services to third parties, some of which may have the same investment objectives and may be in a position to acquire properties in competition with the Company. In the event that a potential investment might be suitable for the Company and an Affiliate, the decision as to which entity will make the investment will be made by the Investment Committee. The Investment Committee also serves as the investment committee of the CPA(R) REITs. The Investment Committee of the Manager will review the investment portfolios of each entity and other factors such as cash flow, the effect of the acquisition on the diversification of each entity's portfolio, the length of the term of the lease, renewal options, the estimated income tax effects of the purchase on each entity, the policies of each entity relating to leverage, the funds of each entity available for investment, the length of time such funds have been available for investment and the various ways in which the potential investment can be structured. Consideration will be given to joint ownership (e.g., tenancy-in-common or joint venture arrangement) of a particular property determined to be suitable for the Company and an Affiliate in order to achieve diversification of each entity's portfolio and efficient completion of an entity's portfolio. In any joint ownership, the investment of the investment entities will be on substantially the same economic terms and conditions, and each investment entity may have a right of first refusal to purchase the interest of the other, if a sale of that interest is contemplated. To the extent that a particular property might be determined to be suitable for more than one investment entity, the investment will be made by the most appropriate investment entity after consideration of the factors identified above. Growth of Company Dependent on Borrowing Capacity and Ability to Raise Capital. The Company's ability to acquire additional properties and make other investments will be subject to the availability of suitable investments and the Company's ability to obtain debt and/or equity capital to make such investments. The Company could be delayed or prevented from structuring transactions and acquiring desirable properties by an inability to obtain debt or equity financing, either because the financial or other terms of the available financing are unacceptable or because debt or equity financing is unavailable on any terms. Possible Environmental Liabilities. Under various federal, state and local environmental laws, ordinances and regulations, a current or former owner of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at such property or may be held liable to governmental entities or to third parties for property or natural resource damage and for investigation, clean up and other costs incurred by such parties in connection with the contamination. Such laws typically impose clean-up responsibility and liability without regard to whether the owner knew of or caused the presence of the contamination, and the liability under such laws has been interpreted to be joint and several, unless the harm is capable of apportionment and there is a reasonable basis for allocation of responsibility. The CPA(R) Partnerships' leases generally provide that the tenant is responsible for compliance with applicable laws and regulations. This contractual arrangement does not eliminate the CPA(R) Partnerships' or Company's statutory liability or preclude claims against the Company by governmental authorities or persons who are not parties to such arrangement. Contractual arrangements in the Company's leases may provide a basis for the Company to recover from the tenant damages or costs for which the Company has been found liable. The cost of an investigation and clean-up of site contamination can be substantial, and the fact that the property is or has been contaminated, even if remediated, may adversely affect the value of the property and the owner's ability to sell or lease the property or to borrow using the property as collateral. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs that it incurs in connection with the contamination, and certain state laws provide that such lien has priority over all other encumbrances on the property or that a lien can be imposed on any other property owned by the liable party. Finally, the owner of a site may be subject to common law claims by third parties based on damages and costs resulting from the environmental contamination emanating from the site. Other federal, state and local laws, regulations and ordinances govern the removal or encapsulation of asbestos-containing material when such material is either in poor condition or in the event of building remodeling, renovation or demolition. Still other federal, state and local laws, regulations and ordinances may require the removal or upgrade of underground storage tanks that are out of service or are out of compliance. 29 41 In addition, federal, state and local laws, regulations and ordinances may impose prohibitions, limitations and operational standards on, or require permits, licenses or approvals in connection with, the discharge of wastewater and other water pollutants, the emission of air pollutants, the operation of air or water pollution equipment, the generation, storage, transportation, disposal and management of materials classified as hazardous or nonhazardous waste, the use of electrical equipment containing polychlorinated biphenyls, the storage or release of toxic or hazardous chemicals and workplace health and safety. Noncompliance with environmental or health and safety requirements may also result in the need to cease or alter operations at a Property which could affect the financial health of a tenant and its ability to make lease payments. Furthermore, if there is a violation of such a requirement in connection with the tenant's operations, it is possible that the Company, as the owner of the Property, could be held accountable by governmental authorities for such violation and could be required to correct the violation. See "BUSINESS AND PROPERTIES -- Environmental Matters" for a discussion of certain environmental matters relating to the Properties and the measures the Company currently undertakes by means of prepurchase site assessments, financial assurances and indemnification provisions and other protective lease terms to address potential liabilities. The CPA(R) Partnerships did not have environmental audits performed on their properties in preparation for the Consolidation. Furthermore, because it was not customary business practice to obtain environmental audits in connection with the acquisition of such properties prior to 1988, no environmental audits were obtained by CPA(R):1-:7 at the time their properties were acquired. Phase I audits were performed for the properties and by CPA(R):1-:6 in 1994. Based upon the results of the Phase I investigations conducted in 1993 and 1994 on the CPA(R):1-6 Properties, Phase II investigations were recommended for 30 Properties. Phase II investigations have been or are in the process of being performed on 21 of the 30 Properties. Of the remaining nine Properties, the particular CPA(R) Partnership determined not to proceed with a Phase II investigation on five Properties and the tenants would not permit a Phase II investigation on the remaining four. Environmental audits were conducted on many of the properties acquired by CPA(R):8 and CPA(R):9 at the time they were acquired. There may, however, be environmental problems associated with these properties not known to the CPA(R) Partnerships which would have been disclosed had the CPA(R) Partnerships obtained new environmental audits in connection with the Consolidation. In the event preexisting environmental conditions requiring remediation are discovered subsequent to the Closing Date, the cost of remediation will be borne by the lessee and the guarantor pursuant to the terms of the lease agreement and any guarantees or by the Company if the lessee and guarantor cannot meet their obligation. Presently, neither the Company nor any of the CPA(R)Partnerships has been notified by any governmental authority of any non-compliance, liability or other claim in connection with any of the Properties. Risk of Investment in Real Property Located Outside the United States. The Company may invest in property located outside the United States. Such investments may be affected by factors peculiar to the laws of the jurisdiction in which such property is located, including but not limited to, land use and zoning laws, environmental laws, laws relating to the foreign ownership of property and laws relating to the ability of foreign persons or corporations to remove profits earned from activities within such country to the person's or corporation's country of origin. These laws may expose the Company to risks that are different from and in addition to those commonly found in the United States. In addition, such foreign investments could be subject to the risks of adverse market conditions due to changes in national or local economic conditions, currency fluctuation, changes in interest rates and in the availability, cost and terms of mortgage funds resulting from varying national economic policies, changes in real estate and other tax rates and other operating expenses in particular countries and changing governmental rules and policies. Potential Claims Against Title to Properties. At the time the Properties were acquired by the CPA(R) Partnerships, each of the CPA(R) Partnerships obtained title insurance for its respective Properties. The Manager will, as it deems necessary, (i) take steps to see that after giving effect to the Consolidation such title insurance coverage remains effective or that such title insurance coverage will be available to each such CPA(R) Partnership or (ii) obtain new title insurance coverage. The General Partners have no actual knowledge of any 30 42 actions, liens or encumbrances (other than mortgage loans) of third parties which would have a material adverse effect upon the Consolidation or the financial condition of the Company. Dependence on Key Personnel. The Company is dependent on the efforts of the executive officers of the Manager and the members of the Investment Committee. While the Company believes that the Manager could find replacements for its executive officers and Investment Committee members from either within or outside the Company, the loss of their services could have a temporary adverse affect on the operations of the Company. Competition for Investments. The Company faces competition to purchase net leased properties or provide alternative sources of real estate financing to businesses from insurance companies, commercial banks, credit companies, pension funds, private individuals, investment companies, REITs and other real estate finance companies. There can be no assurance that the Company will find suitable net leased properties in the future. Status of the Company under ERISA. The Company has received an opinion of counsel to the effect that based on certain assumptions concerning the public ownership and transferability of the Listed Shares, the Listed Shares should be "publicly-offered securities" for purposes of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and that, consequently, the assets of the Company should not be deemed "plan assets" of an ERISA plan, individual retirement account or other non-ERISA plan that invests in the Listed Shares. If the Company's assets were deemed to be plan assets of any such plan, then, among other consequences, certain persons exercising discretion as to the Company's assets would be fiduciaries under ERISA, transactions involving the Company undertaken at their direction or pursuant to their advice might violate ERISA, and certain transactions that the Company might enter into in the ordinary course of its business might constitute "prohibited transactions" under ERISA and the Code. If a prohibited transaction were to occur, the Code imposes an excise tax equal to 15 percent of the amount involved and authorizes the IRS to impose an additional 100 percent excise tax if the prohibited transaction is not "corrected." Such taxes would be imposed on any disqualified person who participates in the prohibited transaction. In addition, certain persons subject to ERISA, exercising discretion as to the Company's assets who permitted such prohibited transaction to occur or who otherwise breached their fiduciary responsibilities, would be required to restore to the plan any profits realized by these fiduciaries as a result of the transaction or breach and to make good to the plan any losses incurred by the plan as a result of such transaction or breach. With respect to an IRA that invests in the Company, the occurrence of a prohibited transaction involving the individual who established the IRA or his beneficiary would cause the IRA to lose its tax-exempt status under Section 408(e)(2) of the Code. BACKGROUND AND REASONS FOR THE CONSOLIDATION GENERAL From 1979 through 1991, W.P. Carey & Co. and its Affiliates raised over $400 million through the offering of Units in the CPA(R) Partnerships. The CPA(R) Partnerships own 198 net leased properties in 37 states. Each CPA(R) Partnership has served as a separate investment vehicle for investors interested in a professionally managed portfolio of net leased real estate. In general, the CPA(R) Partnerships' original objectives were to provide Unitholders with increasing quarterly cash distributions from operations, preserve and protect Unitholders' capital and provide the potential for capital appreciation. Each CPA(R) Partnership has made regular quarterly cash distributions throughout various economic cycles, and the CPA(R) Partnerships, collectively, have distributed over $462 million to Unitholders from their inception through July 15, 1997. 31 43 BACKGROUND OF THE CPA(R) PARTNERSHIPS AND THE GENERAL PARTNERS The following table sets forth additional information concerning the CPA(R) Partnerships and the capital raised by each:
NUMBER OF PROPERTIES TOTAL CAPITAL DATE OF LAST OWNED OR FINANCED BY RAISED BY ADMISSION OF CPA(R) PARTNERSHIP AS GENERAL CPA(R) ORIGINAL OF PARTNERSHIP PARTNERS(1) PARTNERSHIP(2) INVESTORS SEPTEMBER 30, 1997(3) - ---------- --------------------------------------- ------------------- ------------- ---------------------- CPA(R):1 W.P. Carey & Co. $20,000,000 9/30/79 19 CPA(R):2 W.P. Carey & Co. 27,500,000 9/23/80 14 CPA(R):3 W.P. Carey & Co. 33,000,000 5/13/82 8 CPA(R):4 CCP 42,784,000 6/16/83 9 CPA(R):5 CCP 56,600,000 3/31/84 20 CPA(R):6 CCP 47,930,000 2/13/85 49 CPA(R):7 Seventh Carey 45,274,000 9/17/87 39 CPA(R):8 Eighth Carey 67,749,000 6/30/89 43 CPA(R):9 Ninth Carey 59,990,000 4/30/91 32
- --------------- (1) William P. Carey is also a general partner of each CPA(R) Partnership. (2) As of the final closing date of the original offering of limited partner interests in each CPA(R) Partnership. (3) Properties owned jointly are indicated as owned by each CPA(R) Partnership that owns an interest in such Property. All of the net proceeds from the offerings of the Units have been invested in real estate, except for amounts used as working capital. In the opinion of the General Partners, the CPA(R) Partnerships have met their objectives of providing Unitholders with increasing cash distributions from operations and preserving capital. However, as discussed herein, the General Partners have not yet been able to meet the CPA(R) Partnerships' investment objective of liquidating on favorable terms. Since the Units were not listed on any national or regional stock exchange, or quoted on the National Association of Securities Dealers Automated Quotations System ("Nasdaq"), there has been limited liquidity available to Unitholders. Secondary market sales activity in the Units has been limited and sporadic, with less than two percent of all outstanding Units traded during 1995 and 1996. The General Partners have monitored transfers of the Units and do not believe secondary market sales prices accurately reflect the value of the CPA(R) Partnerships. In 1995, 1996 and through September 30, 1997, secondary market sales prices were generally below the Total Exchange Value per Unit. See "SECONDARY MARKET AND OWNERSHIP OF UNITS." The CPA(R) Partnerships intended to sell their assets and dissolve when economic conditions permitted, during varying periods ranging from seven to fifteen years after the partnership was fully invested in real estate. EFFORTS TO DISPOSE OF PROPERTIES Because the CPA(R) Partnerships expected to hold their investments for a number of years after their formation, no efforts to dispose of the Properties were made by the General Partners in the early years of the CPA(R) Partnerships' existence. Instead, the General Partners concentrated their initial efforts on making suitable investments for the CPA(R) Partnerships, consistent with the CPA(R) Partnerships' investment policies and restrictions, and managing the Properties efficiently in order to maximize the cash flow from the Properties. As the contemplated period for disposal of the Properties approached, the General Partners began to explore the feasibility of selling the Properties. Since 1987, the General Partners have considered a variety of alternative approaches to liquidating the first six CPA(R) Partnerships. At that time, the General Partners considered combining the CPA(R) Partnerships into a master limited partnership that would have had partnership units listed on the NYSE. In this transaction, Limited Partners would have exchanged their Units for units of the master limited partnership. 32 44 This idea was abandoned for a number of reasons, including among others, the stock market crash in October 1987. In 1989, the CPA(R) Partnerships authorized the repurchase of Units on the secondary market in order to give those investors who wished to liquidate their investment an opportunity to sell their Units at prices the General Partners believed represented fair value for such Units. The CPA(R) Partnerships did not implement this repurchase plan for various reasons, including a concern that such repurchase plan would not be in the best interests of all the Limited Partners. Some of the CPA(R) Partnerships have repurchased Units on a limited basis. In 1991, the General Partners considered converting the first six CPA(R) Partnerships into separate REITs that would have had their shares listed on a national securities exchange. After an initial exploration of this alternative, the General Partners were advised that separate, relatively small REITs advised by an advisor instead of being internally managed would not be well received by traditional purchasers of REIT shares. Therefore, the General Partners decided not to pursue the conversion of the CPA(R) Partnerships into separate REITs. Throughout this period, the CPA(R) Partnerships also considered the possibility of selling individual Properties to third parties. The CPA(R) Partnerships made inquiries from time to time of local real estate brokers regarding the possibility of selling some of the Properties. While some CPA(R) Partnerships have sold Properties, as this process continued, the General Partners became concerned that the process of selling the Properties individually would take an extended period of time and that certain Properties would be difficult to sell at fair prices. During the continuation of the selling process, the CPA(R) Partnerships would continue to be responsible for all the costs of maintaining the CPA(R) Partnerships as public entities, including accounting and SEC reporting functions as well as other administrative costs. The General Partners believe that the cost of operating the CPA(R) Partnerships over the time period necessary to sell the Properties in such manner would ultimately reduce the net proceeds to the Limited Partners. Since 1986 and through June 30, 1997, the CPA(R)Partnerships have sold 55 Properties (excluding portions of Properties sold in connection with condemnations) for total consideration of approximately $162,000,000. These sales were made in connection with the exercise of tenant purchase options and other opportunities deemed by the General Partners to be advantageous for a CPA(R) Partnership. The General Partners also considered the alternative of selling the entire portfolio of Properties in a bulk sale to a third party. This alternative was not pursued because the General Partners believed that the sales price would have to be significantly discounted in such a transaction and that the Limited Partners would not receive fair market value for the Properties and because the Unitholders would be forced to recognize a significant capital gain if the Properties were sold for their Appraised Value. In late 1992, the General Partners again considered the alternatives available for liquidating the CPA(R) Partnerships, including the options discussed above, as well as a transaction in which the first six CPA(R) Partnerships would be combined with the other CPA(R) Partnerships into a single REIT. As part of such a transaction, the General Partners considered merging W.P. Carey & Co. into the new entity or having W.P. Carey & Co. serve as an outside manager to the new entity. This transaction was abandoned because of the nature of the securities to be received by Limited Partners and regulatory concerns. In late 1993, in the course of discussion of a variety of possible transactions with management of the General Partners, the CPA(R) Partnerships' investment banker informed management that it believed that the then current conditions in the public market for REITs made it possible to use equity and debt capital of a REIT to purchase the Properties of the first six CPA(R) Partnerships in a REIT transaction. In July, 1994, the General Partners approved the sale of the Properties owned by the first six CPA(R) Partnerships to a REIT controlled by management. The General Partners' approval was based upon a review of the terms of the transaction, the expected benefits to the Limited Partners and the alternatives to the sale, as well as a consideration of the fairness of the transaction to the Limited Partners based upon a review of the appraisal of the Properties and discussions regarding a fairness opinion. 33 45 The sale transaction was dependent upon the ability of the REIT to raise capital at a price high enough to raise sufficient capital to purchase the Properties on terms which management and its advisors deemed favorable. In October 1994, management determined that the needed capital could not be raised at a price that satisfied its criteria. In addition, the General Partners grew increasingly concerned about the tax impact on the Limited Partners of the sale of the Properties. In the proposed transaction, most Limited Partners would have recognized taxable income immediately upon the sale of the Properties. For these reasons, the sale transaction was abandoned in October 1994. The General Partners continued to consider options to achieve the CPA(R) Partnerships' objectives. Beginning in late 1995, the consideration of these options included CPA(R):7, CPA(R):8 and CPA(R):9 as these CPA(R) Partnerships were approaching the time when their liquidation could begin. At that time, the General Partners were seeking a transaction that would provide liquidity to those Unitholders that wanted the ability to liquidate their investment but retain for the CPA(R) Partnerships some flexibility as to the timing and tax impact of the liquidation. In addition, the General Partners wanted to provide an opportunity to Unitholders to continue to hold their Units and take advantage of the continuing benefits of such ownership. Lastly, the General Partners wanted to provide Limited Partners with an opportunity to retain an investment which provides them with substantially the same rights as those the Unitholders have as Limited Partners. The General Partners then proceeded to develop its plans for the Consolidation. During the first nine months of 1996, the General Partners engaged the Independent Appraiser to provide the Fairness Opinion and the Appraisals and continued working on structuring and analyzing the Consolidation. Management reported to the Boards of Directors of the General Partners on the progress of the Consolidation at the Boards' regular meetings in April and July 1996. At each meeting, the Boards authorized management to proceed with its investigation of the Consolidation. The General Partners considered structuring the Company as a REIT. After careful consideration of this structure, the General Partners concluded that it was not advisable to structure the Company as a REIT because (i) the Consolidation of the CPA(R) Partnerships into a REIT would cause the Partners to realize approximately $336 million in capital gains, (ii) the general partners were concerned that the Company's capital structure and operations would not allow it to qualify as a REIT and (iii) the limited liability company structure provides more operating flexibility than a REIT. At a special board meeting held on October 5, 1996, management presented to the Boards the full details of the Consolidation including the potential advantages and disadvantages of the Consolidation to the Limited Partners. After a full discussion of the Consolidation at the special meeting, the Boards of the General Partners voted unanimously to approve the filing of the Registration Statement and the execution of the Merger Agreements. TERMS OF THE CONSOLIDATION Structure of the Merger. If the Consolidation is approved, it will take the form of a Merger pursuant to which each Participating Partnership will merge with a Subsidiary Partnership and survive the Merger. Each Merger is proposed to be effected pursuant to a Merger Agreement between each Subsidiary Partnership and the respective CPA(R) Partnership. Prior to or simultaneously with the completion of the Consolidation, the Company will engage in a series of transactions (the "Formation Transactions") to consolidate the business of the Participating Partnerships into the Company. The transactions described below will have occurred or will take place simultaneously with the closing of the Consolidation. - The Company was formed as a Delaware limited liability company with the Manager and the Initial Member as the initial members. 34 46 - The Company formed nine limited partnerships. The Company is the General Partner of each Subsidiary Partnership, and the Initial Member is the initial limited partner of each Subsidiary Partnership. - Each newly formed partnership will be merged with each CPA(R) Partnership whose Limited Partners approve the Consolidation. Each surviving partnership will be a "Subsidiary Partnership." In connection with the Consolidation, the following number of Listed Shares per Unit will be issued to the Unitholders of each Participating Partnership who elect Listed Shares:
LISTED SHARES PER UNIT CPA(R): (EXCHANGE RATIO) ----------------------------------------------------------- ---------------- 1.......................................................... 26.30 2.......................................................... 27.96 3.......................................................... 37.93 4.......................................................... 32.97 5.......................................................... 18.37 6.......................................................... 69.03 7.......................................................... 55.39 8.......................................................... 69.55 9.......................................................... 52.63
- CPA(R) Partnership Units exchanged for Listed Shares will be held by the Company and exchanged on a one-for-one basis for Subsidiary Partnership Units. - Unitholders who elect to receive Subsidiary Partnership Units will have their Units exchanged on a one-for-one basis for Subsidiary Partnership Units in the Subsidiary Partnership in which they own an interest. - Each corporate General Partner of the CPA(R) Partnerships will receive Listed Shares in exchange for a portion of its General Partner interests, the number of which will vary dependent upon which CPA(R) Partnerships participate in the Consolidation. See "COMPENSATION, REIMBURSEMENT AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGERS." - Each corporate General Partner of the CPA(R) Partnerships will contribute to the Manager its Listed Shares and receive equity in the Manager in proportion to the value of its contribution. The number of Listed Shares to be received by each corporate General Partner with respect to each Participating Partnership is as follows:
NUMBER OF LISTED SHARES RECEIVED BY MANAGER IF CPA(R) PARTNERSHIP CPA(R) PARTNERSHIP PARTICIPATES IN THE CONSOLIDATION -------------------------------------------- --------------------------------------- CPA(R):1.................................... 314 CPA(R):2.................................... 156,885 CPA(R):3.................................... 293,075 CPA(R):4.................................... 10,865 CPA(R):5.................................... -- CPA(R):6.................................... 8,847 CPA(R):7.................................... 36,709 CPA(R):8.................................... 155,023 CPA(R):9.................................... ------- TOTAL....................................... 661,718 =======
35 47 - William P. Carey, as General Partner of each of the CPA(R) Partnerships, will receive Listed Shares in exchange for a portion of his General Partner interests, the number of which will vary dependent upon which CPA(R) Partnerships participate in the Consolidation. The number of Listed Shares to be received by Mr. Carey with respect to each Participating Partnership is as follows:
NUMBER OF LISTED SHARES RECEIVED BY MR. CAREY CPA(R) IF CPA(R) PARTNERSHIP PARTNERSHIP PARTICIPATES IN THE CONSOLIDATION ----------------------------------------------- --------------------------------- CPA(R): 1...................................... 35 CPA(R): 2...................................... 1,306 CPA(R): 3...................................... 2,253 CPA(R): 4...................................... 10,865 CPA(R): 5...................................... -- CPA(R): 6...................................... 8,847 CPA(R): 7...................................... 9,177 CPA(R): 8...................................... 38,756 CPA(R): 9...................................... 177
- The General Partners will retain the remainder of their General Partner interests which will be converted into Limited Partner interests in the Subsidiary Partnerships. As a result of the Consolidation, the Unitholders who elect to receive Listed Shares will cease to own direct interests in the CPA(R) Partnerships. Unitholders who elect Subsidiary Partnership Units and the Company will own direct interests in the Subsidiary Partnerships. After the Consolidation, the Subsidiary Partnerships will own all of the business and operations owned by the Participating Partnerships prior to the Consolidation and will be responsible for all of the Participating Partnerships' liabilities. The General Partners may decide not to pursue the Consolidation at any time before it becomes effective, whether before or after approval by the Unitholders. Effective Time. If approved, the Consolidation is expected to become effective on or about January 1, 1998 (the "Effective Time"). TOTAL EXCHANGE VALUE AND ALLOCATION OF LISTED SHARES AND SUBSIDIARY PARTNERSHIP UNITS General. The Total Exchange Value was determined as of June 30, 1997 and has been allocated to each of the CPA(R) Partnerships solely to establish a consistent method of allocating Listed Shares and Subsidiary Partnership Units for purposes of the Consolidation. The Total Exchange Value of the CPA(R) Partnerships does not necessarily reflect the aggregate price at which Listed Shares or Subsidiary Partnership Units may be sold. See "RISK FACTORS." The number of Listed Shares to be issued to each Participating Partnership upon consummation of the Consolidation will equal the Total Exchange Value allocated to the Participating Partnership (reduced by the Total Exchange Value associated with the number of Subsidiary Partnership Units issued to the Participating Partnership) divided by $20, an arbitrary amount chosen for the sole purpose of allocating Listed Shares and which is not intended to imply that the Listed Shares will trade at a price of $20 per Listed Share. No fractional Listed Shares will be issued by the Company in connection with the Consolidation. See "No Fractional Listed Shares" below. As of the date of this Prospectus, the General Partners do not know of any material change in the financial performance or condition of any of the CPA(R) Partnerships that will materially affect the Total Exchange Value. Adjustments to Exchange Value and Allocation of Shares. All determinations of the Total Exchange Value for purposes of allocating the Listed Shares among the CPA(R) Partnerships and then between the Unitholders and the General Partners, other than the final computation of the expenses of the Consolidation, were determined as of June 30, 1997 in the manner described below under "Determination of Exchange Value." Each CPA(R) Partnership will operate and make distributions prior to the Closing Date such that its 36 48 Exchange Value relative to the Total Exchange Value of the other parties to the Consolidation remains substantially the same as the relative Total Exchange Value shown in the Prospectus. No adjustment will be made to these allocations unless a material change in the value of an asset or a liability is discovered after June 30, 1997 and before the effective date of the Consolidation which cannot be adjusted through the CPA(R) Partnerships' distributions. In the event such a change arises, the consideration to be received by the Unitholders will either be adjusted as described below or, if the matter relates to a CPA(R) Partnership and the adjustment would be in excess of 10 percent of such Total Exchange Value allocated to the CPA(R) Partnership, that CPA(R) Partnership may not participate without again obtaining the approval of the revised terms by Unitholders holding a majority of outstanding Units of the CPA(R) Partnership. In the event a matter is discovered after a CPA(R) Partnership has merged with a Subsidiary Partnership, there will be no adjustment to the consideration issued by the Company even though the discovery of the matter effectively could reduce the value of the assets obtained by the Company from that CPA(R) Partnership. See "RISK FACTORS -- Reduction in Value from Contingent or Undisclosed Liabilities." If a material change in the value of an asset or liability or potential liability is discovered with respect to a CPA(R) Partnership participating in the Consolidation between June 30, 1997 and prior to the effective date of the Consolidation which was not included in the computation of Total Exchange Value and the relative Total Exchange Value of the parties cannot be maintained through adjusting distributions that would reduce the corresponding value of the assets contributed by the other CPA(R) Partnerships, an adjustment may be made to the Total Exchange Value allocated to that CPA(R) Partnership. If the amount of the change in the value of an asset or liability can be reasonably determined and it is in excess of ten percent of the Total Exchange Value allocated to that CPA(R) Partnership, the Total Exchange Value allocated to that CPA(R) Partnership will be redetermined and its allocation of Listed Shares adjusted as though the asset or liability were in existence on June 30, 1997. DETERMINATION OF TOTAL EXCHANGE VALUE The Total Exchange Value allocated to each CPA(R) Partnership is computed as (A) the sum of (i) the estimated fair market value of the real estate assets thereof as determined by the Independent Appraisals as of March 31, 1997 and (ii) its Net Other Assets and Liabilities; (B) reduced by (iii) such Partnership's mortgage and other debt, (iv) its share of Consolidation Expenses and transfer taxes, (v) the preferred return due to its General Partners relating to properties previously sold and (vi) the General Partners' retained interest in such Partnership. Consolidation Expenses, which are expected to amount to $2,997,000, excluding transfer taxes, are allocated to the CPA(R) Partnerships in accordance with their relative Total Exchange Values before giving effect to the Consolidated Expenses. 37 49 The determination of the Total Exchange Value allocated to each CPA(R) Partnership is summarized in the following table: DERIVATION OF TOTAL EXCHANGE VALUE
ESTIMATED CONSOLIDATION APPRAISED EXPENSES GENERAL GENERAL VALUE NET OTHER AND PARTNERS' TOTAL PARTNERS' TOTAL OF REAL ASSETS AND MORTGAGE AND TRANSFER PREFERRED CONSOLIDATION RETAINED EXCHANGE ESTATE(1) LIABILITIES(2) OTHER DEBT TAXES RETURN(3) VALUE INTEREST(4) VALUE ------------ ----------- ------------- ----------- ----------- ------------ ----------- ------------ CPA(R):1..... $ 33,390,000 $ 747,236 $ (12,591,452) $ (169,517) $ (133,823) $ 21,242,444 $ (198,740) $ 21,043,704 CPA(R):2..... 40,680,000 1,892,610 (7,349,619) (277,610) (1,048,845) 33,896,536 (39,081) 33,857,455 CPA(R):3..... 52,750,000 4,716,559 (300,000) (417,289) (731,823) 56,017,447 (48,843) 55,968,604 CPA(R):4..... 49,880,000 16,467,073 (7,896,487) (434,877) (857,754) 57,157,955 (335,185) 56,822,770 CPA(R):5..... 54,640,000 4,221,823 (15,434,940) (342,508) (1,067,133) 42,017,242 (430,844) 41,586,398 CPA(R):6..... 104,300,000 2,992,356 (39,608,317) (682,208) (18,099) 66,983,732 (461,454) 66,522,278 CPA(R):7..... 70,300,000 6,331,464 (24,046,101) (418,149) (805,015) 51,362,199 (364,527) 50,997,672 CPA(R):8..... 136,670,000 17,439,605 (54,695,751) (792,338) (53,055) 98,568,461 (682,646) 97,885,815 CPA(R):9..... 139,890,000 (1,201,957) (74,476,977) (521,854) (29,830) 63,659,382 (583,438) 63,075,944 ------------ ----------- ------------- ----------- ----------- ------------ ----------- ------------ TOTAL........ $682,500,000 $53,606,769 $(236,399,644) $(4,056,350) $(4,745,377) $490,905,398 $(3,144,758) $487,760,640 ============ =========== ============= =========== =========== ============ =========== ============
- --------------- (1) Reflects the Independent Appraisal of the value of the CPA(R) Partnerships' Properties as of March 31, 1997. (2) Net Other Assets and Liabilities include cash, net accounts receivable, rent deposits and net accounts payable, marketable securities as of June 30, 1997, estimates of the realizable value of certain litigation claims of the CPA(R) Partnerships, the estimated change in value to two Properties as a result of material events occurring subsequent to the appraisal date, and adjustments reflecting cash distributions made by the CPA(R) Partnerships in July 1997. (3) Includes only amounts payable to the General Partners for properties previously sold based on the trading prices of Listed Shares as described in the table entitled "Calculation of Required Listed Share Price for Payment of General Partners' Preferred Return" under "COMPENSATION, REIMBURSEMENT AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGER." (4) Represents the General Partners' interest of one percent of CPA(R) Partnership distributions of Cash from Sales and Financings up to a maximum of the amounts listed above, which will be retained after the Consolidation. 38 50 Net Other Assets and Liabilities Table. The following table sets forth the components of Net Other Assets and Liabilities which, apart from the appraised value of real estate resulting from the Independent Appraisal, comprise the greatest components of Total Exchange Value for the CPA(R) Partnerships. In general, the Net Other Assets and Liabilities were derived from the unaudited financial statements as of June 30, 1997. NET OTHER ASSETS AND LIABILITIES OF CPA(R) PARTNERSHIPS
NET ACCOUNTS RECEIVABLE RENT DEPOSITS AND AND OTHER NET ACCOUNTS CASH(1) ADJUSTMENTS(2) PAYABLE(3) SECURITIES(4) TOTAL ----------- -------------- ----------------- ------------- ----------- CPA(R):1.................... $ 741,871 $ 845,965 $ (840,600) $ 747,236 CPA(R):2.................... 1,168,955 1,702,513 (978,858) 1,892,610 CPA(R):3.................... 1,110,623 4,661,677 (1,055,741) 4,716,559 CPA(R):4.................... 3,388,952 4,101,467 (1,591,794) $ 10,568,448 16,467,073 CPA(R):5.................... 4,091,246 479,929 (2,104,536) 1,755,184 4,221,823 CPA(R):6.................... 2,889,939 2,874,736 (2,772,319) 2,992,356 CPA(R):7.................... 6,065,650 2,249,155 (1,983,341) 6,331,464 CPA(R):8.................... 6,497,813 1,469,199 (2,745,591) 12,218,184 17,439,605 CPA(R):9.................... 1,122,813 1,164,304 (3,489,074) (1,201,957) ----------- -------------- ----------------- ------------- ----------- Total....................... $27,077,862 $ 19,548,945 $ (17,561,854) $ 24,541,816 $53,606,769 ========== =========== ============= ========== ==========
- --------------- (1) Cash and cash equivalents (2) Net Accounts Receivable includes Escrow funds, Tenant and insurance receivables, Accrued interest and Rents receivable, Reserve for uncollected rent, estimates of the realizable value of certain litigation claims of the CPA(R) Partnerships and the estimated change in value to two Properties as a result of material events occurring subsequent to the appraisal date. (3) Rent Deposits and Net Accounts Payable includes Accrued interest payable, Escrow liabilities, Accounts payable and accrued expenses, Prepaid rental income, Security deposits and Accounts payable to Affiliates, and adjustments reflecting cash distributions made by CPA(R) Partnerships in July 1997. (4) Securities include stock and rights to purchase stock. Securities listed on an exchange or Nasdaq or rights to acquire such securities have been valued at market value as of June 30, 1997. All other securities have been valued at book value as reflected on the balance sheets of the respective CPA(R) Partnerships on June 30, 1997. ALLOCATION OF LISTED SHARES TO UNITHOLDERS AND GENERAL PARTNERS The method utilized to allocate Listed Shares to Unitholders and the General Partners will involve two steps. Listed Shares will first be allocated among the Participating Partnerships based upon the Total Exchange Value allocated to each of the Participating Partnerships relative to the Total Exchange Value of all of the CPA(R) Partnerships. The General Partners believe that the Total Exchange Value allocated to each of the CPA(R) Partnerships represent fair estimates of the value of their assets, net of liabilities, allocable Consolidation Expenses and the General Partners' preferred return and retained interest, as of June 30, 1997, and constitute a reasonable basis for allocating the Listed Shares among all of the Participating Partnerships. The Listed Shares to be received by each Participating Partnership will be allocated between the Unitholders and the General Partners of each Participating Partnership based on those provisions of such Partnership's Partnership Agreement applicable to distributions on liquidation of the CPA(R) Partnership. The General Partners will receive 733,134 Listed Shares in exchange for that portion of their General Partner interest which represents the General Partners' share of the appreciation of the Properties owned by the CPA(R) Partnerships. The General Partners are generally entitled to a share (ranging from two to 39 51 15 percent) of the increase in the value of the Properties owned by each CPA(R) Partnership after the Unitholders receive a return of their initial investment plus a cumulative return which varies by CPA(R) Partnership. In the Consolidation, the value of the General Partners' interest in the appreciation of the Properties has been calculated assuming the Properties were sold at the appraised value and the proceeds distributed to the Unitholders. This method has been used because the General Partners believe it is the best way to approximate the value the General Partners are entitled to receive in connection with the appreciation of the CPA(R) Partnership Properties but at the same time receiving that value in the same form (Listed Shares) as the Unitholders are receiving their continuing interest. The General Partners will be issued Listed Shares only with respect to the appreciation in the value of the portfolios of the CPA(R) Partnerships that participate in the Consolidation. The General Partners' Retained Interest represents the one percent interest in Cash from Sales and Cash from Financings of each Subsidiary Partnership, which interest will be limited to the dollar amount shown in the table "Derivation of Total Exchange Value." This interest will be converted from a General Partner interest in the CPA(R) Partnerships to a Limited Partner interest in the Subsidiary Partnerships. The table below shows the allocation of Total Exchange Value and Listed Shares between the General Partners and the Unitholders in each Participating Partnership assuming that (1) all CPA(R) Partnerships participate in the Consolidation and (2) all Unitholders in each CPA(R) Partnership elect to receive Listed Shares. The actual number of Listed Shares allocated to the Unitholders of each Participating Partnership upon consummation of the Consolidation will be reduced to the extent Subsidiary Partnership Units are issued to the Unitholders in the Participating Partnership. SUMMARY ALLOCATION OF TOTAL EXCHANGE VALUE AND LISTED SHARES BETWEEN UNITHOLDERS AND GENERAL PARTNERS(1)
TOTAL TOTAL EXCHANGE LISTED EXCHANGE VALUE SHARES TOTAL VALUE ATTRIBUTABLE LISTED SHARES ATTRIBUTABLE EXCHANGE ATTRIBUTABLE TO TO GENERAL ATTRIBUTABLE TO TO GENERAL TOTAL LISTED VALUE UNITHOLDERS(2) PARTNERS(3) UNITHOLDERS(4) PARTNERS(5) SHARES ------------ --------------- ------------ --------------- ------------ ------------ CPA(R):1........................... $ 21,043,704 $ 21,036,720 $ 6,984 1,051,836 349 1,052,185 CPA(R):2........................... 33,857,455 30,693,620 3,163,835 1,534,681 158,192 1,692,873 CPA(R):3........................... 55,968,604 50,062,060 5,906,544 2,503,103 295,327 2,798,430 CPA(R):4........................... 56,822,770 56,388,180 434,590 2,819,409 21,729 2,841,138 CPA(R):5........................... 41,586,398 41,586,398 -- 2,079,320 -- 2,079,320 CPA(R):6........................... 66,522,278 66,168,400 353,878 3,308,420 17,695 3,326,115 CPA(R):7........................... 50,997,672 50,079,940 917,732 2,503,997 45,887 2,549,884 CPA(R):8........................... 97,885,815 94,010,240 3,875,575 4,700,512 193,778 4,894,290 CPA(R):9........................... 63,075,944 63,072,402 3,542 3,153,620 177 3,153,797 ------------ ----------- ------------ ---------- ------- ---------- Total.............................. $487,760,640 $ 473,097,960 $14,662,680 23,654,898 733,134 24,388,032 ============ =========== ============ ========== ======= ==========
- --------------- (1) Assumes participation in the Consolidation by all CPA(R) Partnerships and that all Unitholders elected to receive Listed Shares. (2) Represents the Limited Partnership interests to be exchanged for Listed Shares. (3) Represents the General Partners' interest for its share of appreciation of the Properties to be exchanged for Listed Shares. (4) Total Exchange Value Attributable to Unitholders divided by $20. (5) Total Exchange Value Attributable to the General Partners divided by $20. 40 52 ALLOCATION OF LISTED SHARES AND TOTAL OF CUMULATIVE DISTRIBUTIONS AND ASSIGNED TOTAL EXCHANGE VALUE PER $1,000 ORIGINAL INVESTMENT The following table sets forth the total number of Shares issued to Unitholders in each CPA(R) Partnership and the number of Listed Shares to be issued per $1,000 originally invested and the total of cumulative distributions and assigned Total Exchange Value. ALLOCATION OF LISTED SHARES AND TOTAL CUMULATIVE DISTRIBUTIONS AND ASSIGNED TOTAL EXCHANGE VALUE PER $1,000 ORIGINAL INVESTMENT(1)
PER $1,000 ORIGINAL INVESTMENT(4) ---------------------------------------------- TOTAL OF CUMULATIVE TOTAL NUMBER DISTRIBUTIONS AND ASSIGNED TOTAL EXCHANGE VALUE OF SHARES ASSIGNED TOTAL NUMBER OF ALLOCABLE TO ALLOCABLE TO TOTAL EXCHANGE EXCHANGE LISTED UNITHOLDERS(2) UNITHOLDERS(3) VALUE VALUE SHARES(5) -------------------- -------------- ------------------- -------- --------- CPA(R):1............ $ 21,036,720 1,051,836 $ 2,260 $1,052 52.59 CPA(R):2............ 30,693,620 1,534,681 3,574 1,118 55.91 CPA(R):3............ 50,062,060 2,503,103 3,940 1,517 75.85 CPA(R):4............ 56,388,180 2,819,409 2,949 1,319 65.93 CPA(R):5............ 41,586,398 2,079,320 2,027 735 36.74 CPA(R):6............ 66,168,400 3,308,420 2,491 1,381 69.03 CPA(R):7............ 50,079,940 2,503,997 2,062 1,108 55.39 CPA(R):8............ 94,010,240 4,700,512 2,169 1,391 69.55 CPA(R):9............ 63,072,402 3,153,620 1,741 1,053 52.63 ------------ ---------- $473,097,960 23,654,898 ============ ==========
- --------------- (1) This table assumes 100 percent Partnership Participation in the Consolidation and that no Subsidiary Partnership Units are issued. (2) See the table entitled "DERIVATION OF TOTAL EXCHANGE VALUE" for a determination of the Total Exchange Value for the CPA(R) Partnerships and the General Partners. (3) The total number of Listed Shares was calculated by dividing the Total Exchange Value by $20, an arbitrary figure. (4) A capital contribution of $500 was required for each Unit in CPA(R):1-5. The capital contribution for each Unit of the remaining CPA(R)Partnerships was $1,000. These columns were calculated assuming an original investment of $1,000 per Unit to facilitate a comparison among the CPA(R) Partnerships. (5) The number of Listed Shares to be issued per $1,000 original investment was calculated by dividing the Total Exchange Value allocable to Unitholders per $1,000 original investment by $20. No fractional Listed Shares will be issued in connection with the Consolidation. See "No Fractional Listed Shares." EXPECTED BENEFITS OF CONSOLIDATION The General Partners believe that the Consolidation is the best way to achieve the CPA(R) Partnerships' investment objectives for the following reasons: Liquidity Through Stock Exchange Listing. The Company has applied for listing of the Listed Shares on the NYSE. Accordingly, if the Listed Shares are listed (listing is a condition to the Consolidation), the Consolidation offers liquidity to those Unitholders who receive Listed Shares in the Consolidation. In addition, to enhance trading in, and liquidity of, the Listed Shares, they will be issued in smaller denominations and therefore larger numbers than the Units in order to permit a broader base of investors. 41 53 Increased Diversification. The Consolidation permits holders of Listed Shares to participate in a company substantially larger and more diversified than any of the CPA(R) Partnerships. The Company will have increased tenant, building type, industry sector and geographic diversity. The size and diversity of the Company spreads the risk of an investment in the Company over a broader group of assets and reduces the dependence of the investment upon the performance of any particular asset or group of assets. Control of Timing of Liquidation by Investors. By creating a freely tradable equity interest in the Company, the Consolidation permits Unitholders to liquidate their interest in the CPA(R) Partnership when such liquidation best serves the Unitholder. In addition, by controlling the timing of the liquidation of their CPA(R) investment, Unitholders will have better control of the timing of the tax impact of the liquidation of their interests. Furthermore, the CPA(R) Partnerships will not be forced to sell their properties and recognize the capital gains that would be generated by such sales. If the CPA(R) Partnerships were liquidated by selling off the Properties at the Appraised Value, the Unitholders would realize capital gains of approximately $336 million. Greater Investment Opportunity. The General Partners believe that the Company will maximize economic value for those Unitholders who receive Listed Shares in connection with the Consolidation. The CPA(R) Partnerships are not in a position to take advantage of external growth opportunities because they have already committed their capital and are not authorized to raise additional funds or reinvest net sale or refinancing proceeds for new investments. Although there can be no assurances, the General Partners believe that, with an infinite life entity, the Company can take advantage of investment opportunities that it believes are attractive relative to their risks. In addition, the General Partners believe that the Company may be able to take advantage of its size to refinance certain CPA(R) Partnership debt at lower interest rates thereby increasing the amount of cash available for distribution or investment. Furthermore, the Company's size may provide a more flexible capital structure and greater access to the capital markets. Choice of Investment -- Listed Shares or Subsidiary Partnership Units. Those Unitholders who do not want the risks and opportunities afforded by the Listed Shares can elect to receive Subsidiary Partnership Units. The Subsidiary Partnership Units are structured so that their economic interests and legal rights are substantially the same as the terms of the Units. These include liquidation of the partnership interest within the expected timeframe through the redemption of the Subsidiary Partnership Units in each Subsidiary Partnership at a price determined by an appraisal no later than the approximate time of redemption of the real estate owned by such Subsidiary Partnership. The Subsidiary Partnership Units represent an interest in the Subsidiary Partnerships, and the performance of, and distributions to the holders of, each series of Subsidiary Partnership Units will be based solely upon the performance of the Subsidiary Partnership that issued such series and, accordingly, of the CPA(R) Partnership relating to such series as it existed prior to the Consolidation. The General Partners believe that Unitholders desire more control over the timing of the liquidation of their investments than they would have if the CPA(R) Partnerships were to continue in existence. Although the Consolidation is not the only means by which Unitholders could achieve liquidity for their investments in the CPA(R) Partnerships, the General Partners believe that the Consolidation is preferable to the alternatives. While Unitholders could sell their Units in the informal secondary markets for real estate limited partnership interests, the General Partners believe the NYSE is a more efficient market and that holders of Listed Shares will get a better price for their interests on the NYSE than they would in the informal secondary market. Alternatively, liquidity could be achieved by the sale of all of the CPA(R) Partnerships' assets and distribution of the net proceeds to Unitholders in a dissolution of the CPA(R) Partnerships if approved by the favorable vote of the holders of a majority in interest of the outstanding Units (if such approval is required by the Partnership Agreement). The General Partners believe that such a liquidation would not be in the best interests of the Unitholders (even if the Consolidation were not being offered), principally because the General Partners believe that higher value can be achieved by holding the CPA(R) Partnerships' assets rather than disposing of them, particularly in light of the transaction costs of such dispositions and the tax impact of such liquidation (a capital gain of approximately $336 million if all the Properties are sold). See "Alternatives to the Consolidation," below. 42 54 By choosing to receive Listed Shares rather than Subsidiary Partnership Units in the Consolidation, Unitholders can obtain the opportunity to liquidate their investment at a time most advantageous and convenient to them. The General Partners anticipate that the liquidity benefit inherent in the Consolidation may temporarily be adversely affected by a number of factors, including (i) the likelihood that some Unitholders will sell their Listed Shares as soon as possible after the Consolidation, putting downward pressure on the price of Listed Shares, and (ii) trading value may reflect market uncertainty about the Company's performance. Given these circumstances, the liquidity aspect of the Consolidation can be viewed from two perspectives. First, for Unitholders who must immediately generate cash from any available source, regardless of the loss of future opportunities, that option will now be available, but may be only at prices which, while perhaps higher than prices generally being offered for Units in the secondary market, are less than underlying asset value. Second, other Unitholders, given the adverse market factors described above, may wish to consider holding their Listed Shares, focusing on the growth potential of the Company and treating liquidity as an "incidental" benefit of the Consolidation. The Subsidiary Partnership Units will not be listed on any national securities exchange and will not be designated as Nasdaq National Market System securities, and no public market is expected to develop for the Subsidiary Partnership Units. ALTERNATIVES TO THE CONSOLIDATION Before deciding to recommend the Consolidation, the General Partners considered alternatives in an effort to achieve maximum Unitholder return and to give a choice of investment to Unitholders. These alternatives were (i) continued management of the CPA(R)Partnerships as currently structured, (ii) conversion of the CPA(R) Partnerships into a single or multiple REITs, (iii) listing of the Units on a national securities exchange or designation of the Units as Nasdaq National Market System securities and (iv) liquidation of the CPA(R) Partnerships. Set forth below are the conclusions of the General Partners regarding their belief that the Consolidation is more beneficial to the Unitholders than the alternatives. The General Partners are unable to quantify the consideration that would be received pursuant to all the alternatives discussed below. Continuation of the CPA(R) Partnerships. An alternative to the Consolidation would be to continue the CPA(R) Partnerships. The CPA(R) Partnerships would remain separate legal entities with their own assets and liabilities, governed by their existing Partnership Agreements. While the disclosure documents used to offer the Units for sale to the public disclosed the intentions of the CPA(R) Partnerships to liquidate their assets within six to 15 years after acquisition, each of the CPA(R) Partnerships has a stated life of approximately 40 years and the Unitholders were advised that the liquidation of the CPA(R) Partnerships would depend on market conditions as they might change from time to time. The CPA(R) Partnerships are all operating profitably and do not need to liquidate to satisfy debt obligations or other current liabilities or to avert defaults, foreclosures or other adverse business developments. A number of advantages would be expected to arise from the continued operation of the CPA(R) Partnerships. Unitholders would probably continue to receive regular quarterly distributions of net cash flow arising from operations and the sale or refinancing of their CPA(R) Partnerships' assets. In addition, continuing the CPA(R) Partnerships without change avoids whatever disadvantages may be inherent in the Consolidation. See "RISK FACTORS." The General Partners rejected this alternative because they concluded that maintaining the CPA(R) Partnerships, as separate entities, may have the following potentially negative results when compared with the benefits that the General Partners perceive may be derived from the Consolidation: (i) a less efficient and cost effective exit strategy for Unitholders wishing to liquidate their investment at a future date, (ii) inability of Unitholders to better control the timing of the tax impact of the liquidation, (iii) illiquidity of Units on a current basis due to the lack of a large and established secondary market, (iv) difficulty in valuing the investment due to the limited secondary market for Units, (v) less flexibility in actively managing the 43 55 portfolio, (vi) limitations on new investments and (vii) no investment choice provided to the Unitholders based upon their individual investment goals. Conversion of CPA(R) Partnerships into REITs. The General Partners explored the possibility of converting each CPA(R) Partnership into a separate REIT that would have had its shares listed on a national securities exchange. The General Partners concluded, after consultation with outside advisors, that separate, relatively small REITs advised by an outside advisor would not be well received by traditional purchasers of REIT shares. The General Partners, therefore, determined that this alternative would not fulfill the objectives of the CPA(R) Partnerships. Listing of the Units on a National Securities Exchange, Designation of the Units as Nasdaq National Market System Securities or Support of Secondary Market. The General Partners explored the possibility of having the Units listed on a national securities exchange such as the NYSE or having the Units designated as Nasdaq National Market System securities. The General Partners concluded that there would be limited trading interest in the Units due to the limitations on the CPA(R) Partnerships' growth contained in the Partnership Agreements and the size of some of the CPA(R) Partnerships and that there would be limited interest in the Units due to the partnership form and the relative lack of corporate democracy attributes. The General Partners concluded that this may result in minimal increases in liquidity. Another alternative which may create liquidity for Unitholders desiring to dispose of their investments in the CPA(R) Partnerships is the creation or support of the secondary market for the Units through limited cash tender offers or repurchase programs sponsored by the CPA(R) Partnerships. While the General Partners did not perform detailed financial analysis and cannot predict with any degree of certainty the possible impact of this alternative on the value of Units, the terms of the Partnership Agreements and federal tax law prohibit this alternative from being available with respect to a majority of the Units. Liquidation of the CPA(R) Partnerships. One of the alternatives available to the General Partners is to proceed with a liquidation of each Partnership in the normal course and distribute the net liquidation proceeds to the General and Limited Partners. Through these liquidations, Unitholders' investment in the CPA(R) Partnerships would be concluded. The General Partners concluded that there would be several disadvantages to using this strategy to liquidate the CPA(R) Partnerships. A complete liquidation of the CPA(R) Partnerships would deprive those Unitholders who do not desire to liquidate their investment in net leased properties from participating in the benefits of future performance and possible property value improvements. In addition, liquidation of the CPA(R) Partnerships' properties does not have certain of the other benefits of the Consolidation, including (i) permitting Unitholders to hold their investment until the time when liquidation is appropriate for their individual investment strategy and (ii) the opportunity to participate in the risks and rewards of the Company's plans for growth. The transaction costs associated with the Consolidation are expected to be significantly less than those which would be incurred in a liquidation of the CPA(R) Partnerships' assets. If the assets of the CPA(R) Partnerships were liquidated over time, not only would higher transaction costs likely be incurred, but distributions to Unitholders from the CPA(R) Partnerships' cash flow from operations may be reduced since the CPA(R) Partnerships' fixed costs, such as general and administrative expenses, would not be proportionately reduced with the liquidation of assets. 44 56 Finally, the complete liquidation of the CPA(R) Partnerships would cause the recognition of capital gains by Unitholders to the extent the selling price of the properties exceed their tax basis. The following table provides the total capital gain that would be recognized if all of the Properties were sold for their Appraised Value:
CAPITAL GAINS ------------ CPA(R):1....................................................... $ 18,285,000 CPA(R):2....................................................... 26,354,000 CPA(R):3....................................................... 42,066,000 CPA(R):4....................................................... 47,095,000 CPA(R):5....................................................... 30,722,000 CPA(R):6....................................................... 50,177,000 CPA(R):7....................................................... 23,470,000 CPA(R):8....................................................... 50,764,000 CPA(R):9....................................................... 47,441,000 ----------- TOTAL.......................................................... $336,374,000 ===========
The Consolidation will not cause the recognition of any taxable income by Unitholders. After the Consolidation, Unitholders will recognize taxable income upon the sale of their Listed Shares for an amount in excess of their tax basis or in the event the Company sells a property for an amount in excess of the Company's tax basis. The Company does not expect to sell a significant number of Properties after the Consolidation, other than sales which occur in the normal course of business. COMPARISON OF ALTERNATIVES General. To assist Unitholders in evaluating the Consolidation, the General Partners compared the consideration to be received by Unitholders of each CPA(R) Partnership in the Consolidation to (i) the estimated range of possible market values of the Listed Shares, assuming consummation of the Consolidation (ii) estimates of the value of the Units on a liquidation basis assuming that the assets of each CPA(R) Partnership were sold at their Appraised Value and the net proceeds distributed to the Unitholders in accordance with the Partnership Agreements (iii) estimates of the value of each CPA(R) Partnership on a going-concern basis assuming that the CPA(R) Partnership were to continue as a stand-alone entity and its assets sold at the end of a period consistent with the original anticipated holding period of the CPA(R) Partnership and (iv) the prices at which each CPA(R) Partnership's Units have sold in the illiquid secondary market. See "SECONDARY MARKET AND OWNERSHIP OF UNITS." Due to the uncertainty in establishing these values, the General Partners have established a range of estimated values for certain of the alternatives, representing a high and low estimated value for the potential consideration. Since the value of the consideration for alternatives to the Consolidation is dependent upon varying market conditions, no assurance can be given that the range of estimated values indicated establishes the highest or lowest possible values. However, the General Partners believe that analyzing the alternatives in terms of ranges of estimated value, based on currently available data and, where appropriate, reasonable assumptions made in good faith, establishes a reasonable framework for comparing alternatives. The results of this comparative analysis are summarized in the following table. Unitholders should bear in mind that the estimated values assigned to the alternate forms of consideration are based on a variety of assumptions that have been made by the General Partners. These assumptions relate, among other things, to projections as to each CPA(R) Partnership's future income, expenses, cash flow and other significant financial matters, the capitalization rates that will be used by prospective buyers when each CPA(R) Partnership's assets are liquidated, securities market conditions and factors affecting the value of securities of real estate companies, the ultimate asset composition and capitalization of the Company and appropriate discount rates to apply to expected cash flows in computing the present value of the cash flows that may be received with respect to Units of each CPA(R) Partnership. In addition, these estimates are based upon certain information available to the General Partners at the time the estimates were computed, and no assurance can be given that the same conditions analyzed by them in arriving at the estimates of value would exist at the time of, or 45 57 following, the Consolidation. The assumptions used have been determined by the General Partners in good faith and, where appropriate, are based upon current and historical information regarding the CPA(R) Partnerships and current real estate markets and have been highlighted below to the extent critical to the conclusions of the General Partners. No assurance can be given that such consideration would be realized through any of the designated alternatives, and Unitholders should carefully consider the following discussions to understand the assumptions, qualifications and limitations inherent in the presented valuation estimates. The estimated values presented in the following table are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These estimated values are based upon certain assumptions that relate, among other things, to (i) projections as to each CPA(R) Partnership's future revenues, expenses, cash flow and other significant financial matters, (ii) securities market conditions and factors affecting the value of securities or real estate companies, (iii) the ultimate asset composition and capitalization of the Company, (iv) the capitalization rates that will be used by prospective buyers when each CPA(R) Partnership's assets are liquidated, (v) selling costs, (vi) appropriate discount rates to apply to expected cash flows in computing the present value of the cash flows and (vii) the manner of sale of each CPA(R) Partnership's properties. Actual results may vary from those set forth below based on numerous factors, including those listed above, interest rate fluctuations, conditions in securities markets, tax law changes, supply and demand for properties similar to those owned by the CPA(R) Partnerships, the manner in which the properties are sold and changes in availability of capital to finance acquisitions of properties. The Company's actual results could differ materially from those estimated in the forward-looking statements as a result of several factors, including those discussed in "RISK FACTORS." Each element of the table is described more fully below.
PER $1,000 INVESTMENT ------------------------------------------------------------------------ ESTIMATED RANGE OF RANGE OF TOTAL TRADING PRICES OF ESTIMATED ESTIMATED SECONDARY EXCHANGE LISTED SHARES GOING-CONCERN LIQUIDATION MARKET PRICES VALUE ------------------- -------------- ----------- ------------- -------- CPA(R)1............... $ 710 - 1,216 $ 940 $ 922 $ 384 - 780 $1,052 CPA(R)2............... 755 - 1,295 970 1,014 530 - 720 1,118 CPA(R)3............... 1,037 - 1,777 1,330 1,414 816 - 1,050 1,517 CPA(R)4............... 911 - 1,562 1,120 1,227 744 - 950 1,319 CPA(R)5............... 496 - 850 610 711 520 - 658 735 CPA(R)6............... 935 - 1,603 1,290 1,173 855 - 936 1,381 CPA(R)7............... 756 - 1,296 1,050 997 510 - 802 1,108 CPA(R)8............... 959 - 1,643 1,230 1,251 600 - 953 1,391 CPA(R)9............... 722 - 1,238 980 939 600 - 920 1,053
Estimated Valuation of Listed Shares. The General Partners analyzed selected statistics on certain publicly traded REITs for the purpose of providing a range of estimated trading values for the Listed Shares. Such analysis comprised the following components: (i) identification of publicly traded REITs with portfolios generally regarded as composed primarily of net leased properties and, in that sense, reasonably comparable to the Company's portfolio, (ii) determination of the recent trading value of the common stock and annual distributions per share of such REITs, (iii) derivation of each selected REIT's distribution yield (annual distribution rate per share divided by the trading price per share), (iv) identification of a range of possible distribution yields based on the highest and lowest distribution yields of the REITs so identified, (v) determination of the pro forma annual distribution per Listed Share of the Company and (vi) estimation of a possible range of trading values for the Listed Shares of the Company, by capitalizing the Company's pro forma annual distribution per Listed Share by the highest and lowest distribution yield rates for the REITs so identified. The following table sets forth for each REIT identified by the General Partners, among other things, the recent trading price per share, the annual distribution, the applicable distribution yield and the ratio of debt to total capitalization. 46 58 SELECTED NET LEASE REITS(1)
EQUITY MARKET DEBT/TOTAL PRICE ANNUAL DIVIDEND CAPITALIZATION TOTAL DEBT MARKET COMPANY SYMBOL (AS OF 9/25/97) DIVIDEND YIELD ($ MILLIONS) ($ MILLIONS) CAPITALIZATION - ------------------------- ------- --------------- -------- -------- ------------- ------------ -------------- Commercial Net Lease Realty Inc. ........... NNN $ 16.50 $ 1.20 7.3% $ 386.0 $181.6 32% Franchise Finance Corp. of America............. FFA 26.44 1.80 6.8% 1,074.3 382.1 26% National Golf Properties Inc. .................. TEE 34.63 1.68 4.9% 730.9 239.8 25% CCA Prison Realty Trust.................. PZN 32.00 1.70 5.3% 690.4 -- 0% Realty Income Corp. ..... O 27.06 1.89 7.0% 622.2 111.4 15% Trinet Corporate Realty Trust Inc. ............ TRI 36.00 2.52 7.0% 729.9 359.9 33% Average.................. 6.4% 23%
- --------------- (1) Based on information contained in Realty Stock Review issue of September 30, 1997. The General Partners also researched and compiled analytical data regarding certain traded equity interests that resulted from the consolidation of real estate limited partnerships during the past four years. The analytical data on entities resulting from recent consolidations of public limited partnerships which disclosed net asset values at the time of the consolidation is summarized below: RECENT CONSOLIDATIONS OF PUBLIC LIMITED PARTNERSHIPS VALUATION STATISTICS
PRICE FOUR WEEKS PRICE AS OF AFTER CONSOLIDATION SEPTEMBER 25, 1997 APPROXIMATE NET ---------------------- ---------------------- DATE OF ASSET VALUE PRICE PER PREMIUM PRICE PER PREMIUM CONSOLIDATION PER SHARE(1) SHARE (DISCOUNT) SHARE (DISCOUNT) ------------- ------------ --------- ---------- --------- ---------- Lexington Corporate Properties... 10/93 $10.00 $10.13 1.2% $ 15.13 51.3% Shurgard Storage Centers......... 3/94 18.90 23.50 24.3 29.06 53.8 Franchise Finance Corporation of America........................ 6/94 20.00 19.75 (1.2) 26.44 32.2 Realty Income Corporation........ 10/94 20.00 15.38 (23.1) 27.06 35.3 Municipal Mortgage and Equity(2)...................... 8/96 17.76 15.13 (14.8) 19.25 8.4 Average Premium................ 36.2
- --------------- (1) Estimated net asset value per share at the time of consolidation based on information disclosed in the registration statements relating to the consolidation transactions of each company. (2) Net Asset Value per Share of Municipal Mortgage and Equity represents the midpoint of the range of values disclosed in the consolidation documents. Based upon the above data, the General Partners observed that the distribution yield on the selected net lease real estate investment trusts ranged from approximately five percent to approximately 7.5 percent. The General Partners also observed that for the stock of the entities listed in the table above resulting from the consolidation of partnerships, within the first twelve weeks of trading such stocks, traded within a range of 23 percent less than net asset value to 24 percent higher than net asset value, but that as of September 25, 1997, all of such entities were trading at premiums to net asset value, with such premiums ranging from eight percent to 54 percent. The General Partners have used a distribution yield range of seven percent to 11 percent to estimate the value of the Listed Shares. Use of such range reflects, in part, the potential variation in the size and capitalization of the Company which could result from the maximum and minimum participation scenarios. When the Company's pro forma annual distribution of $1.65 per Share was capitalized at (i.e., divided by) 47 59 these distribution yield rates, the resulting range of possible value per Listed Share was between $15 and $23.50. The high value of the estimated trading range of Listed Shares per $1,000 of original investment for each CPA(R) Partnership was determined by multiplying the $23.50 per Listed Share figure by the number of Listed Shares per $1,000 original investment to be received by the Unitholders of such CPA(R) Partnership. Similarly, the low value of the estimated trading range of Listed Shares per $1,000 of original investment for each CPA(R) Partnership was determined by multiplying the $15 per Listed Share figure by the number of Listed Shares per $1,000 original investment to be received by the Unitholders of such CPA(R) Partnership. The General Partners concluded that the per Listed Share price range established by utilizing a seven percent to 11 percent distribution yield provides a value range which is consistent with the price range of selected net lease REITs and a premium range to asset value within the range of consolidations of other real estate limited partnerships completed during the past four years. The General Partners also compared the Company to the selected REITs in terms of debt ratios and distribution yields. With respect to the distribution yield, based on pro forma distributions of $1.65 per Listed Share and a hypothetical share value of $20 per Listed Share, the Company's distribution yield would be 8.25 percent, which is 29 percent higher than the average distribution yield of the selected REITs. With respect to the debt ratio, the Company's debt ratio would be approximately 35 percent, assuming the market value of the Company's Shares is the Total Exchange Value. The Company's debt ratio would be higher than the average debt ratio of the selected net lease REITs. However, unlike the other entities, over 89 percent of the Company's debt is recourse only to the property subject to the mortgage securing the debt. COMPARISON OF THE COMPANY WITH SELECTED NET LEASE REITS
AVERAGE AVERAGE DISTRIBUTION DEBT YIELD(1) RATIO(2) ------------ -------- SELECTED NET LEASE REITS (see table on page 46)........................ 6.6% 23% THE COMPANY Assuming Listed Shares valued at $20 per Listed Share (100% Participation and no Subsidiary Partnership Units)............. 8.3% 34% Assuming Listed Shares valued at $15 per Listed Share (100% Participation and no Subsidiary Partnership Units)............. 11.0% 40%
- --------------- (1) The Distribution Yield is computed by dividing annualized distributions for the most recent quarter by the stock price on September 25, 1997. For the Company, the Distribution Yield is the pro forma distribution divided by the hypothetical Listed Share price shown. (2) The Debt Ratio shown is the ratio of debt to total market capitalization based on stock prices prevailing on September 25, 1997. For the Company, the Debt Ratio shown is the ratio of debt to total market capitalization based on the hypothetical Listed Share price shown assuming all the CPA(R) Partnerships participate in the Consolidation. The General Partners reached the following conclusions when comparing the estimated range of values of the Listed Shares with the estimated range of values of the consideration associated with alternatives to the Consolidation: (i) it is not possible to assign a specific value to the Listed Shares or to predict accurately the prices at which the Listed Shares will trade in the market following the Consolidation; (ii) given the uncertainty as to the value of the Listed Shares, which is dependent in part upon the capital structure resulting from the Consolidation, it is appropriate to analyze the Listed Shares as having a range of potential values; (iii) the Listed Shares, when traded, may trade at prices higher or lower than the range of values estimated by the Company, depending upon a variety of factors and market conditions not susceptible to precise determination; (iv) there are similar difficulties in establishing the consideration available to Unitholders through alternatives to the Consolidation, with such values also dependent upon a number of factors and market conditions not susceptible to precise determination, making it appropriate to analyze such consideration, for certain of these alternatives as falling within ranges depending upon a number of assumptions; and (v) the assumptions used by the General Partners in establishing ranges of estimated values for the alternatives to the Consolidation may not prove to be accurate, and such consideration may have a value 48 60 higher or lower than the range of estimated values used by the General Partners. Furthermore, even if based on present market conditions, there is an overlap between the indicated ranges of estimated values of the Listed Shares versus the consideration associated with the alternatives to the Consolidation, so that the lower range of potential values of the Listed Shares following the Consolidation may be less than potential values for one or more of the alternatives to the Consolidation, the Listed Shares may still constitute fair consideration for a CPA(R) Partnership's assets because (i) the Consolidation entails other potential benefits to Unitholders (e.g., the potential impact on distributions and the tax deferred nature of the transaction) besides the market value of the Listed Shares which, in the General Partners' opinion, could outweigh the possibility that the value of the Listed Shares at the time of the Consolidation might be less than the value of alternative consideration, (ii) as market conditions change over time, the range of possible values for the Listed Shares may improve in relation to the range of potential values for the alternatives to the Consolidation and (iii) the upper end of the range of estimated potential values for the Listed Shares is equal to or higher than the highest estimated value for such alternatives. Notwithstanding the uncertainties in estimating the value of the Listed Shares, the General Partners believe the available information suggests that the Listed Shares constitute fair consideration for the Units taking into account the ranges of estimated values for the Listed Shares and the ranges of estimated values for alternatives to the Consolidation. Estimated Going-Concern Values. The General Partners have estimated the going-concern values of each CPA(R) Partnership by analyzing projected cash flows and distributions assuming that each CPA(R) Partnership was operated as an independent stand-alone entity. The analysis incorporated estimates of revenues and operating expenses for each of the Properties, capital expenditures, entity-level general and administrative costs and cash flow distributions and proceeds from sale of the properties. It is assumed the property portfolio is liquidated in private real estate markets at a residual value based upon estimated cash flows and residual values utilized in the portfolio appraisal, and the net proceeds resulting from the liquidation of the properties and other remaining assets of the CPA(R) Partnership are paid out to Unitholders in a liquidating distribution in accordance with the provisions of each CPA(R) Partnership Agreement. Among the factors influencing the discount rates utilized for each CPA(R) Partnership were leverage, credit quality of tenants, lease rates in comparison to current market rates and other factors. The going-concern values was calculated by using the implied portfolio discount rate used by the Independent Appraiser to determine the appraised value of the properties of that CPA(R) Partnership. The estimated value of each CPA(R) Partnership on a going-concern basis is not intended to reflect the distributions payable to Unitholders if the assets of each CPA(R) Partnership were to be sold at their current fair market values. Estimated Liquidation Values. Since one of the alternatives available is to proceed with a liquidation of the CPA(R) Partnerships and the corresponding distribution of the net liquidation proceeds to Unitholders, the General Partners have estimated the liquidation value of each CPA(R) Partnership. In estimating the liquidation value, the General Partners assumed that the real estate of each CPA(R) Partnership would be sold at appraised value. This alternative also assumes that non-real estate assets (except for Marketable Securities, which are valued at market) are sold at their book value, that the CPA(R) Partnerships incur selling costs at the time of liquidation (state and local transfer taxes, real estate commissions and legal and other closing costs) and that the remaining net liquidation proceeds are distributed among the Unitholders of each CPA(R) Partnership in accordance with the provisions of each Partnership Agreement. The liquidation analysis assumes that the portfolio of each CPA(R) Partnership is sold in a single transaction at its appraised portfolio value. Should the assets be liquidated over time, even at prices equal to those projected, distributions to Unitholders out of the cash flow from operations of the CPA(R) Partnership might be reduced because the relatively fixed costs of the CPA(R) Partnership, such as general and administrative expenses, are not proportionately reduced with the liquidation of assets. However, for simplification purposes, the sales are assumed to occur concurrently. Applying these procedures, the General Partners arrived at the liquidation values set forth in the table. The real estate portfolio appraisal sets forth, subject to the specified assumptions, limitations and qualifications, the Independent Appraiser's professional opinion as to the market value of the real estate portfolio of 49 61 each CPA(R) Partnership as of March 31, 1997. However, while the portfolio appraisal is not necessarily indicative of the price at which the assets would sell, the real estate portfolio appraisal assumes that the assets of each CPA(R) Partnership are disposed of in an orderly manner and are not sold in forced or distressed sales where sellers might be expected to dispose of their interests at substantial discounts to their actual value. See "-- Real Estate Appraisal." Assumptions, Limitations and Qualifications. The General Partners have estimated a range of possible values for the Listed Shares, which are applicable for the Company assuming 100 percent participation and Minimum Participation. Because the Company's equity capitalization may vary by approximately $250 million depending on whether the Consolidation is completed with 100 percent participation or Minimum Participation, this potential variance could cause a material difference in the assumptions underlying the Company's estimate of a range of Listed Share values. This analysis also is based on the assumption that the market regards the Listed Shares as being comparable to the equity securities of the selected REITs. No assurance can be given that the market will treat the Listed Shares in a comparable manner to the equity securities identified in the tables entitled "Selected Net Lease REITs" and "Recent Consolidations of Public Limited Partnerships -- Valuation Statistics," or that market conditions as of the closing of, or following, the Consolidation will be similar to those existing when the information was compiled. The prices at which the Listed Shares initially trade may be affected, among other things, by (i) potential pent-up selling pressures as a result of the historic illiquidity of investments in the CPA(R) Partnerships, (ii) the Company's lack of an operating history, (iii) the unfamiliarity of institutional investors, financial analysts and broker-dealers with the Company and its prospects as an investment when compared with other equity securities and (iv) the historical financial performance of the Participating Partnerships. It is impossible to predict how these factors will impact the prices of the Listed Shares. Such prices may be either lower or higher than those in the range of estimated values. Distribution Comparison. The General Partners have considered the potential impact of the Consolidation upon distributions that would be made to Unitholders who exchange their Units for Listed Shares. The following table compares distributions that will be received by holders of Listed Shares assuming 100 percent participation and an initial annual distribution rate of $1.65 with distributions currently being received from the CPA(R) Partnerships. COMPARISON OF DISTRIBUTIONS BY CPA(R) PARTNERSHIPS AND THE COMPANY PER $1,000 INVESTMENT
DIVIDENDS FROM LISTED SHARES DISTRIBUTIONS FROM ISSUED IN THE CPA(R) PARTNERSHIP CPA(R) PARTNERSHIP(1) CONSOLIDATION(2) ------------------------------- ------------------------ ---------------------------- CPA(R):1....................... $70.56 $ 86.78 CPA(R):2....................... 51.12 92.25 CPA(R):3....................... 99.36 125.15 CPA(R):4....................... 98.40 108.78 CPA(R):5....................... 66.72 60.62 CPA(R):6....................... 97.16 113.89 CPA(R):7....................... 73.28 91.39 CPA(R):8....................... 88.16 114.76 CPA(R):9....................... 84.96 86.84
- --------------- (1) Annualized rate based on distributions paid in July 1997. (2) Assuming an annual distribution rate of $1.65 per Listed Share. In evaluating this estimate, Unitholders should bear in mind that a number of factors affect the level of distributions. These factors include the distributable income generated by operations, the principal and interest payments on debt, capital expenditure levels, the Company's policy with respect to cash distributions and the capitalization and asset composition of the Company, which will vary based on the CPA(R) Partnerships which 50 62 ultimately participate in the Consolidation. A comparison of the possible distribution levels of the Company with those of each CPA(R) Partnership does not show how the Consolidation might affect a Unitholder's distribution level over a number of years. The distribution rate for Unitholders of CPA(R):5 is expected to be lower immediately after the Consolidation because CPA(R):5 has been paying distributions at a higher rate relative to the value of its assets than the other CPA(R) Partnerships. There can be no assurance that the distribution rates of the CPA(R) Partnerships can be maintained if the Consolidation does not occur. CONDITIONS TO THE CONSOLIDATION The principal conditions to the Consolidation are: (i) approval of the Consolidation by CPA(R) Partnerships representing the Minimum Participation Amount and (ii) approval of the Listed Shares for listing on the NYSE. No federal or state regulatory requirements must be complied with, or approval must be obtained in connection with, the Consolidation. The General Partners may decide not to pursue the Consolidation at any time before it becomes effective, whether before or after approval by the Unitholders. RECOMMENDATION OF THE GENERAL PARTNERS AND FAIRNESS DETERMINATION The General Partners believe the Consolidation to be fair to, and in the best interests of each of, the CPA(R) Partnerships and the Unitholders. The General Partners recommend that the Unitholders approve the Consolidation and elect to receive Listed Shares. Each Unitholder must make his own determination as to whether to select Listed Shares or Subsidiary Partnership Units based upon his personal situation, and such decision should be based upon a careful examination of the Unitholder's personal finances, investment objectives, liquidity needs, tax situation and expectations as to the Company's future growth. Based upon their analysis of the Consolidation, the General Partners believe that: (i) the terms of the Consolidation, when considered as a whole, are fair to the Unitholders; (ii) the Listed Shares offered to the Unitholders were allocated fairly and constitute fair consideration for the interests of the Unitholders; (iii) the Subsidiary Partnership Units offered to the Unitholders were allocated fairly and constitute fair consideration for the interests of the Unitholders; (iv) the terms of the Consolidation and the offered consideration are fair to the Unitholders under all of the combinations that may result from the options afforded to Unitholders; and (v) after comparing the potential benefits and detriments of the Consolidation with those of several alternatives, the Consolidation is more attractive to the Unitholders than such alternatives. These beliefs are based upon the General Partners' analysis of the terms of the Consolidation, an assessment of its potential economic impact upon the Unitholders, a consideration of the combinations that may result from the various options available to Unitholders, a comparison of the potential benefits and detriments of the Consolidation and certain alternatives to the Consolidation and a review of the financial condition and performance of the CPA(R) Partnerships and the terms of critical agreements, such as the Partnership Agreements. The General Partners also believe that the Consolidation is procedurally fair for several reasons. First, the Consolidation is required to be approved by Unitholders holding a majority of the outstanding Units of each CPA(R) Partnership and is subject to certain conditions set forth under "Conditions to the Consolidation" above. Second, the General Partners believe that the Total Exchange Value of the CPA(R) Partnerships has been determined according to a process that is fair, because the process involved appraisals of all CPA(R) Partnership properties by the same appraisal firm, the Independent Appraiser, thereby maximizing consistency among the appraisals. The Total Exchange Value of the CPA(R) Partnerships also includes the CPA(R) Partnerships' non-real estate assets and liabilities based principally on the most recent interim unaudited financial statements. Third, all Participating Investors, including Dissenting Investors, will be given the opportunity to elect to receive Listed Shares or Subsidiary Partnership Units. Although the General Partners believe the terms of the Consolidation are fair to Unitholders, the General Partners have conflicts of interest with respect to the Consolidation. These conflicts include, among others, (i) the determination not to retain independent parties to negotiate the terms of the Consolidation on behalf of the Unitholders or the CPA(R) Partnerships, (ii) the General Partners' realization of substantial economic benefits upon completion of the Consolidation and (iii) the General Partners' relief from certain ongoing liabilities with respect to Participating Partnerships. For a further discussion of the conflicts of interest and 51 63 potential benefits of the Consolidation to the General Partners, see "INTERESTS OF CERTAIN PERSONS IN THE CONSOLIDATION AND CONFLICTS OF INTEREST -- Substantial Benefits to General Partners." MATERIAL FACTORS UNDERLYING BELIEF AS TO FAIRNESS The following is a discussion of the material factors underlying the General Partners' belief that the terms of the Consolidation are fair as a whole and to the Unitholders. 1. Consideration Offered. Unitholders and the General Partners will be offered the same form of consideration in the Consolidation with respect to their capital interest in the properties. The General Partners believe that the form, allocation and amount of consideration offered to the General Partners and Unitholders, including Dissenting Investors, constitute fair value. The allocation of the Listed Shares and the Subsidiary Partnership Units offered to Unitholders is based on the same valuation methodology which was consistently applied to each of the CPA(R) Partnerships. Therefore, the General Partners believe that the Total Exchange Value adequately takes into account the relative values of each of the CPA(R) Partnerships. In addition, the General Partners compared the values of the consideration which would have been received by Unitholders in alternative transactions and concluded that the Consolidation is fair in light of the values of such consideration. 2. Similarity of CPA(R) Partnerships. The General Partners do not believe that there are any material differences among the CPA(R) Partnerships that would affect the fairness of the Consolidation to Unitholders in any particular CPA(R) Partnership. Substantially all of the assets of the CPA(R) Partnerships are net leased real estate properties which are almost identical in nature, and the CPA(R) Partnerships have substantially the same capital structures. In addition, the investment objectives of each of the CPA(R)Partnerships are substantially the same. These factors make it easier to fairly compare the value of the CPA(R) Partnerships relative to each other and the value of the Subsidiary Partnership Units to the Listed Shares and to fairly allocate the Listed Shares and Subsidiary Partnership Units among Unitholders and the General Partners. The primary differences among the CPA(R) Partnerships are as follows: - Date of Formation. The CPA(R) Partnerships were formed at different times and, therefore, would have begun liquidation at different times. As a result, the earlier formed CPA(R) Partnerships have already sold some Properties. - Partnership Structure. Although the CPA(R) Partnership Agreements have slightly different provisions with respect to allocations, distributions and fees, the General Partners believe the differences in such provisions are not substantial. - Size and Diversity. Some of the CPA(R) Partnerships have purchased fewer properties and are less diverse with respect to the number of tenants, geographic location and types of the properties. 3. Market Value. To the extent that there is trading in the Units, such trading takes place in an informal secondary market. The Units do not trade in any orderly, active market. The Total Exchange Value assigned to the CPA(R) Partnerships in connection with the Consolidation is greater than the weighted average value of the CPA(R) Partnerships as reflected by the reported secondary sales prices of the Units. See "SECONDARY MARKET AND OWNERSHIP OF PARTNERSHIP UNITS" for the limited information available with respect to secondary market sales of the Units. A direct comparison of the current or historic prices of the Listed Shares and the Units cannot be made because there is no current or historic market price information available with respect to the Listed Shares, which will not be issued or traded prior to the Consolidation. Therefore, the determination of the consideration to be received by Participating Investors is based upon the valuation of the CPA(R) Partnerships as described under "APPRAISALS AND FAIRNESS OPINION" and is not based upon the current or historic market prices of the Units. Because there is no active trading market for the Units, the General Partners believe that historic sales prices of the Units in the secondary market are not indicative of the value of the underlying assets. For example, during fiscal year 1996, less than two percent of all the outstanding Units in the CPA(R) Partnerships traded in the secondary market. 52 64 4. Unitholder Choice of Investment -- Listed Shares or Subsidiary Partnership Units. Offering Unitholders a choice to exchange their Units for Listed Shares or Subsidiary Partnership Units does not ensure that the offered consideration is fair vis-a-vis the value of the consideration available to Unitholders through the alternatives to the Consolidation, but does enhance the procedural fairness of the Consolidation by giving all Unitholders the opportunity to elect Listed Shares or Subsidiary Partnership Units. Through this element of the Consolidation, the General Partners are attempting to accommodate the possibly different investment objectives of the Unitholders, with the Subsidiary Partnership Units providing an investment on substantially the same economic interests and legal rights as the Units and the Listed Shares representing equity securities in the Company permitting the holders of Listed Shares to participate in the Company's potential growth and to have a more liquid investment. Each Unitholder must make his own determination as to the form of consideration best suiting his personal situation, and such decisions should be based upon a careful examination of the Unitholder's personal finances, investment objectives, liquidity needs, tax situation and expectations as to the Company's future growth. 5. Independent Appraisals and Fairness Opinion. The General Partners' belief as to the fairness of the Consolidation as a whole and to the Unitholders, and the General Partners' statements above regarding the material terms underlying their belief as to fairness, are partially based upon the Independent Appraisals. The General Partners attributed significant weight to the Independent Appraisals and the Fairness Opinion, which they believe support their conclusion that the Consolidation is fair as a whole, and to the Unitholders. The Fairness Opinion does not address every possible combination of CPA(R) Partnerships in the Consolidation because of the extremely large number of combinations. The General Partners will receive a Fairness Opinion addressing the actual combination of CPA(R) Partnerships participating in the Consolidation prior to the closing. The General Partners do not know of any factors that would materially alter the conclusions made in the Independent Appraisals or the Fairness Opinion, including developments or trends that have materially affected or are reasonably likely to materially affect such conclusions. The General Partners believe that the engagement of the Independent Appraiser to provide the Independent Appraisals and the Fairness Opinion assisted the General Partners in the fulfillment of their fiduciary duties to the CPA(R) Partnerships and the Unitholders, notwithstanding that the Independent Appraiser received fees for its services, has received fees from the CPA(R) Partnerships in the past and may receive fees for its services from the Company in the future. See "APPRAISALS AND FAIRNESS OPINION." The Fairness Opinion does not address (i) the fairness of any terms of the Consolidation (other than the fairness of the allocations of the Listed Shares for the maximum and minimum participation levels as defined therein) or the amounts or allocations of consolidation costs or the amounts of consolidation costs borne by Limited Partners at various levels of participation in the Consolidation, (ii) the relative value of the Listed Shares and the Subsidiary Partnership Units to be issued in the Consolidation, (iii) the prices at which the Listed Shares or Subsidiary Partnership Units may trade following the Consolidation or the trading value of the Listed Shares or Subsidiary Partnership Units to be received compared with the current fair market value of the CPA(R) Partnership's portfolio or other assets if liquidated in real estate markets or (iv) alternatives to the Consolidation. 6. Valuation of Alternatives. The General Partners estimated the value of the CPA(R) Partnerships as going concerns and if liquidated. See "-- Comparison to Alternative Considerations" above. On the basis of these calculations, the General Partners believe that the ultimate value of the Listed Shares will exceed the going concern value and liquidation value of each CPA(R) Partnership. 7. Cash Available for Distribution Prior to, and After, the Consolidation. The General Partners believe the Consolidation will be accomplished without materially decreasing the aggregate cash available from operations otherwise payable to Unitholders. The effect of the Consolidation and the cash available for distribution will vary, however, from CPA(R) Partnership to CPA(R) Partnership. In addition to the receipt of cash available for distribution, Participating Investors will be able to benefit from the potential growth of the Company and will also receive enhanced investment liquidity. 53 65 8. Net Book Value of the Partnership. The General Partners calculated the book value of the CPA(R) Partnerships as of June 30, 1997. This calculation was done by dividing the total Limited Partners' capital by $1,000 to calculate the book value per $1,000 invested. This figure was compared to the Total Exchange Value per $1,000 invested. SUMMARY OF BOOK VALUE AND TOTAL EXCHANGE VALUE PER $1,000 INVESTED
TOTAL BOOK VALUE PER EXCHANGE VALUE PER $1,000 INVESTED $1,000 INVESTED --------------- ------------------ CPA(R):1..................................... $ 441 $1,052 CPA(R):2..................................... 949 1,118 CPA(R):3..................................... 1,035 1,517 CPA(R):4..................................... 706 1,319 CPA(R):5..................................... 581 735 CPA(R):6..................................... 881 1,381 CPA(R):7..................................... 762 1,108 CPA(R):8..................................... 876 1,391 CPA(R):9..................................... 663 1,053
On the basis of these calculations, the General Partners believe that the ultimate value of the Listed Shares will exceed the book value of each CPA(R) Partnership. The General Partners do not know of any factors that may materially affect (i) the value of the consideration to be received by the Participating Investors in the Consolidation, (ii) the value of the Units for purposes of comparing the expected benefits of the Consolidation to the potential alternatives considered by the General Partners or (iii) the analysis of the fairness of the Consolidation. See "RISK FACTORS" and "APPRAISALS AND FAIRNESS OPINION." RELATIVE WEIGHT ASSIGNED TO MATERIAL FACTORS The General Partners gave greatest weight to the factors set forth in paragraphs one through six above in reaching their conclusions as to the substantive and procedural fairness of the Consolidation. FAIRNESS TO UNITHOLDERS RECEIVING LISTED SHARES IN THE CONSOLIDATION The Listed Shares represent equity securities in the Company permitting the holders of the Listed Shares to participate in the Company's potential growth. Thus, the holders of Listed Shares will share in both the benefits and risks of an investment of the Company. In addition, unlike the Subsidiary Partnership Units, the value of the Listed Shares will be based upon the performance of the Company and all of its assets, rather than simply the assets of the CPA(R) Partnership corresponding to the corresponding series of Subsidiary Partnership Units. Further, the Listed Shares will be listed on the NYSE which should make an investment in the Listed Shares a more liquid investment than an investment in the Units. See "COMPARISON OF UNITS, LISTED SHARES AND SUBSIDIARY PARTNERSHIP UNITS." On balance, the General Partners have concluded that the Consolidation is fair to the Unitholders who receive Listed Shares in connection with the Consolidation because such investment has more growth potential than an investment in the Units and the Listed Shares should be a more liquid investment than an investment in the Units. FAIRNESS TO UNITHOLDERS RECEIVING SUBSIDIARY PARTNERSHIP UNITS IN THE CONSOLIDATION The Subsidiary Partnership Units have been structured so that their economic interests and legal rights are substantially the same as the terms and conditions of the Units. The performance of, and distributions with respect to, Subsidiary Partnership Units will be based solely upon the performance of those assets of the 54 66 corresponding Subsidiary Partnerships. Accordingly, for purposes of the Subsidiary Partnership Units, it will be deemed that the CPA(R) Partnerships never engaged in the Consolidation. In addition, like the Units, the Subsidiary Partnership Units will not be listed on any national securities exchange and no market for the Subsidiary Partnership Units is expected to develop. See "COMPARISON OF UNITS, LISTED SHARES AND SUBSIDIARY PARTNERSHIP UNITS." On balance, the General Partners have concluded that the Consolidation is fair to the Unitholders who receive Subsidiary Partnership Units in connection with the Consolidation, because the Subsidiary Partnership Units have been structured such that their terms and conditions are substantially the same as the terms and conditions of the Units. FAIRNESS IN VIEW OF CONFLICTS OF INTEREST The General Partners have fiduciary duties to the CPA(R) Partnerships and the Unitholders. The General Partners, in handling the affairs of the CPA(R) Partnerships, are expected to exercise good faith, to use care and prudence and to act with a duty of loyalty to the Unitholders. Under these fiduciary duties, the General Partners are obligated to ensure that the CPA(R) Partnerships are treated fairly and equitably in transactions with third parties, especially where consummation of such transactions may result in the interests of General Partners being opposed to, or not totally in line with, the interests of the Limited Partners. In considering the Consolidation, the General Partners gave full consideration to these fiduciary duties. However, the Consolidation affords a number of benefits to the General Partners. The General Partners may be viewed as having a potential conflict of interest with Unitholders with respect to the determination of the number of Listed Shares the General Partners and their Affiliates will receive in the Consolidation in exchange for a portion of their General Partner interests, retained interest in each Subsidiary Partnership and the fees payable to the Manager in connection with the Consolidation and thereafter. In addition, other matters occurring contemporaneously with the Consolidation may involve conflicts of interest between the General Partners and the Unitholders. Furthermore, the General Partners will not have any personal liability for Company obligations and liabilities which occur after the Consolidation. Unitholders were not separately represented in establishing the terms of the Consolidation. Such representation might have caused the terms of the Consolidation to be different, and perhaps more favorable to the Unitholders in some respects from those described herein. To help mitigate some of these potential conflicts of interest, the General Partners obtained the Fairness Opinion and the Independent Appraisal. See "INTEREST OF CERTAIN PERSONS IN THE CONSOLIDATION AND CONFLICTS OF INTEREST." CONSEQUENCES IF THE CONSOLIDATION IS NOT APPROVED If the Consolidation is not consummated for any reason, the CPA(R) Partnerships presently intend to continue to operate as ongoing businesses in their current form. In managing the business of the CPA(R) Partnerships, the General Partners will take whatever actions they deem are appropriate to satisfy their fiduciary obligations to the Unitholders and the CPA(R) Partnerships. The General Partners will consider various options relating to the continuation of the business of the CPA(R) Partnership and the liquidation of the CPA(R) Partnerships. No other transaction is currently being actively considered by the CPA(R) Partnerships as an alternative to the Consolidation, although the CPA(R) Partnerships may from time to time explore other alternatives. The CPA(R) Partnerships will pay the Consolidation Expenses if the Consolidation is not approved. UNITHOLDER ELECTIONS Each Unitholder must decide whether to approve the Consolidation. In addition, each Unitholder must decide whether to receive all Listed Shares or all Subsidiary Partnership Units in connection with the Consolidation. If a Unitholder whose CPA(R) Partnership approves the Consolidation fails to make an election with respect to the type of interest he would like to receive in the Consolidation or fails to return a Consent Card, he will receive all Listed Shares in the Consolidation. 55 67 These elections are to be made on the Consent Card accompanying this Prospectus, which must be properly completed and returned to ChaseMellon within the time frame allowed to Unitholders on voting in the Consolidation. See "VOTING PROCEDURES -- Consent Card and Vote Required." ACCOUNTING TREATMENT Because the Consolidation involves the transfer of assets and liabilities among entities which have common general partners, management and common control, the General Partners' interest in the assets and liabilities of the Company and the Participating Partnerships will carry over their pre-Consolidation, historical cost basis. The exchange of Limited Partner interests for Listed Shares will be accounted for as a purchase and recorded at the fair value of the Listed Shares exchanged. COSTS AND EXPENSES All costs and expenses incurred by the Company or the CPA(R) Partnerships in connection with the Consolidation will be paid by the CPA(R) Partnerships from cash on hand, whether or not the Consolidation is consummated. The following is a statement of certain estimated costs and expenses incurred by the CPA(R) Partnership and the Company in connection with the Consolidation: Securities and Exchange Commission Registration Fee.............. $ 142,452 NYSE Fee......................................................... 149,498 Legal Fees and Expenses.......................................... 1,100,000 Fairness Opinion................................................. 475,000 Accounting Fees and Expenses..................................... 580,000 Solicitation Fees and Expenses................................... 125,000 Printing and Engraving Expenses.................................. 225,000 Miscellaneous.................................................... 200,050 ---------- Total.................................................. $2,997,000 ==========
NO FRACTIONAL LISTED SHARES No fractional Listed Shares will be issued by the Company in the Consolidation. Each Unitholder who would otherwise be entitled to fractional Listed Shares will receive one Listed Share for each fractional Listed Share of 0.5 or greater. No Listed Shares will be issued for fractional Listed Shares of less than 0.5. The maximum allocated Total Exchange Value which a Unitholder could forfeit if such Unitholder's fractional share was 0.49 is approximately $10 (on a per Unitholder, not a per Unit, basis), assuming the value of the Listed Share is equal to $20. EFFECT OF THE CONSOLIDATION ON DISSENTING INVESTORS A Unitholder of a Participating Partnership who dissents or abstains from voting with respect to the Consolidation does not have a statutory right to elect to be paid the appraised value of his interest in the Participating Partnership. However, all Unitholders, including Dissenting Investors, will be given the opportunity to elect to receive Subsidiary Partnership Units instead of Listed Shares for their Units as described under "The Subsidiary Partnership Units." Unlike holders of Listed Shares, holders of Subsidiary Partnership Units will have no right to participate in the Company's earnings in excess of operating expenses, debt service and other obligations and will not benefit from any growth in shareholders' equity that might result from the future performance of the Company but will benefit only from the performance of the assets held by the Subsidiary Partnership corresponding to the CPA(R) Partnership in which the Dissenting Investor was a Limited Partner. 56 68 EFFECT OF CONSOLIDATION ON NONPARTICIPATING PARTNERSHIPS Each Nonparticipating Partnership will continue to operate as a separate legal entity with its own assets and liabilities. There will be no change in its investment objectives, policies or restrictions, the Nonparticipating Partnership will remain subject to the terms of its Partnership Agreement and the Limited Partners will retain their current interests. Nonparticipating Partnerships will pay a share of the expenses of the Consolidation. EFFECTIVE TIME The Effective Time of the Consolidation will be at the time the Certificates of Merger with respect to the merger of the Participating Partnerships with the Subsidiary Partnerships are filed with the Secretary of State of the State of Delaware or California or at such later time as may be specified in the Certificates of Merger. It is anticipated that such filings will be made as promptly as practicable after the requisite approval of the Unitholders has been obtained and the other conditions to the Consolidation have been satisfied or waived, if permitted under the Merger Agreements. TITLE INSURANCE At the time the Properties were acquired by the CPA(R)Partnerships, each CPA(R) Partnership received title insurance policies insuring the condition of title of such Properties. Under such policies, a successor in the interest by operation of law to each CPA(R) Partnership will become the insured. ENVIRONMENTAL MATTERS The environmental laws of the federal government and of certain state and local governments impose liability on current property owners for the cleanup of hazardous and toxic substances discharged on the property. This liability may be imposed without regard to the timing, cause or person responsible for the release of such substances onto the property. The lessees are required to comply with such laws pursuant to the lease agreements, but the Company could be subject to liability in the event that it acquires property having such environmental problems. This potential liability could adversely affect the Unitholders of CPA(R) Partnerships without such environmental liability. The CPA(R) Partnerships did not have environmental audits performed on their properties in preparation for the Consolidation. The General Partners based this decision on the environmental information about the Properties previously obtained and the cost of new environmental audits. The General Partners have estimated that the cost of Phase I audits for CPA(R):7, CPA(R):8 and CPA(R):9, those CPA(R) Partnerships which did not have Phase I audits performed for their properties in 1994, would be approximately $380,000. Pursuant to lease, guaranty and other agreements with the tenants, such tenants and guarantors are liable for environmental liabilities. Furthermore, because it was not customary business practice to obtain environmental audits in connection with the acquisition of such properties prior to 1988, no environmental audits were obtained by CPA(R):1 through CPA(R):7 at the time their properties were acquired. Phase I audits were performed for the properties by CPA(R):1 through CPA(R):6 in 1994. Environmental audits were conducted on the properties acquired by CPA(R):8 and CPA(R):9 at the time they were acquired. There may, however, be environmental problems associated with these properties not known to the CPA(R) Partnerships which would have been disclosed had the CPA(R) Partnerships obtained new environmental audits in connection with the Consolidation. In the event preexisting environmental conditions requiring remediation are discovered subsequent to the Closing Date, the cost of remediation will be borne by the lessee and the guarantor pursuant to the terms of the lease agreement and any guarantees or by the Company, if the lessee and guarantor cannot meet their obligation to pay. Neither the Company nor any of the CPA(R) Partnerships has been notified by any governmental authority or are aware of any non-compliance, liability or other claim in connection with any of the properties of the CPA(R) Partnerships. 57 69 LEGAL PROCEEDINGS The General Partners and one or more of the CPA(R) Partnerships are involved in litigation incidental to their businesses, but no material litigation is currently pending or threatened against the Company, any of the CPA(R) Partnerships, their properties or the General Partners. AMENDMENT, TERMINATION AND WAIVER Subject to applicable law, the Merger Agreements may be amended or waived by the Company and the General Partners at any time prior to the filing of the Certificate of Merger with the California or Delaware Secretary of State, provided that, after approval by Unitholders holding a majority of the outstanding Units of a CPA(R) Partnership or the Shareholders of the Company, without the further approval of the Unitholders of such CPA(R) Partnership and the Shareholders of the Company, no amendment or waiver may be made which (i) materially and adversely affects the rights of the Unitholders without the approval of the Unitholders holding a majority in interest of the affected CPA(R) Partnership, (ii) alters or changes (A) the amount or type of consideration which a Unitholder of such CPA(R) Partnership shall be entitled to receive for Units in such CPA(R) Partnership, (B) the Operating Agreement or (C) the terms and conditions of the Partnership Merger Agreement, if such alteration or change would adversely affect the Participating Investors or the Shareholders of the Company, or (iii) waives the condition that CPA(R) Partnerships representing an aggregate of at least $200 million in Total Exchange Value participate in the Consolidation. A Merger Agreement may be terminated at any time prior to the filing of the Certificate of Merger with the California or Delaware Secretary of State (i) by the Company and the General Partners, (ii) if the conditions to the merger as set forth in the Merger Agreement are not satisfied or (iii) if the Consolidation is not consummated prior to June 30, 1998 or such later date as mutually agreed in writing by the parties thereto. APPRAISALS AND FAIRNESS OPINIONS The CPA(R) Partnerships have engaged the Independent Appraiser, an independent appraisal firm, to provide an Independent Appraisal of the real estate of the CPA(R) Partnerships. The Total Exchange Value of each of the CPA(R) Partnerships and the allocation of Listed Shares and Subsidiary Partnership Units was determined primarily based on these Independent Appraisals. See "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Total Exchange Value and Allocation of Shares and Subsidiary Partnership Units" and "APPRAISALS AND FAIRNESS OPINIONS." The CPA(R) Partnerships also engaged the Independent Appraiser to render the Fairness Opinion. See "APPRAISALS AND FAIRNESS OPINIONS" regarding the parties providing the Independent Appraisals and Fairness Opinion, any material relationships with these parties and compensation received or expected to be received by them and summaries of the Independent Appraisals and the Fairness Opinion and any assumptions, limitations and qualifications relating thereto. DISTRIBUTION POLICY The following summarizes the Company's current distribution policy with respect to Listed Shares and the Subsidiary Partnership Units. The Board of Directors of the Company will have the ability to change the Company's distribution policy with respect to the Listed Shares without the consent of the Shareholders. The Board of Directors of the Company will have the discretion to adopt a distribution reinvestment plan in the future which would permit holders of Listed Shares to reinvest the distributions they receive from the Company in additional Listed Shares. LISTED SHARES After the Consolidation, the Company intends to make regular quarterly distributions to the Shareholders. The first distribution after the closing of the Consolidation is expected to be approximately $0.4125 per Listed Share, which is equivalent to an annual distribution of $1.65 per Listed Share or an annual distribution of 8.25 percent based on the Total Exchange Value per Listed Share of $20. 58 70 The following table illustrates the adjustments made to the Company's pro forma net income before extraordinary items for the 12 months ended June 30, 1997, in estimating its cash available for distribution for the 12 month period ending June 30, 1998 and in establishing its estimated initial annual distribution:
MAXIMUM MINIMUM PARTICIPATION(1) PARTICIPATION(1) ---------------- ---------------- Pro forma net income for the 12 months ended June 30, 1997 before extraordinary items(2)................... $ 42,764 $ 18,159 Adjustments: Non-cash expenses and other adjustments(3)........... 12,758 5,020 Gains on sales of properties and securities.......... (830) (780) Excess of minority interest income over distributions to minority interest.............................. 485 29 Decrease in interest expense(4)...................... 3,747 1,478 Contractual rent increases and new leases(5)......... 2,004 1,028 Lease expirations(6)................................. (3,146) (1,094) Reduction of cash flow from hotels due to commencement of renovations(7).................... (1,172) (762) ------- ------- Estimated adjusted cash generated before debt repayments and capital expenditures for the 12 months ending June 30, 1998................................. 56,610 23,078 Capital expenditures................................... (4,630) (3,508) ------- ------- Estimated adjusted cash generated before debt repayments........................................... 51,980 19,570 Principal amortization of mortgage debt(8)............. (7,772) (2,960) ------- ------- Estimated adjusted cash generated after debt repayments........................................... $ 44,208 $ 16,610 ======= ======= Expected initial annual distribution(9)................ $ 40,399 $ 16,848 ======= ======= Expected initial annual distribution per Listed Share................................................ $ 1.65 $ 1.65 ======= =======
- --------------- (1) Maximum participation assumes that all of the CPA(R) Partnerships participate in the Consolidation; minimum participation assumes that only CPA(R):1, CPA(R):2, CPA(R):3, CPA(R):5 and CPA(R):7 participate in the Consolidation. (2) Reflects the following:
MAXIMUM MINIMUM PARTICIPATION PARTICIPATION ------------- ------------- Pro forma net income for the 12 months ended December 31, 1996...................................................... $44,220 $18,858 Add: Pro forma net income for the 6 months ended June 30, 1997...................................................... 20,327 8,876 Less: Pro forma net income for the 6 months ended June 30, 1996...................................................... (21,783) (9,575) ------ ------ Pro forma net income for the 12 months ended June 30, 1997 before extraordinary items................................ $42,764 $18,159 ====== ======
(3) Reflects the following:
MAXIMUM MINIMUM PARTICIPATION PARTICIPATION ------------- ------------- Depreciation and amortization............................... $10,012 $ 3,890 Non-cash writedown of real estate assets.................... 3,666 1,350 Vested portion of performance fees paid in stock............ 718 271 Directors' and employee's compensation paid in stock........ 375 375 Operating and financing lease adjustments................... (2,013) (866) ------ ------ $12,758 $ 5,020 ====== ======
59 71 Performance fees and a portion of the compensation of Directors and the Company's sole employee will be paid in the form of Listed Shares. Operating and financing lease adjustments represent the effect of adjusting straight-line rents on operating leases and interest income on direct financing leases included in pro forma net income, to a cash basis. (4) Represents the estimated decrease in interest expense on amortizing debt for the 12 months ending June 30, 1998. (5) Represents the estimated increase in lease revenues due to contractually scheduled rental adjustments and the commencement of new leases. Scheduled rental adjustments are based on increases in the Consumer Price index or fixed increases. (6) Represents the reduction in lease revenues due to scheduled lease expirations. (7) A renovation of the hotel in Livonia, Michigan is expected to commence in January 1998, resulting in a temporary reduction of operating cash flows. The renovation will be completed within twelve months of commencement and is expected to result in an increase in hotel revenues. (8) Represents scheduled principal amortization on mortgage debt for the 12 months ending June 30, 1998, excluding balloon payments on maturing debt. (9) Based on estimated average outstanding Listed Shares for the 12 months ending June 30, 1998. The Company will consider various factors in determining future distributions including expected cash flows generated from operating activities, cash requirements to fund property improvements and expansions, debt service requirements, the level of cash balances on hand and the Company's ability to generate funds from operations. These factors will be taken into account in determining the Company's ability to pay a sustainable level of distributions. In addition the Company expects to commence acquiring new investments to meet its growth objectives and such acquisition strategy may affect the Company's ability to maintain or increase future distribution levels. The Company intends to utilize cash generated from operations to fund distributions to shareholders and pay regularly scheduled principal amortization on mortgage debt. For the three years ended December 31, 1994, 1995 and 1996 cash generated from operations of approximately $45,131,000, $63,276,000 and $50,983,000, exceeded distributions to the Limited Partners of approximately $35,589,000, $57,216,000 and $34,173,000, respectively. The increase in cash generated from operations of approximately $18,145,000 in 1995 is primarily due to receipt of approximately $15,188,000 in connection with the restructuring of certain leases. The increase in distributions in 1995 of approximately $21,627,000 is due to the distribution of proceeds from the sale of certain properties. For the six months ended June 30, 1996 and 1997 cash generated from operations of approximately $23,360,000 and $25,406,000 exceeded distributions of approximately $17,666,000 and $17,336,000, respectively. Cash flows provided by investing activities for the three years ended December 31, 1994, 1995 and 1996 amounted to approximately $37,136,000, $24,327,000 and $19,545,000, respectively, primarily due to the sale of properties. Most of the Company's properties are subject to net leases under which the lessees are required to pay all operating expenses of the properties and structural repairs. Consequently historical cash needs for capital expenditures on the properties have not been material. Capital expenditures for the three years ended December 31, 1994, 1995 and 1996 are approximately $2,492,000, $2,095,000 and $3,420,000, respectively. For the six months ended June 30, 1996 and 1997 capital expenditures totaled approximately $2,144,000 and $1,354,000 respectively. Future capital expenditures may be expected to increase as many of the Company's leases are over 10 years old and are scheduled to approach their initial expiration dates. If cash generated from operating activities is not sufficient to fund future capital expenditures, such expenditures could be funded from the Company's working capital reserves or from additional borrowing of secured or unsecured debt. Cash flows from financing activities primarily consists of payment of mortgage principal in connection with loan prepayments or scheduled principal amortization, payment of distributions to partners and the refinancing of mortgage loans. Net cash used in financing activities totaled approximately $70,045,000, $105,578,000 and $69,686,000 for the three years ended December 31, 1994, 1995 and 1996, respectively, and 60 72 $32,660,000 and $25,526,000 for the six months ended June 30, 1996 and 1997 respectively. Scheduled principal payments on debt for the years ended December 31, 1997, 1998 and 1999 are expected to be approximately $40,771,000, $28,012,000 and $37,832,000, respectively, consisting primarily of balloon payments on mortgage loans currently in place. Such payments can be funded partially but not entirely from cash generated from operations. The Company intends to establish unsecured bank lines of credit or may refinance loans on selected properties to fund these obligations. The Company's lease revenues from existing properties are expected to decrease due to the modification of leases with Policy Management Systems and Hughes Markets. The modification of those leases resulted in a temporary increase in lease revenues during 1995, 1996 and the first quarter of 1997. In July 1994 the Company agreed to accelerate the term of a lease with Policy Management Systems from the originally scheduled expiration in June 2003 to June 1997, resulting in a corresponding acceleration of the rental income that would have been paid over the original remaining term of the lease. Annual rents subsequent to the acceleration increased from approximately $1,850,000 to approximately $5,200,000. The lease with Policy Management Systems expired in June 1997. The Company has leased a portion of the property at an annual rental of approximately $723,000 and is currently re-marketing the remaining space. The Company believes that annual rents on the property, when fully leased, will approximate the annual rents received prior to acceleration of the term of the lease with Policy Management Systems. The lease with Hughes Markets, Inc. for a property in Los Angeles, California, expired in April 1996 and was extended for a period of two years with a significant increase in rent. In connection with the lease extension the Company was able to increase annual rents during the extension period from approximately $1,800,000 to approximately $4,000,000. Hughes Markets agreed to make a lump sum payment of approximately $3,500,000 upon the expiration of the extended lease term in April 1998, and such amount is recognized on a pro rata, straight-line basis over the extension term. The Company has entered into an agreement to lease the Los Angeles property upon termination of the lease with Hughes Markets for an annual rent of approximately $1,800,000 for a term of nine years. The Company intends to commence purchasing additional investments subsequent to the Consolidation. Such acquisitions may be financed with funds provided by unsecured lines of credit, additional borrowing on unleveraged properties or the issuance of additional equity. The total value of the Company's assets is approximately $750 million and total debt equals approximately $219 million. Acquisitions of new properties are expected to increase future lease revenues. SUBSIDIARY PARTNERSHIP UNITS The Subsidiary Partnership Units have been structured so that the determination of their distributions and their other terms and conditions are substantially the same as the terms and conditions of the Units prior to the Consolidation. The performance of, and distributions with respect to, Subsidiary Partnership Units will be based upon the performance of those properties owned by the corresponding Subsidiary Partnerships. The amount of each distribution will be determined by the Board of the Company, as General Partner of the Subsidiary Partnerships, as it had been determined by the Board of the General Partner of each CPA(R) Partnership. The Company's objective with respect to the Subsidiary Partnership Units is to pay distributions to holders of Subsidiary Partnership Units as if the Consolidation had never occurred. Accordingly, the Company's quarterly distributions to the holders of Subsidiary Partnership Units will be determined based upon those assets held from time to time by the Subsidiary Partnerships after the Consolidation. Specifically, the net cash flows generated by the properties owned by a Subsidiary Partnership will be decreased by such Subsidiary Partnership's allocable share of Company administrative expenses, which will be allocated on the basis of the gross revenue generated by the Subsidiary Partnerships and the Company reduced by debt service and cash retained for maintenance of required working capital (the "Amount Available for Distribution"). Distributions to the holders of Subsidiary Partnership Units will be satisfied out of the resources of the corresponding Subsidiary Partnership and the revenues generated by the Properties of that Subsidiary 61 73 Partnership. All the adjustments to revenues and expenses of the Company noted above can and will be specifically identified and will be subject to review of the Company's independent auditors on an annual basis. "Net cash flows generated by the properties" means (i) all rent received from such Properties, less (ii) any debt service payable on debt secured by such Properties and cash flows used for general and administrative purposes relating to the Properties, plus (iii) all cash flow generated from the interest income on short term investments and other investments of the CPA(R) Partnerships, if any. In the event of a sale or transfer of a Property to a third party which is unaffiliated with the Company, the Subsidiary Partnership Units relating to the Subsidiary Partnership owning such Property would be paid a distribution of the pro rata portion of the net proceeds of such sale as deemed appropriate by the Company. Sale proceeds may be paid to the Company by the Subsidiary Partnership contemporaneously with the distribution to the holders of the Subsidiary Partnership Units. On the Redemption Date for each series of Subsidiary Partnership Units, the Properties owned by each corresponding CPA(R) Partnership at the time of the Consolidation will be appraised by a third party appraiser. The total value of the properties will be adjusted by the other assets and liabilities of the Subsidiary Partnership to determine the redemption value of the Subsidiary Partnership. The holders of Subsidiary Partnership units will then be paid the redemption value of the Subsidiary Partnership Units in cash and the Subsidiary Partnership Units will be fully redeemed at that time. See "DESCRIPTION OF LISTED SHARES AND SUBSIDIARY PARTNERSHIP UNITS -- Subsidiary Partnership Units." MINIMUM PARTICIPATION The Company does not intend to change the expected distribution per share if less than 100 percent participation in the Consolidation is achieved. If the Minimum Participation is achieved, the Company believes that operating cash flow and existing cash balances will be sufficient to sustain the expected per share distribution rate. Assuming Minimum Participation by the CPA(R) Partnerships, historical cash flow from operating activities for the year ended December 31, 1996 of approximately $20,059,000 exceeded distributions paid to the Limited Partners of $14,409,000. For the six months ended June 30, 1997 cash flows from operating activities of approximately $9,288,000 exceeded distributions paid of approximately $7,389,000. Cash flows provided by investing activities amounted to approximately $20,447,000 for the year ended December 31, 1996 consisting primarily of proceeds from the sale of properties. Capital expenditures for 1996 were $1,101,000. Cash flows used by investing activities for the six months ended June 30, 1997 totaled approximately $1,306,000 consisting primarily of capital expenditures. Cash flows used by financing activities for the year ended December 31, 1996 totaled approximately $36,126,000 and included prepayments of mortgages of approximately $31,535,000 in connection with the sale of properties. Cash flows used by financing activities for the six months ended June 30, 1997 were approximately $9,060,000 and consisted primarily of distributions paid. For a discussion of the tax treatment of distributions, see "FEDERAL INCOME TAX CONSIDERATIONS -- Taxation of Distributions." 62 74 COMPARISON OF UNITS, LISTED SHARES AND SUBSIDIARY PARTNERSHIP UNITS The following summary compares a number of differences between ownership of Units, Listed Shares and Subsidiary Partnership Units and the effects relating thereto. The Subsidiary Partnership Units have been structured with substantially the same economic interests and legal rights as the Units and the description will only note the differences between CPA(R) Units and the Subsidiary Partnership Units.
SUBSIDIARY PARTNERSHIP UNITS LISTED SHARES UNITS ------------------------- ------------------------- ------------------------- ISSUANCE IN SERIES The Units were issued in The Listed Shares will The Subsidiary series through nine not be issued in series. Partnership Units will different limited The previous holders of be issued in nine series partnership offerings. Units who receive Listed to correspond to the Shares in the nine different CPA(R) Consolidation will all Partnerships in which hold identical Listed holders of Subsidiary Shares. Partnership Units will own interests. GENERAL BUSINESS The CPA(R) Partnerships The Company has broad in- The Subsidiary own net leased commercial vestment objectives. Its Partnership Units will and industrial real current plans may be represent interests in estate which are being recast in the discretion the Subsidiary Part- held until they must be of the Board of nerships. The Company's sold pursuant to the Directors without the investment policy will respective partnership consent of the Share- not affect the rights of agreements. The CPA(R) holders. the holders of Partnerships are not Subsidiary Partnership purchasing new Units to distributions, properties. preferences and redemptions. DISTRIBUTIONS AND The CPA(R) Partnerships The initial policy of the The Subsidiary Partner- DIVIDENDS make quarterly distribu- Company will be to dis- ships will make quarterly tions of operating cash tribute quarterly cash distributions of flow as determined by flow from operations operating cash flow as the Managing General (exclusive of capital determined by the Partner and distribute related items and Company (as the General net proceeds from the reserves) to the holders Partner) and distribute sale or refinancing of of Listed Shares. The net proceeds from the Property as deemed ap- Board of Directors has sale or refinancing as propriate by the Managing the discretion to deemed appropriate by General Partner. The Man- determine whether or not the Company. The General aging General Partner has and when to declare and Partner has the the discretion to pay distributions and discretion to determine determine whether or not the amount of any whether or not and when and when to pay distributions. Funds for to pay distributions and distributions and the distributions to the the amount of any dis- amount of any distribu- holders of Listed Shares tributions. tions. will be available only after distributions are made to holders of Sub- sidiary Partnership Units.
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SUBSIDIARY PARTNERSHIP UNITS LISTED SHARES UNITS ------------------------- ------------------------- ------------------------- MANAGEMENT AND The business and affairs The business and affairs The business and affairs FIDUCIARY DUTIES of each CPA(R) of the Company are of each Subsidiary Partnership are managed managed by the Manager Partnership are managed by the Managing General under the direction of by the Company as Partner of each the Board of Directors. General Partner of each Partnership. The Managing Directors can be removed Subsidiary Partnership. General Partner or any from office by the While the General other General Partner may affirmative vote of the Partner of each be removed by the vote holders of at least a Subsidiary Partnership of a majority in majority of the can be removed by the interest of the then-outstanding Listed vote of a majority in Unitholders in each Shares. Although the law interests of holders of CPA(R) Partnership. in this area is unde- Subsidiary Partnership Delaware and California veloped, Delaware common Units, the Company may common law imposes law would most likely im- own a majority of the fiduciary duties of pose fiduciary duties of Subsidiary Partnership care, loyalty, good care, loyalty, good Units. Delaware and faith and fair dealing faith and fair dealing California common law on the General Partners. on the Directors of the imposes fiduciary duties Company and the Manager. of care, loyalty, good The Manager will run the faith and fair dealing day-to-day operations of on the General Partners. the Company. VOTING RIGHTS Under the Partnership Under the Organizational Under the Partnership Agreements, the Unit- Documents, the holders of Agreements, the Unit- holders have voting Listed Shares have voting holders have voting rights with respect to, rights with respect to: rights with respect to, among other things: (i) (i) election of among other things: (i) the removal of any Directors, (ii) the sale the removal of any General Partner and the or disposition of all or General Partner and the election of a substantially all of the election of a replacement therefor, assets of the Company at replacement therefor, (ii) the sale of all or any one time (other than (ii) the sale of all or substantially all of the sales or dispositions, substantially all of the assets of the CPA(R) the proceeds of which are assets of the Partnerships (except for needed to redeem the Sub- Partnerships (except for sales made in connection sidiary Partnership sales made in connec- with the liquidation of Units), (iii) the merger tion with the the CPA(R) Part- or consolidation of the liquidation of the nerships) and (iii) the Company (where the Partnerships) and (iii) adoption of the Company is not the the adoption of the Partnership Agreement surviving entity), (iv) Partnership Agreement Amendments. the dissolution of the Amendments. Company and (v) certain anti-takeover provisions. Each Unit entitles its Each Listed Share Each Subsidiary Partner- holder to cast one vote entitles its holder to ship Unit entitles its on each matter presented cast one vote on each holder to cast one vote to the Unitholders. matter presented to the on each matter presented holders of Listed Shares. to the limited partners of the corresponding Subsidiary Partnership. Approval of any matter Approval of any matter Approval of any matter submitted to Unitholders submitted to the holders submitted to the holders generally requires of Listed Shares of a series of approval of a majority generally requires the Subsidiary Partnership in interest of the Units affirmative vote of Units generally re- then outstanding. holders of a majority of quires the affirmative the Listed Shares vote of holders of a present at a meeting at majority of such series which a quorum is of the Subsidiary present. Partnership Units. The Company may own a ma- jority of the outstanding Subsidiary Partnership Units of each Subsidiary Partnership.
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SUBSIDIARY PARTNERSHIP UNITS LISTED SHARES UNITS ------------------------- ------------------------- ------------------------- At any meeting, a Unit- Any action that may be At any meeting, a holder holder may vote in taken at a meeting may be of Subsidiary Partnership person, by written proxy taken by written consent Units may vote in person, or by a signed writing in lieu of a meeting by written proxy or by a directing the manner in executed by holders of signed writing directing which his or her vote Listed Shares sufficient the manner in which his should be cast. Proxies to authorize such action or her vote should be are revocable at the at a meeting. At any cast. Proxies are pleasure of the meeting, a holder of revocable at the plea- Unitholder executing Listed Shares may vote sure of the holder of them. in person, by written Subsidiary Partnership proxy or by a signed Units executing them. writing directing the manner in which his vote should be cast. Any proxy is revocable at the pleasure of the holder of Listed Shares executing it. SPECIAL MEETINGS A special meeting of the A special meeting of the A special meeting of the Unitholder of a CPA(R) Shareholders may be holders of Subsidiary Partnership may be called by the Board of Partnership Units may be called by the Managing Directors of the Company called by the General General Partner of the or in accordance with a Partner of the CPA(R) Partnership or in written request signed Subsidiary Partnership accordance with a by the holders of at or in accordance with a written request signed least 10 percent of the written request signed by at least 10 percent outstanding Listed by at least 10 percent in interest of the Unit- Shares. in interest of the holders of that CPA(R) holders of Subsidiary Partnership. Partnership Units of that Subsidiary Partnership.
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SUBSIDIARY PARTNERSHIP UNITS LISTED SHARES UNITS ------------------------- ------------------------- ------------------------- REDEMPTION The Units are not redeem- The Listed Shares are not Holders of Subsidiary able. The Partnership redeemable, except pursu- Partnership Units will Agreement does, however, ant to certain change of receive proceeds from require that the CPA(R) control and business the sale of a Property Partnership distribute combination provisions of the corresponding proceeds of the sale of adopted by the Company. Subsidiary Partnership Properties not required The Listed Shares can be (which does not include for other CPA(R) sold on the NYSE. the pledge of a Property Partnership needs. The in connection with the CPA(R) Partnerships may leveraging of such sell Properties at any Property). The time, if such sale is Subsidiary Partnerships deemed by the General may sell the Properties Partners to be in the owned by them at any best interest of the time. Limited Partners. In addition, each Participating Partnership will be appraised on a specified date. As soon as practicable after the completion of the appraisal, holders of Subsidiary Partnership Units will be paid the value of their Units in cash. The above provision providing for redemption is designed to be consistent with the expectations of a Unitholder that his or her Units would be effectively redeemed in 12 to 15 years after the proceeds from the offering of Units were invested. Such expectation results from a provision in each of the Partnership Agreements that the Gen- eral Partner should begin to liquidate each Partnership within a specified period after the equity is invested in property, market conditions permitting. This provision tracks the timing expectations of Limited Partners.
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SUBSIDIARY PARTNERSHIP UNITS LISTED SHARES UNITS ------------------------- ------------------------- ------------------------- LIQUIDATION RIGHTS In the event of the Upon the liquidation of In the event of the liquidation of a CPA(R) the Company, the holders liquidation of a Partnership, the assets of Listed Shares will be Subsidiary Partnership, of the CPA(R) entitled to share the assets of the Partnership remaining ratably in any assets Subsidiary Partnership after the satisfaction remaining after satis- remaining after the of all debts and faction of obligations to satisfaction of all liabilities of the CPA(R) creditors and any debts and liabilities of Partnership, the liquidation preferences the Subsidiary satisfaction of expenses on any Shares (including Partnership, the of the liquidation of the Partnership Shares) satisfaction of its the CPA(R) Partnership that may then be expenses of liquidation and the establishment of outstanding. Therefore, and the establishment of a reasonable reserve in holders of Listed Shares a reasonable reserve in connection therewith are will be entitled to a connection therewith are distributed to distribution based distributed to holders Unitholders and General proportionately on their of the Subsidiary Partners pursuant to the ownership of the Company. Partnership Units terms of each pursuant to the terms of Partnership Agreement its Partnership Agree- which provide generally ment, which provide that Limited Partners generally that Limited must receive a return of Partners must receive a their initial capital return of their initial plus a specified return capital plus a specified before the General return before the Partners receive a share General Partners receive of such distributions. a share of such distributions. RIGHT TO COMPEL A CPA(R) Partnership may The vote of holders of A Subsidiary Partnership DISSOLUTION be dissolved at the the Listed Shares owning may be dissolved at the election of a majority at least a majority of election of a majority in interest of the interests in the Company in interest of the Limited Partners of such is sufficient to cause Limited Partners of such CPA(R) Partnership. the dissolution of the Partnership. Company. EXPENSES OF THE The CPA(R) Partnerships The holders of Listed The holders of Subsidiary CONSOLIDATION are responsible for all Shares are responsible Partnership Units are not expenses incurred in the for their pro rata share responsible for any of Consolidation. of the expenses incurred the expenses incurred in in the Consolidation. the Consolidation. LIMITED LIABILITY Limited Partners are not Holders of Listed Shares Holders of Subsidiary generally liable for are not generally liable Partnership Units are obligations of the for obligations of the not generally liable for CPA(R) Partnership. Company. obligations of the Company or the Subsidiary CPA(R) Partnerships. LIQUIDITY AND MAR- The Units are freely The Listed Shares will be The Subsidiary KETABILITY transferable. There is freely transferable, and Partnership Units will no organized market for it is a condition to be freely transferable. the Units; thus, trading consummation of the The Subsidiary in the Units is sporadic Consolidation that the Partnership Units will and occurs solely Listed Shares be listed not be listed on any through private transac- on the NYSE. national securities tions. exchange, and no public market is expected to develop for the Subsidi- ary Partnership Units. RESTRICTIONS ON Units may only be None. Subsidiary Partnership TRANSFER assigned with the Units may only be Consent of the General assigned with the Partner of the CPA(R) consent of the Manager. Partnership.
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SUBSIDIARY PARTNERSHIP UNITS LISTED SHARES UNITS ------------------------- ------------------------- ------------------------- CONTINUITY OF EXIS- The Partnership Agree- The Organizational Docu- The Partnership Agree- TENCE ments provide for the ments provide for ments provide for the CPA(R) Partnerships to perpetual existence, Subsidiary Partnerships continue in existence although the expulsion, to continue in existence until a specified date, bankruptcy or dis- until a specified date, unless earlier dissolved solution of the Manager unless earlier dissolved in accordance with the may result in the in accordance with the applicable CPA(R) dissolution of the applicable Subsidiary Partnership Agreement. Company. Partnership Agreement. FINANCIAL REPORTS The CPA(R) Partnerships The Company will be sub- The Subsidiary Partner- are subject to the ject to the reporting re- ships will be subject to reporting requirements quirements of the the reporting of the Exchange Act and Exchange Act and will requirements of the file annual and file annual and Exchange Act and will quarterly reports quarterly reports file annual and quarterly thereunder. The CPA(R) thereunder. The Company reports thereunder. The Partnerships also currently intends to Subsidiary Partnerships provide annual and provide annual and currently intend to quarterly reports, in- quarterly reports to its provide annual and cluding details of the Shareholders. quarterly reports to operation of the their holders of business. Subsidiary Partnership Units. PAYMENTS TO THE Fees for a portion of the Fees for the services Fees for a portion of the GENERAL PARTNERS AND services rendered by the rendered by the Manager services rendered by the THEIR AFFILIATES General Partners are paid will be paid by the Company are paid to the to the General Partners Company. The portion of Company or their or their affiliates. General Partners' affiliates. general partner interests in the CPA(R) Partnerships not converted to Listed Shares will be con- verted to limited partner interests. CERTAIN LEGAL RIGHTS Delaware and California Delaware law affords mem- Delaware and California laws allow a Unitholder bers of a limited laws allow a holder of to institute legal liability company rights Subsidiary Partnership action on behalf of the to bring derivative Units to institute legal CPA(R) Partnership (a actions when the action on behalf of the partnership derivative managers or members with Subsidiary Partnership action) to recover authority to do so have (a partnership damages where the failed to institute an derivative action) to re- general partner has action to recover cover damages where the failed to institute the damages and class general partner has action. In addition, a actions to recover failed to institute the Unitholder may institute damages. Shareholders may action. In addition, a legal action on behalf also have rights to holder of Subsidiary of himself or all other bring actions in federal Partnership Units may similarly situated courts to enforce institute legal action interest holders (a federal rights. These on behalf of himself or class action) to recover rights are comparable to herself or all other damages. The Part- the rights of the similarly situated nership Agreements permit Unitholders in the CPA(R) interest holders (a Unitholders to bring a Partnerships. class action) to recover derivative action on damages. The Partnership behalf of the CPA(R) Agreements permit a Partnerships to the same holder of Subsidiary extent as a Unitholder Partnership Units to has such right under bring a derivative Delaware or California action on behalf of the law. Unitholders may Subsidiary Partnerships also have rights to to the same extent as a bring actions in federal Unitholder has such right courts to enforce under Delaware or federal rights. California law. Unitholders may also have rights to bring ac- tions in federal courts to enforce federal rights.
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SUBSIDIARY PARTNERSHIP UNITS LISTED SHARES UNITS ------------------------- ------------------------- ------------------------- INSPECTION OF BOOKS Any Unitholder of a Under Delaware law and Any holder of Subsidiary AND RECORDS CPA(R) Partnership may the Operating Agreement, Partnership Units may have access during each Shareholder has the have access during ordinary business hours right, subject to such ordinary business hours to certain information reasonable standards as to certain information regarding the status of may be set forth in the regarding the status of the business and Organizational Documents the business and finan- financial condition of or otherwise established cial condition of the such CPA(R) Partnership by the Board of Subsidiary Partnership, maintained at the Directors of the in which such holder has principal office of the Company, to obtain from an interest, maintained CPA(R) Partnership. In the Company from time to at the principal office addition, any time upon reasonable of the Partnership. In Unitholder, upon a written demand for any addition, any holder of written request to the purpose reasonably Subsidiary Partnership Managing General Partner related to the Units, upon a written and the payment of Shareholder's interest request to the reasonable costs of as a member of the Subsidiary Partnership fulfilling such re- Company certain and the payment of quest, is entitled to information regarding reasonable costs of copy or have copies made the status of the busi- fulfilling such re- of a current list of ness, affairs and quest, is entitled to Unitholders and their financial condition of copy or have copies made respective holdings in the Company. The Board of a current list of the CPA(R) Partnership of Directors of the holders of Subsidiary (subject to certain Company has the right to Partnership Units and limitations), the keep confidential from their holdings in the Partnership Agreement, the Shareholders, for Partnership in which such any appraisal obtained such period of time as Unitholder has an in connection with the the Board deems interest (subject to acquisition of a Prop- reasonable, any in- certain limitations), erty and the CPA(R) formation which the Board the Partnership Partnerships' tax reasonably believes to Agreement, any appraisal returns, written be in the nature of obtained in connection partnership agreements, trade secrets or other with the acquisition of financial statements, information the a Property and the books and records. In disclosure of which the Subsidiary Partnerships' addition, pursuant to Board in good faith tax returns, written Rule 14a-7 under the believes is not in the partnership agreements, Exchange Act, the best interest of the financial statements, Unitholders will have Company or could damage books and records. In the right to obtain a the Company or its addition, pursuant to list of the Unitholders business or which the Rule 14a-7 under the from the CPA(R) Company is required by Exchange Act, the Partnership whenever the law or by agreement with Unitholders will have CPA(R) Partnership a third party to keep the right to obtain a solicits proxies or confidential. In list of the holders of consents. addition, pursuant to Subsidiary Partnership Rule 14a-7 under the Ex- Units from the change Act, the Subsidiary Partnership Shareholders will have whenever the Subsidiary the right to obtain a Partnership solicits list of the Share- proxies or consents. holders from the Company whenever the Company so- licits proxies or consents.
69 81 COMPARISONS OF CPA(R) PARTNERSHIPS AND COMPANY The information below highlights a number of the significant differences between the CPA(R) Partnerships and the Company relating to, among other things, forms of organization, investment objectives, policies and restrictions, asset diversification, capitalization, management structure and investor rights. These comparisons are intended to assist Unitholders in understanding how their investment will be changed if, as a result of the Consolidation, their Units are exchanged for Listed Shares. Following the captioned sections is a summary discussion of the expected effects of the Consolidation on Unitholders who receive Listed Shares in exchange for their Units. FORM OF ORGANIZATION CPA(R) PARTNERSHIPS The CPA(R) Partnerships are limited partnerships organized under California and Delaware law which were formed for the purpose of investing in a real estate portfolio consisting primarily of net leased real estate. The CPA(R) Partnerships have been taxed as partnerships for federal income tax purposes. COMPANY The Company is a Delaware limited liability company formed for the purpose of investing in primarily net leased real estate. The Company expects to qualify as a partnership for federal income tax purposes. The CPA(R) Partnerships are limited partnerships under California and Delaware state law, while the Company is organized as a Delaware Limited Liability Company. The CPA(R) Partnerships and the Company are each vehicles appropriate for holding real estate investments and afford passive investors, such as Unitholders and Shareholders, certain benefits, including limited liability, a professionally managed portfolio and the avoidance of double-level taxation. The CPA(R)Partnerships are under the control of their General Partners, while the Company is governed by its Board of Directors. LENGTH OF INVESTMENT CPA(R) PARTNERSHIPS An investment in each of the CPA(R) Partnerships was presented to Unitholders as a finite-length investment, with the Unitholders to receive regular cash distributions out of each CPA(R) Partnership's net operating income and special distributions of net sale proceeds through the liquidation of each CPA(R) Partnership's real estate investments. Each of the General Partners of the CPA(R) Partnerships stated its intention to sell each CPA(R) Partnership's properties within a period of six to 15 years of the final acquisition of property. Unitholders were advised that sale of the CPA(R) Partnerships' assets would, however, be dependent upon market conditions. COMPANY Unlike the CPA(R) Partnerships, the Company intends to continue its operations for an indefinite time period and has no specific plans for the disposition of the assets acquired through the Consolidation or subsequent acquisitions. The Company is allowed to retain its net sale or refinancing proceeds for new investments, capital expenditures, working capital reserves or other appropriate purposes. See "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Expected Benefits from the Consolidation." Unitholders in each of the CPA(R) Partnerships expect liquidation of their investments when the assets of the CPA(R) Partnership are liquidated. In contrast, the Company does not expect to dispose of its investments within any prescribed period and, in any event, plans to retain the net sale proceeds for future investments. Holders of Listed Shares are expected to achieve liquidity for their investments by trading Listed Shares in the public market and not through the liquidation of the Company's assets. The Listed Shares may trade at a discount from, or premium to, the liquidation value of the Company's Properties. 70 82 NATURE OF INVESTMENT CPA(R) PARTNERSHIPS The Units of each CPA(R) Partnership constitute equity interests entitling each Unitholder to its pro rata share of cash distributions made to the Unitholders of the CPA(R) Partnership. Each of the CPA(R) Partnership Agreements specifies how cash available for distribution, whether arising from operations or sales or refinancings, is to be shared among the General Partners and Unitholders. The distributions made to the Unitholders are not fixed in amount, are determined by the General Partners and depend upon each CPA(R) Partnership's operating results and the amounts received upon sale or refinancing of the CPA(R) Partnership's assets. COMPANY The Listed Shares constitute equity interests in the Company. Each holder of Listed Shares will be entitled to his or her pro rata share of distributions made with respect to the Listed Shares. The distributions payable to Listed Shareholders are not fixed in amount and only paid when declared by the Board of Directors. The Company intends to pay quarterly distributions. Both the Units and Listed Shares represent equity interests entitling the holders thereof to participate in the growth of the CPA(R) Partnerships and the Company, respectively. Distributions and dividends payable with respect to the Units and Listed Shares depend upon the performance of the CPA(R) Partnerships and the Company, respectively. PROPERTIES AND DIVERSIFICATION CPA(R) PARTNERSHIPS The investment portfolio of each of the CPA(R) Partnerships is limited to the assets acquired with the initial equity raised from the Unitholders as well as the debt financing obtained by the CPA(R) Partnership within the established borrowing restrictions. The CPA(R) Partnerships are not authorized to issue additional equity securities to expand their investment portfolios. COMPANY The Company is authorized to own and acquire additional net leased real estate, to make other investments and to issue additional equity and debt securities to acquire additional assets. The investment portfolio for each CPA(R) Partnership was limited to the assets acquired with its initial equity and limited debt financing. If the Consolidation is approved, the Company will hold an investment portfolio substantially larger and more diversified than the portfolio of any of the CPA(R) Partnerships and with the potential for future growth through acquisition. An investment in the Company should not be viewed as an investment in a specific pool of assets, but, instead, as an investment in an ongoing real estate investment business, subject to the risks normally attendant to ongoing real estate ownership. PERMITTED INVESTMENTS CPA(R) PARTNERSHIPS Each of the CPA(R) Partnerships was authorized to invest in net leased real estate. COMPANY The Company is authorized to invest in net leased real estate or invest in any other type of asset. The CPA(R) Partnerships have concentrated their investments almost solely in net leased real estate. The Company is authorized to make investments in any asset, including other commercial real estate or mortgage loans. Accordingly, the Company's investments may be more diversified than the investments of the CPA(R) Partnerships. The investment diversification, if it occurs, while potentially serving as a hedge against the risk of 71 83 having all of the Company's investments limited to a single type of asset, would expose the Company to other risks. ADDITIONAL EQUITY CPA(R) PARTNERSHIPS None of the CPA(R) Partnerships is authorized to issue equity securities other than the Units. Therefore, no dilution of the Unitholders' distributive share of cash available for distribution can occur. COMPANY The Board of Directors may, in its discretion, issue additional equity securities. The Company may sell additional equity from time to time to increase its available capital. The issuance of additional equity interests may result in the dilution of the interests of the Shareholders. The CPA(R) Partnerships are not authorized to issue additional Units or other equity interests, and, therefore, the Units are not subject to dilution, except as provided in the Partnership Agreements. In contrast, the Company has substantial flexibility to raise equity capital to finance its business and affairs through the sale of equity interests. The Company, through the issuance of new equity securities, may substantially expand its capital base to make new investments. The issuance of additional equity securities by the Company may dilute the interests of the holders of Listed Shares (but not holders of Subsidiary Partnership Units) and the Company may issue equity interests with priorities or preferences superior to Listed Shares (but not Subsidiary Partnership Units) with respect to distributions and liquidation proceeds. 72 84 BORROWING POLICIES CPA(R) PARTNERSHIPS Each of the CPA(R) Partnerships is authorized to borrow funds necessary, appropriate or advisable in conducting its business and affairs. The Partnership Agreements place various restrictions on the authority of the CPA(R) Partnerships to borrow funds. Furthermore, as a matter of overall policy, each of the CPA(R) Partnerships has limited the amount it has borrowed to finance its acquisitions and other business activities. See "BUSINESS AND PROPERTIES -- Mortgage Debt" for the outstanding borrowings of each of the CPA(R) Partnerships as of March 31, 1997. COMPANY The Company is permitted to borrow, on a secured or unsecured basis, funds to finance its business without limits. In conducting its business, the Company may borrow funds without limits. Borrowing funds may allow the Company to substantially expand its asset base, but may also increase the Company's risks due to its leveraged investments. RESTRICTIONS UPON RELATED PARTY TRANSACTIONS CPA(R) PARTNERSHIPS Each of the Partnership Agreements restricts the respective CPA(R) Partnership from entering into certain business transactions with the General Partners and its affiliates, except to the extent that such transactions were specifically disclosed in the disclosure document pursuant to which the Units were offered and sold to the public, with respect to any proposed services to be rendered to the CPA(R) Partnership, the compensation for such services is required to be comparable and competitive with that charged by a third party rendering comparable services and certain other conditions are required to be met. While the Partnership Agreements do not specify a procedure for authorizing transactions with their General Partners or Affiliates, it is possible to amend the Partnership Agreements to authorize such a transaction because each of the Partnership Agreements may be amended by a majority vote of Unitholders. COMPANY The Organizational Documents and the LLCA prohibit the Company from entering into a transaction with any of the interested parties unless the terms or conditions of such transactions have been disclosed to the Board of Directors and approved by a majority of Directors not otherwise interested in the matter (including a majority of Independent Directors), and such Directors, in approving the transaction, have determined it to be fair, competitive, commercially reasonable and on terms and conditions no less favorable to the Company than those available from unaffiliated third parties. In addition, the Organizational Documents specifically authorize the Company to acquire property from interested parties to the extent the terms and conditions of the acquisition have been approved by a majority of the Directors not otherwise interested in the transaction (including a majority of the Independent Directors), and such Directors have made good faith determinations as to the fairness of the compensation provided for such property. Except for transactions specifically approved in the Partnership Agreements (and which were disclosed in the disclosure documents prepared for the offering and sale of the Units), the CPA(R) Partnerships are not authorized to enter into transactions with the General Partners and their Affiliates, unless the transactions are approved in advance by a vote of the Unitholders. The Organizational Documents of the Company contain similar restrictions, but the Company may enter into a transaction with its Directors, officers and significant Shareholders, if the transaction is approved by a majority of the Directors not interested in the matter following a determination that the transaction is fair, competitive and commercially reasonable. The 73 85 Organizational Documents do not require the approval of Shareholders for entering into transactions with interested parties. MANAGEMENT CONTROL AND RESPONSIBILITY CPA(R) PARTNERSHIPS Under each of the Partnership Agreements, the General Partners are, subject to certain narrow limitations, vested with all management authority to conduct the business of the CPA(R) Partnership, including authority and responsibility for overseeing all executive, supervisory and administrative services rendered to the CPA(R) Partnership. The General Partners have the right to continue to serve in such capacities unless removed by a majority vote of the Unitholders. Unitholders have no right to participate in the management and control of the CPA(R) Partnerships and have no voice in its affairs except for certain limited matters that may be submitted to a vote of the Unitholders under the terms of the Partnership Agreements. See "-- Voting Rights." The General Partners are accountable as fiduciaries to the CPA(R) Partnership and are required to exercise good faith and integrity in their dealings in conducting the CPA(R) Partnership's affairs. See "FIDUCIARY RESPONSIBILITY." COMPANY The Board of Directors has exclusive control over the Company's business and affairs, subject only to the restrictions in the Organizational Documents. Holders of Listed Shares have the right to elect members of the Board of Directors. The Directors are accountable to the Company as fiduciaries and are required to exercise good faith and integrity in conducting the Company's affairs. See "FIDUCIARY RESPONSIBILITY." The Board of Directors has engaged the Manager to operate the Company on a day-to-day basis. Holders of Listed Shares have greater control over management of the Company than the Unitholders have over the CPA(R) Partnerships, because the members of the Company's Board of Directors are elected by the holders of Listed Shares. The General Partners do not need to seek re-election, but, instead, serve unless removed by an affirmative vote of Unitholders owning a majority of the Units entitled to vote, which is generally an extraordinary event. Holders of Listed Shares, like Unitholders, are passive investors and must rely upon management for the prudent administration of their investments. 74 86 MANAGEMENT LIABILITY AND INDEMNIFICATION CPA(R) PARTNERSHIPS As a matter of state law, the General Partners have liability for the payment of CPA(R) Partnership obligations and debts, unless limitations upon such liability are expressly stated in the obligation. Each of the CPA(R) Partnership Agreements provides that neither General Partners nor any of the Affiliates performing services on behalf of the CPA(R) Partnership will be liable to the CPA(R) Partnership or its Unitholders for any act or omission performed in good faith, pursuant to authority granted by the Partnership Agreement, in a manner reasonably believed to be within the scope of authority granted and in the best interests of the CPA(R) Partnership, provided that such act or omission did not constitute fraud, misconduct, bad faith or negligence. In addition, the CPA(R) Partnership Agreements indemnify the General Partners and their Affiliates for liability, loss, damage, costs and expenses, including attorneys' fees, incurred by them in conducting the CPA(R) Partnerships' business, except in the case of fraud, misconduct, bad faith or negligence. COMPANY The Company's Directors are not personally liable for ordinary liabilities of the Company. The Organizational Documents provide that a Director's liability for breach of fiduciary duty is limited to the full extent allowable under Delaware Law. The Organizational Documents and state laws provide indemnification rights to Directors and officers who act in good faith, in a manner reasonably believed to be in or not opposed to the best interests of the Company and, with respect to criminal actions or proceedings, without reasonable cause to believe their conduct was unlawful. In addition, the Organizational Documents indemnify Directors and officers against amounts paid for settlement, authorize the Company to advance expenses incurred in defense, upon the Company's receipt of an appropriate undertaking to repay such amounts if appropriate, and authorize the Company to carry insurance for the benefit of the officers and Directors, even for matters to which such persons are not entitled indemnification. See "FIDUCIARY RESPONSIBILITY." The Company has also agreed to indemnify the Manager. In the Consolidation, the Company will be assuming all existing and continuing liabilities of the Participating Partnerships, including their obligations to indemnify the General Partners. The General Partners of each of the CPA(R) Partnerships have, under most circumstances, no liability to its CPA(R) Partnership for acts or omissions it undertakes when performed in good faith, in a manner reasonably believed to be within the scope of its authority and in the best interests of the CPA(R) Partnership. Each General Partner also has, under specified circumstances, a right to be reimbursed by its CPA(R) Partnership for liability, loss, damage, costs and expenses it incurs by virtue of serving as General Partner. Although the standards are expressed somewhat differently, there are similar protections from liability available to Directors and officers of the Company, when acting on behalf of the Company, and rights of Directors and officers to seek indemnification from the Company. The Company believes that the scope of the liability and indemnification provisions in the organizational documents provides protection against claims for personal liability against the Company's Directors and officers which is comparable to, though not identical with, the protections afforded to the General Partners and their Affiliates under the Partnership Agreements. In the consolidation, the Company will be assuming all of the existing and contingent liabilities of the participating partnerships, including their obligations to indemnify the General Partners. 75 87 ANTITAKEOVER PROVISIONS CPA(R) PARTNERSHIPS Changes in management can be effected only by removal of the General Partners, which action requires a majority vote of Unitholders. Due to transfer restrictions in the Partnership Agreements, the General Partners may restrict transfers of the Units and, in particular, affect whether the transferees have voting rights. An assignee of a Unit may not become a substitute Unitholder, entitling him or her to vote on matters that may be submitted to the Unitholders for approval, unless such substitution is consented to by the General Partners, which consent, in the General Partners' absolute discretion, may be withheld. The General Partners may exercise this right of approval to deter, delay or hamper attempts by persons to acquire a majority interest of the Unitholders. COMPANY The Organizational Documents contain a number of provisions that may have the effect of delaying or discouraging a hostile takeover of the Company. The provisions include, among others, the following: (i) the power of the Board of Directors to issue additional equity interests in the Company and (ii) the classified Board of Directors, wherein only one-third of Directors are re-elected to the Board in any given year and Directors serve three-year terms. In addition, the Company has a Shareholder Rights Plan. See "DESCRIPTION OF SHARES." Certain provisions of the Governing Documents of the Partnerships and the Company could be used to deter attempts to obtain control of the CPA(R) Partnerships and the Company in transactions not approved by the General Partners and the Board of Directors, respectively. Because the Listed Shares are freely transferable and the Company's Directors are elected by the Shareholders, there is a greater likelihood of changes in control in the case of the Company than the CPA(R) Partnerships, notwithstanding those provisions described above. VOTING RIGHTS CPA(R) PARTNERSHIPS Unitholders may, by a majority vote, without the concurrence of the General Partners, amend the Partnership Agreement, dissolve the CPA(R) Partnership, remove and/or elect a General Partner and approve or disapprove the sale of all or substantially all of the CPA(R) Partnership's assets. Unitholders may not exercise these rights in a way to extend the term of the CPA(R) Partnerships, change the CPA(R) Partnerships to general partnerships, change the limited liability of the Unitholders or affect the status of the CPA(R) Partnerships for federal income tax purposes. COMPANY The Company's Board of Directors consists of three classes. Holders of Listed Shares are entitled to elect one class of the Company's Board of Directors at each annual meeting of the Company. The Organizational Documents grant holders of Listed Shares the non-exclusive right, without the approval of the Board of Directors, to amend the Organizational Documents, dissolve the Company, vote to remove members of the Board of Directors and approve or disapprove the sale of substantially all of the Company's assets. In addition, certain other actions may not be taken by the Board of Directors without the approval of a majority vote of the holders of Listed Shares, including (i) amending the Certificate of Formation, (ii) amending certain of the Bylaw provisions, (iii) merging the Company with or into another entity, unless the Company is the surviving entity and certain other conditions are met, (iv) selling all or substantially all of the Company's assets and (v) dissolving the Company. 76 88 Holders of Listed Shares have different voting rights, including the right to elect Directors on a periodic basis, than the voting rights afforded to Unitholders. LIMITED LIABILITY OF INVESTORS CPA(R) PARTNERSHIPS Under each of the CPA(R) Partnership Agreements and applicable state law, assuming the Unitholders do not participate in the control of the business of a CPA(R) Partnership, the liability of Unitholders, as Unitholders, for the CPA(R) Partnership's debts and obligations is limited to the amount of their investment in the CPA(R) Partnership, together with an interest in undistributed income, if any. The Units are fully paid and non-assessable (subject to the obligation of a Unitholder to repay wrongful distributions). COMPANY Under Delaware law, Shareholders will not be liable for Company debts or obligations. Listed Shares, upon issuance, will be fully paid and non-assessable (subject to the obligation of a Shareholder to repay wrongful distributions). The limitation on personal liability of Shareholders of the Company is substantially the same as that of Unitholders in the CPA(R) Partnerships. LIQUIDITY CPA(R) PARTNERSHIPS The Units may not be transferred if such transfers would result in the termination of the CPA(R) Partnership under Section 708 of the Code or cause the CPA(R) Partnership to lose its classification as a "partnership" for federal income tax purposes. In addition, no transferee of a Unit has the right to become a substitute Unitholder (entitling such person to vote on matters submitted to a vote of the Unitholders) unless, among other things, such substitution is approved by the General Partners, who may grant or withhold such consent in their absolute discretion. In view of the foregoing restrictions, it was never intended that the Units would be actively traded, and no broad-based secondary market for the Units exists. COMPANY The Listed Shares are freely transferable and listed on the NYSE. See "RISK FACTORS." The Units constitute illiquid investments and Unitholders may find it difficult to dispose of their Units, if they wish to do so, or may be obligated to sell the Units at substantial discounts to facilitate the sale. In contrast, the Listed Shares will be listed on the NYSE. 77 89 VOTING PROCEDURES THE VOTE OF EACH UNITHOLDER IS IMPORTANT. EACH UNITHOLDER IS URGED TO MARK, DATE AND SIGN THE CONSENT CARD AND RETURN IT IN THE ENCLOSED ENVELOPE. TIME OF VOTING The vote of the Unitholders with respect to the Consolidation will be tabulated on December 16, 1997, unless such date is extended by the General Partners in their sole discretion. The votes will be tabulated by ChaseMellon, which is not affiliated with the Company, the CPA(R) Partnerships or the General Partners. See "Consent Card and Vote Required." RECORD DATE AND OUTSTANDING UNITS The Consolidation is being submitted for approval to those Persons holding Units as of the Record Date. The Record Date is October 7, 1997 for all CPA(R) Partnerships. At the Record Date, the following number of Units were held of record by the number of Unitholders indicated below:
NUMBER OF UNITS NUMBER OF PARTNERSHIP HELD OF RECORD UNITHOLDERS ---------------------------------- --------------- --------------------- CPA(R):1.......................... 40,000 1,718 CPA(R):2.......................... 54,900 1,977 CPA(R):3.......................... 66,000 2,470 CPA(R):4.......................... 85,528 3,045 CPA(R):5.......................... 113,200 3,575 CPA(R):6.......................... 47,930 2,885 CPA(R):7.......................... 45,209 2,281 CPA(R):8.......................... 67,582 3,627 CPA(R):9.......................... 59,918 3,342
Each Unitholder is entitled to one vote for each Unit held. Accordingly, the number of Units entitled to vote with respect to the Consolidation is equivalent to the number of Units held of record at the Record Date. APPROVAL DATE The Prospectus and form of Consent Card constitutes the General Partners' notice of the Consolidation. Each Unitholder has until 5:00 p.m., New York Time, on December 16, 1997, unless extended by the General Partners in their sole discretion (the "Approval Date") to inform the General Partners whether such Unitholder wishes to approve or disapprove of his CPA(R) Partnership's participation in the Consolidation. The General Partners ask that each Unitholder vote by completing and returning the form of Consent Card accompanying this Prospectus in the manner described below. A vote to approve a CPA(R) Partnership's participation in the Consolidation will constitute a vote to adopt the related CPA(R) Partnership Agreement Amendments to the CPA(R) Partnership Agreements, while a vote against a CPA(R) Partnership's participation in the Consolidation will constitute a vote against the amendments. The General Partners may decide not to pursue the Consolidation with respect to any CPA(R) Partnership for any reason and at any time before it becomes effective, whether before or after approval by the Unitholders. CONSENT CARD AND VOTE REQUIRED Unitholders who wish to vote FOR the Consolidation, all related transactions and the Partnership Agreement Amendments should complete, sign and return the Consent Card relating to their Units which accompanies this Prospectus. Each Unitholder's attention is directed to the Consent Card and Election Form contained in this Prospectus as Appendix C. A Consent Card, Election Form and a letter of instructions have 78 90 been prepared for each Unitholder. Consent Cards and Election Forms must be delivered in person or by mail or by other delivery service to ChaseMellon at the following address on, or prior to, the Approval Date: ChaseMellon Shareholder Services L.L.C. 85 Challenger Road Ridgefield Park, NJ 07660 Approval of the Consolidation by a CPA(R) Partnership requires the vote of Unitholders holding a majority of the outstanding Units of the CPA(R) Partnership as of the Record Date. An automated system administered by ChaseMellon will tabulate the votes. Abstentions will be tabulated with respect to the Consolidation and related matters. Broker non-votes are not counted for purposes of determining whether the Consolidation and related proposals have been approved. Abstentions and broker non-votes will have the effect of a vote against the Consolidation. The following number of Units must be voted in favor of the Consolidation for it to be approved by each respective CPA(R) Partnership:
NUMBER OF UNITS REQUIRED FOR PARTNERSHIP APPROVAL OF CONSOLIDATION --------------------------------------------- ---------------------------- CPA(R):1..................................... 20,001 CPA(R):2..................................... 27,451 CPA(R):3..................................... 33,001 CPA(R):4..................................... 42,765 CPA(R):5..................................... 56,601 CPA(R):6..................................... 23,966 CPA(R):7..................................... 22,605 CPA(R):8..................................... 33,792 CPA(R):9..................................... 29,960
A Unitholder who signs and returns the Consent Card without indicating a vote will be deemed to have voted FOR the Consolidation and for the adoption of the Partnership Agreement Amendments and will receive Listed Shares, unless he elects on his Election Form to receive Subsidiary Partnership Units. Unitholders who wish to vote AGAINST the Consolidation should also complete a Consent Card. The failure to return a Consent Card will have the same effect as abstaining from voting with respect to the Consolidation. Unitholders of a CPA(R) Partnership which approves and participates in the Consolidation will receive Listed Shares of the Company, unless the Unitholder elects to receive Subsidiary Partnership Units. A Unitholder who abstains from voting by indicating his abstention on the Consent Card will also receive Listed Shares, unless the Unitholder elects to receive Subsidiary Partnership Units as indicated on the on his Election Form. A Unitholder who does not return the Consent Card will receive Listed Shares if his CPA(R) Partnership participates in the Consolidation. All questions as to the form of all documents and the validity (including time of receipt) of all approvals and elections will be determined by the General Partners, and such determinations shall be final and binding. The General Partners reserve the absolute right to waive any of the conditions of the Consolidation or any defects or irregularities in any approval of the Consolidation or preparation of the form of Consent Card. The General Partners' interpretation of the terms and conditions of the Consolidation will be final and binding. The General Partners shall be under no duty to give notification of any defects or irregularities in any approval of the Consolidation or preparation of the form of Consent Card and Election Form and shall not incur any liability for failure to give such notification. REVOCABILITY OF CONSENT Unitholders may withdraw or revoke their consent at any time prior to the Approval Date. To be effective, a written, telegraphic, fax or telex notice of revocation or withdrawal of the Consent Card must be received by no later than the Approval Date, addressed as follows: ChaseMellon Shareholder Services L.L.C., 79 91 85 Challenger Road, Ridgefield Park, NJ 07660. A notice of revocation or withdrawal must specify the Unitholder's name and the name of the CPA(R) Partnership to which such revocation or withdrawal relates. SOLICITATION OF VOTES; SOLICITATION EXPENSES Votes of Unitholders may be solicited by the management of the General Partners or by third parties. Costs of solicitation will be allocated as set forth in "BACKGROUND AND REASONS FOR THE CONSOLIDATION -- Consolidation Expenses." No party will receive any compensation contingent upon solicitation of a favorable vote. Shareholder Communications Corporation ("SCC") will be engaged to assist in the solicitation of consents. As the end of the solicitation period approaches, certain Unitholders may receive a call from a representative of SCC if the General Partners of the CPA(R) Partnerships have not yet received their vote. Authorization to permit SCC to execute proxies may be obtained by telephonic transmitted instructions from Unitholders at the sole discretion of the General Partners. Proxies that are obtained telephonically will be recorded in accordance with the procedures set forth below. The General Partners believe that these procedures are reasonably designed to ensure that the identity of the Unitholder casting the vote is accurately determined and that the voting instructions of the Unitholder are accurately determined. In all cases where a telephonic proxy is solicited, the SCC representative is required to ask the Unitholder for such Unitholder's full name, address, social security or employer identification number, title (if the person giving the proxy is authorized to act on behalf of an entity, such as a corporation) and the number of Units owned and to confirm that the Unitholder has received the Prospectus in the mail. If the information solicited agrees with the information provided to SCC by the General Partners, then the SCC representative has the responsibility to explain the process, read the proposals listed on the Consent Card and ask for the Unitholder's instructions on each proposal. The SCC representative, although he is permitted to answer questions about the process, is not permitted to recommend to the Unitholder how to vote, other than to read any recommendation set forth in the proxy statement. SCC will record the Unitholder's instructions on the card. Within 72 hours, SCC will send the Unitholder a letter or mailgram to confirm the Unitholder's vote and asking the Unitholder to call SCC immediately if the Unitholder's instructions are not correctly reflected in the confirmation. If a Unitholder wishes to participate in the solicitation, but does not wish to give a consent by telephone, such Unitholder may still submit the Consent Card originally sent with the Prospectus. Any consent given by a Unitholder, whether in writing or by telephone, is revocable. A Unitholder may revoke the accompanying consent or a consent given telephonically at any time prior to its use by filing with the General Partners a written revocation or duly executed proxy bearing a later date. ALTERNATIVES AVAILABLE TO UNITHOLDERS WHO OBJECT TO THE CONSOLIDATION Unitholders may vote against the Consolidation. If the holders of a majority of the outstanding Units in the CPA(R) Partnerships representing the Minimum Participation Amount do not approve the Consolidation, the Consolidation will not be completed. Unitholders will retain their current CPA(R) Partnership Units if a majority of that CPA(R) Partnership's Unitholders vote against the Consolidation. Even if the Consolidation is completed, a particular CPA(R) Partnership will not participate in the Consolidation if the holders of at least a majority of the outstanding Units in that CPA(R) Partnership do not approve the Consolidation. Rather, that CPA(R) Partnership will continue to operate as a separate legal entity with its own assets and liabilities, and its investment objectives, policies and restrictions will not change. As a result, the Unitholders of that CPA(R) Partnership will retain their current interest in the CPA(R) Partnership. Unitholders may elect to receive Subsidiary Partnership Units. Subsidiary Partnership Units have been structured to allow Unitholders to retain an investment that provides substantially the same economic interests and legal rights as his investment in a CPA(R) Partnership. 80 92 UNITHOLDER NAMES AND ADDRESSES Under Rule 14a-7 of the Exchange Act, the CPA(R) Partnerships are obligated, upon the written request of a Unitholder, to deliver to the requesting Unitholder: (i) a statement of the approximate number of Unitholders in each CPA(R) Partnership and (ii) the estimated cost of mailing a proxy statement, form of proxy or other similar communication to such Unitholders. In addition, pursuant to Rule 14a-7, a Unitholder has the right, at his option, either: (i) to have his CPA(R) Partnership mail (at the Unitholder's expense) copies of any proxy statement, proxy form or other soliciting material furnished by the Unitholder to the CPA(R) Partnership's Unitholders designated by the Unitholder or (ii) to have the CPA(R) Partnership deliver, within five business days of the receipt of the request, a reasonably current list of the names, addresses and class of Units held by a CPA(R) Partnership's Unitholders, which list shall be updated as often as practicable prior to the record date for Unitholders as to the matters contemplated in this Prospectus. NO RIGHT OF APPRAISAL Unitholders of a Participating Partnership who ABSTAIN or vote AGAINST the Consolidation will not be entitled to dissenters' or appraisal rights under the Partnership Agreements, or the Delaware or the California Partnership Law. Such rights, when they exist, give the holders of securities the right to surrender such securities for an appraised value in cash, if they oppose a merger or similar reorganization. No such rights will be provided by the CPA(R) Partnerships or the Company. Additionally, the common law of both Delaware and California imposes fiduciary duties of care, loyalty, good faith and fair dealing on the General Partners in effecting or attempting to effect the Consolidation. AMENDMENTS TO PARTNERSHIP AGREEMENTS The Partnership Agreements do not specifically address the merger of the CPA(R) Partnerships. The General Partners are, therefore, proposing to amend the Partnership Agreements to include specific provisions authorizing the Consolidation and the transactions related thereto (the "Partnership Agreement Amendments"). The proposed Partnership Agreement Amendments expressly authorize all actions necessary to successfully accomplish the Consolidation. Unitholders voting in favor of their CPA(R) Partnership's participation in the Consolidation will also have voted in favor of the proposed CPA(R) Partnership Agreement Amendments. Since a CPA(R) Partnership's participation in the Consolidation and the approval of the CPA(R) Partnership Agreement Amendments both require approval of Unitholders holding a majority of outstanding Units of the CPA(R) Partnership, the Partnership Agreement Amendments will be effective as to each CPA(R) Partnership participating in the Consolidation. See "THE CONSOLIDATION -- Amendments to the Partnership Agreements." ISSUANCE OF CERTIFICATES UNITHOLDERS SHOULD NOT SEND ANY CERTIFICATES WITH THE ENCLOSED CONSENT. Promptly after the Effective Time, the Company will cause to be mailed to all Unitholders of record who will receive Shares in the Consolidation a certificate for the number of Listed Shares to be received by each Unitholder. Each CPA(R):4 Unitholder will be required to return his CPA(R):4 Partnership certificate or a lost certificate affidavit. No certificates will be issued to holders of Subsidiary Partnership Units. After the Effective Time, there will be no further registration of transfers of Units that were issued and outstanding immediately before such time and that were converted or exchanged in the Consolidation for Shares. 81 93 INTERESTS OF CERTAIN PERSONS IN THE CONSOLIDATION AND CONFLICTS OF INTEREST A number of conflicts of interest are inherent in the relationships among the CPA(R) Partnerships, the General Partners and the Unitholders. In recognition of these conflicts and the resulting need to independently determine that the Consolidation is in the best interest of the Unitholders, the General Partners engaged the Independent Appraiser to render the Fairness Opinion and to independently determine the fair value of the Properties. Certain conflicts of interest are summarized below. SUBSTANTIAL BENEFITS TO GENERAL PARTNERS The General Partners have participated in the initiation and structuring of the Consolidation and will realize substantial economic benefits if the Company is able to proceed with and consummate the Consolidation as to some or all of the CPA(R) Partnerships. For example, if the Consolidation is consummated, the General Partners will receive 733,134 Listed Shares in exchange for that portion of their general partner interest which represents the General Partners' share of the appreciation of properties owned by the CPA(R) Partnerships. Additionally, if the Consolidation is completed, W.P. Carey & Co. will receive compensation for investment banking services in connection with the Consolidation in the form of warrants to purchase Listed Shares. If all the CPA(R) Partnerships participate in the Consolidation, W.P. Carey & Co. will receive warrants to purchase 2,284,800 Listed Shares at $21 per Share and 725,930 Listed Shares at $23 per Share. The warrants will be exercisable for 10 years generally beginning one year after the date the Consolidation is completed. Because the General Partners have a financial interest in the consummation of the Consolidation, there is an inherent conflict of interest in their structuring of the terms and conditions of the Consolidation, and the manner in which the Consolidation has been structured might have been different if structured by persons having no financial interest in whether or not the Consolidation proceeded. Certain of the potential benefits to the General Partners from the Consolidation and the inherent conflicts related thereto are reviewed below. A transaction involving the purchase, financing, lease and sale of any Property by the Company may result in the immediate realization by the Manager and its Affiliates of substantial commissions, fees, compensation and other income. Subject to the Management Agreement, the Manager has discretion with respect to all decisions relating to the occurrence and terms of any such transaction, except to the extent such transaction involves Affiliates of the Manager, in which case the allocation of such transaction must be approved by a majority of the Independent Directors. Potential conflicts may arise in connection with the determination by the Manager (on behalf of the Company) of whether to hold or sell a Property, as such determination could impact the timing and amount of fees payable to the Manager. The Company may purchase, sell or finance Properties through certain Affiliates of the Manager engaged in the real estate brokerage business or through other Affiliates of the Company. Through the Consolidation, the Company will ensure continuity of the business established by the General Partners. The Properties will continue to be managed by Affiliates of the General Partners, as long as the Company holds such investments and the Manager is retained by the Company. Furthermore, the proceeds from the sale of the Properties can be reinvested by the Company, and the Manager can manage the properties purchased with such proceeds. The Company will, therefore, afford ongoing employment opportunities for executive management and others employed to assist with the administration and day-to-day operations of the CPA(R) Partnerships. Absent the creation of an infinite-life vehicle to hold these investments, the CPA(R) Partnerships would have been dissolved and their assets sold, and W.P. Carey & Co.'s business would have declined to the extent that new assets would not have been brought under its control, management or ownership. For a comparison of the fees and other compensation paid to the General Partners in connection with their management of the CPA(R) Partnerships to the fees expected to be paid to the Manager, see "COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGER." 82 94 COMMON GENERAL PARTNERS W.P. Carey & Co. serves as the corporate general partner of CPA(R):1, CPA(R):2 and CPA(R):3; CCP serves as the corporate general partner of CPA(R):4, CPA(R):5 and CPA(R):6; Seventh Carey serves as the corporate general partner of CPA(R):7; Eighth Carey serves as the corporate general partner of CPA(R):8; and Ninth Carey serves as the corporate general partner of CPA(R):9. William P. Carey serves as a general partner of all of the CPA(R) Partnerships. The Boards of Directors of W.P. Carey & Co., CCP, Seventh Carey, Eighth Carey and Ninth Carey are comprised of the same persons, except that Stephen H. Hamrick serves as a Director of only Seventh Carey, Eighth Carey and Ninth Carey. The General Partners of each CPA(R) Partnership have an independent obligation to ensure that such CPA(R) Partnership's participation in the Consolidation is fair and equitable, considering all factors unique to such CPA(R) Partnership and without regard to whether the Consolidation is fair and equitable to any of the other participants (including other CPA(R) Partnerships in which such General Partners may also serve as general partners). The General Partners have sought to discharge faithfully this obligation to each of the CPA(R) Partnerships, but it should be borne in mind that each of the General Partners or their affiliates serves in a similar capacity with respect to the other CPA(R) Partnerships. If each of the CPA(R) Partnerships had separate general partners who did not serve in a similar capacity for any of the other CPA(R) Partnerships, these general partners would have had a totally independent perspective (not affected by a consideration of the interests of any of the other CPA(R) Partnerships) which might have led them to advocate positions during the negotiations and structuring of the Consolidation differently from those taken by the General Partners. LACK OF INDEPENDENT REPRESENTATION OF UNITHOLDERS While the Independent Appraiser has provided the Fairness Opinion, the CPA(R) Partnerships have not retained any outside representatives to act on behalf of the Unitholders in negotiating the terms and conditions of the Consolidation. An independent representative was not engaged because the General Partners believe that they can fairly represent the interests of the Limited Partners and because, if an independent representative had been retained for the CPA(R) Partnerships, either collectively or on an individual basis, the fees and expenses of the Consolidation would have been higher. No group of Unitholders was empowered to negotiate the terms and conditions of the Consolidation or to determine what procedures should be in place to safeguard the rights and interests of the Unitholders. In addition, no investment banker, attorney, financial consultant or expert was engaged to represent the interests of the Unitholders. The General Partners and the management of the General Partners have been the parties responsible for structuring all the terms and conditions of the Consolidation. Legal counsel engaged to assist with the preparation of the documentation for the Consolidation, including this Prospectus, was engaged by the General Partners and did not serve, or purport to serve, as legal counsel for the CPA(R) Partnerships or Unitholders. If another representative or representatives had been retained for the Unitholders, the terms of the Consolidation might have been different and, possibly, more favorable to the Unitholders. In particular, had separate representation for each of the CPA(R) Partnership been arranged by the General Partners, the terms of the Consolidation may have been different. While independent representatives were not engaged to represent the interests of the CPA(R) Partnerships in structuring the Consolidation, the General Partners believe the procedures used to protect the financial interests of the Unitholders are fair. For example, the General Partners agreed that the Listed Shares will be allocated among the CPA(R) Partnerships in accordance with their respective Total Exchange Values and within the CPA(R) Partnerships between Unitholders and the General Partners according to the provisions of each CPA(R) Partnership Agreement. Recognizing the inherent conflict of interest in having the General Partners establish these numbers independently (without active involvement from persons not having a financial interest in the Consolidation), they engaged the Independent Appraiser to value the real estate portfolios owned by each of the CPA(R) Partnerships. See "APPRAISALS AND FAIRNESS OPINION." FIDUCIARY DUTIES OF GENERAL PARTNERS The General Partners have fiduciary duties to the CPA(R) Partnerships and the Unitholders. The General Partners, in handling the affairs of the CPA(R) Partnerships, are expected to exercise good faith, care and 83 95 prudence and to act with a duty of loyalty to the Unitholders. Under these fiduciary duties, the General Partners are obligated to ensure that the CPA(R) Partnerships are treated fairly and equitably in transactions with third parties, especially where consummation of such transactions may result in the interests of General Partners being opposed to, or not totally in line with, the interests of the Limited Partners. Accordingly, the General Partners of the CPA(R) Partnerships are required to assess whether the Consolidation is fair and equitable, taking into account the unique characteristics of the CPA(R) Partnerships (such as the CPA(R) Partnerships' gross revenue and expenses, the prospects for increases or decreases in future cash flow affecting the value of its assets and the quality of the credit of the CPA(R) Partnerships' tenants) and the CPA(R) Partnerships' objectives with respect to the timing and manner of the liquidation of the CPA(R) Partnerships. FEATURES DISCOURAGING POTENTIAL TAKEOVERS Certain provisions in the Organizational Documents, as well as statutory rights under the LLCL, could be used by the Company's management to delay, discourage or thwart efforts of third parties to acquire control of, or a significant equity interest in, the Company. See "DESCRIPTION OF SHARES and Subsidiary Partnership Units -- Restricting Changes in Control and Business Combination Provisions." ALLOCATION OF SERVICES AND EXPENSES Personnel to be used by the Manager currently provide services related to the operation of other real estate entities affiliated with the Manager which will not be included in the Consolidation. These entities were formed by the General Partners and their Affiliates. If the Consolidation is consummated, employees of the Manager will provide services related to the operation of the Company and the Nonparticipating Partnerships and these other entities. As a result, possible conflicts of interest may arise regarding allocation of services of these employees between the Company and the Nonparticipating Partnerships and these other entities. Employees will continue to provide services directly related to the operations of these Nonparticipating Partnerships and the cost of such services will be reimbursable by the Nonparticipating Partnerships, all pursuant to the respective Partnership Agreements. In addition, although Mr. Carey will devote a substantial portion of his activities to the operations of the Company, he may remain involved in the business activities of the CPA(R) REITs and any future programs. There may be a conflict in the allocation of Mr. Carey's services between the Company and such entities. NON-ARM'S-LENGTH AGREEMENTS Except as otherwise provided below, all agreements and arrangements, including those relating to compensation, between the Company and the Manager or any of its Affiliates will not be the result of arm's-length negotiations. Certain provisions of the Organizational Documents, however, target generally potential conflicts which might otherwise result from such agreements and arrangements by, among other things, requiring that compensation to the Manager and its Affiliates be approved by a majority of the Independent Directors and that terms of future transactions with Affiliates be no less favorable to the Company than terms which could be obtained from unaffiliated entities providing similar services as an ongoing activity in the same geographical location. The initial Independent Directors were selected by W.P. Carey & Co. COMPETITION WITH THE COMPANY FROM AFFILIATES OF THE MANAGER IN THE PURCHASE, SALE, LEASE AND OPERATION OF PROPERTIES W.P. Carey & Co., its subsidiaries and Affiliates and William P. Carey currently manage or advise public and private real estate investment partnerships and REITs whose investment and rate of return objectives are similar to those of the Company. In addition, they expect to manage or advise, directly or through Affiliates, additional REITs and other investment entities. Therefore, those entities may be in competition with the Company with respect to properties, potential purchasers, sellers and lessees of properties and mortgage financing for Properties. The Manager will use best efforts to present suitable investments to the Company consistent with the investment procedures, objectives and policies of the Company. However, the Manager and its Affiliates are not restricted from advising or managing other entities, any of which may have investment objectives similar 84 96 to those of the Company. In the event a potential investment might be suitable for the Company and an Affiliate, the decision as to which entity will make the investment will be made by the Investment Committee. The Investment Committee serves as the investment committee of the CPA(R) REITs. The Investment Committee of the Manager will review the investment portfolios of each entity and other factors such as cash flow, the effect of the acquisition on the diversification of each entity's portfolio, the length of the term of the lease, renewal options, the estimated income tax effects of the purchase on each entity, the policies of each entity relating to leverage, the funds of each entity available for investment, the length of time such funds have been available for investment and the various ways in which the potential investment can be structured. Consideration will be given to joint ownership (e.g., tenancy-in-common or joint venture arrangement) of a particular property determined to be suitable for the Company and an Affiliate in order to achieve diversification of each entity's portfolio and efficient completion of an entity's portfolio. In any joint ownership, the investment of the investment entities will be on substantially the same economic terms and conditions, and each investment entity may have a right of first refusal to purchase the interest of the other if a sale of that interest is contemplated. To the extent that a particular property might be determined to be suitable for more than one investment entity, the investment will be made by the most appropriate investment entity after consideration of the factors identified above. The Company believes that there are currently a sufficient number of potential investments available to satisfy the investment policies of all investment entities for which the Manager and its Affiliates are responsible. See "RISK FACTORS -- Risks of Joint Ventures." ADJACENT PROPERTIES Although it is not expected to occur, if the Manager or any of its Affiliates acquires Properties that are adjacent to those of the Company, the value of such Properties may be enhanced by the interests of the Company. It also is possible that such Properties could be in competition with those of the Company for prospective tenants. FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNERS Under California and Delaware partnership law, the General Partners are accountable to the Limited Partners as fiduciaries and are required to exercise good faith and integrity in all their dealings in the Partnerships' affairs. The Partnership Agreements generally provide that the General Partners shall not have any liability, responsibility or accountability in damages or otherwise to any other Partner or CPA(R) Partnership for, and the CPA(R) Partnerships agree to indemnify, pay, protect and hold harmless each General Partner (on the demand of and to the satisfaction of such General Partner) from and against, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, proceedings, costs, expenses and disbursements of any kind or nature whatsoever (including without limitation all costs and expenses of defense, appeal and settlement of any and all suits, actions or proceedings instituted against such General Partner or the CPA(R) Partnerships and all costs of investigation in connection therewith) (collectively, "Liabilities") which may be imposed on, incurred by, or asserted against such General Partner or a CPA(R) Partnership in any way relating to or arising out of, or alleged to relate to or arise out of, any action or inaction on the part of such Partnership or on the part of such General Partner as a general partner of a CPA(R) Partnership; provided, that a particular General Partner shall be liable, responsible and accountable and a CPA(R) Partnership shall not be liable to a particular General Partner, for any portion of such Liabilities resulting from such General Partner's own negligence misconduct, fraud, bad faith or other breach of fiduciary duty to a CPA(R) Partnership or any Partner. As a result, Unitholders might have a more limited right of action in certain circumstances than they would have in the absence of such a provision in a Partnership Agreement. The Partnership Agreements also provide that if any action, suit or proceeding shall be pending or threatened against a CPA(R) Partnership or any General Partner relating to or arising, or alleged to relate to or arise, out of any such action or inaction, each General Partner shall have the right to employ, at the expense of a CPA(R) Partnership, separate counsel of such General Partner's choice in such action, suit or proceeding. The satisfaction of the obligations of a CPA(R) Partnership under the indemnification provisions of a CPA(R) 85 97 Partnership Agreement will be from and limited to the assets of the CPA(R) Partnership, and no Partner shall have any personal liability on account thereof. INDEMNIFICATION OF DIRECTORS AND OFFICERS OF THE COMPANY The Directors and officers of the Company, in exercising the powers and responsibilities of managing the Company, owe the Company and its Shareholders a duty of care and a duty of loyalty. However, under the so-called "business judgment rule," which could apply by analogy to the Directors and officers of the Company, the Directors and officers of the Company may not be liable for errors in judgment or other acts or omissions made in good faith which are done in a manner they believe to be in the best interests of the Company and are performed with the care that an ordinarily prudent person in a like position will use under similar circumstances. In the event any legal action were brought against the Directors or officers of the Company, they may be able to assert defenses based on the business judgment rule. According to the Organizational Documents, all Directors and officers of the Company are entitled to indemnification from the Company for any loss, damage or claim (including any reasonable attorney's fees incurred by such person in connection therewith) due to any act or omission made by him, except in the case of fraudulent or illegal conduct of such person, provided that any indemnity shall be paid out of, and to the extent of, the assets of the Company only (or any insurance proceeds available therefor) and no Shareholder shall have any personal liability on account thereof. The termination of any action, suit or proceeding by judgment, order, settlement or conviction or upon a plea of nolo contendere or its equivalent, shall not of itself create a presumption that the Director or officer acted fraudulently or illegally. The indemnification provided by the Organizational Documents is not deemed to be exclusive of any other rights to which those indemnified may be entitled under any agreement, vote of Shareholders or Directors or otherwise and shall inure to the benefit of the heirs, executors and administrators of such a person. Any repeal or modification of the indemnification provisions contained in the Organizational Documents will not adversely affect any right or protection of a Director or officer of the Company existing at the time of such repeal or modification. The Company will enter into indemnification agreements with each of its Directors. The indemnification agreements will require, among other things, that the Company indemnify its officers and Directors to the fullest extent permitted by Delaware law and advance to the Directors all related expenses, subject to reimbursement if it is subsequently determined that indemnification is not permitted. The Company must also indemnify and advance all expenses incurred by officers and Directors seeking to enforce their rights under the indemnification agreements and cover officers and Directors under the Company's Directors and officers liability insurance. Although the form of indemnification agreement offers substantially the same scope of coverage afforded by provisions in the Organizational Documents, it provides greater assurance to officers and Directors that indemnification will be available, because, as a contract, it cannot be modified unilaterally in the future by the Board of Directors or by the Shareholders to eliminate the rights that it provides. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to Directors, officers or persons controlling the Company pursuant to any provisions described in this Consent Solicitation/Prospectus, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. DIRECTORS AND OFFICERS INSURANCE According to the Organizational Documents, the Company may, if the Directors of the Company deem it appropriate in their sole discretion, obtain insurance for the benefit of the Company's Directors and officers, relating to the liability of such persons. The Directors and officers liability insurance would insure (i) the officers and Directors of the Company from any claim arising out of an alleged wrongful act by such persons while acting as Directors and officers of the Company and (ii) the Company to the extent that it has indemnified the Directors and officers for such loss. 86 98 BUSINESS AND PROPERTIES The CPA(R) Partnerships and the Company (or their representatives) from time to time may make or may have made certain forward-looking statements, whether orally or in writing, including, without limitation, statements in this Prospectus and otherwise, regarding the business plan of the CPA(R) Partnerships and the Company, estimates of future cash flows of the Company, the types of investments to be made by the Company and hypothetical distribution and returns to Unitholders. Such statements are qualified in their entirety by reference to, and are accompanied by, the factors disclosed under the heading "RISK FACTORS." Such factors could cause actual results to differ materially from those projected in such forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. THE COMPANY'S BUSINESS The Company's objective is to increase shareholder value and its Funds from Operations through prudent management of its real estate assets and opportunistic investments. The Company intends to capitalize on its status as a publicly-traded real estate investment company to take immediate advantage of the significant opportunities to make net lease and other real estate investments at attractive returns. The Company expects to evaluate a number of different opportunities in a variety of property types and geographic locations and to pursue the most attractive based upon its analysis of the risk/return tradeoffs. The Company's business plan is an expansion of the business plans of the CPA(R) Partnerships. In addition to acquiring additional net leased properties, the Company intends to: - Seek additional investment and other opportunities that leverage core management skills (which include in-depth credit analysis, asset valuation and sophisticated structuring techniques); - optimize the current portfolio of properties through expansion of existing properties, timely dispositions and favorable lease modifications; - utilize its enhanced size and access to capital to refinance existing debt; and - increase the Company's access to capital. The Company expects to be a perpetual life, growth-oriented company and, therefore, instead of selling all of its properties as the CPA(R) Partnerships had been designed to do, will continue to own properties as long as it believes ownership helps attain the Company's objectives. The Board of Directors will have the ability to change investment financing, distribution and other policies of the Company without the consent of the Shareholders. MANAGEMENT OF THE COMPANY The Manager will provide both strategic and day-to-day management for the Company, including research, investment analysis, acquisition and development services, asset management, capital funding services, disposition of assets and administrative services. The Manager has dedicated senior executives in each area of its organization so that the Company will function as a fully integrated operating company. ACQUISITION STRATEGIES The Manager has a well-developed process with established procedures and systems for acquiring net leased property. As a result of its reputation and experience in the industry and the contacts maintained by its professionals, the Manager has a presence in the net lease market that has provided it with the opportunity to invest in a significant number of transactions on an ongoing basis. The Company seeks to utilize the Manager's presence in the net lease market to acquire additional properties in transactions with both new and current tenants. In evaluating opportunities for the Company, the Manager carefully examines the credit, management and other attributes of the tenant and the importance of the property under consideration to the tenant's operations. Careful credit analysis is a crucial aspect of every transaction. The Company believes that the Manager has one of the most extensive underwriting processes in the industry and has an experienced staff of professionals involved with underwriting transactions. The Manager seeks to identify those prospective tenants 87 99 whose creditworthiness is likely to improve over time. The Company believes that the experience of its management in structuring sale-leaseback transactions to meet the needs of a prospective tenant enables the Manager to obtain a higher return for a given level of risk than would typically be available by purchasing a property subject to an existing lease. The Manager's strategy in structuring its net lease investments for the Company is to: (i) combine the stability and security of long-term lease payments, including rent increases, with the appreciation potential inherent in the ownership of real estate; (ii) enhance current returns by utilizing varied lease structures; (iii) reduce credit risk by diversifying its investments by tenant, type of facility, geographic location and tenant industry; and (iv) increase potential returns by obtaining equity enhancements from the tenant when possible, such as warrants to purchase tenant common stock. FINANCING STRATEGIES Consistent with its investment policies, the Company intends to use leverage, when available on favorable terms. The Company also plans to have in place a credit facility, which it intends to use primarily to acquire additional properties and refinance existing debt. In addition, the Manager will continually seek opportunities and consider alternative financing techniques to refinance debt, reduce interest expense or improve its capital structure. TRANSACTION ORIGINATION In analyzing potential acquisitions, the Manager reviews and structures many aspects of a transaction, including the tenant, the real estate and the lease, to determine whether a potential acquisition can be structured to satisfy the Company's acquisition criteria. The aspects of a transaction which are reviewed and structured by the Manager include the following: - Tenant Evaluation. The Manager subjects each potential tenant to an extensive evaluation of its credit, management, position within its industry, operating history and profitability. The Manager seeks tenants it believes will have stable or improving credit. By leasing properties to such tenants, the Company can generally charge rent that is higher than the rent charged to tenants with recognized credit and, thereby, enhance its current return from such properties as compared with properties leased to companies whose credit potential has already been recognized by the market. Furthermore, if a tenant's credit does improve, the value of the Company's properties leased to such tenants will likely increase (if all other factors affecting value remain unchanged). The Manager may also seek to enhance the likelihood of a tenant's lease obligations being satisfied, such as through a letter of credit or a guaranty of lease obligations from the tenant's corporate parent. Such credit enhancement provides the Company with additional financial security. - Leases with Increasing Rents. The Manager seeks to include clauses in the Company's leases that provide for increases in rent over the term of the leases. These increases are generally tied to increases in certain indices such as the consumer price index, in the case of retail stores participation in gross sales above a stated level, mandated rental increases on specific dates and by other methods. The Company seeks to avoid entering into leases that provide for contractual reductions in rents during their primary term. - Properties Important to Tenant Operations. The Manager, on behalf of the Company, generally seeks to acquire properties with operations that are essential or important to the ongoing operations of the tenant. The Company believes that such properties provide better protection in the event that a tenant files for bankruptcy, because leases on properties essential or important to the operations of a bankrupt tenant are less likely to be rejected and, thereby, terminated by a bankrupt tenant. The Manager also seeks to assess the income, cash flow and profitability of the business conducted at the property, so 88 100 that, if the tenant is unable to operate its business, the Company can either continue operating the business conducted at the property or re-lease the property to another entity in the industry which can operate the property profitably. - Lease Provisions that Enhance and Protect Value. When appropriate, the Manager attempts to include provisions in the Company's leases that require the Company's consent to certain tenant activity or require the tenant to satisfy certain operating tests. These provisions include, for example, operational and financial covenants of the tenant, prohibitions on a change in control of the tenant and indemnification from the tenant against environmental and other contingent liabilities. Including these provisions in its leases enables the Company to protect its investment from changes in the operating and financial characteristics of a tenant that may impact its ability to satisfy its obligations to the Company or could reduce the value of the Company's Properties. - Diversification. The Manager attempts to diversify the Company's portfolio of properties to avoid dependence on any one particular tenant, type of facility, geographic location and tenant industry. By diversifying its portfolio, the Company reduces the adverse effect on the Company of a single underperforming investment or a downturn in any particular industry. The Manager employs a variety of other strategies and practices in connection with the Company's acquisitions. These strategies include attempting to obtain equity enhancements in connection with transactions. Typically, such equity enhancements involve warrants to purchase stock of the tenant to which the property is leased or the stock of the parent of the tenant. In certain instances, the Company grants to the tenant a right to purchase the property leased by the tenant, but generally the option purchase price will be not less than the fair market value of the property. The Manager's practices include performing evaluations of the physical condition of properties and performing environmental surveys in an attempt to determine potential environmental liabilities associated with a property prior to its acquisition. ACQUISITION AND UNDERWRITING PROCESS The Manager's Acquisition and Asset Management Department has the primary responsibility for the origination and negotiation of acquisitions of properties. Members of this Department will identify potential acquisitions and conduct negotiations with sellers and tenants. Members of the Acquisition and Asset Management Department generally structure the terms of any financing the Company may use to acquire a property. As a transaction is structured, it is evaluated by the Chairman of the Investment Committee with respect to the potential tenant's credit, business prospects, position within its industry and other characteristics important to the long-term value of the property and the capability of the tenant to meet its lease obligations. Before a property is acquired, the transaction is reviewed by the Investment Committee to ensure that it satisfies the Company's investment criteria. Aspects of the transaction that are typically reviewed by the Investment Committee include the expected financial returns, the creditworthiness of the tenant, the real estate characteristics and the lease terms. The Investment Committee is not directly involved in originating or negotiating potential acquisitions, but instead functions as a separate and final step in the acquisition process. The Manager places special emphasis on having experienced individuals serve on its Investment Committee and does not invest in a transaction unless it is approved by the Investment Committee. The Company believes that the Investment Committee review process gives it a unique, competitive advantage over other unaffiliated net lease companies because of the substantial experience and perspective that the Investment Committee has in evaluating the blend of corporate credit, real estate and lease terms that combine to make an acceptable risk. The following people serve on the Investment Committee: - George E. Stoddard, Chairman, was formerly responsible for the direct corporate investments of The Equitable Life Assurance Society of the United States and has been involved with the CPA(R) net lease funds for over 16 years. 89 101 - Frank J. Hoenemeyer, Vice Chairman, was formerly Vice Chairman, Director and Chief Investment Officer of The Prudential Insurance Company of America. As Chief Investment Officer, Mr. Hoenemeyer was responsible for all of Prudential's investments, including stocks, bonds, private placements, real estate and mortgages. - Lawrence R. Klein is Benjamin Franklin Professor of Economics Emeritus at the University of Pennsylvania and its Wharton School. Dr. Klein has been awarded the Alfred Nobel Memorial Prize in Economic Sciences and currently advises various governments and government agencies. The Company invests in properties subject to Triple Net Leases (i.e., leases in which the tenant is responsible for real estate taxes and assessments, repairs and maintenance, insurance and other expenses relating to the property and has the duty to restore in case of casualty). However, the Company may, in its discretion, acquire properties subject to leases under which it has more responsibilities than would normally be the case under a Triple Net Lease and may make other investments. ASSET MANAGEMENT The Company believes that effective management of net lease assets is essential to maintain and enhance property values. Important aspects of asset management include restructuring transactions to meet the evolving needs of current tenants, re-leasing properties, refinancing debt, selling properties and knowledge of the bankruptcy process. The Company believes that the Manager's knowledgeable and experienced professionals are well qualified in these areas of asset management. The Manager will monitor, on an ongoing basis, compliance by tenants with their lease obligations and other factors that could affect the financial performance of any of its Properties. Such monitoring includes receiving assurances that each tenant has paid real estate taxes, assessments and other expenses relating to the Properties it occupies and confirming that appropriate insurance coverage is being maintained by the tenant. The Manager reviews financial statements of its tenants and undertakes regular physical inspections of the condition and maintenance of its Properties. Additionally, the Manager periodically analyzes each tenant's financial condition, the industry in which each tenant operates and each tenant's relative strength in its industry. 90 102 PROPERTIES Upon completion of the Consolidation (assuming participation by all CPA(R) Partnerships), the Company, through its subsidiaries, will own 198 Properties, 191 of which are currently net leased. The following table provides certain information with respect to the Properties.
PROPERTY SQUARE LESSEE LEASE GUARANTOR PROPERTY LOCATION TYPE(1) FOOTAGE ANNUAL RENT - -------------------------------- -------------------------------- ------------------- -------- --------- ----------- Santee Dairies, Inc.(2) Hughes Markets, Inc. Los Angeles, CA 1 390,000 $ 5,783,992 Dr Pepper Bottling Company of Dr Pepper Holdings, Inc. Irving, TX 2 459,497 Texas Houston, TX 2 262,450 --------- 721,947 $ 3,998,000 Detroit Diesel Corporation Detroit, MI 1 2,730,750 $ 3,658,059 Barnstead Thermolyne Corporation Sybron International Corporation Dubuque, IA 1 144,300 $ 452,956 Ormco Corporation Glendora, CA 3 25,000 $ 369,186 Erie Scientific Company Portsmouth, NH 1 95,000 $ 537,058 Nalge Company Rochester, NY 1 221,600 $ 985,378 Kerr Corporation Romulus, MI 1 220,000 $ 966,504 --------- ----------- 705,900 $ 3,311,082 Gibson Greetings, Inc. Cincinnati, OH 1 593,340 Berea, KY 2 601,500 --------- 1,194,840 $ 3,100,000 Stoody Deloro Stellite, Inc. Industry, CA 1 325,800 $ 2,234,190 Goshen, IN 1 54,270 $ 500,212 --------- ----------- 380,070 $ 2,734,402 AmerSig Southeast, Inc. Quebecor Printing Inc. Doraville, GA 1 432,559 $ 1,522,498 AS Memphis, Inc. Olive Branch, MS 1 270,500 $ 980,643 --------- ----------- 703,059 $ 2,503,141 Furon Company New Haven, CT 1 110,389 Mickleton, NJ 1 86,175 Aurora, OH 1 147,848 Mantua, OH 1 150,544 Bristol, RI 1 105,642 Aurora, OH 3 26,692 --------- 627,290 $ 2,416,049 Pre Finish Metals Incorporated Material Sciences Corporation Walbridge, OH 1 313,704 $ 2,263,395 AutoZone, Inc. Fleming Companies, Inc. 31 Locations: 4 185,990 $ 540,815 NC, TX, AL, GA, IL, $ 844,164 LA, MO AutoZone, Inc. 13 Locations: 4 70,425 $ 311,686 FL, LA, MO, NC, TN AutoZone, Inc. 11 Locations: 4 59,400 $ 529,760 FL, GA, NM, SC, --------- ----------- TX 315,815 $ 2,226,425 Orbital Sciences Corporation Chandler, AZ 1 280,000 $ 2,153,739 The Gap, Inc. Erlanger, KY 2 391,000 $ 1,225,994 2 362,750 $ 927,568 --------- ----------- 753,750 $ 2,153,562 Simplicity Manufacturing, Port Washington, WI 1 414,236 Inc.(A) Port Washington, WI 1 5,440 --------- 419,676 $ 1,996,712 AP Parts Manufacturing Company AP Parts International, Inc. Toledo, OH 1 1,160,000 Pinconning, MI 1 220,588 --------- 1,380,588 $ 1,836,534 NVR, Inc. NVR L.P. Thurmont, MD 1 150,468 $ 729,114 Farmington, NY 1 29,273 Pittsburgh, PA 3 42,000 $ 938,046 Pittsburgh, PA 3 36,000 --------- ----------- 257,741 $ 1,667,160 Unisource Worldwide, Inc. Commerce, CA 2 411,579 $ 1,292,800 Anchorage, AK 2 44,712 $ 312,700 --------- ----------- 456,291 $ 1,605,500 MAXIMUM TERM INCREASE LEASE (MONTH AND % OF LESSEE FACTOR EXPIRATION YEAR) REVENUES - -------------------------------- -------- ---------- ---------- -------- Santee Dairies, Inc.(2) Stated 4/98 10/98 7.61% Dr Pepper Bottling Company of Texas CPI 6/14 6/14 5.26% Detroit Diesel Corporation PPI 6/10 6/30 4.81% Barnstead Thermolyne Corporation CPI 12/13 12/38 Ormco Corporation CPI 12/13 12/38 Erie Scientific Company CPI 12/13 12/38 Nalge Company CPI 12/13 12/38 Kerr Corporation CPI 12/13 12/38 4.36% Gibson Greetings, Inc. Stated 11/13 11/23 4.08% Stoody Deloro Stellite, Inc. CPI 2/10 2/35 CPI 2/10 2/35 3.60% AmerSig Southeast, Inc. CPI 12/09 12/34 AS Memphis, Inc. CPI 6/08 6/33 3.29% Furon Company PPI 7/12 7/37 3.18% Pre Finish Metals Incorporated CPI 6/03 6/28 2.98% AutoZone, Inc. % Sales 1/11 1/26 % Sales 2/11 2/26 AutoZone, Inc. % Sales 8/12 8/37 AutoZone, Inc. % Sales 8/13 8/38 2.93% Orbital Sciences Corporation CPI 9/09 9/29 2.83% The Gap, Inc. CPI 2/03 2/43 CPI 2/03 2/43 2.83% Simplicity Manufacturing, Inc.(A) CPI 3/03 3/13 2.63% AP Parts Manufacturing Company CPI 12/07 12/22 2.42% NVR, Inc. CPI 3/14 3/39 CPI 3/14 3/18 2.19% Unisource Worldwide, Inc. Stated 4/10 4/30 Stated 12/09 12/29 2.11%
- --------------- (1) Property types are coded as follows: 1 -- Industrial/Manufacturing; 2 -- Distribution/Warehouse; 3 -- Office/Research; 4 -- Retail; 5 -- Hotel; 6 -- Day Care Center 91 103
PROPERTY SQUARE LESSEE LEASE GUARANTOR PROPERTY LOCATION TYPE(1) FOOTAGE ANNUAL RENT - -------------------------------- -------------------------------- ------------------- -------- --------- ----------- Cleo Inc. CSS Industries, Inc. Memphis, TN 1 1,006,566 $ 1,500,000 Peerless Chain Company Winona, MN 1 357,760 $ 1,463,425 Information Resources, Inc. Chicago, IL 3 159,600 (33.33% ownership) Chicago, IL 3 92,400 --------- 252,000 $ 1,457,788 Red Bank Distribution, Inc.(B) Cincinnati, OH 2 589,150 $ 1,400,567 Brodart Co. Williamsport, PA 3 309,030 Williamsport, PA 3 212,201 --------- 521,231 $ 1,344,764 Gould, Inc. Oxnard, CA 3 142,796 $ 1,215,000 Ohmeda Medical Devices Division Inc. (Sublessee) Datcon Instrument Company Lancaster, PA 1 70,712 $ 600,262 High Voltage Engineering Corp. Sterling, MA 1 70,000 $ 578,757 --------- ----------- (Lessee for Sterling/Guarantor 140,712 $ 1,179,019 for Lancaster) Seven Up Bottling Co. of St. KSG, Inc. St. Louis, MO 2 148,100 $ 1,132,310 Louis, United States Postal Service Bloomingdale, IL 3 116,000 $ 1,089,982 Duff-Norton Company, Inc. Yale International, Inc. Forrest City, AR 1 265,000 $ 1,020,717 Armel, Inc. Kinney Shoe Corporation Ft. Lauderdale, FL 2 80,540 $ 964,941 DeVlieg-Bullard, Inc. McMinnville, TN 1 276,991 Frankenmuth, MI 1 132,400 --------- 409,391 $ 953,803 General Electric Company King of Prussia, PA 3 88,578 $ 934,186 Wal-Mart Stores, Inc. West Mifflin, PA 4 118,125 $ 891,129 Anthony's Manufacturing Company, San Fernando, CA 1 95,420 Inc. San Fernando, CA 1 7,220 San Fernando, CA 1 40,285 San Fernando, CA 1 39,920 --------- 182,845 $ 876,000 Hotel Corporation of America Topeka, KS 5 117,590 $ 833,457 Holiday Inn Franchisee Varo Inc. Imo Industries, Inc. Garland, TX 1 150,203 $ 822,750 United Stationers Supply Co. United Stationers, Inc. New Orleans, LA 2 59,000 Memphis, TN 2 75,000 San Antonio, TX 2 63,321 --------- 197,321 $ 812,500 AT&T Corp. Bridgeton, MO 3 55,810 $ 794,764 Agency Management Service, Inc. Continental Casualty Company College Station, TX 3 98,552 $ 771,666 Winn-Dixie Montgomery, Inc. Winn-Dixie Stores, Inc. Montgomery, AL 4 32,690 $ 191,534 Panama City, FL 4 34,710 $ 170,399 Leeds, AL 4 25,600 $ 144,713 Bay Minette, AL 4 34,887 $ 128,472 Brewton, AL 4 30,625 $ 134,500 --------- ----------- 158,512 $ 769,618 General Cinema Corp. of Harcourt General, Inc. Burnsville, MN 4 31,837 $ 467,500 Minnesota General Cinema Corp. of Michigan Canton, MI 4 29,818 $ 233,750 --------- ----------- 61,655 $ 701,250 Western Union FSI Bridgeton, MO 3 78,080 $ 656,882 Exide Electronics Corporation Exide Electronics Group, Inc. Raleigh, NC 3 27,770 $ 572,130 Family Dollar Services, Inc. Salisbury, NC 2 311,182 $ 561,600 Swiss-M-Tex, L.P. Travelers Rest, SC 1 178,693 Liberty, SC 1 16,500 --------- 195,193 $ 546,095 Motorola, Inc. Urbana, IL 3 46,350 $ 540,000 EXCEL Teleservices, Inc. EXCEL Communications, Inc. Reno, NV 3 53,158 $ 532,800 MAXIMUM TERM INCREASE LEASE (MONTH AND % OF LESSEE FACTOR EXPIRATION YEAR) REVENUES - -------------------------------- -------- ---------- ---------- -------- Cleo Inc. CPI 12/05 12/15 1.97% Peerless Chain Company CPI 6/11 6/26 1.93% Information Resources, Inc. (33.33% ownership) CPI 10/10 10/15 1.92% Red Bank Distribution, Inc.(B) CPI 6/15 6/35 1.84% Brodart Co. CPI 6/08 6/28 1.77% Gould, Inc. Stated 11/99 11/19 1.60% Ohmeda Medical Devices Division Inc. (Sublessee) Datcon Instrument Company CPI 11/13 11/38 High Voltage Engineering Corp. CPI 11/13 11/38 (Lessee for Sterling/Guarantor 1.55% for Lancaster) Seven Up Bottling Co. of St. CPI 3/12 3/37 1.49% Louis, United States Postal Service Stated 4/06 4/06 1.43% Duff-Norton Company, Inc. CPI 12/12 12/32 1.34% Armel, Inc. CPI 9/01 9/16 1.27% DeVlieg-Bullard, Inc. CPI 4/06 4/26 1.26% General Electric Company Market 7/98 7/08 1.23% Wal-Mart Stores, Inc. CPI 1/07 1/37 1.17% Anthony's Manufacturing Company, Inc. CPI 5/07 5/12 1.15% Hotel Corporation of America Stated 9/03 9/03 1.10% Holiday Inn Franchisee Varo Inc. Stated 9/02 9/07 1.08% United Stationers Supply Co. CPI 3/10 3/30 1.07% AT&T Corp. Stated 11/01 11/11 1.05% Agency Management Service, Inc. Stated 10/98 10/03 1.02% Winn-Dixie Montgomery, Inc. % Sales 3/08 3/38 % Sales 3/08 3/38 % Sales 3/04 3/34 % Sales 6/07 6/37 % Sales 10/10 10/30 1.01% General Cinema Corp. of % Sales 7/06 7/31 Minnesota General Cinema Corp. of Michigan % Sales 7/05 7/30 0.92% Western Union FSI Stated 11/01 11/11 0.86% Exide Electronics Corporation CPI 7/06 7/31 0.75% Family Dollar Services, Inc. None 4/97 4/98 0.74% Swiss-M-Tex, L.P. CPI 8/07 8/31 0.72% Motorola, Inc. Stated 12/00 12/20 0.71% EXCEL Teleservices, Inc. Stated 8/06 8/16 0.70%
- --------------- (1) Property types are coded as follows: 1 -- Industrial/Manufacturing; 2 -- Distribution/Warehouse; 3 -- Office/Research; 4 -- Retail; 5 -- Hotel; 6 -- Day Care Center 92 104
PROPERTY SQUARE LESSEE LEASE GUARANTOR PROPERTY LOCATION TYPE(1) FOOTAGE ANNUAL RENT - -------------------------------- -------------------------------- ------------------- -------- --------- ----------- Penn Virginia Resources Penn Virginia Corporation Cuyahoga Falls, OH 1 80,445 Corporation Pennsylvania Crusher Corporation Broomall, PA 3 22,810 (Joint Tenants) Duffield, VA 3 12,804 --------- 116,059 $ 498,750 Titan Corporation (18.54% San Diego, CA 3 166,403 $ 485,084 ownership) Wozniak Industries, Inc. Schiller Park, IL 1 84,197 $ 452,400 Childtime Childcare, Inc. 12 Locations: 6 83,694 $ 413,638 (33.93% ownership) AZ, CA, MI, TX Yale Security Inc. Lemont, IL 1 130,000 $ 399,000 CSK Auto, Inc. Denver, CO 4 8,129 $ 51,709 Glendale, AZ 4 3,406 $ 58,564 Apache Junction, 4 5,055 $ 43,316 AZ Casa Grande, AZ 4 11,588 $ 56,695 Scottsdale, AZ 4 8,000 $ 118,586 Mesa, AZ 4 3,401 $ 59,955 --------- ----------- 39,579 $ 388,825 B&G Contract Packaging, Inc. Maumelle, AR 2 80,000 $ 168,000 80,000 $ 162,000 --------- ----------- 2 160,000 $ 330,000 Lockheed Martin Corporation Glen Bumie, MD 2 45,804 $ 310,000 JumboSports Inc. Moorestown, NJ 3 74,066 $ 308,750 Broomfield Tech Center Broomfield, CO 3 60,660 $ 180,081 Corporation Broomfield, CO 3 40,440 $ 120,054 --------- ----------- 101,100 $ 300,135 Payless ShoeSource, Inc. Fontana, CA 4 4,500 $ 183,146 (8 Stores) Rialto, CA 4 4,500 Reynoldsburg, OH 4 3,840 Tallmadge, OH 4 4,000 Anderson, IN 4 4,500 Cuyahoga Falls, OH 4 3,792 Marlon, OH 4 3,900 Fremont, OH 4 4,000 The Southland Corporation (1 Merced, CA 4 4,500 $ 20,370 Store) Chief Auto Parts, Inc. (3 Sacramento, CA 4 4,400 $ 63,798 Stores) Stockton, CA 4 4,500 Sacramento, CA 4 4,400 --------- ----------- The Kobacker Company (Obligor 50,832 $ 267,314 for all 12 Stores) Petrocon Engineering, Inc. Beaumont, TX 3 48,700 $ 118,800 (One Lease applies to three portions $ 103,740 of Facility.) $ 43,200 ----------- $ 265,740 Federal Express Corporation Corpus Christi, TX 2 30,212 $ 189,986 College Station, TX 2 12,080 $ 56,700 ----------- $ 246,686 NYNEX Milton, VT 3 30,624 $ 215,600 Penberthy, Inc. PCC Flow Technologies, Inc. Prophetstown, IL 1 161,878 $ 209,507 Allied Plywood Corporation Manassas, VA 1 60,446 $ 185,000 Rochester Button Company South Boston, VA 1 43,387 Kenbridge, VA 1 38,000 --------- 81,387 $ 180,000 Sunds Defibrator Woodhandling, Carthage, NY 1 76,000 $ 144,239 Inc. Pepsi-Cola Metropolitan Bottling PepsiCo, Inc. Houston, TX 2 17,725 $ 97,568 Company, Inc. Service Corporation International (Sublessee) MAXIMUM TERM INCREASE LEASE (MONTH AND % OF LESSEE FACTOR EXPIRATION YEAR) REVENUES - -------------------------------- -------- ---------- ---------- -------- Penn Virginia Resources Corporation Pennsylvania Crusher Corporation (Joint Tenants) Market 8/99 8/34 0.66% Titan Corporation (18.54% CPI 7/07 7/31 0.64% ownership) Wozniak Industries, Inc. Stated 12/03 12/23 0.60% Childtime Childcare, Inc. CPI 1/16 1/41 0.55% (33.93% ownership) Yale Security Inc. Stated 4/11 4/11 0.53% CSK Auto, Inc. CPI 1/08 1/38 CPI 1/02 1/22 CPI 1/02 1/22 CPI 1/02 1/22 CPI 1/02 1/22 CPI 1/02 1/22 0.51% B&G Contract Packaging, Inc. Stated 12/97 12/03 Stated 7/98 7/01 0.44% Lockheed Martin Corporation Stated 4/01 4/21 0.41% JumboSports Inc. Stated 6/12 6/42 0.41% Broomfield Tech Center None 12/01 12/01 Corporation None 5/02 5/02 0.39% Payless ShoeSource, Inc. None 12/06 12/36 (8 Stores) The Southland Corporation (1 None 12/06 12/36 Store) Chief Auto Parts, Inc. (3 None 12/06 12/36 Stores) The Kobacker Company (Obligor 0.35% for all 12 Stores) Petrocon Engineering, Inc. Stated 12/98 12/00 (One Lease applies to three por None 6/97 6/01 of Facility.) None 11/97 11/01 0.35% Federal Express Corporation Market 5/99 5/09 Market 2/99 2/09 0.32% NYNEX Stated 2/03 2/13 0.28% Penberthy, Inc. CPI 4/06 4/26 0.28% Allied Plywood Corporation Stated 3/02 3/02 0.24% Rochester Button Company None 12/16 12/36 0.24% Sunds Defibrator Woodhandling, CPI 8/05 7/97 0.19% Inc. Pepsi-Cola Metropolitan Bottling Stated 10/04 10/04 0.13% Company, Inc. Service Corporation International (Sublessee)
- --------------- (1) Property types are coded as follows: 1 -- Industrial/Manufacturing; 2 -- Distribution/Warehouse; 3 -- Office/Research; 4 -- Retail; 5 -- Hotel; 6 -- Day Care Center 93 105
PROPERTY SQUARE LESSEE LEASE GUARANTOR PROPERTY LOCATION TYPE(1) FOOTAGE ANNUAL RENT - -------------------------------- -------------------------------- ------------------- -------- --------- ----------- Popular Stores, Inc. Scottsdale, AZ 4 11,800 $ 95,810 Stair Pans of America, Inc. Fredericksburg, VA 1 45,821 $ 89,810 Inno Tech Industries, Inc. Elyria, OH 1 183,000 $ 60,000 Family Bargain Center Colville, WA 4 15,300 $ 49,255 Cents Stores, Inc. Mesa, AZ 4 11,039 $ 54,000 The Crafters Mall, Inc. Glendale, AZ 4 11,760 $ 47,964 Kinko's, Inc. Canton, OH 4 1,700 $ 47,067 Capin Mercantile Corporation Silver City, NM 4 11,280 $ 36,660 Building 7 Corporation Apache Junction, 4 9,945 $ 23,100 AZ Moise L. Wexler, Scott Wexler New Orleans, LA 4 1,641 $ 19,692 Scallon's Carpet Castle, Inc. Casa Grande, AZ 4 3,134 $ 17,710 Arthur L. Jones Greensboro, NC 4 1,700 $ 10,725 Petoskey Holiday Inn Petoskey, MI 5 83,462 Alpena Holiday Inn Alpena, MI 5 96,333 Livonia Holiday Inn Livonia, MI 5 158,000 Vacant Columbia, SC 1 168,600 Vacant Sumter, SC 1 87,000 Vacant Garland, TX 1 52,249 Vacant Canton, OH 4 4,800 ----------- Total Revenue $75,996,924 ============ MAXIMUM TERM INCREASE LEASE (MONTH AND % OF LESSEE FACTOR EXPIRATION YEAR) REVENUES - -------------------------------- -------- ---------- ---------- -------- Popular Stores, Inc. % Sales 7/00 7/10 0.13% Stair Pans of America, Inc. Stated 7/07 7/12 0.12% Inno Tech Industries, Inc. None 4/98 4/03 0.08% Family Bargain Center CPI 7/00 1/15 0.06% Cents Stores, Inc. Stated 1/13 1/13 0.07% The Crafters Mall, Inc. None Quarterly Renewals 0.06% Kinko's, Inc. % Sales 8/00 8/10 0.06% Capin Mercantile Corporation None 5/00 5/05 0.05% Building 7 Corporation CPI 6/01 6/06 0.03% Moise L. Wexler, Scott Wexler % Sales 10/05 10/15 0.03% Scallon's Carpet Castle, Inc. Stated 12/03 12/03 0.02% Arthur L. Jones CPI 4/99 4/01 0.01% Petoskey Holiday Inn Alpena Holiday Inn Livonia Holiday Inn Vacant Vacant Vacant Vacant -------- Total Revenue 100% =========
- --------------- (1) Property types are coded as follows: 1 - Industrial/Manufacturing; 2 - Distribution/Warehouse; 3 - Office/Research; 4 - Retail; 5 - Hotel; 6 - Day Care Center. (2) A lease has been entered into with Copeland Beverage Group, Inc. which will commence when the lease with Santee Dairies expires. The lease with Copeland provides for an annual rent of $1,800,000 with increases based on the CPI and is for a term of 9 years. (A) Simplicity has exercised its option to purchase the property. The sale is expected to be completed by no later than April 1998. (B) A suit has been brought to enforce Red Bank's obligations under this lease. Red Bank is not currently paying the equity portion of the rent due under the lease ($48,124 per month). 94 106 Three Properties owned by the CPA(R) Partnerships, through a subsidiary, are Holiday Inn hotels two of which are not leased. All of these Holiday Inn hotels (the "Hotels") are licensed to operate as Holiday Inns. The following table provides certain information with respect to the Hotels that are not leased.
NAME LOCATION NUMBER OF ROOMS SQUARE FEET - ----------------------------------------------- ------------ --------------- ----------- Petoskey Holiday Inn........................... Petoskey, MI 144 83,462 Livonia Holiday Inn............................ Livonia, MI 226 158,000 Alpena Holiday Inn............................. Alpena, MI 148 96,333
The operating results of the Alpena and Petoskey Hotels for the year ended December 31, 1996 and for the six months ended June 30, 1997 are as follows:
ALPENA PETOSKEY LIVONIA ------- ------- ------- (IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, 1996: Revenues.................................................... $ 3,074 $ 2,247 $ 8,716 Management fees*............................................ (59) (43) (195) Other operating expenses.................................... (2,347) (1,953) (6,108) ------- ------- ------- Operating income......................................... $ 668 $ 251 $ 2,413 ======= ======= ======= FOR THE SIX MONTHS ENDED JUNE 30, 1997: Revenues.................................................... $ 1,543 $ 1,083 $ 4,408 Management fees*............................................ (46) (22) (133) Other operating expenses.................................... (1,111) (966) (2,991) ------- ------- ------- Operating income......................................... $ 386 $ 95 $ 1,284 ======= ======= =======
- --------------- * Paid to unaffiliated third parties The Hotel located in Livonia, Michigan is leased to Livho, Inc. ("Livho"), a corporation wholly-owned by Francis J. Carey. Livho, will own the Holiday Inn license and the other licenses necessary for the operation of the hotel. Livho will rent the hotel from CD for a base rent of $175,000 per year plus a percentage of the gross receipts at the hotel. CD expects to spend approximately $4,000,000 to upgrade the hotel so that it will qualify as a Holiday Inn Select hotel. DESCRIPTION OF MOST SIGNIFICANT TENANTS The following is a brief description of the tenants which will pay the most rent to the Company on an annual basis. Santee Dairies, Inc., the largest processor of milk products in the West, processes 235,000 to 260,000 gallons of milk per day. Owned by Hughes Markets, Inc. and Stake Brothers Markets, the company also processes, bottles and distributes yogurt, sour cream, ice cream, cottage cheese and fruit juices. The highlights of Santee's 1996 fiscal year include net sales of $194 million, total assets of approximately $66 million and a net worth of $26 million. Hughes, the guarantor of the Santee lease, operates a chain of 51 supermarkets in the Southern California area, wholly owns a real estate holding company and owns 50 percent of Santee. The highlights of Hughes' fiscal year ending March 1997 included net sales of approximately $1.0 billion, total assets of approximately $279 million and a net worth of approximately $160 million. Dr Pepper Bottling Company of Texas is the largest independent franchise bottler of Dr Pepper brand products, accounting for approximately 13 percent of the total domestic volume of such products. One of the largest independent soft drink bottlers in the United States, the Company bottles the following products: Dr Pepper, Seven-Up, Canada Dry, Sunkist soft drinks, A&W Root Beer, A&W Cream Soda, Squirt and 95 107 Countrytime lemonade. For the 1996 fiscal year, its net sales totaled over $390 million and its assets totaled over $237 million. Detroit Diesel is a leading designer and producer of heavy-duty diesel engines and a broad range of new replacement and re-manufactured parts and components. The company's markets include on-highway vehicles (truck, bus and coach), construction, industrial, power generation, military and marine. For the year ending December 31, 1996, Detroit Diesel's net revenues totaled $1,963 million; its total assets were $1,113 million; its long-term debt was $93 million; and its stockholders' equity was $321 million. Sybron International Corporation is the parent company of four operating subsidiaries which hold leadership product positions in laboratory and professional orthodontic and dental markets in the United States and abroad. The Sybron companies have become market leaders by developing, manufacturing and marketing an expanding array of value-added products which meet their customers' needs. The highlights of Sybron's fiscal year ending September 30, 1996 included total assets of over $975 million and a net worth of over $283 million. Gibson Greetings, Inc. designs, manufactures and sells greeting cards, gift-wrapping paper, stationery, candles, calendars and related gift items. Most of the greeting cards are designed and printed at the Cincinnati location and then sent to the Berea facility for shipment to retail stores. In mid-November 1995, the company sold Cleo, Inc., its wholly-owned gift wrap subsidiary, to CSS Industries, Inc., but continues to produce gift wrapping accessories. In 1996, Gibson's net sales totaled $390 million; its assets totaled $425 million; its long-term debt totaled $41 million; and its net worth totaled $256 million. Started by Charles Stoody in 1921, Stoody Deloro Stellite, Inc. is the global leader in the application, design and manufacturing of consumable welding products, products that protect equipment and parts from wear and erosion. SDS's coatings for metals and formed products are significant due to abrasion, impact, heat and corrosive environments in industries such as construction, mining, agriculture, chemical, military and transportation. The company is a profitable division of Thermadyne Holdings Corporation which manufactures and sells worldwide a broad range of welding apparatus, commercial and industrial maintenance equipment and coatings. Thermadyne operates facilities in the U.S., Canada, England, Germany, Italy, Japan, Singapore, Mexico and Malaysia. For the 1996 fiscal year, Thermadyne had net sales of $440 million and total assets of $353 million. Furon designs and manufactures highly engineered products composed of high performance polymer materials. The company's parts and components are used primarily by original equipment manufacturers who reach a broad spectrum of markets: hydrocarbon processing, utilities, pulp and paper, automotive, truck, beverage equipment, food processing, semiconductors, electronic assembly and medical devices and equipment. Most of the components are designed to meet the particular specifications of each customer. For the fiscal year ended February 5, 1997, Furon's net sales totaled over $390 million; its assets totaled over $344 million; and its stockholders' equity totaled over $61 million. Quebecor Printing Inc. is the largest commercial printer in the United States, Canada and Europe. Based in Canada, the Company has over 23,000 employees and operates 100 printing facilities in the U.S., Canada, France, the U.K., Spain, Mexico and India. For the 1996 fiscal year, Quebecor Printing Inc. had revenues of over $3.1 billion and total assets of over $2.9 billion. Material Sciences Corporation is a technology based manufacturer of continuously processed specialty coated materials and services. The company is a market leader in its four principal product groups: laminates and composites, metalizing and coating, coil coating and electrogalvanizing. For its fiscal year ending February 28, 1997, the company's net sales totaled over $236 million; its assets totaled over $202 million; and its stockholders' equity totaled over $121 million. AutoZone, Inc. currently operates 1,423 auto-part stores in 27 states, primarily in the Sunbelt and Midwest regions. The "Do-It-Yourself" stores sell replacement parts (from spark plugs to complete engines), entire lines of accessories and motor oils for domestic and foreign cars, vans and light trucks. 96 108 Orbital Sciences Corporation designs, manufactures and operates a broad range of space-related products and services, including small and medium-sized satellites and personal navigation equipment. The company is the world's leading provider of small launch vehicles, including the Pegasus and Taurus vehicles. The Gap, Inc. is one of the largest specialty and private-label clothing retailers in the United States. Over the past ten years, the company has enjoyed significant growth through trade names including Gap, GapKids, Baby Gap, Banana Republic and Old Navy. As of March 1996, The Gap, Inc. operated 1,701 stores including some outside of the U.S. For the fiscal year ended February 1997, the company's sales increased 20 percent to $5.3 billion. 97 109 MORTGAGE DEBT Upon consummation of the Consolidation, the Company will have debt of approximately $219 million, excluding the debt of unconsolidated joint ventures. Approximately $194 million of such debt will be limited recourse mortgage debt secured by mortgages on 108 properties. Substantially all of the mortgage debt is fixed rate and self-amortizing, and the weighted annual interest rate on the mortgage debt is 8.9 percent. The following table provides certain information with respect to the Company's debt, including its proportionate share of the debt of unconsolidated joint ventures:
NUMBER AS OF INTEREST MATURITY TENANT/GUARANTOR NAME PROPERTIES JUNE 30, 1997 RATE DATE - ---------------------------------------------------- ---------- ------------- -------- -------- Broomfield Tech Center Corporation.................. 2 $ 2,250,640 9.00% 9/11 Payless ShoeSource, Inc.(1)......................... 12 1,025,761 10.50% 1/06 Varo Inc............................................ 1 2,485,302 10.00% 10/02 The Gap, Inc........................................ 1 6,259,172 7.25% 5/99 Unisource Worldwide, Inc............................ 1 6,847,993 7.24% 2/10 Pre Finish Metals Incorporated...................... 1 2,347,677 Floating 7/98 Simplicity Manufacturing, Inc....................... 2 5,031,101 10.52% 7/98 Brodart Co.......................................... 1 3,218,698 7.60% 1/04 Arley Corporation................................... 1 4,754,940 10.38% 1/93 Alpena Holiday Inn.................................. 1 7,330,000 (2) (2) Petoskey Holiday Inn................................ 1 7,330,000 (2) (2) Motorola, Inc....................................... 1 2,187,826 10.50% 10/96(3) AutoZone, Inc....................................... 32 8,743,039 9.51% 8/98 General Cinema Corp. of Minnesota, Inc.............. 1 2,039,908 8.50% 7/06 Armel, Inc.......................................... 1 261,060 Floating 1/98 AP Parts Manufacturing Company...................... 2 5,736,608 7.63% 2/01 Wal-Mart Stores, Inc................................ 1 3,464,336 8.25% 8/03 Livonia Holiday Inn................................. 1 2,608,808 Floating 11/97 Swiss-M-Tex, L.P.................................... 2 1,714,176 Floating 9/97 Svbron Acquisition Company.......................... 5 14,311,422 11.25% 1/99 NVR................................................. 2 6,700,000 7.50% 12/02 Topeka Holiday Inn.................................. 1 8,642,294 6.75% 10/06 7.75% 9/03 High Voltage Engineering Corp....................... 2 4,299,203 6.05% 12/98 General Electric Company............................ 1 3,386,923 10.50% 5/98 United Stationers Supply Co......................... 3 2,348,134 7.56% 12/99 Dr. Pepper Bottling Company of Texas................ 2 15,642,067 11.85% 7/99 Orbital Sciences Corporation........................ 1 8,587,426 10.00% 9/20 AmerSig Southeast, Inc.............................. 1 6,300,840 Floating 5/01 AS Memphis, Inc..................................... 1 3,947,300 Floating 5/01 Furon Company....................................... 6 12,700,000 8.42% 7/12 Detroit Diesel Corporation.......................... 1 23,745,378 7.16% 6/10 Red Bank Distribution, Inc.......................... 1 5,440,902 10.00% 8/10 Floating Information Resources, Inc.......................... 2 7,522,037 10.70% 10/00 Childtime Childcare, Inc............................ 12 1,289,340 9.55% 12/06 Stamford, CT Property(4)............................ 1 6,300,000 10.15% Titan Corporation................................... 1 1,975,594 9.75% 7/03 Unsecured recourse debt............................. -- 24,711,981 Floating ------------- 108 $233,487,886 =============
- --------------- (1) Loan encumbers properties leased to Payless ShoeSource, Inc., The Southland Corporation and Chief Auto Parts, Inc. (2) Series of bonds maturing between September 1997 and September 2015 with interest rates ranging from 6.60 percent to 9.00 percent. (3) Lender continues to accept monthly payments. (4) This obligation was fully satisfied after June 30, 1997. 98 110 ENVIRONMENTAL MATTERS The Company will generally undertake a third party Phase I investigation of potential environmental risks when evaluating an acquisition. A "Phase I investigation" is an investigation for the presence or likely presence of hazardous substances or petroleum products under conditions which indicate an existing release, a post release or a material threat of a release. A Phase I investigation does not typically include any sampling. The Company may acquire a property with environmental contamination, subject to a determination of the level of risk and potential cost of remediation. The Company generally will require property sellers to fully indemnify it against any environmental problem or condition existing as of the date of purchase. In some instances, the Company will be the assignee of or successor to the buyer's indemnification rights. Additionally, the Company will generally structure its leases to require the tenant to assume all responsibility for environmental compliance or environmental remediation and to provide that non-compliance with environmental laws be deemed a lease default. In certain instances, the Company may also require a cash reserve, a letter of credit or a guarantee from the tenant, the parent company or a third party to assure funding of remediation. The value of these protections depend upon the financial strength of the entity providing the protection. Where warranted, further assessments are performed by third-party environmental consulting and engineering firms. Phase I investigations were performed by the CPA(R) Partnerships on all CPA(R):1-6 Properties between July 1993 and February 1994. Except as specified in the following sentence, a Phase I investigation or its substantial equivalent was conducted on all CPA(R):8-9 Properties around the time of acquisition of such properties. The CPA(R) Partnerships did not undertake investigations at Tandem Holdings (St. Louis, MO); Winn-Dixie (Bay Minette and Brewton, AL); M-Tex (Traveler's Rest and Liberty, SC); Northern Automotive Corporation (Mesa, Glendale, Apache Junction and Casa Grande, AZ and Denver, CO); Family Bargain Center (Colville, WA); Capin Mercantile Corporation (Silver City, NM) and the 25 AutoZone stores in Florida, Georgia, Louisiana, Missouri, New Mexico, North Carolina, South Carolina, Tennessee and Texas. Based upon the results of the Phase I investigations conducted in 1993 and 1994 on the CPA(R):1-6 Properties, Phase II investigations were recommended for 30 properties. Phase II investigations have been or are in the process of being performed on 21 of the 30 properties. On five of the properties the particular CPA(R) Partnership determined not to proceed with a Phase II investigation and on four of the properties the tenants would not permit a Phase II investigation. The issues for which Phase II investigations were recommended with respect to each of the nine properties are: (a) PicWay Shoes, Cleveland, OH (records review to determine the existence of any underground storage tanks ("UST") due to former use of property as gas station), (b) Waterbed Outlet, Merced, CA (records review to determine existence of any USTs due to former use of property as gas station), (c) Santee Dairies, Los Angeles, CA (geophysical survey to locate potential USTs), (d) Arley Merchandise, Sumter, SC (tightness test on existing UST), (e) Stoody Deloro, Goshen, IN (subsurface investigation to determine if any release from abandoned UST), (f) Industrial General, Belleville, OH (removal and closure of inactive UST), (g) Industrial General, Bald Knob, AR (soil testing for potential contamination), (h) Industrial General, Newburyport, MA (testing of concrete underground leaching pit) and (i) Industrial General, Forrest City, AR (general housekeeping and regulatory compliance issues). The Company believes that if any remediation is indicated as a result of Phase II investigations, the cost of any material remediation would be born by the lessees pursuant to the terms of the existing leases. COMPETITION The Company faces competition from insurance companies, commercial banks, credit companies, pension funds, private individuals, investment companies, REITs and other real estate finance companies. The Company also faces competition from institutions or investors that provide or arrange for other types of financing through private or public offerings of equity or debt and from traditional bank financings. The Company believes that its 20 years of continuous market presence through the CPA(R) Partnerships, the experience of its management and its ability to underwrite credit and asset-based investment opportunities allow it to compete effectively. 99 111 EMPLOYEES The Company has one employee. The Manager has over 60 officers, employees and directors who will be involved in the operations of the Company. INSURANCE Under their leases, the Company's tenants will generally be responsible for providing adequate insurance on the properties leased. The Company believes the Properties are covered by adequate fire, flood and property insurance provided by reputable companies. However, some of the Properties are not covered by disaster-type insurance with respect to certain hazards (such as earthquakes) for which coverage is not available or available only at rates which, in the opinion of the Company, are prohibitive. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. POLICIES WITH RESPECT TO CERTAIN ACTIVITIES The following is a discussion of certain investment, financing, conflicts of interest and other policies of the Company. These policies have been determined by the Company's Board of Directors and generally may be amended or revised from time to time by the Board of Directors without a vote of the Shareholders. INVESTMENT POLICIES Investments. The Company seeks to acquire and manage a diversified portfolio of real estate and other assets. In its real estate activities, the Company seeks to structure leases and to acquire properties subject to leases that generally provide: (i) that the tenant is responsible for all operating and capital expenses, as well as environmental and other contingent liabilities, (ii) for contractual rent increases over the term of the lease and (iii) for primary lease terms of 5 to 25 years. While the Company generally intends to hold its Properties for long-term investment, the Company may dispose of a Property if it deems such disposition to be in its best interests. The Company may sell Properties to tenants pursuant to purchase options included in certain leases. Investments in Real Estate Mortgages. While the Company emphasizes equity real estate investments in properties subject to long-term leases, it may, in its discretion, invest in mortgages and other interests related to real estate. The Company does not presently intend to invest to a significant extent in mortgages, but may do so. The mortgages in which the Company may invest may be first mortgages or junior mortgages and may or may not be insured by a governmental agency. Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers. The Company also may invest in securities of entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities. The Company may acquire all or substantially all of the securities or assets of REITs or similar entities where such investments would be consistent with its investment policies. The Company may also receive an equity interest or rights to purchase equity interests in tenants or affiliates of tenants in connection with sale-leaseback transactions. In any event, the Company does not intend that its investments in securities will require it to register as an "Investment Company" under the Investment Company Act of 1940, and the Company would divest itself of such securities before any such registration would be required. Joint Ventures and Wholly-Owned Subsidiaries. The Company may enter into joint ventures or general partnerships and other participations with real estate developers, owners and others for the purpose of obtaining an equity interest in a particular property or properties in accordance with the Company's investment policies. Such investments permit the Company to own interests in large properties without unduly restricting diversification and, therefore, add flexibility in structuring the Company's portfolio. See "RISK FACTORS -- Risks of Joint Ventures." 100 112 The Company may from time to time participate jointly with other entities sponsored or managed by one of its Affiliates in investments as tenants-in-common or in some other joint venture arrangement. Any joint investment will be on substantially the same economic terms and conditions, and each investment entity may have a right of first refusal to purchase the interest of the other if a sale of that interest is contemplated. Engaging in the Purchase and Sale of Investments and Investing in the Securities of Others for the Purpose of Exercising Control. As part of its investment activities, the Company may acquire, own and dispose of general and limited partner interests, stock, warrants, options or other equity interests in entities and exercise all rights and powers granted to the owner of any such interests. Offering Securities in Exchange for Property. The Company may offer securities in exchange for property. Repurchasing or Reacquiring Its Own Shares. The Company may purchase or repurchase Shares from any Person for such consideration as the Board of Directors may determine in its reasonable discretion, whether more or less than the original issuance price of such Share or the then trading price of such Share. Issuance of Additional Shares. The Board of Directors may, in its discretion, issue additional equity securities. The Company expects to raise additional equity from time to time to increase its available capital. The issuance of additional equity interests may result in the dilution of the interests of the Shareholders. FINANCING POLICIES Issuance of Senior Securities. The Company may at any time issue securities senior to the Listed Shares, upon such terms and conditions as may be determined by the Board of Directors. Borrowing Policy. The Company may, at any time, borrow, on a secured or unsecured basis, funds to finance its business and in connection therewith execute, issue and deliver promissory notes, commercial paper, notes, debentures, bonds and other debt obligations which may be convertible into Shares or other equity interests or be issued together with warrants to acquire Shares or other equity interests. Lending of Money. The Company may, at any time, make (i) mortgage loans secured by properties, subject to the restrictions upon related party transactions contained in the Bylaws, (ii) secured loans secured by other assets and (iii) unsecured loans. MISCELLANEOUS POLICIES Making Annual or Other Reports to Shareholders. The Company will be subject to the reporting requirements of the Exchange Act and will file annual and quarterly reports thereunder. The Company currently intends to provide annual and quarterly reports to its Shareholders. Restrictions Upon Related Party Transactions. The Bylaws prohibit the Company from engaging in a transaction with a Director, officer, advisor, person owning or controlling 10% or more of any class of Company's outstanding voting securities of any affiliate of the aforementioned ("interested parties"), except to the extent that such transactions are specifically authorized by the terms of the Bylaws. The Bylaws prohibit the Company from entering into a transaction with any of the interested parties unless the terms or conditions of such transaction have been disclosed to the Board of Directors and approved by a majority of Directors not otherwise interested in the matter (including a majority of Independent Directors), and such Directors, in approving the transaction, have determined it to be fair, competitive, commercially reasonable and on terms and conditions no less favorable to the Company than those available from unaffiliated third parties. In addition, the Bylaws specifically authorize the Company to acquire property from interested parties to the extent the terms and conditions of the acquisition have been approved by a majority of the Directors not otherwise interested in the transaction (including a majority of the Independent Directors), and such Directors have made good faith determinations as to the fairness of the compensation provided for such property. Company Control. The Board of Directors has exclusive control over the Company's business and affairs subject only to the restrictions in the Organizational Documents. Shareholders have the right to elect 101 113 members of the Board of Directors. The Directors are accountable to the Company as fiduciaries and are required to exercise good faith and integrity in conducting the Company's affairs. See "FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION." WORKING CAPITAL RESERVES The Company will maintain working capital reserves or immediate borrowing capacity in amounts that the Board of Directors determines to be adequate to meet normal contingencies in connection with the operation of the Company's business and investments. CORPORATE PROPERTY ASSOCIATES PARTNERSHIP SELECTED COMBINED FINANCIAL INFORMATION The following table sets forth selected combined operating and balance sheet information on a consolidated pro forma basis for the Company and on a combined historical basis, assuming 100% participation and minimum participation, for the CPA(R) Partnerships. The following information should be read in conjunction with the financial statements and notes thereto for the Company and the Group included elsewhere in this Consent Solicitation Statement. The combined historical operating and balance sheet information of the CPA(R) Partnerships as of December 31, 1995 and 1996 and for the years ended December 31, 1994, 1995 and 1996 have been derived from the historical Combined Financial Statements audited by Coopers & Lybrand L.L.P., independent accountants, whose report with respect thereto is included elsewhere in this Consent Solicitation Statement. The combined historical operating information for the six months ended June 30, 1996 and 1997 and the years ended December 31, 1992 and 1993 and the historical balance sheet information as of June 30, 1997, and December 31, 1992, 1993 and 1994, have been derived from the unaudited combined financial statements of the Group. In the opinion of Management, the combined historical operating information for the six months ended June 30, 1996 and 1997 and the historical balance sheet information as of June 30, 1997 include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information set forth therein. The unaudited pro forma consolidated operating and balance sheet information is presented as if the Consolidation transaction and the related issuance of Listed Shares occurred on June 30, 1997 for the consolidated balance sheet and January 1, 1996 for the consolidated statements of income. The pro forma financial information is not necessarily indicative of what the actual financial position and results of operations of the Company would have been as of and for the periods indicated, nor does it purport to represent the Company's future financial position and results of operations. 102 114 CPA(R) PARTNERSHIPS SELECTED COMBINED FINANCIAL INFORMATION
AS OF AND FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------- 1996 (PRO FORMA(2)) ------------------------ 100% PARTICIPATION(3) ------------------------ NO 5% HISTORICAL(1) SUBSIDIARY SUBSIDIARY ------------------------------------------------- PARTNERSHIP PARTNERSHIP 1992 1993 1994 1995 1996 UNITS(5) UNITS(6) -------- -------- -------- --------- -------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING DATA: Revenues.................................... $102,936 $109,027 $109,137 $ 107,946 $102,731 $ 102,731 $ 102,731 Income before extraordinary items, attributable to Listed Shares(7)........... 32,245 33,790 38,456 49,363 45,547 44,220 41,933 Pro forma income before extraordinary items per Listed Share(8)........................ 1.81 1.80 Distributions............................... $ 41,363 $ 50,638 $ 35,589 $ 57,216 $ 34,173 OTHER DATA: Cash provided by operating activities....... 43,706 45,673 45,131 63,276 50,983 Cash provided by (used in) investing activities................................. 6,098 21,051 37,136 24,327 19,545 Cash used in financing activities........... (46,444) (66,071) (70,045) (105,578) (69,686) BALANCE SHEET DATA: Real estate, net(9)......................... $342,641 $345,199 $330,671 $ 301,505 $271,660 Investment in direct financing leases....... 302,181 260,663 244,746 218,922 215,310 Total assets................................ 706,767 679,284 659,047 582,324 544,728 Mortgages and notes payable................. 373,549 358,768 325,886 274,737 227,548 AS OF AND FOR THE YEAR ENDED DECEMBER 31, AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, ----------------------- -------------------------------------------------------- 1997 (PRO FORMA(2)) ------------------------------------- MINIMUM MINIMUM PARTICIPATION(4) 100% PARTICIPATION(3) PARTICIPATION(4) -------------------------- --------------------- ---------------- NO NO 5% NO SUBSIDIARY 5% SUBSIDIARY HISTORICAL SUBSIDIARY SUBSIDIARY SUBSIDIARY PARTNERSHIP PARTNERSHIP ------------------ PARTNERSHIP PARTNERSHIP PARTNERSHIP UNITS(5) UNITS(6) 1996 1997 UNITS(5) UNITS(6) UNITS(5) ----------- ------------- -------- -------- ----------- ----------- ----------- OPERATING DATA: Revenues.................................... $40,717 $40,717 $ 51,446 $ 50,985 $ 50,985 $ 50,985 $ 21,083 Income before extraordinary items, attributable to Listed Shares(7)........... 18,858 17,927 22,545 21,022 20,327 19,271 8,876 Pro forma income before extraordinary items per Listed Share(8)........................ 1.85 1.84 .83 .82 .86 Distributions............................... $ 17,666 $ 17,336 OTHER DATA: Cash provided by operating activities....... 23,360 25,406 Cash provided by (used in) investing activities................................. 15,309 (1,354) Cash used in financing activities........... (32,660) (25,526) BALANCE SHEET DATA: Real estate, net(9)......................... $249,030 $ 377,707 $ 377,707 $ 118,657 Investment in direct financing leases....... 216,403 268,142 268,142 117,843 Total assets................................ 540,508 752,046 752,046 273,333 Mortgages and notes payable................. 219,356 219,356 219,356 55,401 AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, ------------------------------------------- 1997 PRO FORMA(2) ------------ MINIMUM PARTICIPATION(4) ---------------- 5% SUBSIDIARY PARTNERSHIP UNITS(6) ----------- OPERATING DATA: Revenues.................................... $ 21,083 Income before extraordinary items, attributable to Listed Shares(7)........... 8,439 Pro forma income before extraordinary items per Listed Share(8)........................ .86 Distributions............................... OTHER DATA: Cash provided by operating activities....... Cash provided by (used in) investing activities................................. BALANCE SHEET DATA: Real estate, net(9)......................... $ 118,657 Investment in direct financing leases....... 117,843 Total assets................................ 273,333 Mortgages and notes payable................. 55,401
- --------------- Notes: (1) See the Combined Financial Statements of the CPA(R) Partnerships included elsewhere herein. (2) See Pro Forma Condensed Consolidated Financial Statements of the Company included elsewhere herein. (3) Reflects pro forma results if all the CPA(R) Partnerships participate in the Consolidation. (4) Reflects pro forma results if only CPA(R): 1, CPA(R): 2, CPA(R): 3, CPA(R): 5 and CPA(R): 7 participate in the Consolidation. This combination of CPA(R) Partnerships has the lowest combined Total Exchange Value in excess of the $200 million and lowest cash flow necessary for the Consolidation to be completed. (5) Reflects pro forma results if the Company issues only Listed Shares and no Subsidiary Partnership Units. (6) Reflects pro forma results if the Company issues 95% Listed Shares and 5% Subsidiary Partnership Units. (7) See Note 13 to the Combined Financial Statements of the Group included elsewhere herein. (8) Computed based on a weighted average number of shares outstanding of: 24,484,170 Listed Shares assuming 100% participation without the issuance of Subsidiary Partnership Units; 23,301,425 Listed Shares assuming 100% participation with the issuance of Subsidiary Partnership Units; 10,210,682 Listed Shares assuming minimum participation without the issuance of Subsidiary Partnership Units; 9,727,035 Listed Shares assuming minimum participation with the issuance of Subsidiary Partnership Units by the Company as if the Consolidation transaction had been consummated as of January 1, 1996. (9) Real estate includes assets leased under operating leases and operating real estate. 103 115 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS SELECTED FINANCIAL DATA OF THE CPA(R) PARTNERSHIPS The following tables set forth selected operating and balance sheet data on a historical and equivalent pro forma basis for the CPA(R) Partnerships. The following information should be read in conjunction with the financial statements and notes thereto for the CPA(R) Partnerships. The historical operating and balance sheet data of the CPA(R) Partnerships as of and for the years ended December 31, 1992, 1993, 1994, 1995 and 1996 have been derived from the historical financial statements audited by Coopers & Lybrand L.L.P., independent accountants. The historical operating data for the six months ended June 30, 1996 and 1997 and the historical balance sheet data as of June 30, 1997 have been derived from the unaudited financial statements of the CPA(R) Partnerships. In the opinion of Management, the historical operating data for the six months ended June 30, 1996 and 1997 and the historical balance sheet data as of June 30, 1997 include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information set forth therein. The unaudited equivalent pro forma operating and balance sheet data is presented as if the Consolidation transaction and the related issuance of Listed Shares occurred on June 30, 1997 for the balance sheet data and January 1, 1996 for the operating data. 104 116 SELECTED FINANCIAL DATA CORPORATE PROPERTY ASSOCIATES (A CALIFORNIA LIMITED PARTNERSHIP)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, --------------------- ----------------------------------------------- JUNE 30, JUNE 30, 1992 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- --------- --------- (IN THOUSANDS EXCEPT PER UNIT AMOUNTS) OPERATING DATA: Revenues................................ $ 4,102 $ 4,418 $ 4,480 $ 4,831 $ 4,589 $ 2,293 $ 2,255 Income before extraordinary item(1)..... 1,058 1,160 1,108 1,842 1,927 902 1,077 Income before extraordinary item allocated: To General Partners................... 11 12 11 19 19 9 11 To Limited Partners................... 1,047 1,148 1,097 1,823 1,908 893 1,066 Per Unit.............................. 26.18 28.71 27.43 45.58 47.70 22.31 26.66 Ratio of earnings to fixed charges(2)... 1.63 1.69 1.69 2.19 2.43 2.27 2.93 CASH FLOW DATA: Net cash provided by operating activities............................ 2,046 2,291 2,216 2,666 2,827 1,374 1,427 Net increase (decrease) in cash and cash equivalents........................... (171) (146) (421) (65) (8) (216) (123) Distributions attributable(3): To General Partners................. 12 13 13 13 14 7 7 To Limited Partners................. 1,234 1,250 1,264 1,333 1,405 702 705 Per Unit............................ 30.86 31.25 31.53 33.32 35.13 8.77 8.82 Payment of mortgage principal(4)........ 972 1,178 1,306 1,417 1,425 673 838 BALANCE SHEET DATA: Cash and cash equivalents............... 1,505 1,359 938 873 865 742 Total assets............................ 26,776 25,531 24,418 23,530 22,226 21,796 Total liabilities....................... 18,987 17,841 16,889 15,471 13,866 13,076 Partners equity: General Partners.................... (101) (102) (104) (99) (96) (92) Limited Partners.................... 7,891 7,793 7,633 8,156 8,456 8,812 Book value per Unit..................... 197.28 194.83 190.82 203.90 211.39 220.31 EQUIVALENT PRO FORMA PER UNIT DATA(5): Income before extraordinary item........ 47.60 21.83 Dividends............................... 43.40 21.70 Book value.............................. 562.03
- --------------- (1) Net income for the year ending December 31, 1996 includes an extraordinary charge on extinguishment of debt of $255. (2) The ratio of earnings to fixed charges is computed as income from continuing operations before minority interest and extraordinary items plus fixed charges (primarily interest) divided by fixed charges. (3) Includes distributions attributable to the fourth quarter of each fiscal year payable in the following fiscal year less distributions in the first fiscal quarter attributable to the prior year. (4) Represents scheduled mortgage principal amortization paid. (5) Equivalent pro forma per Unit data is computed as the Company's pro forma income before extraordinary items per Unit, dividends and book value per Unit, assuming 100% participation without the issuance of Subsidiary Partnership Units, multiplied by the exchange ratio per Unit. Pro forma dividends are estimated at $1.65 per Listed Share, the Company's pro forma book value is $21.37 per Listed Share and the exchange ratio is 26.30 Listed Shares per CPA(R):1 Unit. 105 117 SELECTED FINANCIAL DATA CORPORATE PROPERTY ASSOCIATES 2 (A CALIFORNIA LIMITED PARTNERSHIP)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, --------------------- ----------------------------------------------- JUNE 30, JUNE 30, 1992 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- --------- --------- (IN THOUSANDS EXCEPT PER UNIT AMOUNTS) OPERATING DATA: Revenues................................ $ 9,764 $ 6,666 $ 5,161 $ 5,186 $ 4,591 $ 2,238 $ 2,455 Income before extraordinary item(1)..... 4,967 10,711 1,732 2,596 2,625 1,190 1,580 Income before extraordinary item allocated: To General Partners................... 50 107 17 26 26 12 16 To Limited Partners................... 4,917 10,604 1,715 2,570 2,599 1,178 1,564 Per Unit.............................. 89.40 192.80 31.18 46.75 47.33 21.46 28.48 Ratio of earnings to fixed charges(2)... 2.47 5.70 2.08 2.90 4.55 3.59 6.54 CASH FLOW DATA: Net cash provided by operating activities............................ 5,514 3,978 2,771 6,164 2,792 1,385 1,672 Net increase (decrease) in cash and cash equivalents........................... (137) 1,284 (181) (3,608) 489 401 102 Distributions attributable(3)(4): To General Partners................. 39 21 15 15 14 7 7 To Limited Partners................. 3,873 16,352 1,447 1,495 2,256 735 701 Per Unit............................ 70.42 297.31 26.31 27.19 41.11 6.69 6.39 Payment of mortgage principal(5)........ 1,985 1,675 1,617 1,490 937 519 437 BALANCE SHEET DATA: Cash and cash equivalents............... 3,083 4,367 4,186 578 1,067 1,169 Total assets............................ 63,247 41,736 40,571 33,123 33,683 34,254 Total liabilities....................... 32,708 17,998 16,560 8,037 8,275 7,974 Partners equity: General Partners.................... 108 183 186 197 208 217 Limited Partners.................... 30,430 23,554 23,825 24,889 25,199 26,063 Book value per Unit..................... 553.27 428.25 433.18 453.35 458.99 474.73 EQUIVALENT PRO FORMA PER UNIT DATA(6): Income before extraordinary item........ 50.61 23.21 Dividends............................... 46.13 23.07 Book value.............................. 597.51
- --------------- (1) 1993 net income includes a $7,857 gain on sale of properties, net of an extraordinary loss on extinguishment of nonrecourse debt of the disposed properties. (2) The ratio of earnings to fixed charges is computed as income from continuing operations before minority interest and extraordinary items plus fixed charges (primarily interest) divided by fixed charges. (3) Includes distributions attributable to the fourth quarter of each fiscal year payable in the following fiscal year less distributions in the first fiscal quarter attributable to the prior year. (4) 1993 distributions include a special distribution of $260 per Limited Partnership Unit ($14,300). Distribution for 1996 include a special distribution of $15.00 per Limited Partnership Unit ($824). (5) Represents scheduled mortgage principal amortization paid. (6) Equivalent pro forma per Unit data is computed as the Company's pro forma income before extraordinary items per Unit, dividends and book value per Unit, assuming 100% participation without the issuance of Subsidiary Partnership Units, multiplied by the exchange ratio per Unit. Pro forma dividends are estimated at $1.65 per Listed Share, the Company's pro forma book value is $21.37 per Listed Share and the exchange ratio is 27.96 Listed Shares per CPA(R):2 Unit. 106 118 SELECTED FINANCIAL DATA CORPORATE PROPERTY ASSOCIATES 3 (A CALIFORNIA LIMITED PARTNERSHIP)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, ------------------- ----------------------------------------------- JUNE 30, JUNE 30, 1992 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- -------- -------- (IN THOUSANDS EXCEPT PER UNIT AMOUNTS) OPERATING DATA: Revenues................................... $ 8,478 $ 7,554 $ 7,392 $ 7,249 $ 5,730 $2,661 $ 4,785 Net income................................. 4,900 2,929 3,215 15,976 4,434 2,000 4,195 Net income allocated: To General Partners...................... 98 59 64 320 89 40 84 To Limited Partners...................... 4,802 2,870 3,151 15,656 4,345 1,960 4,111 Per Unit................................. 72.76 43.49 47.74 237.21 65.84 29.70 62.28 Ratio of earnings to fixed charges(1)...... 3.50 2.67 2.98 13.53 60.00 37.99 152.18 CASH FLOW DATA: Net cash provided by operating activities............................... 5,252 4,387 4,647 12,918 3,907 1,720 2,131 Net increase (decrease) in cash and cash equivalents.............................. 3,021 720 824 (7,693) 338 123 (385) Distributions attributable(2): To General Partners...................... 130 93 93 168 66 33 33 To Limited Partners(3)................... 8,032 4,536 4,568 12,208 3,268 1,632 1,639 Per Unit................................. 121.70 68.72 69.21 184.97 49.51 12.36 12.42 BALANCE SHEET DATA: Cash and cash equivalents.................. 7,308 8,028 8,851 1,158 1,496 1,111 Total assets............................... 57,978 57,171 57,050 33,223 32,530 34,937 Total liabilities.......................... 27,323 28,203 29,524 2,444 637 519 Partners equity: General Partners......................... 109 75 47 192 215 265 Limited Partners......................... 30,536 28,892 27,479 30,587 31,679 34,152 Book value Unit............................ 462.67 437.76 416.35 463.44 479.99 517.46 EQUIVALENT PRO FORMA PER UNIT DATA(4): Income before extraordinary item........... 68.65 31.48 Dividends.................................. 62.58 31.29 Book value................................. 810.56
- --------------- (1) The ratio of earnings to fixed charges is computed as income from continuing operations before minority interest and extraordinary items plus fixed charges (primarily interest) divided by fixed charges. (2) Includes distributions attributable to the fourth quarter of each fiscal year payable in the following fiscal year less distributions in the first fiscal quarter attributable to the prior year. (3) Include special distributions of $50 and $120 in 1992 and 1995, respectively, per Limited Partnership Unit. (4) Equivalent pro forma per Unit data is computed as the Company's pro forma income before extraordinary items per Unit, dividends and book value per Unit, assuming 100% participation without the issuance of Subsidiary Partnership Units, multiplied by the exchange ratio per Unit. Pro forma dividends are estimated at $1.65 per Listed Share, the Company's pro forma book value is $21.37 per Listed Share and the exchange ratio is 37.93 Listed Shares per CPA(R):3 Unit. 107 119 SELECTED FINANCIAL DATA CORPORATE PROPERTY ASSOCIATES 4 (A CALIFORNIA LIMITED PARTNERSHIP)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, --------------------- ----------------------------------------------- JUNE 30, JUNE 30, 1992 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- --------- --------- (IN THOUSANDS EXCEPT PER UNIT AMOUNTS) OPERATING DATA: Revenues................................ $ 8,723 $ 9,253 $ 8,443 $ 8,061 $ 9,322 $ 4,069 $ 5,193 Income from continuing operations before extraordinary item.................... 3,698 4,741 4,443 8,679 6,914 3,015 1,799 Income from continuing operations before extraordinary item allocated: To General Partners................... 222 284 266 879 415 181 108 To Limited Partners................... 3,476 4,457 4,177 7,800 6,499 2,834 1,691 Per Unit(3)........................... 40.63 52.08 48.81 91.16 75.95 33.13 19.78 Ratio of earnings to fixed charges(1)... 2.09 2.55 2.76 4.92 5.31 3.41 4.62 CASH FLOW DATA: Net cash provided by operating activities............................ 5,071 6,232 5,772 6,099 7,168 3,106 3,742 Net increase (decrease) in cash and cash equivalents........................... (423) (187) (1,120) 5,070 (2,910) 413 (1,280) Distributions attributable(2): To General Partners................... 290 292 293 323 268 132 134 To Limited Partners................... 4,539 4,570 4,590 8,667 4,193 2,093 2,103 Per Unit(3)........................... 53.04 53.41 53.64 101.29 49.00 12.23 12.30 Payment of mortgage principal(4)........ 645 806 1,168 1,158 898 464 398 BALANCE SHEET DATA: Cash and cash equivalents............... 3,817 3,630 2,509 7,579 4,669 3,389 Total assets............................ 58,331 57,497 56,108 48,508 42,067 38,735 Total liabilities....................... 29,342 28,277 27,322 20,146 11,264 8,369 Partners equity: General Partners...................... (474) (460) (486) 62 211 184 Limited Partners...................... 29,464 29,681 29,272 28,300 30,592 30,182 Book value per Unit..................... 344.33 346.87 342.09 330.73 357.68 352.89 EQUIVALENT PRO FORMA PER UNIT DATA(5): Income before extraordinary item........ 59.68 27.37 Dividends............................... 54.40 27.20 Book value.............................. 704.57
- --------------- (1) The ratio of earnings to fixed charges is computed as income from continuing operations before minority interest and extraordinary items plus fixed charges (primarily interest) divided by fixed charges. (2) Includes distributions attributable to the fourth quarter of each fiscal year payable in the following fiscal year less distributions in the first fiscal quarter attributable to the prior year. (3) Distributions for 1995 include a $50 per Unit special distribution to the Limited Partners. (4) Represents scheduled mortgage principal amortization paid. (5) Equivalent pro forma per Unit data is computed as the Company's pro forma income before extraordinary items per Unit, dividends and book value per Unit, assuming 100% participation without the issuance of Subsidiary Partnership Units, multiplied by the exchange ratio per Unit. Pro forma dividends are estimated at $1.65 per Listed Share, the Company's pro forma book value is $21.37 per Listed Share and the exchange ratio is 32.97 Listed Shares per CPA(R):4 Unit. 108 120 SELECTED FINANCIAL DATA CORPORATE PROPERTY ASSOCIATES 5 (A CALIFORNIA LIMITED PARTNERSHIP)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, --------------------- ----------------------------------------------- JUNE 30, JUNE 30, 1992 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- --------- --------- (IN THOUSANDS EXCEPT PER UNIT AMOUNTS) OPERATING DATA: Revenues................................ $18,195 $18,261 $18,125 $15,768 $13,205 $ 6,505 $ 4,971 Income before extraordinary item........ 5,857 4,496 5,557 1,913 7,776 4,652 467 Income before extraordinary item allocated: To General Partners................... 351 270 1,011 201 463 314 28 To Limited Partners................... 5,506 4,226 4,546 1,712 7,314 4,337 439 Per Unit.............................. 48.64 37.34 40.16 15.12 64.61 38.31 3.87 Ratio of earnings to fixed charges(1)... 2.10 1.90 2.21 1.54 4.72 1.12 1.67 CASH FLOW DATA: Net cash provided by operating activities............................ 6,202 6,241 6,293 4,688 5,606 2,042 1,852 Net increase (decrease) in cash and cash equivalents........................... (133) (448) 5,633 (5,626) 2,937 3,089 (1,147) Distributions attributable(2): To General Partners................... 348 350 352 365 244 122 121 To Limited Partners................... 5,445 5,489 5,516 7,635 3,816 1,904 1,888 Per Unit(3)........................... 48.10 48.49 48.73 67.45 33.71 8.41 8.34 Payment of mortgage principal(4)........ 915 826 725 463 365 118 BALANCE SHEET DATA: Cash and cash equivalents............... 2,742 2,294 7,927 2,301 5,238 4,091 Total assets............................ 95,637 93,950 92,366 72,268 52,652 50,132 Total liabilities....................... 55,993 55,638 54,478 40,522 17,586 17,414 Partners equity: General Partners...................... (667) (747) (95) (263) (68) (161) Limited Partners...................... 40,311 39,058 37,983 32,009 35,133 32,879 Book value per Unit..................... 356.10 345.04 335.54 282.77 310.36 290.45 EQUIVALENT PRO FORMA PER UNIT DATA(5): Income before extraordinary item........ 33.25 15.25 Dividends............................... 30.31 15.16 Book value.............................. 392.57
- --------------- (1) The ratio of earnings to fixed charges is computed as income from continuing operations before minority interest and extraordinary items plus fixed charges (primarily interest) divided by fixed charges. (2) Includes distributions attributable to the fourth quarter of each fiscal year payable in the following fiscal year less distributions in the first fiscal quarter attributable to the prior year. (3) 1995 distributions include a special distribution of $20 per Limited Partnership Unit. (4) Represents scheduled mortgage amortization paid. (5) Equivalent pro forma per Unit data is computed as the Company's pro forma income before extraordinary items per Unit, dividends and book value per Unit, assuming 100% participation without the issuance of Subsidiary Partnership Units, multiplied by the exchange ratio per Unit. Pro forma dividends are estimated at $1.65 per Listed Share, the Company's pro forma book value is $21.37 per Listed Share and the exchange ratio is 18.37 Listed Shares per CPA(R):5 Unit. 109 121 SELECTED FINANCIAL DATA CORPORATE PROPERTY ASSOCIATES 6 A CALIFORNIA LIMITED PARTNERSHIP
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, --------------------- ----------------------------------------------- JUNE 30, JUNE 30, 1992 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- --------- --------- (IN THOUSANDS EXCEPT PER UNIT AMOUNTS) OPERATING DATA: Revenues(1).............................. $14,177 $15,387 $15,694 $16,738 $16,537 $ 7,997 $ 8,696 Income before extraordinary gain......... 4,254 3,920 3,099 5,771 6,025 2,917 3,521 Income before extraordinary gain allocated: To General Partners.................... 255 235 186 347 428 175 211 To Limited Partners.................... 3,999 3,685 2,913 5,424 5,597 2,472 3,309 Per Unit............................... 83.40 76.85 60.76 113.16 116.78 57.20 69.04 Ratio of earnings to fixed charges(2).... 1.78 1.74 1.60 2.23 2.40 2.30 2.72 CASH FLOW DATA: Net cash provided by operating activities............................. 6,067 5,532 5,094 11,133 7,616 3,694 4,317 Net increase (decrease) in cash and cash equivalents............................ 2,011 (1,978) (1,052) (936) (139) 715 (448) Distributions attributable(3): To General Partners.................... 279 281 281 286 295 139 141 To Limited Partners.................... 4,368 4,406 4,429 4,483 4,629 2,307 2,327 Per Unit............................... 91.10 91.88 92.26 93.53 96.58 24.07 24.28 Payment of mortgage principal(4)......... 1,072 1,300 1,331 1,356 1,156 859 577 BALANCE SHEET DATA: Cash and cash equivalents................ 7,443 5,465 4,413 3,477 3,338 2,890 Total assets............................. 96,244 92,570 90,186 88,422 88,154 86,866 Total liabilities........................ 56,882 53,963 53,185 48,318 46,906 44,564 Partners equity: General Partners....................... (207) (251) (346) (157) (5) 66 Limited Partners....................... 39,569 38,857 37,346 40,260 41,252 42,236 Book value per Unit...................... 825.21 810.36 778.86 839.98 860.68 881.20 EQUIVALENT PRO FORMA PER UNIT DATA(5): Income before extraordinary item......... 124.94 57.29 Dividends................................ 113.90 56.95 Book value............................... 1,475.17
- --------------- (1) Revenues for 1995 include $688 which reflect recovery of rents which had been reserved for in 1994. (2) The ratio of earnings to fixed charges is computed as income from continuing operations before minority interest and extraordinary items plus fixed charges (primarily interest) divided by fixed charges. (3) Includes distributions attributable to the fourth quarter of each fiscal year payable in the following fiscal year less distributions in the first fiscal quarter applicable to the prior year. (4) Represents scheduled payment of mortgage principal paid. (5) Equivalent pro forma per Unit data is computed as the Company's pro forma income before extraordinary items per Unit, dividends and book value per Unit, assuming 100% participation without the issuance of Subsidiary Partnership Units, multiplied by the exchange ratio per Unit. Pro forma dividends are estimated at $1.65 per Listed Share, the Company's pro forma book value is $21.37 per Listed Share and the exchange ratio is 69.03 Listed Shares per CPA(R):6 Unit. 110 122 SELECTED FINANCIAL DATA CORPORATE PROPERTY ASSOCIATES 7 A CALIFORNIA LIMITED PARTNERSHIP
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, --------------------- ----------------------------------------------- JUNE 30, JUNE 30, 1992 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- --------- --------- (IN THOUSANDS EXCEPT PER UNIT AMOUNTS) OPERATING DATA: Revenues............................... $10,123 $12,243 $13,840 $12,196 $12,731 $ 6,164 $ 6,678 Income (loss) from continuing operations before extraordinary item(1).............................. 1,885 (836) 12,049 3,956 4,399 2,101 2,380 Income (loss) from continuing operations before extraordinary item(1): To General Partners................ 113 244 431 187 260 122 143 To Limited Partners................ 1,772 (1,080) 11,618 3,769 4,139 1,979 2,237 Per Unit........................... 39.13 (23.85) 256.62 83.31 91.55 43.78 49.48 Ratio of earnings to fixed charges(2)........................... 1.52 0.77 4.38 2.63 3.27 3.07 3.61 CASH FLOW DATA: Net cash provided by operating activities........................... 4,490 4,139 5,347 5,090 5,499 2,497 2,481 Net increase (decrease) in cash and cash equivalents..................... 93 1,249 7,266 (5,557) 624 841 474 Distributions attributable(3): To General Partners................ 191 178 279 206 210 104 106 To Limited Partners(4)............. 2,997 2,784 10,084 3,229 3,289 1,638 1,656 Per Unit........................... 60.62 61.49 222.74 71.38 72.74 18.12 18.31 Payment of mortgage principal(5)....... 560 740 739 1,567 614 449 197 BALANCE SHEET DATA: Cash and cash equivalents.............. 2,011 3,260 10,526 4,968 5,592 6,066 Total assets........................... 77,074 73,240 66,865 56,229 55,432 55,832 Total liabilities...................... 45,059 43,929 28,806 23,120 21,408 21,188 Partners equity: General Partners................... (252) (120) 113 111 162 199 Limited Partners................... 32,268 29,431 37,946 32,998 33,863 34,446 Book value per Unit.................... 712.72 650.07 838.13 729.89 749.02 761.93 EQUIVALENT PRO FORMA PER UNIT DATA(6): Income before extraordinary item....... 100.26 45.97 Dividends.............................. 91.39 45.70 Book value............................. 1,183.68
- --------------- (1) 1994 income includes an extraordinary loss of $511,503. 1993 and 1995 net income includes extraordinary gains of $879,000 and $1,324,000 respectively, on the extinguishment of debt. (2) The ratio of earnings to fixed charges is computed as income from continuing operations before minority interest and extraordinary items plus fixed charges (primarily interest) divided by fixed charges. (3) Includes distributions attributable to the fourth quarter of each fiscal year payable in the following fiscal year less distributions in the first fiscal quarter attributable to the prior year. (4) Distributions for 1994 include a special distribution of $150 per Limited Partnership Unit paid in January 1995. (5) Represents scheduled principal amortization paid. (6) Equivalent pro forma per Unit data is computed as the Company's pro forma income before extraordinary items per Unit, dividends and book value per Unit, assuming 100% participation without the issuance of Subsidiary Partnership Units, multiplied by the exchange ratio per Unit. Pro forma dividends are estimated at $1.65 per Listed Share, the Company's pro forma book value is $21.37 per Listed Share and the exchange ratio is 55.39 Listed Shares per CPA(R):7 Unit. 111 123 SELECTED FINANCIAL DATA CORPORATE PROPERTY ASSOCIATES 8, L.P. A DELAWARE LIMITED PARTNERSHIP
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, -------------------- ----------------------------------------------- JUNE 30, JUNE 30, 1992 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- -------- --------- (IN THOUSANDS EXCEPT PER UNIT AMOUNTS) OPERATING DATA: Revenues................................ $13,660 $14,364 $15,190 $15,453 $16,207 $ 8,000 $ 8,213 Income from continuing operations before extraordinary item.................... 4,312 5,258 6,012 8,338 9,453 4,887 4,837 Income from continuing operations before extraordinary item allocated: To General Partners................ 431 526 601 834 965 489 484 To Limited Partners................ 3,881 4,732 5,411 7,504 8,488 4,398 4,354 Per Unit........................... 57.29 69.84 79.86 110.93 125.60 65.08 64.42 Ratio of earnings to fixed charges(1)... 1.64 1.81 2.04 2.65 2.82 2.51 3.21 CASH FLOW DATA: Net cash provided by operating activities............................ 6,321 8,377 8,627 10,271 10,948 5,161 5,368 Net increase (decrease) in cash and cash equivalents........................... (288) 772 979 439 (269) 817 1,648 Distributions attributable (2): To General Partners................ 630 634 637 644 658 327 331 To Limited Partners................ 5,669 5,702 5,729 5,799 5,919 2,949 2,978 Per Unit........................... 83.68 84.16 84.56 85.76 87.58 21.82 22.03 Payment of mortgage principal(3)........ 303 457 969 3,358 1,769 1,174 620 BALANCE SHEET DATA: Cash and cash equivalent................ 2,929 3,701 4,681 5,119 4,850 6,498 Total assets............................ 120,971 120,670 116,323 114,890 108,629 109,665 Total liabilities....................... 66,355 67,123 63,242 60,065 50,898 50,402 Partners equity: General Partners................... (452) (559) (605) (413) (104) 49 Limited Partners................... 55,068 54,105 53,686 55,238 57,835 59,214 Book value per Unit..................... 812.83 798.61 792.42 817.34 855.78 876.18 EQUIVALENT PRO FORMA PER UNIT DATA(4): Income before extraordinary item........ 125.89 57.73 Dividends............................... 114.76 57.38 Book value.............................. 1,486.28
- --------------- (1) The ratio of earnings to fixed charges is computed as income from continuing operations before minority interest and extraordinary items plus fixed charges (primarily interest) divided by fixed charges. (2) Includes distributions attributable to the fourth quarter of each fiscal year payable in the following fiscal year less distributions in the first fiscal quarter attributable to the prior year. (3) Represents scheduled mortgage principal amortization paid. (4) Equivalent pro forma per Unit data is computed as the Company's pro forma income before extraordinary items per Unit, dividends and book value per Unit, assuming 100% participation without the issuance Partnership Subsidiary Units, multiplied by the exchange ratio per Unit. Pro forma dividends are estimated at $1.65 per Listed Share, the Company's pro forma book value is $21.37 per Listed Share and the exchange ratio is 69.55 Listed Shares per CPA(R):8 Unit. 112 124 SELECTED FINANCIAL DATA CORPORATE PROPERTY ASSOCIATES 9, L.P. A DELAWARE LIMITED PARTNERSHIP
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, ------------------- ----------------------------------------------- JUNE 30, JUNE 30, 1992 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- -------- -------- (IN THOUSANDS EXCEPT PER UNIT AMOUNTS) OPERATING DATA: Revenues.................................. $11,920 $12,217 $11,612 $11,947 $12,075 $6,100 $ 5,990 Income before extraordinary item.......... 2,849 3,866 3,908 3,189 5,175 2,544 2,501 Income before extraordinary item allocated: To General Partners..................... 285 387 391 319 517 254 250 To Limited Partners..................... 2,564 3,479 3,517 2,870 4,658 2,290 2,251 Per Unit................................ 42.79 58.07 58.69 47.91 77.73 38.22 37.57 Ratio of earnings to fixed charges(1)..... 1.51 1.69 1.76 1.66 2.03 2.00 2.02 CASH FLOW DATA: Net cash provided by operating activities.............................. 5,212 6,429 5,807 5,922 6,162 3,164 3,059 Net increase (decrease) in cash and cash equivalents............................. (614) (614) 297 2 (221) (174) (314) Distributions attributable(2): To General Partners.................. 554 557 560 562 566 282 283 To Limited Partners.................. 4,984 5,013 5,037 5,060 5,084 2,539 2,545 Per Unit............................. 83.19 83.66 84.06 84.46 84.85 21.19 21.24 Payment of mortgage principal(3).......... 299 465 530 766 1,465 716 776 BALANCE SHEET DATA: Cash and cash equivalents................. 1,972 1,358 1,655 1,658 1,437 1,123 Total assets.............................. 108,418 105,608 104,024 101,072 98,518 97,570 Total liabilities......................... 62,900 61,787 62,365 61,840 59,755 59,133 Partners equity: General Partners..................... (597) (767) (983) (1,226) (1,273) (1,306) Limited Partners..................... 46,115 44,588 42,642 40,458 40,037 39,742 Book value per Unit....................... 769.64 744.15 711.67 675.22 668.19 663.28 EQUIVALENT PRO FORMA PER UNIT DATA(4): Income before extraordinary item.......... 95.26 43.68 Dividends................................. 86.84 43.42 Book value................................ 1,124.70
- --------------- (1) The ratio of earnings to fixed charges is computed as income from continuing operations before minority interest and extraordinary items plus fixed charges (primarily interest) divided by fixed charges. (2) Includes distributions attributable to the fourth quarter of each fiscal year payable in the following fiscal year less distributions in the first fiscal quarter attributable to the prior year. (3) Represents scheduled mortgage principal amortization paid. (4) Equivalent pro forma per Unit data is computed as the Company's pro forma income before extraordinary items per Unit, dividends and book value per Unit, assuming 100% participation without the issuance Subsidiary Partnership Units, multiplied by the exchange ratio per Unit. Pro forma dividends are estimated at $1.65 per Listed Share, the Company's pro forma book value is $21.37 per Listed Share and the exchange ratio is 52.63 Listed Shares per CPA(R):9 Unit. 113 125 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) OVERVIEW The following discussion should be read in conjunction with the "Summary Selected Combined Financial Information," "Selected Combined Financial Information" and "Combined Financial Statements" and notes thereto included elsewhere in this Consent Solicitation Statement. The combined financial statements of the CPA(R) Partnerships consist of nine real estate limited partnerships. It is intended that after the Consolidation is completed, the ownership interests of the CPA(R) Partnerships will be controlled by the Company. Upon completion of the transaction, the Company will have a portfolio of 198 properties with an appraised value of approximately $682,000 and a carrying value of $645,849 (net of accumulated depreciation). Total debt will approximate $219,356, including limited recourse mortgage indebtedness of $194,347. The CPA(R) Partnerships are in the business of investing in commercial and industrial real estate which is net leased to corporations throughout the United States. Each investment is made pursuant to an extensive evaluation of the lessee's credit, management, position within its industry, operating history and profitability. Properties selected for investment are those which Management concluded as being essential to the operations of the lessees. The CPA(R) Partnerships' real estate portfolio is diversified by type of property, geographic location and industry. Net lease investments are structured to provide stable cash flow by entering into long-term net leases that require lessees to pay all operating expenses of the properties. Leases may also include operational and financial covenants that lessees must satisfy in order to protect the CPA(R) Partnerships' investments. The CPA(R) Partnerships financed property acquisitions with limited recourse mortgage debt where the cost of such financing has been favorable. The real estate portfolio consists of the properties acquired with the proceeds of the initial offerings of the CPA(R) Partnerships. Pursuant to their partnership agreements, the CPA(R) Partnerships cannot reinvest the proceeds from the sale of properties in new investments. Subsequent to the Consolidation, the Company will have greater operating flexibility to achieve its growth objectives. Depending on prevailing market conditions, the portfolio's leverage may be restructured to reduce financing costs and increase cash flow. A substantial portion of the financing used by the CPA(R) Partnerships has been in the form of limited recourse mortgage debt. As a publicly traded entity, the Company is expected to have other financing options available for its capital needs. Proceeds from property dispositions may be reinvested to increase the portfolio's rate of return. In addition, the Company will have the option of raising new equity capital in order to expand the portfolio. Accordingly, future results may not reflect the present trend of declining lease revenues (the total of rental income from operating leases and interest income from direct financing leases). RESULTS OF OPERATIONS As noted above, the CPA(R) Partnerships have generally structured leases so that the lessee is responsible for all operating expenses relating to the leased properties, including property taxes, insurance, maintenance and repairs. The leases generally include provisions that have rent increases based on formulas indexed to increases in the Consumer Price Index ("CPI"), periodic mandated increases or, for certain retail business, percentage rents on sales above an established benchmark. The CPA(R) Partnerships acquired the operations of five hotels subsequent to the CPA(R) Partnerships entering into lease termination agreements with the two lessees which had operated the hotels. Since December 31, 1995, the CPA(R) Partnerships have exchanged an interest in a hotel in Kenner, Louisiana for units in the operating partnership of a publicly traded real estate investment trust and sold a hotel in Rapid City, South Dakota. Comparison of the Six Months Ended June 30, 1997 and 1996. Net income decreased by $1,271, or 6%, primarily due to the recognition of a gain of $4,644 on the sale of real estate in the six months ended June 30, 114 126 1996 and an increase in non-cash writedowns of real estate of $2,366 during the six months ended June 30, 1997. Income before non-cash writedowns of real estate, net gains and extraordinary items reflected an increase of $5,158, or 25%, due to an increase in lease revenues, other income and a reduction in interest expense. Lease revenues increased by $2,148 primarily as a result of a lease modification and the commencement of new leases. The lease with Hughes Markets, Inc. was extended effective May 1996 at an annual rental of approximately $4,000. The lease extension accounted for $1,320 of the increase in lease revenues for the six month period. The lease with Hughes Markets is scheduled to expire in April 1998. The Company entered into a net lease agreement for the property currently occupied by Hughes with Copeland Beverage Group, Inc. Copeland's right of possession of the property and the date which it will be required to commence paying rent of $1,800 per year shall be the date, on or after April 30, 1998, that Hughes vacates the property. Scheduled rent increases and the commencement of new leases in 1996 contributed additional revenues of approximately $928. The additional lease revenues were partially offset by decreases of approximately $537 due to the sale of properties in 1996. Other income increased by $3,141 primarily due to the receipt of a distribution of proceeds in connection with a bankruptcy settlement of a former tenant. The trend of decreasing expenses for interest and depreciation has continued as a result of property sales and the retirement of debt. Interest expense decreased by $2,105 due to the prepayment of mortgage loans in connection with the sale of properties and scheduled amortization of mortgage principal. Depreciation expense decreased by $326 due to the sale of properties. General and administrative expenses increased due to higher accruals for state and local taxes and an increase in administrative reimbursements. Property expenses decreased by $186, due to a reduction in property carrying costs as a result of the net leasing of vacant properties during 1996. Operating income from hotel properties decreased by $2,019 for the six months ended June 30, 1997 as compared to the similar period in 1996, due to the sale of one hotel property in Rapid City, South Dakota and the exchange of another hotel property in Kenner, Louisiana in 1996 for operating partnership units of a newly formed, publicly traded real estate investment trust. Excluding the operations of the hotels sold or exchanged, operating income from the hotels in Alpena, Petoskey and Livonia, Michigan, increased by approximately $282 or 19%. Revenues from the three hotels increased by 6%, while expenses increased by only 1%. The growth in revenues is due to a strategy of increasing average room rates while occupancy generally remained constant. The operations of the Alpena and Petoskey hotels are seasonal in nature, with the most significant portion of their earnings historically generated during the third quarter of the year. Comparison of the Years Ended December 31, 1996 and 1995. Net income decreased by 14%, due to the realization of nonrecurring gains in 1995. A gain of $11,500 was recognized in 1995 on the settlement of litigation with a former tenant. In addition, an extraordinary gain of $3,207 was also recognized in 1995 on the extinguishment of debt. Income before net gains, extraordinary items and noncash charges for property writedowns would have reflected an increase of 12% for the comparable periods. Lease revenues decreased by 1.8%, primarily due to the sales of Properties. The sale of Properties leased to Industrial General Corporation, Genesco, IBM, GATX and AutoZone resulted in a $3,000 reduction in lease revenues. The Gibson lease restructuring in 1995 resulted in an additional $2,250 reduction in lease revenues for the comparable periods. Annual rent payments on the Gibson lease were reduced in exchange for receipt of a lump sum payment of $12,200, severing one of the Properties from the lease and an extension of the lease term on the remaining properties until November 2013. The severed property was subsequently leased to a subsidiary of CSS Industries, Inc. in connection with the lease restructuring. The decrease in lease revenues was partially offset by rent increases during 1996, which amounted to approximately $3,306. Scheduled rent increases of $965 affected 17 of the CPA(R) Partnerships' leases accounting for annual revenues of $16,200. A negotiated rent increase with Hughes Markets, Inc. resulted in additional lease revenues of $2,341 in 1996. In addition, lease revenues for 1996 increased by $677 due to the commencement of new leases. Interest expense decreased by $5,642 in 1996, as compared to 1995, while total debt decreased by approximately $47,189 during the same period. The decrease in interest expense has also been affected by the 115 127 accelerating amortization of limited recourse mortgage loans. General and administrative expenses decreased by $762, due to costs associated with state taxes in 1995 and certain non-recurring costs related to the relocation of the CPA(R) Partnerships offices in 1995. Property expenses decreased by 2%, due to certain non-recurring costs incurred in 1995 in connection with assessing liquidity alternatives for the limited partners of the CPA(R) Partnerships. Income from hotel operations decreased by $1,000, due to the disposition of two hotel properties. Operating income from each of the three remaining hotel properties increased by 7% to 13% in 1996. The increases in operating income are generally due to higher occupancy rates or increases in average room rates. Gains realized in 1996 include a gain of $4,400 on the sale of a property in Hodgkins, Illinois leased to GATX Logistics, Inc. and a gain of $785 on the sale of a hotel in Rapid City, South Dakota. The sale of the Hodgkins, Illinois property was influenced by Management's belief that the future value of the property would be affected by the scheduled expiration of the lease with GATX in 1999. The Rapid City hotel property was sold pursuant to Management's decision that the hotel would not generate an adequate return on an additional investment of funds required to maintain the hotel's affiliation with Holiday Inn. During 1996, a writedown of $1,300 was recorded based on an evaluation of the net realizable value of the Rapid City hotel. Comparison of the Years Ended December 31, 1995 and 1994. Net income for 1995 reflected an increase of 40 percent primarily due to gains and extraordinary items. Excluding the effect of such nonrecurring items, income would have reflected an increase of 13 percent, primarily due to decreases in expenses for interest, property operations, depreciation and amortization. The decrease in interest expense is due to the accelerating amortization (scheduled principal payments) of limited recourse mortgage loans, the satisfaction of other mortgage loans in connection with property sales or lease restructurings and the refinancing of selected loans at lower rates of interest. The decrease in expenses for depreciation and amortization is due to the sale of properties and the full depreciation of certain components on older properties. Property expenses for 1994 include nonrecurring costs incurred in connection with assessing liquidity alternatives for the limited partners of the CPA(R) Partnerships and costs incurred in successfully resolving disputes with lessees. Costs involving disputes with lessees decreased in 1995 as a result of the successful settlement of litigation with The Leslie Fay Company ("Leslie Fay") and Anthony's Manufacturing Company, Inc. ("Anthony's"). The decrease in lease revenues of 4% was solely due to the sale of properties in 1994 and 1995. This decrease was partially offset by rent increases on certain leases. Annualized lease revenues increased by approximately $1,000 as a result of such rent increases. Hotel operating results reflected increases of 11% in revenues and earnings. Although several factors contributed to these increases, the most significant factor was due to the CPA(R) Partnerships' engagement of a new hotel management company to operate all five of the hotels in January 1995. The hotel management company raised room rates at the Kenner, Louisiana and Livonia, Michigan hotels, both of which are operated as Holiday Inns, with no detrimental impact on occupancy rates. The Kenner property was transferred to an unaffiliated entity in July 1996 in exchange for an equity interest in such entity. Gains in 1995 include a gain on settlement with Leslie Fay, gains from the completion of several sale transactions which are more fully described in Note 13 to the accompanying Combined Financial Statements and gains on the extinguishment of debt. The gain on the settlement with Leslie Fay concluded a dispute which commenced in 1992 after Leslie Fay challenged the previously agreed to method for determining the purchase price for the property pursuant to a purchase option. The CPA(R) Partnerships recognized a gain of $11,499 on the settlement of the dispute and retained ownership of the property. The property, which was purchased by the CPA(R) Partnerships in 1982 for $9,400, was subsequently sold in January 1996. LIQUIDITY AND CAPITAL RESOURCES The CPA(R) Partnerships' portfolio of Properties was acquired with funds from the initial offering of each Partnership and with financing provided by limited recourse mortgage debt. Funds from the initial offerings were also used to establish working capital reserves in accordance with the provisions of each partnership agreement. Cash flow from operations has historically been used to pay scheduled principal payment 116 128 obligations on mortgage debt and to fund quarterly distributions to partners, generally at an increasing rate each quarter. The CPA(R) Partnerships have historically maintained cash balances at levels which management deemed prudent for day-to-day operations and for maintaining reserves for capital needs, such as paying off maturing mortgages loans, funding improvements at the hotel properties and for the remarketing of properties. Net proceeds from the sale of assets or settlement of disputes with lessees have been used to pay off high rate mortgage debt or to fund special distributions to partners, after reviewing the adequacy of cash reserves. In accordance with their partnership agreements, the CPA(R) Partnerships may not use proceeds from the sale of assets for reinvestment in properties. Pursuant to the terms of limited recourse mortgage debt, lenders have recourse only to the properties collateralizing such debt. Three of the CPA(R) Partnerships have utilized unsecured loans over the past several years to pay off limited recourse debt. The terms of the recourse loans require borrowers to meet financial covenants, including debt service coverage ratios, maintenance of tangible net worth and compliance with limitations on total nonrecourse debt. The Company expects to meet certain long-term liquidity requirements, such as capital improvements, scheduled debt maturities and new property acquisitions through long-term secured and unsecured indebtedness and the issuance of equity securities. Upon completion of the Consolidation, the Company will have a real estate portfolio with an appraised value of approximately $682,000, limited recourse mortgage debt of approximately $194,347 and recourse debt of $24,709. Management believes that a restructuring of debt will provide an opportunity to enhance cash flow and future growth. Existing debt may be refinanced with recourse loans where the cost of such financing is favorable. Historically a significant amount of cash flow has been used to fund scheduled amortization of mortgage principal. Scheduled mortgage principal amortization paid in 1996 amounted to $8,844. The Company may use non-amortizing debt in the future to reduce debt service levels and provide additional cash flow for funding capital improvements or the acquisition of new properties. As a perpetual life entity, the Company may utilize unsecured financing to lower financing costs and improve operating flexibility. Management believes that the Company will have additional borrowing capacity that can be used to fund capital needs. The CPA(R) Partnerships have historically distributed a significant portion of cash flow to their Partners. The Company will initially distribute a significant portion of its cash flow to Shareholders. In the future, management will have the ability to evaluate whether a greater return may be realized by reinvesting excess cash flows, rather than increasing the rate of distributions. The Company expects to meet its short-term liquidity requirements, including general and administrative and property expenses, scheduled principal payment installment obligations and distribution objectives from cash generated from operations and from existing cash balances. The CPA(R) Partnerships maintained working capital reserves in order to fund their non-recurring needs, including capital improvements and maturing debt. The Company's cash balance after the Consolidation is expected to approximate $21,500. Such cash balance may decrease in the future as the Company will have the opportunity to use lines of credit to supplement cash flow from operations to fund short-term liquidity needs. 117 129 MANAGEMENT FOLLOWING THE CONSOLIDATION DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The individuals who will serve as Directors and executive officers of the Company upon completion of the Consolidation are listed below.
NAME OFFICE - ------------------------------------------- ----------------------------------------------------- Francis J. Carey........................... Chairman of the Board, Chief Executive Officer and Director Gordon F. DuGan............................ President, Chief Acquisitions Officer and Director Steven M. Berzin........................... Vice Chairman and Director Donald E. Nickelson........................ Chairman of the Audit Committee and Director William P. Carey........................... Chairman of the Executive Committee and Director Eberhard Faber, IV......................... Director Barclay G. Jones III....................... Director Dr. Lawrence R. Klein...................... Director Charles C. Townsend Jr. ................... Director Reginald Winssinger........................ Director Claude Fernandez........................... Executive Vice President -- Financial Operations John J. Park............................... Executive Vice President, Chief Financial Officer and Treasurer H. Augustus Carey.......................... Senior Vice President and Secretary Samantha K. Garbus......................... Vice President -- Asset Management Susan C. Hyde.............................. Vice President -- Shareholder Services Robert C. Kehoe............................ Vice President -- Accounting Edward V. LaPuma........................... Vice President -- Acquisitions
The following is a biographical summary of the experience of the Directors and executive officers of the Company. Francis J. Carey, age 71, was elected in 1997 as Chairman, Chief Executive Officer and a Director of the Company, at which time he resigned his positions as President and a Director of W.P. Carey & Co., CPA(R):10, CIP(TM) and CPA(R):12. He had served as President of W.P. Carey since 1987 and as a Director since its founding in 1973. Prior to 1987 he was senior partner in Philadelphia, head of the real estate department nationally and a member of the executive committee of the Pittsburgh-based firm of Reed Smith Shaw & McClay, counsel for W.P. Carey & Co. and the Company. He served as a member of the executive committee and Board of Managers of the Western Savings Bank of Philadelphia from 1972 until its takeover by another bank in 1982, and is former chairman of the Real Property, Probate and Trust Section of the Pennsylvania Bar Association. Mr. Carey served as a member of the Board of Overseers of the School of Arts and Sciences at the University of Pennsylvania from 1983 to 1990. He has also served as a member of the Board of Trustees and executive committee of the Investment Program Association since 1990 and on the Business Advisory Council of the Business Council for the United Nations since 1994. He holds A.B. and J.D. degrees from the University of Pennsylvania and completed executive programs in corporate finance and accounting at Stanford University Graduate School of Business and the Wharton School of the University of Pennsylvania. Mr. Carey is the father of H. Augustus Carey and the brother of William P. Carey. Gordon F. DuGan, age 31, was elected Executive Vice President and a Managing Director of W.P. Carey & Co. in June 1997. Mr. DuGan rejoined W.P. Carey as Deputy Head of Acquisitions in February 1997. Mr. DuGan was until September 1995 a Senior Vice President in the Acquisitions Department of W.P. Carey & Co. Mr. DuGan jointed W.P. Carey & Co. as Assistant to the Chairman in May 1988, after graduating from the Wharton School at the University of Pennsylvania where he concentrated in Finance. From October 1995 until February 1997, Mr. DuGan was Chief Financial Officer of Superconducting Core Technologies, Inc., a Colorado-based wireless communications equipment manufacturer. 118 130 Steven M. Berzin, age 47, was elected Executive Vice President, Chief Financial Officer and a Managing Director of W.P. Carey & Co. in July 1997. From 1993 to 1997, Mr. Berzin was Vice President -- Business Development of General Electric Capital Corporation in the office of the Executive Vice President and, more recently, in the office of the President, where he was responsible for business development activities and acquisitions. From 1985 to 1992, Mr. Berzin held various positions with Financial Guaranty Insurance Company, the last two being Managing Director, Corporate Development, and Senior Vice President and Chief Financial Officer. Mr. Berzin was associated with the law firm of Cravath, Swaine & Moore from 1977 to 1985 and from 1976 to 1977, he served as law clerk to the Honorable Anthony M. Kennedy, then a United States Circuit Judge. Mr. Berzin received a B.A. and M.A. in Applied Mathematics from Harvard University, a B.A. in Jurisprudence and an M.A. from Oxford University, and a J.D. from Harvard Law School. Donald E. Nickelson, age 64, serves as Chairman of the Board and Director of Greenfield Industries, Inc. and Director of Allied Healthcare Products, Inc. Mr. Nickelson is Vice-Chairman and Director of the Harbor Group, a leverage buy-out firm. He is also a Director of Sugen Corporation and D.T.I. Industries, Inc. and Trustee of Mainstay Mutual Fund Group. From 1986 to 1988, Mr. Nickelson was President of PaineWebber Incorporated, from 1988 to 1990 he was President of the PaineWebber Group and a Director from 1980 to 1993. Prior to 1986, Mr. Nickelson served in various capacities with affiliates of PaineWebber Incorporated and its predecessor firm. From 1988 to 1989, Mr. Nickelson was a Director of a diverse group of corporations in the manufacturing, service and retail sectors, including Wyndham Baking Co., Inc., Hoover Group, Inc., Peebles, Inc. and Motor Wheel Corporation. He is a former Chairman of National Car Rentals, Inc. Mr. Nickelson is also a former Director of the Chicago Board Options Exchange and is a former Chairman of the Pacific Stock Exchange. William P. Carey, age 67, has been active in lease financing since 1959 and a specialist in net leasing of corporate real estate property since 1964. Before founding W.P. Carey & Co., in 1973, he served as Chairman of the Executive Committee of Hubbard, Westervelt & Mottelay (now Merrill Lynch Hubbard), head of Real Estate and Equipment Financing at Loeb Rhoades & Co. (now Lehman Brothers), head of Real Estate and Private Placements, Director of Corporate Finance and Vice Chairman of the Investment Banking Board of duPont Glore Forgan Inc. A graduate of the University of Pennsylvania's Wharton School of Finance, Mr. Carey is a Governor of the National Association of Real Estate Investment Trusts (NAREIT) and a Trustee of The Johns Hopkins University and of other educational and philanthropic institutions. He has served for many years on the Visiting Committee to the Economics Department of the University of Pennsylvania and co-founded with Dr. Lawrence R. Klein the Economics Research Institute at that university. Mr. Carey also serves as Chairman of the Board and Chief Executive Officer of CPA(R):10, CIP(TM) and CPA(R):12. Mr. Carey is the brother of Francis J. Carey and the uncle of H. Augustus Carey. Eberhard Faber, IV, age 61, is currently a Director of PNC Bank, Chairman of the Board and Director of the Citizens Voice, a newspaper, a Director of Ertley's Motorworld, Inc., Vice-Chairman of the Board of Kings College and a Director of Geisinger Wyoming Valley Hospital. Mr. Faber served as Chairman and Chief Executive officer of Eberhard Faber, Inc., from 1973 to 1987. Mr. Faber also served as the Director of the Philadelphia Federal Reserve Bank, including service as the Chairman of its Budget and Operations Committee from 1980 to 1986. Mr. Faber has served on the boards of several companies, including First Eastern Bank from 1980 to 1993. Barclay G. Jones III, age 37, is Vice Chairman and a Managing Director of W.P. Carey & Co. Mr. Jones joined W.P. Carey & Co. as Assistant to the President in July 1982, after his graduation from the Wharton School of the University of Pennsylvania where he majored in Finance and Economics. Mr. Jones has served as a director of W.P. Carey & Co. since April 1992 and is a director of the Wharton School Club of New York. Dr. Lawrence R. Klein, age 77, is Benjamin Franklin Professor Emeritus of Economics and Finance at the University of Pennsylvania and its Wharton School, having joined the faculty of the University in 1958. He is a holder of earned degrees from the University of California at Berkeley and the Massachusetts Institute of Technology and has been awarded the Alfred Nobel Memorial Prize in Economic Sciences, as well as a number of honorary degrees. Founder of Wharton Econometric Forecasting Associates, Inc., Dr. Klein has 119 131 been counselor to various corporations, governments and government agencies, including the Federal Reserve Board and the President's Council of Economic Advisers. Dr. Klein joined W.P. Carey & Co. in 1984 as Chairman of the Economic Policy Committee and as a Director. Charles C. Townsend, Jr., age 69, currently is an Advisory Director of Morgan Stanley & Co., having held such position since 1979. Mr. Townsend was a Partner and a Managing Director of Morgan Stanley & Co. from 1963 to 1978 and served as Chairman of Morgan Stanley Realty Corporation from 1977 to 1982. Mr. Townsend holds a B.S.E.E. from Princeton University and an M.B.A. from Harvard University. Mr. Townsend serves as director of CPA(R):10, CIP(R) and. CPA(R):12. Reginald Winssinger, age 55, is currently Chairman of the Board and Director of Horizon Real Estate Group, Inc. Mr. Winssinger has managed portfolios of diversified real estate assets exceeding $500 million throughout the United States for more than 20 years. Mr. Winssinger is active in the planning and development of major land parcels and has developed 20 commercial properties. Mr. Winssinger is a native of Belgium with more than 25 years of real estate practice, including 10 years based in Brussels, overseeing appraisals, construction and management. Mr. Winssinger holds a B.S. in Geography from the University of California at Berkeley and received a Degree in Appraisal and Survey in Belgium. Mr. Winssinger presently serves as Honorary Belgium Consul to the State of Arizona, a position he has held since 1991. Claude Fernandez, age 45, is a Managing Director, Executive Vice President and Chief Administrative Officer of W.P. Carey & Co. Mr. Fernandez joined W.P. Carey & Co. as Assistant Controller in March 1983, was elected Controller in July 1983, and Vice President in April 1986, First Vice President in April 1987, Senior Vice President in April 1989 and Executive Vice President in April 1991. Prior to joining W.P. Carey & Co., Mr. Fernandez was associated with Coldwell Banker, Inc. in New York for two years and with Arthur Andersen & Co. in New York for over three years. Mr. Fernandez, a Certified Public Accountant, received a B.S. degree in Accounting from New York University in 1975 and an M.B.A. in Finance from Columbia University Graduate School of Business in 1981. John J. Park, age 33, is a Senior Vice President, Treasurer and a Managing Director of W.P. Carey & Co. Mr. Park became a First Vice President of W.P. Carey & Co. in April 1993 and Senior Vice President in October, 1995. Mr. Park joined W.P. Carey & Co. as an Investment Analyst in December 1987 and became a Vice President in July 1991. Mr. Park received B.S. in Chemistry from Massachusetts Institute of Technology in 1986 and an M.B.A. in Finance from the Stern School of New York University in 1991. H. Augustus Carey, age 40, is a Senior Vice President and a Managing Director at W.P. Carey & Co. He returned to W.P. Carey & Co. as a Vice President in August 1988 and was elected First Vice President in April 1992. Mr. Carey previously worked for W.P. Carey & Co. from 1979 to 1981 as Assistant to the President. From 1984 to 1987, Mr. Carey served as a loan officer in the North American Department of Kleinwort Benson Limited in London, England. He received his A.B. in Asian Studies from Amherst College in 1979 and a M.Phil. in Management Studies from Oxford University in 1984. He is the son of Francis J. Carey and the nephew of William P. Carey. Samantha K. Garbus, age 29, is a Vice President and Director of Property Management of W.P. Carey & Co. Ms. Garbus became a Second Vice President of W.P. Carey & Co. in April 1995 and Vice President in April 1997. Ms. Garbus joined W.P. Carey & Co. as a Property Management Associate in January 1992. Ms. Garbus received a B.A. degree in History from Brown University in 1990 and an M.B.A. from The Stern School of New York University in January 1997. Susan C. Hyde, age 29, is a Vice President and Director of Investor Relations of W.P. Carey & Co. Ms. Hyde joined W.P. Carey & Co. in 1990, became a Second Vice President in April 1995 and Vice President in April 1997. Ms. Hyde graduated from Villanova University in 1990 where she received a B.S. degree in Business Administration with a concentration in marketing and a B.A. degree in English. Robert C. Kehoe, age 37, a Vice President of W.P. Carey & Co., joined W.P. Carey & Co. as a Senior Accountant in 1987. Mr. Kehoe became a Second Vice President of W.P. Carey & Co. in April 1992 and Vice President in July 1997. Prior to joining W.P. Carey & Co., Mr. Kehoe was associated with Deloitte Haskins & Sells for three years and was Manager of Financial Controls at CBS Educational and Professional Publishing 120 132 for two years. Mr. Kehoe received his B.S. degree in Accounting from Manhattan College in 1982 and his M.B.A. from Pace University in 1993. Edward V. LaPuma, age 24, is a Vice President and Research Officer for W.P. Carey & Co. and its Affiliate, Carey Institutional Properties. Mr. LaPuma joined W.P. Carey & Co. as an Assistant to the Chairman in July 1995, became Second Vice President in July 1996 and Vice President in April 1997. A graduate of the University of Pennsylvania, Mr. LaPuma received a B.A. degree in Global Economic Strategies from The College of Arts and Sciences and a B.S. degree in Economics with a concentration in Finance from the Wharton School. DIRECTORS AND PRINCIPAL OFFICERS OF THE MANAGER The Directors and principal officers of the Manager who will have responsibility for providing services to the Company are as follows:
NAME OFFICE - ------------------------------------------------ ---------------------------------------------- William P. Carey................................ Chairman of the Board and Director Barclay G. Jones, III........................... President and Director Frank J. Hoenemeyer............................. Vice Chairman of the Investment Committee and Director Dr. Lawrence R. Klein........................... Chairman of the Economic Policy Committee and Director George E. Stoddard.............................. Chairman of the Investment Committee and Director Steven M. Berzin................................ Executive Vice President, Chief Financial Officer and Director Gordon F. DuGan................................. Executive Vice President Claude Fernandez................................ Executive Vice President H. Augustus Carey............................... Senior Vice President and Secretary Anthony S. Mohl................................. Senior Vice President -- Property Management John J. Park.................................... Senior Vice President and Treasurer Michael D. Roberts.............................. First Vice President and Controller Gordon J. Whiting............................... First Vice President -- Acquisitions
Information regarding Messrs. W. P. Carey, Jones, Klein, Berzin, DuGan, Fernandez, Park and H.A. Carey is set forth under "Management -- Directors and Principal Officers of the Company." George E. Stoddard, age 80, was until 1979 officer-in-charge of the Direct Placement Department of The Equitable Life Assurance Society of the United States ("Equitable") with responsibility for all activities related to Equitable's portfolio of corporate investments acquired through direct negotiation. Mr. Stoddard was associated with Equitable for over 30 years. He holds an A.B. degree from Brigham Young University, an M.B.A. from Harvard Business School and an LL.B. from Fordham University Law School. Mr. Stoddard also serves as President and Managing Director of W.P. Carey & Co. Frank J. Hoenemeyer, age 77, is the former Vice Chairman and Chief Investment Officer of the Prudential Insurance Company of America, where he was responsible for Prudential's real estate and securities portfolio, now over $200 billion. Mr. Hoenemeyer was with Prudential of the University of Pennsylvania for 37 years. He graduated with a B.S. from Xavier University and an M.A. from the Wharton School. Anthony S. Mohl, age 35, is a Senior Vice President of W.P. Carey & Co. Mr. Mohl joined W.P. Carey & Co. as Assistant to the President in September 1987 after receiving an M.B.A. from the Columbia University Graduate School of Business and became a Second Vice President in January 1990. Mr. Mohl was employed as an analyst in the strategic planning group of Kurt Salmon Associates after receiving a B.A. degree in History from Wesleyan University. 121 133 Michael D. Roberts, age 45, First Vice President and Controller of W.P. Carey & Co., joined W.P. Carey & Co. in April 1989 as a Second Vice President and Assistant Controller, was named Vice President and Controller in October 1989 and First Vice President in July 1990. From August 1980 to February 1983 and from September 1983 to April 1989, he was employed by Coopers & Lybrand and held the position of Audit Manager at the time of his departure. A Certified Public Accountant, Mr. Roberts received a B.A. degree in Sociology from Brandeis University and an M.B.A. from Northeastern University. Gordon J. Whiting, age 31, is a First Vice President of W.P. Carey & Co. Mr. Whiting became a First Vice President of W.P. Carey & Co. in April 1997 and Vice President in October 1995. Prior to joining W.P. Carey & Co. as a Second Vice President in September 1994, after Mr. Whiting received an M.B.A. from the Columbia University Graduate School of Business where he concentrated in finance, Mr. Whiting founded an import/export Company based in Hong Kong after receiving a B.S. in Business Management and Marketing from Cornell University. TERMS OF DIRECTORS OF THE COMPANY Pursuant to the Organizational Documents, the Board of Directors of the Company is divided into three classes serving staggered three-year terms. The terms of the first, second and third classes will expire in 1998, 1999 and 2000, respectively. The term of Messrs. Berzin, DuGan and Winssinger will expire in 1998; the term of Messrs. F. Carey, Faber and Jones will expire in 1999; and the term of Messrs. W. Carey, Klein, Townsend and Nickelson will expire in 2000. Directors for each class will be chosen for a three-year term upon the expiration of the current class' term beginning in 1998. The staggered terms for Directors may affect the holder of Listed Shares ability to change control of the Company, even if a change of control were in the interests of the Shareholders. An individual who has been elected to fill a vacancy will hold office only for the unexpired term of the Director being replaced. The Organizational Documents provide that the number of Directors of the Company will be fixed by the Board of Directors, but must consist of not fewer than five nor more than 15 members. One class of Directors will be elected annually by the affirmative vote of the holders of at least a majority of the Listed Shares present at a meeting at which a quorum is present. Directors can be removed from office only by the affirmative vote of the holders of at least a majority of the Listed Shares. In addition, any vacancy (other than a vacancy created by an increase in the number of Directors) may be filled, at any regular meeting or at any special meeting of the Directors called for that purpose, by the affirmative vote of a majority of the remaining Directors, though less than a quorum. A vacancy created by an increase in the number of Directors shall be filled by a majority of the entire Board of Directors. Accordingly, the Board of Directors could temporarily prevent any holder of Listed Shares from enlarging the Board of Directors and filling the new Directorships with such holders' own nominees. The Board of Directors expects to hold meetings at least quarterly and may take action on behalf of the Company by unanimous written consent without a meeting. Directors may participate in meetings by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. COMMITTEES OF THE BOARD OF DIRECTORS OF THE COMPANY Executive Committee. The Executive Committee may authorize the execution of contracts and agreements, including those related to the borrowing of money by the Company. The Executive Committee will exercise, during intervals between meetings of the Board of Directors and subject to certain limitations, all of the powers of the full Board of Directors and will monitor and advise the Board of Directors on strategic business planning for the Company. Audit Committee. Promptly following the consummation of the Consolidation, the Board of Directors will establish an audit committee that will consist of two or more Independent Directors (the "Audit Committee"). (For purposes of the Company's operations, the term "independent" as applied to a Director means a person who (i) is not an officer of the Company and (ii) is, in the view of the Company's Board of Directors, free of any relationship that would interfere with the exercise of independent judgment.) The Audit 122 134 Committee will be established to make recommendations concerning the engagement of independent public accountants, review with the independent public accountants the plans and results of the audit engagement, approve professional services provided by the independent public accountants, review the independence of the independent public accountants, consider the range of audit and non-audit fees and review the adequacy of the Company's internal accounting controls. The membership of the Committees of the Board of Directors will be established after the Consolidation. COMPENSATION OF THE BOARD OF DIRECTORS The Company intends to pay its Directors who are not officers of the Company fees for their services as Directors. Such Directors will receive annual compensation of $35,000. Initially, compensation will be paid in the form of restricted Listed Shares and options to purchase Listed Shares. This compensation may be changed by the Board of Directors. Officers or employees of the Company or Manager who are Directors will not be paid any director fees. EXECUTIVE COMPENSATION The Company was organized as a Delaware limited liability company in October 1996 and will pay no compensation until the Consolidation is completed. The following table sets forth the base compensation to be awarded to Francis J. Carey, the Company's Chief Executive Officer on an annualized basis during 1997. SUMMARY COMPENSATION TABLE
ANNUAL LONG TERM COMPENSATION SALARY(1) AWARDS & OPTIONS(2) --------- ---------------------- Francis J. Carey............................................ $ 250,000 121,000 Chairman & Chief Executive Officer
- --------------- (1) Amount specified is an annualized projection for fiscal year 1997, which ends December 31, 1997. It does not include bonuses that may be paid. (2) Upon the effective date of the Consolidation, Mr. Carey will receive options to purchase 38,500 Listed Shares at $20 per share and a grant of 7,500 Listed Shares as part of his annual compensation. The transferability of the Listed Shares will be restricted. Mr. Carey will also receive a one-time grant of options to purchase 75,000 Listed Shares at $20 per Listed Share. OPTION GRANT IN FISCAL YEAR 1997(1)
POTENTIAL REALIZABLE VALUE PERCENT OF AT ASSUMED ANNUAL RATE OF TOTAL OPTIONS SHARE PRICE APPRECIATION GRANTED TO EXERCISE FOR OPTION TERM OPTIONS EMPLOYERS IN PRICE PER EXPIRATION ------------------------- GRANTED(1) FISCAL YEAR SHARE DATE 5% 10% ---------- ------------- --------- ---------- ---------- ---------- Francis J. Carey... 113,500 100% $20 * $1,427,591 $3,617,795
- --------------- * Expiration Date will be 10 years from the date of grant, which will be the date the Consolidation is completed. (1) The options will become exercisable for one-third of the covered shares on each of the first, second and third anniversary of the date of grant. 1997 LISTED SHARE INCENTIVE PLAN Prior to the Offering, the Board of Directors will adopt, and the initial shareholders of the Company will approve, the 1997 Plan for the purpose of attracting and retaining executive officers, Directors and employees. The 1997 Plan will be administered by the Compensation Committee of the Board of Directors or its delegate. The Compensation Committee may not delegate its authority with respect to grants and awards to individuals subject to Section 16 of the Exchange Act. As used in this summary, the term "Administrator" means the Compensation Committee or its delegate, as appropriate. 123 135 Officers and other employees of the Company and its Affiliates generally will be eligible to participate in the 1997 Plan. The Administrator selects the individuals who will participate in the 1997 Plan ("Participants"). The 1997 Plan authorizes the issuance of up to 700,000 Listed Shares. The Plan provides for the grant of (i) share options which may or may not qualify as incentive stock options under Section 422 of the Code, (ii) performance shares, (iii) dividend equivalent rights ("DERs"), issued alone or in tandem with options, and (iv) restricted shares, which are contingent upon the attainment of performance goals or subject to vesting requirements or other restrictions. The Administrator shall prescribe the conditions which must occur for restricted shares or performance shares to vest and incentive awards to be earned. In connection with the grant of options under the 1997 Plan, the Administrator will determine the option exercise period and any vesting requirements. The initial options granted under the Plan will have 10-year terms and will become exercisable for one-third of the covered shares (disregarding fractional shares, if any) on the first and second anniversaries of the date of grant and, for the balance of the shares, on the third anniversary of the date of grant subject to acceleration of vesting upon a change in control of the Company (as defined in the 1997 Plan). An option may be exercised for any number of whole shares less than the full number for which the option could be exercised. A Participant will have no rights as a shareholder with respect to Listed Shares subject to his or her option until the option is exercised. If a Participant is terminated due to dishonesty or similar reasons, all unexercised options, whether vested or unvested, will be forfeited. Any Listed Shares subject to options which are forfeited (or expire without exercise) pursuant to the vesting requirement or other terms established at the time of grant will again be available for grant under the 1997 Plan. The exercise price of options granted under the 1997 Plan may not be less than the fair market value of the Listed Shares on the date of grant. Payment of the exercise price of an option granted under the 1997 Plan may be made in cash, cash equivalents acceptable to the Compensation Committee or, if permitted by the option agreement, by exchanging Common Shares having a fair market value equal to the option exercise price. On the effective date of the Offering, options for 113,500 Listed Shares and 7,500 restricted Listed Shares will be granted to the sole employee of the Company. The options will have an exercise price equal to $20 per Listed Share. No option, DER, restricted Listed Shares or performance shares may be granted under the 1997 Plan after December 31, 2006. The Board may amend or terminate the 1997 Plan at any time, but an amendment will not become effective without shareholder approval if the amendment materially (i) increases the number of shares that may be issued under the 1997 Plan (other than an adjustment or automatic increase described above), (ii) changes the eligibility requirements or (iii) increases the benefits that may be provided under the 1997 Plan. No amendment will affect a Participant's outstanding award without the Participant's consent. INCENTIVE COMPENSATION The Company may award incentive compensation to employees of the Company and its subsidiaries, including incentive awards under the 1997 Plan that may be earned on the attainment of performance objectives stated with respect to criteria described above or other performance-related criteria. The Compensation Committee may, in its discretion, approve bonuses to executive officers and certain other officers and key employees if the Company achieves Company-wide, regional and/or business unit performance objectives determined by it each year. THE NON-EMPLOYEE DIRECTOR PLAN Prior to the issuance of the Listed Shares, the Board of Directors will also adopt, and the Company's shareholders will approve, the Non-Employee Directors' Plan to provide incentives to attract and retain Independent Directors. The Directors' Plan provides for the grant of options and the award of Listed Shares to each eligible Director of the Company. No Director who is an employee of the Company or an employee of the Manager is eligible to participate in the Non-Employee Directors' Plan. 124 136 The Directors' Plan provides that each Independent Director who is a member of the Board of Directors on the first day of trading of the Listed Shares will be granted an option to purchase 4,000 Listed Shares at an exercise price of $20 per Listed Share and 1,250 Listed Shares. The exercise price of options granted under the Directors' Plan may be paid in cash, acceptable cash equivalents, Listed Shares or a combination thereof. Options issued under the Directors' Plan are exercisable for ten years from the date of grant. The option granted under the Directors' Plan shall become exercisable for 1,333 Listed Shares on each of the first and second anniversaries of the date of grant and for 1,334 Listed Shares on the third anniversary of the date of grant provided that Trustee is a member of the Board of Directors on such anniversary date. To the extent an option has become exercisable under the Directors' Plan, it may be exercised whether or not the Trustee is a member of the Board on the date or dates of exercise. An option may be exercised for any number of whole shares less than the full number of which the option could be exercised. A Trustee will have no rights as a Shareholder with respect to Listed Shares subject to his or her option, until the option is exercised. In subsequent annual periods, each Independent Director may also receive quarterly an award of options to purchase Listed Shares or Restricted Listed Shares. Awards will be made on each April 1, July 1, October 1 and January 1 (each date, a "Quarterly Award Date") during the term of the Directors' Plan. Each Independent Director may receive, on each Quarterly Award Date on which he is a member of the Board of Directors, the number of options to purchase Listed Shares or restricted Listed Shares having a fair market value on that date that as nearly as possible equals, but does not exceed $6,250. Restrictions on the exercisability of the options shall lapse or vest over a three year period. The transfer of Listed Shares granted to Directors may be restricted, and the restriction will lapse as specified at the time of the grant. The terms of outstanding options, the number of Listed Shares for which options will thereafter be awarded and the number of Listed Shares to be awarded on a Quarterly Award Date shall be subject to adjustment in the event of a share dividend, share split, combination, reclassification, recapitalization or other similar event. The Directors' Plan provides that the Board of Directors may amend or terminate the Directors' Plan, but the Directors' Plan may not be amended more than once every six months, other than to comply with changes in the Code, the Employee Retirement Income Security Act of 1974 or the rules thereunder. An amendment will not become effective without shareholder approval if the amendment materially changes the eligibility requirements or increases the benefits that may be provided under the Directors' Plan. No options for Listed Shares may be granted, and no Listed Shares may be awarded under the Directors' Plan after December 31, 2003. THE MANAGER Carey Management LLC, the Manager, will serve as the manager of the Company. The Manager is a limited liability company and its members are W.P. Carey & Co., CCP, Seventh Carey, Eighth Carey and Ninth Carey. The Company has entered into a management agreement with the Manager (the "Management Agreement") pursuant to which the Manager will manage the Company's day-to-day affairs. This will include the purchase and disposition of Company investments and the management of the properties owned by the Company. The Manager and its Affiliates will receive certain fees and compensation pursuant to the Management Agreement. See "COMPENSATION, REIMBURSEMENT AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGER." SHAREHOLDINGS Upon consummation of the Consolidation, the Manager will own 661,718 Listed Shares, which constitutes approximately 3% of the outstanding Listed Shares as of such date (assuming 100% Partnership Participation). Furthermore, any resale of the 661,718 Listed Shares that the Manager will own and the resale of any Shares which may be acquired by Affiliates of the Company are subject to the provisions of Rule 144 promulgated under the Securities Act, which limits the number of Shares that may be sold at any one time and the manner of such resale. Although the Manager is not prohibited from acquiring additional Listed 125 137 Shares. There is no limitation on the ability of the Manager or its Affiliates to resell any Shares they may acquire in the future. In addition, upon completion of the Consolidation, the Manager will receive Warrants to purchase 2,284,800 Listed Shares at $21 per Listed Share and 725,930 Listed Shares at $23 per Listed Share. MANAGEMENT DECISIONS The primary responsibility for the selection of Company investments and the negotiation for such investments will reside in Francis J. Carey, Chairman and Chief Executive Officer of the Company and Steven M. Berzin, William P. Carey, Gordon F. DuGan, Barclay G. Jones III and George E. Stoddard, all of whom are officers or Directors of the Manager. Each potential Company investment will be submitted for review to the Investment Committee. George E. Stoddard, Chairman, Frank J. Hoenemeyer and Lawrence R. Klein currently serve as members of the Investment Committee. The Board of Directors of the Manager has empowered the Investment Committee to authorize and approve Company investments on behalf of the Manager. However, the Board of Directors of the Manager retains ultimate authority to authorize and approve Company investments on behalf of the Manager and may make such investments on behalf of the Company without the approval of, and irrespective of any adverse recommendation by, the Investment Committee or any other Person, except the Board of Directors of the Company. LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS OF THE COMPANY Pursuant to the Organizational Documents, no Directors or officers of the Company will be liable, responsible or accountable in damages or otherwise to the Company or any of the Shareholders for any act or omission performed or omitted by such Director or officer, except in the case of fraudulent or illegal conduct of such person. INDEMNIFICATION OF DIRECTORS AND OFFICERS According to the Organizational Documents, all Directors and officers of the Company are entitled to indemnification from the Company. See "FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION -- Indemnification of Directors and Officers of the Company." MANAGEMENT SERVICES PROVIDED BY MANAGER The Manager will provide both strategic and day-to-day management for the Company, including acquisition services, research, investment analysis, asset management, capital funding services, disposition of assets and administrative services. The Manager will also provide office and other facilities for the Company's needs. Through the Manager and its Affiliates, the Company will function as a fully integrated operating company. The Board has authorized the Manager to make investments in any property on behalf of the Company. Certain types of transactions, however, require the prior approval of the Board and a majority of the Independent Directors, including the following: (i) the allocation of interests in investments made through joint venture arrangements with Affiliates of the Manager that are public companies, (ii) the terms of any investment made with the Manager or any affiliate of the Manager that is not a public company, (iii) transactions that present issues which involve conflicts of interest for the Manager (other than conflicts involving the payment of fees or the reimbursement of expenses or joint investments) and (iv) the lease of assets to the Manager, any Director or an Affiliate of the Manager. The Company will reimburse the Manager for all of the costs that it incurs in connection with the services it provides to the Company, including, but not limited to: (i) expenses attributable to the Consolidation (including but not limited to, advertising expenses, expense reimbursement, counsel and accounting fees), (ii) the cost of goods and services used by the Company and obtained from entities not affiliated with the Manager, including brokerage fees paid in connection with the purchase and sale of securities, (iii) administrative services (including personnel costs, provided, however that no reimbursement shall be made for costs of personnel to the extent that such personnel are used in transactions for which the Manager 126 138 receives a separate transactional fee), (iv) rent, depreciation, leasehold improvement costs, utilities or other administrative items and (v) Acquisition Expenses, which are defined to include expenses related to the selection and acquisition of Properties. The term of the Management Agreement ends on December 31, 1998 and thereafter will be automatically renewed for successive one-year periods, unless either party shall give the other party notice of non-renewal not less than 60 days before the end of any such period. Additionally, the Management Agreement may be terminated (a) immediately by the Company for "Cause" or upon the bankruptcy of the Manager or a material breach of the Management Agreement by the Manager or (b) immediately with "Good Reason" by the Manager. "Good Reason" is defined in the Management Agreement to mean either (i) any failure to obtain a satisfactory agreement from any successor to the Company to assume and agree to perform the Company's obligations under the Management Agreement or (ii) any material breach of the Management Agreement of any nature whatsoever by the Company. "Cause" is defined in the Management Agreement to mean fraud, criminal conduct, willful misconduct or willful or negligent breach of fiduciary duty by the Manager or a breach of the Management Agreement by the Manager. Following the termination of the Management Agreement by the Company, the Manager shall be entitled to receive payment of any earned, but unpaid, compensation and expense reimbursements accrued as of such date and an incentive fee based on the appraised value of the properties owned by the CPA(R) Partnership. If the Management Agreement is terminated (i) in connection with a Change of Control of the Company, (ii) by the Company for any reason other than Cause or (iii) by the Manager for Good Reason, the Manager also shall be entitled to the payment of the Termination Fee. The Manager shall be entitled to receive all accrued, but unpaid, compensation and expense reimbursements and the Termination Fee in cash within 30 days of the effective date of the termination. The Manager and its Affiliates expect to engage in other business ventures, and, as such, their resources will not be dedicated exclusively to the business of the Company. However, pursuant to the Management Agreement, the Manager must devote sufficient resources to the administration of the Company to discharge its obligations. The Management Agreement is not assignable or transferable by either party without the consent of the other party, except that the Manager may assign the Management Agreement to an Affiliate that has a net worth of $3,000,000 or more or for whom the Manager agrees to guarantee its obligations to the Company, and either the Manager or the Company may assign or transfer the Management Agreement to a successor entity. The Manager or its Affiliates will be paid certain fees in connection with services provided to the Company. In the event the Management Agreement is not renewed by the Company or is terminated without Cause by the Company or with Good Reason by the Manager, the Manager will be paid all accrued and unpaid fees and expense reimbursements and, in certain circumstances, will also be paid a Termination Fee. The Company will not reimburse the Manager or its Affiliates for services for which the Manager or its Affiliates are entitled to compensation in the form of a separate fee. See "COMPENSATION, REIMBURSEMENT AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGER." 127 139 SECONDARY MARKET AND OWNERSHIP OF CPA(R) PARTNERSHIP UNITS SALE PRICES OF UNITS The Units are not listed on any national or regional securities exchange or quoted on the Nasdaq System, and there is no established public trading market for the Units. Secondary sales activity for the Units has been limited and sporadic. The General Partners monitor transfers of the Units (a) because the admission of the transferee as a substitute investor requires the consent of the General Partners under each of the Partnership Agreements and (b) in order to track compliance with safe harbor provisions to avoid treatment of the CPA(R) Partnerships as "publicly traded partnerships" for federal income tax purposes. Set forth in the table that follows is certain information regarding transactions in the Units. Such information was obtained from the sources indicated. The transactions reflected in the tables below represent only some of the transactions in the Units. There have been other secondary transactions in the Units, although specific information regarding such transactions is not readily available to the General Partners. Because the information regarding transactions in the Units included in the tables below is provided without verification by the General Partners and because the information provided does not reflect sufficient activity to cause the prices shown to be representative of the values of the Units, such information should not be relied upon as indicative of the ability of Unitholders to sell their Units in secondary transactions or as to the prices at which such Units may be sold. Therefore, the information presented should not necessary be relied upon by Unitholders in determining whether or not to vote in favor of the Consolidation. The General Partners do not believe that the secondary sale prices of the Units accurately reflect the value of the assets of the CPA(R) Partnerships, because secondary sale prices are adversely affected by a variety of factors unrelated to the value of the assets of a CPA(R) Partnership. Units are generally traded on a sporadic basis. Sale prices can vary dramatically based on the number of Units sold at one or over time. Additionally, the Tax Reform Act of 1986 contained provisions which eliminated certain federal income tax advantages associated with investments in limited partnerships and which caused limited partnerships to place restrictions on transfers of interests in order to avoid taxation of income at the partnership and partner levels. Accordingly, limited partnerships have not been well received by investors and secondary sale prices have been adversely affected. While the General Partners receive some information regarding the prices of secondary transactions in the Units, the General Partners do not receive or maintain comprehensive information regarding all activities of all broker/dealers and others known to facilitate secondary sales of the Units. The General Partners estimate, based solely on the transfer records of the CPA(R) Partnership, that the number of Units transferred in sale transactions (i.e., excluding transactions believed to be between related parties, family members or the same beneficial owner) were as follows: SECONDARY MARKET PARTNERSHIP NET UNIT PRICES FROM JANUARY 1, 1997 THROUGH SEPTEMBER 30, 1997 AS TRACKED BY THE GENERAL PARTNER
WEIGHTED NUMBER OF DOLLAR VALUE UNIT UNITS OF TRADES SALES PRICE HIGH LOW TRADED TRACKED ----------- ---- ---- --------- ------------ CPA(R):1............................................. $ 362 $390 $292 815 $ 407,500 CPA(R):2............................................. 331 360 265 734 99,090 CPA(R):3............................................. 468 525 408 675 168,750 CPA(R):4............................................. 438 475 372 641 275,630 CPA(R):5............................................. 279 329 260 1,261 596,453 CPA(R):6............................................. 896 936 855 1,280 1,280,000 CPA(R):7............................................. 737 802 510 692 588,200 CPA(R):8............................................. 906 953 600 2,228 2,228,000 CPA(R):9............................................. 747 920 600 1,258 1,258,000
128 140 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of Units as of June 30, 1997 by each director and executive officer of each General Partner and by all Directors and executive officers of the Managing General Partner and the Company as a group, and, upon consummation of the Consolidation, the Listed Share ownership of such officers and Directors. The business address of the individuals listed is 50 Rockefeller Plaza, New York, NY 10020.
CPA(R):1 CPA(R):2 CPA(R):3 CPA(R):4 CPA(R):5 CPA(R):6 ---------------- ---------------- ---------------- ---------------- ---------------- -------- LISTED LISTED LISTED LISTED LISTED UNITS SHARES(1) UNITS SHARES(1) UNITS SHARES(1) UNITS SHARES(1) UNITS SHARES(1) UNITS ----- --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- W.P. Carey.............. 205 5,289(4) 210 5,767(5) 211 7,955(6) 205 6,792(7) 210 3,786(8) 105 F.J. Carey.............. -- -- -- -- -- -- 10 331 -- -- 25 S. M. Berzin(10)........ -- -- -- -- -- -- -- -- -- -- -- G.F. DuGan(10).......... -- -- -- -- -- -- -- -- -- -- -- E. Faber................ -- -- -- -- -- -- -- -- -- -- -- B.G. Jones(10).......... 4 103 -- -- -- -- -- -- -- -- -- L.R. Klein.............. -- -- -- -- -- -- -- -- -- -- -- D.E. Nickelson.......... -- -- 28 769 -- -- -- -- -- -- -- C.C. Townsend Jr........ -- -- -- -- -- -- -- -- -- -- -- R. Winssinger........... -- -- -- -- -- -- -- -- -- -- -- All Directors & officers as a group ( members).. 209 5,392 258 7,085 253 9,538 215 7,123 210 3,786 150 TOTAL LISTED SHARES CPA(R):6 CPA(R):7 CPA(R):8 CPA(R):9 BENEFICIALLY ---------- ---------------- ---------------- ---------------- OWNED AFTER THE LISTED LISTED LISTED LISTED THE CONSOLIDATION SHARES(1) UNITS SHARES(1) UNITS SHARES(1) UNITS SHARES(1) COMPANY (2)(3) --------- ----- --------- ----- --------- ----- --------- ------- --------------- < W.P. Carey.............. 7,141(9) 110 6,047(10) 108 7,530(11) 108 5,671(12) 733,134(13) 793,956 F.J. Carey.............. 1,700 13 715 15 1,046 15 788 7,500 12,080 S. M. Berzin(10)........ -- -- -- -- -- -- -- -- -- G.F. DuGan(10).......... -- -- -- -- -- -- -- -- -- E. Faber................ -- -- -- -- -- -- -- 1,250 1,250 B.G. Jones(10).......... -- 4 220 -- -- -- -- -- 323 L.R. Klein.............. -- -- -- -- -- -- -- 1,250 1,250 D.E. Nickelson.......... -- 70 3,848 15 1,046 24 1,260 1,250 8,173 C.C. Townsend Jr........ -- -- -- -- -- -- -- 1,250 1,250 R. Winssinger........... -- -- -- -- -- -- -- 1,250 1,250 All Directors & officers as a group ( members).. 9,473 222 12,204 158 11,016 164 8,719 751,778 826,186
- --------------- (1) Listed Share numbers represent the number of Listed Shares each would receive after the Consolidation when the Units are converted to Listed Shares. Conversion rates can be found on page 12 of this Consent Solicitation/Prospectus. (2) Unless otherwise indicated, each person has sole voting and investment power with respect to all Units and Listed Shares owned by such person. (3) Assuming that all CPA(R) Partnerships participate in the Consolidation. (4) Of these amounts, 5,026 Listed Shares are owned by W.P. Carey & Co., a corporation in which Mr. W.P. Carey owns a majority of the outstanding shares. (5) Of these amounts, 5,208 Listed Shares are owned by W.P. Carey & Co., a corporation in which Mr. W.P. Carey owns a majority of the outstanding shares. (6) Of these amounts 7,121 Listed Shares are owned by W.P. Carey & Co., a corporation in which Mr. W.P. Carey owns a majority of the outstanding shares. (7) Of these amounts, 6,462 Listed Shares are owned by CCP, a corporation in which Mr. W.P. Carey owns a majority of the outstanding shares. (8) Of these amounts, 3,419 Listed Shares are owned by CCP, a corporation in which Mr. W.P. Carey owns a majority of the outstanding shares. (9) Of these amounts 6,796 Listed Shares are owned by CCP, a corporation in which Mr. W.P. Carey owns a majority of the outstanding shares. (10) Of these amounts 5,238 Listed Shares are owned by Seventh Carey, a corporation in which Mr. W.P. Carey owns a majority of the outstanding shares. (11) Of these amounts, 6,827 Listed Shares are owned by Eighth Carey, a corporation in which Mr. W.P. Carey owns a majority of the outstanding shares. (12) Of these amounts, 5,103 Listed Shares are owned by Ninth Carey, a corporation in which Mr. W.P. Carey owns a majority of the outstanding shares. (13) Of this amount, 661,718 Listed Shares will be owned by the Manager, a limited liability company in which Mr. W.P. Carey owns a majority of the interests. (14) Messrs. Berzin, DuGan & Jones own an interest in the Listed Shares owned by the Manager, W.P. Carey & Co. and its Affiliates through the W.P. Carey & Co. Partnership Equity Plan. 129 141 No person or group is known by the General Partners to be the beneficial owner of more than 5% of the outstanding Units of any CPA(R) Partnership at June 30, 1997. There exists no arrangement known to the CPA(R) Partnerships, the operation of which may at a subsequent date result in a change of control of the Partnerships. DESCRIPTION OF SHARES AND SUBSIDIARY PARTNERSHIP UNITS The following summary of certain provisions of the Organizational Documents does not purport to be complete. Reference is made to the full text of the Organizational Documents for their entire terms. See "COMPARISON OF UNITS, LISTED SHARES AND SUBSIDIARY PARTNERSHIP UNITS" for additional information about the Listed Shares and the Subsidiary Partnership Units. LISTED SHARES In the Consolidation, the Listed Shares will not be issued in series. Accordingly, the holders of Units of all nine CPA(R) Partnerships who acquire Listed Shares in the Consolidation will receive identical Listed Shares. The holders of the Listed Shares will bear the expenses of the formation of the Company and the Consolidation. The performance of, and distributions with respect to, the Listed Shares will be based upon the performance of the entire portfolio of the Company's assets. The Company will pay distributions to holders of the Listed Shares when declared by its Board of Directors out of funds legally available therefor. While the initial policy of the Company will be to make quarterly distributions to the holders of Listed Shares, the level and timing of distributions will depend on, among other things, the cash flow and earnings of the Company, its financial condition, debt covenants, reinvestment policies and such other factors as the Board of Directors deems relevant. Distributions to the holders of Listed Shares may be subject to preferences on distributions on securities which may be issued by the Company in the future. The Company does not intend to distribute to the holders of Listed Shares net cash receipts from sales or refinancings of assets, but, instead, to retain such funds to make new investments or for other purposes, taking into account the income tax impact, if any, of reinvesting such proceeds rather than distributing them. These policies are within the discretion of the Board of Directors and may be changed from time to time. It is expected that the Board of Directors, in setting the level of the distributions to the holders of Listed Shares, will take into account, among other things, the Company's financial performance, need of funds for working capital reserves, capital improvements, tax consequences to holders of Listed Shares and new investment opportunities. See "DISTRIBUTION POLICY." The Listed Shares are not redeemable, except pursuant to certain anti-takeover provisions adopted by the Company. See "Restricting Changes in Control and Business Combination Provisions." Upon the liquidation of the Company, the holders of Listed Shares will be entitled to share ratably in any assets remaining after satisfaction of obligations to creditors, payment of expenses and any liquidation preferences on any Shares that may then be outstanding. Therefore, holders of Listed Shares will be entitled to a distribution based proportionately on their ownership of the Company. Any matter submitted to the holders of Listed Shares generally requires the affirmative vote of holders of a majority of the Listed Shares for approval. There are no cumulative voting rights with respect to the election of Directors. Listed Shareholders have voting rights with respect to (i) the election and removal of Directors, (ii) the sale or disposition of all or substantially all of the assets of the Company at any one time (other than sales or dispositions, the proceeds of which are needed to redeem the Partnership Shares), (iii) the merger or consolidation of the Company (where the Company is not the surviving entity), (iv) the dissolution of the Company and (v) certain anti-takeover provisions. The holders of Listed Shares will be entitled to one vote for each Listed Share owned. Any action that may be taken at a meeting may be taken by written consent in lieu of a meeting executed by holders of Shares sufficient to authorize such action at a meeting. At any meeting, a holder of Listed Shares may vote in person, by written proxy or by a signed writing directing the 130 142 manner in which his vote should be cast. Proxies are revocable at the pleasure of the holder of Listed Shares executing it. No holders of any Listed Shares have any preemptive rights or any rights to convert their Listed Shares into any other securities of the Company. Since a public market for the Listed Shares is a condition to the consummation of the Consolidation, the Company has applied for listing of the Listed Shares on the NYSE. SUBSIDIARY PARTNERSHIP UNITS The Subsidiary Partnership Units have been structured so that their economic interests and legal rights are substantially the same as the terms and conditions of the Units. A series of Subsidiary Partnership Units will be issued by each of the Subsidiary Partnerships to correspond with the nine CPA(R) Partnerships. A Subsidiary Partnership Unit will represent a direct ownership interest in a Subsidiary Partnership as a limited partner. The performance of, and distributions with respect to, each series of Subsidiary Partnership Units will be based solely upon the performance of the Subsidiary Partnership that issued such series. Thus, the performance of, and the distributions to the holders with respect to, each series of Subsidiary Partnership Units will be measured by reference to the performance of the CPA(R) Partnership relating to that series as they existed prior to the Consolidation. See "DISTRIBUTION POLICY." A liquidating distribution will be made with respect to a series of Subsidiary Partnership Units in the following situations: (i) sale of a Property which is owned by a Subsidiary Partnership (which does not include the pledge of a Property in connection with the leveraging of such Property) or (ii) as soon as practicable after appraisals are performed on the CPA(R) Partnerships' properties no later than the dates listed below.
CPA(R) APPRAISAL DATE ------------------------------------------------- ------------------ CPA(R):1......................................... December 31, 1998 CPA(R):2......................................... December 31, 1998 CPA(R):3......................................... December 31, 1998 CPA(R):4......................................... December 31, 1998 CPA(R):5......................................... December 31, 2001 CPA(R):6......................................... December 31, 2001 CPA(R):7......................................... December 31, 2001 CPA(R):8......................................... December 31, 2002 CPA(R):9......................................... December 31, 2002
The above provision providing for a partial liquidation upon the sale of a Property and the redemption of the Subsidiary Partnership Units is designed to be consistent with the expectations of a Unitholder that the liquidation of the CPA(R) Partnerships would begin no later than a certain date. Such expectation results from a provision in each of the Partnership Agreements. Thus, that provision essentially tracks the Partnership Agreement provisions. Upon the liquidation of a Subsidiary Partnership, after satisfaction of all of the Subsidiary Partnership's creditors, the holders of each series of Subsidiary Partnership Units will be entitled to receive out of the assets of the Subsidiary Partnerships available for distribution therefor, an amount in cash or in kind equal to the total appraised value on such date of all assets of the Subsidiary Partnership to the extent such Subsidiary Partnership has not yet been the subject of a redemption event, minus the related selling expenses which would be incurred in such a sale (based on local conditions existing at the time). After payment of the full amount of the liquidation distributions to which they are entitled, the holders of the Subsidiary Partnership Units will not be entitled to any further participation in any distribution of assets of the Company. The holders of Subsidiary Partnership Units have voting rights with respect to the following matters relating to the Subsidiary Partnership in which they own Units: (i) removal of any General Partner and (ii) the sale or all or substantially all of the assets of the Subsidiary Partnership (except for sales made in connection with the liquidation of the Subsidiary Partnership). Holders of each class of Subsidiary Partnership Units will be entitled to the same percentage vote as they would have been entitled to as Limited Partners on 131 143 matters relating to the CPA(R) Partnership in which they own Units. The remaining percentage vote will be cast by the Company, which is expected to own the Subsidiary Partnership Units not owned by Unitholders. Any action that may be taken at a meeting may be taken by written consent in lieu of a meeting executed by holders of Subsidiary Partnership Units sufficient to authorize such action at a meeting. At any meeting, a holder of Subsidiary Partnership Units may vote in person, by written proxy or by a signed writing directing the manner in which his vote should be cast. Proxies are revocable at the pleasure of the holder of Subsidiary Partnership Units executing it. Each Subsidiary Partnership is prohibited from issuing any equity securities without the approval of the holders of the Subsidiary Partnership Units as long as the Subsidiary Partnership Units are outstanding. No holders of any Subsidiary Partnership Units have any preemptive rights or any rights to convert their Subsidiary Partnership Units into any securities of the Company. The Subsidiary Partnership Units will not be listed on any national securities exchange and will not be listed on the Nasdaq National Market, and no public market for the Subsidiary Partnership Units is expected to develop. RESTRICTING CHANGES IN CONTROL AND BUSINESS COMBINATION PROVISIONS Certain provisions of the Organizational Documents and the Shareholder Rights Plan could make more difficult a change of control of the Company by means of a tender offer, a proxy contest or otherwise. These provisions are intended to enhance the likelihood of continuity and stability in the composition of the Company's Board of Directors and management and in the policies formulated by the Board of Directors and to discourage an unsolicited takeover of the Company, if the Board of Directors determines that such takeover is not in the best interests of the Company and its Shareholders. However, these provisions could have the effect of discouraging certain attempts to acquire the Company or remove incumbent management, even if some or a majority of Shareholders deemed such an attempt to be in their best interests. Additional Classes and Series of Shares. The Organizational Documents of the Company authorize the Board of Directors (subject to certain restrictions) to provide for the issuance of Shares in other classes or series, to establish the number of Shares in each class or series and to fix the preference, conversion and other rights, voting powers, restrictions, limitations as to distributions, qualifications or terms or conditions of redemption of such class or series. The Company believes that the ability of the Board of Directors to issue one or more classes or series will provide the Company with increased flexibility in structuring possible future financing and acquisitions and in meeting other needs which might arise. The additional classes or series, as well as the Listed Shares and Partnership Shares, will be available for issuance without further action by the Company's Shareholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which the Company's securities may be listed or traded. Although the Board of Directors has no intention at the present time of doing so, it could issue a class or series that could, depending on the terms of such class or series, impede a merger, tender offer or other transaction that some or a majority of the Shareholders might believe to be in their best interests or in which the Shareholders might receive a premium for their Shares over the then current market price of such Shares. Staggered Board of Directors. Pursuant to the Organizational Documents, the Board of Directors of the Company is divided into three classes, serving staggered three-year terms. See "MANAGEMENT." The terms of the first, second and third classes will expire in 1998, 1999 and 2000, respectively. Directors for each class will be chosen for a three-year term upon the expiration of the current class's term, beginning in 1998. The staggered terms for Directors may affect the Company's Shareholders' ability to change control of the Company even if a change of control were in the interests of the Shareholders. An individual who has been elected to fill a vacancy will hold office only for the unexpired term of the Director he is replacing. Number of Directors; Removal; Filling Vacancies. The Organizational Documents provide that the number of Directors of the Company will be fixed by the Board of Directors, but must consist of not fewer than five nor more than 15 Directors. After consummation of the Consolidation, the Board will consist of 11 Directors. One class of Directors will be elected annually by the affirmative vote of the holders of at least a 132 144 majority of the then-outstanding Listed Shares present at a meeting at which a quorum is present. Directors can be removed from office only by the affirmative vote of the holders of at least a majority of the then-outstanding Listed Shares. In addition, any vacancy (other than a vacancy created by an increase in the number of Directors) may be filled, at any regular meeting or at any special meeting of the Directors called for that purpose, by the affirmative vote of a majority of the remaining Directors, though less than a quorum. A vacancy created by an increase in the number of Directors shall be filled by a majority of the entire Board of Directors. Business Combination Provisions. The Organizational Documents of the Company contain certain business combination provisions (the "Business Combination Provisions"). The Business Combination Provisions, in general, provide that the transactions described in paragraphs (i) through (vi) below (each, a "Business Combination") involving an Interested Party (as defined below) are not permitted earlier than five years following the most recent date on which an Interested Party became an Interested Party (the "Five-Year Tolling Period"), unless either (A) the Business Combination or the transaction which resulted in the Interested Party becoming an Interested Party is approved by the Board of Directors prior to the most recent date on which the Interested Party became an Interested Party (the "Determination Date") or (B) on or subsequent to the Determination Date, but before the expiration of the Five-Year Tolling Period, the transaction is approved by two-thirds of the Board of Directors and two-thirds in interest of the Listed Shareholders other than the Interested Party. In addition, the Business Combination Provisions provide that, following the Five-Year Tolling Period, unless the Business Combination was approved by the Board of Directors prior to the Determination Date, or the minimum price criteria and procedural requirements described in paragraphs (a) and (b) below have been met (collectively, the "Fair Price and Procedural Requirements"), a Business Combination is permitted only if the Business Combination is recommended to the Shareholders by the Board of Directors and then approved by (i) 80% in interest of the Listed Shareholders and (ii) two-thirds in interest of the Listed Shareholders other than the Interested Party (the voting requirements of clauses (i) and (ii) to be referred to herein as the "Special Approval Vote"). An "Interested Party" is defined as any person (other than (a) the Company, (b) any subsidiary of the Company, (c) the General Partners, and (d) the Original Shareholders and (e) any affiliate or associate of any person in (c) or (d) above) that (i) is the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding Shares, (ii) is an affiliate or associate of the Company and within two years prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the then outstanding Shares or (iii) is an affiliate or associate of any person described in clauses (i) or (ii) above. A "Business Combination" includes the following transactions: (i) Unless the merger, consolidation or exchange of interests does not alter the contractual rights of the Shares as expressly set forth in the Company Organizational Documents or change or convert in whole or in part the outstanding Shares, any merger, consolidation or exchange of interests of the Company or any subsidiary with (a) any Interested Party or (b) any other entity (whether or not itself an Interested Party) which is, or after the merger, consolidation or exchange of interests will be, an affiliate of an Interested Party that was an Interested Party prior to the transaction; (ii) Any sale, lease, transfer or other disposition, other than in the ordinary course of business, in one transaction or a series of transactions in any 12-month period to any Interested Party or any affiliate of any Interested Party (other than the Company or any of its subsidiaries) of any assets of the Company or any subsidiary having, measured as of the time the transaction or transactions are approved by the Board of Directors of the Company, an aggregate book value as of the end of the Company's most recently ended fiscal quarter of 10% or more of the total market value of the outstanding Shares or of its net worth as of the end of its most recently ended fiscal quarter; (iii) The issuance or transfer by the Company or any subsidiary, in one transaction or a series of transactions, of any of the Shares or any equity securities of a subsidiary which have an aggregate market value of 5% or more of the total market value of the outstanding Shares to any Interested Party or any 133 145 affiliate of any Interested Party (other than the Company or any of its subsidiaries) except pursuant to the exercise of warrants or rights to purchase securities offered pro rata to all Shareholders or any other method affording substantially proportionate treatment to the Shareholders; (iv) The adoption of any plan or proposal for the liquidation or dissolution of the Company in which anything other than cash will be received by an Interested Party or any affiliate of any Interested Party; (v) Any reclassification of securities or recapitalization of the Company, or any merger, consolidation or exchange of Shares with any of its subsidiaries which has the effect, directly or indirectly, in one transaction or a series of transactions, of increasing by 5% or more of the total number of outstanding Shares, the proportionate amount of the outstanding Shares or the outstanding number of any class of equity securities of any subsidiary which is directly or indirectly owned by any Interested Party or any affiliate of any Interested Party; or (vi) The receipt by any Interested Party or any affiliate of any Interested Party (other than the Company or any of its subsidiaries) of the benefit, directly or indirectly (except proportionately as a Shareholder), of any loan, advance, guarantee, pledge or other financial assistance or any tax credit or other tax advantage provided by the Company or any of its subsidiaries. (a) Minimum Price Criteria. A Business Combination proposed by an Interested Party after the expiration of the Five-Year Tolling Period must obtain the Special Approval Vote unless the Interested Party complies with the Fair Price and Procedural Requirements or the Board of Directors approves the Business Combination or the transaction in which the Interested Party became an Interested Party prior to the Determination Date. The Fair Price and Procedural Requirements provide that, in a Business Combination involving cash or other consideration being paid to the Shareholders, the consideration will be required to be either in cash or in the same form as the Interested Party paid in acquiring the largest number of Shares that it has acquired in any one transaction or series of related transactions, except to the extent that the Shareholders otherwise elect in connection with their approval of the proposed transaction. In addition, the transaction constituting the Business Combination must provide for payment of consideration per Share at least equal to the highest of the following: (i) the highest per Share price paid by the Interested Party for any of the Shares of the same class or series acquired by it (A) within the five-year period immediately prior to the first public announcement of the proposed Business Combination (the "Announcement Date") or (B) within the five-year period immediately before the Determination Date, (ii) the highest preferential amount per Share to which the holders of the Shares of such class or series are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, (iii) the fair market value per Share of the same class or series on the Announcement Date or the Determination Date, whichever is higher or (iv) the price per Share equal to the fair market value per Share on the Announcement Date or on the Determination Date, whichever is higher, multiplied by a fraction equal to (A) the highest per Share price paid by the Interested Party for any of the Shares of the same class or series acquired by it within the five-year period immediately prior to the Announcement Date over (B) the fair market value per Share of the same class or series on the first day in such five-year period on which the Interested Party acquired any of the Shares. For purposes of the Fair Price and Procedural Requirements, the fair market value of the Shares on the Announcement Date or the Determination Date will be the highest closing sale price during the 30-day period immediately preceding the date in question of a Share of the same class or series on the composite tape for NYSE-listed stocks, or, if Shares of the same class or series are not quoted on the composite tape, on the NYSE, or, if the Shares of the same class or series are not listed on the NYSE, on the principal United States securities exchange registered under the Exchange Act on which the Shares of the same class or series are listed, or, if the Shares of the same class or series are not listed on any such exchange, the highest closing bid quotation with respect to a Share of the same class or series during the 30-day period preceding the date in question on the NASD automated quotation system or any system then in use, or, if no such quotations are available, the fair market value on the date in question of a Share of the same class or series as determined by the Board of Directors in good faith. 134 146 (b) Procedural Requirements. The Fair Price and Procedural Requirements also provide that, in order to avoid the Special Approval Vote, after an Interested Party becomes an Interested Party, it will have to comply with certain procedural requirements, as well as the minimum price requirements, unless the Business Combination is approved by the Board of Directors prior to the Determination Date. Under the Fair Price and Procedural Requirements, the Special Approval Vote applies after the expiration of the Five Year Tolling Period (unless the Board of Directors approves the Business Combination prior to the Determination Date) if the Company, after the Interested Party has proposed a Business Combination and after the Determination Date but prior to consummation of such Business Combination, (A) fails to pay in a timely manner the full amount of any distributions on any preferred Shares (including any Partnership Shares) then outstanding, (B) fails to increase the annual rate of distributions made with respect to any Shares to reflect any recapitalization, reorganization or similar transaction which has the effect of reducing the number of outstanding Shares or (C) reduces the annual rate of distributions paid on any class or series of Shares that are not preferred. The provisions of clauses (A), (B) and (C) do not apply if no Interested Party or an affiliate or associate of an Interested Party voted as a member of the Board of Directors in a manner inconsistent with clauses (A), (B) and (C) and the Interested Party, within 10 days after any act or failure to act inconsistent with such items, notifies the Board of Directors that the Interested Party disapproves thereof and requests in good faith that the Board of Directors rectify such act or failure to act. This provision is designed to prevent an Interested Party who controls the necessary voting power from attempting to depress the market price of the Shares prior to consummating a Business Combination by reducing distributions thereon and thereby reducing the consideration required to be paid pursuant to the minimum price criteria. The Special Approval Vote also applies to a proposed Business Combination after the expiration of the Five Year Tolling Period (unless the Board of Directors approves the Business Combination prior to the Determination Date) if the Interested Party acquired any additional Shares (except as part of the transaction in which it became an Interested Party or by virtue of proportionate Share splits or distributions) in any transaction subsequent to the time it proposes a Business Combination. This provision is intended to prevent an Interested Party from purchasing additional Shares at prices that are lower than those set by the minimum price criteria after it proposes a Business Combination. The Interested Party will be required to meet the Fair Price and Procedural Requirements with respect to each class or series of Shares, whether or not the Interested Party owned Shares of that class or series prior to proposing the Business Combination. If the Fair Price and Procedural Requirements are not met with respect to each class or series of Shares, the Special Approval Vote will be applicable unless the Business Combination was approved by the Board of Directors prior to the Determination Date. In addition, if the transaction is not of a type which involves the receipt of any cash, securities or other consideration by Shareholders generally, such as a sale of assets or an issuance of Company interests to an Interested Party, the minimum price criteria discussed in paragraph (a) above could not be met and the Special Approval Vote will be applicable unless the transaction were approved by the Board of Directors prior to the Determination Date. Advantages and Disadvantages of the Business Combination Provisions. The Business Combination Provisions are designed to prevent certain of the potential inequities of Business Combinations that involve two or more steps. In the first instance, in order to complete a Business Combination within the Five-Year Tolling Period, the Interested Party must either (i) obtain the approval by the Board of Directors prior to the Determination Date or (ii) obtain the approval of two-thirds of the Board of Directors and two-thirds in interest of the Shareholders (excluding the vote of the Interested Party). The effect of these provisions is to place a veto power over certain transactions in the hands of the Board of Directors and Shareholders, other than the Interested Party. In the second instance, after the expiration of the Five-Year Tolling Period, the Interested Party must either assure itself of obtaining the affirmative votes of at least (i) 80% in interest of all Shareholders and (ii) two-thirds in interest of the Shareholders (excluding the vote of the Interested Party) prior to the vote on the Business Combination, or be prepared to meet the Fair Price and Procedural Requirements. The Fair Price and Procedural Requirements are designed to protect those Shareholders who have not tendered or 135 147 otherwise sold their Shares to a third party who is attempting to acquire control, by helping to assure that at least the same price and form of consideration is paid to such Shareholders in a Business Combination as were paid to Shareholders in the initial step of the acquisition. In the absence of these provisions, an Interested Party who acquires control of the Company could subsequently, by virtue of such control, force minority Shareholders to sell or exchange their Shares at a price that may not reflect any premium the Interested Party may have paid in order to acquire its interest. Such a price could be lower than the price paid by the Interested Party in acquiring control and could also be in a less desirable form of consideration (e.g., equity or debt securities of the Interested Party instead of cash). In many situations, the Fair Price and Procedural Requirements will require that an Interested Party pay Shareholders a higher price for their Shares and/or structure the transaction differently from what would be the case without the provision. Accordingly, the Board of Directors believes that, to the extent a Business Combination is involved as part of a plan to acquire control of the Company, the Business Combination Provisions may increase the likelihood that an Interested Party will negotiate directly with the Board of Directors. The Board of Directors believes that it is in a better position than individual Shareholders of the Company to negotiate effectively on behalf of all Shareholders, in that the Board of Directors is likely to be more knowledgeable than most individual Shareholders in assessing the business and prospects of the Company. Therefore, the Board of Directors is of the view that negotiations between the Board of Directors and an Interested Party will increase the likelihood that Shareholders in general will receive a higher price for their Shares than otherwise might be obtained. Although some substantial acquisitions of equity securities are made without the objective of effecting a subsequent Business Combination, in many cases a purchaser acquiring control desires to have the option to consummate such a Business Combination. Assuming that to be the case, the Business Combination Provisions will tend to deter a potential purchaser whose objective is to seek control of the Company at a relatively low price, since acquiring the remaining equity interest will not be assured unless the applicable voting requirements were met, the Fair Price and Procedural Requirements were satisfied or the Board of Directors were to approve the transaction prior to the Determination Date. The Business Combination Provisions also should help to deter the accumulation of large blocks of the Shares, which the Board of Directors believes to be potentially disruptive to the stability of the Company and which could precipitate a change of control of the Company on terms unfavorable to other Shareholders. Tender offers or other non-open market acquisitions of equity securities usually are made at prices above their prevailing market price. In addition, acquisitions of equity securities by persons attempting to acquire control through market purchases may cause the market price of the securities to reach levels that are higher than might otherwise be the case. The presence of the Business Combination Provisions may deter such purchases, particularly those of less than all of the Shares, and may, therefore, deprive the Company's Shareholders of an opportunity to sell their Shares at a temporarily higher market price. Because of the Special Approval Vote for approval of any subsequent Business Combination and the possibility of having to pay a price to other Shareholders in such a Business Combination that is not less than the price paid for its initial holdings, the Business Combination Provisions may make it more costly for a third party to acquire control of the Company. It should be noted that the Business Combination Provisions will not necessarily deter persons who might be willing to seek control by acquiring a substantial portion of the Shares when they have no intention of acquiring the remaining Shares. In certain cases, the Fair Price and Procedural Requirements' minimum price provisions, while providing objective pricing criteria, could be arbitrary and not indicative of value. In addition, an Interested Party may be unable, as a practical matter, to comply with all of the procedural requirements. In these circumstances, unless an Interested Party were assured of obtaining the required number of affirmative votes from the other Shareholders, it will be forced either to negotiate with the Board of Directors and offer terms acceptable to the Board of Directors or to abandon such proposed Business Combination. Amendments to Business Combination Provisions. The Organizational Documents provide that the Business Combination Provisions may be amended or repealed only by a vote of 80% in interest of all Listed 136 148 Shareholders, voting together as a single class, excluding Shares held by any Interested Party or any affiliate of an Interested Party. Control Share Acquisition Provisions. The Organizational Documents also contain control Share acquisition provisions (the "Control Share Acquisition Provisions"). The Control Share Acquisition Provisions, in general, provide that any person or entity that acquires one-fifth or more of the outstanding Shares of any class or series acquires voting rights with respect to the acquired Shares only to the extent approved by the affirmative vote of two-thirds in interest of the Listed Shareholders, but excluding any votes cast with respect to Shares in respect of which the acquirer is entitled to exercise or direct the exercise of the voting power. The Control Share Acquisition Provisions provide that a person or entity acquires Control Shares whenever it acquires Shares that, but for the operation of the Control Share Acquisition Provisions, will bring its voting power within any of the following ranges: (i) one-fifth to one-third, (ii) one-third to a majority or (iii) a majority or more. A "Control Share Acquisition" generally means the acquisition of Shares that will entitle the acquiring person immediately after the acquisition to exercise or direct the exercise of the voting power of Shares within one of these ranges of voting power. Excepted from the definition of Control Share Acquisition is an acquisition of Shares from any person whose previous acquisition of Shares was pursuant to the laws of descent or distribution or the satisfaction of a pledge or other security interest created in good faith and not for the purpose of circumventing the Control Share Acquisition Provisions or a merger, consolidation or exchange of interests if the Company is a party thereto. Subject to certain exceptions, a Control Share Acquisition does not include the acquisition of Shares in good faith and not for the purpose of circumventing the Control Share Acquisition Provisions by or from any person whose voting rights have previously been authorized by the Listed Shareholders in compliance with the Control Share Acquisition Provisions or any person whose previous acquisition of the Shares will have constituted a Control Share Acquisition but for the exclusions in the preceding sentence. In addition, a Control Share Acquisition does not include the acquisition of Shares by (a) any subsidiary of the Company, (b) the General Partners and the Original Shareholders and (c) any affiliate or associate of any person in (b) above. Voting Rights of Control Shares. Under the Control Share Acquisition Provisions, a person or entity that acquires Control Shares pursuant to a Control Share Acquisition acquires voting rights with respect to those control Shares only to the extent approved by the affirmative vote of two-thirds in interest of the Listed Shareholders, but excluding any votes cast with respect to Shares in respect of which the acquirer is entitled to exercise or direct the exercise of the voting power. The acquirer may require the Company to hold a meeting of the Listed Shareholders for the purpose of considering the status of its voting rights by complying with the requirements of the Organizational Documents. The acquirer must deliver to the Company an acquiring person statement, which must set forth, among other things, the terms of the proposed acquisition and representations that the proposed Control Share Acquisition, if consummated, will not be contrary to law, and that the acquirer has the financial capacity to make such acquisition. If the acquirer so requests at the time of delivery of the acquiring person statement and gives a written undertaking to pay the expenses of a meeting, the Board of Directors is generally required to call and hold, within 50 days after receipt of the acquiring person statement and undertaking, a meeting of the Listed Shareholders to consider the voting rights to be accorded the Shares to be acquired in the Control Share Acquisition. In connection with calling the meeting, the Company must send a notice to the Listed Shareholders which includes or is accompanied by both the acquiring person statement and a statement by the Board of Directors setting forth its position or recommendation or stating that it is taking no position or making no recommendation with respect to the issue of voting rights to be accorded the Shares acquired in the Control Share Acquisition. Redemption of Control Shares. If an acquiring person statement has been delivered on or before the tenth day after the Control Share Acquisition and the Listed Shareholders do not vote to approve voting rights to the Control Shares, the Company may redeem the Control Shares from the acquirer at any time during the 60-day period commencing on the day of a meeting at which the voting rights of the Control Shares were considered and not approved. If the acquirer fails to deliver an acquiring person statement on or before the tenth day after the Control Share Acquisition, the Company may redeem the Control Shares (except Control 137 149 Shares for which voting rights have been approved) at any time during the period commencing on the 11th day after the Control Share Acquisition and ending 60 days after the acquiring person statement has been delivered. Any redemption of Control Shares shall be at the fair value of the Control Shares as of the date of the last acquisition of Control Shares by the acquirer or, if a meeting is held to consider the voting rights of the Control Shares, as of the date of the meeting. Advantages and Disadvantages of the Control Share Acquisition Provisions. The Control Share Acquisition Provisions will permit the Listed Shareholders to review, on a collective basis, the merits of a proposed acquisition of control of the Company without the time pressure and coercive atmosphere often present with tender offers and other non-negotiated transactions. Although a change of control may in certain circumstances be beneficial to security holders, the Control Share Acquisition Provisions are intended to provide the Listed Shareholders with the continued ability to make a reasoned, thoughtful decision on proposed acquisitions of significant voting power. It also may enhance the Company's bargaining power with a potential acquirer. The Control Share Acquisition Provisions also may make it more difficult or costly for another party to acquire and exercise control of the Company. To the extent that it has the effect of discouraging a future takeover attempt, it could prevent Shareholders from realizing any premium over the prevailing market price that might be involved in any such transaction. The Control Share Acquisition Provisions also may discourage gradual market purchases by an acquirer, thereby depriving some Listed Shareholders of an opportunity to sell their Shares at a temporarily higher market price, though the provisions of the Control Share Acquisition Provisions may force an acquirer to pay a higher price for control and Shareholders will thereby benefit. Finally, to the extent that the Control Share Acquisition Provisions enable the Company to resist a takeover or a change of control or removal of the Board of Directors, it could make it more difficult to remove the existing management of the Company, even if such removal will be beneficial to the Shareholders. Amendments to Control Share Acquisition Provisions. The Organizational Documents provide that the Control Share Acquisition Provisions may be amended or repealed only by a vote of 80% in interest of all Listed Shareholders, excluding any votes cast with respect to Control Shares held by an acquirer. Shareholder Rights Plan. The Company intends to enter into the Shareholder Rights Plan with a rights agent that will provide for the issuance of one right (a "Right") for each outstanding Share to the Company's Listed Shareholders of record on a record date to be established by the Board of Directors (the "Rights Record Date"). Each Right will entitle the holder thereof to buy one Share at a specified exercise price, which will be subject to adjustment. Set forth below is a description of the proposed terms of the Listed Shareholder Rights Plan. Distribution Date. Until the close of business on the tenth day after the earlier to occur of (i) the date a person (an "Acquiring Person") (other than the Company, any subsidiary of the Company, the General Partners, any Affiliate of the General Partners, the Original Shareholders and any employee benefit plan of the Company) alone or together with affiliates and associates, has become the beneficial owner of 5% or more of the outstanding Shares or (ii) the date of the commencement of, or announcement of, an intention to make a tender offer or exchange offer the consummation of which will result in the beneficial ownership by a person or group (other than the Company, any subsidiary of the Company, the General Partners, any Affiliate of the General Partners, the Original Shareholders and any employee benefit plan of the Company) of 10% or more of the outstanding Shares (the earlier of (i) or (ii) being called the "Rights Distribution Date"), the Rights will be evidenced by the Shares registered in the name of the holders of the Shares and not be separate Right certificates. The Shareholder Rights Plan is expected to provide that, until the Rights Distribution Date, the Rights will be transferred with and only with the Shares. Until the Rights Distribution Date (or earlier termination or expiration of the Rights), the transfer of any Shares outstanding as of the Rights Record Date will also constitute the transfer of the Rights associated with such Shares. As soon as practicable following the Rights Distribution Date, separate certificates evidencing the Rights (a "Rights Certificate") will be mailed to 138 150 holders of record of the Shares as of the close of business on the Rights Distribution Date and such separate Rights Certificates alone will evidence the Rights. The Rights are not exercisable until the Rights Distribution Date. The Rights will expire on the tenth anniversary of the Rights Record Date (the "Final Expiration Date") unless the Final Expiration Date is extended or unless the Rights are earlier redeemed by the Company, as described below. Adjustments to Purchase Price. The purchase price payable (the "Exercise Price"), and the number of the Shares or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution in the event the Company (i) declares or pays any distribution on the Shares payable in Shares or other securities, (ii) subdivides or splits the outstanding Shares into a greater number of interest or (iii) combines or consolidates the outstanding Shares into a smaller number of interests or effects a reverse split of the outstanding Shares. Exercise of Rights. In the event that on or after the Rights Distribution Date, the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold (in one transaction or a series of transactions other than in the ordinary course of business), proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then current Exercise Price, that number of partnership interests, common shares or other equity securities of the acquiring entity which at the time of such transaction will have a market value of two times the Exercise Price. In the event that any person, together with its affiliates and associates, becomes the beneficial owner of 5% or more of the Shares then outstanding, unless such acquisition is approved by the Board of Directors, each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereafter be void), will thereafter have the right to receive upon exercise thereof and payment of the Exercise Price, the greater of (i) the number of Shares for which such Right was exercisable immediately prior to such event or (ii) that number of Shares having a market value of two times the Exercise Price. Redemption of Rights. At any time prior to the earlier to occur of (i) the acquisition by a person, together with its affiliates and associates of beneficial ownership of 5% or more of the outstanding Shares or (ii) the Final Expiration Date, the Board of Directors may cause the Company to redeem the Rights in whole, but not in part, at a redemption price of $.01 per Right. Immediately upon any redemption of the Rights, all rights relating to the Rights (except the right to receive the redemption price for each Right), including the right to exercise the Rights, will terminate. Amendment of Rights Plan. The terms of the Rights may be amended by the Board of Directors in any manner without the consent of the holders of the Rights, except that from and after such time as any person becomes an Acquiring Person, no such amendment may adversely affect the interest of the holders of the Rights (other than Acquiring Persons). Effect of the Rights Plan. Although the Rights will not prevent a takeover of the Company, the Rights may have certain anti-takeover effects. The Rights could cause substantial dilution to a person or group that attempts to acquire the Company in a manner or on terms not approved by the Board of Directors. The Rights, however, should not deter any prospective offerer willing to negotiate in good faith with the Company. RESALE OF SHARES The Listed Shares to be received by the General Partners and their affiliates as a substitute for a portion of their general partner interests in the CPA(R) Partnerships will be restricted shares which may only be resold pursuant to an effective registration statement or pursuant to Rule 144 under the Securities Act. The General Partners and their affiliates will have the ability to compel the Company to register the Listed Shares they receive in the Consolidation. The costs of this registration would be borne by the Company. Shares received by persons who may be deemed to be "affiliates" of the Company may be sold by those persons only in accordance with the provisions of Rule 144 under the Securities Act, pursuant to an effective registration under the Securities Act, or in transactions that are exempt from registration under the Securities Act. Rule 144 provides, in general, that those Shares may be sold by the affiliate only if (i) the number of Shares sold within any three-month period does not exceed the greater of 1% of the total number of 139 151 outstanding Shares or the average weekly trading volume of the shares during the four calendar weeks immediately preceding the date on which the notice of sale is filed with the SEC and (ii) the Shares are sold in transactions directly with a "market maker" or in "brokers' transactions" within the meaning of Rule 144 under the Securities Act. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Shares will be ChaseMellon Shareholder Services L.L.P. COMPENSATION, REIMBURSEMENT AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGER COMPENSATION PAYABLE BY THE CPA(R) PARTNERSHIPS Under the Partnership Agreements, the General Partners are entitled to receive fees in connection with managing the affairs of each CPA(R) Partnership. The Partnership Agreements also provide that the General Partners are to be reimbursed for their expenses for services performed for each Partnership, such as legal, accounting, transfer agent, data processing and duplicating services. The General Partners are currently entitled to receive the following fees and distributions from the CPA(R) Partnerships:
PREFERRED RETURN ON MAXIMUM PERCENTAGE SALE PERCENTAGE OF CPA(R) OF CASH OF GAIN ON SALE OF PROGRAM PROPERTY MANAGEMENT/LEASING FEE DISTRIBUTIONS PROPERTY(1) PROPERTY(2) - ------------- ---------------------------------------- ------------- ------------- --------------- CPA(R):1..... 5% of Adjusted Cash from Operations(3) 1% 3% 10% CPA(R):2..... 5% of Adjusted Cash from Operations(3) 1% 3% 10% CPA(R):3..... 5% of Adjusted Cash from Operations(3) 2% 3% 10% CPA(R):4..... 1% of gross lease payments(4) 6% 3% 12% CPA(R):5..... 1% of gross lease payments(4) 6% 3% 12% CPA(R):6..... 1% of gross lease payments(4) 6% 3% 12% CPA(R):7..... 1% of gross lease payments(4) 6% 3% 10% CPA(R):8..... 3% of gross lease payments over first 10% 3% 15% five years of original term of each lease CPA(R):9..... 3% of gross lease payments over first 10% 3% 15% five years of original term of each lease
- --------------- (1) Preferred returns on the sale of property only after investors receive from the sale of properties 100% of the amount invested in the CPA(R) Program plus for CPA(R):1, CPA(R):2 and CPA(R):3, a cumulative annual return of six percent to nine percent with payments pro rated on the basis of the return achieved, for CPA(R):4, CPA(R):5 and CPA(R):6, a cumulative annual return of six percent and for CPA(R):7, CPA(R):8 and CPA(R):9, a cumulative annual return of eight percent. (2) Represents maximum share of gain on the sale of a property after all subordination provisions are satisfied. The General Partners' share of the gain on the sale of properties is payable only after investors receive from the sale of properties 100 percent of the amount invested in the CPA(R) Program plus an annual return of between six percent and nine percent. In addition, certain of the CPA(R) Partnerships have subordination provisions relative to the total cash returned to investors. 140 152 (3) "Adjusted Cash from Operations" does not include cash proceeds realized from the sale, exchange or other disposition of assets of the Partnership or from financing of Partnership property or the refinancing of any Partnership indebtedness. (4) The management fee for properties not subject to leases with an initial term of 10 years or more is (i) 6% of the gross revenues of such leases where such Affiliate performs leasing, re-leasing and leasing related services, or (ii) 3% of gross revenues of such leases where such services are not performed; provided, however, that in no event shall such management fee exceed an amount which is competitive for similar services in the same geographic area and further provided that bookkeeping services and fees paid to non-Affiliates for management services shall be included in the management fee. The general partners of the CPA(R) Partnerships have earned the following payments over the past three years:
PARTNERSHIP DISTRIBUTIONS MANAGEMENT REIMBURSED OF CASH FROM CPA(R) PROGRAM YEAR FEES EXPENSES OPERATIONS TOTAL - --------------------------- ---- ---------- ----------- ------------ ---------- CPA(R):1................... 1994 $ 44,581 $ 51,607 $ 12,699 $ 108,887 1995 72,881 44,250 13,135 130,266 1996 66,815 43,956 12,919 123,690 CPA(R):2................... 1994 57,148 56,265 14,590 128,003 1995 254,174 51,138 14,917 320,229 1996 101,644 51,394 13,322 166,360 CPA(R):3................... 1994 162,711 84,839 93,127 340,677 1995 930,191 86,183 94,447 1,110,821 1996 218,507 84,519 62,206 365,232 CPA(R):4................... 1994 98,187 160,125 292,697 551,009 1995 91,564 95,644 286,854 474,062 1996 210,254 148,728 221,872 580,854 CPA(R):5................... 1994 156,947 178,840 351,738 687,525 1995 116,825 117,584 345,833 580,242 1996 76,763 113,288 222,848 412,899 CPA(R):6................... 1994 97,849 154,562 280,823 533,234 1995 156,629 152,795 282,718 592,142 1996 111,048 115,128 229,831 456,007 CPA(R):7................... 1994 135,794 113,171 194,804 443,769 1995 102,753 123,492 214,536 440,781 1996 101,181 110,024 174,151 385,356 CPA(R):8................... 1994 199,664 101,761 635,791 937,216 1995 26,777 87,856 641,394 756,027 1996 22,037 135,221 590,134 747,392 CPA(R):9................... 1994 346,802 90,304 558,971 996,077 1995 131,703 93,245 561,616 786,564 1996 7,354 109,085 508,557 624,996
141 153 AMOUNTS PAYABLE TO THE MANAGER AFTER THE CONSOLIDATION Amounts Payable by the Company. The following is a description of the fees payable by the Company to the Manager in connection with the services to be provided by the Manager. Management Fee. The Manager will be paid a monthly management fee at an annual rate of .5% of the Total Capitalization of the Company. The Management Fee and Performance Fee will each be reduced by one-half of the amount received by the Manager from the Subsidiary Partnerships for property management or leasing fees and distributions of Cash from Operations. The Total Capitalization of the Company will be measured each month by adding (i) the average of total principal amount of the debt owed by the Company (measured as of the first and last day of each month) and (ii) the Average Market Capitalization of the Company (measured by multiplying the closing price of the Listed Shares on each trading day of the month by the total number of Listed Shares issuable in the Consolidation outstanding each trading day, adding the product for each day and dividing the sum by the number of trading days in the month). Performance Fee. The Manager will be paid a monthly Performance Fee at an annual rate of .5% of the Total Capitalization of the Company. This fee will be paid in the form of restricted Listed Shares which will vest ratably over five years. Before such shares are vested, the restricted Listed Shares will not be transferable and will be subject to forfeiture in the event the Manager is terminated for cause or resigns. The restricted Listed Shares will vest immediately in the event of a change of control and certain other circumstances. The Management Fee and Performance Fee will each be reduced by one-half of the amount received by the Manager from the Subsidiary Partnerships for property management or leasing fees and distributions of Cash from Operations. The sale of the Listed Shares will be restricted pursuant to Rule 144 of the '33 Act. The fee amount will be divided by the closing price of the Listed Shares on the last trading day of the month to determine the number of Listed Shares to be paid to the Manager. Termination Fee. If the Management Agreement is terminated in connection with a change of control, by the Company without cause or by the Manager with Good Reason, the Manager will be entitled to receive a Termination Fee. The Termination Fee equals the sum of (A) any fees that would be earned by the Manager upon the disposition of the assets of the Company and the Subsidiary Partnerships at their appraised value as of the date the Management Agreement is terminated (the "Termination Date") and (B)(1) if the agreement is terminated by the Company after a change in control, $50 million if the change in control occurs on or before December 31, 1998 and thereafter, five times the total fees paid to the Manager by the Company and the Subsidiary Partnerships in the 12 months preceding the change in control and (2) if the agreement is terminated without cause or for Good Reason, $50 million if the agreement is terminated before December 31, 1999; $40 million if the agreement is terminated before December 31, 2000; $30 million if the agreement is terminated before December 31, 2001; $20 million if the agreement is terminated before December 31, 2002 and $10 million if the agreement is terminated before December 31, 2003. The Manager may also be paid fees on a transactional basis for acquisitions, dispositions and other similar transactions. The terms of such fees will be negotiated with the Board of Directors. Amounts Payable by the Subsidiary Partnerships. After the Consolidation, the general partner interest held by the Manager in each Subsidiary Partnership will be converted to a limited partner interest. The Manager will be entitled solely to the distributions from the respective Subsidiary Partnerships described below. Distributions paid to the Manager by the Subsidiary Partnerships described in the following table will reduce the management fee and performance fee otherwise payable to the Manager by the Company each by one-half of the amount paid by the Subsidiary Partnership:
PERCENTAGE OF DISTRIBUTIONS SUBSIDIARY PARTNERSHIP PROPERTY MANAGEMENT/ LEASING FEE OF CASH FROM OPERATIONS - ------------------------------- ------------------------------------- --------------------------- CPA(R):1....................... 5% of Adjusted Cash from Operations 1% CPA(R):2....................... 5% of Adjusted Cash from Operations 1% CPA(R):3....................... 5% of Adjusted Cash from Operations 2%
142 154
PERCENTAGE OF DISTRIBUTIONS SUBSIDIARY PARTNERSHIP PROPERTY MANAGEMENT/ LEASING FEE OF CASH FROM OPERATIONS - ------------------------------- ------------------------------------- --------------------------- CPA(R):4....................... 1% of gross lease payments(1) 6% CPA(R):5....................... 1% of gross lease payments(1) 6% CPA(R):6....................... 1% of gross lease payments(1) 6% CPA(R):7....................... 1% of gross lease payments(1) 6% CPA(R):8....................... 3% of gross lease payments over first 10% five years of original term of each lease CPA(R):9....................... 3% of gross lease payments over first 10% five years of original term of each lease.
- --------------- (1) The management fee for properties not subject to leases with an initial term of less than 10 years is (i) 6% of the gross revenues of such leases where such Affiliate performs leasing, re-leasing and leasing related services, or (ii) three percent of gross revenues of such leases where such services are not performed; provided, however, that in no event shall such management fee exceed an amount which is competitive for similar services in the same geographic area and further provided that bookkeeping services and fees paid to non-Affiliates for management services shall be included in the management fee. Incentive Fee. The Manager will be paid an Incentive Fee equal to 15 percent of the amount of the net proceeds received from the sale of a property previously held by a CPA(R) Partnership in excess of the appraised value of the equity interest in such property used in the Consolidation less an adjustment for the share of such net proceeds in excess of the appraised value of the equity interest attributable to the Manager's interest in the Listed Shares. FEES PAYABLE OVER PAST THREE YEARS The following table sets forth the actual amounts of compensation and distributions paid by the CPA(R) Partnerships on a combined basis to the General Partners for the last three fiscal years and the amounts that would have been payable to the Manager and its affiliates over the same period if the Consolidation had taken place effective January 1, 1994. This comparison assumes that the Company would have conducted its business the same way as the CPA(R) Partnerships conducted their business over the same period. This is not expected to be the case if the Consolidation is consummated. GENERAL PARTNERS'/MANAGER'S COMPENSATION
HISTORICAL PRO FORMA FOR CONSOLIDATION(1) ------------------------------------------------- ----------------------------------------------- PARTNERSHIP TOTAL GENERAL TOTAL LEASING/ CASH PARTNERS' CASH PERFORMANCE TOTAL MANAGEMENT PARTNERSHIP COMPEN- PREFERRED MANAGEMENT COMPEN- FEE- COMPEN- FEES DISTRIBUTIONS SATION(2) RETURN(3) FEE(4) SATION STOCK(4) SATION(5) ---------- ------------- ---------- ---------- ---------- ---------- ----------- ---------- 1994......... $1,299,683 $ 2,435,240 $3,734,923 $ 849,593 $4,150,000 $4,150,000 $ 830,000 $4,980,000 1995......... 1,883,497 2,455,450 4,338,947 962,591 3,940,000 3,940,000 1,618,000 5,558,000 1996......... 915,603 2,035,838 2,951,441 803,813 3,695,000 3,695,00 2,357,000 6,052,000
- --------------- (1) Reflects estimated management fees that would have been paid to the Manager if the Consolidation had been completed as of January 1, 1994, assuming maximum participation without the issuance of Subsidiary Partnership Units. Actual fees would have depended on the market price of the Listed Shares (see Note 4). (2) Each CPA(R) Partnership is subject to a maximum allowable leverage percentage ranging from 67 percent to 80 percent of the purchase price of properties. Assuming the CPA(R) Partnerships had achieved the maximum allowable leverage, additional management fees and distributions of $884,000, $1,198,000 and $1,044,000 would have been received for 1994, 1995 and 1996 respectively. Achievement of the maximum allowable leverage would have resulted in an increase in average outstanding debt, and corresponding assets, of $158,000,000 in 1994, $167,000,000 in 1995 and $204,000,000 in 1996. (3) Reflects the General Partners' Interest in their subordinated preferred return related to asset sales consummated in 1994, 1995 and 1996. Pursuant to the CPA(R) Partnership Agreements, the General Partners may be entitled to receive 143 155 a subordinated preferred return, measured based upon the cumulative proceeds arising from the sale of partnership assets. The preferred return is payable only after the limited partners receive 100 percent of their initial investment from the proceeds of asset sales and a cumulative annual return ranging from six percent to nine percent since the inception of the Partnership. A Partnership's ability to satisfy the requirement may not be determinable until liquidation of a substantial portion of the Partnership's assets has been made. For purposes of this presentation, it is assumed that this requirement has been satisfied. (4) Management fees and Performance Fees are equal to 0.5 percent of the Company's Total Capitalization payable in cash and 0.5% thereof payable in the form of Listed Shares of the Company, respectively, but shall not in any event be less than the total amount of leasing fees and distributions otherwise paid to the General Partners of the CPA Partnerships. Total Capitalization equals the Company's average market capitalization plus the average outstanding debt for the relevant period. For purposes of the presentation, in the absence of applicable market values for the Listed Shares, pro forma Total Capitalization is deemed to be equal to the sum of the Total Exchange Value and the average outstanding debt of the CPA(R) Partnerships. The Company's actual market capitalization may increase or decrease depending on the Company's operating performance and market conditions; management fees actually paid would increase or decrease accordingly. The performance fee will be paid in the form of restricted Listed Shares which will vest ratably over five years. The sale of the Listed Shares by the Manager will be restricted pursuant to Rule 144 of the '33 Act. The amounts shown under "Performance Fee -- Stock" represent amounts of restricted Listed Shares that would have vested in each of the years 1994, 1995 and 1996. (5) Assuming the Company had utilized leverage of 67 percent, additional management fees, paid in cash, of $613,000, $686,000 and $748,000 and the vested portion of performance fees, paid in Listed Shares, of $340,000, $1,192,000 and $2,018,000 for the years ended December 31, 1994, 1995 and 1996 respectively would have been paid. Achievement of this level of leverage would have resulted in an increase in average outstanding debt, and corresponding assets, of $132,000,000 in 1994, $142,000,000 in 1995 and $168,000,000 in 1996. GENERAL PARTNERS PREFERRED RETURN The General Partners may be entitled to receive a subordinated preferred return, measured based upon the cumulative proceeds arising from the sale of the CPA(R) Partnerships' assets. Pursuant to the provisions of the partnership agreements of the CPA(R) Partnerships, the preferred return may be paid only after the limited partners of a CPA(R) Partnership receive 100% of their initial investment from the proceeds of assets sales and a cumulative annual return ranging from six percent to nine percent since the inception of the affected Partnership although for certain CPA(R) Partnerships the preferred return can be paid on a pro rata basis in proportion to the percentage attainment of limited partner cumulative annual return preferences after certain minimum return thresholds have been met. The General Partners' interest in such preferred return amounts to approximately $5,111,000 based upon the cumulative proceeds from the sale of assets since the inception of the CPA(R) Partnerships through June 30, 1997, assuming the Limited Partners preferred return has been satisfied. This amount has been determined based on the terms of each Partnership Agreement and reflects the preferred return payable to the General Partners solely in connection with properties which have previously been sold by the CPA(R) Partnerships and for which such preferred returns were not paid to the General Partners. The preferred return payable on account of CPA(R):5 was discounted for purposes of calculating Total Exchange Value to take into account that the Trigger Price for CPA(R):5 exceeds $20. The CPA(R) Partnerships' ability to satisfy the subordination provisions of the partnership agreements may not be determinable until liquidation of a substantial portion of a Partnership's assets have been made. To determine whether or not the subordination provisions have been achieved with respect to the payment of preferred returns relating to properties previously sold, after the Consolidation, the subordination provision that must be satisfied for the payment of the preferred return will be deemed satisfied if the Listed Shares achieve a closing price equal to or in excess of the Trigger Price indicated in the table below for five consecutive trading days. This price will provide Unitholders the opportunity to liquidate their interest and to have received the cumulative annual return required in the CPA(R) Partnership Agreement before the preferred return may be paid. If any Cash From Sales or Cash From Financings from transactions involving properties held by a particular CPA(R) Partnership are distributed, the subordination requirement will be reduced by the Cash From Sales and Cash From Financings distributed on account of such transaction and the per share price of the Listed Shares for the satisfaction of the subordination provision will be recalculated. 144 156 The following table outlines the preferred return the General Partners may be entitled to receive as of June 30, 1997 and the Listed Share trigger price that must be achieved before such return will be paid: CALCULATION OF REQUIRED LISTED SHARE PRICE FOR PAYMENT OF GENERAL PARTNERS' PREFERRED RETURN
CASH FROM SALES AND TOTAL CASH FINANCINGS TO TOTAL SHARES TRIGGER PRICE TO GENERAL FROM SALES AND BE "RETURNED" ISSUABLE TO BE ACHIEVED TO PARTNER TOTAL FINANCINGS TO SATISFY PARTNERSHIP SATISFY CPA(R) PREFERRED CAPITAL DISTRIBUTED TO SUBORDINATION LIMITED SUBORDINATION PARTNERSHIP RETURN INVESTED LIMITED PARTNERS PROVISION(1) PARTNERS PROVISION - --------- ----------- ----------- ---------------- ------------- ------------ ---------------- CPA(R):1 $ 133,823 $20,000,000 $ 324,724 $ 19,675,276 1,051,836 $18.71 CPA(R):2 1,048,845 27,500,000 23,631,006 3,868,994 1,534,681 2.52 CPA(R):3 731,823 33,000,000 28,164,538 4,835,462 2,503,103 1.93 CPA(R):4 857,754 42,784,000 9,600,704 33,183,296 2,819,409 11.77 CPA(R):5 1,067,133(2) 56,600,000 8,553,965 48,046,035 2,079,320 23.11 CPA(R):6 18,099 47,950,000 2,266,012 45,683,988 3,308,420 13.81 CPA(R):7 805,015 45,274,000 9,185,813 39,729,962 2,503,997 15.87 CPA(R):8 53,055 67,582,000 -- 67,582,000 4,700,512 14.38 CPA(R):9 29,830 59,915,000 2,154,618 58,525,519 3,153,620 18.56
- --------------- (1) Includes cash required to satisfy the cumulative return provisions of the CPA Partnership Agreements where applicable. (2) Reflects a discount to account for the Trigger Price exceeding $20. INVESTMENT BANKING FEE If the Consolidation is completed, W.P. Carey & Co. will receive compensation for investment banking services in the form of warrants to purchase Listed Shares. If all the CPA(R) Partnerships participate in the Consolidation, W.P. Carey & Co. will receive warrants to purchase 2,284,800 Listed Shares at $21 per Share and 725,930 Listed Shares at $23 per Share. The warrants will be exercisable 10 years beginning one year after the date the Consolidation is completed. The following number of warrants will be payable upon the participation of the listed CPA(R) Partnership in the Consolidation:
IF CPA(R) PARTNERSHIP PARTICIPATES WARRANTS EXERCISABLE AT WARRANTS EXERCISABLE AT IN CONSOLIDATION $21 PER LISTED SHARE $23 PER LISTED SHARE ------------------------------------ ----------------------- ----------------------- CPA(R):1.......................... 116,300 37,000 CPA(R):2.......................... 125,400 39,800 CPA(R):3.......................... 159,500 50,700 CPA(R):4.......................... 209,900 66,700 CPA(R):5.......................... 188,600 59,900 CPA(R):6.......................... 344,100 109,300 CPA(R):7.......................... 235,000 74,700 CPA(R):8.......................... 480,600 152,700 CPA(R):9.......................... 425,400 135,130 --------- ------- 2,284,800 725,930 ========= =======
145 157 APPRAISALS AND FAIRNESS OPINION GENERAL Total Exchange Values were determined as of June 30, 1997 and have been assigned to each of the CPA(R) Partnerships solely to establish a consistent method of allocating the Listed Shares and Subsidiary Partnership Units for purposes of the Consolidation. The Total Exchange Values were determined by the General Partners based primarily on the Independent Appraisal of each CPA(R) Partnership's portfolio of real estate by the Independent Appraiser. The General Partner engaged the Independent Appraiser to render an opinion that the allocation of Listed Shares among the Partnerships is fair to the Unitholders from a financial point of view. The Independent Appraisals and the Fairness Opinion rendered by the Independent Appraiser as set forth in Appendix A and Appendix B. Additionally, copies of the Independent Appraisals and Fairness Opinion may be obtained without charge upon written request to: Susan C. Hyde, Director of Shareholder Services, Carey Diversified LLC, 50 Rockefeller Plaza, New York, NY 10020. The General Partners did not impose any limitations, other than as described in this Prospectus, on the scope of the investigations conducted by the Independent Appraiser to enable them to render their Independent Appraisal and Fairness Opinion. The General Partners have not made any contacts, other than as described in this Prospectus, with any outside party regarding the preparation by the outside party of an opinion as to the fairness of the Consolidation, an appraisal of the CPA(R) Partnerships or their assets or any other report with respect to the Consolidation. EXPERIENCE OF INDEPENDENT APPRAISER Since its founding in 1978, the Independent Appraiser, Robert A. Stanger & Co., Inc., has provided information, research, investment banking and consulting services to clients throughout the United States, including major NYSE firms and insurance companies and over 70 companies engaged in the management and operation of Partnerships and REITs. The investment banking activities of the Independent Appraiser include financial management services, asset and securities valuations, industry and company research and analysis, litigation support and expert witness services, and due diligence investigations in connection with both publicly registered and privately placed securities transactions. The Independent Appraiser, as part of its investment banking business, is regularly engaged in the valuation of businesses, their securities, and/or their assets in connection with mergers, acquisitions, reorganizations and for estate, tax, corporate and other purposes. The Independent Appraiser's valuation practice principally involves partnerships, partnership securities and the assets typically held through partnerships, such as real estate, oil and gas reserves, cable television systems and equipment leasing assets. The General Partners selected the Independent Appraiser because of its experience and reputation in connection with real estate partnerships and real estate assets and its familiarity with the Properties. The General Partners have engaged the Independent Appraiser to appraise the real estate portfolios of a number of the CPA(R) Programs annually since 1989. INDEPENDENT APPRAISAL The Independent Appraiser was engaged by the CPA(R)Partnerships to appraise the real estate portfolios of each CPA(R) Partnership and has delivered a written summary of its analysis, based upon the review, analysis, scope and limitations described therein, as to the fair market value of each CPA(R) Partnership's portfolio of Properties as of March 31, 1997 (the "Independent Appraisal"). The Independent Appraisal, which contains a description of the assumptions and qualifications made, matters considered and limitations on the review and analysis is set forth in Appendix B and should be read in its entirety. Certain of the material assumptions, qualifications and limitations to the Independent Appraisal are described below. The Independent Appraiser has consented to the use of the Independent Appraisal in this Consent/Solicitation Statement. Summary of Methodology. Due to the type of real estate assets held by the CPA(R) Partnerships and the nature of lease terms, the Independent Appraiser was engaged to value the portfolio of Properties based on the income approach, utilizing primarily a discounted cash flow analysis as encumbered by current leases and financing. Such an approach estimates a property's capacity to produce income through an analysis of the 146 158 rental stream, operating expenses, net income and residual value. The General Partners believe that use of the income approach in estimating the market value of the CPA(R) Partnerships' real estate portfolios, is the most appropriate way of assessing the value of the real estate assets owned by the CPA(R) Partnerships because that is the method generally used by purchasers valuing income producing property. The Independent Appraiser concluded that the use of the income approach was reasonable and appropriate. In conducting the Independent Appraisal, representatives of the Independent Appraiser reviewed and relied upon, without independent verification, certain information supplied by the General Partners and the CPA(R)Partnerships, including, but not limited to: lease abstracts; renewal and purchase option status and information relating to the creditworthiness of tenants; financial schedules of current lease rates, income, expenses, debt service, cash flow and related financial information; property descriptive information and physical condition of improvements; information relating to mortgage encumbrances; and, where appropriate, proposed sales terms and related documentation concerning certain properties in the portfolios. Representatives of the Independent Appraiser also performed site inspections on all of the Properties in the portfolios during 1995 and 1996 in the context of a prior appraisal of the portfolios. In the course of these site visits, the physical facilities of the Properties were inspected and information on the local market, the subject property and the tenant was gathered. Information gathered during the site inspection was supplemented and updated by a review of published information concerning economic, demographic and real estate trends in local, regional and national markets and by information updates provided by management and obtained through telephonic interviews of local market information sources. In addition, the Independent Appraiser discussed with management of the General Partners the condition of each Property (including any deferred maintenance, renovations, reconfigurations and other factors affecting the physical condition of the improvements), competitive conditions in net lease property markets, tenant credit trends affecting the Properties, certain lease and financing terms, and historical and anticipated lease revenues and expenses. The Independent Appraiser also reviewed the acquisition criteria and parameters used by real estate investors utilizing published information and information derived from interviews conducted by the Independent Appraiser with buyers, owners and managers of net lease properties and with financing sources for net lease property transactions. The Independent Appraiser then estimated the value of each portfolio of Properties based solely on the income approach to valuation. Specifically, the discounted cash flow method, or, where appropriate, the income capitalization method, was used to determine the value of the leased fee interest in each Property based upon the lease and financing that encumber the Property. The value indicated by the income approach represents the amount an investor would probably pay for the expectation of receiving the net cash flow from the Property after payment of debt service on existing financing assumed by the buyer during the subject lease term and the proceeds (after repayment of debt) from the ultimate sale of the Property. In applying the discounted cash flow method, the Independent Appraiser utilized pro forma statements of operations for each Property reflecting the leases and financing which currently encumber the Properties. Rental revenue projections were developed for each Property based on the terms of existing leases (or, in the case of property not subject to long-term net leases, based on analysis of market rents and historical rents achieved at the subject property). Property management fees and, where appropriate, vacancy and collection losses were factored into the analysis. Finally, debt service payments were deducted from net operating income for each Property, consistent with the terms of the existing financing encumbering such Property. Where a capital expense reserve, deferred maintenance or extraordinary capital expenditure was required, the cash flows (and value) were adjusted accordingly. Expenses relating solely to investor reporting and accounting were excluded from the analysis. The Independent Appraiser assumed that the Properties would be sold after the expiration of the lease terms and that tenants would renew their leases when any renewal terms were deemed favorable to the tenants (i.e., where the tenant has an option to renew at a rental rate below the projected market rate rent at that time). 147 159 The reversion value of the Property to be realized upon sale was estimated based on the current economic rental rate which would be reasonable for the subject Property, escalated at a rate indicative of current expectations in the marketplace. The market rate net income of the Property in the twelve months following the sale was then capitalized at an appropriate rate to determine the reversionary value of the Property. Net proceeds to equity owners were determined by deducting the appropriate costs of sale and balances due on the Property's mortgage debt in the projected year of sale based on each mortgage's amortization schedule. For Properties on which the tenant holds a contractual purchase option, the terms of the option were reviewed and residual values were adjusted accordingly. Distinct discount rates were then applied to the operating cash flow projections and the reversion values. The selection of the appropriate discount rate for determining the present value of future operating cash flow streams from each net leased Property was based on such factors as the creditworthiness of the tenant, the length of the lease term and the general interest rate environment. Specifically, the Independent Appraiser conducted an analytical review of the available financial statements of the tenants and/or guarantors under the subject leases, focusing primarily on the balance sheet, profit and loss statement, cash flow statement and management's discussion of capital resources and liquidity. Measures of financial strength were derived and considered in determining the tenant's ability to fulfill the lease obligation. These factors included size, leverage of capital structure, profitability, cash flow and liquidity. The Independent Appraiser also reviewed each tenant's and/or guarantor's corporate debt ratings, if any, issued by such nationally recognized statistical ratings organizations as Standard & Poor's Corporation and Moody's Investors Service, Inc., and/or Value Line financial strength ratings. The Independent Appraiser then reviewed the interest rate environment as of the date of the Independent Appraisal, including yields-to-maturity among corporate bonds based on various maturities and credit ratings. This analysis was conducted to arrive at a base discount rate, determined by the marketplace, to reflect the risk of holding corporate debt with credit quality commensurate with the tenant's/guarantor's creditworthiness and a term approximately equal to the remaining lease term for each Property. Premiums deemed appropriate were then added to the base rate to reflect real estate, leverage and above-market lease rate risk. Discount rates applied to the reversion value of the real estate upon sale were based on acquisition criteria and projection parameters for various property types (e.g. industrial/warehouse, retail, office, etc.) in use in the marketplace by real estate investors, after adjusting for such factors as property age, quality, anticipated functional and/or economic obsolescence, and competitive position. Finally, the discounted present value of the equity cash flow stream from operations after debt service, the discounted present value of net proceeds from property sales, and the balance as of March 31, 1997 of outstanding debt encumbering the Property were aggregated for each Property to arrive at the appraised value of the Properties. The resulting property values were adjusted for any joint venture interests based on information provided by the General Partners and the Partnership and were then added to determine a total estimated portfolio valuation. 148 160 Conclusion as to Appraised Value. Based on the valuation methodology described above, the Independent Appraiser estimated the value of the portfolio of Properties held by each CPA(R) Partnership as follows:
REAL ESTATE PARTNERSHIP NAME PORTFOLIO VALUE CONCLUSION ----------------------------------------------- -------------------------- CPA(R):1..................................... $ 33,390,000 CPA(R):2..................................... 40,680,000 CPA(R):3..................................... 52,750,000 CPA(R):4..................................... 49,880,000 CPA(R):5..................................... 54,640,000 CPA(R):6..................................... 104,300,000 CPA(R):7..................................... 70,300,000 CPA(R):8..................................... 136,670,000 CPA(R):9..................................... 139,890,000 ------------ TOTAL.......................................... $682,500,000 ============
Assumptions, Limitations and Qualifications of the Independent Appraisal. The appraisal report has been prepared on a limited summary basis in conformity with the departure provisions of the Uniform Standards of Professional Appraisal Practice. As such, the report differs from a self-contained appraisal report in that (i) the data is limited to the summary data and conclusions presented and (ii) the Cost and Market Approaches were excluded, and the conclusions were based upon the Income Approach. The Independent Appraiser utilized certain assumptions to determine the Appraised Value of the Portfolios. The Independent Appraisal reflects the Independent Appraiser's valuation of the real estate portfolios of the CPA(R) Partnerships as of March 31, 1997 in the context of the information available on such date. Events occurring after March 31, 1997 and before the Closing could affect the properties or assumptions used in preparing the Independent Appraisal. The Independent Appraiser has no obligation to update the Independent Appraisal on the basis of subsequent events. In connection with preparing the Independent Appraisal, the Independent Appraiser was not engaged to, and consequently did not prepare any written report or compendium of its analysis for internal or external use beyond the analysis set forth in Appendix B. The Independent Appraiser will not deliver any additional written summary of the analysis. See Appendix B for a discussion of the specific assumptions, limitations and qualifications of the Independent Appraisal. Compensation and Material Relationships. The Independent Appraiser has been paid an aggregate fee of $475,000 by the CPA(R) Partnerships for preparing the Independent Appraisal. In addition, the Independent Appraiser is entitled to reimbursement for reasonable legal, travel and out-of-pocket expenses incurred in making site visits and preparing the valuations, subject to an aggregate maximum of $20,000 and is entitled to indemnification against certain liabilities, including certain liabilities under federal securities laws. The fee was negotiated between the General Partners and the Independent Appraiser and payment thereof is not dependent upon completion of the Consolidation. The General Partners or an affiliate has engaged the Independent Appraiser to appraise the portfolios of a number of the CPA(R) Programs, including the CPA(R) Partnerships, annually since 1989, and together, during the past two years, have paid the Independent Appraiser aggregate fees of approximately $774,000. The CPA(R) Programs, the Company and affiliates may engage the Independent Appraiser to provide appraisal and other services in the future. There is no contract, agreement or understanding between the Company, the CPA(R) Programs or the Advisor and the Independent Appraiser regarding any future engagement. FAIRNESS OPINION General. The Independent Appraiser was engaged by the General Partners to conduct an analysis of the allocation of Listed Shares among the CPA(R) Partnerships pursuant to the Consolidation and has delivered a written summary of its determination, based on the review, analysis, scope and limitations described therein, 149 161 as to the fairness of the allocations of Listed Shares among the CPA(R) Partnerships, from a financial point of view, pursuant to the Consolidation (the "Fairness Opinion"). The full text of the Fairness Opinion, which contains a description of the assumptions and qualifications made, matters considered and limitations imposed on the review and analysis is set forth in Appendix A and should be read in its entirety. Certain of the material assumptions, qualifications and limitations to the Fairness Opinion are described below. The summary set forth below does not purport to be a complete description of the analyses used by the Independent Appraiser in rendering the Fairness Opinion. Arriving at a fairness opinion is a complex analytical process not necessarily susceptible to partial analysis or amenable to summary description. Except for certain assumptions described more fully below, which the CPA(R) Partnerships advised the Independent Appraiser that it will be reasonable to make, the CPA(R) Partnerships imposed no conditions or limitations on the scope of the Independent Appraiser's investigation or the methods and procedures to be followed in rendering the Fairness Opinion. The CPA(R) Partnerships have agreed to indemnify the Independent Appraiser against certain liabilities arising out of the Independent Appraiser's engagement to prepare and deliver the fairness opinion. Upon consummation of the Consolidation, such indemnity obligations with respect to the Participating Partnerships will be obligations of the Company. Selection of the Independent Appraiser. The Partnership selected the Independent Appraiser because of its experience in providing similar services to other parties in connection with transactions comparable to the Consolidation, the Independent Appraiser's reputation in connection with real estate partnerships and real estate assets and the Independent Appraiser's prior experience in the valuation of the Partnerships' assets. The General Partners have engaged the Independent Appraiser to appraise the real estate portfolios of a number of CPA(R) Partnerships annually since 1989. The compensation payable by the CPA(R) Partnerships to the Independent Appraiser in connection with the rendering of the Fairness Opinion is not contingent on the approval or completion of the Consolidation. Summary of Materials Considered. The Independent Appraiser's analysis of the Consolidation involved the following: (i) review of a draft of this Consent Solicitation Statement/Prospectus in substantially the form which will be filed with SEC and provided to Unitholders; (ii) review of the financial statements of the CPA(R) Partnerships contained in Forms 10-K, as amended, filed with the SEC for the CPA(R) Partnerships' 1995 and 1996 fiscal year, and Forms 10-Q, as amended, filed with the SEC for the quarter ended June 30, 1997; (iii) review of certain operating and financial information (including property level financial data) relating to the business, financial condition and results of operations of the CPA(R) Partnerships, and discussions with management of the CPA(R) Partnerships regarding the operations and business plan, and the historical financial statements, budgets and future prospects of the CPA(R)Partnerships; (iv) review of the Appraisals of the portfolio of properties of each CPA Partnership; (v) review of the methodology used by the General Partners to allocate Listed Shares among the Partnerships; and (vi) conduct of such other studies, analyses, inquiries and investigations as the Independent Appraiser deemed appropriate. Analysis and Conclusions. The General Partners of the Partnerships requested that the Independent Appraiser opine as to the fairness, from a financial point of view, of the allocation of Listed Shares among the Partnerships assuming all Partnerships elect to participate in the Consolidation (the "Maximum Participation" scenario) and assuming the minimum number of Partnerships participate in the Consolidation comprised of CPA(R):1, CPA(R):2, CPA(R):3, CPA(R):5 and CPA(R):7 (the "Minimum Participation" scenario). The Independent Appraiser's evaluation of the fairness from a financial point of view of the allocations of Listed Shares pursuant to the Consolidation employed, but was not limited to, comparisons of the Exchange Value to be contributed to the Company by each Partnership to the Exchange Value of the Partnerships as a group. In its evaluation of the fairness of the allocation of Listed Shares among the CPA(R) Partnerships, the Independent Appraiser observed that the Exchange Values were assigned to the CPA(R) Partnerships by the General Partners based on: Independent Appraisals provided by the Independent Appraiser of the estimated value of the real estate portfolio of each Partnership as of March 31, 1997; valuations made by the General Partners of other Partnership assets and liabilities as of June 30, 1997; and adjustments made by the General Partners to the foregoing values to reflect cash distributions made by the CPA Partnerships in July 1997, the 150 162 General Partners' 1% interest in sale/refinancing proceeds which will be retained in the Consolidation, certain returns due to the General Partners relating to properties which have previously been sold by the CPA Partnerships, estimates of the realizable value of certain litigation claims of the CPA Partnerships, the estimated change in value of two properties as a result of material events occurring subsequent to the appraisal date, and estimated transfer taxes associated with each CPA Partnership's portfolio; and costs of the Consolidation to be allocated among the Partnerships in proportion to their Total Exchange Value before such cost allocation. The Independent Appraiser also observed that the General Partners intend to make such pre-consolidation cash distributions to Limited Partners in each CPA(R) Partnership as may be necessary to cause the relative Total Exchange Values of the Participating Partnerships as of the closing date to be substantially equivalent to the relative estimated Total Exchange Values as shown in the Consent Solicitation Statement/Prospectus. Relying on these Total Exchange Values, the Independent Appraiser observed that the allocation of Listed Shares offered to each CPA(R) Partnership reflects the net value of the assets contributed to the Company by each CPA(R) Partnership after deducting a pro rata share of the costs associated with the Consolidation. The Independent Appraiser believes that basing such allocations on the value of net assets contributed to the Company is fair from a financial point of view. Based on the foregoing, the Independent Appraiser concluded that, based upon its analysis and the assumptions, limitations and qualifications thereto, and as of the date of the information considered in the Fairness Opinion, the allocation of Listed Shares offered pursuant to the Consolidation among the CPA(R) Partnerships in the Maximum Participation and Minimum Participation scenarios is fair, from a financial point of view, to the Unitholders. Assumptions. In rendering its opinion, the Independent Appraiser relied, without independent verification, on the accuracy and completeness of all financial and other information contained in the Consent Solicitation Statement/Prospectus or that was otherwise publicly available or furnished or otherwise communicated to the Independent Appraiser. The Independent Appraiser has not made an independent evaluation or appraisal of the determinations of the non-real estate assets and liabilities of the Partnerships. The Independent Appraiser relied upon the balance sheet value determinations for the Partnerships and the adjustments made by the General Partners to the real estate Independent Appraisals to arrive at the Exchange Values. The Independent Appraiser also relied upon the assurance of the CPA(R) Partnerships and the General Partners that the calculations made to determine all allocations among each CPA(R) Partnership and, within each Partnership between the General Partners and the Unitholders, are consistent with the provisions of each Partnership Agreement relating to cash distributions rules, that any financial projections or pro forma statements or adjustments provided to the Independent Appraiser were reasonably prepared and adjusted on bases consistent with actual historical experience and reflect the best currently available estimates and good faith judgments, that no material changes have occurred in the Partnerships' values subsequent to valuation dates cited above or in the real estate portfolio values subsequent to March 31, 1997 which are not reflected in the Partnerships' Exchange Values herein, and that the CPA(R) Partnerships and the General Partners are not aware of any information or facts regarding the CPA(R) Partnerships that would cause the information supplied to the Independent Appraiser to be incomplete or misleading. Limitations and Qualifications of Fairness Opinion. The Independent Appraiser was not asked to and therefore did not perform an analysis with respect to any combinations of CPA(R) Partnership participation other than those noted above. Further, the Independent Appraiser is not opining as to whether or not any specified combination will result from the Consolidation. The Independent Appraiser was not requested to and did not: (a) select the method of determining the allocation of the Listed Shares or Subsidiary Partnership Units or establish the allocations; (b) make any recommendations to the Unitholders, General Partners or the CPA(R) Partnerships with respect to whether to approve or reject the Consolidation or whether to elect to receive Listed Shares or Subsidiary Partnership Units; or (c) express any opinion as to (i) the impact of the Consolidation with respect to combinations of Participating Partnerships other than those specifically identified in the Fairness Opinion; (ii) the tax consequences of the Consolidation for Unitholders or for the Company, (iii) the potential impact of any preferential return to holders of Subsidiary Partnership Units or the Company's fee structure on the cash flow received from, or the market value of, Listed Shares of the 151 163 Company received by Participating Partnerships; (iv) the potential capital structure of the Company or its impact on the financial performance of the Listed Shares or the Subsidiary Partnership Units; (v) the potential impact on the fairness of the allocations of any subsequently discovered environmental or contingent liabilities; or (vi) whether or not alternative methods of determining the relative amounts of Listed Shares and Subsidiary Partnership Units to be issued would have also provided fair results or results substantially similar to those of the allocation methodology used. Further, the Independent Appraiser did not express any opinion as to (a) the fairness of any terms of the Consolidation (other than the fairness of the allocations for the combinations of Participating Partnerships as described above) or the amounts or allocations of Consolidation costs or the amounts of Consolidation costs borne by Unitholders at various levels of participation in the Consolidation; (b) the relative value of the Listed Shares and the Subsidiary Partnership Units to be issued in the Consolidation; (c) the prices at which the Listed Shares or Subsidiary Partnership Units may trade following the Consolidation or the trading value of the Listed Shares or Subsidiary Partnership Units to be received compared with the current fair market value of the Partnerships' portfolios or other assets if liquidated in real estate markets; and (d) alternatives to the Consolidation. In connection with preparing the Fairness Opinion, the Independent Appraiser was not engaged to, and consequently did not, prepare any written report or compendium of its analysis for internal or external use beyond the analysis set forth in Appendix A. The Independent Appraiser will not deliver any additional written summary of the analysis. Compensation and Material Relationships. The Independent Appraiser has been paid a fee of $475,000 by the Partnerships for preparing the Fairness Opinion. In addition, the Independent Appraiser will be reimbursed for all reasonable out-of-pocket expenses, including legal fees, up to a maximum of $20,000 and indemnified against certain liabilities, including certain liabilities under the federal securities laws. The fee was negotiated between the Partnerships and the Independent Appraiser. Payment of the fee to the Independent Appraiser is not dependent upon completion of the Consolidation. The Independent Appraiser has rendered consulting and appraisal services to the General Partners and their affiliates and the Partnerships in the past. In addition, the General Partners and affiliates have paid certain nominal amounts to Independent Appraiser for subscriptions to publications of the Independent Appraiser. The Independent Appraiser has been compensated for preparing the Independent Appraisals and the compensation for such services is summarized above under "Real Estate Independent Appraisals by the Independent Appraiser -- Compensation and Material Relationships." Such engagements were made by the Partnerships pursuant to separate agreements. INCOME TAX CONSEQUENCES The following is a discussion of the material tax considerations that may be relevant to a prospective Shareholder. It is impractical to set forth in this Prospectus all aspects of federal, state, local and foreign tax law which may impact upon a Shareholder's participation in the Company. Furthermore, the discussion of various aspects of federal, state, local and foreign taxation contained herein is based on the Internal Revenue Code of 1986 (the "Code"), existing laws, judicial decisions and administrative regulations ("Regulations"), rulings and practice, all of which are subject to change. Any change could be retroactive so as to apply to the Company and/or its properties. The following discussion is generally directed to the federal tax treatment of a U.S. resident individual Shareholder subject to regular federal income tax. Separate sections herein describe in summary form the federal tax treatment of certain other classes of potential Shareholders including IRAs, Keoghs, corporate pension and profit-sharing trusts and other tax-exempt entities. There is no discussion of the federal tax treatment of non-resident aliens and foreign corporations. The discussion herein of the particular tax concerns of these classes of potential Shareholders is only a general summary. To the extent that the discussion involves matters of law, it represents the opinion of Reed Smith Shaw & McClay as to all material federal income tax aspects of the Consolidation. The Company has received an opinion from its counsel Reed Smith Shaw & McClay, LLP (i) that the Company and each Participating 152 164 Partnership will be classified as partnerships for federal tax purposes, provided, (a) that each Participating Partnership is not a publicly traded partnership for Federal income tax purposes or 90 percent or more of its gross income consists of qualifying income as defined in Code Section 7704(d) and 90 percent or more of the Company's gross income consists of qualifying income as described in Code Section 7704(d), and (b) the Company and each Participating Partnership is organized as described in and operates in compliance with its governing agreements and, (ii) that the Consolidation will be a non-taxable transaction with respect to Unitholders who become holders of Listed Shares except for any amount by which (a) the excess of (1) a Unitholder's share of his Participating Partnership's liabilities immediately before the Consolidation over (2) that Unitholder's share of the liabilities of the Company immediately after the Consolidation exceeds (b) the Unitholder's basis in his Partnership interest immediately before the Consolidation, (iii) that the Consolidation will be a non-taxable transaction with respect to Subsidiary Partnership Unitholders except for any amount by which (a) the excess of (1) a Subsidiary Partnership Unitholder's share of his Participating Partnership's liabilities immediately before the Consolidation over (2) that Subsidiary Partnership Unitholder's share of the liabilities of his Participating Partnership immediately after the Consolidation exceeds (b) the Subsidiary Partnership Unitholder's basis in his Partnership interest immediately before the Consolidation, (iv) which confirms the opinions attributed to it in this Prospectus, and (v) which concludes that in the aggregate, the remaining federal income tax consequences of owning Shares in the Company referred to in this Prospectus will occur or be realized by the Shareholders. No rulings have been sought from the IRS with respect to any of the tax matters described in this Prospectus. The opinions of counsel are dependent upon the present provisions of the Code, Regulations and existing administrative and judicial interpretations thereof, all of which are subject to change. A copy of the opinion of counsel filed as exhibit 8.1 to the Company's Registration Statement filed with the Commission on (333- ), can be obtained without charge by contacting Susan C. Hyde -- Director of Shareholder Services of Carey Diversified LLC, 50 Rockefeller Plaza, New York, NY 10020 or by calling 1-800-733-8481 ext. CPA. UNITHOLDERS SHOULD CONSULT THEIR TAX ADVISORS CONCERNING THEIR INDIVIDUAL TAX SITUATIONS WITH RESPECT TO THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES ARISING FROM OWNING SHARES. NEW TAX LAW PROVISIONS The Taxpayer Relief Act of 1997 (the "1997 Tax Act") became law on August 6, 1997. Among the changes relevant to Unitholders are the following: - The maximum capital gain rate applicable to the sale of a capital asset (not including gain attributable to depreciation on real estate) held for more than 18 months is 20%; - The maximum capital gain rate applicable to the sale of a capital asset held for more than 12 months but not more than 12 months is 28%; - In general, gain attributable to depreciation on real estate is subject to tax at a maximum rate of 25%; - A large partnership, like the Company, beginning in 1998, may elect to be an "electing large partnership." In general, an electing large partnership separately reports to its partners its (a) passive activity income and loss, (b) income and loss from other than passive activities, (c) net capital gain allocable to (i) passive activity sources and (ii) other sources, (d) tax exempt interest, (e) net alternative minimum tax adjustments separately reported for passive activity loss limitations, other activities and credits, (f) income tax credits, (g) cancellation of indebtedness income, and (h) other items as to be provided in IRS Regulations. Other special rules also will apply to electing large partnerships. Seventy percent of an electing large partnership's deductions that would be miscellaneous itemized deductions are disallowed and the remaining 30 percent pass through to the partners and are not subject to the 2% floor. See "Deductibility of Fees," below. An electing large partnership will not terminate if 50% or more of its interests are sold or exchanged in a 12-month period. Also, if the IRS changes an item of partnership income, gain, loss, deduction, or credit, the partnership generally will be liable for interest and penalties, and (i) the change will affect the partners in the year the IRS makes the change as opposed to the partners in the year the partnership originally reported the item (thus, a partner's prior year's return would not be affected), or (ii) the partnership can pay tax on the 153 165 item at the highest rate (corporate or individual). In addition, the partnership's K-1s must be mailed to its partners by March 15th of each year. The Company currently is evaluating whether to elect to be treated as an electing large partnership; and * For tax years beginning in 1998, a partnership's tax year will close with respect to a partner on the date of that partner's death. As a result, a portion of the partnership's items of income, loss, gain, deduction or credit flow through to the decedent's last life time income tax return and the remainder of the partnership's items are included on the estate's and/or beneficiaries' income tax returns. The 1997 Tax Act is complicated and many of its provisions potentially are subject to varying interpretation. There are no judicial decisions, administrative regulations, rulings, or practice addressing the 1997 Tax Act yet. As a result, there are uncertainties concerning interpretations of the 1997 Tax Act. CLASSIFICATION AS "PARTNERSHIPS" The federal income tax consequences of owning Shares in the Company described herein are dependent upon the classification of the Company and the Participating Partnerships as partnerships for federal income tax purposes rather than as associations taxable as corporations. For federal tax purposes, a limited liability company, like the Company, is treated as a partnership and its shareholders are treated as partners if certain conditions are satisfied. The Company intends to satisfy those conditions and, therefore, with certain exceptions, a Shareholder's federal income tax treatment will be substantially similar to that of a Unitholder. No ruling will be sought from the IRS that the Company or the Participating Partnerships will be treated as partnerships for federal income tax purposes. Further, it is not likely that the Company or the Participating Partnerships would receive a ruling that they would be treated as partnerships for federal income tax purposes if they sought such a ruling because they do not satisfy all of the IRS criteria for obtaining such a ruling. The Company and the Participating Partnerships will rely on an opinion of counsel that they will be classified as partnerships for federal tax purposes. The opinion of counsel is not binding on the IRS or the courts. Counsel's opinion as to partnership status assumes and is conditioned on the following: (1) the Company is organized and will operate throughout its existence in compliance with the Delaware LLCL and in accordance with the terms and provision of the Operating Agreement; (2) the Participating Partnerships were organized and will continue to operate throughout their existence in substantial compliance with applicable state statutes concerning limited partnerships and in accordance with the terms and provisions of their partnership agreements, all as presently in effect and as amended. The Company believes that such conditions will be satisfied. If for any reason any Participating Partnership were treated for federal income tax purposes as an association taxable as a corporation in any taxable year: (1) the income, deductions and losses of such Participating Partnership would not pass through to the Company and then the Shareholders; (2) the Participating Partnership would be required to pay federal income taxes on its taxable income at rates up to a maximum of 35%, thereby substantially reducing the amount of cash available for distribution to the Company and then the Shareholders; (3) state and local taxes also could be imposed on such Participating Partnership; and (4) any distributions to the Company from such Participating Partnership would be treated as taxable dividends to the extent of the current and accumulated earnings and profits of that Participating Partnership. In addition, the change in a Participating Partnership's status for tax purposes could be treated by the IRS as a taxable event, in which case the Company and the Shareholders could have a tax liability under circumstances in which they would not receive any cash distributions. Similar consequences would result if the Company were treated as a corporation in any taxable year. Effective January 1, 1997, in general, a noncorporate domestic entity with two or more owners will be treated as partnership for federal income tax purposes unless the entity affirmatively elects to be treated as a corporation. Neither the Company nor any Participating Partnership will elect to be treated as a corporation. An entity qualifying as a partnership could be taxed as a corporation under special rules applicable to a publicly traded partnership. If a publicly traded partnership does not satisfy income tests set forth in the Code, 154 166 it will be taxed as a corporation. The Company will be a publicly traded partnership, but the Participating Partnerships are not expected to be publicly traded partnerships. For federal income tax purposes, a publicly traded partnership is treated as a corporation unless 90 percent or more of its gross income for each tax year of its existence is "qualifying income." Qualifying income, in relevant part, includes: rents from real property, gain from the sale or other disposition of real property, gain from the sale or disposition of a capital asset or depreciable property held for more than one year, real property held for more than one year used in the trade or business that is not inventory, all interest and dividends and gain from the sale or other disposition of stock, securities or foreign currencies, or other income, including but not limited to, gains from options, futures or forward contacts derived with respect to the business of investing in such stock, securities or currencies. With few exceptions, the properties owned by the Participating Partnerships produce income that will be qualifying income for the Company. Because it anticipates that at least 90 percent of its gross income will be qualifying income, the Company anticipates that it will be taxable for federal income tax purpose as a partnership and not as a corporation. TAX CONSEQUENCES OF THE CONSOLIDATION Counsel has rendered an opinion that except to the limited extent discussed below, the Consolidation will be a non-taxable transaction with respect to the Unitholders who become Shareholders and with respect to Subsidiary Partnership Unitholders. The Consolidation will involve a merger of the Subsidiary Partnerships into each Participating Partnership, pursuant to which, among other things, the Unitholders who become Shareholders will receive Shares in the Company in exchange for their limited partner interests in the Participating Partnerships. Subsidiary Partnership Unitholders will continue to own their interest(s) in their respective Subsidiary Partnership(s). While different federal income tax characterizations of these transactions are possible, assuming that the Participating Partnerships and the Company are treated as partnerships (see "Classification as 'Partnerships'," above), the substance and effect of the Consolidation should be a contribution by the Unitholders who become Shareholders of their Participating Partnership interests to the Company in exchange for Shares in the Company. However, a Unitholder who becomes a Shareholder or who remains a Subsidiary Partnership Unitholder would recognize taxable income in the amount by which (a) the excess of (i) a Unitholder's share of his Participating Partnership's liabilities immediately before the Consolidation over (ii) that Unitholder's share of the liabilities of the Company or the Subsidiary Partnership, as the case may be, immediately after the Consolidation exceeds (b) the Unitholder's basis in his Partnership interest immediately before the Consolidation. In addition, to the extent such liability reduction is disproportionate as among the Partners in the particular Participating Partnership, a Unitholder will recognize ordinary income to the extent any reduction in his or her share of liabilities is attributable to the Participating Partnership's "substantially appreciated inventory" and "unrealized receivables" (including the Participating Partnership's previously allowed depreciation and cost recovery deductions subject to recapture) as those terms are defined in Section 751 of the Code. The Company anticipates that the Participating Partnerships will have no or an insignificant amount of unrealized receivables or substantially appreciated inventory items. Any gain will generally be treated as gain from the sale of a capital asset. See "Treatment of Gain or Loss on Disposition of Shares," below and "New Tax Law Provisions," above. The Company does not anticipate that any Unitholder who acquired his or her CPA Partnership Interest from such CPA Partnership will recognize any gain or loss as a result of the Consolidation. The Manager will receive a percentage of the Listed Shares issued in the Consolidation in consideration for its contribution to the Company of a portion of its interests in the Participating Partnerships. See "Historical Cash Distributions and Assigned Exchange Value -- Allocation of Listed Shares Between Limited Partners and General Partners." The issuance by the Company of Shares to the Manager may reduce the percentage of the Company's nonrecourse debt that is allocated to the Shareholders. Any such reduction will be treated as a deemed distribution to the Shareholders, reducing their basis in the Shares received in the 155 167 Consolidation. To the extent that any such deemed distribution exceeds a Shareholder's adjusted basis for the Shares received in the Consolidation, gain will be recognized by such Shareholder. See "Treatment of Cash Distributions from the Company," below. In addition, the IRS may contend that the adjustment of the relative rights among the Manager and Shareholders may be viewed as a taxable disposition of a portion of the Unitholders who become Shareholders interests in such Participating Partnerships. The tax basis of the Shares received by a Shareholder will equal the adjusted tax basis of his limited partner interest immediately prior to the Consolidation (i) increased by his share, if any, of the liabilities of the Company (which include the Company's share of the liabilities of the Participating Partnership) and the taxable gains, if any, on the Consolidation and (ii) decreased (but not below zero) by his share, if any, of the Participating Partnership's liabilities immediately prior to the Consolidation. The holding period of the Shares will include the holding period of such Shareholder for his limited partnership interest. A Subsidiary Partnership Unitholder will calculate his basis in this same manner using his Subsidiary Partnership as the reference and his holding period for his Units will not change. The Participating Partnerships will be deemed terminated for federal income tax purposes as a result of the Consolidation. If the Consolidation occurs on any day other than December 31, this will result in a short taxable year for these Partnerships. Each Unitholder in a Participating Partnership must report, in his or her taxable year that includes the date on which the Consolidation is consummated, an allocable share of all income, gain, loss and deduction of such Participating Partnership for the period January 1 of the year in which the Consolidation occurs until the consummation of the Consolidation. A Unitholder whose taxable year differs from that of the Participating Partnership could have "bunching" of income because of the termination. However, a Unitholder whose taxable year is the calendar year will not experience any "bunching" of income. In addition, as a consequence of the termination of each Participating Partnership, each Participating Partnership will begin a new depreciation period for its assets (39 years for its depreciable real property) thereby reducing the annual depreciation deductions. TAX CONSEQUENCES OF CONSOLIDATION TO SUBSIDIARY PARTNERSHIP UNITHOLDERS Subsidiary Partnership Unitholders will be treated as owners of interests in their Subsidiary Partnership. Subsidiary Partnership Unitholders will receive an IRS Form K-1 from their Subsidiary Partnership reporting their share of the Subsidiary Partnership's items of income, deduction, gain and loss. SHAREHOLDERS OR SUBSIDIARY PARTNERSHIP UNITHOLDERS, NOT PARTNERSHIP, SUBJECT TO TAX The Company and each Subsidiary Partnership, is required to report to the IRS each item of its income, gain, loss, deduction and items of tax preference, if any. The Company and each Subsidiary Partnership will file a federal and may file a Delaware partnership return of income but the Company will not itself be subject to any federal or Delaware income taxes. See "Classification as a Partnership," above and "State and Local Tax Consequences," below. Each Shareholder will report on his personal income tax return his distributive share of each item of the Company's income, gain, loss, deduction, credit and tax preference. Each Shareholder will be taxed on his pro rata share of the Company's taxable income, whether or not he has received or will receive any cash distributions from the Company. A Shareholder's share of the taxable income of the Company and the income tax payable by such Shareholder with respect to such taxable income may exceed the cash actually distributed to him. A Subsidiary Partnership Unitholder is taxed on the same manner with respect to his Subsidiary Partnership. The income tax returns of the Company or a Subsidiary Partnership may be audited by the IRS, and such audit may result in the audit of the returns of the Shareholders or the Subsidiary Partnership Unitholders. Various deductions claimed by the Company or the Subsidiary Partnership Unitholders on its returns could be disallowed in whole or in part on audit, which would result in an increase in the taxable income or a decrease in the taxable loss of the Company or the Subsidiary Partnership with no associated increase in distributions with which to pay any resulting increase in tax liabilities of the Shareholders or Subsidiary Partnership Unitholders. 156 168 Each Shareholder is required to treat partnership items on his return consistently with their treatment on the Company's return, unless a Shareholder files a statement with the IRS identifying the inconsistency. Failure to satisfy this requirement could result in an adjustment to conform the treatment of the items by such Shareholder with its treatment on the Company's return, and may cause such Shareholder to be subject to penalties. The same rules apply to a Subsidiary Partnership Unitholder with respect to his Subsidiary Partnership. Audits of partnership items are conducted at the Company level in a single proceeding, rather than in separate proceedings with each Shareholder. Administrative adjustment of determinations of the Company items made on audit can be initiated by the Tax Matters Partners (the "TMP") or by any other Shareholder. Suits challenging IRS determinations may be brought by the Manager, who has been designated by the Company as the TMP or, if the TMP fails to act, by other Shareholders owning certain minimum interests. Only one such action may be litigated. All Shareholders generally will be bound (subject to certain exceptions) by the outcome of final partnership administrative adjustments by the IRS resulting from an audit handled by the TMP, as well as by the outcome of judicial review of such adjustments. The Company will be the TMP of each Participating Partnership and these audit rules apply to such Partnerships in the same manner as they apply to the Company. See "New Tax Law Provisions" above for a discussion of electing large partnerships. ALLOCATIONS OF PROFITS AND LOSSES A portion of each Participating Partnership's income, gain, loss, and deduction will be allocated to the Manager as limited partner of each Participating Partnership and the remainder will be allocated to the Company and the Subsidiary Partnership Unitholders. Items allocated by the Company to the owners of Listed Shares will be shared among them according to the respective number of Listed Shares owned by each Shareholder. These allocation provisions will be recognized for federal income tax purposes only if they are considered to have "substantial economic effect" and are not retroactive allocations or are determined to be in accordance with the partners' interests in the Partnership. Certain special allocations are required by the Code and Regulations for contributed property (Section 704(c) allocations) and other tax compliance items such as the basis adjustments required under a Code Section 754 election. See "Tax Elections," below. Allocations under Section 704(c) of the Code will require gain inherent in contributed property to be allocated to the person or persons who contributed it and may require the allocation of depreciation deductions from property contributed or deemed to be contributed to a partnership, or property whose book value is adjusted by a partnership on admission of new partners, away from the contributing or previously admitted partner where there is unrealized gain inherent in such property. As a consequence of the Consolidation, the Shareholders will be deemed to have contributed their partnership Units to the Company. The Manager will select the method for making allocations under Section 704(c) of the Code. See, "Tax Consequences of the Consolidation," above. The Company will allocate its taxable income and losses among the Shareholders in proportion to the number of Shares owned by them based on the number of months during the year for which the Shareholder was a record owner of the Shares. The Company will treat the Shareholder who is the record owner of such Share as of the close of business on the last day of the month as having been the owner of such Share for the entire month. Hence, in the case of a sale or other transfer of a Share recorded before the last day of a calendar month, the transferor Shareholder will not be allocated any taxable income for the month in which the record transfer occurs, and the transferee Shareholder will be allocated all taxable income for such month. Therefore, taxable income or loss may be allocated to a Shareholder even though such income or loss was not actually realized by such Shareholder. Furthermore, transferees of Shares may recognize income during a period for which they did not receive distributions. The Code generally requires that items of partnership income and deduction be allocated among transferors and transferees of partnership interests, as well as among partners whose interests otherwise vary during a taxable period, on a daily basis. The Company's proposed allocation method will not comply with this requirement. In the event a monthly convention is not allowed by Regulations (or only applies to transfers of 157 169 less than all of a partner's interest), the IRS may contend that taxable income or losses of the Company must be reallocated among the Shareholders. If the IRS were to sustain any such contention, the Shareholders respective tax liabilities would be adjusted to the possible detriment of certain Shareholders. The Manager is authorized to revise the Company's method of allocation between transferors and transferees (as well as among partners whose interests otherwise vary during a taxable period) to comply with any future Regulations. Similarly, the IRS could challenge the allocations made by the Subsidiary Partnerships. The Company believes that the allocations under the Participating Partnership Agreements and the Operating Agreement should be regarded as meeting the standards of Section 704(b) of the Code. Counsel is unable to opine to that effect, however, because, among other things, allocations to preserve uniformity as among Shares are not in technical compliance with the Regulations. PASSIVE ACTIVITY LOSS LIMITATIONS The Code provides that deductions from passive trade or business activities, to the extent they exceed income from all such passive activities (exclusive of portfolio income), generally may not be deducted against other income of individuals, estates, trusts, closely held C corporations or personal service corporations. Passive income, gain, losses and credits from a publicly traded partnership, such as the Company, may only be applied against other items of income, gain and loss from that publicly traded partnership. Any unused passive activity losses and credits are treated as suspended losses and credits, and can be carried forward and treated as deductions and credits from passive activities in the next taxable year. Suspended losses and credits attributable to passive trade or business activities are allowed in full upon a fully taxable disposition of the taxpayer's entire interest in the activity to an unrelated party. Suspended passive activity losses of a publicly traded partnership, such as the Company, are allowed only upon a disposition of all of a Shareholder's interest in the publicly traded partnership. If an interest in a passive activity is transferred by reason of death, the amount of suspended passive activity losses that may be deducted are reduced to the extent of any step-up in the basis of the interest in the passive activity which occurs at the time. A gift of an interest in a passive activity does not trigger recognition of suspended passive activity losses, but permits the donee to increase his basis in the interest by the amount of those losses up to the fair market value of such interest. Pursuant to the legislative history of the legislation that included the passive activity loss rules in the Code, income generated by the Company will constitute portfolio income to the Shareholders, not passive activity income. Shareholders will not be able to offset passive activity losses from other sources with income generated by the Company. See "Investment and Other Limitations on the Deduction of Interest" below. However, suspended passive activity losses from the Company can offset passive income from the Company. In contrast, passive activity income allocated by a Subsidiary Partnership to a Subsidiary Partnership Unitholder will be passive activity income so long as the Subsidiary Partnership is not a publicly traded partnership. The Company does not anticipate that the Subsidiary Partnerships will be publicly traded partnerships. DEDUCTIBILITY OF FEES All expenditures of the Company and the Participating Partnerships must constitute ordinary and necessary business expenses in order to be deductible, unless the deduction of any such item is otherwise expressly permitted by the Code (e.g., interest and certain taxes). In addition, all expenditures for personal services must be reasonable in amount and, in order to be deductible, must represent payment for services actually rendered during the current taxable year rather than in future years. The Company and the Participating Partnerships intend to claim deductions both for property management fees and for expense reimbursements payable to the Manager or its affiliates. The Company believes, on advice of counsel, that the management fees and reimbursements payable to the Manager will be deductible as ordinary and necessary business expenses by the Company and/or the Participating Partnerships. However, because the Company's belief depends upon essentially factual determinations, no assurance can be given that the deduction of any of the fees paid to the Manager will not be successfully challenged by the IRS. These issues are essentially questions of fact with respect to which counsel cannot opine. If all or a portion of such 158 170 deductions were to be disallowed, the Company's taxable income would be increased or its losses would be reduced. The Company may pay acquisition fees to the Manager, its Affiliates or others in connection with the acquisition of properties. The Company intends to add Acquisition Fees paid to the basis of the property acquired. Also, the Participating Partnership Agreements permit and the Operating Agreement permits the Participating Partnerships and the Company to pay a fee to the Manager or its Affiliates in connection with the sale of a partnership property. The Participating Partnerships and the Company intend to treat these expenses as expenses of sale of the property involved, thereby decreasing any gain or increasing any loss recognized thereupon. The Code limits the deductibility of an individual's miscellaneous itemized deductions, including investment expenses, to the amount by which such deductions exceed 2% of his adjusted gross income. Individual Shareholders and Subsidiary Partnership Unitholders will be subject to this limitation in determining their deductibility of their allocable share of the Company's management fees and other expenses unless the Company or the Participating Partnerships are deemed to be engaged in a trade or business. If the Company elects to be treated as an electing large partnership, this limitation no longer will apply to Shareholders. See "New Tax Law Provisions", above. Subsidiary Partnership Unitholders remain subject to this rule. ORGANIZATION AND CONSOLIDATION EXPENSES The Participating Partnerships and the Company will incur expenses in connection with the Company's organization and the Consolidation. Expenses of organizing the Company ("organization expenses") or of issuing and marketing Shares in the Company ("syndication expenses") may not be deducted by the Company, any Shareholder or any Subsidiary Partnership Unitholder. However, an election is permitted to amortize organization expenses (but not syndication expenses) over a period of not less than 60 months. Organization expenses are defined as expenditures that are (i) incident to the creation of a partnership; (ii) chargeable to capital accounts; and (iii) of a character that, if expended incident to the creation of a partnership having an ascertainable life, would be amortized over such life. The Company and each Subsidiary Partnership intends to make such an election. Syndication expenses are defined as expenditures connected with the issuing and marketing of interests in the Company. Registration fees, printing costs, selling and promotional material costs and legal fees for securities and tax advice pertaining to registration of the Shares with the SEC are syndication expenses and, therefore, do not qualify for amortization. START-UP EXPENDITURES Section 195 of the Code provides that "start-up expenditures" may, at the election of the taxpayer, be amortized ratably over a period of not less than 60 months (beginning with the month that the business begins). The determination of whether an item is a start-up expenditure is based on the facts and circumstances in each case. The Company may seek to deduct certain expenses incurred by it prior to the commencement of any rental activity or of its ownership interest in the Participating Partnerships. The IRS may disallow any such deductions as not having been incurred in connection with an existing trade or business of the Participating Partnerships and/or the Company. If the IRS were successful in such disallowance, such disallowed expenses would be available as deductions only through amortization over the applicable start-up expenditure period (to the extent a proper election is in place and such expenses qualify as start-up expenditures). The Participating Partnerships and the Company intend to take steps to preserve their right to amortize start-up expenses commencing with the date of the Consolidation, in the event it is ultimately determined that the Company began business at that time. Although the Participating Partnerships and the Company are advised by counsel and tax accountants, because of the uncertainty that presently surrounds these matters, no opinion of counsel will be received with respect to these deductions and there can be no assurance that, despite the Participating Partnerships' or the Company's best efforts, they will be able to preserve their right to amortize the above described expenses. 159 171 TAX AND "AT RISK" BASIS OF SHARES The manner of calculating a Shareholder's initial adjusted basis for his Shares has been discussed above. See "Tax Consequences of the Consolidation," above. Each Shareholder's initial adjusted basis for his Share(s) will be increased by the amount of (i) his share of items of income and gain of the Company and (ii) any increase in his proportionate share of the Company's share of nonrecourse indebtedness to which the Participating Partnerships' or the Company's properties are subject (limited to the fair market value of the property securing such indebtedness), and reduced, but not below zero, by (a) the amount of his share of items of the Company loss and deduction and expenditures which are neither properly deductible nor properly chargeable to his capital account, (b) the amount of any cash distributions (including any decrease in his or her share of liabilities) and (c) the basis of any property distributions received by such Shareholder. Subsidiary Partnership Unitholders calculate their basis for their Subsidiary Partnership Units in the same manner with reference to the Subsidiary Partnership's liabilities, items of income, loss, deduction, gain, and credit and distributions. See "Treatment of Gain or Loss on Disposition of Shares" and "New Tax Law Provisions." The amount of the Company's losses that may be deducted by a Shareholder is limited to the adjusted basis of the Shareholder's Shares. Any excess losses are carried over until the Shareholder has sufficient basis to deduct such losses. Deductibility of a Shareholder's share of the Company's losses is further limited by his "at risk" basis as determined pursuant to the "at risk" rules found in Section 465 of the Code. The "at risk" rules provide that a taxpayer may not deduct losses from an activity for a taxable year to the extent such losses exceed the aggregate amount for which the taxpayer is considered "at risk" with respect to the activity. Any loss in excess of a taxpayer's amount "at risk" will be allowed as a deduction in succeeding taxable years if and to the extent the taxpayer is "at risk" with respect to the activity in such subsequent year. The "at risk" rules apply to essentially all Shareholders except those that are C corporations owned by more than five individuals during the last half of the corporation's taxable year. If the Company's "at risk" basis in the Participating Partnerships or a Shareholder's "at risk" basis in the Company is decreased below zero in any year (e.g., due to the Company's or the Shareholder's receipt of a cash distribution or a decrease in its or his share of liabilities included in its or his "at risk" basis), the Company and the Shareholder will recognize income to the extent his or its "at risk" basis is below zero. However, the amount of income which must be recognized in these circumstances is limited to the net losses previously allowed to the Company from the Participating Partnerships or to the Shareholder from the Company. A Shareholder will be deemed to be "at risk" with respect to its share of qualified nonrecourse financing secured by real property. However, a Shareholder will not be considered to have amounts "at risk" to the extent he is protected against losses through guarantees, stop-loss agreements or other similar arrangements. To the extent that any borrowing by a Participating Partnership or the Company is qualified nonrecourse financing, the "at risk" rules should not limit the deductibility of any Participating Partnership and/or Company losses, if any. However, to the extent that any borrowings by a Participating Partnership or the Company is not qualified nonrecourse financing, the "at risk" rules could apply to limit the deductibility of losses by the Company or Shareholders, respectively. The same rules apply to Subsidiary Partnership Unitholders. The passive activity loss limitations are applied after the "at risk" rules are applied. Therefore, a loss not currently deductible under the "at risk" rules would be suspended pursuant to the "at risk" rules, not the passive activity loss rules. Any such suspended losses could later become subject to the passive activity loss rules when they would otherwise be deductible under the "at risk" rules. See "Passive Activity Loss Limitations," above. TREATMENT OF CASH DISTRIBUTIONS FROM THE COMPANY Cash distributions (which are considered to include any reduction in Participating Partnership and/or the Company nonrecourse indebtedness) made to Shareholders, other than those in exchange for or in redemption of all or part of their Share(s), generally will not affect a Shareholder's distributive share of income or loss from the Company. Such distributions may represent distributions of income, returns of capital or both. A 160 172 distribution of income or a return of capital generally does not result in any recognition of gain or loss for federal income tax purposes but reduces a Shareholder's adjusted basis in his Shares. Cash distributions in excess of a Shareholder's adjusted basis in his Shares will result in the recognition of gain to the extent of such excess. Ordinarily, any such recognized gain will be treated as gain from the sale or exchange of Shares. Cash distributions from operations or in redemption of all or part of that Subsidiary Partnership Unitholder's interest in the Subsidiary Partnership made by a Subsidiary Partnership to a Subsidiary Partnership Unitholder will be taxable as described above. A cash distribution made by a Subsidiary Partnership to a Subsidiary Partnership Unitholder in redemption of all of that Subsidiary Partnership Unitholder's interest in the Subsidiary Partnership also could result in recognition of loss by such Subsidiary Partnership Unitholder if the Subsidiary Partnership Unitholder's basis for his interest in the Subsidiary Partnership exceeds the sum of the cash received and his allocable share of nonrecourse indebtedness. See "Tax Consequences of the Consolidation" and "Tax and 'At Risk' Basis of Shares," above and "Treatment of Gain or Loss on Disposition of Shares," below. TREATMENT OF GAIN OR LOSS ON DISPOSITION OF SHARES OF UNITS Any gain or loss recognized by a Shareholder upon the sale or exchange of his Shares will generally be treated as capital gain or loss, except that the portion of any proceeds of sale which is attributable to any unrealized receivables (which term includes, for these purposes, allocable depreciation recapture attributable to underlying partnership property (see "Depreciation Recapture," below) or appreciated inventory items (to the extent that the value of such inventory items of the Company exceeds the basis of such property, had such property been disposed of by the Company prior to the sale of such Shareholder's share) will generally be treated as ordinary income. See "New Tax Law Provisions" above for a discussion of capital gains tax rates. Shareholders which are corporations or trusts are taxable on amounts representing depreciation recapture attributable to underlying Participating Partnership or Company property upon distribution of Shares to their shareholders or beneficiaries. The installment method of reporting income or gain is not available for a sale or exchange of Listed Shares because the Code prohibits use of the "installment method" to report gain on the sale or exchange of publicly traded property. Additionally, gains, if any, on sale of a Subsidiary Partnership Unitholder's interest sold on the installment method, are taxable in the year of sale or exchange to the extent of any ordinary income realized, even if the sale or exchange is otherwise reported on the "installment method." See "Installment Sales" and "Depreciation Recapture," below. In determining the amount received upon the sale or exchange of a Share, a Shareholder must include, among other things, his allocable share of non-recourse indebtedness. Therefore, it is possible that the gain or other income recognized on the sale of a Share may exceed the cash proceeds of the sale and, in some cases, the income taxes payable with respect to the sale may exceed such cash proceeds. The same rules apply to the sale by a Subsidiary Partnership Unitholder of his Units. The IRS has ruled that a partner must maintain an aggregate adjusted tax basis in his aggregate partnership interest (consisting of all interests acquired in separate transactions). On the sale of a portion of such aggregate interest, a partner would be required to allocate, on the basis of the relative fair market values of such interests on the date of sale, his aggregate tax basis between the portion of the interest sold and the portion of the interest retained. This requirement, if applicable to the Company, effectively would preclude a Shareholder owning Shares that were purchased at different prices on different dates from controlling the timing of the recognition of the inherent gain or loss in his Shares by selecting the specific Shares that he would sell. The ruling does not address whether this aggregation requirement, if applicable, results in the tacking of the holding period of older Shares on the holding period of more recently acquired Shares. Because the application of this ruling in the context of a publicly traded partnership, such as the Company, is not clear, a person acquiring Shares and considering the subsequent purchase of additional Shares should consult his professional tax advisor as to the possible tax consequences of the ruling. When a Shareholder or Subsidiary Partnership Unitholder subject to the passive activity loss limitations disposes of his entire interest in the Partnership in a fully taxable disposition to an unrelated party, his 161 173 suspended passive activity losses, if any, from the Partnership will be deductible. If a Shareholder or Subsidiary Partnership Unitholder subject to the passive activity loss limitations disposes of less than his entire interest in his respective partnership or disposes of his interests in a transaction which is not fully taxable, any suspended passive activity will remain suspended. See "Passive Activity Loss Limitations," above. TREATMENT OF GIFTS OF SHARES Generally, no gain or loss is recognized for income tax purposes as a result of a gift of property. However, in the event that a gift of a Share is made at a time when a Shareholder's allocable share of nonrecourse indebtedness exceeds the adjusted basis for his Share, such Shareholder will recognize gain upon the transfer of such Share to the extent of such excess. Any such gain will generally be treated as capital gain. Gifts of Shares may also be subject to a gift tax imposed pursuant to the rules generally applicable to all gifts of property. The same rules also apply to gifts of Subsidiary Partnership Units. A gift of a Share or Subsidiary Partnership Unit will not cause any suspended passive activity losses to be deductible. The donee's basis for the Subsidiary Partnership Unit Share is the donor's basis immediately before the gift plus any suspended passive activity losses allocable to the gifted Share. However, the donee's basis for purposes of determining loss on a later disposition cannot exceed the fair market value of the Share or Unit on the date of the gift. Consequently, if the sum of the donor's basis for the Share or Unit and suspended passive activity losses exceed the Share's or Unit's fair market value, a portion of the suspended passive activity losses could be lost and would never be deductible. ISSUANCE OF ADDITIONAL SHARES The Company may issue new Shares to finance the acquisition of additional properties or for other purposes. On any issuance of additional Shares, the capital accounts of the existing Shareholders will be adjusted to reflect a revaluation of the Company's properties (based on their then fair market value, net of liabilities, to which they are then subject). Any resulting unrealized gain or loss will be allocated among the existing Shareholders and subsequent allocations of taxable income, gain, loss and deduction will be made in accordance with the Regulations. See "Allocations of Profits and Losses," above. The issuance of additional Shares also could result in a decrease in a Shareholder's share of nonrecourse debt. Any such reduction would be treated as a distribution of cash. See "Treatment of Cash Distributions from the Company," above. TREATMENT OF GAIN OR LOSS ON SALE OF PROPERTY Gains or losses realized by the Company on sales of property held for more than one year will be treated as long-term capital gain or loss, (i) unless it is determined that the Company or the Participating Partnership that owns the property is a "dealer" in real estate for federal income tax purposes, (ii) except to the extent that the properties sold constitute Section 1231 Assets (real property assets used in a trade or business and held for more than one year), and (iii) except to the extent the company sells personal property and has depreciation recapture. See "New Tax Law Provisions," above "Section 1231 Assets" include depreciable real property of the type which the Company and/or the Participating Partnerships own and intend to acquire. If the properties sold constitute Section 1231 assets, a Shareholder's or Subsidiary Partnership Unitholder's proportionate share of gains and losses from the sale of such assets would be combined with any other Section 1231 gains or losses recognized by him during the year. The net Section 1231 gain would be taxed as capital gain, except that if the Shareholder or Subsidiary Partnership Unitholder has reported net Section 1231 losses in any of the five years prior to such sale, any net Section 1231 gains would be reported as ordinary income to the extent of such reported losses. Net Section 1231 losses would be taxed as ordinary losses. See "New Tax Law Provisions" for a discussion of capital gains rates. In the event that the entity owning the property is determined to be a "dealer," any gain or loss on the sale or other disposition of a property by such entity would be treated as ordinary income or loss. Although none of the Participating Partnerships nor the Company anticipates being deemed a "dealer" in real estate, there can be no assurance that the proposed course of activities of the Company may not result in it being 162 174 deemed "dealer." The Company intends to conduct its activities, and to consult with a tax professional from time to time with regard to the structuring of its operations and transactions, to avoid being deemed a "dealer." However, since the determination of "dealer" status is essentially factual and will depend upon the nature of the properties acquired and the conduct of activities by the Company, counsel is unable to express an opinion as to whether the Company or any Participating Partnership might be deemed a "dealer." A foreclosure of a mortgage on a property or the acceptance of a deed in lieu of foreclosure is deemed to be a disposition of such property. In such transactions, the Company or a Participating Partnership may recognize gain in an amount equal to the excess, if any, of the outstanding mortgage over the adjusted basis of such property. In certain other circumstances, the gain allocable to the Shareholders or Subsidiary Partnership Unitholders upon a sale, exchange or other disposition of Partnership property may exceed any resulting cash distributable to the Shareholders or Subsidiary Partnership Unitholders and in some cases the income taxes payable by the Shareholders or Subsidiary Partnership Unitholders with respect to such gain may exceed the cash distributable, if any, to such Shareholders or Subsidiary Partnership Unitholders. SALE-LEASEBACK TRANSACTIONS Many of the Participating Partnerships Investments are and a number of the Company's investments may be in the form of sale-leaseback transactions wherein the Participating Partnership or the Company either (i) purchased or will purchase property free of encumbrances, net lease such property back to the seller and obtain separate mortgage financing or (ii) purchase property subject to a mortgage and/or an existing net lease. If a Sale-Leaseback transaction were recharacterized as a financing arrangement, the Participating Partnership or the Company, as the case may be, would not be entitled to depreciation deductions with respect to the property, and the lease payments received by the Participating Partnership or the Company and, in certain circumstances, any gain on the sale of such property could be treated, at least in part, as interest income. Such a recharacterization could increase a Shareholder's or a Subsidiary Partnership Unitholder's share of ordinary income and decrease such Shareholder's or a Subsidiary Partnership Unitholder's share of capital gain. The Participating Partnerships and the Company will attempt to structure each net lease transaction to be recognized as a leasing arrangement for federal income tax purposes and not treated as a financing arrangement or conditional sale. On June 3, 1996, the IRS proposed regulations under Code Section 467. Code Section 467 applies to rental agreements that have increasing or decreasing rents or prepaid or deferred rents. For lease-backs or long term agreements entered into for tax avoidance purposes ("disqualified lease-backs or long term agreements"), the proposed Regulations under Code Section 467 provide that the rent effectively must be leveled and accrued economically. Both rent and interest would be accrued for each period similar to a mortgage. These Regulations do not define what constitutes a tax avoidance purpose. For leases other than disqualified lease-backs or long term agreements, the Regulations under Code Section 467 provide that rent properly allocated to each period must be accrued in that period and interest is deemed to be paid or earned on any deferred on prepaid rent. These Regulations are proposed to apply to disqualified lease-backs and long term agreements entered into after June 3, 1996 and other leases entered into after the date final regulations are issued. The Company and the Participating Partnerships engage in long-term sale lease-back transactions; however, based on current law and interpretations thereof, neither the Company nor the Participating Partnerships believe that their typical transactions would be found to have a tax avoidance purpose. Also, neither the Company nor the Participating Partnerships anticipate having any significant deferred or prepaid rent. However, because these Regulations are new and not entirely clear, neither the Company nor the Participating Partnerships can determine with any assurance how these Regulations, if adopted, might apply to them. 163 175 ACQUISITION OF STOCK, OPTIONS AND WARRANTS The Company currently owns (directly or through the Participating Partnerships) and may invest in the stock of, or other interests in, or warrants or other rights to purchase the stock of or other interests (an "Equity Interest") in any tenant or the parent or controlling person of any tenant of the Company. If the acquisition of such Equity Interest occurs contemporaneously with the purchase of property in a Sale-Leaseback transaction or the execution of a lease and no separate consideration is provided for such acquisition, the purchaser will be required to allocate the price paid between the property and the Equity Interest based upon the relative fair market values of each, or in the case of a lease, the lessor may be required to recognize rental income equal to the value of the Equity Interest. Upon the sale or exchange of such Equity Interest, the gain or loss will generally be capital gain or loss and will be short-term or long-term depending on the property's holding period. Upon the exercise of an option or warrant, the price paid for the option or warrant will be added to the exercise price to determine the Participating Partnership's or the Company's basis in the stock or other interest acquired. The holding period for the stock or other interest acquired through such an exercise will commence on the day after the date of exercise of the option or warrant. Should an option or warrant owned by the Participating Partnerships or the Company expire or lapse unexercised, the Participating Partnerships or the Company, respectively will sustain a loss equal to the amount paid for the option or warrant. Such loss will generally be a capital loss and will be short-term or long-term depending on the Participating Partnership's or the Company's holding period. TAX ELECTIONS The Company and the Participating Partnerships may make various elections for federal income tax reporting purposes which could result in various items of income, gain, loss, deduction and credit being treated differently for tax purposes than for accounting purposes. The Code provides for optional adjustments to the basis of partnership property for measuring both depreciation and gain upon distributions of partnership property (Section 734) and transfers of Shares (Section 743) provided that a partnership election has been made pursuant to Section 754. The Operating Agreement and the Participating Partnership Agreements each require that a Section 754 election be made. Any such election, once made, is irrevocable without the consent of the IRS. The IRS has ruled that under the Code and applicable Regulations, the Section 754 election will generally allow a Shareholder who purchases Shares from another Shareholder in the open market to increase his share of the tax basis in the Participating Partnership's properties to reflect the purchaser's purchase price for such Shares, as if such purchaser had acquired a direct interest in the Company's assets and of its proportionate share of the Company's assets. If a Shareholder's adjusted basis in his Shares is less than his proportionate share of the adjusted basis of the Company's property at the time of acquisition of such Shares, such Shareholder's basis in his share of the Company's property must be reduced by such an amount resulting in adverse consequences to such Shareholder. The Company will calculate the basis adjustment for subsequent purchasers who furnish certain information to the Company. For purchasers who do not furnish this information, the Company intends to provide information to enable them to calculate the basis adjustment for themselves. The calculations and adjustments in connection with any Section 754 election would depend, among other things, on the day on which a transfer occurs and the price at which the transfer occurs. In order to help reduce the complexity of these calculations and the resulting administrative cost to the Company, the Operating Agreement provides that the Company will apply the following methods in making the necessary adjustments: (i) the price paid by a transferee for his Shares will be deemed to be the lowest quoted trading price of the Shares during the month in which the transfer was deemed to occur, irrespective of the actual price paid; and (ii) the transfer will be deemed to occur at the close of business on the last day of the calendar month in which the transfer occurs, irrespective of when the transfer actually occurs. The application of these conventions would yield a less favorable tax result, as compared to adjustments based on actual price, to a transferee who paid more than the lowest quoted trading price for his Shares. 164 176 The calculations under Section 754 are highly complex, and there is little legal authority dealing with the mechanics of the calculations, particularly in the context of large, publicly-held partnerships. It is possible the IRS might take the position that the adjustments made by the Company do not meet the requirements of the Code or the Regulations, particularly given the special assumptions to be applied by the Company for administrative convenience. If the IRS were to sustain such a position, any increased depreciation deductions allowable to a transferee of Shares as the result of the Section 754 election might be reduced, and any gain allocable to a transferee on the sale of the Company's and the Participating Partnerships' properties might be increased. Similar rules will apply with respect to any transfer of Units in a Participating Partnership or a Subsidiary Partnership Unitholder. The Manager is authorized by the Operating Agreement and by the Participating Partnership Agreements to cause the Participating Partnerships and the Company to make or revoke any election required or allowed to be made by partnerships under the Code. Such election(s) may increase or decrease taxable income or loss. See "New Tax Law Provisions" above for a discussion of electing large partnerships. DEPRECIATION Current tax law provides for an accelerated cost recovery system ("ACRS") of depreciation. Under this system, the cost of eligible nonresidential real property, whether new or used, generally must be depreciated over a 39-year period using the straight-line method. Furthermore, under ACRS, eligible personal property is divided into six classes, i.e., 3-year, 5-year, 7-year, 10-year, 15-year, and 20-year property. This property, whether new or used, generally must be depreciated over specified periods using a statutorily prescribed accelerated method of depreciation or, if the taxpayer so elects, using the straight-line method over various periods. The depreciation periods are lengthened in certain circumstances where real property is leased to a tax-exempt entity or owned by a partnership having tax-exempt entities as partners. For this purpose, "tax-exempt entities" do not include those entities which would be taxable on their allocable share of Partnership income as "unrelated business taxable income." Generally, as a result of the deemed termination of the Participating Partnerships, all nonresidential real property owned by the Participating Partnerships at the time of the Consolidation and any other real property acquired by the Company will be subject to a 39 year recovery period, and will be depreciated using the straight-line method. Any personal property acquired by the Company generally will be depreciated over a seven-year recovery period using the double declining balance method (switching to straight-line at a time to maximize the depreciation deductions). As a result, the amount of the depreciation deductions of each Participating Partnership after the Consolidation will be less than the normal depreciation deductions before the Consolidation. If the Consolidation occurs in 1998 and the Company and Participating Partnerships elect to be treated as electing large partnership, it is possible, but not certain, that the Participating Partnership will not terminate and their depreciation deduction will not change. See "New Tax Law Provisions" above. If, for tax purposes, a Participating Partnership is not considered the owner of a CPA Property held at the time of the Consolidation (for example, where a lease is treated as a financing arrangement rather than a "true lease"), the Shareholders would not be entitled to depreciation deductions with respect to that Property. It is anticipated that the Participating Partnerships will be treated as the owners for tax purposes of all of the CPA Properties held at the time of the Consolidation. In addition, if any tax-exempt entities hold Shares and the Company's allocations are not considered to be "qualified allocations," then a portion of the Company's depreciation deductions, corresponding to the tax-exempt entities' percentage interest in the Company, may be required to be depreciated over somewhat longer recovery periods than those otherwise applicable. See "Allocations of Profits and Losses" and "Tax Elections" above, and "Investment by Qualified Pension and Profit-Sharing Plans (Including Keoghs), Stock Bonus Plans, and Individual Retirement Accounts," below. DEPRECIATION RECAPTURE The Code provides that excess depreciation (the excess of accelerated depreciation over straight-line depreciation) on depreciable real property, other than low-income housing, and all depreciation on depreciable 165 177 real property eligible for ACRS where other than straight-line depreciation is used, is subject to recapture as ordinary income (to the extent of gain) when the property is sold regardless of how long it is held before such sale. Since the Participating Partnerships and the Company will only claim straight-line depreciation, it is unlikely that non-corporate Shareholders of the Company will be subject to depreciation recapture with respect to the Company's depreciable real property whether or not eligible for depreciation under ACRS. However, if depreciable real property is sold or otherwise disposed of within 12 months of its acquisition, then all depreciation, including straight-line, will be subject to recapture as ordinary income upon such disposition. See "New Tax Law Provisions," above for a discussion of the special rate applicable to gain allocable to depreciation on real property. Additionally, under the Code, a corporate Shareholder is required to recognize as ordinary income 20% of its distributive share of the Company's gain from the disposition of depreciable real property, to the extent of the depreciation deductions claimed thereon, regardless of whether straight-line depreciation was used. The Code also provides that all depreciation on tangible personal property and certain items of real property such as elevators and escalators is, to the extent of any gain recognized, subject to recapture as ordinary income when such property is sold, regardless of how long it is held before sale. The Company and/or the Participating Partnerships will own items of such property and, accordingly, the Company and the Shareholders may be subject to depreciation recapture with respect thereto. ALTERNATIVE MINIMUM TAX Individual and corporate taxpayers have potential liability for alternative minimum tax. Certain items from the Company could affect a Shareholder's alternative minimum tax liability. Since such liability is dependent upon each Shareholder's own circumstance, Shareholders should consult their own tax advisors concerning the alternative minimum tax consequences of being a Shareholder. Likewise, Subsidiary Partnership Unitholders should consult their own tax advisors concerning the alternative minimum tax consequences of being a Unitholder. INSTALLMENT SALES-IMPUTED INTEREST If a sale or exchange of the Company's or a Participating Partnership's real or personal property requires a payment or payments to be made in more than one tax year, the Code allows any gain recognized to be reported on the installment method." The Code provides that interest is payable on the applicable percentage of tax deferred in connection with installment sales of all non-dealer property the sale price of which exceeds $150,000. Such interest is payable when the aggregate face amounts of installment obligations held by a taxpayer which are issued during the taxable year exceed $5,000,000 and until any such installment obligation is satisfied. A Shareholder will be treated as owning a proportionate share of any Company or Participating Partnership installment obligation and the $5,000,000 threshold is measured at the Shareholder level. Interest must be paid on the deferred tax at the rate applicable to underpayments of tax in effect for the month with which the taxpayer's taxable year ends. The same rules apply with respect to any Subsidiary Partnership Unitholder's interest in a Participating Partnership that holds an installment obligation. The Code provides that a dealer may not report dealer gains on the installment method. A dealer with respect to real property is a taxpayer who holds real property for sale to customers in the ordinary course of the taxpayer's trade or business. The Company does not anticipate that it or any Participating Partnership will be a dealer in real property. Therefore, neither a Shareholder nor a Subsidiary Partnership Unitholder who is not a dealer in real property should be eligible to report any gain from an installment sale by the Company or any Participating Partnership of property on the installment method. Additionally, the Code provides that if an installment obligation arising from the disposition of non-dealer property is pledged as security for any indebtedness, the net proceeds of such secured indebtedness shall be treated as a payment with respect to the installment obligation. If, upon an installment sale of property, the Participating Partnerships or the Company were to receive a rate of interest on any installment obligation from the buyer which is below the rate provided by law, the sales terms would be recharacterized in a manner which would increase ordinary income to the Participating 166 178 Partnerships or the Company, while decreasing in a corresponding manner, first, any long-term capital gains, and second, any depreciation recapture. Such interest income would be recognized by the Participating Partnerships and/or the Company according to the original issue discount rules. (See "Accrual of Original Issue Discount," below.) Because the terms of sale of properties will be determined in part by then-current market conditions and negotiations with potential buyers, no assurance can be given that interest income will not be imputed on installment sales. ACCRUAL OF ORIGINAL ISSUE DISCOUNT The Code contains extensive rules relating to the tax accounting for original issue discount ("OID"). The Participating Partnerships and the Company will be subject to the OID rules with respect to its installment sales. OID can arise with respect to an installment sale if (i) the interest rate varies according to fixed (non-floating) terms, (ii) the debtor is permitted to defer interest payments to years after such interest accrues, (iii) the amount of the creditor's share of income or appreciation from the mortgaged property under a right of participation is determined in a year before payment of such amount is due, or (iv) interest is imputed on an installment sale. See "Installment Sales -- Imputed Interest," above. The Participating Partnerships or the Company may sell properties on an installment basis with any or all of the preceding terms and therefore may be subject to the OID rules. Recognition of OID as an item of income in any year will have the effect of either reducing losses, if any, allocable to Shareholders or increasing the amount of income which Shareholders must report from the Company without the receipt of cash distributions with which to pay any tax resulting from the reporting of such income. However, the Company expects the amount of OID, if any, which the Company might recognize in any year would be minor in comparison with cash distributions allocable to Shareholders in such year. Investment Interest and Other Limitations on the Deduction of Interest A Shareholder's or a Subsidiary Partnership Unitholder's (that is not a corporation) investment interest expense may be deducted only up to the Shareholder's or the Subsidiary Partnership Unitholder's net investment income (i.e., the income from interest, dividends, rents, royalties and net short-term capital gains from investment property to the extent it exceeds the expenses, including straight line depreciation, incurred in earning such income). Interest subject to the investment interest limitation includes all interest on debt incurred in connection with property held for investment (including property subject to a net lease) but not incurred in connection with the taxpayer's trade or business, other than consumer interest and qualified residence interest. To the extent that the Participating Partnerships' or the Company's properties are considered to be "investment assets," the amount of mortgage interest allocated to each Shareholder or Subsidiary Partnership Unitholder, other than a corporation, may be deductible by him only to the extent it does not exceed his net investment income plus the amount by which certain deductions attributable to property subject to a net lease exceeds the net income of such property. The amount of interest not deductible due to such limitation, if any, may be carried over to subsequent years within certain limits. The Participating Partnerships and the Company anticipate that substantially all of their properties will be treated as investment assets and that substantially all of their mortgage interest deductions allocated to the Shareholders or Subsidiary Partnership Unitholder will be subject to the above rules on disallowance and carryover. However, unless the Participating Partnerships or the Company realize a loss for tax purposes in any taxable year, the Company anticipates that neither a Shareholder nor a Subsidiary Partnership Unitholder will have any "excess investment interest" subject to disallowance attributable to his interest in the Company. Should the Company or a Subsidiary Partnership suffer a loss for any reason, the Shareholders and Subsidiary Partnership Unitholders of that Subsidiary Partnership may realize "excess investment interest" because of their investment in the Company or that Subsidiary Partnership. In addition to the "investment interest" limitation described above, Section 265(a)(2) of the Code disallows certain deductions for interest paid by a taxpayer or a related person on indebtedness incurred or continued to purchase or carry tax-exempt obligations. A Shareholder for whom tax-exempt obligations 167 179 constitute a significant portion of his net worth should consider the impact of Section 265(a)(2) of the Code on his ability to deduct his allocable share of the Company's or his Subsidiary Partnership's interest expense. Neither the Participating Partnerships nor the Company anticipate that they will prepay any interest, but either or both may be required by prospective lenders to pay certain amounts commonly referred to as "points" which may be considered prepayments of interest for federal income tax purposes. The Code requires that interest prepayments (including "points") be capitalized and amortized over the life of the loan with respect to which they were paid. CONSTRUCTION EXPENSES The Participating Partnerships or the Company may incur expenditures in connection with the construction of improvements on real property, some of which must be capitalized for federal income tax purposes. The Code provides that interest and real estate taxes incurred during the construction period of improved real property which would otherwise be deductible must be added the basis of the property and recovered through depreciation deductions. See "Depreciation," above. INVESTMENT BY QUALIFIED PENSION AND PROFIT-SHARING PLANS (INCLUDING KEOGHS), STOCK BONUS PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS Qualified pension and profit-sharing plans (including Keoghs), stock bonus plans and IRA's (each a "Qualified Plan") are generally exempt from taxation except to the extent that their "unrelated business taxable income" (as defined in Section 512 of the Code) exceeds $1,000 during any fiscal year. The IRS has ruled that an exempt employee's trust which becomes a limited partner in a partnership carrying on a trade or business will realize such unrelated business taxable income. There can be no assurance that the activities of the Company or any Participating Partnership would not be characterized as the conduct of a trade or business by the IRS. Even to the extent the activities of the Company or any Participating Partnership were not so characterized, since the Company's and each Participating Partnership's income will be primarily rental income from "debt-financed property," a portion of each Qualified Plan's distributive share of the Company's (or if a Subsidiary Partnership Unitholder, the Subsidiary Partnership) taxable income (including capital gain) will constitute unrelated business taxable income. This portion is determined in accordance with the provisions of Section 514(a) of the Code and is that portion of the Qualified Plan's distributive share of its partnership's income which is approximately equivalent to the ratio of that partnership's share of debt to the basis of the partnership's share of the partnership's property. Therefore, a Qualified Plan that purchases Shares in the Company may be required to report all or a portion of its pro rata share of the Company's taxable income as unrelated business taxable income. If, and to the extent that, the Qualified Plan's unrelated business taxable income from all sources exceeds $1,000 in any year, the Qualified Plan could incur a tax liability with respect to such excess at such tax rates as would be applicable to such organizations if such organizations were not otherwise exempt from taxation. The same results apply with respect to a Qualified Plan that remains as a Subsidiary Partnership Unitholder. Section 514(c)(9) of the Code excludes from treatment as "debt-financed property" certain investments in real property and improvements by, among others, a pension, profit sharing, or stock bonus trust which qualifies under Section 401 of the Code (a "Qualified Trust"). A Qualified Trust does not include an IRA which is not a sponsored IRA for which a determination letter has been issued under Section 401(a) of the Code. It is not clear that the acquisition or improvement of any real property by the Participating Partnerships or the Company will be an acquisition or improvement contemplated by Section 514(c)(9) of the Code with respect to a Qualified Trust. Furthermore, even if so contemplated, there can be no assurance that any acquisition or improvement of real property by the Participating Partnership or the Company which is otherwise "debt-financed" will qualify for the exclusion under Section 514(c)(9) of the Code with respect to any Qualified Trust, especially since many of the Participating Partnership's or the Company's properties are expected to be leased to the sellers thereof. In considering an investment in the Company of a portion of the assets of a Qualified Plan, a fiduciary should also consider among other things (i) the definition of plan assets under "ERISA" and the status of 168 180 labor regulations regarding the definition of plan assets and (ii) whether the investment satisfies the diversification requirements of Section 404(a)(l)(C) of ERISA. CERTAIN FEDERAL ESTATE TAX MATTERS For federal estate tax purposes, an asset owned by a decedent is taxed at its fair market value on the date of death of the decedent or, in some cases, an alternate date prescribed by the Code. The basis for a Share received from a decedent will be determined by adding the decedent's share of the Company's liabilities to the estate tax value of the Share. As a result, the taxable gain which a successor Shareholder may realize upon the sale of a Share may be lower or higher than the taxable gain which would have been realized by the decedent if the decedent had transferred the Company interest during his lifetime. Upon the death of an individual Shareholder, suspended passive activity losses are deductible by the deceased shareholder only to the extent that the suspended passive activity losses exceed the difference between the new Shareholder's (who received his interest from the decedent) basis for the Share and the adjusted basis for the Share the deceased Shareholder had immediately before his death. The same consequences apply with respect to Units owned by a decedent. See "Passive Activity Loss Limitations," and "Tax and 'At-Risk' Basis of Shares," above. Any passive activity losses disallowed pursuant to this rule are lost permanently. TAX PENALTIES AND INTEREST The time period during which the IRS must claim any deficiencies with respect to partnership items in tax returns of Shareholders is generally three years from the time that the Company files its partnership return, but not commencing earlier than the due date for such return. The statute of limitations may be extended automatically for certain Shareholders or Subsidiary Partnerships Unitholders for which certain information is not provided. The period may be extended with respect to any Shareholder or Subsidiary Partnership Unitholder by agreement between the IRS and such Shareholder or Subsidiary Partnership Unitholder. In addition, the period may be extended for all Shareholders or Subsidiary Partnership Unitholders by an agreement entered into by the TMP with the IRS. For settlements entered into after the date of enactment of the 1997 Tax Act, the one-year partner-level statute of limitations on assessments for underpayments resulting from partnership level adjustments does not begin to run until all partnership level items are settled. The Code imposes penalties of up to 20 percent on any underpayment of tax attributable to a substantial understatement, valuation misstatement, negligence or disregard of rules and regulations. The penalty is increased to 40% for any underpayment attributable to a gross valuation misstatement. A substantial understatement subject to the penalty does not include any amount attributable to (i) the tax treatment of any item if there was substantial authority for the treatment, or (ii) the tax treatment of any item with respect to which the relevant facts are adequately disclosed in the return if there was a reasonable basis for the position. If, however, any item of understatement is attributable to a "tax shelter", the amount of understatement is reduced only by the portion of the understatement that is attributable to tax treatment for which there was "substantial authority" and with respect to which the taxpayer "reasonably believed" that the tax treatment adopted was "more likely than not the proper treatment". A "tax shelter" is defined to include a partnership if the "principal purpose" of the partnership is the "avoidance or evasion of federal income tax". It is possible that the IRS would take the position that the Company or any Participating Partnership is a tax shelter for this purpose and require the higher degree of proof applicable to tax shelters. TERMINATION OF THE COMPANY FOR TAX PURPOSES Under Section 708(b) of the Code, if (i) at any time no part of the business of the Company continues to be carried on by any of the partners in the Company or (ii) within a 12-month period 50% or more of the total interests in partnership capital and profits are sold or exchanged, a termination of the Company would occur for federal income tax purposes, and the taxable year of the Company would close. It is possible that Shares representing 50% or more of the capital and profits interests in the Company might be sold or exchanged 169 181 within a single 12-month period. For this purpose, a Share that changes hands several times during a 12-month period will only be deemed sold or exchanged once. The tax results would be the same as the treatment of the Participating Partnerships in the Consolidation. See "Tax Consequences of the Consolidation." Generally, a Shareholder would not recognize any taxable gain or loss as a result of the deemed termination of the Company. A Shareholder, however, would recognize gain to the extent, if any, that the Shareholder's pro rata share of the Company's cash (and the reduction, if any, in the Shareholder's pro rata share of the Company's indebtedness) at the date of a termination exceeded the adjusted tax basis of his Shares. Also, the Company's taxable year would terminate. If the Shareholder's taxable year were other than the calendar year, the inclusion of more than one year of Company income in a single taxable year of the Shareholder could result. Finally, a termination of the Company could cause the Subsidiary Partnerships, the Company, the Subsidiary Partnerships' property or the Company's property to become subject to unfavorable statutory or regulatory changes enacted after the date of the Consolidation and prior to the termination but which were not previously applicable to the Subsidiary Partnerships or the Company or their assets. A deemed termination of the Company will likely cause a deemed termination of the Subsidiary Partnerships. As a result, if the Company is terminated, the Subsidiary Partnership Unitholders and the Subsidiary Partnerships would experience the tax consequences described above. See "New Tax Law Provisions," for a discussion of electing large partnerships. The Participating Partnerships will likely be deemed terminated for federal income tax purposes as a result of the Consolidation. See "Tax Consequences of the Consolidation," and "Depreciation," above for the impact of such a termination. STATE AND LOCAL TAX CONSEQUENCES In addition to the federal income tax aspects described above, prospective Shareholders should consider potential state tax consequences of an investment in the Company. Each Shareholder is advised to consult his own tax advisor to determine whether the state in which he is a resident imposes an income tax upon his share of the taxable income of the Company, or an estate or inheritance tax, and whether an income tax or other return also must be filed in those states where the Company acquires real property. The Company will inform each Shareholder and each Subsidiary Partnership will inform each holder of Subsidiary Partnership Units of his share of income or losses to be reported to each of the states in which the Subsidiary Partnerships own or the Company owns property. Personal exemptions, computed in various ways, are allowed by some states and may reduce the amount of tax owed, if any, to a particular state. The Subsidiary Partnerships or the Company may be required to withhold state taxes from distributions to the Company or Shareholders or pay state or local taxes. Any such withholding or payment would reduce distributions by the Company to the Shareholders and by each Subsidiary Partnership to its holders of Subsidiary Partnership Units. To the extent that a nonresident Shareholder or a holder of Subsidiary Partnership Units pays tax to a state by virtue of the Company's or a Subsidiary Partnership's operations within that state, he may be entitled to a deduction or credit against tax owed to his state of residence with respect to the same income, and should consult his tax adviser in that regard. In addition, payment of such state taxes presently constitutes a deduction for federal income tax purposes if the taxpayer itemizes deductions. NECESSITY OF PROSPECTIVE SHAREHOLDERS OBTAINING PROFESSIONAL ADVICE The foregoing analysis is not intended as a substitute for careful tax planning. The tax matters relating to the Company, the Subsidiary Partnerships and the transactions described herein are complex and are subject to varying interpretations. Moreover, the effect of existing income tax laws, the meaning and impact of which is not yet clear, and of proposed changes in income tax laws will vary with the particular circumstances of each Unitholder and, in reviewing this Prospectus, these matters should be considered. Accordingly with respect to federal income tax consequences of the Consolidation as they may relate to individual Unitholders, each Unitholder should consult with and rely on his professional tax advisor. In no event should the Participating Partnerships, Company, General Partners, Manager or any of their affiliates, counsel or any other professional 170 182 advisors or counsel engaged by any of them, be considered as guarantors of the tax consequences of an investment in the Company. Unitholders should look to, and rely on, their professional tax advisors with respect to the tax consequences of the Consolidation and this investment. LEGAL MATTERS Reed Smith Shaw & McClay has delivered an opinion to the effect that the discussion under "INCOME TAX CONSIDERATIONS" fairly summarizes the federal income tax considerations that are likely to be material to a Unitholder whose Units are exchanged for Listed Shares or Subsidiary Partnership Units in the Consolidation. Richards, Layton & Finger has delivered an opinion to the effect that, upon the consummation of the Consolidation, the Shares offered pursuant to this Prospectus will be validly issued, fully paid and nonassessable. EXPERTS The financial statements included in the Annual Reports on Form 10-K for the year ended December 31, 1996, of the individual CPA(R) Partnerships incorporated by reference in this Consent Solicitation Statement, the combined balance sheets of the CPA(R) Partnerships (the "Group") as of December 31, 1995 and 1996 and the combined statements of income, partners capital and cash flows for each of the three years in the period ended December 31, 1996 and the balance sheet of Carey Diversified LLC as of August 31, 1997, included in this Consent Solicitation Statement, have been incorporated and included herein, respectively, in reliance on the reports of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. GLOSSARY OF TERMS "Acquisition Expenses" means the expenses of the Company related to the selection and acquisition of properties by the Company, whether or not such properties are acquired, including but not limited to legal fees and expenses, travel and communications expenses, costs of appraisals and fairness letters, non-refundable option payments on property not acquired, accounting fees and expenses, costs of title reports and title insurance, transfer and recording taxes and miscellaneous expenses. "Adjusted Cash from Operations" means cash receipts from the ordinary day-to-day operations of the Partnership (including all interest on Partnership investments and mortgages held by the Partnership) without deduction for any management fee or for depreciation and amortization of intangibles such as organization, underwriting and debt placement costs but after deducting all other expenses, debt amortization and provisions for reserves established by the Manager which it deems to be reasonably required for the proper operation of the business of a Subsidiary Partnership. "Affiliate" means, with respect to any Person, (i) any Person directly or indirectly controlling, controlled by or under common control with such Person, (ii) any Person owning or controlling 10% or more of the outstanding voting securities of such Person, (iii) any officer, director or partner of such Person or of any Person specified in (i) or (ii) above and (iv) any company in which any officer, director or partner of any Person specified in (iii) above is an officer, director or partner. "Amount Available for Distribution" means with respect to a Subsidiary Partnership, the net cash flows generated by the properties owned by such Subsidiary Partnership on the date of the Consolidation (i) decreased by each Property's allocable share of the Company's administrative expenses which will be allocated on the basis of the gross revenue, less debt service, generated by each Property owned by the Partnerships and the Company and (ii) increased for any cash flows used to pay Consolidation expenses. "Appraised Value" means the value according to an appraisal made by an independent qualified appraiser. Such qualification may be demonstrated by membership in a nationally recognized appraisal society such as American Institute of Real Estate Appraisers ("M.A.I."), Society of Real Estate Appraisers ("S.R.E.A.") or their equivalent, but is not limited thereto. 171 183 "Approval Date" means December 16, 1997, the date by which Unitholders' Consent Cards must be received by the General Partners. "Audit Committee" means the committee of the Board of Directors consisting of two or more Independent Directors established to make recommendations concerning the engagement of independent public accountants, review with the independent public accountants the plans and results of the audit engagement, approve professional services provided by the independent public accountants, review the independence of the independent public accountants, consider the range of audit and non-audit fees and review the adequacy of the Company's internal accounting controls. "Average Market Capitalization" means, for the relevant period, the closing price of the Listed Shares on each trading day of the period multiplied by the total number of Listed Shares outstanding on each trading day (including "Listed Shares Equivalent Units"), adding the product for each day and dividing the sum by the number of trading days in the period; provided, however that this definition may be adjusted to account for changes to the capital structure of the Company. For purposes of this calculation, the number of "Listed Share Equivalent Units" is equal to the sum of the product of (i) the total number of Subsidiary Partnership Units outstanding for each Subsidiary Partnership and (ii) the Subsidiary Partnership Exchange Ratio for each Subsidiary Partnership. "Business Combination" means one of the following transactions: (i) unless the merger, consolidation or exchange of interests does not alter the contract rights of the Shares as expressly set forth in the Company organizational documents or change or convert in whole or in part the outstanding Shares, any merger, consolidation or exchange of interests of the Company or any subsidiary with (a) any Interested Party or (b) any other entity (whether or not itself an Interested Party) which is, or after the merger, consolidation or exchange of interest will be, an affiliate of an Interested Party that was an Interested Party prior to the transaction; (ii) any sale, lease, transfer or other disposition, other than in the ordinary course of business, in one transaction or a series of transactions in any 12-month period to any Interested Party or any affiliate of any Interested Party (other than the Company or any of its subsidiaries) of any assets of the Company or any subsidiary having, measured as of the time the transaction or transactions are approved by the Board of Directors of the Company, an aggregate book value as of the end of the Company's most recently ended fiscal quarter of 10% or more of the total market value of the outstanding Shares or of its net worth as of the end of its most recently ended fiscal quarter; (iii) the issuance or transfer by the Company or any subsidiary, in one transaction or a series of transactions, of any of the Shares or any equity securities of a subsidiary which have an aggregate market value of 5% or more of the total market value of the outstanding Shares to any Interested Party or any affiliate of any Interested Party (other than the Company or any of its subsidiaries) except pursuant to the exercise of warrants or rights to purchase securities offered pro rata to all Shareholders or any other method affording substantially proportionate treatment to the Shareholders; (iv) the adoption of any plan or proposal for the liquidation or dissolution of the Company in which anything other than cash will be received by an Interested Party or any affiliate of any Interested Party; (v) any reclassification of securities or recapitalization of the Company, or any merger, consolidation or exchange of Shares with any of its subsidiaries which has the effect, directly or indirectly, in one transaction or a series of transactions, of increasing by 5% or more of the total number of outstanding Shares, the proportionate amount of the outstanding Shares or the outstanding number of any class of equity securities of any subsidiary which is directly or indirectly owned by any Interested Party; or (vi) the receipt by any Interested Party or any affiliate of any Interested Party (other than the Company or any of its subsidiaries) of the benefit, directly or indirectly (except proportionately as a Shareholder), of any loan, advance, guarantee, pledge or other financial assistance or any tax credit or other tax advantage provided by the Company or any of its subsidiaries. "Cash from Financings" means the net cash proceeds realized by a CPA(R) Partnership from the financing of a CPA(R) Partnership property or the refinancing of any CPA(R) Partnership indebtedness. "Cash from Sales" means the net cash proceeds realized by a CPA(R) Partnership from the sale, exchange or other disposition of any of its assets. Cash From Sales shall not include net cash proceeds realized from the financing of CPA(R) Partnership property or the refinancing of any CPA(R) Partnership indebtedness. 172 184 "CCP" means Carey Corporate Property, Inc., managing general partner of CPA(R):4, CPA(R):5 and CPA(R):6. "Closing Date" means the date on which the Merger is consummated and on which the Participating Investors shall receive Listed Shares or Subsidiary Partnership Units in exchange for their Units pursuant to the Prospectus. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any similar law or provision enacted in lieu thereof, unless the context indicates otherwise. "Commission" means the Securities and Exchange Commission. "Company" means Carey Diversified LLC. "Consent Card" means the card accompanying this Prospectus to be used by the Unitholder to vote his wishes to approve or disapprove of his CPA(R) Partnership's participation in the Consolidation. "Consolidation" means the merger of up to nine Subsidiary Partnerships with and into the CPA(R) Partnerships. "Consolidation Expenses" means all of the costs and expenses incurred by the Company or the CPA(R) Partnerships in connection with the Consolidation including such expenses as: (i) the preparing, printing, filing and delivering of the Registration Statement and the Prospectus (including any Partnership Agreement Amendments thereof or supplements thereto); (ii) the preparing and printing of the Prospectus, other solicitation material and related documents and the filing and/or recording of such certificates or other documents necessary to comply with the laws of the State of Delaware for the formation of a limited partnership, the merger of a limited partnership into another limited partnership and for the continued good standing of a limited partnership; (iii) the qualification or registration of the limited liability company interests under state securities or 'Blue Sky' laws; (iv) the filing fees payable to the United States Securities and Exchange Commission and to the National Association of Securities Dealers, Inc.; (v) the fees of the Company's counsel; and (vi) all solicitation expenses, including the cost of all sales literature and the costs related to investor and broker/dealer sales and information meetings and the cost of solicitation and tabulation of the consents and elections. "Control Shares" means Shares that, but for the operation of the Control Share Acquisition Provisions, bring their holder's voting power within any of the following ranges: (i) one-fifth to one-third; (ii) one-third to a majority; or (iii) a majority or more. "Control Share Acquisition" means the acquisition of Shares, with certain exceptions listed under "DESCRIPTION OF LISTED SHARES AND SUBSIDIARY PARTNERSHIP UNITS -- Control Share Acquisition Provisions," that will entitle the acquiring person immediately after the acquisition to exercise or direct the exercise of the voting power of Shares within one of the ranges designating Control Shares. "Control Share Acquisition Provisions" means Control Share acquisition provisions contained in the Organizational Documents. "CPA(R):1" means Corporate Property Associates. "CPA(R):2" means Corporate Property Associates 2. "CPA(R):3" means Corporate Property Associates 3. "CPA(R):4" means Corporate Property Associates 4, a California limited partnership. "CPA(R):5" means Corporate Property Associates 5. "CPA(R):6" means Corporate Property Associates 6 -- a California limited partnership. "CPA(R):7" means Corporate Property Associates 7 -- a California limited partnership. "CPA(R):8" means Corporate Property Associates 8, L.P., a Delaware limited partnership. 173 185 "CPA(R):9" means Corporate Property Associates 9, L.P., a Delaware limited partnership. "CPA(R) Partnerships" or "Partnerships" means CPA(R):1, CPA(R):2, CPA(R):3, CPA(R):4, CPA(R):5, CPA(R):6, CPA(R):7, CPA(R):8 and CPA(R):9. "CPA(R) Programs" means, collectively, the CPA(R) Partnerships and the CPA(R) REITs. "CPA(R) REITs" means Corporate Property Associates 10 Incorporated, Carey Institutional Properties, Inc. and Corporate Property Associates 12 Incorporated, all Maryland corporations. "Directors" means persons authorized to manage and direct the affairs of the Company and who are members of the Board of Directors of the Company. "Dissenting Investors" means Unitholders who vote against the Consolidation. "Distribution" means any transfer of money or property by a Partnership to a Partner without consideration. "Dividend Payment Date" means the date on which the Company makes a distribution. "Effective Time" means the date and time as of which a Merger is effective. "Eighth Carey" means Eighth Carey Corporate Property, Inc., managing general partner of CPA(R):8. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Exchange Act" means the Securities Exchange Act of 1934. "Exchange Ratio" means the number of Listed Shares issued in exchange for each CPA(R) Partnership Unit in the Consolidation. "Fairness Opinion" means the opinion of the Independent Appraiser to the CPA(R) Partnerships as to the fairness, from a financial point of view, of the allocation of Listed Shares to the CPA(R) Partnerships. "Fiscal Quarter" means the three-month period ending on the last day of the third, sixth, ninth and twelfth calendar months of each Fiscal Year of the Partnership. "Fiscal Year" means the twelve-month period ending on December 31. "Formation Transactions" means the series of transactions which together comprise the Consolidation. "Funds from Operations" means net income (loss) before depreciation, amortization, other noncash items, extraordinary items and gains or losses on sales of assets. "General Partners" means the general partners of each of the CPA(R) Partnerships which include William Polk Carey, W.P. Carey & Co., CCP, Seventh Carey, Eighth Carey and Ninth Carey. "General Partners' Preferred Return" means the three percent of the Cash from Sales owed to the General Partners in connection with the sale of properties by the CPA(R) Partnerships prior to the Consolidation. "General Partners' Retained Interest" means the portion of the Total Consolidation Value allocated to the General Partners that is retained by the General Partners in the form of limited partner interests in the Subsidiary Partnerships. "Good Reason" means (i) any failure to obtain a satisfactory agreement from any successor to the Company to assume and agree to peform the Company's obligations under the Management Agreement, (ii) any breach of the Management Agreement of any nature by the Company or (iii) a change in control of the Company. "Independent Appraisal" means the appraisal of the Properties performed by the Independent Appraiser. "Independent Appraiser" means Robert A. Stanger & Co., Inc. 174 186 "Independent Director" means a Director of the Company who (i) is not an officer of the Company and (ii) is, in the view of the Company's Board of Directors, free of any relationship that would interfere with the exercise of independent judgment. "Initial Member" means Carey Property Advisors L.P. "Interested Party" means any person (other than (a) the Company, (b) any subsidiary of the Company, (c) the General Partners and the Original Shareholders, and (d) any affiliate or associate of any person in (c) above) that: (i) is the beneficial owner, directly or indirectly, of 10% or more of the outstanding Shares, (ii) is an affiliate or associate of the Company and at any time within the two year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the then outstanding Shares, or (iii) is an affiliate or associate of any person described in clauses (i) or (ii) above. "Investment Committee" means the committee of the board of directors of the Manager primarily responsible for the approval of investments to be made by the Company. "IRS" means Internal Revenue Service "LLCA" means the Delaware Limited Liability Company Act (6 Del.C. sec.sec. 18-101 et seq.) "Limited Partner" means any person or entity in his, her or its capacity as a limited partner of a CPA(R) Partnership and whose name and address are set forth on the books and records of the Partnership. "Listed Shareholder" means a Shareholder of the Company who owns Listed Shares. "Listed Shares" means a limited liability company interest in the Company representing a share of all of the income, loss and capital of the Company. "Management Agreement" means the agreement between the Company and the Manager relating to the management of the Company by the Manager. "Manager" means Carey Management LLC. "Merger" means the merger of a Subsidiary Partnership into a CPA(R) Partnership. "Merger Agreements" or "Partnership Merger Agreements" means each Agreement and Plan of Merger to be entered into by each Subsidiary Partnership and the respective CPA(R) Partnership. "Minimum Participation Amount" means $200 million. "NASD" means the National Association of Securities Dealers, Inc. "Nasdaq" means the National Association of Securities Dealers Automated Quotations System. "Net Lease or Triple Net Lease" means a lease in which the tenant undertakes to pay all or substantially all the cash expenses, excluding debt service, related to the leased property. "Net Other Assets and Liabilities" means with respect to any CPA(R) Partnership (A) the sum of (i) cash, (ii) accounts receivable, (iii) security deposits, (iv) cash held in escrow, (v) the value of all securities and (vi) the value of any claims in bankruptcy and (vii) any post March 31, 1997 adjustment to the value of any Properties, less (B) the sum of (i) accounts payable, (ii) accrued interest, (iii) accrued rent, (iv) rent deposits, (v) escrowed liabilities, (vi) prepaid rent and (vii) transfer taxes payable upon consummation of the Consolidation. "Ninth Carey" means Ninth Carey Corporate Property, Inc., managing general partner of CPA(R):9. "Nonparticipating Partnership" means a CPA(R) Partnership which does not participate in the Consolidation. "NYSE" means the New York Stock Exchange. "Operating Agreement" means the limited liability company agreement of the Company. 175 187 "Organizational Documents" means the Certificate of Formation, the Operating Agreement and the Bylaws of the Company, as amended. "Original Shareholder" means Carey Management LLC. "Participating Investor" means a Unitholder of a Participating Partnership. "Participating Partnership" means a CPA(R) Partnership which participates in the Consolidation. "Partner" means the General Partner and any Limited Partner where no distinction is required by the context in which the term is used. "Partnership" means a CPA(R) Partnership. "Partnership Agreement Amendments" means the amendments of the partnership agreements expressly authorizing the Consolidation. "Partnership Interest" or "Interest" means the interest of each Partner in the profits, losses, distributions, capital and assets of a Partnership. "Partnership Merger Agreement" means the Agreement and Plan of Merger to be executed by a Subsidiary Partnership and a Participating Partnership in connection with the Consolidation. "Person" means any natural person, partnership, corporation, limited liability company, association or other legal entity. "Prime Rate" means the rate of interest announced as the Prime Rate from time to time by the Company's primary lender. "Property or Properties" means the partial or entire interests in real property, including leasehold interests and personal and mixed property connected therewith held by the CPA(R) Partnerships or the Company. "Prospectus" shall mean the Prospectus Statement which is included in the registration statement filed with the Securities and Exchange Commission in connection with the issuance of the Shares in the Consolidation. "Proxy" means a written authorization signed by a Partner or the Partner's duly authorized attorney-in-fact giving another person the power to vote with respect to the limited partner interest of that Partner or a written authorization signed by a Shareholder or the Shareholder's duly authorized attorney-in-fact giving another person the power to vote with respect to the limited liability company interest of that Shareholder. "Signed," for the purpose of this paragraph, means the placing of the Partner's or Shareholder's name on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the Partner or the Partner's duly authorized attorney-in-fact or the Shareholder or the Shareholder's duly authorized attorney-in-fact. "Purchase Price of Property" means the price paid upon the purchase of a particular property, including the amount of any acquisition fees and all liens and mortgages on the property, but excluding points and prepaid interest. "Registration Statement" means the Company's Registration Statement on Form S-4 filed with the Securities and Exchange Commission in the form in which it becomes effective, as the same may at any time and from time to time thereafter be amended or supplemented. "Redemption Date" means the date as of which a Participating Partnership's Properties are appraised for purposes of redeeming the corresponding class of outstanding Partnership Shares. "REIT" means real estate investment trust. "Right" means a right to buy one Share at a specified exercise price, which will be subject to adjustment. "Rights Certificate" means a certificate evidencing a Right. 176 188 "Rights Distribution Date" means the earlier of (i) the date an Acquiring Person, alone or together with affiliates and associates, has become the beneficial owner of 5% or more of the outstanding Shares or (ii) the date of the commencement of, or announcement of, an intention to make a tender offer or exchange offer the consummation of which will result in the beneficial ownership by a person or group (other than the Company, any subsidiary of the Company, any employee benefit plan of the Company or any subsidiary of the Company or the General Partners or their affiliates) of 10% or more of the outstanding Shares. "Rights Record Date" means a record date established by the Board of Directors for determining the Company's Shareholders of record who will be entitled to a Right for each outstanding Share held by such person. "Securities Act" means the Securities Act of 1933, as amended. "Seventh Carey" means Seventh Carey Corporate Property, Inc., managing general partner of CPA(R):7. "Shareholder" means a member of the Company and holder of Shares. "Shareholder Rights Plan" means the Shareholder rights plan adopted by the Company. "Shareholders" means the holders of the Shares collectively. "Shares" means the Listed Shares of the Company, and includes any other limited liability company interests that the Company may issue in the future. "Solicitation/Communication Costs" means all of the costs and expenses associated with communication to and solicitation of the Unitholders incurred by the Company or the Partnerships in connection with the Consolidation. "Solicitation Materials" means the Prospectus and any additional material used to solicit consents in connection with the Consolidation. "Solicitation Period" means the period commencing on the date of delivery of this Consent Solicitation Statement and continuing until the later of (i) October 29, 1997 and (ii) such later date as may be selected by the General Partners. "Subsidiary Partnership" means a limited partnership formed by the Company which will merge with and into a CPA(R) Partnership in connection with the Consolidation but for purposes of this Prospectus only, in certain sections, is used to refer to the surviving CPA(R) Partnership. "Subsidiary Partnership Unit" means a limited partnership unit in a Subsidiary Partnership. "Tabulator" means ChaseMellon Shareholder Services. "Termination Fee" means an amount equal to the sum of (A) any fees that would be earned by the Manager upon the disposition of the assets of the Company and the Subsidiary Partnerships at their appraisal value measured as of the date the Management Agreement is terminated, (the "Termination Date") and (B)(1) if the agreement is terminated by the Company after a change in control, $50 million if the change in control occurs on or before December 31, 1998 and thereafter, five times the total fees paid to the Manager by the Company and the Subsidiary Partnership in the 12 months preceding the change in control and (2) if the agreement is terminated without cause or good reason, $50 million if the agreement is terminated before December 31, 1999; $40 million if the agreement is terminated before December 31, 2000; $30 million if the agreement is terminated before December 31, 2001; $20 million if the agreement is terminated before December 31, 2002 and $10 million if the agreement is terminated before December 31, 2003. " '33 Act" means the Securities Act of 1933, as amended. "Total Capitalization" means, for a specified period, the sum of (i) the average of the total principal amount of the debt outstanding (measured as of the first and last day of each period) and (ii) the Average Market Capitalization of the Company over the same period. 177 189 "Total Consolidation Value" means, with respect to the Participating Partnership, the sum of (i) the Appraised Value of the real estate of such partnerships and (ii) Net Other Assets and Liabilities less the sum of (A) the outstanding principal amount of all debt of the Participating Partnerships and (B) Consolidation Expenses and (C) the General Partners' Preferred Return. "Total Exchange Value" means Total Consolidation Value less the General Partners' Retained Interest. The Total Exchange Value is the value of the Participating Partnerships being distributed in the form of Subsidiary Partnership Units and Listed Shares. "Triple Net Lease" means a lease in which the tenant is responsible for real estate taxes and assessments, repairs and maintenance, insurance, other expenses relating to the property and the duty to restore in case of casualty. "Unit" means an interest of a Limited Partner in a CPA(R) Partnership representing a specific initial capital contribution of $500 per unit for CPA(R):1 through CPA(R):5 and $1,000 per Unit for CPA(R):6 through CPA(R):9. "Unitholders" means limited partners in the CPA(R) Partnerships. "W.P. Carey & Co." means W.P. Carey & Co., Inc., a New York corporation. 178 190 INDEX TO FINANCIAL STATEMENTS
PAGE NO. -------- CAREY DIVERSIFIED LLC Pro Forma (unaudited): ASSUMING 100% PARTICIPATION WITHOUT THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS: Condensed Consolidated Balance Sheet as of June 30, 1997...................... F-2 Notes to Condensed Consolidated Balance Sheet................................. F-3 Condensed Consolidated Statements of Income for the year ended December 31, 1996 and six months ended June 30, 1997...................................... F-5 Notes to Condensed Consolidated Statements of Income.......................... F-6 ASSUMING 100% PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS: Condensed Consolidated Balance Sheet as of June 30, 1997...................... F-8 Notes to Condensed Consolidated Balance Sheet................................. F-9 Condensed Consolidated Statements of Income for the year ended December 31, 1996 and six months ended June 30, 1997...................................... F-12 Notes to Condensed Consolidated Statements of Income.......................... F-13 ASSUMING MINIMUM PARTICIPATION WITHOUT THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS: Condensed Consolidated Balance Sheet as of June 30, 1997...................... F-16 Notes to Condensed Consolidated Balance Sheet................................. F-17 Condensed Consolidated Statements of Income for the year ended December 31, 1996 and six months ended June 30, 1997...................................... F-19 Notes to Condensed Consolidated Statements of Income.......................... F-20 ASSUMING MINIMUM PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS: Condensed Consolidated Balance Sheet as of June 30, 1997...................... F-22 Notes to Condensed Consolidated Balance Sheet................................. F-23 Condensed Consolidated Statements of Income for the year ended December 31, 1996 and six months ended June 30, 1997...................................... F-26 Notes to Condensed Consolidated Statements of Income.......................... F-27 Historical: Report of Independent Accountants............................................. F-30 Balance Sheet as of August 31, 1997........................................... F-31 Notes to Balance Sheet........................................................ F-32 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS Combined Financial Statements: Report of Independent Accountants............................................. F-35 Combined Balance Sheets as of December 31, 1995 and December 31, 1996 and (unaudited) as of June 30, 1997.............................................. F-36 Combined Statements of Income for the year ended December 31, 1994, 1995 and 1996 and (unaudited) for the six months ended June 30, 1996 and 1997......... F-37 Combined Statements of Partners' Capital for the years ended December 31, 1994, 1995 and 1996 and (unaudited) for the six months ended June 30, 1997... F-38 Combined Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and (unaudited) for the six months ended June 30, 1996 and 1997..... F-39 Notes to Combined Financial Statements........................................ F-40 Supplemental Schedule: Schedule III -- Real Estate and Accumulated Depreciation...................... F-55
F-1 191 CAREY DIVERSIFIED LLC PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 1997 (UNAUDITED) ASSUMING 100% PARTICIPATION WITHOUT THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS: The following unaudited pro forma Condensed Consolidated Balance Sheet has been presented as if the Consolidation transaction and the related issuance of Listed Shares had occurred on June 30, 1997. This unaudited pro forma Condensed Consolidated Balance Sheet should be read in conjunction with the balance sheet of Carey Diversified LLC as of August 31, 1997 and the combined financial statements of the Group, and notes thereto included elsewhere herein. In management's opinion, all adjustments necessary to reflect the Consolidation transaction and the related issuance of Listed Shares have been made. The exchange of Limited Partner (non-controlling) interests for Listed Shares will be accounted for as a purchase and recorded at the fair value of the Listed Shares exchanged. The exchange of the General Partner's interest for Listed Shares will be accounted for on the historical basis of accounting. This unaudited pro forma Condensed Consolidated Balance Sheet is not necessarily indicative of what the actual financial position would have been at June 30, 1997, nor does it purport to represent the future financial position of the Company.
GROUP PRO FORMA PRO FORMA HISTORICAL(1) ADJUSTMENTS CONSOLIDATED -------------- ----------- ------------ (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Real estate leased to others: Accounted for under the operating method, net............. $225,294 $ 129,611(2) $354,905 Net investment in direct financing leases................. 216,403 51,739(2) 268,142 Operating real estate, net.................................. 23,736 (934)(2) 22,802 Real estate held for sale................................... 14,816 6,557(2) 21,373 Equity investments.......................................... 13,523 30,131(2) 43,654 Cash and cash equivalents................................... 27,079 (5,566)(3) 21,513 Other assets, net........................................... 19,657 19,657 -------- -------- -------- Total assets....................................... $540,508 $ 211,538 $752,046 ======== ======== ======== LIABILITIES AND PARTNERS' CAPITAL/MEMBERS' EQUITY Mortgage notes payable...................................... $194,347 $194,347 Note payable to affiliate................................... 300 300 Notes payable............................................... 24,709 24,709 Accounts payable to affiliates.............................. 3,046 $ 3,642(4) 6,688 Other liabilities........................................... 10,958 10,958 -------- -------- -------- Total liabilities.................................. 233,360 3,642 237,002 -------- -------- -------- Minority interest........................................... (578) (5,538)(5) (6,116) -------- -------- -------- Redeemable minority interest................................ PARTNERS' CAPITAL/MEMBERS' EQUITY Partners' capital........................................... 307,726 (307,726)(6) Listed Shares, no par value; 24,388,057 shares issued and outstanding............................................... 521,160(6) 521,160 -------- -------- -------- 307,726 213,434 521,160 -------- -------- -------- Total liabilities and partners' capital/members' equity........................................... $540,508 $ 211,538 $752,046 ======== ======== ========
See accompanying notes to pro forma condensed consolidated balance sheet. F-2 192 CAREY DIVERSIFIED LLC NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) ASSUMING 100% PARTICIPATION WITHOUT THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS: (1) Reflects the Group's unaudited historical combined balance sheet as of June 30, 1997. (2) Reflects adjustments to record the Limited Partners' interest in the assets of the Company at their fair value, as follows:
APPRAISED REAL ESTATE VALUE OF COST OF ASSETS AT GENERAL REAL ESTATE ACQUISITION HISTORICAL PARTNERS' NET ASSETS OF ASSETS COST INTEREST ADJUSTMENT ----------- ----------- ----------- --------- ---------- Real estate accounted for under the operating method, net................ $ 354,467 $ 5,316 $(225,294) $(4,878) $129,611 Net investment in direct financing leases............................... 266,098 3,991 (216,403) (1,947) 51,739 Operating real estate, net............. 22,430 336 (23,736) 36 (934) Equity investments..................... 44,127 662 (13,523) (1,135) 30,131 Real Estate Held for Sale.............. 21,300 319 (14,816) (246) 6,557
The real estate assets of the Company have been appraised by an independent appraiser. The carrying value of the non-real estate assets and the liabilities of the Company are deemed to approximate their fair values. The General Partners' effective interest in the assets and liabilities of the Company is approximately 3.63%, consisting of a 1% interest in the liquidating proceeds of the Participating Partnerships and an approximate 3.01% interest in the Listed Shares of the Company. (3) Decrease in cash reflects the following: Payment of transaction costs....................................... $2,997 Payment of transfer taxes on properties............................ 1,059 Payment of deferred leasing fees................................... 1,510 ------ $5,566 ======
After the Consolidation, certain deferred leasing fees will be paid for leasing services rendered by the General Partners of certain CPA(R) Partnerships prior to the Consolidation. Such leasing fees were previously accrued by the CPA(R) Partnerships. (4) Net increase reflects the following: Accrual of preferred return....................................... $ 5,111 Payment of deferred leasing fees to Corporate General Partners.... (1,510) Distribution payable in respect of minority interest.............. 41 ------- $ 3,642 =======
The Corporate General Partners may be entitled to receive a preferred return, measured based upon the cumulative proceeds arising from the sale of the CPA(R) Partnership's assets. The preferred return amounts to $5,111 based upon the cumulative proceeds from the sale of assets since the inception of the CPA(R) Partnerships through June 30, 1997, assuming all requisite subordination requirements for the payment of such returns have been satisfied. After the Consolidation, the preferred return will be paid to the Manager if the Listed Shares achieve specified closing prices for five consecutive trading days. Upon completion of the Consolidation, the Participating Partnerships will distribute excess cash to the holders of Subsidiary Partnership Units, including the Company, in an amount sufficient to allow the F-3 193 CAREY DIVERSIFIED LLC NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED) Company to fund the payment of transaction costs and transfer taxes on the properties. The Manager and the Individual General Partner will be entitled to a portion of such distributions in accordance with their 1% interest in the liquidating distributions of the Participating Partnerships. (5) Decrease reflects the following: Corporate General Partners' preferred return....................... $5,111 Distribution to Manager............................................ 41 General Partners' share of transaction costs and transfer taxes.... 386 ------ $5,538 ======
The capital interest of the Corporate and Individual General Partners is classified under minority interest. The general partnership interests include an interest in the income, losses and distributions of the operating cash flows of the CPA(R) Partnerships which range from 1% to 10% of such amounts. The General Partners are also entitled to a share of the liquidation proceeds from the disposition of Partnership assets and payment of a preferred return subject to the satisfaction of certain subordination provisions. The General Partner's share of liquidation proceeds may range from 1% to 15% of the liquidating proceeds of each CPA(R) Partnership. Pursuant to the Consolidation, the Corporate General Partners of the CPA(R) Partnerships will contribute their General Partnership interests to a newly organized manager of the Company (the "Manager") in exchange for an interest in the Manager. The Manager will retain the Corporate General Partners' interests in the income, losses and operating cash flows of the CPA(R)Partnerships. The Manager and the Individual General Partner will retain an interest in the liquidating proceeds of each CPA(R) Partnership equal to 1% of such proceeds. The Individual General Partner will retain his interest in each Participating Partnership and such interest will be held in a limited partnership capacity. The General Partners' share of liquidation proceeds in excess of 1%, assuming a sale of CPA(R) Partnership assets at their appraised values, will be exchanged by the Manager and the Individual General Partner for 733,134 Listed Shares of the Company upon consummation of the Consolidation. (6) Increase in partners' capital reflects the following: Exchange of limited partner and certain general partnership interests for Listed Shares at historical cost................. $307,726 Adjustment of limited partners' interest based upon the fair value of Listed Shares exchanged............................... 206,866 Issuance of Warrants............................................. 6,568 -------- $521,160 ========
If the Consolidation is completed, W.P. Carey & Co. will receive compensation for investment banking services in the form of warrants to purchase Listed Shares. If all the CPA(R) Partnerships participate in the Consolidation, W.P. Carey & Co. will receive warrants to purchase 2,284,000 Listed Shares at $21 per share and 725,930 Listed Shares at $23 per share. The warrants generally will be exercisable over 10 years beginning one year after the date the Consolidation is completed. The increase in capital of $6,568 reflecting the issuance of warrants is equal to the estimated fair value of the warrants. (7) Pro forma book value per share as of June 30, 1997 is $21.37, which is computed as total equity divided by Listed Shares outstanding. F-4 194 CAREY DIVERSIFIED LLC PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE UNAUDITED SIX MONTHS ENDED JUNE 30, 1997 ASSUMING 100% PARTICIPATION WITHOUT THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS: The following unaudited pro forma Condensed Consolidated Statements of Income are presented as if the Consolidation transaction and the related issuance of Listed Shares had occurred as of January 1, 1996. The unaudited pro forma Condensed Consolidated Statements of Income should be read in conjunction with the balance sheet of Carey Diversified LLC as of August 31, 1997 and the combined financial statements of the Group, and notes thereto included elsewhere herein. In management's opinion, all adjustments necessary to reflect the Consolidation transaction have been made. The exchange of Limited Partner (non-controlling) interests for Listed Shares will be accounted for as a purchase and recorded at the fair value of the Listed Shares exchanged. The exchange of the General Partner's interest for Listed Shares will be accounted for on the historical basis of accounting. These unaudited pro forma Condensed Consolidated Statements of Income are not necessarily indicative of what actual results of operations of the Company would have been, nor do they purport to represent the results of operations for future periods.
YEAR ENDED DECEMBER 31, 1996 SIX MONTHS ENDED JUNE 30, 1997 -------------------------------------------- -------------------------------------------- CPA(R) CPA(R) PARTNERSHIPS PRO FORMA PRO FORMA PARTNERSHIPS PRO FORMA PRO FORMA HISTORICAL(1) ADJUSTMENTS CONSOLIDATED HISTORICAL(1) ADJUSTMENTS CONSOLIDATED ------------- ----------- ------------ ------------- ----------- ------------ (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Revenues: Rental income................. $ 44,576 $ 44,576 $23,675 $ 23,675 Interest income from direct financing leases............ 32,644 32,644 16,278 16,278 Other interest income......... 1,681 1,681 568 568 Other income.................. 1,901 1,901 3,431 3,431 Revenues of hotel operations.................. 21,929 21,929 7,033 7,033 -------- ----------- ------- ----------- 102,731 102,731 50,985 50,985 -------- ----------- ------- ----------- Expenses: Interest...................... 23,200 23,200 10,086 10,086 Depreciation and amortization................ 11,274 $(1,220)(2) 10,054 5,462 $(476)(2) 4,986 General and administrative.... 3,747 925(3) 4,672 2,611 388(3) 2,999 Property expenses............. 4,008 1,184(4) 5,192 1,532 819(4) 2,351 Writedown to net realizable value....................... 1,300 1,300 3,666 3,666 Operating expense of hotel operations.................. 15,947 15,947 5,272 5,272 -------- ------- ----------- ------- ----- ----------- 59,476 889 60,365 28,629 731 29,360 -------- ------- ----------- ------- ----- ----------- Income before net gains, minority interest and extraordinary items....... 43,255 (889) 42,366 22,356 (731) 21,625 Gains on sale of real estate and securities, net(5)............ 5,474 (487)(6) 4,987 -------- ------- ----------- ------- ----- ----------- Income before minority interest and extraordinary items..................... 48,729 (1,376) 47,353 22,356 (731) 21,625 Minority interest income........ (3,182) 49(7) (3,133) (1,334) 36(7) (1,298) -------- ------- ----------- ------- ----- ----------- Income before extraordinary items..................... $ 45,547 $(1,327) $ 44,220 $21,022 $(695) $ 20,327 ======== ======= =========== ======= ===== =========== Pro forma income before extraordinary items per Listed Share......................... $ 1.81 $ 0.83 =========== =========== Pro forma weighted average number of Listed Shares outstanding................... 24,484,170 24,624,734 =========== =========== Ratio of earnings to fixed charges(8).................... 2.98 3.14 =========== ===========
See accompanying notes to pro forma condensed consolidated statements of income. F-5 195 CAREY DIVERSIFIED LLC NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS) ASSUMING 100% PARTICIPATION WITHOUT THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS: (1) Reflects the Group's historical audited combined income statements for the year ended December 31, 1996 and unaudited combined income statements for the six months ended June 30, 1997. (2) Reflects changes in connection with adjustment of Limited Partners' interest in real estate assets to fair value and adoption of new depreciable lives for such assets as follows:
YEAR ENDED SIX MONTHS ASSETS AT REVISED DECEMBER 31, ENDED FAIR VALUE LIFE 1996 JUNE 30, 1997 ---------- ------- ------------ -------------- Buildings and improvements... $ 282,524 40 $ 7,063 $ 3,532 Personal property............ 16,371 7 2,339 1,170 -------- ------- 9,402 4,702 Less: historical depreciation expense.................... (10,668) (5,196) -------- ------- Difference................... (1,266) (494) Elimination of General Partners' (3.63%) interest................... 46 18 -------- ------- Net decrease in expense...... $ (1,220) $ (476) ======== =======
(3) Increase in general and administrative expenses as follows:
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED 1996 JUNE 30, 1997 ------------ -------------- Directors' compensation.......................... $225 $113 Employee compensation............................ 400 125 Other expenses of a public company............... 300 150 ---- ---- $925 $388 ==== ====
F-6 196 CAREY DIVERSIFIED LLC NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME -- (CONTINUED) (4) The Company will pay a management fee and a performance fee each at an annual rate of .5% of the Total Capitalization of the Company. The performance fee will be paid in the form of restricted Listed Shares issued by the Company. Restricted Listed Shares will vest over a five year period at 20% per year. Total Capitalization will be determined by adding the average total principal amount of debt owed by the Company and the Average Market Capitalization of the Company. The fees will be reduced by any payments made to the Manager and Individual General Partner by the CPA(R) Partnerships for distributions of operating cash flows and CPA(R) Partnership leasing fees. Such reduction may not exceed the total management and performance fees incurred by the Company in any fiscal year. Pro forma management and performance fees payable by the Company are as follows:
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED 1996 JUNE 30, 1997 ------------ -------------- Average market capitalization.................... $487,761 $487,761 Average debt..................................... 251,143 223,452 -------- -------- 738,904 711,213 Partial year pro-ration.......................... N/A x.5 -------- -------- Total market capitalization for the period....... 738,904 355,607 -------- -------- Management fee @ .5%............................. 3,695 1,778 Performance fee, vested portion, @ .5%........... 739 725 Reductions: Partnership distributions to minority interests...................................... (2,334) (1,156) Partnership leasing fees......................... (916) (528) -------- -------- Net fee.......................................... $ 1,184 $ 819 ======== ========
Pursuant to the management agreement, average market capitalization is to be calculated on a daily basis based on the market price of the Listed Shares. As such information is not available on a historical basis, Average Market Capitalization is equal to the Total Exchange Value and average debt is equal to the average combined debt as of the beginning and end of the period. (5) The Manager will be paid an incentive fee equal to 15% of the amount of the proceeds received from the sale of any property acquired in connection with the Consolidation in excess of the appraised value of the property used in the Consolidation, less an adjustment for the share of such net proceeds in excess of the appraised value of the equity interest attributable to the Manager's interest in the Listed Shares. No adjustment has been reflected in the pro forma Statements of Income for incentive fees that would have been paid in connection with any such sales during the year ended December 31, 1996 and the six months ended June 30, 1997. (6) Represents an adjustment for estimated disposition fees payable to the Manager on sales of properties. Subject to approval by the Board of Directors of the Company, the Manager may be entitled to receive a disposition fee on the sale of properties. The amount of such fee will be determined by agreement with the Board of Directors. For purposes of this presentation it is assumed that disposition fees average historical levels, namely 3% of the sales price of properties. (7) Reflects minority interest share of pro forma adjustments. (8) The ratio of earnings to fixed charges is computed as income from operations before minority interest plus fixed charges (primarily interest) divided by fixed charges. F-7 197 CAREY DIVERSIFIED LLC PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 1997 (UNAUDITED) ASSUMING 100% PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS: The following unaudited pro forma Condensed Consolidated Balance Sheet has been presented as if the Consolidation transaction and the related issuance of Listed Shares had occurred on June 30, 1997. This unaudited pro forma Condensed Consolidated Balance Sheet should be read in conjunction with the balance sheet of Carey Diversified LLC as of August 31, 1997 and the combined financial statements of the Group, and notes thereto included elsewhere herein. In management's opinion, all adjustments necessary to reflect the Consolidation transaction and the related issuance of Listed and Subsidiary Partnership Units have been made. For purposes of the pro forma balance sheet presentation it is assumed that holders of 5% Limited Partnership interests elect to receive Subsidiary Partnership Units. The exchange of Limited Partner (non-controlling) interests for Listed Shares will be accounted for as a purchase and recorded at the fair value of the Listed Shares exchanged. The exchange of the General Partner's interest for Listed Shares will be accounted for on the historical basis of accounting. This unaudited pro forma Condensed Consolidated Balance Sheet is not necessarily indicative of what the actual financial position would have been at June 30, 1997, nor does it purport to represent the future financial position of the Company.
CPA(R) PARTNERSHIPS PRO FORMA PRO FORMA HISTORICAL(1) ADJUSTMENTS CONSOLIDATED -------------- ----------- ------------ (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Real estate leased to others: Accounted for under the operating method, net......... $225,294 $ 129,611(2) $354,905 Net investment in direct financing leases............. 216,403 51,739(2) 268,142 Operating real estate, net.............................. 23,736 (934)(2) 22,802 Real estate held for sale............................... 14,816 6,557(2) 21,373 Equity investments...................................... 13,523 30,131(2) 43,654 Cash and cash equivalents............................... 27,079 5,566(3) 21,513 Other assets, net....................................... 19,657 19,657 -------- -------- -------- Total assets.................................. $540,508 $ 211,538 $752,046 ======== ======== ======== LIABILITIES AND PARTNERS' CAPITAL/MEMBERS' EQUITY Mortgage notes payable.................................. $194,347 $194,347 Note payable to affiliate............................... 300 300 Notes payable........................................... 24,709 24,709 Accounts payable to affiliates.......................... 3,046 $ 3,857(4) 6,903 Other liabilities....................................... 10,958 10,958 -------- -------- -------- Total liabilities............................. 233,360 3,857 237,217 -------- -------- -------- Minority interest....................................... (578) (5,540)(5) (6,118) -------- -------- -------- Redeemable minority interest............................ 23,442(6) 23,442 -------- -------- PARTNERS' CAPITAL/MEMBERS' EQUITY Partners' capital....................................... 307,726 (307,726)(7) Listed Shares, no par value; 23,205,312 shares issued and outstanding....................................... 497,505(7) 497,505 -------- -------- -------- 307,726 189,779 497,505 -------- -------- -------- Total liabilities and partners' capital/members' equity...................................... $540,508 $ 211,538 $752,046 ======== ======== ========
See accompanying notes to pro forma condensed consolidated balance sheet. F-8 198 CAREY DIVERSIFIED LLC NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) ASSUMING 100% PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS: (1) Reflects the CPA(R) Partnerships unaudited historical combined balance sheet as of June 30, 1997. (2) Reflects adjustments to record the Limited Partners' interest in the assets of the Company at their fair value, as follows:
APPRAISED REAL ESTATE VALUE OF COST OF ASSETS AT GENERAL REAL ESTATE ACQUISITION HISTORICAL PARTNERS' NET ASSETS OF ASSETS COST INTEREST ADJUSTMENT ----------- ----------- ----------- --------- ---------- Real estate accounted for under the operating method, net.............. $ 354,467 $ 5,316 $ (225,294) $ (4,878) $129,611 Net investment in direct financing leases......... 266,098 3,991 (216,403) (1,947) 51,739 Operating real estate, net...................... 22,430 336 (23,736) 36 (934) Equity investments......... 44,127 662 (13,523) (1,135) 30,131 Real estate held for sale..................... 21,300 319 (14,816) (246) 6,557
The real estate assets of the Company have been appraised by an independent appraiser. The carrying value of the non-real estate assets and the liabilities of the Company are deemed to approximate their fair values. The General Partners' effective interest in the assets and liabilities of the Company is approximately 3.63%, consisting of a 1% interest in the liquidating proceeds of the Participating Partnerships and an approximate 3.01% interest in the Listed Shares of the Company. (3) Decrease in cash reflects the following: Payment of transaction costs........................................ $2,997 Payment of transfer taxes on properties............................. 1,059 Payment of deferred leasing fees.................................... 1,510 ------ $5,566 ======
After the Consolidation, certain deferred leasing fees will be paid for leasing services rendered by the Corporate General Partners of certain CPA(R) Partnerships prior to the Consolidation. Such leasing fees were previously accrued by the CPA(R) Partnerships. (4) Net increase reflects the following: Accrual of preferred return........................................ $ 5,111 Payment of deferred leasing fees to Corporate General Partners..... (1,510) Distribution payable to Subsidiary Partnership Unitholders......... 213 Distribution payable in respect of minority interest............... 43 ------- $ 3,857 =======
The Corporate General Partners may be entitled to receive a preferred return, measured based upon the cumulative proceeds arising from the sale of the CPA(R) Partnerships' assets. The preferred return amounts to $5,111 based upon the cumulative proceeds from the sale of assets since the inception of the CPA(R) Partnerships through June 30, 1997, assuming all requisite subordination requirements for the payment of such returns have been satisfied. After the Consolidation, the preferred return will be paid to the Manager if the Listed Shares achieve specified closing prices for five consecutive trading days. F-9 199 CAREY DIVERSIFIED LLC NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED) Upon completion of the Consolidation, the Participating Partnerships will distribute excess cash to the holders of Subsidiary Partnership Units, including the Company, sufficient to allow the Company to fund the payment of transaction costs and transfer taxes on properties. Subsidiary Partnership Unitholders will be entitled to a pro-rata portion of such distributions in accordance with their interests in the underlying assets of the Participating Partnerships. A newly organized manager of the Company (the "Manager") and the Individual General Partner will also be entitled to a portion of such distributions in accordance with their 1% limited partnership interest in the liquidating distributions of the Participating Partnerships. (5) Decrease reflects the following: Corporate General Partners' preferred return........................ $5,111 Distribution to Manager............................................. 43 General Partners' share of transaction costs and transfer taxes..... 386 ------ $5,540 ======
The capital interest of the Corporate and Individual General Partners is classified under minority interest. The General Partnership interests include an interest in the income, losses and distributions of the operating cash flows of the CPA(R) Partnerships which range from 1% to 10% of such amounts. The General Partners are also entitled to a share of the liquidation proceeds from the disposition of CPA(R) Partnership assets and payment of a preferred return subject to the satisfaction of certain subordination provisions. The General Partners' share of liquidation proceeds may range from 1% to 15% of the liquidating proceeds of each CPA(R) Partnership. Pursuant to the Consolidation, the Corporate General Partners of the CPA(R) Partnerships will contribute their General Partnership interests to the Manager in exchange for an interest in the Manager. The Manager will retain the Corporate General Partners' interests in the income, losses and operating cash flows of the CPA(R) Partnerships. The Manager and the Individual General Partner will retain an interest in the liquidating proceeds of each CPA(R) Partnership equal to 1% of such proceeds. The Individual General Partner will retain his interest in each Participating Partnership and such interest will be held in a limited partnership capacity. The General Partners' share of liquidation proceeds in excess of 1%, assuming a sale of CPA(R) Partnership assets at their appraised values, will be exchanged by the Manager and the Individual General Partner for 733,134 Listed Shares of the Company upon consummation of the Consolidation. (6) Increase represents the following: Issuance of Subsidiary Partnership Units at redemption value....... $23,655 Distributions payable to holders of Subsidiary Partnership Units... (213) ------- $23,442 =======
For purposes of this presentation it is assumed that holders of 5% of Limited Partnership Units elect to receive Subsidiary Partnership Units, representing an interest in the capital, income and distributions of an individual Subsidiary Partnership. Subsidiary Partnership Units are expected to be redeemed based on scheduled appraisal dates for each CPA(R) Partnership's properties commencing December 31, 1998 through December 31, 2002. The redeemable minority interest is recorded at its redemption value. F-10 200 CAREY DIVERSIFIED LLC NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED) (7) Increase in partners' capital reflects the following: Exchange of limited partner and certain general partnership interests for Listed Shares and Subsidiary Partnership Units at historical cost................................................. $307,726 Adjustment of Limited Partners' interest based upon the fair value of Listed Shares exchanged...................................... 206,866 Issuance of Subsidiary Partnership Units for 5% of Limited Partnership interests........................................... (23,655) Issuance of Warrants.............................................. 6,568 -------- $497,505 ========
If the Consolidation is completed, W.P. Carey & Co. will receive compensation for investment banking services in the form of warrants to purchase Listed Shares. If all the CPA(R) Partnerships participate in the Consolidation, W.P. Carey & Co. will receive warrants to purchase 2,284,000 Listed Shares at $21 per share and 725,930 Listed Shares at $23 per share. The warrants generally will be exercisable over 10 years beginning one year after the date the Consolidation is completed. The increase in capital of $6,568 reflecting the issuance of warrants is equal to the estimated fair value of the warrants. (8) Pro forma book value per share as of June 30, 1997 is $21.44, which is computed as total equity divided by Listed Shares outstanding. F-11 201 CAREY DIVERSIFIED LLC PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE UNAUDITED SIX MONTHS ENDED JUNE 30, 1997 ASSUMING 100% PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS: The following unaudited pro forma Condensed Consolidated Statements of Income are presented as if the Consolidation transaction and the related issuance of Listed Shares had occurred as of January 1, 1996. The unaudited pro forma Condensed Consolidated Statements of Income should be read in conjunction with the balance sheet of Carey Diversified LLC as of August 31, 1997 and the combined financial statements of the CPA(R) Partnerships and notes thereto included elsewhere herein. In management's opinion, all adjustments necessary to reflect the Consolidation transaction have been made. For purposes of the pro forma financial statement presentation, it is assumed that holders of 5% of Limited Partnership Units elect to receive Subsidiary Partnership Units. The exchange of Limited Partner (non-controlling) interests for Listed Shares will be accounted for in accordance with purchase accounting principles. The carrying value of the Limited Partners' interests in the assets and liabilities of the Company will be adjusted to their estimated fair value. The exchange of the General Partners' interest for Listed Shares will be accounted for on the historical basis of accounting. Such exchange will be treated as a reorganization of interests under common control. These unaudited pro forma Condensed Consolidated Statements of Income are not necessarily indicative of what actual results of operations of the Company would have been, nor do they purport to represent the results of operations for future periods.
YEAR ENDED DECEMBER 31, 1996 ------------------------------------------- SIX MONTHS ENDED JUNE 30, 1997 CPA(R) ------------------------------------------- PARTNERSHIPS PRO FORMA PRO FORMA GROUP PRO FORMA PRO FORMA HISTORICAL(1) ADJUSTMENTS CONSOLIDATED HISTORICAL(1) ADJUSTMENTS CONSOLIDATED ------------- ----------- ------------ ------------- ----------- ------------ (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Revenues: Rental income......................... $ 44,576 $ 44,576 $ 23,675 $ 23,675 Interest income from direct financing leases.............................. 32,644 32,644 16,278 16,278 Other interest income................. 1,681 1,681 568 568 Other income.......................... 1,901 1,901 3,431 3,431 Revenues of hotel operations.......... 21,929 21,929 7,033 7,033 -------- ----------- -------- ----------- 102,731 102,731 50,985 50,985 -------- ----------- -------- ----------- Expenses: Interest.............................. 23,200 23,200 10,086 10,086 Depreciation and amortization......... 11,274 $(1,220)(2) 10,054 5,462 $ (476)(2) 4,986 General and administrative............ 3,747 925(3) 4,672 2,611 388(3) 2,999 Property expenses..................... 4,008 1,184(4) 5,192 1,532 819(4) 2,351 Writedown to net realizable value..... 1,300 1,300 3,666 3,666 Operating expense of hotel operations.......................... 15,947 15,947 5,272 5,272 -------- ------- ----------- -------- ------- ----------- 59,476 889 60,365 28,629 731 29,360 -------- ------- ----------- -------- ------- ----------- Income before net gains, minority interest, and extraordinary items... 43,255 (889) 42,366 22,356 (731) 21,625 Gains on sale of real estate and securities, net(5).................... 5,474 (487)(6) 4,987 -------- ------- ----------- -------- ------- ----------- Income before minority interest, and extraordinary items................. 48,729 (1,376) 47,353 22,356 (731) 21,625 Minority interest income................ (3,182) (2,238)(7) (5,420) (1,334) (1,020)(7) (2,354) -------- ------- ----------- -------- ------- ----------- Income before extraordinary items attributable to Listed Shares....... $ 45,547 $(3,614) $ 41,933 $ 21,022 $(1,751) $ 19,271 ======== ======= =========== ======== ======= =========== Pro forma income before extraordinary items per Listed Share................ $ 1.80 $ 0.82 =========== =========== Pro forma weighted average number of Listed Shares outstanding............. 23,301,425 23,441,989 =========== =========== Ratio of earnings to fixed charges(8)... 2.98 3.14 =========== ===========
See accompanying notes to pro forma condensed consolidated statements of income. F-12 202 CAREY DIVERSIFIED LLC NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS) ASSUMING 100% PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS: (1) Reflects the CPA(R) Partnerships historical combined income statements for the year ended December 31, 1996 and unaudited for the six months ended June 30, 1997. (2) Reflects changes in connection with adjustment of Limited Partners' interest in real estate assets to fair value and adoption of new depreciable lives for such assets as follows:
YEAR ENDED SIX MONTHS ASSETS AT REVISED DECEMBER 31, ENDED FAIR VALUE LIFE 1996 JUNE 30, 1997 ---------- ------- ------------ -------------- Buildings and improvements... $ 282,524 40 $ 7,063 $ 3,532 Personal property............ 16,371 7 2,339 1,170 -------- ------- 9,402 4,702 Less: historical depreciation expense.................... (10,668) (5,196) -------- ------- Difference................... (1,266) (494) Elimination of General Partners' (3.63%) interest................... 46 18 -------- ------- Net decrease in expense...... $ (1,220) $ (476) ======== =======
(3) Increase in general and administrative expenses as follows:
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED 1996 JUNE 30, 1997 ------------ -------------- Directors' compensation.......................... $225 $113 Employee compensation............................ 400 125 Other expenses of a public company............... 300 150 ---- ---- $925 $388 ==== ====
F-13 203 CAREY DIVERSIFIED LLC NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME -- (CONTINUED) (4) The Company will pay a management fee and a performance fee each at an annual rate of .5% of the Total Capitalization of the Company. The performance fee will be paid in the form of restricted Listed Shares issued by the Company. Restricted Listed Shares will vest over a five year period at 20% per year. Total Capitalization will be determined by adding the average total principal amount of debt owed by the Company and the Average Market Capitalization of the Company. The fees will be reduced by any payments made to the Manager and Individual General Partner by the CPA(R) Partnerships for distributions of operating cash flows and CPA(R) Partnership leasing fees. Such reduction may not exceed the total management and performance fees incurred by the Company in any fiscal year. Pro forma management and performance fees payable by the Company are as follows:
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED 1996 JUNE 30, 1997 ------------ -------------- Average market capitalization.................... $487,761 $487,761 Average debt..................................... 251,143 223,452 -------- -------- 738,904 711,213 Partial year pro-ration.......................... N/A x.5 -------- -------- Total market capitalization for the period....... 738,904 355,607 -------- -------- Management fee @ .5%............................. 3,695 1,778 Performance fee, vested portion, @ .5%........... 739 725 Reductions: Partnership distributions to minority interests...................................... (2,334) (1,156) Partnership leasing fees......................... (916) (528) -------- -------- Net fee.......................................... $ 1,184 $ 819 ======== ========
Pursuant to the management agreement Average Market Capitalization is to be calculated on a daily basis based on the market price of the Listed Shares. As such information is not available on a historical basis, Average Market Capitalization is equal to the Total Exchange Value and average debt is equal to the average combined debt as of the beginning and end of the period. (5) The Manager will be paid an incentive fee equal to 15 percent of the amount of the proceeds received from the sale of any property acquired in connection with the Consolidation in excess of the appraised value of the property used in the Consolidation, less an adjustment for the share of such net proceeds in excess of the appraised value of the equity interest attributable to the Manager's interest in the Company's Listed Shares. No adjustment has been reflected in the pro forma statements of income for incentive fees that would have been paid in connection with any such sales during the year ended December 31, 1996 and the six months ended June 30, 1997. (6) Represents an adjustment for disposition fees payable to the Manager on sales of properties. Subject to approval by the Board of Directors of the Company, the Manager may be entitled to receive a disposition fee on the sale of properties. The amount of such fee will be determined by agreement with the Board of Directors. For purposes of this presentation it is assumed that disposition fees average historical levels, namely 3% of the sales price of properties. F-14 204 CAREY DIVERSIFIED LLC NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME -- (CONTINUED) (7) Reflects the following:
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1996 JUNE 30, 1997 ----------------- ------------------ Minority interest income.................. 49 36 Redeemable minority interest income....... (2,287) (1,056) ------ ---- (2,238) (1,020) ====== ====
The Manager will retain the interest of the General Partners in the income and losses of the Subsidiary Partnerships. Such interests range from 1% to 10% of the income and losses of each CPA(R) Partnership. Minority interest income represents the General Partners share of pro forma adjustments based on such interests. Redeemable minority interest income represents the interest of the Subsidiary Partnership Unitholders in the income of the Participating Partnerships. For purposes of this presentation it is assumed that holders of 5% of Limited Partnership Units elect to receive Subsidiary Partnership Units, representing an interest in the capital, income and distributions of an individual Subsidiary Partnership. (8) The ratio of earnings to fixed charges is computed as income from operations before minority interest plus fixed charges (primarily interest) divided by fixed charges. F-15 205 CAREY DIVERSIFIED LLC PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 1997 (UNAUDITED) ASSUMING MINIMUM PARTICIPATION WITHOUT THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS: The following unaudited pro forma Condensed Consolidated Balance Sheet has been presented as if the Consolidation transaction and the related issuance of Listed Shares had occurred on June 30, 1997. This unaudited pro forma Condensed Consolidated Balance Sheet should be read in conjunction with the balance sheet of Carey Diversified LLC as of August 31, 1997 and the combined financial statements of the CPA(R) Partnerships, and notes thereto included elsewhere herein. In management's opinion, all adjustments necessary to reflect the Consolidation transaction and the related issuance of Listed Shares have been made. The exchange of Limited Partner (non-controlling) interests for Listed Shares will be accounted for as a purchase and recorded at the fair value of the Listed Shares exchanged. The exchange of the General Partners' interest for Listed Shares will be accounted for on the historical basis of accounting. This unaudited pro forma Condensed Consolidated Balance Sheet is not necessarily indicative of what the actual financial position would have been at June 30, 1997, nor does it purport to represent the future financial position of the Company.
GROUP PRO FORMA PRO FORMA HISTORICAL(1) ADJUSTMENTS CONSOLIDATED ------------- ----------- ------------ (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Real estate leased to others: Accounted for under the operating method, net........ $ 72,070 $ 31,659(2) $103,729 Net investment in direct financing leases............ 81,077 36,766(2) 117,843 Operating real estate, net............................. 15,553 (625)(2) 14,928 Real estate held for sale.............................. 5,132 5,494(2) 10,626 Equity investments..................................... (646) 4,714(2) 4,068 Cash and cash equivalents.............................. 13,178 (1,625)(3) 11,553 Other assets, net...................................... 10,586 10,586 -------- -------- -------- Total assets................................. $ 196,950 $ 76,383 $273,333 ======== ======== ======== LIABILITIES AND PARTNERS' CAPITAL/MEMBERS' EQUITY Mortgage notes payable................................. $ 44,343 $ 44,343 Note payable to affiliate.............................. 1,451 1,451 Notes payable.......................................... 9,607 9,607 Accounts payable to affiliates......................... 544 $ 3,804(4) 4,348 Other liabilities...................................... 4,226 4,226 -------- -------- -------- Total liabilities............................ 60,171 3,804 63,975 -------- -------- -------- Minority interest...................................... 428 (4,021)(5) (3,593) -------- -------- -------- Redeemable minority interest........................... PARTNERS' CAPITAL/MEMBERS' EQUITY Partners' capital...................................... 136,351 (136,351)(6) Listed Shares, no par value; 10,172,716 shares issued and outstanding...................................... 212,951(6) 212,951 -------- -------- -------- 136,351 76,600 212,951 -------- -------- -------- Total liabilities and partners' capital/members' equity.................... $ 196,950 $ 76,383 $273,333 ======== ======== ========
See accompanying notes to pro forma condensed consolidated balance sheet. F-16 206 CAREY DIVERSIFIED LLC NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) ASSUMING MINIMUM PARTICIPATION WITHOUT THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS: (1) Reflects the Group's unaudited historical combined balance sheet as of June 30, 1997. The Group, assuming minimum participation, consists of Corporate Property Associates, Corporate Property Associates 2, Corporate Property Associates 3, Corporate Property Associates 5 and Corporate Property Associates 7, representing the combination of CPA(R) Partnerships having the lowest combined net cash provided by operating activities, which also satisfies the criteria for minimum exchange value needed to consummate the Consolidation. (2) Reflects adjustments to record the Limited Partners' interest in the assets of the Company at their fair value, as follows:
APPRAISED REAL ESTATE VALUE OF COST OF ASSETS AT GENERAL REAL ESTATE ACQUISITION HISTORICAL PARTNERS' NET ASSETS OF ASSETS COST INTEREST ADJUSTMENT ----------- ----------- ----------- --------- ---------- Real estate accounted for under the operating method, net.............. $ 103,892 $ 1,650 $ (72,070) $ (1,813) $ 31,659 Net investment in direct financing leases............................. 118,073 1,875 (81,077) (2,105) 36,766 Operating real estate................ 14,660 233 (15,554) 36 (625) Equity investments................... 4,270 68 646 (270) 4,714 Real estate held for sale............ 10,770 171 (5,132) (315) 5,494
The real estate assets of the Company have been appraised by an independent appraiser. The carrying value of the non-real estate assets and the liabilities of the Company are deemed to approximate their fair values. The General Partners' effective interest in the assets and liabilities of the Company is approximately 5.42%, consisting of a 1% interest in the liquidating proceeds of the Participating Partnerships and an approximate 4.89% interest in the Listed Shares of the Company. (3) Decrease in cash reflects the following: Payment of transaction costs........................................ $1,249 Payment of transfer taxes on properties............................. 376 ------ $1,625 ======
(4) Net increase reflects the following: Accrual of preferred return........................................ $ 3,787 Distribution payable in respect of minority interest............... 17 ------ $ 3,804 ======
The Corporate General Partners may be entitled to receive a preferred return, measured based upon the cumulative proceeds arising from the sale of the Group's assets. The preferred return amounts to $3,787 based upon the cumulative proceeds from the sale of assets since the inception of the Partnerships through June 30, 1997, assuming all requisite subordination requirements for the payment of such returns have been satisfied. After the Consolidation, the preferred return will be paid to the Manager if the Listed Shares achieve specified closing prices for five consecutive trading days. Upon completion of the Consolidation, the Participating Partnerships will distribute excess cash to the holders of Subsidiary Partnership Units, including the Company, in an amount sufficient to allow the Company to fund the payment of transaction costs and transfer taxes on properties. A newly organized F-17 207 CAREY DIVERSIFIED LLC NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED) manager (the "Manager") and the Individual General Partner will be entitled to a portion of such distributions in accordance with their 1% interest in the liquidating distributions of the Participating Partnerships. (5) Decrease reflects the following: Corporate General Partners' preferred return........................ $3,787 General Partners' share of transaction costs and transfer taxes..... 217 Distribution payable to Manager..................................... 17 ------ $4,021 ======
The capital interest of the Corporate and Individual General Partners is classified under minority interest. The General Partnership interests include an interest in the income, losses and distributions of the operating cash flows of the CPA(R) Partnerships which range from 1% to 10% of such amounts. The General Partners are also entitled to a share of the liquidation proceeds from the disposition of Partnership assets and payment of a preferred return subject to the satisfaction of certain subordination provisions. The General Partners' share of liquidation proceeds may range from 1%, to 15% of the liquidating proceeds of each CPA(R) Partnership. Pursuant to the Consolidation, the Corporate General Partners of the CPA(R) Partnerships will contribute their General Partnership interests to the Manager in exchange for an interest in the Manager. The Manager will retain the Corporate General Partners' interests in the income, losses and operating cash flows of the CPA(R) Partnerships. The Manager and the Individual General Partner will retain an interest in the liquidating proceeds of each CPA(R) Partnership equal to 1% of such proceeds. The Individual General Partner will retain his interest in each Participating Partnership and such interest will be held in a limited partnership capacity. The General Partners' share of liquidation proceeds in excess of 1%, assuming a sale of CPA(R) Partnership assets at their appraised values, will be exchanged by the Manager and the Individual General Partner for 499,754 Listed Shares of the Company upon consummation of the Consolidation. (6) Increase in partners' capital reflects the following: Exchange of limited partner and certain general partnership interests for Listed Shares at historical cost.................. $136,351 Adjustment of limited partners' interest based upon the fair value of Listed Shares exchanged...................................... 74,229 Issuance of Warrants.............................................. 2,371 -------- $212,951 ========
If the Consolidation is completed, W.P. Carey & Co. will receive compensation for investment banking services in the form of warrants to purchase Listed Shares. If the minimum number of CPA(R) Partnerships participate in the Consolidation, W.P. Carey & Co. will receive warrants to purchase 824,800 Listed Shares at $21 per share and 262,100 Listed Shares at $23 per share. The warrants generally will be exercisable over 10 years beginning one year after the date the Consolidation is completed. The increase in capital of $2,371, reflecting the issuance of warrants is equal to the estimated fair value of the warrants. (7) Pro forma book value per share as of June 30, 1997 is $20.94, which is computed as total equity divided by Listed Shares outstanding. F-18 208 CAREY DIVERSIFIED LLC PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE UNAUDITED SIX MONTHS ENDED JUNE 30, 1997 ASSUMING MINIMUM PARTICIPATION WITHOUT THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS: The following unaudited pro forma Condensed Consolidated Statements of Income are presented as if the Consolidation transaction and the related issuance of Listed Shares had occurred as of January 1, 1996. The unaudited pro forma Condensed Consolidated Statements of Income should be read in conjunction with the balance sheet of Carey Diversified LLC as of August 31, 1997 and the combined financial statements of the Group, and notes thereto included elsewhere herein. In management's opinion, all adjustments necessary to reflect the Consolidation transaction have been made. The exchange of Limited Partner (non-controlling) interests for Listed Shares will be accounted for as a purchase and recorded at the fair value of the Listed Shares exchanged. The exchange of the General Partner's interest for Listed Shares will be accounted for on the historical basis of accounting. These unaudited pro forma Condensed Consolidated Statements of Income are not necessarily indicative of what actual results of operations of the Company would have been, nor do they purport to represent the results of operations for future periods.
YEAR ENDED DECEMBER 31, 1996 SIX MONTHS ENDED JUNE 30, 1997 -------------------------------------------- ------------------------------------------ GROUP PRO FORMA PRO FORMA GROUP PRO FORMA PRO FORMA HISTORICAL(1) ADJUSTMENTS CONSOLIDATED HISTORICAL(1) ADJUSTMENTS CONSOLIDATED ------------- ----------- ------------ ------------- ----------- ------------ (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Revenues: Rental income.................... $14,303 $ 14,303 $ 7,773 $ 7,773 Interest income from direct financing leases............... 13,602 13,602 6,621 6,621 Other interest income............ 646 646 279 279 Other income..................... 96 96 1,815 1,815 Revenues of hotel operations..... 12,070 12,070 4,595 4,595 ------- ---------- ------- ---------- 40,717 40,717 21,083 21,083 ------- ---------- ------- ---------- Expenses: Interest......................... 6,106 6,106 2,420 2,420 Depreciation and amortization.... 4,288 $ (397)(2) 3,891 2,082 $(139)(2) 1,943 General and administrative....... 1,703 925(3) 2,628 1,205 388(3) 1,593 Property expenses................ 2,413 507(4) 2,920 885 320(4) 1,205 Writedown to net realizable value.......................... 1,300 1,300 1,350 1,350 Operating expense of hotel operations..................... 9,082 9,082 3,443 3,443 ------- ------- ---------- ------- ----- ---------- 24,892 1,035 25,927 11,385 569 11,954 ------- ------- ---------- ------- ----- ---------- Income before net gains minority interest and extraordinary items.......... 15,825 (1,035) 14,790 9,698 (569) 9,129 Gains on sale of real estate and securities, net(5)............... 5,336 (469)(6) 4,867 ------- ------- ---------- ------- ----- ---------- Income before minority interest and extraordinary items...... 21,161 (1,504) 19,657 9,698 (569) 9,129 Minority interest income........... (855) 56(7) (799) (281) 28(7) (253) ------- ------- ---------- ------- ----- ---------- Income before extraordinary items........................ $20,306 $(1,448) $ 18,858 $ 9,417 $(541) $ 8,876 ======= ======= ========== ======= ===== ========== Pro forma income before extraordinary items per Listed Share............................ $ 1.85 $ 0.86 ========== ========== Pro forma weighted average number of Listed Shares outstanding..... 10,210,682 10,264,877 ========== ========== Ratio of earnings to fixed charges(8)....................... 4.17 4.75 ========== ==========
See accompanying notes to pro forma condensed consolidated statements of income. F-19 209 CAREY DIVERSIFIED LLC NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS) ASSUMING MINIMUM PARTICIPATION WITHOUT THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS: (1) Reflects the Group's historical combined income statement for the year ended December 31, 1996 and unaudited for the six months ended June 30, 1997. The Group, assuming minimum participation, consists of Corporate Property Associates, Corporate Property Associates 2, Corporate Property Associates 3, Corporate Property Associates 5 and Corporate Property Associates 7, representing the combination of partnerships having the lowest combined net cash provided by operating activities, which also satisfies the criteria for minimum exchange value needed to consummate the Consolidation. (2) Reflects changes in connection with adjustment of Limited Partners' interest in real estate assets to fair value and adoption of new depreciable lives for such assets as follows:
YEAR ENDED SIX MONTHS ASSETS AT REVISED DECEMBER 31, ENDED FAIR VALUE LIFE 1996 JUNE 30, 1997 ---------- ------- ------------ -------------- Buildings and improvements........ $ 88,536 40 $ 2,213 $ 1,107 Personal property................. 10,572 7 1,510 755 Less: historical depreciation expense......................... (4,143) (2,009) ------- ------- Difference........................ (420) (147) Elimination of General Partners' (5.42%) interest................ 23 8 ------- ------- Net decrease in expense........... $ (397) $ (139) ======= =======
(3) Increase in general and administrative expenses as follows:
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED 1996 JUNE 30, 1997 ------------ -------------- Directors' compensation........................... $225 $113 Employee compensation............................. 400 125 Other expenses of a public company................ 300 150 ---- ---- $925 $388 ==== ====
F-20 210 CAREY DIVERSIFIED LLC NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME -- (CONTINUED) (4) The Company will pay a management fee and a performance fee each at an annual rate of .5% of the Total Capitalization of the Company. The performance fee will be paid in the form of restricted Listed Shares issued by the Company. Restricted Listed Shares will vest over a five year period at 20% per year. Total Capitalization will be determined by adding the average total principal amount of debt owed by the Company and the Average Market Capitalization of the Company. The fees will be reduced by any payments made to the Manager and Individual General Partner by the CPA(R) Partnerships for distributions of operating cash flows and Partnership leasing fees. Such reduction may not exceed the total management and performance fees incurred by the Company in any fiscal year. Pro forma management and performance fees payable by the Company are as follows:
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED 1996 JUNE 30, 1997 ------------ -------------- Average market capitalization..................... $203,454 $203,454 Average debt...................................... 70,263 56,237 -------- -------- 273,717 259,691 Partial year pro-ration........................... N/A x .50 -------- -------- Total market capitalization for the period........ 273,717 129,846 -------- -------- Management fee @ .5%.............................. 1,369 649 Performance fee, vested portion, @ .5%............ 274 267 Reductions: Partnership distributions to minority interests... (571) (274) Partnership leasing fees.......................... (565) (322) -------- -------- Net fee........................................... $ 507 $ 320 ======== ========
Pursuant to the management agreement average market capitalization is to be calculated on a daily basis based on the market price of the Listed Shares. As such information is not available on a historical basis, Average Market Capitalization is equal to Total Exchange Value and average debt is equal to the average combined debt as of the beginning and end of the period. (5) The Manager will be paid an incentive fee equal to 15% of the amount of the proceeds received from the sale of any property acquired in connection with the Consolidation in excess of the appraised value of the property used in the Consolidation, less an adjustment for the share of such net proceeds in excess of the appraised value of the equity interest attributable to the Manager's interest in the Company's Listed Shares. No adjustment has been reflected in the pro forma Statements of Income for incentive fees that would have been paid in connection with any such sales during the year ended December 31, 1996 and the six months ended June 30, 1997. (6) Represents an adjustment for estimated disposition fees payable to the Manager on sales of properties. Subject to approval by the Board of Directors of the Company, the Manager may be entitled to receive a disposition fee on the sale of properties. The amount of such fee will be determined by agreement with the Board of Directors. For purposes of this presentation it is assumed that disposition fees average historical levels, namely 3% of the sales price of properties. (7) Reflects the minority interest share of pro forma adjustments. (8) The ratio of earnings to fixed charges is computed as income from operations before minority interest plus fixed charges (primarily interest) divided by fixed charges. F-21 211 CAREY DIVERSIFIED LLC PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 1997 (UNAUDITED) ASSUMING MINIMUM PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS: The following unaudited pro forma Condensed Consolidated Balance Sheet has been presented as if the Consolidation transaction and the related issuance of Listed Shares had occurred on June 30, 1997. This unaudited pro forma Condensed Consolidated Balance Sheet should be read in conjunction with the balance sheet of Carey Diversified LLC as of August 31, 1997 and the combined financial statements of the CPA(R) Partnerships, and notes thereto included elsewhere herein. In management's opinion, all adjustments necessary to reflect the Consolidation transaction and the related issuance of Listed and Subsidiary Partnership Units have been made. For purposes of the pro forma balance sheet presentation it is assumed that holders of 5% of Limited Partnership interests elect to receive Subsidiary Partnership Units. The exchange of Limited Partner (non-controlling) interests for Listed Shares will be accounted for as a purchase and recorded at the fair value of the Listed Shares exchanged. The exchange of the General Partner's interest for Listed Shares will be accounted for on the historical basis of accounting. This unaudited pro forma Condensed Consolidated Balance Sheet is not necessarily indicative of what the actual financial position would have been at June 30, 1997, nor does it purport to represent the future financial position of the Company.
GROUP PRO FORMA PRO FORMA HISTORICAL(1) ADJUSTMENTS CONSOLIDATED ------------- ----------- ------------ (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Real estate leased to others: Accounted for under the operating method, net............... $ 72,070 $ 31,659(2) $103,729 Net investment in direct financing leases................... 81,077 36,766(2) 117,843 Operating real estate, net.................................... 15,553 (625)(2) 14,928 Real estate held for sale..................................... 5,132 5,494(2) 10,626 Equity investments............................................ (646) 4,714(2) 4,068 Cash and cash equivalents..................................... 13,178 (1,625)(3) 11,553 Other assets, net............................................. 10,586 10,586 -------- -------- -------- Total assets......................................... $ 196,950 $ 76,383 $273,333 ======== ======== ======== LIABILITIES AND PARTNERS' CAPITAL/MEMBERS' EQUITY Mortgage notes payable........................................ $ 44,343 $ 44,343 Note payable to affiliate..................................... 1,451 1,451 Notes payable................................................. 9,607 9,607 Accounts payable to affiliates................................ 544 $ 3,890(4) 4,434 Other liabilities............................................. 4,226 4,226 -------- -------- -------- Total liabilities.................................... 60,171 3,890 64,061 -------- -------- -------- Minority interest............................................. 428 (4,021)(5) (3,593) -------- -------- -------- Redeemable minority interest.................................. 9,587(6) 9,587 -------- -------- PARTNERS' CAPITAL/MEMBERS' EQUITY Partners' capital............................................. 136,351 (136,351)(7) Listed Shares, no par value; 9,689,069 shares issued and outstanding................................................. 203,278(7) 203,278 -------- -------- -------- 136,351 66,927 203,278 -------- -------- -------- Total liabilities and partners' capital/members' equity............................................. $ 196,950 $ 76,383 $273,333 ======== ======== ========
See accompanying notes to pro forma condensed consolidated balance sheet. F-22 212 CAREY DIVERSIFIED LLC NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) ASSUMING MINIMUM PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS: (1) Reflects the Group's unaudited historical combined balance sheet as of June 30, 1997. The Group, assuming minimum participation, consists of Corporate Property Associates, Corporate Property Associates 2, Corporate Property Associates 3, Corporate Property Associates 5 and Corporate Property Associates 7, representing the combination of partnerships having the lowest combined net cash provided by operating activities, which also satisfies the criteria for minimum exchange value needed to consummate the Consolidation. (2) Reflects adjustments to record the Limited Partners' interest in the assets of the Company at their fair value, as follows:
APPRAISED REAL ESTATE VALUE OF COST OF ASSETS AT GENERAL REAL ESTATE ACQUISITION HISTORICAL PARTNERS' NET ASSETS OF ASSETS COST INTEREST ADJUSTMENT ----------- ----------- ----------- --------- ---------- Real estate accounted for under the operating method, net.... $ 103,892 $ 1,650 $ (72,070) $ (1,813) $ 31,659 Net investment in direct financing leases............. 118,073 1,875 (81,077) (2,105) 36,766 Operating real estate.......... 14,660 233 (15,554) 36 (625) Equity investments............. 4,270 68 646 (270) 4,714 Real estate held for sale...... 10,770 171 (5,132) (315) 5,494
The real estate assets of the Company have been appraised by an independent appraiser. The carrying value of the non-real estate assets and the liabilities of the Company are deemed to approximate their fair values. The General Partners' effective interest in the assets and liabilities of the Company is approximately 5.42%, consisting of a 1% interest in the liquidating proceeds of the Participating Partnerships and an approximate 4.89% interest in the Listed Shares of the Company. (3) Decrease in cash reflects the following: Payment of transaction costs........................................ $1,249 Payment of transfer taxes on properties............................. 376 ------ $1,625 ======
(4) Net increase reflects the following: Accrual of preferred return........................................ $ 3,787 Distribution payable to Subsidiary Partnership Unitholders......... 86 Distribution payable in respect of minority interest............... 17 ------- $ 3,890 =======
The Corporate General Partners may be entitled to receive a preferred return, measured based upon the cumulative proceeds arising from the sale of the Group's assets. The preferred return amounts to $3,787 based upon the cumulative proceeds from the sale of assets since the inception of the Partnerships through June 30, 1997, assuming all requisite subordination requirements for the payment of such returns have been satisfied. After the Consolidation, the preferred return will be paid to the Manager if the Listed Shares achieve specified closing prices for five consecutive trading days. F-23 213 CAREY DIVERSIFIED LLC NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED) Upon completion of the Consolidation, the Participating Partnerships will distribute excess cash to the holders of Subsidiary Partnership Units, including the Company, in an amount sufficient to allow the Company to fund the payment of transaction costs and transfer taxes on properties. Subsidiary Partnership Unitholders will be entitled to a pro-rata portion of such distributions in accordance with their interests in the underlying assets of the Participating Partnerships. A newly organized manager (the "Manager") and the Individual General Partner, will also be entitled to a portion of such distributions in accordance with their 1% interest in the liquidating distributions of the Participating Partnerships. (5) Decrease reflects the following: Corporate General Partners' preferred return........................ $3,787 General Partners' share of transaction costs and transfer taxes..... 217 Distribution to Manager............................................. 17 ------ $4,021 ======
The capital interest of the Corporate and Individual General Partners is classified under minority interest. The General Partnership interests include an interest in the income, losses and distributions of the operating cash flows of the CPA(R) Partnerships which range from 1% to 10% of such amounts. The General Partners are also entitled to a share of the liquidation proceeds from the disposition of Partnership assets and payment of a preferred return subject to the satisfaction of certain subordination provisions. The General Partners' share of liquidation proceeds may range from 1% to 15% of the liquidating proceeds of each CPA(R) Partnership. Pursuant to the Consolidation, the Corporate General Partners of the CPA(R) Partnerships will contribute their General Partnership interests to the Manager in exchange for an interest in the Manager. The Manager will retain the Corporate General Partners' interests in the income, losses and operating cash flows of the CPA(R) Partnerships. In addition, the Manager and Individual General Partner will retain an interest in the liquidating proceeds of each Partnership equal to 1% of such proceeds. The Individual General Partner will retain his interest in each Participating Partnership and such interest will be held in a limited partnership capacity. The General Partners' share of liquidation proceeds in excess of 1%, assuming a sale of CPA(R) Partnership assets at their appraised values, will be exchanged by the Manager and the Individual General Partner for 499,754 Listed Shares of the Company upon consummation of the Consolidation. (6) Increase represents the following: Issuance of Subsidiary Partnership Units at redemption value........ $9,673 Distributions payable to Subsidiary Partnership Unitholders......... (86) ------ $9,587 ======
For purposes of this presentation it is assumed that holders of 5% of Limited Partnership Units elect to receive Subsidiary Partnership Units, representing an interest in the capital, income and distributions of an individual Subsidiary Partnership. Subsidiary Partnership Units are expected to be redeemed based on scheduled appraisal dates for each CPA(R) Partnership's properties commencing December 31, 1998 through December 31, 2002. The redeemable minority interest is recorded at its redemption value. F-24 214 CAREY DIVERSIFIED LLC NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED) (7) Increase in partners' capital reflects the following: Exchange of limited partner and certain general partnership interests for Listed Shares and Subsidiary Partnership Units at historical cost................................................. $136,351 Adjustment of limited partners' interest based upon the fair value of Listed Shares exchanged...................................... 74,229 Issuance of Subsidiary Partnership Units for 5% of Limited Partnership interests........................................... (9,673) Issuance of Warrants.............................................. 2,371 -------- $203,278 ========
If the Consolidation is completed, W.P. Carey & Co. will receive compensation for investment banking services in the form of warrants to purchase Listed Shares. If the minimum number of CPA(R) Partnerships participate in the Consolidation, W.P. Carey & Co. will receive warrants to purchase 824,800 Listed Shares at $21 per share and 262,100 Listed Shares at $23 per share. The warrants generally will be exercisable over 10 years beginning one year after the date the Consolidation is completed. The increase in capital of $2,371, reflecting the issuance of warrants is based on the estimated fair value of the warrants. (8) Pro forma book value per share as of June 30, 1997 is $28.21, which is computed as total equity divided by Listed Shares outstanding. F-25 215 CAREY DIVERSIFIED LLC PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE UNAUDITED SIX MONTHS ENDED JUNE 30, 1997 ASSUMING MINIMUM PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS: The following unaudited pro forma Condensed Consolidated Statements of Income are presented as if the Consolidation transaction and the related issuance of Listed Shares had occurred as of January 1, 1996. The unaudited pro forma Condensed Consolidated Statements of Income should be read in conjunction with the balance sheet of Carey Diversified LLC as of August 31, 1997 and the combined financial statements of the Group, and notes thereto included elsewhere herein. In management's opinion, all adjustments necessary to reflect the Consolidation transaction have been made. For purposes of the pro forma income statement presentation it is assumed that holders of 5% of Limited Partnership Units elect to receive Subsidiary Partnership Units. The exchange of Limited Partner (non-controlling) interests for Listed Shares will be accounted for in accordance with purchase accounting principles. The carrying value of the Limited Partners' interests in the assets and liabilities of the Company will be adjusted to their estimated fair value. The exchange of the General Partners' interest for Listed Shares will be accounted for on the historical basis of accounting. Such exchange will be treated as a reorganization of interests under common control. These unaudited pro forma Condensed Consolidated Statements of Income are not necessarily indicative of what actual results of operations of the Company would have been, nor do they purport to represent the results of operations for future periods.
YEAR ENDED DECEMBER 31, 1996 SIX MONTHS ENDED JUNE 30, 1997 -------------------------------------------- -------------------------------------------- GROUP PRO FORMA PRO FORMA GROUP PRO FORMA PRO FORMA HISTORICAL(1) ADJUSTMENTS CONSOLIDATED HISTORICAL(1) ADJUSTMENTS CONSOLIDATED -------------- ----------- ------------ -------------- ----------- ------------ (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Revenues: Rental income..................... $ 14,303 $ 14,303 $ 7,773 $ 7,773 Interest income from direct financing leases................ 13,602 13,602 6,621 6,621 Other interest income............. 646 646 279 279 Other income...................... 96 96 1,815 1,815 Revenues of hotel operations...................... 12,070 12,070 4,595 4,595 ------- --------- ------- --------- 40,717 40,717 21,083 21,083 ------- --------- ------- --------- Expenses: Interest.......................... 6,106 6,106 2,420 2,420 Depreciation and amortization..... 4,288 $ (397)(2) 3,891 2,082 $(139)(2) 1,943 General and administrative........ 1,703 925(3) 2,628 1,205 388(3) 1,593 Property expenses................. 2,413 507(4) 2,920 885 320(4) 1,205 Writedown to net realizable value........................... 1,300 1,300 1,350 1,350 Operating expense of hotel operations...................... 9,082 9,082 3,443 3,443 ------- ------- --------- ------- ----- --------- 24,892 1,035 25,927 11,385 569 11,954 ------- ------- --------- ------- ----- --------- Income before net gains, minority interest, and extraordinary items........................... 15,825 (1,035) 14,790 9,698 (569) 9,129 Gains on sale of real estate and securities, net(5)................ 5,336 (469)(6) 4,867 ------- ------- --------- ------- ----- --------- Income before minority interest and extraordinary items......... 21,161 (1,504) 19,657 9,698 (569) 9,129 Minority interest income............ (855) (875)(7) (1,730) (281) (409)(7) (690) ------- ------- --------- ------- ----- --------- Income before extraordinary items attributable to Listed Shares (8)............................. $ 20,306 $(2,379) $ 17,927 $ 9,417 $(978) $ 8,439 ======= ======= ========= ======= ===== ========= Pro forma income before extraordinary items per Listed Share............................. $ 1.84 $ 0.86 ========= ========= Pro forma weighted average number of Listed Shares outstanding......... 9,727,035 9,781,230 ========= ========= Ratio of earnings to fixed charges (8)............................... 4.17 4.75 ========= =========
See accompanying notes to pro forma condensed consolidated statements of income. F-26 216 CAREY DIVERSIFIED LLC NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS) ASSUMING MINIMUM PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS: (1) Reflects the Group's historical combined income statements for the year ended December 31, 1996 and unaudited for the six months ended June 30, 1997. The Group, assuming minimum participation, consists of Corporate Property Associates, Corporate Property Associates 2, Corporate Property Associates 3, Corporate Property Associates 5 and Corporate Property Associates 7, representing the combination of partnerships having the lowest combined net cash provided by operating activities, which also satisfies the criteria for minimum exchange value needed to consummate the Consolidation. (2) Reflects changes in connection with adjustment of Limited Partners' interest in real estate assets to fair value and adoption of new depreciable lives for such assets as follows:
YEAR ENDED SIX MONTHS ASSETS AT REVISED DECEMBER 31, ENDED FAIR VALUE LIFE 1996 JUNE 30, 1997 ---------- ------- ------------ ------------- Buildings and improvements....... $ 88,536 40 $ 2,213 $ 1,107 Personal property................ 10,572 7 1,510 755 Less: historical depreciation expense........................ (4,143) (2,009) ------- ------- Difference....................... (420) (147) Elimination of General Partners' (5.42%) interest............... 23 8 ------- ------- Net decrease in expense.......... $ (397) $ (139) ======= =======
(3) Increase in general and administrative expenses as follows:
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED 1996 JUNE 30, 1997 ------------ -------------- Directors' compensation.......................... $225 $113 Employee compensation............................ 400 125 Other expenses of a public company............... 300 150 ---- ---- $925 $388 ==== ====
F-27 217 CAREY DIVERSIFIED LLC NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME -- (CONTINUED) (4) The Company will pay a management fee and a performance fee each at an annual rate of .5% of the Total Capitalization of the Company. The performance fee will be paid in the form of restricted Listed Shares issued by the Company. Restricted Listed Shares will vest over a five year period at 20% per year. Total Capitalization will be determined by adding the average total principal amount of debt owed by the Company and the Average Market Capitalization of the Company. The fees will be reduced by any payments made to the Manager and the Individual General Partner by the CPA(R) Partnerships for distributions of operating cash flows and Partnership leasing fees. Such reduction may not exceed the total management and performance fees incurred by the Company in any fiscal year. Pro forma management and performance fees payable by the Company are as follows:
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED 1996 JUNE 30, 1997 ------------ -------------- Average market capitalization.................... $203,454 $203,454 Average debt..................................... 70,263 56,237 -------- -------- 273,717 259,691 Partial year pro-ration.......................... N/A x .50 -------- -------- Average total assets for the period.............. 273,717 129,846 -------- -------- Management fee @ .5%............................. 1,369 649 Performance fee, vested portion, @ .5%........... 274 267 Reductions: Partnership distributions to minority interests...................................... (571) (274) Partnership leasing fees......................... (565) (322) -------- -------- Net fee.......................................... $ 507 $ 320 ======== ========
Pursuant to the management agreement, Average Market Capitalization will be calculated on a daily basis based on the market price of the Listed Shares. As such information is not available on a historical basis, Average Market Capitalization is equal to the Total Exchange Value including Subsidiary Partnership Units and average debt is equal to the average combined debt as of the beginning and end of the period. (5) The Manager will be paid an incentive fee equal to 15% of the amount of the proceeds received from the sale of any property acquired in connection with the Consolidation in excess of the appraised value of the property used in the Consolidation, less an adjustment for the share of such net proceeds in excess of the appraised value of the equity interest attributable to the Manager's interest in the Company's Listed Shares. No adjustment has been reflected in the pro forma statements of income for incentive fees that would have been paid in connection with any such sales during the year ended December 31, 1996 and the six months ended June 30, 1997. (6) Represents an adjustment for estimated disposition fees payable to the Manager on sales of properties. Subject to approval by the Board of Directors of the Company, the Manager may be entitled to receive a disposition fee on the sale of properties. Such fee will be determined by agreement with the Board of Directors. For purposes of this presentation it is assumed that disposition fees average historical levels, namely 3% of the sales price of properties. F-28 218 CAREY DIVERSIFIED LLC NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME -- (CONTINUED) (7) Reflects the following:
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1996 JUNE 30, 1997 ----------------- ------------------ Minority interest income.................. $ 56 $ 28 Redeemable minority interest income....... (931) (437) ---- ---- $(875) $ (409) ==== ====
The Manager will retain the interest of the General Partners in the income and losses, of the Subsidiary Partnerships. Such interests range from 1% to 10% of the income and losses of each CPA(R) Partnership. Minority interest income represents the General Partners' share of pro forma adjustments based on such interests. Redeemable minority interest income represents the interest of the Subsidiary Partnership Unitholders in the income of the Participating Partnerships. For purposes of this presentation it is assumed that holders of 5% of Limited Partnership Units elect to receive Subsidiary Partnership Units, representing an interest in the capital, income and distributions of an individual Subsidiary Partnership. (8) The ratio of earnings to fixed charges is computed as income from operations before minority interest plus fixed charges (primarily interest) divided by fixed charges. F-29 219 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Carey Diversified LLC: We have audited the accompanying balance sheet of Carey Diversified LLC as of August 31, 1997. The balance sheet is the responsibility of the Company's management. Our responsibility is to express an opinion on the balance sheet based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of Carey Diversified LLC as of August 31, 1997, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. New York, New York October 10, 1997 F-30 220 CAREY DIVERSIFIED LLC BALANCE SHEET AUGUST 31, 1997 ASSETS Cash.................................................................. $500 ==== MEMBERS' EQUITY Listed shares, no par value, 25 shares issued and outstanding (Note 4).................................................................. $500 ====
See accompanying notes to balance sheet. F-31 221 CAREY DIVERSIFIED LLC NOTES TO BALANCE SHEET (1) FORMATION OF THE COMPANY Carey Diversified LLC, a limited liability company, was formed under the laws of the state of Delaware on October 15, 1996 for the purpose of acquiring up to nine public limited partnerships in the Corporate Property Associates series of limited partnerships (the "CPA(R) Partnerships"), if approved by the holders of a majority of the outstanding units of each of the individual partnerships. The acquisition will be accomplished by a consolidation by merger (the "Consolidation") of the CPA(R) Partnerships into nine subsidiary partnerships (the "Subsidiary Partnerships") of the Company which will be formed for this purpose. The Consolidation will not occur unless the CPA(R) Partnerships approving the Consolidation represent at least $200,000,000 Exchange Value, as defined. In exchange for acquiring all of the limited partners' and a portion of the general partners' interests in the Partnerships, the Company will issue 24,388,032 Listed Shares. The Manager will retain the Corporate General Partners interest in the income, losses and operating cash flow of the Subsidiary Partnerships which range from 1% to 9%. The Company will acquire and own industrial and commercial property net leased to creditworthy corporations and other creditworthy entities and will continue the net lease business operations of the CPA(R) Partnerships. Upon completion of the Consolidation the Company will own a portfolio of 198 properties with a carrying value of $646,000,000, that are net leased to 76 tenants. The real estate assets of the CPA(R) Partnerships are subject to limited recourse mortgage debt of approximately $194,347,000. The Company expects to be taxed as a partnership for Federal and most state and local income tax purposes. (2) MANAGEMENT AGREEMENT The Company has entered into a Management Agreement with Carey Management LLC (the "Manager") pursuant to which the Manager will provide personnel and such administrative support as may be required to carry on the operations of the Company. The Company will pay the Manager a cash management fee of .5% per annum of the Total Capitalization of the Company, as defined. The Manager will also be paid a performance fee in like amount, which will be paid in the form of restricted Listed Shares issued by the Company which will vest ratably over five years. Before such Listed Shares are vested, they will not be transferable and will be subject to forfeiture in the event the Manager is terminated for cause or resigns. The Listed Shares will vest immediately in the event of a change in control or certain other circumstances. Management and performance fees due to the Manager will be reduced by the sum of distributions of operating cash flow, management fees and leasing fees paid by the Subsidiary Partnerships to the Manager and the Individual General Partner. Subject to approval by the Board of Directors of the Company, the Manager may be entitled to receive a disposition fee on the sale of properties. Such fee will be determined by agreement with the Board of Directors. The Manager shall be paid an incentive fee equal to 15% of the amount of the proceeds received from the sale of any property acquired in connection with the Consolidation in excess of the appraised value of the property used in the Consolidation, less an adjustment for the share of such net proceeds in excess of the appraisal value of the equity interest attributable to the Manager's interest in the Listed Shares. (3) REDEEMABLE MINORITY INTEREST Each Subsidiary Partnership is authorized to issue Subsidiary Partnership Units to unitholders of the CPA(R) Partnership who choose not to receive Listed Shares and wish to retain a security that is substantially similar to the CPA(R) Partnerships Units. The terms and conditions of the Subsidiary Partnership Units are substantially the same as the terms of the CPA(R) Partnerships Units. The F-32 222 CAREY DIVERSIFIED LLC NOTES TO BALANCE SHEET -- (CONTINUED) performance of, and distributions with respect to the Subsidiary Partnership Units will be based solely upon the performance of the assets owned by the Subsidiary Partnership corresponding to such units. Subsidiary Partnership Units will be redeemed by the Company as soon as practicable after appraisals are performed on the properties. Such appraisals will commence as of December 31, 1998 and the final appraisal will be made no later than December 31, 2002. The Subsidiary Partnership Units will not be listed on any national securities exchange or the Nasdaq National Market System. (4) LISTED SHARES The Company is authorized to issue Listed Shares, representing interests in the income, loss and capital of the Company. Listed Shares will be issued to holders of units of all nine CPA(R) Partnerships who choose to receive such shares upon consummation of the Consolidation. Holders of Listed Shares will bear a pro rata portion of the cash costs of the formation of the Company and the Consolidation. Such costs will approximate $2,997,000. The performance of and distributions with respect to the Listed Shares will be based upon the performance of the entire portfolio of the Company's assets. Listed Shares are not redeemable, except pursuant to certain anti-takeover provisions adopted by the Company. The Company will pay distributions to holders of Listed Shares when declared by its Board of Directors out of available funds. Approval of any matter submitted to the holders of Listed Shares generally requires the affirmative vote of holders of a majority of the Listed Shares that are present at a meeting at which a quorum is present. There are no cumulative voting rights with respect to: (i) the election and removal of directors; (ii) the sale or disposition of all or substantially all of the assets of the Company at any one time; (iii) the merger or consolidation of the Company (where the Company is not the surviving entity); (iv) the dissolution of the Company; and (v) certain anti-takeover provisions. The holders of the Listed Shares will be entitled to one vote for each Listed Share owned. If the Consolidation is completed, W. P. Carey & Co., Inc. will receive compensation for investment banking services in the form of warrants to purchase Listed Shares. If all the CPA(R) Partnerships participate in the Consolidation, W. P. Carey & Co., Inc. will receive warrants to purchase 2,284,000 Listed Shares at $21 per share and 725,930 Listed Shares at $23 per share. The warrants generally will be exercisable over 10 years beginning one year after the date the Consolidation is completed. The compensation of $6,568,000 is based on the estimated fair value of the warrants. (5) ADDITIONAL CLASSES AND SERIES OF SHARES The Organizational Documents of the Company authorize the Board of Directors (subject to certain restrictions) to provide for the issuance of Shares in other classes or series, to establish the number of Shares in each class or series and to fix the preference, conversion and other rights, voting powers, restrictions, limitations as to distributions, qualifications or terms or conditions of redemption of such class or series. The Company believes that the ability of the Board of Directors to issue one or more classes or series will provide the Company with increased flexibility in structuring possible future financing and acquisitions, and in meeting other needs which might arise. The additional classes or series, as well as the Listed Shares, will be available for issuance without further action by the Company's Shareholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which the Company's securities may be listed or traded. (6) NON-EMPLOYEE DIRECTORS' SHARE PLAN Non-employee directors will be granted options for Listed Shares, and may elect to receive Listed Shares in lieu of fees, under the 1997 Non-Employee Directors' Share Plan. The Plan provides that each non- F-33 223 CAREY DIVERSIFIED LLC NOTES TO BALANCE SHEET -- (CONTINUED) employee director will be automatically granted an option to purchase 4,000 Listed Shares (i) at the effective time of the Consolidation or upon his initial election or appointment thereafter, and (ii) on a quarterly basis beginning in 1999, options or restricted shares with a total value of $6,250. Such options will have an exercise price equal to the fair market value of Listed Shares on the date of grant, and will expire at the earlier of 10 years after the date of grant or one year after the optionee ceases serving as a director. Such options generally will become exercisable one year after grant, subject to earlier exercisability in the event of death, disability, or a change in control (as defined), and will be forfeited in the event of cessation of service as a director within 10 months after the date of grant. The plan also will permit a non-employee director to elect to be paid any directors' fees in the form of Listed Shares. A director who makes such election will receive Listed Shares having a fair market value equal to the amount of fees he has elected to forego, with such Shares issuable at the time the fees otherwise would have been paid or on a deferred basis. A total of 300,000 Listed Shares are reserved for grant under the plan. The number and kind of shares reserved and automatically granted under the plan are subject to adjustment in the event of stock splits, stock dividends, and other extraordinary events. (7) LISTED SHARE INCENTIVE PLAN The 1997 Listed Share incentive plan authorizes the issuance of up to 700,000 Listed Shares to eligible officers and employees of the Company and its affiliates. The Plan provides for the grant of (i) share options which may or may not qualify as incentive stock options under Section 422 of the Internal Revenue Code, (ii) performance shares, (iii) dividend equivalent rights issued alone or in tandem with option and (iv) restricted shares, which are contingent upon the attainment of goals or subject to vesting requirements. On the effective date of the Offering, options to purchase 113,500 Listed Shares and 7,500 Restricted Shares will be granted to the sole employee of the Company. The options will have an exercise price of $20 per Listed Share. F-34 224 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Corporate Property Associates Partnerships: We have audited the combined balance sheets of Corporate Property Associates Partnerships, as described in Note 1, as of December 31, 1995 and 1996, and the related combined statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 1996. We have also audited the financial statement schedule included in this Consent Solicitation Statement. These financial statements and financial statement schedule are the responsibility of the General Partners. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the General Partners, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Corporate Property Associates Partnerships as of December 31, 1995 and 1996, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the Schedule of Real Estate and Accumulated Depreciation as of December 31, 1996, when considered in relation to the basic financial statements taken as a whole, presents, fairly, in all material respects, the financial information required to be included therein. COOPERS & LYBRAND L.L.P. New York, New York March 22, 1997 F-35 225 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS COMBINED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, --------------------- JUNE 30, 1995 1996 1997 -------- -------- ------------ (UNAUDITED) ASSETS Real estate leased to others: Accounted for under the operating method, net........... $260,617 $247,580 $225,294 Net investment in direct financing leases............... 218,922 215,310 216,403 -------- -------- -------- Real estate leased to others......................... 479,539 462,890 441,697 Operating real estate, net................................ 40,888 24,080 23,736 Real estate held for sale................................. 12,785 434 14,816 Cash and cash equivalents................................. 27,711 28,553 27,079 Equity investments........................................ 4,260 13,660 13,523 Other assets, net of accumulated amortization of $1,914 and $2,023 at December 31, 1995 and 1996 and $1,842 at June 30, 1997........................................... 17,141 15,111 19,657 -------- -------- -------- Total assets.................................... $582,324 $544,728 $540,508 ======== ======== ======== LIABILITIES Mortgage notes payable.................................... $247,478 $202,339 $194,347 Notes payable to affiliate................................ 2,550 500 300 Notes payable............................................. 24,709 24,709 24,709 Accounts payable to affiliates............................ 2,283 2,543 3,046 Other liabilities......................................... 14,005 11,342 10,958 -------- -------- -------- Total liabilities............................... 291,025 241,433 233,360 -------- -------- -------- Minority interest......................................... (1,597) (750) (578) -------- -------- -------- Commitments and contingencies PARTNERS' CAPITAL Partners' capital......................................... 292,896 304,045 307,726 -------- -------- -------- Total liabilities and partners' capital......... $582,324 $544,728 $540,508 ======== ======== ========
The accompanying notes are an integral part of the combined financial statements. F-36 226 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS COMBINED STATEMENTS OF INCOME (IN THOUSANDS)
FOR THE YEARS ENDED FOR THE SIX MONTHS DECEMBER 31, ENDED JUNE 30, ---------------------------------- --------------------------- 1994 1995 1996 1996 1997 -------- -------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) Revenues: Rental income.................... $ 41,645 $ 42,255 $ 44,576 $21,549 $23,675 Interest income from direct financing leases.............. 40,213 36,391 32,644 16,256 16,278 Other interest income............ 1,294 1,700 1,681 992 568 Other income..................... 3,453 2,523 1,901 290 3,431 Revenues of hotel operations..... 22,532 25,077 21,929 12,359 7,033 -------- -------- -------- -------- ------- 109,137 107,946 102,731 51,446 50,985 -------- -------- -------- -------- ------- Expenses: Interest......................... 33,120 28,842 23,200 12,191 10,086 Depreciation and amortization.... 13,321 12,810 11,274 5,788 5,462 General and administrative....... 3,663 4,509 3,747 2,006 2,611 Property expenses................ 8,151 4,086 4,008 1,718 1,532 Writedowns to net realizable value......................... 2,889 3,619 1,300 1,300 3,666 Operating expenses of hotel operations.................... 16,177 18,037 15,947 8,879 5,272 -------- -------- -------- -------- ------- 77,321 71,903 59,476 31,882 28,629 -------- -------- -------- -------- ------- Income before net gains, minority interest in income and extraordinary items.... 31,816 36,043 43,255 19,564 22,356 Gain on sales of real estate and securities, net.................. 9,646 4,964 5,474 4,644 Gain on settlement................. 11,499 -------- -------- -------- -------- ------- Income before minority interest in income and extraordinary items.... 41,462 52,506 48,729 24,208 22,356 Minority interest in income........ (3,006) (3,143) (3,182) (1,663) (1,334) -------- -------- -------- -------- ------- Income before extraordinary items.... 38,456 49,363 45,547 22,545 21,022 Extraordinary gain (loss) on extinguishments of debt, net of minority interest of $98, $(205) and $3 in 1994, 1995 and 1996.... (1,014) 3,207 (252) (252) -------- -------- -------- -------- ------- Net income............... $ 37,442 $ 52,570 $ 45,295 $22,293 $21,022 ======== ======== ======== ======== =======
The accompanying notes are an integral part of the combined financial statements. F-37 227 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS COMBINED STATEMENTS OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND (UNAUDITED) FOR THE SIX-MONTHS ENDED JUNE 30, 1997 (IN THOUSANDS) Balance, December 31, 1993................................ $295,959 Distributions to partners................................. (35,589) Net income, 1994.......................................... 37,442 -------- Balance, December 31, 1994................................ 297,812 Distributions to partners................................. (57,216) Purchase of Limited Partnership Units..................... (270) Net income, 1995.......................................... 52,570 -------- Balance, December 31, 1995................................ 292,896 Distributions to partners................................. (34,173) Purchase of Limited Partnership Units..................... (17) Change in unrealized appreciation, marketable securities.............................................. 44 Net income, 1996.......................................... 45,295 -------- Balance, December 31, 1996................................ 304,045 Distributions to partners................................. (17,336) Change in unrealized appreciation, marketable securities.............................................. (5) Net income, six months ended June 30, 1997................ 21,022 -------- Balance, June 30, 1997 (unaudited)........................ $307,726 ========
The accompanying notes are an integral part of the combined financial statements. F-38 228 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, FOR THE SIX MONTHS ------------------------------ ENDED JUNE 30, 1994 1995 1996 -------------------------- ------- -------- ------- 1996 1997 ----------- ----------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net income...................................................... $37,442 $ 52,570 $45,295 $ 22,293 21,022 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of deferred financing costs, net of amortization of deferred gains and deferred rental income...................................................... 13,108 12,670 10,905 5,630 5,288 Extraordinary (gain) loss..................................... 1,014 (3,207) 252 252 Net gain on sales............................................. (9,646) (4,964) (5,474) (4,644) Gain on settlement............................................ (11,499) Minority interest in income................................... 3,006 3,143 3,182 1,663 1,334 Distributions to minority interest............................ (2,435) (2,670) (2,334) (1,172) (1,162) Scheduled rents on operating and direct financing leases (less) greater than income recognized....................... 31 364 (1,343) (323) (993) Write-downs to net realizable value........................... 2,889 3,619 1,300 1,300 3,666 Restructuring consideration received.......................... 1,950 15,188 Net changes in operating assets and liabilities and other..... (2,228) (1,938) (800) (1,639) (3,749) ------- -------- ------- ------- ------- Net cash provided by operating activities................. 45,131 63,276 50,983 23,360 25,406 ------- -------- ------- ------- ------- Cash flows from investing activities: Purchases of real estate and capital expenditures............... (2,492) (2,095) (3,420) (2,144) (1,354) Installment and settlement proceeds............................. 2,286 5,436 Proceeds from sales of real estate and securities............... 37,608 22,736 23,394 17,453 Other........................................................... (266) (1,750) (429) ------- -------- ------- ------- ------- Net cash used in investing activities..................... 37,136 24,327 19,545 15,309 (1,354) ------- -------- ------- ------- ------- Cash flows from financing activities: Distributions to partners....................................... (35,589) (57,216) (34,173) (17,666) (17,336) Payments of mortgage principal.................................. (60,281) (60,349) (63,171) (35,655) (20,692) Release of escrow funds in connection with mortgage prepayments................................................... 2,395 Proceeds from mortgage financings and notes payable............. 27,400 10,000 28,189 23,400 12,700 Proceeds from notes payable to affiliate........................ 2,550 1,000 1,000 Payments of notes payable to affiliate.......................... (3,050) (3,050) (200) Deferred financing costs........................................ (505) (293) (603) (434) (178) Other........................................................... (1,070) (270) (273) (255) 180 ------- -------- ------- ------- ------- Net cash used in financing activities..................... (70,045) (105,578) (69,686) (32,660) (25,526) ------- -------- ------- ------- ------- Net increase (decrease) in cash and cash equivalents...... 12,222 (17,975) 842 6,009 (1,474) Cash and cash equivalents, beginning of period.................... 33,464 45,686 27,711 27,711 28,553 ------- -------- ------- ------- ------- Cash and cash equivalents, end of period.................. $45,686 $ 27,711 $28,553 $ 33,720 $ 27,079 ======= ======== ======= ======= =======
Supplemental schedule of noncash investing and financing activities: In July 1996, the Group exchanged its interest in a hotel property and related assets and liabilities for units in the operating partnership of a publicly-traded real estate investment trust (see Note 15). The assets and liabilities transferred were as follows: Operating real estate, net of accumulated depreciation............................... $16,098 Mortgage note payable................................................................ (7,304) Other assets and liabilities transferred, net........................................ 69 ------- Equity investment.................................................................... $ 8,863 =======
The accompanying notes are an integral part of the combined financial statements. F-39 229 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS (INFORMATION RELATING TO THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) 1. ORGANIZATION AND BASIS OF COMBINATION The combined financial statements consist of interests in nine Corporate Property Associates real estate limited partnerships (individually, the "Partnership") and their wholly-owned subsidiaries (collectively, the "Group") which have been presented on a combined basis because of the affiliated general partners, common management and common control and because the entities are expected to be the subject of a consolidation by merger with Carey Diversified LLC. All material inter-entity transactions have been eliminated. The General Partners' interest in the Group is classified under minority interest as such interest will be maintained subsequent to the consolidation. The Group is engaged in the net leasing of industrial and commercial real estate. In accordance with the Amended Agreements of Limited Partnership of each Partnership (the "Agreements"), the Subsidiaries will terminate between 2004 and 2050. The primary entities referred to above are as follows: Corporate Property Associates Corporate Property Associates 2 Corporate Property Associates 3 Corporate Property Associates 4, a California limited partnership Corporate Property Associates 5 Corporate Property Associates 6 -- a California limited partnership Corporate Property Associates 7 -- a California limited partnership Corporate Property Associates 8, L.P., a Delaware limited partnership Corporate Property Associates 9, L.P., a Delaware limited partnership 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Interim Unaudited Financial Information The combined financial statements as of June 30, 1997 and for the six months ended June 30, 1996 and 1997 are unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the combined financial statements for the interim periods have been made. The results of interim periods are not necessarily indicative of results to be obtained for a full year. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Real Estate Leased to Others Real estate is leased to others on a net lease basis, whereby the tenant is generally responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance, repairs, renewals and improvements. The Group diversifies its real estate investments among various corporate tenants engaged in different industries and by property type throughout the United States. No lessee currently represents 10% or more of total leasing revenues (see Note 10). F-40 230 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The leases are accounted for under either the direct financing or operating methods. Such methods are described below: Direct financing method -- Leases accounted for under the direct financing method are recorded at their net investment (Note 5). Unearned income is deferred and amortized to income over the lease terms so as to produce a constant periodic rate of return on the Group's net investment in the lease. Operating method -- Real estate is recorded at cost, revenue is recognized as rentals are earned and expenses (including depreciation) are charged to operations as incurred. When scheduled rentals vary during the lease term, income is recognized on a straight-line basis so as to produce a constant periodic rent. Substantially all of the Group's leases provide for either scheduled rent increases, periodic rent increases based on formulas indexed to increases in the Consumer Price Index or sales overrides. Operating Real Estate Land and buildings and personal property are carried at cost. Major renewals and improvements are capitalized while replacements, maintenance and repairs which do not improve or extend the lives of the respective assets are expensed currently. Real Estate Held for Sale Real estate held for sale is accounted for at the lower of cost or fair value, less costs to sell. Long-Lived Assets Effective January 1, 1995, the Group adopted the provisions of Statement of Financial Accounting Standards No. 121 -- Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of ("SFAS 121"). Pursuant to SFAS 121, the Group assesses the recoverability of its long-lived assets, including residual interests of real estate assets, based on projections of cash flows over the life of such assets. In the event that such cash flows are insufficient, the assets are adjusted to their estimated fair value. Prior to the adoption of SFAS 121, the Company assessed the recoverability of its long-lived assets, including residual interests, based on either projections of cash flows over the life of such assets or, for vacant properties, the estimated fair value. The adoption of SFAS 121 did not have a material effect on the Group's combined financial condition or results of operations. Depreciation Depreciation is computed using the straight-line method over the estimated useful lives of the properties which range from 5 to 50 years. Cash Equivalents The Group considers all short-term, highly liquid investments that are both readily convertible to cash and have a maturity of generally three months or less at the time of purchase to be cash equivalents. Items classified as cash equivalents include commercial paper and money market funds. Substantially all of the Group's cash and cash equivalents at December 31, 1995 and 1996 and at June 30, 1997 were held in the custody of three financial institutions. Newly Issued Accounting Standards In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 128 -- Earnings per Share ("SFAS No. 128"), which establishes standards for computing and F-41 231 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) presenting earnings per share. SFAS No. 128 will be effective for financial statements issued for periods ending after December 15, 1997. Earlier application is not permitted. Management has not reached a determination about the effects of this change on the Company's financial statements. Other Assets and Liabilities Included in other assets are accrued rents and interest receivable, escrow funds and deferred charges. Included in other liabilities are accrued interest payable, accounts payable and accrued expenses, deferred rental income and deferred gains. Escrow funds are funds which are restricted, primarily as additional collateral on the mortgage financing for certain of the Group's hotel properties. Such restricted amounts totaled $2,929 and $754 at December 31, 1995 and 1996, respectively and $903 at June 30, 1997. Escrow funds of $2,395 were used in 1996 to fund mortgage prepayments. Deferred charges are costs incurred in connection with mortgage financing and refinancing and are amortized over the terms of the mortgages. Deferred rental income is the aggregate difference for operating method leases between scheduled rents which vary during the lease term and rent recognized on a straight-line basis. Also included in deferred rental income are lease restructuring fees received which are recognized over the remainder of the initial lease terms. Deferred gains consist of assets acquired in excess of liabilities assumed in connection with acquiring certain hotel operations and certain funds received in connection with two loan refinancings which are being amortized into income over 20 and 24 years, respectively. The deferred gain on the acquisition of hotel operations was realized in 1996 in connection with the sale of such hotels. Equity Investments The Group's limited partner interests in two real estate limited partnerships in which such ownership is less than 50% are accounted for under the equity method, i.e., at cost, increased or decreased by the Group's pro rata share of earnings or losses, less distributions. Equity income in the limited partnerships has been included in other income in the accompanying combined financial statements. The Group's income from these equity investments was $600, $565 and $583 in 1994, 1995 and 1996, respectively, and $290 and $297 for the six months ended June 30, 1996 and 1997, respectively. Distributions received from such investments were $902, $850 and $795 in 1994, 1995 and 1996, respectively, and $290 and $397 in each of the six months ended June 30, 1996 and 1997. The Group is the sole limited partner in the two partnerships with the general partner interests owned by Corporate Property Associates 10 Incorporated ("CPA(R):10"), an affiliate. An ownership interest in a third limited partnership in which CPA(R):10 owned the general partner interest was written off in 1995. An interest in the operating partnership of a publicly-traded real estate trust which interest was acquired in July 1996 is also accounted for under the equity method. The share of income from this investment was $572 in 1996 and $731 for the six months ended June 30, 1997 (see Note 15). Distributions received were $253 in 1996 and $767 for the six months ended June 30, 1997. Federal Income Taxes Each CPA(R) Partnership is not liable for Federal income tax purposes as each partner recognizes his proportionate share of income or loss in his tax return. Accordingly, no provision for income taxes is recognized for financial statement purposes. F-42 232 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Distributions and Profits and Losses Partners' distributions and profits and losses are allocated in accordance with the terms of the Agreements of individual Partnerships. Reclassifications Certain 1994 and 1995 amounts have been reclassified to conform to the 1996 financial statement presentation. 3. TRANSACTIONS WITH RELATED PARTIES The Agreements of each of the CPA(R) Partnerships provide that the General Partners (consisting of W. P. Carey & Co., Inc. ("W.P. Carey") or affiliated companies as Corporate General Partners and William P. Carey as Individual General Partner) are allocated between 1% and 10%, for the applicable Partnership, of the profits and losses as well as Distributable Cash From Operations, as defined, and the Limited Partners are allocated between 90% and 99%, for the applicable Partnership, of the profits and losses as well as Distributable Cash From Operations. The partners are also entitled to receive an allocation of gains and losses from the sale of properties and to receive net proceeds from such sales with such allocation and distribution as defined in the Agreements. The General Partners may be entitled to receive a subordinated preferred return, measured based upon the cumulative proceeds arising from the sale of the Group's assets. Pursuant to the provisions of the Agreements, the preferred return may be paid only after the limited partners of a Partnership receive 100% of their initial investment from the proceeds of asset sales and a cumulative annual return ranging from 6% to 9% since the inception of the affected Partnership. The General Partners interest in such preferred return amounts to $5,111 based upon the cumulative proceeds from the sale of assets since the inception of the Partnerships through June 30, 1997. The Group's ability to satisfy the subordination provisions of the Agreement will not be determinable until either liquidation of a substantial portion of a Partnership's assets are made, formal plans of liquidation are adopted or limited partnership units are converted to other securities which provide the security holder with greater liquidity than a limited partnership unit. The Group believes that as of the report date, ultimate payment of the preferred return is reasonably possible, but not probable, as defined pursuant to Statement of Financial Accounting Standards No. 5. Under the Agreements, certain affiliates are entitled to receive property management or leasing fees and reimbursement of certain expenses incurred in connection with the operations of the CPA(R) Partnerships. General and administrative reimbursements consist primarily of the actual cost of personnel needed in providing administrative services necessary to the operation of the CPA(R) Partnerships. Property management and leasing fees in 1994, 1995 and 1996 were $1,299, $1,886 and $916, respectively, and $426 and $528 for the six months ended June 30, 1996 and 1997, respectively. General and administrative reimbursements in 1994, 1995 and 1996 were $991, $852 and $911, respectively, and $479 and $677 for the six months ended June 30, 1996 and 1997, respectively. For the years ended December 31, 1994, 1995 and 1996, fees aggregating $922, $652 and $902, respectively, and $411 and $213 for the six months ended June 30, 1996 and 1997, respectively, were incurred for legal services in connection with the Group's operations and were provided by a law firm in which the Secretary of the Corporate General Partners of the Partnerships is a partner. The Group is a participant in an agreement with W.P. Carey and certain affiliates for the purpose of leasing office space used for the administration of the Group, other affiliated real estate entities and W.P. Carey and for sharing the associated costs. Pursuant to the terms of the agreement, the Group's share of rental, occupancy and leasehold improvement costs is based on adjusted gross revenues, as defined. Net expenses incurred in 1994, 1995 and 1996 were $523, $964 and $720, respectively, and $397 and $355 for the F-43 233 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) six months ended June 30, 1996 and 1997, respectively. The increase for 1995 was due,in part, to certain nonrecurring costs related to the relocation of the Group's offices. In November 1995, the Group borrowed $2,550 from W.P. Carey in connection with the retirement of a mortgage loan. The loans from W.P. Carey were evidenced by two promissory notes, bearing interest at the prime rate and required the Group to pay the entire principal amount and accrued interest thereon on demand. In addition, the notes allowed the CPA(R) Partnerships to prepay the note, in whole or in part, at any time without penalty. As of June 30, 1997 the outstanding balance on the remaining note was $300. 4. REAL ESTATE LEASED TO OTHERS ACCOUNTED FOR UNDER THE OPERATING METHOD Real estate leased to others, at cost, and accounted for under the operating method is summarized as follows:
DECEMBER 31, --------------------- JUNE 30, 1995 1996 1997 -------- -------- -------- Land............................................... $ 74,533 $ 73,310 $ 69,447 Buildings.......................................... 273,688 266,193 247,930 -------- -------- -------- 348,221 339,503 317,377 Less: Accumulated depreciation..................... 87,604 91,923 92,083 -------- -------- -------- $260,617 $247,580 $225,294 ======== ======== ========
The scheduled future minimum rents, exclusive of renewals, under noncancellable operating leases amount to $40,683 in 1997, $37,900 in 1998, $31,516 in 1999, $29,998 in 2000, $28,205 in 2001 and aggregate $326,933 through 2016. Contingent rentals were $998, $1,583 and $1,697 in 1994, 1995 and 1996, respectively. 5. NET INVESTMENT IN DIRECT FINANCING LEASES Net investment in direct financing leases is summarized as follows:
DECEMBER 31, --------------------- JUNE 30, 1995 1996 1997 -------- -------- -------- Minimum lease payments receivable.................. $462,037 $426,491 $429,626 Unguaranteed residual value........................ 214,431 210,146 210,886 -------- -------- -------- 676,468 636,637 640,512 Less: Unearned income.............................. 457,546 421,327 424,109 -------- -------- -------- $218,922 $215,310 $216,403 ======== ======== ========
The scheduled future minimum rents, exclusive of renewals, under noncancellable direct financing leases amount to $28,228 in 1997, $28,183 in 1998, $28,198 in 1999, $28,322 in 2000, $29,017 in 2001 and aggregate $426,491 through 2016. Contingent rentals were approximately $5,394, $4,889 and $3,444 in 1994, 1995 and 1996, respectively. F-44 234 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 6. OPERATING REAL ESTATE Operating real estate relating to the Group's hotel operations is summarized as follows:
DECEMBER 31, ------------------- JUNE 30, 1995 1996 1997 ------- ------- ---------- Land................................................. $ 6,435 $ 3,867 $ 3,867 Buildings............................................ 41,740 27,979 27,998 Personal property.................................... 7,194 5,581 5,824 ------- ------- ------- 55,369 37,427 37,689 Less: Accumulated depreciation....................... 14,481 13,347 13,953 ------- ------- ------- $40,888 $24,080 $ 23,736 ======= ======= =======
7. MORTGAGE NOTES PAYABLE AND NOTES PAYABLE A. MORTGAGE NOTES PAYABLE: Mortgage notes payable, substantially all of which are limited recourse obligations, are collateralized by the assignment of various leases and by real property with a carrying amount of approximately $398,639, before accumulated depreciation. As of December 31, 1996, mortgage notes payable have interest rates varying from 6.35% to 11.85% per annum and mature from 1997 to 2020. Scheduled principal payments during each of the next five years following December 31, 1996 and thereafter are as follows:
YEAR ENDING DECEMBER 31, ------------------------------------------------------------ 1997........................................................ $ 40,771 1998........................................................ 28,012 1999........................................................ 37,832 2000........................................................ 4,836 2001........................................................ 22,440 Thereafter.................................................. 68,448 -------- $202,339 ========
B. NOTES PAYABLE: The Group's notes payable which aggregate $24,709 at December 31, 1995 and 1996 and June 30, 1997 provide for quarterly payments of interest at a variable rate of the London Inter-Bank Offered Rate plus 4.25% per annum with such notes maturing between July 1999 and December 1999 at which time balloon payments for the entire outstanding principal balance will be due. Each note obligation is recourse to the assets of a specific Partnership. Covenants under the notes limit the amount of limited recourse indebtedness the applicable Partnership may incur. Additionally, each Partnership must maintain certain debt coverage ratios, minimum net worth and aggregate appraised property values. The debt coverage ratios requires each Partnership to maintain ratios of free operating cash flow, as defined, to the debt service on the applicable note ranging from 3:1 to 3.4:1 over the terms of the note. The net worth and aggregate property value minimums range from $15,000 to $25,000. Under the covenants, certain of the Partnerships have limitations on the amount of total indebtedness which such Partnership may incur. The Company is in compliance with the covenants of the note payable agreements. F-45 235 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The note payable agreements require that the lender be offered the proceeds from property sales as a principal payment. To date, the lender has declined to accept all mandatory offers of proceeds. Except for the application of proceeds from property sales and other limited circumstances, no loan prepayments may be made until 1999. Interest paid by the Group on mortgages and notes payable aggregated approximately $31,016, $28,197 and $23,805 in 1994, 1995 and 1996, respectively, and $12,557 and $10,161 for the six months ended June 30, 1996 and 1997, respectively. 8. DISTRIBUTIONS TO PARTNERS Distributions declared and paid to partners are summarized as follows: 1994: Quarterly................................................ $35,589 ======= 1995: Quarterly................................................ $35,962 Special.................................................. 21,254 ------- $57,216 ======= 1996: Quarterly................................................ $33,350 Special.................................................. 823 ------- $34,173 =======
Distributions declared and paid for the six month period ended June 30, 1997 were comprised of quarterly distributions of $16,544 and special distributions of $792. 9. INCOME FOR FEDERAL TAX PURPOSES Income for financial statement purposes differs from income for Federal income tax purposes because of the difference in the treatment of certain items for income tax purposes and financial statement purposes. A reconciliation of accounting differences is as follows:
1994 1995 1996 ------- ------- ------- Net income per Statements of Income................... $37,442 $52,570 $45,295 Excess tax depreciation............................... (11,383) (10,489) (8,440) Difference in recognition of gain from sales.......... 11,439 7,272 3,532 Difference in the recognition of restructuring fees... 14,491 Difference in timing of recognition of purchase installments as income.............................. 2,286 (5,881) Writedowns to net realizable value.................... 2,889 11,019 1,300 Minority interest..................................... 3,006 3,143 3,182 Other................................................. (3,184) (448) (3,244) ------- ------- ------- Income reported for Federal income tax purposes..... $42,495 $71,677 $41,625 ======= ======= =======
10. INDUSTRY SEGMENT INFORMATION The Group's operations consist of two business segments (i) the investment in and the leasing of industrial and commercial real estate and (ii) owning and operating hotels. F-46 236 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) For the years ended December 31, 1994, 1995 and 1996 and for the six months ended June 30, 1996 and 1997, the Group earned its net leasing revenues (i.e., rental income and interest income from direct financing leases) from over 75 lessees. A summary of net leasing revenues including all lease obligors representing more than $1,000 in revenues for any annual period is as follows:
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, 1997 --------------------------------------------- ----------------------------- 1994 % 1995 % 1996 % 1996 % 1997 % ------- --- ------- --- ------- --- ------- --- ------- --- Hughes Markets, Inc............... 1,717 2 1,734 2 4,463 5 1,571 4 2,892 7 Advanced System Applications, Inc............................. $ 3,404 4% $ 4,693 6% $ 4,586 6% $ 2,320 6% $ 2,267 6% Dr Pepper Bottling Company of Texas........................... 3,998 5 3,998 5 3,998 5 1,999 5 1,999 5 Detroit Diesel Corporation........ 3,502 4 3,496 5 3,645 5 1,823 5 1,823 5 Gibson Greetings, Inc............. 7,810 10 7,234 9 3,384 4 1,687 5 1,721 4 Sybron Acquisition Company........ 3,311 4 3,311 4 3,311 4 1,656 4 1,656 4 Stoody Deloro Stellite, Inc....... 2,091 3 2,551 3 2,624 3 1,317 4 1,385 3 Quebecor Printing................. 2,313 3 2,569 3 2,533 3 1,271 3 1,309 3 AutoZone, Inc..................... 2,354 3 2,444 3 2,304 3 1,142 3 1,215 3 Furon Company..................... 2,539 3 2,539 3 2,528 3 1,289 3 1,208 3 Pre Finish Metals Incorporated.... 2,237 3 2,436 3 2,408 3 1,197 3 1,208 3 Orbital Sciences Corporation...... 2,008 2 2,154 3 2,154 3 1,077 3 1,077 3 The Gap, Inc...................... 2,154 3 2,154 3 2,154 3 1,077 3 1,077 3 Simplicity Manufacturing, Inc..... 1,997 2 1,997 3 1,997 3 998 3 998 2 AP Parts Manufacturing, Inc....... 1,526 2 1,526 2 1,729 2 857 2 918 2 NVRyan, L.P....................... 1,846 2 1,803 3 1,814 2 924 2 908 2 Cleo, Inc......................... 1,793 2 891 2 915 2 Peerless Chain Company............ 1,269 1 1,280 2 1,611 2 757 2 854 2 Unisource Worldwide, Inc. ........ 1,646 2 1,656 2 1,646 2 823 2 827 2 Red Bank Distribution, Inc........ 1,313 2 1,350 2 1,401 2 700 2 700 2 Brodart, Co....................... 1,323 2 1,319 2 1,314 2 658 2 655 2 Gould, Inc........................ 1,125 1 1,133 1 1,215 2 608 2 608 2 High Voltage Engineering Corporation..................... 1,140 1 1,168 1 1,179 1 591 2 587 1 Spreckels Industries, Inc......... 880 1 1,021 1 1,021 1 510 1 510 1 Anthony's Manufacturing Company, Inc............................. 1,348 2 1,073 1 876 1 438 1 438 1 GATX Logistics, Inc............... 1,834 2 1,399 2 381 1 381 1 331 1 New Valley Corporation............ 1,046 1 605 1 604 1 302 1 Other............................. 24,127 30 20,003 25 18,547 26 8,941 24 9,867 26 ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- $81,858 100% $78,646 100% $77,220 100% $37,805 100% $39,953 100% ======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Results for the hotel properties are summarized as follows:
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, 1997 ---------------------------------- ------------------- 1994 1995 1996 1996 1997 -------- -------- -------- ------- ------- Revenues........................................ $ 22,532 $ 25,077 $ 21,929 $12,359 $ 7,033 Management fees paid to unaffiliated hotel managers...................................... (583) (594) (547) (363) (200) Other operating expenses........................ (15,594) (17,443) (15,400) (8,516) (5,072) -------- -------- -------- ------- ------- $ 6,355 $ 7,040 $ 5,982 $ 3,480 $ 1,761 ======== ======== ======== ======= =======
F-47 237 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 11. GAIN ON SETTLEMENT In August 1995, the Group reached a settlement with The Leslie Fay Company ("Leslie Fay") and its surety company regarding Leslie Fay's lease with the Group. In connection with the settlement, the Group recognized a gain of $11,499, which consisted of aggregate net cash received from Leslie Fay and the surety company of $18,840 and the waiving of the $383 interest obligation that had been accrued on the Leslie Fay monthly payments, offset by the writedown of $7,400 and aggregate management fees, payable to an affiliate, of $324 on the monthly payments received from Leslie Fay since the beginning of the dispute in 1992. Of the rent received, $5,436 was received in 1995. Under the settlement agreement, Leslie Fay was required to dismiss with prejudice all of its suits filed against the Group, and the Group's bankruptcy claim against Leslie Fay, as an unsecured creditor, was reduced to $2,650. On June 30, 1997 The Group received securities with a market value of $1,619 as a distribution on its claim. Such distribution represents 79% of the total settlement amount; however, there is no assurance that the remaining amount of the claim will be distributed. As the fair value of the property was no longer impacted by the Leslie Fay lease, the Group wrote down the estimated fair value of the property, net of anticipated selling costs, to $2,000 and recognized a noncash charge of $7,400, which is netted against the gain of settlement. In January 1996, the Group sold the vacant property to a third party, net of transaction costs, for $1,854. The Group recognized an additional writedown on the property to an amount equal to the net sales proceeds, resulting in a charge to income in 1995 of $146. Accordingly, no gain or loss was recognized in 1996 in connection with the sale. 12. GAINS AND LOSSES ON SALE SIGNIFICANT SALES OF PROPERTIES AND SECURITIES ARE SUMMARIZED AS FOLLOWS: 1996 In January 1996, the Group sold a multi-tenant property in Helena, Montana whose primary tenant was IBM Corporation ("IBM") for $4,800. Net of closing costs, the Group received cash proceeds of $1,741 and assigned a mortgage loan obligation of $2,854 and accrued interest of $12 thereon to the purchaser. A gain of $90 was recognized on the sale. All of the Group's leases at the Helena property, including the IBM lease, were assigned to the purchaser. In April 1996, the Group sold its warehouse property in Hodgkins, Illinois leased to GATX Logistics, Inc. ("GATX") for $13,200 and assigned the GATX lease to the purchaser. Net of the costs of sale and amounts necessary to satisfy the $3,209 balance on the mortgage loan collateralized by the Hodgkins property, the Group received cash proceeds of $9,661 and recognized a gain of $4,408. The Group used $7,477 of the cash proceeds from the Hodgkins sale to satisfy two mortgage loan obligations which were scheduled to mature in 1996. In 1985, the Group purchased a hotel in Rapid City, South Dakota, which it operated as a Holiday Inn, with $6,800 of tax-exempt bonds which were supported by a letter of credit issued by a third party. In September 1994, the Group was advised by Holiday Inn that it would need to upgrade the hotel's physical plant by January 1997 in order to meet the requirements of a modernization plan adopted by Holiday Inn or surrender its Holiday Inn license. As the cost of such upgrade was estimated to be $1,925 Management concluded that such additional investment would not justify compliance with the modernization plan. Although Management was considering an affiliation with another national hotel chain, earnings were expected to decline after any change in affiliation. In 1995, under an agreement with the issuer of the letter of credit supporting the $6,800 tax-exempt mortgage bond on the Rapid City property, the Group agreed to use its best efforts to sell the hotel property in exchange for an extension of the letter of credit from October 1995 to October 1997. Annual cash flow from F-48 238 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) the hotel (hotel earnings, adjusted for depreciation and amortization, less debt service on the tax-exempt bonds) for 1995, the last full year of operations, was $305. In 1995, the Group reevaluated the net realizable value of the property and recognized a noncash charge of $1,000. In 1996, the Group recognized an additional charge of $1,300 as a writedown to net realizable value to an amount Management believed would approximate the proceeds from a sale. In October 1996, the Group sold the property and the operating assets and liabilities of the hotel for $4,105. The Group recognized a gain of $785 on the sale. The bond was paid off by utilizing the net proceeds from the sale, $302 of cash and various escrow accounts which had been held by the bond trustee or issuer of the letter of credit. The gain includes the recognition of the release of unamortized deferred gains relating to the acquisition of the hotel operation in 1991 from the former lessee. 1995 In December 1995, the Group sold the food service facility in Jupiter, Florida, at which it operated a restaurant, for $4,140, recognizing a gain on the sale of $1,019. In June 1995, the Group sold its property in Allentown, Pennsylvania, which it purchased in June 1983 for $11,702, to its lessee, Genesco, Inc. ("Genesco") for $15,200 and recognized a gain on the sale of $3,330, net of certain costs. In connection with the sale, the Group paid off an existing limited recourse mortgage loan on the Genesco property for $5,723. In August 1985, the Group purchased from and net leased to Industrial General Corporation ("IGC") and certain of its wholly-owned subsidiaries, seven properties located in Elyria and Bellville, Ohio, Forrest City and Bald Knob, Arkansas, Carthage, New York, Saginaw, Michigan and Newburyport, Massachusetts for $9,100. Subsequent to the purchase, the Group agreed to exchange the Saginaw property for an expansion of the Newburyport facility, severed the Carthage property from the lease and entered into a lease with FMP/Rauma Group ("FMP") and sold the Forrest City property. On July 28, 1995, IGC filed a voluntary petition of bankruptcy under Chapter 11 of the United States Bankruptcy Code. In connection with IGC's sale of its plastics division, on September 14, 1995, the Group entered into a series of transactions which resulted in the termination of the IGC lease, the sale of the Bald Knob, Bellville and Newburyport properties and the full satisfaction of the mortgage loan obligation collateralized by all of the IGC properties and the FMP property which had been scheduled to mature on September 1, 1995. In connection with the sale of the Bald Knob property to IGC, the Group received cash of $987 and IGC, with the consent of the mortgage lender, assumed the Group's mortgage obligation of $720 and accrued interest of $6. Additionally, the Group is scheduled to receive an additional $200 from IGC over an eight-month period commencing in 1996. The Bellville and Newburyport properties were sold for $2,400 in cash to the third party which acquired the assets of the IGC plastics division. The Group used $2,200 of the proceeds to pay off the remaining balance on the matured mortgage loan obligation on the IGC and FMP properties. In connection with the sale of the three properties, the Group realized a loss of $1,720 in 1995. In December 1994, the Group also sold the Forrest City property for $650 and realized a loss of $887 on such sale in 1994. In January 1984, the Group purchased properties in Gordonsville, Virginia and in North Bergen, New Jersey for $7,000 and entered into a net lease with Liberty Fabrics of New York ("Liberty"). In December 1993, Liberty notified the Group of its intention to exercise its purchase option on the properties. Pursuant to the lease, the purchase price would be the greater of $7,000 or fair market value as encumbered by the lease. On October 18, 1994, Liberty filed suit to compel the Group to transfer title of the properties to Liberty for $9,359, the fair market value which had been determined pursuant to the purchase option appraisal process. Because the Group believed fair market value of the properties exceeded $9,359, Management challenged the Liberty suit to seek a higher purchase price. On December 29, 1994, the Group and Liberty terminated the lease and agreed that the properties would be transferred to Liberty for $9,359, subject to a final determination of the fair value of the property. If the fair market value was determined to be greater than $9,359, Liberty F-49 239 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) would have the right within 30 days of the determination to rescind the transfer, in which case all proceeds would be returned to Liberty, title of the properties transferred back to the Group and Liberty would pay all rents in arrears for the period from the initial transfer of title to Liberty. In January 1996, the Court ruled in favor of Liberty. As a result of this ruling, Liberty no longer had the right to rescind the transaction. Accordingly, the Group recognized a gain in 1995 on the sale of the properties of $2,334. 1994 In November 1994, Pace Membership Warehouse, Inc. ("Pace"), a former subsidiary of Kmart corporation ("Kmart"), purchased a property in Tampa, Florida owned by the Group and a property owned by CPA(R) 10 in Des Moines, Iowa for an aggregate purchase price of $14,150. In connection with Kmart's sale of Pace's business operations in 1994, the acquirer did not assume the operations at the Pace properties. Based on the provisions in the Pace leases, the Group and CPA(R):10 were able to negotiate the sale of the properties. Pursuant to a fairness opinion performed by an independent investment banking firm, $7,000 of the purchase price was allocated to the Group. A portion of the Group's proceeds from the sale were used to satisfy the remaining $3,290 mortgage balance on the Tampa property. In connection with the sale, the Group recognized a gain of $2,028, net of certain costs. In October 1994, the Group sold its properties leased to Mid-Continent Bottlers, Inc.'s ("Mid-Continent") to the lessee for $17,800 and sold the Group's 3.29% limited partnership interest in Midcon Bottlers, L.P., an affiliate of Mid-Continent, for $700. In connection with the sales, the Group recognized gains of $7,814 and $683, respectively. The Group used $3,895 of the sales proceeds to satisfy the Mid-Continent mortgage loan. In addition, the Group used a portion of the proceeds to prepay certain mortgage loans on properties which remain subject to leases. Proceeds from the Genesco, Pace and Mid-Continent sales were used to fund special distributions to partners of $13,334 in 1995. 13. EXTRAORDINARY GAINS AND LOSSES ON EXTINGUISHMENT OF DEBT 1996 In 1996, the Group obtained $6,400 of new limited recourse mortgage financing on one of its properties leased to The Gap, Inc. (the "Gap"). Proceeds from the mortgage financing were used to pay off the remaining balance of $6,195 on an existing mortgage loan on the Gap property, certain refinancing costs and prepayment charges of $255. The prepayment charges have been reflected as an extraordinary charge on the extinguishment of debt in the accompanying combined financial statements. The new mortgage loan is a limited recourse obligation and is collateralized by a deed of trust and a lease assignment. The loan bears interest at 7.25% per annum and provides for monthly payments of principal and interest of $58 based on a 15-year amortization schedule. The retired mortgage loan provided for quarterly payments of $211 at an annual interest rate of 10%. The new mortgage loan has a term of three years and a balloon payment of $5,608 will be due on the maturity date, May 1, 1999. 1995 In connection with the sale of its property in Jupiter, Florida in December 1995, the Group satisfied the mortgage notes collateralized by the Jupiter property. Under a prior agreement, certain principal and interest payments were deferred through 1995. The prior agreement provided that the payment of deferred amounts would be forgiven under certain circumstances including the payment in full of all other amounts due under the mortgage notes. At the time of sale, the Group paid all amounts due and met the conditions for forgiveness of the deferred amounts. Accordingly, the Group recognized an extraordinary gain of $1,324 on the extinguishment of debt on the satisfaction of the Jupiter property mortgage notes. F-50 240 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The Group recognized a gain on the satisfaction of the mortgage loan collateralized by the property leased to Anthony's Manufacturing Company, Inc. ("Anthony's"). In May 1995, the Group paid off and satisfied the mortgage loan collateralized by the Anthony's properties. The lender accepted payments aggregating $5,440 to satisfy an outstanding principal balance of $6,854 and accrued interest thereon of $705. In connection with the satisfaction of the debt, the Group recognized an extraordinary gain on the extinguishment of debt of $2,088, net of certain related legal costs. To pay off the mortgage obligation, the Group used the $1,550 received from Anthony's under a settlement agreement. 1994 In December 1994, using, in part, proceeds from the Mid Continent sale, the Group paid off mortgage loans on three other properties with a combined outstanding balance of $8,376. In connection with paying the mortgages, the Group paid prepayment charges of $470 and wrote off unamortized financing costs of $42 and recognized an extraordinary loss of $512. In June 1990, the Group purchased land and buildings in Detroit and Redford, Michigan for $31,500, of which $24,000 was financed by a limited recourse mortgage loan, and entered into a net lease with an initial lease term of twenty years with Detroit Diesel Corporation ("Detroit Diesel"). The mortgage loan provided for quarterly interest only payments at an annual rate of 11.28% with payments of principal commencing on December 15, 1995. On May 25, 1994, the Group prepaid the existing $24,000 mortgage loan and obtained $25,000 of new mortgage financing. The new mortgage loan bears interest at the rate of 7.16% per annum and provided for quarterly interest only payments of $448 through December 15, 1995 at which time quarterly interest and principal payments of $690 commenced and which are payable through June 15, 2010 at which time the loan will be fully amortized. Pursuant to the Detroit Diesel lease, Detroit Diesel was entitled to a rent reduction equal to 70% of any benefit realized from the refinancing of the mortgage loan in exchange for its paying 70% of the costs incurred in connection with any such refinancing other than prepayment premiums. In lieu of paying any refinancing costs, Detroit Diesel consented to allowing the Group to refinance the mortgage debt for $1,000 in excess of the original mortgage financing and for the Group to keep any proceeds which remained after prepaying the original mortgage loan and paying prepayment charges and the financing costs of the new loan. The Detroit Diesel lease was amended so that rentals under the lease reflect the refinancing benefits. Although gross rents under the lease decreased, total equity rents (i.e., rent, net of debt service requirements) over the remaining initial term are scheduled to increase by approximately $2,804. In connection with paying off the original mortgage loan, the Group incurred an extraordinary charge on the extinguishment of debt as a result of paying a prepayment charge of $600. 14. WRITEDOWNS TO NET REALIZABLE VALUE SIGNIFICANT WRITEDOWNS OF PROPERTIES TO NET REALIZABLE VALUE ARE SUMMARIZED AS FOLLOWS: As described in Note 16, Simplicity Manufacturing, Inc. ("Simplicity") notified the Group that it was exercising its option to purchase the property it leases from the Group in Port Washington, Wisconsin on April 1, 1998. Although the appraisal process has not yet been completed, the Group has concluded that it is not likely that the agreed-upon exercise price will be in excess of the minimum exercise price of $9,684. Accordingly, the Group has recognized a noncash charge of $2,316 in 1997 on the writedown of the property to its estimated net realizable value of $9,684. The Group owns two properties in Sumter and Columbia, South Carolina leased to Arley Merchandise Corporation ("Arley"). A limited recourse mortgage loan of $4,765, collateralized by the properties and an assignment of the Arley lease, matured in January 1993. The Group and the lender entered into a forbearance F-51 241 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) agreement at that time and attempted to reach an agreement to restructure the loan. Such agreement was not reached and the forbearance agreement expired in July 1995. In May 1997, the lender made a demand for payment of the entire outstanding principal balance of the loan. Although the Group made certain offers to the lender, the lender rejected such offers and, in June 1997, the lender initiated a lawsuit for the purpose of foreclosing on the Arley properties. The Group is evaluating whether it will contest the foreclosure action. In connection with such foreclosure the Group has estimated that the fair value of the Arley properties is approximately $3,940 and has recorded a change of $1,350 on the writedown of the Arley properties to their estimated net realizable value. As the loan is limited recourse, the lender's sole recourse is to the Arley properties. The Group owned a hotel property in Rapid City, South Dakota which it sold in October 1996. As more fully described in Note 12, the Group reevaluated the net realizable value of the property in 1995 and recognized a noncash charge of $1,000 on the writedown. An additional noncash charge of $1,300 was recorded in 1996. In connection with the sale of the IGC properties as described in Note 12, the Group retained ownership of a property in Elyria, Ohio and has written off its carrying value of $692 in 1995. In January 1991, the Group and CPA(R):10 formed a limited partnership, Hope Street Connecticut Limited Company ("Hope Street"), for the purpose of purchasing land and an office building in Stamford, Connecticut for $11,000. The Group contributed $1,500 to Hope Street for a 31.915% limited partnership interest and CPA(R):10 contributed $3,200 for a 68.085% general partnership interest. Hope Street used this equity and assumed an existing limited recourse mortgage loan of $6,300 collateralized by the property and also assumed an existing net lease, as lessor, with Xerox Corporation ("Xerox"), as lessee. The Xerox lease provided for annual rent of $1,300 with an initial term through August 31, 1995 and two five-year renewal terms at Xerox's option. The mortgage loan was an interest only obligation with annual debt service of $639 and was scheduled to mature on September 1, 1995 with a balloon payment of $6,300 due at that time. In August 1995, Xerox vacated the property at the end of the initial term. Hope Street was unsuccessful in its efforts to remarket the property and find a new lessee even at a substantially lower annual rental. Based on its assessment of current conditions for the Stamford market, the general partner concluded that the net realizable value of the property was less than the outstanding balance of the mortgage loan. Given these circumstances, the general partner considered various alternatives, including negotiating with the lender to extend the maturity, restructure the loan or satisfy the balloon payment obligation at a substantial discount. All of these alternatives were rejected by the lender. Since the Group does not anticipate receiving any further cash distributions from Hope Street nor does the Group have any obligation to Hope Street, the Group wrote off its remaining equity investment in Hope Street and recognized a charge of $1,173 in 1995. The Group owns three properties located in Reno, Nevada; Bridgeton, Missouri and Moorestown, New Jersey. On April 1, 1993, the lessee, New Valley Corporation ("New Valley"), filed a petition of voluntary bankruptcy seeking reorganization under Chapter 11 of the United States Bankruptcy Code. In connection with the bankruptcy filing, the Bankruptcy Court approved New Valley's termination of its lease with the Group for the Moorestown, New Jersey property in May 1993. In 1993, the Group wrote down the Moorestown property to its estimated net realizable value of $2,960 and recognized a charge of $2,144 on the writedown. In December 1994, the Bankruptcy Court also approved the termination of New Valley's lease on the Reno property effective December 31, 1994. In connection with the lease termination, the Group recognized a charge of $1,143 and wrote down the Reno property in 1994 to its estimated net realizable value of $3,295. In 1994, the Group entered into contracts to sell two properties formerly leased to NVRyan L.P. ("NVRyan") in Jefferson, Georgia and Fredricksburg, Virginia, respectively. As the proposed purchase prices were in excess of the carrying value of such properties, the Group recognized charges of $1,746 and wrote F-52 242 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) down the Jefferson and Fredricksburg properties to an amount equal to the anticipated sales proceeds. In addition the Group recognized a charge of $1,089 in 1993 on the writedown of a property in Plant City, Florida formerly leased to NVRyan to the anticipated sales proceeds when the lessee of the property informed the Group of its intention to exercise its purchase option. The Jefferson and Plant City properties were sold in 1994 with no gain or loss recognized at the time of sale. The sale of the Fredricksburg property was not completed. In addition, the Group has written down properties held for sale to an amount equal to the estimated sales proceeds when such amount is less than the carrying value of such property. 15. EXCHANGE TRANSACTION The Group purchased a hotel property in Kenner, Louisiana, in June 1988. The Group assumed operating control of the hotel in 1992 after evicting the lessee due to its financial difficulties. On July 30, 1996, the Group completed a transaction with American General Hospitality Operating Partnership L.P. (the "Operating Partnership"), the operating partnership of a newly-formed real estate investment trust, American General Hospitality Corporation, ("AGH"), in which the Group received 920,672 limited partnership units in exchange for the hotel property and its operations. In connection with the exchange the Group and the Operating Partnership assumed the mortgage loan obligation collateralized by the hotel property of $7,304. AGH owns an 81.3% equity interest in the Operating Partnership. The exchange of the hotel property for limited partnership units was treated as a nonmonetary exchange for tax and financial reporting purpose. The Group's interest in the Operating Partnership is being accounted for under the equity method. After one year, the Group will have the right to convert its equity interest in the Operating Partnership to shares of common stock in AGH on a one-for-one basis. AGH completed an initial public offering during 1996. The Partnership's carrying value for the limited partnership units at the time of the exchange of $9,292 was based on the historical basis of assets transferred, net of liabilities assumed by the Operating Partnership; cash contributed and costs incurred to complete the exchange. As of December 31, 1996, the audited consolidated financial statements of AGH reported total assets of $243,115 and shareholders' equity of $127,461 and for the period from July 31, 1996 to December 31, 1996 revenues of $13,496, income before minority interest of $6,326 and net income of $5,129. As of August 6, 1997, AGH's quoted per share market value was 27 1/8 resulting in an aggregate value of approximately $24,973. The carrying value of the equity interest in the Operating Partnership as of December 31, 1996 was $9,612. For the period from July 31, 1996 to December 31, 1996, and for the six months ended June 30, 1997, the Group's share of the Operating Partnership's earnings were $572 and $731, respectively. Between January 1995 and July 1996, the Group had engaged an affiliate of AGH to manage the operations of Kenner on their behalf. Such affiliate is currently engaged to manage the operations of three of the Group's hotel properties. 16. REAL ESTATE HELD FOR SALE In September 1996, the Group entered into a purchase and sale agreement for the sale of the Group's property in Louisville, Kentucky, leased to Winn-Dixie Stores, Inc. ("Winn-Dixie") for $1,100 less selling costs, which includes a 5% brokerage commission. The Winn-Dixie lease is scheduled to expire in December 1999. The carrying value of the Winn-Dixie property at June 30, 1997 was $434. The property was sold in August 1997, at which time the Group received $995 after selling costs. In March 1997, Simplicity Manufacturing, Inc. ("Simplicity") notified the Group that it was exercising its option to purchase the property it leases from the Group in Port Washington, Wisconsin on April 1, 1998. The option price will be the greater of $9,684 or fair market value, capped at $12,000. An appraisal process to determine fair market value has commenced. After paying the limited recourse mortgage loan, the Group will realize cash proceeds of up to $7,678 and no less than $5,362, before any selling costs. Annual cash flow from F-53 243 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) the property (rent less mortgage debt service on the property) is $934. The carrying value of the Simplicity property at June 30, 1997 was $9,684. In December 1996, KSG, Inc. ("KSG") notified the Group that it was exercising its option to purchase the property it leases in Hazelwood, Missouri. The exercise price will be the greater of $4,698 (the Group's purchase price for the property in March 1987) and fair market value as encumbered by the lease. The option provides that the sale of the property occur no later than March 8, 1998. An appraisal process to determine fair market value has commenced. Annual cash flow from the KSG property is approximately $820. The carrying value of the KSG property at June 30, 1997 was $4,698. 17. ENVIRONMENTAL MATTERS Substantially all of the Group's properties, other than the hotel properties, are currently leased to corporate tenants, all of which are subject to environmental statutes and regulations regarding the discharge of hazardous materials and related remediation obligations. The Group generally structures a lease to require the tenant to comply with all laws. In addition, substantially all of the Group's net leases include provisions which require tenants to indemnify the Group from all liabilities and losses related to their operations at the leased properties. The costs for remediation, which are expected to be performed and paid by the affected tenant, are not expected to be material. In the event that the Group absorbs a portion of any costs because of a tenant's failure to fulfill its obligations, Management believes such expenditures will not have a material adverse effect on the Group's financial condition, liquidity or results of operations. In 1994, based on the results of Phase I environmental reviews performed in 1993, the Group voluntarily conducted Phase II environmental reviews on certain of its properties. The Group believes, based on the results of Phase I and Phase II reviews, that its leased properties are in substantial compliance with Federal and state environmental statutes and regulations. Portions of certain properties, which do not include any of the hotel properties, have been documented as having a limited degree of contamination, principally in connection with surface spills from facility activities and leakage from underground storage tanks. For those conditions which were identified, the Group has advised the affected tenants of the Phase II findings and of their obligations to perform required remediation. 18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short maturity of these items. The Group estimates that the fair value of mortgage notes payable and other notes payable approximates the carrying amounts for such loans at December 31, 1996. The fair value of debt instruments was evaluated using a discounted cash flow model with discount rates which take into account the credit of the tenants and interest rate risk. F-54 244 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1996
INITIAL COST COST INCREASE TO COMPANY CAPITALIZED (DECREASE) --------------------------- SUBSEQUENT TO IN NET DESCRIPTION ENCUMBRANCES LAND BUILDINGS ACQUISITION(a) INVESTMENT(b) - ----------------------------------------------- ------------ ----------- ------------ -------------- ------------- Operating Method: Office, warehouse and manufacturing buildings leased to Broomfield Tech Center Corporation................................... $ 2,250,640 $ 354,970 $ 3,073,575 $ 559,647 Office and manufacturing buildings leased to IMO Industries Inc. .......................... 2,485,302 685,026 2,006,559 2,617,652 Office and manufacturing buildings formerly leased to IMO Industries, Inc. ............... 221,474 448,641 4,384 $ (38,155) Distribution facilities and warehouses leased to The Gap, Inc. ............................. 6,259,172 1,363,909 19,065,813 225,569 Supermarkets leased to Winn-Dixie Stores, Inc. ......................................... 191,942 904,589 6,749,989 111,880 Land leased to Kobacker Stores, Inc. .......... 395,944 1,236,735 (176,112) Warehouse and manufacturing plant leased to Pre Finish Metals Incorporated.................... 2,347,677 636,000 16,470,208 33,652 Retail store in Greensboro, North Carolina..... 40,946 186,926 14,508 Retail store in New Orleans, Louisiana......... 129,065 188,599 15,776 Retail stores on adjacent sites leased to Kinko's of Ohio, Inc. and Color Tile, Inc. ... 47,350 581,034 10,795 Warehouse and distribution center leased to, Maybelline, Inc., and B&G Contract Packaging, Inc. ......................................... 216,000 3,048,862 25,103 Land leased to Unisource Worldwide, Inc. ...... 2,278,415 3,575,000 Centralized telephone bureau leased to Excel Telecommunications, Inc. ..................... 1,139,600 3,379,679 505,662 (1,230,690) Building leased to Sports & Recreation, Inc. ......................................... 677,600 4,908,238 (2,625,838) Dairy processing facility leased to Hughes Markets, Inc. ................................ 2,029,682 9,699,041 26,000 Office building in Beaumont, Texas leased to Petrocon Engineering, Inc. ................... 510,000 4,490,000 612,462 (4,346,960) Office, manufacturing and warehouse buildings leased to Continental Casualty Company........ 1,311,193 1,800,000 6,710,638 105,000 Warehouse and distribution center leased to Family Dollar Stores, Inc. ................... 946,865 291,540 5,708,460 153,179 Manufacturing facilities leased to Arley Merchandise Corporation....................... 4,754,940 256,000 7,544,000 8,555 GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD(c)(d) ------------------------------------------- ACCUMULATED DESCRIPTION LAND BUILDINGS TOTAL DEPRECIATION DATE ACQUIRED - ----------------------------------------------- ----------- ------------ ------------ ----------- -------------------- Operating Method: Office, warehouse and manufacturing buildings leased to Broomfield Tech Center Corporation................................... $ 354,970 $ 3,633,222 $ 3,988,192 $2,194,402 November 17, 1978 Office and manufacturing buildings leased to IMO Industries Inc. .......................... 685,026 4,624,211 5,309,237 2,391,393 April 20, 1979 Office and manufacturing buildings formerly leased to IMO Industries, Inc. ............... 183,319 453,025 636,344 453,025 April 20, 1979 Distribution facilities and warehouses leased July 6, 1979 and to The Gap, Inc. ............................. 1,363,909 19,291,382 20,655,291 10,590,278 February 16, 1988 March 12, 1984, June 17, 1987, March 17 & Supermarkets leased to Winn-Dixie Stores, 21, 1988, and Inc. ......................................... 904,589 6,861,869 7,766,458 2,069,929 October 26, 1990 Land leased to Kobacker Stores, Inc. .......... 1,060,623 1,060,623 January 17, 1979 Warehouse and manufacturing plant leased to Pre December 11, 1980 Finish Metals Incorporated.................... 636,000 16,503,860 17,139,860 8,382,550 and June 30, 1986 Retail store in Greensboro, North Carolina..... 40,946 201,434 242,380 139,023 September 2, 1980 Retail store in New Orleans, Louisiana......... 129,065 204,375 333,440 144,842 January 5, 1981 Retail stores on adjacent sites leased to Kinko's of Ohio, Inc. and Color Tile, Inc. ... 47,350 591,829 639,179 415,828 October 1, 1980 Warehouse and distribution center leased to, Maybelline, Inc., and B&G Contract Packaging, Inc. ......................................... 216,000 3,073,965 3,289,965 1,608,633 April 9, 1981 Land leased to Unisource Worldwide, Inc. ...... 3,575,000 3,575,000 April 29, 1980 Centralized telephone bureau leased to Excel Telecommunications, Inc. ..................... 1,139,600 2,654,651 3,794,251 143,692 November 24, 1981 Building leased to Sports & Recreation, Inc. ......................................... 359,068 2,600,932 2,960,000 325,117 November 24, 1981 Dairy processing facility leased to Hughes Markets, Inc. ................................ 2,055,682 9,699,041 11,754,723 6,440,728 June 1, 1983 Office building in Beaumont, Texas leased to Petrocon Engineering, Inc. ................... 278,801 986,701 1,265,502 498,078 August 11, 1983 Office, manufacturing and warehouse buildings leased to Continental Casualty Company........ 1,800,000 6,815,638 8,615,638 5,115,164 October 20, 1983 Warehouse and distribution center leased to Family Dollar Stores, Inc. ................... 291,540 5,861,639 6,153,179 2,069,770 December 16, 1983 Manufacturing facilities leased to Arley Merchandise Corporation....................... 256,000 7,552,555 7,808,555 2,391,593 July 13, 1984 LIFE ON WHICH DEPRECIATION IN LATEST STATEMENT OF INCOME DESCRIPTION IS COMPUTED - ----------------------------------------------- ------------- Operating Method: Office, warehouse and manufacturing buildings leased to Broomfield Tech Center Corporation................................... 10-30 yrs. Office and manufacturing buildings leased to IMO Industries Inc. .......................... 17 yrs. Office and manufacturing buildings formerly leased to IMO Industries, Inc. ............... 17 yrs. Distribution facilities and warehouses leased to The Gap, Inc. ............................. 5-50 yrs. Supermarkets leased to Winn-Dixie Stores, Inc. ......................................... 5-40 yrs. Land leased to Kobacker Stores, Inc. .......... Warehouse and manufacturing plant leased to Pre Finish Metals Incorporated.................... 5-30 yrs. Retail store in Greensboro, North Carolina..... 15-35 yrs. Retail store in New Orleans, Louisiana......... 15-35 yrs. Retail stores on adjacent sites leased to Kinko's of Ohio, Inc. and Color Tile, Inc. ... 15-35 yrs. Warehouse and distribution center leased to, Maybelline, Inc., and B&G Contract Packaging, Inc. ......................................... 30 yrs. Land leased to Unisource Worldwide, Inc. ...... Centralized telephone bureau leased to Excel Telecommunications, Inc. ..................... 30 yrs. Building leased to Sports & Recreation, Inc. ......................................... 30 yrs. Dairy processing facility leased to Hughes Markets, Inc. ................................ 5-36 yrs. Office building in Beaumont, Texas leased to Petrocon Engineering, Inc. ................... 30 yrs. Office, manufacturing and warehouse buildings leased to Continental Casualty Company........ 10-40 yrs. Warehouse and distribution center leased to Family Dollar Stores, Inc. ................... 30 yrs. Manufacturing facilities leased to Arley Merchandise Corporation....................... 30 yrs.
F-55 245 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
INITIAL COST TO COST INCREASE COMPANY CAPITALIZED (DECREASE) --------------------------- SUBSEQUENT TO IN NET DESCRIPTION ENCUMBRANCES LAND BUILDINGS ACQUISITION(a) INVESTMENT(b) - ----------------------------------------------- ------------ ----------- ------------ -------------- ------------- Operating Method -- (Continued): Manufacturing and office buildings leased to Penn Virginia Corporation..................... 453,192 3,246,808 3,112 Land leased to Exide Electronics Corporation... 1,170,000 Motion picture theaters leased to Harcourt General Corporation........................... 2,039,908 1,387,000 5,113,000 36,459 Office and research facility leased to Gould, Inc. ......................................... 1,422,000 8,418,500 34,587 Office/Manufacturing facility in leased to Inno Tech Industries, Inc. ........................ 122,884 568,756 (691,640) Office facility leased to Motorola, Inc. ...... 2,187,829 387,000 3,981,000 11,455 Warehouse and manufacturing facility leased to Martin Marietta Corporation................... 398,475 2,590,092 26,491 Warehouse and office facility leased to Kinney Shoe Corporation/Armel, Inc. ................. 261,060 1,360,935 3,899,415 8,000 Manufacturing and office facility leased to Yale Security, Inc. .......................... 1,884,503 300,000 3,400,000 Manufacturing facilities leased to AP Parts Manufacturing Company, Inc. .................. 5,736,608 443,500 11,256,500 1,733,087 Manufacturing facilities leased to Anthony's Manufacturing Company, Inc. .................. 3,200,000 8,300,000 Manufacturing facilities leased to Swiss M-Tex, L.P. ......................................... 1,714,176 420,440 4,379,560 1,300 (127,721) Land leased to AutoZone, Inc. ................. 3,234,924 7,199,219 60,795 (206,920) Retail stores formerly leased to Yellow Front Stores, Inc. ................................. 4,934,160 3,897,549 329,838 (2,238,493) Office facility leased to NYNEX................ 275,363 1,955,820 24,093 Land leased to Sybron Acquisition Company...... 424,604 742,246 4,230 Office facility leased to Advanced System Applications, Inc., and United States Postal Service....................................... 298,417 1,484,340 14,835,661 57,244 610,000 Manufacturing and office facility leased to Allied Plywood, Inc. ......................... 661,196 1,932,997 13,383 GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD(c)(d) ------------------------------------------- ACCUMULATED DESCRIPTION LAND BUILDINGS TOTAL DEPRECIATION DATE ACQUIRED - ----------------------------------------------- ----------- ------------ ------------ ----------- -------------------- Operating Method -- (Continued): Manufacturing and office buildings leased to Penn Virginia Corporation..................... 453,192 3,249,920 3,703,112 2,391,080 August 7, 1984 Land leased to Exide Electronics Corporation... 1,170,000 1,170,000 N/A June 20, 1985 Motion picture theaters leased to Harcourt July 17, 1985 and General Corporation........................... 1,387,000 5,149,459 6,536,459 1,855,848 July 31, 1986 Office and research facility leased to Gould, Inc. ......................................... 1,423,875 8,451,212 9,875,087 3,125,698 November 25, 1985 Office/Manufacturing facility in leased to Inno Tech Industries, Inc. ........................ August 30, 1985 Office facility leased to Motorola, Inc. ...... 387,000 3,992,455 4,379,455 1,469,228 December 23, 1985 Warehouse and manufacturing facility leased to Martin Marietta Corporation................... 401,541 2,613,517 3,015,058 925,009 May 15, 1986 Warehouse and office facility leased to Kinney Shoe Corporation/Armel, Inc. ................. 1,360,935 3,907,415 5,268,350 1,340,471 September 17, 1986 Manufacturing and office facility leased to Yale Security, Inc. .......................... 300,000 3,400,000 3,700,000 85,000 August 13, 1985 Manufacturing facilities leased to AP Parts Manufacturing Company, Inc. .................. 443,500 12,989,587 13,433,087 3,815,719 December 23, 1986 Manufacturing facilities leased to Anthony's Manufacturing Company, Inc. .................. 3,200,000 8,300,000 11,500,000 2,725,001 February 24, 1987 Manufacturing facilities leased to Swiss M-Tex, L.P. ......................................... 292,719 4,380,860 4,673,579 1,362,919 August 24, 1987 January 17 & May 2, 1986 August 24, 1987 Land leased to AutoZone, Inc. ................. 7,053,094 7,053,094 & August 24, 1988 Retail stores formerly leased to Yellow Front Stores, Inc. ................................. 3,332,294 3,590,760 6,923,054 801,945 January 29, 1988 Office facility leased to NYNEX................ 275,363 1,979,913 2,255,276 588,475 January 29, 1988 Land leased to Sybron Acquisition Company...... 746,476 746,476 December 22, 1988 Office facility leased to Advanced System Applications, Inc., and United States Postal Service....................................... 1,485,075 15,502,170 16,987,245 4,107,715 September 29, 1988 Manufacturing and office facility leased to Allied Plywood, Inc. ......................... 661,627 1,945,949 2,607,576 210,811 March 31, 1989 LIFE ON WHICH DEPRECIATION IN LATEST STATEMENT OF INCOME DESCRIPTION IS COMPUTED - ----------------------------------------------- ------------- Operating Method -- (Continued): Manufacturing and office buildings leased to Penn Virginia Corporation..................... 5-30 yrs. Land leased to Exide Electronics Corporation... Motion picture theaters leased to Harcourt General Corporation........................... 30 yrs. Office and research facility leased to Gould, Inc. ......................................... 30 yrs. Office/Manufacturing facility in leased to Inno Tech Industries, Inc. ........................ N/A Office facility leased to Motorola, Inc. ...... 30 yrs. Warehouse and manufacturing facility leased to Martin Marietta Corporation................... 30 yrs. Warehouse and office facility leased to Kinney Shoe Corporation/Armel, Inc. ................. 30 yrs. Manufacturing and office facility leased to Yale Security, Inc. .......................... 30 yrs. Manufacturing facilities leased to AP Parts Manufacturing Company, Inc. .................. 30 yrs. Manufacturing facilities leased to Anthony's Manufacturing Company, Inc. .................. 30 yrs. Manufacturing facilities leased to Swiss M-Tex, L.P. ......................................... 30 yrs. Land leased to AutoZone, Inc. ................. N/A Retail stores formerly leased to Yellow Front Stores, Inc. ................................. 30 yrs. Office facility leased to NYNEX................ 30 yrs. Land leased to Sybron Acquisition Company...... N/A Office facility leased to Advanced System Applications, Inc., and United States Postal Service....................................... 30 yrs. Manufacturing and office facility leased to Allied Plywood, Inc. ......................... 30 yrs.
F-56 246 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
INITIAL COST TO COST INCREASE COMPANY CAPITALIZED (DECREASE) --------------------------- SUBSEQUENT TO IN NET DESCRIPTION ENCUMBRANCES LAND BUILDINGS ACQUISITION(a) INVESTMENT(b) - ----------------------------------------------- ------------ ----------- ------------ -------------- ------------- Operating Method -- (Continued): Manufacturing and office in Fredericksburg, Virginia...................................... 87,936 1,110,847 3,458 (456,203) Manufacturing facilities leased to Amerisig, Inc. ......................................... 10,248,140 3,957,645 15,961,355 13,782 Land leased to High Voltage Engineering Corporation................................... 805,487 1,720,000 1,601 Manufacturing facility leased to Mayfair Molded Products Corporation.......................... 793,325 2,456,675 4,356 Distribution and office facilities leased to Federal Express Corporation................... 394,544 2,102,456 49,041 Land leased to Dr Pepper Bottling Company of Texas......................................... 4,586,706 7,351,740 34,370 Manufacturing facilities leased to Furon Company....................................... 12,542,043 4,187,766 19,104,746 127,177 (1,551,221) Manufacturing facility leased to Detroit Diesel Corporation................................... 23,745,378 4,986,450 26,513,550 8,130 Engineering and Fabrication Facility leased to Orbital Sciences Corporation.................. 8,587,426 3,675,966 7,757,081 5,976,705 Land leased to NVRyan L.P. .................... 2,377,669 3,342,854 23,850 Distribution facility leased to PepsiCo........ 156,327 829,488 15,075 Land leased to Childtime Childcare, Inc. ...... 528,164 1,170,448 Land and building leased to General Electric Company....................................... 3,386,923 1,253,772 6,519,634 Hotel complex leased to Hotel Corporation of America....................................... 8,569,627 762,839 8,241,162 ------------ ----------- ------------ ----------- ------------ $116,381,682 $76,319,048 $262,632,914 $ 13,631,443 $(13,079,953) ============ =========== ============ =========== ============ GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF PERIOD(c)(d) ------------------------------------------- ACCUMULATED DESCRIPTION LAND BUILDINGS TOTAL DEPRECIATION DATE ACQUIRED - ----------------------------------------------- ----------- ------------ ------------ ----------- -------------------- Operating Method -- (Continued): Manufacturing and office in Fredericksburg, March 31 and Virginia...................................... 54,566 691,472 746,038 75,161 December 29, 1989 Manufacturing facilities leased to Amerisig, Inc. ......................................... 3,961,025 15,971,757 19,932,782 4,072,514 June 24, 1988 Land leased to High Voltage Engineering Corporation................................... 1,721,601 1,721,601 N/A November 10, 1988 Manufacturing facility leased to Mayfair Molded Products Corporation.......................... 794,388 2,459,968 3,254,356 661,365 December 8, 1988 Distribution and office facilities leased to March 24 and June Federal Express Corporation................... 401,526 2,144,515 2,546,041 541,376 30, 1989 Land leased to Dr Pepper Bottling Company of Texas......................................... 7,386,110 7,386,110 N/A June 30, 1989 Manufacturing facilities leased to Furon Company....................................... 3,863,089 18,005,379 21,868,468 4,154,768 January 29, 1990 Manufacturing facility leased to Detroit Diesel Corporation................................... 4,987,737 26,520,393 31,508,130 5,782,813 June 15, 1990 Engineering and Fabrication Facility leased to Orbital Sciences Corporation.................. 3,676,492 13,733,260 17,409,752 2,850,054 September 29, 1989 Land leased to NVRyan L.P. .................... 3,366,704 3,366,704 May 16, 1989 Distribution facility leased to PepsiCo........ 158,717 842,173 1,000,890 200,045 November 16, 1989 Land leased to Childtime Childcare, Inc. ...... 1,170,448 1,170,448 January 4, 1991 Land and building leased to General Electric Company....................................... 1,253,772 6,519,634 7,773,406 1,745,123 December 21, 1988 Hotel complex leased to Hotel Corporation of America....................................... 762,839 8,241,162 9,004,001 1,661,000 ----------- ------------ ------------ ----------- $73,310,193 $266,193,259 $339,503,452 $91,923,183 =========== ============ ============ =========== LIFE ON WHICH DEPRECIATION IN LATEST STATEMENT OF INCOME DESCRIPTION IS COMPUTED - ----------------------------------------------- ------------- Operating Method -- (Continued): Manufacturing and office in Fredericksburg, Virginia...................................... 30 yrs. Manufacturing facilities leased to Amerisig, Inc. ......................................... 30 yrs. Land leased to High Voltage Engineering Corporation................................... N/A Manufacturing facility leased to Mayfair Molded Products Corporation.......................... 30 yrs. Distribution and office facilities leased to Federal Express Corporation................... 30 yrs. Land leased to Dr Pepper Bottling Company of Texas......................................... N/A Manufacturing facilities leased to Furon Company....................................... 30 yrs. Manufacturing facility leased to Detroit Diesel Corporation................................... 30 yrs. Engineering and Fabrication Facility leased to Orbital Sciences Corporation.................. 30 yrs. Land leased to NVRyan L.P. .................... N/A Distribution facility leased to PepsiCo........ 30 yrs. Land leased to Childtime Childcare, Inc. ...... N/A Land and building leased to General Electric Company....................................... 30 yrs. Hotel complex leased to Hotel Corporation of America....................................... 30 yrs.
F-57 247 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1996
INITIAL COST TO COST COMPANY CAPITALIZED --------------------------- SUBSEQUENT TO DESCRIPTION ENCUMBRANCES LAND BUILDINGS ACQUISITION(a) - ------------------------------------------------------- ------------ ----------- ------------ ------------- Direct financing method: Office buildings and warehouses leased to Unisource Worldwide, Inc........................................ $4,569,578 $ 298,655 $ 9,956,345 $ 9,528 Retail stores leased to Kobacker Stores, Inc........... 629,817 2,008,850 105,207 Centralized Telephone Bureau leased to New Valley Corporation........................................... 893,200 5,050,489 Computer Center leased to AT&T Corporation............. 369,600 6,985,844 3,189 Warehouse and manufacturing buildings leased to Gibson Greetings, Inc........................................ 1,904,186 17,239,235 Warehouse and manufacturing buildings leased to Cleo, Inc................................................... 1,133,761 15,142,206 Manufacturing and product testing buildings leased to Simplicity Manufacturing, Inc......................... 5,031,101 472,700 11,527,300 Manufacturing, distribution and office buildings leased to Brodart Co......................................... 3,218,689 241,550 6,141,429 Manufacturing facility to Spreckels Industries, Inc.... 444,730 5,055,270 Manufacturing facilities leased to Rochester Button Company, Inc.......................................... 86,663 2,815,596 4,429 Office and research facility leased to Exide Electronics Corporation............................... 2,030,000 1,500 Manufacturing facilities leased to DeVlieg Bullard, Inc................................................... 310,032 4,782,667 Manufacturing facility leased to Penberthy Products, Inc................................................... 48,968 1,028,333 Manufacturing facility and warehouse leased to Stoody Deloro Stellite, Inc.................................. 2,815,000 11,885,000 Manufacturing facilities leased Sunds Defibrator Woodhandling, Inc..................................... 24,750 669,427 Retail stores leased to AutoZone, Inc.................. 5,508,115 12,649,956 98,930 Manufacturing facility leased to Peerless Chain Company............................................... 829,000 6,991,000 Retail facility leased to Wal-Mart Stores, Inc......... 3,464,336 1,467,000 5,208,000 10,250 Manufacturing and warehouse facility leased to KSG, Inc................................................... 1,099,700 3,598,220 104 Manufacturing and office facilities leased to Sybron Acquisition Company................................... 13,886,818 1,984,406 22,383,348 138,318 Manufacturing and office facilities leased to NVRyan L.P................................................... 4,322,331 570,729 12,904,948 321,200 Manufacturing and generating facilities leased to High Voltage Engineering Corporation....................... 3,493,716 688,000 7,242,000 7,394 Office/warehouse facilities leased to Stationers Distributing Company.................................. 2,348,134 1,120,000 3,510,000 293 Bottling and Distribution facilities lease to Dr Pepper Bottling Company of Texas............................. 11,055,361 20,848,260 97,467 Office/warehouse facility leased to Red Bank Distribution, Inc..................................... 5,440,902 1,572,296 9,065,704 11,302 Day care facilities leased to Childtime Childcare, Inc................................................... 761,176 1,686,816 ----------- ----------- ------------ -------- $63,730,074 $18,374,926 $208,406,243 $ 809,111 =========== =========== ============ ======== GROSS AMOUNT AT INCREASE WHICH CARRIED AT (DECREASE) CLOSE OF PERIOD(c) IN NET ------------------ DESCRIPTION INVESTMENT(b) TOTAL - ------------------------------------------------------- ------------- ------------------ Direct financing method: Office buildings and warehouses leased to Unisource Worldwide, Inc........................................ $ 655,180 $ 10,919,708 Retail stores leased to Kobacker Stores, Inc........... (376,015) 1,738,042 Centralized Telephone Bureau leased to New Valley Corporation........................................... (52,236) 5,891,453 Computer Center leased to AT&T Corporation............. 60,569 7,419,202 Warehouse and manufacturing buildings leased to Gibson Greetings, Inc........................................ (5,845,212) 13,298,209 Warehouse and manufacturing buildings leased to Cleo, Inc................................................... (4,933,279) 11,342,688 Manufacturing and product testing buildings leased to Simplicity Manufacturing, Inc......................... 12,000,000 Manufacturing, distribution and office buildings leased to Brodart Co......................................... (189,424) 6,193,555 Manufacturing facility to Spreckels Industries, Inc.... 5,500,000 Manufacturing facilities leased to Rochester Button Company, Inc.......................................... (1,003,639) 1,903,049 Office and research facility leased to Exide Electronics Corporation............................... 2,031,500 Manufacturing facilities leased to DeVlieg Bullard, Inc................................................... 5,092,699 Manufacturing facility leased to Penberthy Products, Inc................................................... 1,077,301 Manufacturing facility and warehouse leased to Stoody Deloro Stellite, Inc.................................. 14,700,000 Manufacturing facilities leased Sunds Defibrator Woodhandling, Inc..................................... 694,177 Retail stores leased to AutoZone, Inc.................. (321,900) 12,426,986 Manufacturing facility leased to Peerless Chain Company............................................... 7,820,000 Retail facility leased to Wal-Mart Stores, Inc......... 6,685,250 Manufacturing and warehouse facility leased to KSG, Inc................................................... 4,698,024 Manufacturing and office facilities leased to Sybron Acquisition Company................................... 24,506,072 Manufacturing and office facilities leased to NVRyan L.P................................................... 457,579 14,254,456 Manufacturing and generating facilities leased to High Voltage Engineering Corporation....................... 7,937,394 Office/warehouse facilities leased to Stationers Distributing Company.................................. (732,255) 3,898,038 Bottling and Distribution facilities lease to Dr Pepper Bottling Company of Texas............................. 20,945,727 Office/warehouse facility leased to Red Bank Distribution, Inc..................................... 10,649,302 Day care facilities leased to Childtime Childcare, Inc................................................... 1,686,816 ------------ ------------ $(12,280,632) $215,309,648 ============ ============ DESCRIPTION DATE ACQUIRED - ------------------------------------------------------- ------------------------------------------------- Direct financing method: Office buildings and warehouses leased to Unisource Worldwide, Inc........................................ December 28, 1979 and April 29, 1980 Retail stores leased to Kobacker Stores, Inc........... January 17, 1979 Centralized Telephone Bureau leased to New Valley Corporation........................................... November 24, 1981 Computer Center leased to AT&T Corporation............. November 24, 1981 Warehouse and manufacturing buildings leased to Gibson Greetings, Inc........................................ January 26, 1982 Warehouse and manufacturing buildings leased to Cleo, Inc................................................... January 26, 1982 Manufacturing and product testing buildings leased to Simplicity Manufacturing, Inc......................... March 3, 1983 Manufacturing, distribution and office buildings leased to Brodart Co......................................... June 15, 1988 Manufacturing facility to Spreckels Industries, Inc.... December 30, 1983 Manufacturing facilities leased to Rochester Button Company, Inc.......................................... April 11, 1984 Office and research facility leased to Exide Electronics Corporation............................... June 20, 1985 Manufacturing facilities leased to DeVlieg Bullard, Inc................................................... April 3, 1986 Manufacturing facility leased to Penberthy Products, Inc................................................... April 3, 1986 Manufacturing facility and warehouse leased to Stoody Deloro Stellite, Inc.................................. February 14, 1985 and December 22, 1986 Manufacturing facilities leased Sunds Defibrator Woodhandling, Inc..................................... August 30, 1985 Retail stores leased to AutoZone, Inc.................. January 17, 1986 May 2, 1986; August 28, 1987 and March 31, 1989 Manufacturing facility leased to Peerless Chain Company............................................... June 18, 1986 Retail facility leased to Wal-Mart Stores, Inc......... August 7, 1986 Manufacturing and warehouse facility leased to KSG, Inc................................................... March 12, 1987 Manufacturing and office facilities leased to Sybron Acquisition Company................................... December 22, 1988 Manufacturing and office facilities leased to NVRyan L.P................................................... March 31, 1989 and May 16, 1989 Manufacturing and generating facilities leased to High Voltage Engineering Corporation....................... November 10, 1988 Office/warehouse facilities leased to Stationers Distributing Company.................................. December 29, 1988 Bottling and Distribution facilities lease to Dr Pepper Bottling Company of Texas............................. June 30, 1989 Office/warehouse facility leased to Red Bank Distribution, Inc..................................... July 20, 1990 Day care facilities leased to Childtime Childcare, Inc................................................... January 4, 1991
F-58 248 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1996
GROSS AMOUNT AT WHICH CARRIED AT CLOSE OF INITIAL COST TO COSTS PERIOD(c)(d)(e) COMPANY CAPITALIZED DECREASE ---------- ------------------------ PERSONAL SUBSEQUENT TO IN NET DESCRIPTION ENCUMBRANCES LAND BUILDING PROPERTY ACQUISITION(a) INVESTMENT(b) LAND ------- ------------ ---------- ----------- ---------- -------------- ------------- ---------- Operating real estate(e): Hotels located in: Alpena, Michigan....... $ 7,330,000 $ 210,000 $ 7,551,000 $ 742,500 $ 925,869 $ 210,000 Petoskey, Michigan..... 7,330,000 527,000 7,211,000 765,500 629,241 527,000 Livonia, Michigan...... 7,566,921 3,130,000 12,410,000 2,260,000 1,064,874 3,130,000 ----------- ---------- ----------- ---------- ---------- ---------- $22,226,921 $3,867,000 $27,172,000 $3,768,000 $2,619,884 $3,867,000 =========== ========== =========== ========== ========== ========== LIFE ON WHICH GROSS AMOUNT AT WHICH CARRIED DEPRECIATION AT CLOSE OF PERIOD(c)(d)(e) IN LATEST -------------------------------------- STATEMENT OF PERSONAL ACCUMULATED INCOME DESCRIPTION PROPERTY BUILDING TOTAL DEPRECIATION DATE ACQUIRED IS COMPUTED ------- ---------- ----------- ----------- ------------ ----------------- ------------- Operating real estate(e): Hotels located in: Alpena, Michigan....... $1,661,869 $ 7,557,500 $ 9,429,369 3,585,930 March 6, 1987 7-30 yrs Petoskey, Michigan..... 1,388,241 7,217,500 9,132,741 3,526,080 June 30, 1987 7-30 yrs Livonia, Michigan...... 2,530,713 13,204,161 18,864,874 6,234,972 November 20, 1987 ---------- ----------- ----------- ----------- $5,580,823 $27,979,161 $37,426,984 $ 13,346,982 June 15, 1988 5-30 yrs ========== =========== =========== ===========
F-59 249 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS NOTES TO SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION (a) Consists of the cost of improvements and acquisition costs subsequent to acquisition, including legal fees, appraisal fees, title costs, other related professional fees and purchases of furniture, fixtures, equipment and improvements at the hotel properties. (b) The decrease in net investment is primarily due to the amortization of unearned income producing constant periodic rate on the net investment in direct financing leases, which differ from scheduled minimum lease rentals, sales of properties, and writedowns of properties to net realizable value. (c) At December 31, 1996, the aggregate cost of real estate owned by the Company and its subsidiaries for Federal income tax purposes is $601,230,573. (d) RECONCILIATION OF REAL ESTATE ACCOUNTED FOR UNDER THE OPERATING METHOD
DECEMBER 31, DECEMBER 31, 1995 1996 ------------ ------------ Balance at beginning of year.................................... $360,009,561 $348,220,453 Additions....................................................... 514,977 2,842,338 Sales........................................................... (14,157,435) Writedowns to net realizable value.............................. (319,685) Reclassification from (to) investment in direct financing lease......................................................... (4,630,293) 3,700,000 Reclassification to real estate held for sale................... (7,354,107) (1,101,904) ------------ ------------ Balance at end of year.......................................... $348,220,453 $339,503,452 ============ ============
RECONCILIATION OF ACCUMULATED DEPRECIATION
DECEMBER DECEMBER 31, 31, 1995 1996 ----------- ----------- Balance at beginning of year...................................... $80,610,386 $87,603,614 Depreciation expense.............................................. 9,975,404 9,334,741 Reclassification to real estate held for sale..................... (2,249,921) Reclassification to direct financing lease........................ (732,255) (667,565) Writeoff resulting from sales of property......................... (4,347,537) ----------- ----------- Balance at end of year............................................ $87,603,614 $91,923,253 =========== ===========
(e) RECONCILIATION FOR OPERATING REAL ESTATE
DECEMBER DECEMBER 31, 31, 1995 1996 ----------- ----------- Balance at beginning of year...................................... $69,187,881 $55,369,375 Additions......................................................... 1,580,013 578,005 Reclassification to real estate held for sale..................... (9,442,947) Writedown to net realizable value................................. (1,000,000) Sales and exchange of property.................................... (4,955,572) (18,520,396) ----------- ----------- Balance at close of year.......................................... $55,369,375 $37,426,984 =========== ===========
F-60 250 CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS NOTES TO SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED) RECONCILIATION OF ACCUMULATED DEPRECIATION OPERATING REAL ESTATE
DECEMBER DECEMBER 31, 31, 1995 1996 ----------- ----------- Balance at beginning of year...................................... $17,915,786 $14,481,112 Depreciation expense.............................................. 2,267,157 1,215,149 Reclassification to real estate held for sale..................... (3,834,823) Writeoff resulting from sales and exchange........................ (1,867,008) (2,349,279) ----------- ----------- Balance at end of year............................................ $14,481,112 $13,346,982 =========== ===========
F-61 251 APPENDIX A 252 Corporate Property Associates Corporate Property Associates 2 Corporate Property Associates 3 Corporate Property Associates 4 Corporate Property Associates 5 Corporate Property Associates 6 Corporate Property Associates 7 Corporate Property Associates 8 Corporate Property Associates 9 50 Rockefeller Center New York, New York 10020 Gentlemen: You have requested that Robert A. Stanger & Co., Inc. ("Stanger") provide an opinion to Corporate Property Associates, Corporate Property Associates 2, Corporate Property Associates 3, Corporate Property Associates 4, Corporate Property Associates 5, Corporate Property Associates 6, Corporate Property Associates 7, Corporate Property Associates 8 and Corporate Property Associates 9 (the "CPA Partnerships") as to the fairness from a financial point of view to the limited partners of the CPA Partnerships (the "Unitholders") of certain allocations of shares (the "Listed Shares") which would be effective following the approval by the CPA Partnerships of a proposed consolidation (the "Consolidation") of the CPA Partnerships into Carey Diversified LLC, a newly formed limited liability company organized in Delaware (the "Company"). We have been advised by the General Partners and the CPA Partnerships that (i) 24,388,032 or 10,172,692 Listed Shares will be issued in the Consolidation assuming Maximum and Minimum Participation as defined below, and that such Listed Shares shall be allocated to the CPA Partnerships as summarized on Exhibit I hereto; and (ii) Unitholders in each CPA Partnership may elect to retain an interest in the CPA Partnership in which they are limited partners and receive subsidiary partnership units (the "Subsidiary Partnership Units") which will be issued in nine series. We have been advised that the distributions to the holders of each series of Subsidiary Partnership Units will be measured by reference to the performance of those properties that are attributable to the respective CPA Partnerships as they existed prior to the Consolidation. Stanger, founded in 1978, provides information, research, investment banking and consulting services to clients throughout the United States, including major New York Stock Exchange member firms and insurance companies and over seventy companies engaged in the management and operation of partnerships and real estate investment trusts. The investment banking activities of Stanger include financial advisory services, asset and securities valuations, industry and company research and analysis, litigation support and expert witness services, and due diligence investigations in connection with both publicly registered and privately placed securities transactions. Stanger, as part of its investment banking business, is regularly engaged in the valuation of businesses and their securities in connection with mergers, acquisitions, and reorganizations and for estate, tax, corporate and other purposes. In particular, Stanger's valuation practice principally involves partnerships, partnership securities and assets typically owned through partnerships including, but not limited to, real estate, mortgages secured by real estate, oil and gas reserves, cable television systems, and equipment leasing assets. In arriving at the opinion set forth below, we have: - Performed appraisals of each Partnership's portfolio of real properties pursuant to a separate engagement between Stanger and the Partnerships; - Reviewed a draft of the Consent Solicitation Statement/Prospectus in substantially the form which will be filed with the Securities & Exchange Commission (the "SEC") and provided to Unitholders by the CPA Partnerships and the Company; 1 253 - Reviewed the financial statements of the CPA Partnerships contained in Forms 10-K, as amended, filed with the SEC for the CPA Partnerships' 1995 and 1996 fiscal years and Forms 10-Q, as amended, filed with the SEC for the quarter ended June 30, 1997; - Reviewed certain operating and financial information (including property level financial statements and operating budgets for each property) relating to the business, financial condition and results of operations of the CPA Partnerships and discussed with management of the CPA Partnerships the operations, business plan, historical financial statements, budgets and future prospects of the CPA Partnerships; - Reviewed the methodology used by the General Partners to allocate Listed Shares among the CPA Partnerships; and - Conducted such other studies, analyses and inquiries as we deemed appropriate. The CPA Partnerships requested that Stanger opine as to the fairness, from a financial point of view, of the allocation of the Listed Shares among the CPA Partnerships assuming all Unitholders elect to receive Listed Shares and that either all CPA Partnerships elect to participate in the Consolidation (the "Maximum Participation Scenario") or the minimum number of CPA Partnerships participate in the Consolidation (the "Minimum Participation Scenario"). The Minimum Participation Scenario assumes the consolidation of only CPA:1, CPA:2, CPA:3, CPA:5, and CPA:7. To evaluate the fairness, from a financial point of view, of the allocation of Listed Shares among the CPA Partnerships, we compared the estimated net asset value to be contributed to the Company by each CPA Partnership to the estimated net asset value of the CPA Partnerships as a Group. We observed that Total Exchange Values were assigned to the CPA Partnerships by the General Partners based on: (i) appraisals provided by Stanger of the estimated value of the real estate portfolio of each CPA Partnership as of March 31, 1997; (ii) valuations made by the General Partners of each CPA Partnership's other assets and liabilities as of June 30, 1997; (iii) adjustments made by the General Partners to the foregoing values to reflect cash distributions made by the CPA Partnership in July 1997, the estimated value of litigation claims of certain CPA Partnerships, the General Partners' 1% interest in sale/financing proceeds which will be retained in the Consolidation, certain returns due to the General Partners which relate to properties which have previously been sold by the CPA Partnerships, and the estimated change in the value of two properties as a result of material events occurring subsequent to the appraisal date; and (iv) the costs of the Consolidation to be allocated among the CPA Partnerships in proportion to their Total Exchange Value before such cost allocation. We further observed that the General Partners intend to make such pre-consolidation cash distributions to Unitholders in each CPA Partnership as may be necessary to cause the relative Total Exchange Values of the CPA Partnerships as of the closing date to be substantially equivalent to the relative Total Exchange Values as of June 30, 1997. Relying on these Total Exchange Values, we observed that the allocation of Listed Shares offered to each CPA Partnership reflects the net value of the assets contributed to the Company by each CPA Partnership after deducting a pro rata share of the costs associated with the Consolidation. In rendering this opinion, Stanger relied, without independent verification, on the accuracy and completeness of all financial and other information contained in the Consent Solicitation Statement/ Prospectus or that was otherwise publicly available or furnished or otherwise communicated to us. Stanger has not made an independent evaluation or appraisal of the determinations of the non-real estate assets and liabilities of the CPA Partnerships. Stanger relied upon the balance sheet value determinations for the CPA Partnerships and the adjustments made by the General Partners to arrive at the Total Exchange Values. We have also relied upon the assurance of the CPA Partnerships and the General Partners that the calculations made to determine Listed Share allocations among the CPA Partnership and within each CPA Partnership between the General Partners and the Unitholders are consistent with the provisions of each CPA Partnership's Partnership Agreement, that any financial projections or pro forma statements or adjustments provided to us were reasonably prepared and adjusted on bases consistent with actual historical experience and reflect the best currently available estimates and good faith judgments, that no material changes have occurred in the CPA Partnerships' asset or liability values subsequent to valuation dates cited above or in the real estate 2 254 portfolio values subsequent to March 31, 1997 which are not reflected in the Partnerships' Exchange Values, and that the CPA Partnerships and the General Partners are not aware of any information or facts regarding the CPA Partnerships that would cause the information supplied to us to be incomplete or misleading. We were not asked to and therefore did not perform an analysis with respect to any combinations of CPA Partnership participation other than those noted above. Further, we are not opining as to whether or not any specified combination will result from the Consolidation. We were not requested to and did not: (a) select the method of determining the allocation of the Listed Shares or Subsidiary Partnership Units or establish the allocation; (b) make any recommendations to the Unitholders, General Partners or the CPA Partnerships with respect to whether to approve or reject the Consolidation or whether to elect to receive Listed Shares or Subsidiary Partnership Units; or (c) express any opinion as to (i) the impact of the Consolidation with respect to combinations of participating CPA Partnerships other than those specifically identified herein; (ii) the tax consequences of the Consolidation for Unitholders or for the Company; (iii) the potential impact of any preferential return on Subsidiary Partnership Units or the Company's fee structure on the cash flow received from, or the market value of, Listed Shares of the Company received by the CPA Partnerships; (iv) the potential capital structure of the Company or its impact on the financial performance of the Listed Shares or the Subsidiary Partnership Units; (v) the potential impact on the fairness of the allocations of any subsequently discovered environmental or contingent liability; or (vi) whether or not alternative methods of determining the relative amounts of Listed Shares and Subsidiary Partnership Units to be issued would have also provided fair results or results substantially similar to those of the allocation methodology used. Further, we are not expressing any opinion as to (a) the fairness of any terms of the Consolidation (other than the fairness of the allocations of the Listed Shares for the combinations of participating CPA Partnerships as described above) or the amounts or allocations of Consolidation costs or the amounts of Consolidation costs borne by Unitholders at various levels of participation in the Consolidation; (b) the relative value of the Listed Shares and the Subsidiary Partnership Units to be issued in the Consolidation; (c) the prices at which the Listed Shares or Subsidiary Partnership Units may trade following the Consolidation or the trading value of the Listed Shares or Subsidiary Partnership Units to be received compared with the current fair market value of the CPA Partnerships' portfolios or other assets if liquidated in real estate markets; and (d) alternatives to the Consolidation. Based upon and subject to the foregoing, it is our opinion that the allocation of the Listed Shares to the CPA Partnerships pursuant to the Consolidation assuming the participation scenarios cited herein is fair to the Unitholders of the CPA Partnerships from a financial point of view. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. We have advised the CPA Partnerships and the General Partners that our entire analysis must be considered as a whole and that selecting portions of analyses and the factors considered, without considering all analyses and factors, could create an incomplete view of the evaluation process underlying this opinion. Our opinion is based on business, economic, real estate market, and other conditions as of the date of our analysis and addresses the Consolidation in the context of information available as of the date of our analysis. Events occurring after that date could affect the value of the assets of the CPA Partnerships or the assumptions used in preparing the opinion. Very truly yours, /s/ ROBERT A. STANGER & CO., INC. - ------------------------------------ Robert A. Stanger & Co., Inc. Shrewsbury, New Jersey October 15, 1997 3 255 EXHIBIT I ALLOCATION OF LISTED SHARES
ALLOCATION OF LISTED SHARES(1) ---------------- Corporate Property Associates................................. 1,052,185 Corporate Property Associates 2............................... 1,692,873 Corporate Property Associates 3............................... 2,798,430 Corporate Property Associates 4............................... 2,841,138 Corporate Property Associates 5............................... 2,079,320 Corporate Property Associates 6............................... 3,326,115 Corporate Property Associates 7............................... 2,549,884 Corporate Property Associates 8, L.P.......................... 4,894,290 Corporate Property Associates 9, L.P.......................... 3,153,797
- --------------- (1) Assumes all Unitholders elect to receive Listed Shares. 256 APPENDIX B 257 PORTFOLIO APPRAISAL REPORT CORPORATE PROPERTY ASSOCIATES 1 CORPORATE PROPERTY ASSOCIATES 2 CORPORATE PROPERTY ASSOCIATES 3 CORPORATE PROPERTY ASSOCIATES 4 CORPORATE PROPERTY ASSOCIATES 5 CORPORATE PROPERTY ASSOCIATES 6 CORPORATE PROPERTY ASSOCIATES 7 CORPORATE PROPERTY ASSOCIATES 8 CORPORATE PROPERTY ASSOCIATES 9 258 TABLE OF CONTENTS
PAGE ---- Letter of Transmittal................................................................. 1 Identification of Subject Portfolios.................................................. 4 Property Ownership and History........................................................ 4 Purpose of Appraisal.................................................................. 4 Function of Appraisal................................................................. 4 Scope of Appraisal.................................................................... 4 Date of Valuation..................................................................... 6 Value Definition...................................................................... 6 Valuation Methodology................................................................. 7 Site Inspections and Data Gathering................................................. 8 Lease Review........................................................................ 9 Market Rental Rates................................................................. 9 Highest and Best Use................................................................ 9 Operational Projections............................................................. 10 Reversion........................................................................... ... Selection of Discount Rates......................................................... 11 Portfolio Value Conclusions........................................................... 13 Portfolio Summaries................................................................... 14 Assumptions and Limiting Conditions................................................... 32
i 259 May 15, 1997 W. P. Carey & Co., Inc. 620 Park Avenue, 4th Floor New York, NY 10020 Gentlemen: You have engaged Robert A. Stanger & Co., Inc. ("Stanger") to estimate the value of the real property portfolios (the "Portfolios") owned by Corporate Property Associates 1, Corporate Property Associates 2, Corporate Property Associates 3, Corporate Property Associates 4, Corporate Property Associates 5, Corporate Property Associates 6, Corporate Property Associates 7, Corporate Property Associates 8 and Corporate Property Associates 9, (hereinafter the "Partnerships"). Such appraisal reflects the estimated market value of the leased fee interests or, where appropriate, fee simple interests in the portfolios of real property owned by the Partnerships (the "Portfolio Valuations") as of March 31, 1997. This report is prepared in accordance with an agreement between Robert A. Stanger & Co., Inc. and W. P. Carey & Co., Inc. ("Carey") and the Partnership, dated April 7, 1997. Pursuant to the agreement, Stanger has been engaged to perform the appraisal on a limited scope basis using a summary report format in conformity with the departure provisions of the Uniform Standards of Professional Appraisal Practice of the Appraisal Institute, relying solely upon the Income Approach to value. As such, the report differs from a self-contained appraisal report in that (i) the data is limited to the summary data and conclusions presented, and (ii) the cost and market approaches were excluded and the conclusions were based upon the income approach. Due to the type of the real estate owned by the Partnerships and the nature of the lease terms, the engagement calls for these assets to be valued utilizing a discounted cash flow analysis, subject to existing leases and debt in place. We have therefore valued the net cash flows related to triple net leases with reversion to underlying real estate value only after the primary lease term and any renewal options deemed favorable to the tenant have been exhausted. Our valuation has been based in part upon information supplied to us by Carey and the Partnerships including but not limited to: lease abstracts; renewal and purchase option status; information relating to the creditworthiness of tenants; schedules of current lease rates, income, expenses, cash flow and related financial information; property descriptive information, physical condition of improvements and acquisition appraisals; information relating to mortgage encumbrances; and, where appropriate, proposed sales terms, sales agreements and supporting documentation. We have also visited the offices of Carey and the Partnerships in New York, New York and have interviewed relevant management personnel. We have relied upon such information and have assumed that the information provided by Carey and the Partnerships is accurate and complete. We have not attempted to independently verify such information. We are advised by Carey and the Partnerships that the purpose of the appraisals is to estimate the value of the leased fee interests or, where appropriate, fee simple interests in the Portfolios under market conditions as of the appraisal date and subject to existing leases and debt in place, and that the Portfolio Valuations will be used in connection with a proposed merger of Partnerships in exchange for shares of a newly formed limited liability company (the "LLC") and assumption of existing indebtedness (the "Transaction"). Stanger understands that the Portfolio Valuations may be reviewed and utilized in connection with the Transaction and Stanger agrees to the use of the Portfolio Valuations for this purpose subject to the terms and conditions of the agreements related thereto. For these purposes, this summary appraisal report was prepared stating our opinion as to the market value of the Portfolios as of March 31, 1997. This report may be summarized and referenced in the proxy statement for the Partnerships relating to the Transaction, subject to prior review by Stanger. However, the attached summary appraisal report should be reviewed in its entirety and is subject to the assumptions and limiting 1 260 conditions contained herein. Background information and analysis upon which value conclusions are based has been retained in our files. Our review was undertaken solely for the purpose of providing an opinion of value, and we make no representation as to the adequacy of such review for any other purpose. Our opinion is expressed with respect to the total value of each of the real estate portfolios, assuming existing financing and lease contracts, in which the Partnerships have an interest and not with respect to limited partners' allocations. Stanger has no present or contemplated future interest in the properties, the Partnerships, the proposed LLC or Carey. The appraisal is only an estimate of the aggregate market value of the leased fee interests or, where appropriate, fee simple interests in the Portfolios as of the date of valuation and should not be relied upon as being the equivalent of the price that would necessarily be received in the event of a sale or other disposition of the properties in the Portfolios. Changes in corporate financing rates generally, changes in individual tenant creditworthiness, changes in tenant motivation with respect to the exercise of renewal or purchase options, or changes in real estate property markets may result in higher or lower values of real property. The use of other valuation methodologies might produce a higher or lower value. However, in our opinion, the use of the discounted cash flow methodology and, where appropriate, the income capitalization method, is appropriate and reasonable. Our opinion is subject to the assumptions and limiting conditions set forth herein. We have used methods and assumptions deemed appropriate in our professional judgment; however, future events may demonstrate that the assumptions were incorrect or that other, different methods or assumptions may have been more appropriate. This abbreviated valuation report provides our value conclusion with respect to the Portfolios, definitions of value, and discussions of the valuation methodology employed, assumptions, and limiting conditions. Sincerely, /s/ ROBERT A. STANGER & CO., INC. -------------------------------------- Robert A. Stanger & Co., Inc. Shrewsbury, New Jersey 2 261 IDENTIFICATION OF SUBJECT PORTFOLIOS The subjects of this appraisal are the real property portfolios (the "Portfolios") in which Corporate Property Associates, Corporate Property Associates 1, Corporate Property Associates 2, Corporate Property Associates 3, Corporate Property Associates 4, Corporate Property Associates 5, Corporate Property Associates 6, Corporate Property Associates 7, Corporate Property Associates 8 and Corporate Property Associates 9 (the "Partnerships") own leased fee or fee simple interests. The Portfolios include office, industrial/warehouse facilities, retail and hotel properties. A listing of the properties in each Portfolio is provided in the "Portfolio Summaries" section of this report. PROPERTY OWNERSHIP AND HISTORY During the past three years, the properties have been owned continuously by the Partnerships, with the exception of the Furon property located at 1395 Danner Drive, Aurora, Ohio, which we have been advised will be acquired during the second quarter of 1997 by Corporate Property Associates 8 and Corporate Property Associates 9 through an exchange for two other properties currently owned and leased to the Furon Company by Corporate Property Associates 8 and 9. PURPOSE OF APPRAISAL The purpose of this appraisal is to estimate the market value of the leased fee or, where appropriate, fee simple interests in the real property Portfolios subject, as appropriate, to existing leases and debt in place under market conditions as of March 31, 1997. FUNCTION OF APPRAISAL The function of this appraisal is to provide a current estimate of market value of the Portfolios for use solely by the Partnerships in connection with the proposed merger of the Partnerships in exchange for shares of a newly formed limited liability company and the assumption of existing indebtedness. No representation is made as to the adequacy of this appraisal for any other purpose. SCOPE OF APPRAISAL The Portfolio Valuations have been prepared on a limited scope basis using a summary report format in conformity with the departure provisions of the Uniform Standards of Professional Appraisal Practice of the Appraisal Institute, in accordance with agreements between Robert A. Stanger & Co., Inc. and Carey and the Partnerships, dated April 7, 1997. Pursuant to the agreements, Stanger has relied solely upon the income approach to value and did not employ the "cost" or "sales comparison" approaches (as described below). In estimating the value of a property, appraisers typically consider three approaches to value: the cost approach, the market data or sales comparison approach, and the income approach. The value estimate by the cost approach incorporates separate estimates of the value of the unimproved site under its highest and best use and the value of the improvements less observed accrued depreciation resulting from physical wear and tear and functional and/or economic obsolescence. The market data or sales comparison approach involves a comparative analysis of the subject property with other similar properties that have sold recently or that are currently offered for sale in the market. The income approach involves an economic analysis of the property based on its potential to provide future net annual income. With respect to leased properties and the valuation of leased fee interests, a discounted cash flow analysis ("DCF") is commonly utilized. The DCF method ascribes a present value to the future cash flows associated with operating the property and the ultimate reversion value of the property, based upon a discount rate commensurate with the risks inherent in ownership of the property and with rates of return offered by alternative investment opportunities. Pursuant to the terms of our engagement, the Portfolio Valuations were performed solely using the income approach. Since a primary buyer group for properties of the type appraised herein is investors, the 3 262 income approach was deemed an appropriate valuation methodology. Further, given the primary criteria used by buyers of properties of the type appraised herein and the existence of generally long-term net leases on the properties, the cost approach was considered less reliable than the income approach. The sales comparison approach was also considered less reliable than the income approach given the primary criteria used by buyers of properties of the type appraised herein, the existence of generally long-term net leases on the properties, and the relative lack of sufficient reliable data from recent transactions involving properties comparable to the subject properties. Consequently, given these factors, the income approach was considered a reasonable approach to valuation for the subject Portfolio. In addition, unless otherwise noted in this report, the leased fee interests have been valued utilizing a discounted cash flow analysis applied to equity cash flows after debt service based on existing financing, which financing has been represented by the owner as being assumable. We have therefore valued net cash flows related to the lease without reversion to underlying real estate value until the primary lease term and any renewal or purchase options deemed favorable to the tenant have been exhausted. Fee simple property interests were valued utilizing either the income capitalization and/or the discounted cash flow method. Changes in corporate financing rates generally, in individual tenant creditworthiness, in tenant motivation with respect to the exercise of renewal options, or in real estate property markets may result in higher or lower values of real property. The use of other valuation methodologies might produce a higher or lower value. Our opinion is subject to the assumptions and limiting conditions set forth herein. Departures -- Uniform Standards of Professional Practice -- With respect to limited appraisals, the departure provisions of the Uniform Standards of Professional Appraisal Practice permit departures from the specific guidelines of Standard 1. In this report the following departures were taken: Standard Rule 1-4 (a) The cost and market approaches are excluded, and the conclusions are based solely on the income approach (see Valuation Methodology).
DATE OF VALUATION The date of valuation for the Portfolios is March 31, 1997. VALUE DEFINITION Market value, as defined by the Appraisal Institute, is the most probable price as of a specified date, in cash, in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably and for self-interest, and assuming that neither is under undue duress. As used in this report, market value is based on a sale of the subject property rights for cash and the assumption of existing third-party indebtedness encumbering the properties. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (a) buyer and seller are typically motivated; (b) both parties are well informed or well advised, and each acts in a manner he considers in his own best interest; (c) a reasonable time is allowed for exposure in the open market; (d) payment is made in terms of cash in U.S. dollars or the substantial equivalent thereof, and the assumption of existing indebtedness; (e) the price represents the normal consideration for the property sold unaffected by special sales concessions granted by anyone associated with the sale. 4 263 The property rights appraised in this report are leased fee interests and, where appropriate, fee simple interests. Leased fee interest is defined as an ownership interest held by a landlord with the right to use and occupancy conveyed by lease to others, and usually consists of the right to receive rent and the right to repossession at the termination of the lease. Fee simple interest is defined as absolute ownership unencumbered by any other interest or estate, subject only to the limitations of eminent domain, escheat, police power, and taxation. The appraisal includes the value of land, land improvements such as paving, fencing, on-site sewer and water lines, the buildings and, with respect to the hotel properties only, furniture fixtures and equipment necessary to achieve the operating results which formed the basis of the valuation as of March 31, 1997. Except for the hotel furniture, fixtures and equipment, as noted above, the appraisal does not include supplies, materials on hand, inventories, furniture, equipment or other personal property, company records, or current or intangible assets that may exist; it pertains only to items considered as real estate. VALUATION METHODOLOGY Pursuant to the terms of this engagement, Stanger has estimated the aggregate value of the Partnerships' leased fee or, where appropriate, fee simple interests in the Portfolios based solely on the income approach to valuation. (Appraisers typically consider three approaches in valuing real property: the cost approach, the income approach, and the sales comparison, or market data, approach. The type and age of a property, the nature of the leases, market conditions and the quantity and quality of data affect the applicability of each approach in a specific appraisal situation.) The income approach is based on the assumption that the value of a property or portfolio of properties can be represented by the present worth of future cash flows. In these Portfolio Valuations, a discounted cash flow ("DCF") analysis is used to determine the value of the leased fee interests in the portfolios of properties based upon the lease and financing that encumber each property, reflecting representations by the owner that such financing is assumable. Fee simple property interests are valued utilizing either the income capitalization and/or the discounted cash flow method. The indicated value by the income approach represents the amount an investor might reasonably be expected to pay for the expectation of receiving the net cash flow after debt service from each Portfolio's properties during the subject lease terms and the proceeds from the ultimate sale of each Portfolio's properties after repayment of remaining mortgage debt. Unless otherwise noted herein, in applying the DCF analysis, we utilized pro forma statements of operations for each of the properties prepared in accordance with the leases and financing which currently encumber the properties. The properties are assumed to be sold after the expiration of the initial lease term and any renewal terms deemed favorable to the tenants (i.e., where the tenant has an option to renew at a rental rate materially below the projected market rate rent at the time of the renewal option, it is assumed that such option will be exercised). The reversion value of the properties which can be realized upon sale is calculated based on the current economic rental rate deemed reasonable for each property, escalated at a rate indicative of current expectations in the marketplace for the property. The market-rate net income of the properties at the year of sale is then capitalized at an appropriate rate reflecting the age, anticipated functional and economic obsolescence and competitive position of the properties to determine the reversion value of the properties. Where properties were deemed to have reached the limit of functional utility and useful life at the time of lease expiration, the reversion was computed based on estimated land value. Net proceeds to equity owners were determined by deducting estimated costs of sale and principal and any accrued interest balances due on the properties' mortgage debt in the projected year of sale based on each mortgage's amortization schedule. Finally, (i) the discounted present value of the equity cash flow stream from operations (after debt service) and the discounted present value of net proceeds from sale, and (ii) the outstanding debt balance as of March 31, 1997 for each property were summed to arrive at a total estimated value for each Portfolio. The resulting Portfolio Values were then adjusted for any joint venture interests in the properties based on information provided by Carey and the Partnerships to arrive at the final Portfolio Values. 5 264 The following describes more fully the steps involved in the valuation methodology. SITE INSPECTIONS AND DATA GATHERING In conducting the Portfolio Valuations, representatives of Stanger performed site inspections of the properties during 1995 and 1996 in the context of a prior appraisal of the Portfolios. In the course of these site visits, the physical facilities of each property were inspected, current market rental rates for competing properties were obtained, information on the local market was gathered, and where possible, the tenant's facilities manager was interviewed concerning the property, its role in company operations, and other factors. Information gathered during the site inspection was supplemented by a review of published information concerning economic, demographic and real estate trends in local, regional and national markets, and by information updates provided by management and obtained through telephonic interviews of local market information sources. In conducting the appraisals, Stanger also interviewed and relied upon Carey management personnel to obtain information relating to the condition of each property, including any deferred maintenance, capital budgets, known environmental conditions, status of on-going or newly planned property additions, reconfigurations, improvements, and other factors affecting the physical condition of the property improvements. Stanger also interviewed Carey's management and acquisitions personnel regarding competitive conditions in net lease property markets, tenant credit trends affecting the properties, certain lease and financing factors, and historical and anticipated lease revenues and expenses. Stanger also reviewed historical operating statements for each of the properties in the subject Portfolios. In addition, Stanger reviewed the acquisition criteria and projection parameters used by real estate investors. Such reviews included a search of real estate data sources and publications concerning real estate buyer's criteria, interviews with sources deemed appropriate in certain local markets (including local appraisers and real estate brokers) to confirm acquisition criteria used, and direct telephonic interviews with major national investors, owners and managers of net lease property portfolios and financing sources for net lease transactions in the marketplace, to investigate the interaction of such factors as required equity rates of return, initial equity yield requirements, tenant credit profile, type of property, and the terms of available financing. Stanger also compiled data on actual transactions involving net leased properties, from which acquisition criteria and parameters were extracted. Information on actual property transactions was obtained during the site inspections and from direct telephonic interviews of local appraisers and real estate brokers, and major national investors, owners and managers of net leased properties, and from other publicly available sources. In addition, Stanger reviewed data provided by Carey on actual acquisitions and sales involving Carey and affiliated entities. LEASE REVIEW Lease abstracts were provided by Carey and the Partnerships and were relied upon in the preparation of operational projections for each property (as discussed below). Stanger reviewed such lease abstracts and interviewed Carey management personnel to ascertain any renegotiated terms and modifications and the status of various options and other factors. Provisions considered and incorporated into the operational projections included current lease rate, escalation factors, percentage rent provisions, renewal options and terms, and purchase options and terms. MARKET RENTAL RATES Representatives of Stanger collected available data on rental rates at competing properties in each local or regional market. Data collected at the time of the site inspection was updated with published data and direct telephonic contacts with local brokers and leasing agents. 6 265 HIGHEST AND BEST USE Highest and best use is defined as: The reasonable probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum profitability. In conformity with the provisions of its engagement, Stanger evaluated each site's highest and best use as currently improved. Based upon the review of each of the sites, the highest and best use of each of the properties remains as currently improved, unless otherwise noted herein. OPERATIONAL PROJECTIONS Based on the lease and market rent analysis, rental revenue projections were developed for each property in each of the Portfolios based on the terms of existing leases (or, in the case of property not subject to long-term net leases, based on analysis of market rents and historical rents achieved at the property). Where lease terms included percentage rent provisions, available sales data were reviewed for each property and sales levels were projected based on escalation factors deemed appropriate in light of the current level of sales, area trends and parameters utilized by buyers of similar properties. Percentage rents were then calculated based on the resulting sales levels and contract provisions relating to sales breakpoints and percentage rent participations. Lease renewals were analyzed based on escalated current market rental rates. The annual market rent escalation rates utilized were based on local market conditions in the area of each property, inflation rates, the projected holding period of the property and rental rate growth parameters applied by investors in similar type properties. Where projected market rental rates at the time of a renewal option materially exceeded the contractual lease renewal rate, the renewal option was assumed to be exercised. Where appropriate, vacancy and collection losses were factored into the analysis. A property management fee deemed appropriate for retaining a professional real estate organization to manage the specific type of property was included in the projections. In the case of net leased properties, the fee utilized was 1% of rental revenues. Expenses relating solely to partnership investor reporting and accounting were excluded. Debt service payments were deducted from net operating income for each property consistent with the terms of the existing financing. For properties where existing debt matures during the lease term, the refinancing capability of the property was reviewed based upon lending criteria utilized by financing sources, including loan-to-value ratios and debt service coverage requirements. For properties meeting such lending criteria, debt balances at maturity of the existing mortgage were considered refinanced at interest rates and amortization schedules deemed appropriate for the property. Finally, where a capital expense reserve, deferred maintenance or extraordinary capital expenditures were required for an individual property, the cash flows and value were adjusted accordingly. REVERSION In the course of performing the appraisals, Stanger reviewed available sales transactions of similar investment properties as well as market data relating to overall capitalization rates for similar properties in the general location of the subject properties. As described above, acquisition criteria used by buyers of similar properties were also reviewed. Based upon these reviews and considering such factors as age, quality, anticipated functional and economic obsolescence, competitive position of the property, the projected date of sale, and buyers' acquisition criteria, appropriate terminal capitalization rates were selected. Where properties were deemed to have reached the limit of functional utility and useful life at the time of lease expiration, the reversion was computed based on escalated land value. Based upon current market rate rents, estimated escalation factors, and the estimated vacancy rate and other property operating expenses incurred by the owner, net operating income during the twelve months following the lease expiration was estimated. The resulting net operating income estimate was capitalized to 7 266 determine residual value. The residual value was discounted, after deducting appropriate sales expenses and mortgage balances, if any, outstanding at the time of sale, to a present value. The discount rate employed was based on current acquisition criteria and target rates of return among commercial property investors. Where any property lease included a purchase option for the lessee, the purchase option price was compared to the projected value of the property based on projected market rental rates (and where appropriate, contractual rent under the lease agreement). Where the purchase option price was less than the projected market value of the property or the purchase option provided a significant financial benefit to the tenant relative to its remaining lease obligation, the purchase option was deemed exercised; otherwise the purchase option was deemed expired. SELECTION OF DISCOUNT RATES Distinct discount rates were then applied to the operating cash flow projections and the reversion values. - OPERATING CASH FLOW -- The selection of the appropriate discount rate for determining the present value of future operating cash flow streams from each net leased property was based primarily upon such factors as the creditworthiness of the tenant, the length of the lease term, and the general interest rate environment. Specifically, Stanger conducted an analytical review of the financial statements of the tenants/guarantors under the subject leases. In the course of this review, Stanger analyzed the most recent available financial statements of the tenants/guarantors, focusing primarily on the balance sheet, profit and loss statement, cash flow statement and management's discussion of capital resources and liquidity. Various measures of financial strength were derived and reviewed to evaluate the tenant's ability to fulfill the lease obligation. These factors encompassed size, leverage, capital structure, profitability, cash flow, debt service and fixed charges coverage and liquidity. Stanger also investigated each tenant's/guarantor's corporate debt ratings, if any, issued by Nationally Recognized Statistical Rating Organizations (for example, Standard & Poors and/or Moody's), and financial strength ratings assigned by Value Line. Stanger also reviewed the interest rate environment as of the date of the Portfolio Valuations, including long-term corporate bond yields. In particular, data sources were screened to determine the yield-to-maturity among corporate bonds based on various maturities and credit ratings. This analysis was conducted to establish a base discount rate, determined by the marketplace, to reflect the risk of holding corporate debt with credit quality commensurate with the lease guarantor's creditworthiness and a term approximately equal to the remaining lease term for each property. Premiums deemed appropriate were then added to the base discount rate to reflect the risks associated with real estate, leverage, and, where appropriate, above-market lease rates or factors unique to the individual lease or tenant. In particular, where contract rent exceeded market rent, the base discount rate used to value the operating cash flow stream was adjusted to reflect the creditworthiness of the tenant and the risk associated in realizing such excess rent. Where operating cash flows were comprised of base rent and percentage rent components, distinct discount rates were applied to the base rent and percentage rent reflective of the relative risk associated with each cash flow stream. - REVERSION VALUE -- To determine appropriate discount rates to apply to the reversion value of the real estate upon final lease expiration, the acquisition criteria and projection parameters in use in the marketplace by real estate investors for various property types (e.g. industrial/warehouse, retail, office, etc.) were reviewed (as described above). Discount rates deemed appropriate were applied to the reversion value of each property after adjusting for such factors as property age, quality, anticipated functional and economic obsolescence, competitive position, and any unique property-related factors. The resulting discounted present value of operating cash flows and the discounted present value of net sale proceeds were added to outstanding debt balances as of March 31, 1997 for each property. The resulting values were adjusted for any joint venture interests in the properties (based on information provided by Carey) and were summed to arrive at a total estimated value for each Portfolio. 8 267 PORTFOLIO VALUE CONCLUSIONS Based upon the review as described above, it is our opinion that the market value of the leased fee interests or, where appropriate, fee simple interests in the Portfolios as encumbered by existing indebtedness and lease agreements as of March 31, 1997 is as follows:
PORTFOLIO VALUE PARTNERSHIP NAME CONCLUSION ------------------------------------------------------------- ------------ Corporate Property Associates 1.............................. $ 33,390,000 Corporate Property Associates 2.............................. 40,680,000 Corporate Property Associates 3.............................. 52,750,000 Corporate Property Associates 4.............................. 49,880,000 Corporate Property Associates 5.............................. 54,640,000 Corporate Property Associates 6.............................. 104,300,000 Corporate Property Associates 7.............................. 70,300,000 Corporate Property Associates 8.............................. 136,670,000 Corporate Property Associates 9.............................. 139,890,000 ------------ TOTAL.............................................. $682,500,000 ============
9 268 CORPORATE PROPERTY ASSOCIATES PORTFOLIO SUMMARY MARCH 31, 1997
PROPERTY PROPERTY NAME ADDRESS TYPE - -------------------------------------------- --------------------------- ----------------- Broomfield Tech............................. 3400 Industrial Lane Office/Warehouse Broomfield, CO Broomfield Tech............................. 3401 Industrial Lane Office/Warehouse Broomfield, CO Chief Auto Parts -- Stockton................ 1339 S. Sutter Street Retail Stockton, CA Southland -- Merced......................... 1414 R Street Retail Merced, CA Payless Shoes -- Rialto..................... 681 Foothill Road Retail Rialto, CA Payless Shoes -- Fontana.................... 9780 Sierra Avenue Retail Fontana, CA Chief Auto Parts -- Sacramento.............. 3121 Marysville Boulevard Retail (Marysville) Sacramento, CA Chief Auto Parts -- Sacramento.............. 1900 Broadway Retail (Broadway) Sacramento, CA Payless Shoes -- Cuyahoga Falls............. 1965 State Road Retail Cuyahoga Falls, OH Payless Shoes -- Talmadge................... 355 West Avenue Retail Talmadge, OH Payless Shoes -- Freemont................... 111 East State Street Retail Freemont, OH Payless Shoes -- Reynoldsburg............... 6736 East Main Street Retail Reynoldsburg, OH Payless Shoes -- Marion..................... 1240 Mt. Vernon Avenue Retail Marion, OH Payless Shoes -- Anderson................... 1816 E. 53rd Street Retail Anderson, IN Varo -- Walnut.............................. 2201-2203 Walnut Street Light Industrial Garland, TX Vacant Facility............................. 553 & 555 N. 5th Street Light Industrial Garland, TX The Gap..................................... 3434 Mineola Pike Distribution/ Erlanger, KY Warehouse Unisource Worldwide......................... 1930 Spur Avenue Distribution/ Anchorage, AK Warehouse Winn-Dixie.................................. 1211 Broadway West Retail Louisville, KY PreFinish Metals............................ 30610 East Broadway Industrial Walbridge, OH
10 269 CORPORATE PROPERTY ASSOCIATES 2 PORTFOLIO SUMMARY MARCH 31, 1997
PROPERTY PROPERTY NAME ADDRESS TYPE - ---------------------------------------------------- ------------------------- -------------- Pre-Finish Metals................................... 30610 East Broadway Industrial Walbridge, OH Unisource Worldwide................................. 2600 S.W. Commerce Way Industrial Commerce,CA Arthur L. Jones..................................... 2729 Ring Road Retail Greensboro, NC Kinko's of Ohio..................................... 4032 Belden Village Ave. Retail Canton, OH Wexler.............................................. 9890 Lake Forrest Ave. Retail New Orleans, LA Color Tile.......................................... 4030 Belden Village Ave. Retail Canton, OH Maybelline/B&G...................................... 1401 Murphy Drive Distribution/ Maumelle, AR Warehouse EXCEL............................................... 5205 Mill Street Office/R&D Reno, NV AT&T................................................ 12976 Hollenberg Road Office/R&D Bridgeton, MO Western Union....................................... 13022 Hollenberg Road Office/R&D Bridgeton, MO Sports & Recreation................................. 308 West Route 38 Retail Moorestown, NJ Gibson Greetings -- Cincinnati...................... 2100 Section Road Industrial Cincinnati, OH Cleo................................................ 4025 Viscount Road Industrial Memphis, TN Gibson Greetings -- Berea........................... Walnut Meadow Lane Industrial Berea,KY
11 270 CORPORATE PROPERTY ASSOCIATES 3 PORTFOLIO SUMMARY MARCH 31, 1997
PROPERTY PROPERTY NAME ADDRESS TYPE - ------------------------------------------------------- ---------------------- ----------- EXCEL.................................................. 5205 Mill Street Office/R&D Reno, NV AT&T................................................... 12976 Hollenberg Road Office/R&D Bridgeton, MO Western Union.......................................... 13022 Hollenberg Road Office/R&D Bridgeton, MO Sports & Recreation.................................... 308 West Route 38 Retail Moorestown, NJ Gibson Greetings -- Cincannati......................... 2100 Section Road Industrial Cincinnati, OH Cleo................................................... 4025 Viscount Road Industrial Memphis, TN Gibson Greetings -- Berea.............................. Walnut Meadow Lane Industrial Berea, KY Santee Dairies......................................... 231 East 23rd Street Dairy Los Angeles, CA
12 271 CORPORATE PROPERTY ASSOCIATES 4 PORTFOLIO SUMMARY MARCH 31, 1997
PROPERTY PROPERTY NAME ADDRESS TYPE - -------------------------------------------------- ------------------------- ----------------- Santee Dairies.................................... 231 East 23rd Street Dairy Los Angeles, CA Simplicity Manufacturing.......................... (2 buildings) 500 North Spring Street Industrial Port Washington, WI Brodart Company................................... 500 Arch Street & Industrial (2 buildings) 1609 Memorial Avenue Williamsport, PA Petrocon Engineering.............................. 3115 Executive Boulevard Office Beaumont, TX Agency Management................................. 3001 East By-Pass Office/ College Station, TX Light Industrial Family Dollar..................................... Airport & Distribution/ Cedar Springs Road Warehouse Salisbury, NC Winn-Dixie........................................ U.S. 411 & Retail Courson Boulevard Leeds, AL
13 272 CORPORATE PROPERTY ASSOCIATES 5 PORTFOLIO SUMMARY MARCH 31, 1997
PROPERTY PROPERTY NAME ADDRESS TYPE - ------------------------------------- ------------------------- -------------------- Spreckles/Duff-Norton................ Hwy. 1 North Industrial Forrest City, AR Rochester Button -- Kenbridge........ 221 Main Street Industrial Kenbridge, VA Rochester Button -- So. Boston....... 1100 Noblin Avenue & Industrial 315 Edmund Street South Boston, VA Arley -- Columbia.................... 3130 Bluff Road Warehouse/ Columbia, SC Light Manufacturing Arley -- Sumter...................... Shaw Street Industrial Sumter, SC Penn Virginia -- Duffield............ U.S. Hwy. 58 -- 421 West Office Duffield, VA Penn Virginia -- Broomall............ 600 Abbott Drive Office/Warehouse Broomall, PA Penn Virginia -- Cuyahoga Falls...... 601 Munroe Falls Ave. Industrial Cuyahoga Falls, OH Exide Electronics.................... 3201 Spring Forrest Road Office Raleigh, NC General Cinema....................... 43555 Ford Road Cinema Canton, MI Inno Tech............................ 154 Olive Street Industrial Elyria, OH Sunds Defibrator..................... 571 West End Avenue Industrial/ Woodhandling Carthage, NY Manufacturing Gould (Spectramed)................... 1900 Williams Drive Office/R&D Oxnard, CA Holiday Inn -- Petoskey.............. U.S. Hwy. 131 South Hotel Petoskey, MI Holiday Inn -- Alpena................ 1000 U.S. 23 North Hotel Alpena, MI DeVlieg-Bullard -- McMinnville....... Morrison Street Industrial McMinnville, TN Penberthy Products................... Lincoln & Locust Street Industrial Prophetstown, IL DeVlieg-Bullard -- Frankenmuth....... 126 North Main Street Industrial Frankenmuth, MI Stoody Deloro........................ 1201 Eisenhower Drive Industrial North Goshen, IN Winn-Dixie........................... 2252 Mt. Meigs Road Retail Montgomery, AL
14 273 CORPORATE PROPERTY ASSOCIATES 6 PORTFOLIO SUMMARY MARCH 31, 1997
PROPERTY PROPERTY NAME ADDRESS TYPE - ------------------------------------------------ ------------------------- ------------------ Holiday Inn -- Petoskey......................... U.S. Highway 131 South Hotel Petoskey, MI Holiday Inn -- Alpena........................... 1000 U.S. 23 North Hotel Alpena, MI Stoody Deloro................................... 16425 Gale Avenue Industrial Industry, CA Yale Security................................... 16300 W. 103rd Street Industrial Lemont, IL Motorola........................................ 1101 East University Ave. Office/R&D Urbana, IL Autozone (31 properties)........................ See Attached Schedule Retail Lockheed Martin................................. 6721 Baymeadow Drive Office/Industrial Glen Burnie, MD Peerless Chain.................................. 1416 E. Sanborn Street Industrial Winona, MN General Cinema.................................. 14551 Burnhaven Circle Cinema Burnsville, MN Wal-Mart (Sams Club)............................ 2930 Lebanon Church St. Retail West Mifflin, PA Armel/Kinney Shoes.............................. 3499 N.W. 53rd Street Office/Warehouse Ft. Lauderdale, FL A.P. Parts -- Toledo............................ 315-543 Matzinger Street Industrial Toledo, OH A.P. Parts -- Pinconning........................ 401 E. 5th Street Industrial Pinconning, MI Anthony's Manufacturing......................... See Note (1) below Industrial San Fernando, CA Holiday Inn -- Livonia.......................... 17123 Laurel Park Drive Hotel Livonia, MI Winn-Dixie...................................... 1315 West 15th Street Retail Panama City, FL
- --------------- (1) Anthony's Manufacturing is located at the following addresses: 12400 and 12918 Gladstone, San Fernando, CA; 12391 Montero Avenue, San Fernando, CA; 12812 Arroyo Street, San Fernando, CA; and 12354 Gladstone Avenue, San Fernando, CA. 15 274 CORPORATE PROPERTY ASSOCIATES 6 PORTFOLIO SUMMARY -- (CONTINUED) MARCH 31, 1997 AUTOZONE LOCATIONS 2006 West Franklin Avenue 295 Craft Highway 1001 Sixth Avenue S.E. Gastonia, NC Chickasaw, AL Decatur, AL 5136 N. Tyron Street 2501 South Boulevard 1030 Ninth Avenue Charlotte, NC Montgomery, AL Bessemer, AL 421 South Center Street 950 32nd Street 1420 14th Street Statesville, NC Columbus, GA Phenix City, AL 1214 Morgantown Blvd 1400 Vandalia Road 407 Holcomb Avenue Lenoir, NC Collinsville, IL Mobile, AL 2602 South Congress 2609 Washington Avenue 1300 E. Prien Lake Road Austin, TX Alton, IL Lake Charles, LA 1925 Waco Drive 310 E. Edwardsville Road 2905 Big Bend Boulevard Waco, TX Wood River, IL Maplewood, MO 2321 Horne Road 521 Carlyle Road 9710 Page Avenue Corpus Christi, TX Belleville, IL Overland, MO 3201 Leopard Street 3011-3013 Cypress Drive 3405 Gravois Avenue Corpus Christi, TX West Monroe, LA St. Louis, MO 1211 Rio Grande 9007 Greenwell Springs Rd. 9644 St. Charles Rock Road Victoria, TX Baton Rouge, LA Breckenridge, MO 1411 Pleasanton Road E. Medorm St. & Hwy. 171 2003 Mac Arthur Drive San Antonio, TX Lake Charles, LA West Orange, TX 1819 Nederland Avenue Nederland, TX
16 275 CORPORATE PROPERTY ASSOCIATES 7 PORTFOLIO SUMMARY MARCH 31, 1997
PROPERTY NAME ADDRESS PROPERTY TYPE - --------------------------------------------- ------------------------- -------------------- Holiday Inn -- Livonia....................... 17123 N. Laurel Avenue Hotel Livonia, MI Seven-Up Bottling............................ 555 McDonnell Boulevard Distribution/ St. Louis, MO Warehouse Winn-Dixie................................... Highway 59 & W. 53rd St. Retail Bay Minette, AL M-Tex, Travelers Rest........................ Highway 25 Industrial Travelers Rest, SC M-Tex, Liberty............................... Peachtree Street Industrial Liberty, SC Autozone (13 properties)..................... See Attached Schedule Retail Northern Auto/Popular Stores................. 7214 E. Thomas Road Retail Scottsdale, AZ Northern Automotive/Scallon's................ 310 E. Florence Blvd. Retail Casa Grande, AZ Northern Automotive/Building 7............... 555 W. U.S. Highway 60 Retail Apache Junction, AZ Northern Auto/Crafters Mall.................. 4322 W. Bell Road Retail Glendale, AZ Northern Auto/Advanced Paper................. 1255 W. Guadalupe Retail Mesa, AZ Capin Mercantile Corp........................ 1410 Pinos Altos Road Retail Silver City, NM Northern Automotive.......................... 2953 West 30th Avenue Retail Denver, CO Family Bargain Center........................ 1150 Main Street Retail Colville, WA NYNEX........................................ Catamount Drive Office/R&D Milton, VT The Gap...................................... 1500 Jamike Avenue Distribution/ Erlanger, KY Warehouse Policy Management Systems.................... One ASA Plaza Office Bloomingdale, IL Sybron/Kerr Manufacturing.................... 28200 Wick Road Industrial/ Romulus, MI Manufacturing Sybron/Barnstead............................. 2555 Kerper Boulevard Industrial/ Dubuque, IA Manufacturing Sybron/Erie Scientific....................... Post Road Industrial/ Portsmouth, NH Manufacturing Sybron/Nalge................................. 75 Panorama Creek Drive Industrial/ Rochester, NY Manufacturing Sybron/Ormco................................. 1308 South Lone Hill Ave. Office/R&D Glendora, CA NVR -- Thurmont.............................. 210 N. Carroll Street Industrial Thurmont, MD NVR -- Farmington............................ 1043 Hook Road Industrial Farmington, NY
17 276 CORPORATE PROPERTY ASSOCIATES 7 PORTFOLIO SUMMARY -- (CONTINUED) MARCH 31, 1997
PROPERTY NAME ADDRESS PROPERTY TYPE - --------------------------------------------- ------------------------- -------------------- Stair Plans America.......................... 29 Synan Road Industrial Fredericksburg, VA Allied Plywood............................... 7891 Notes Drive Industrial/Light Manasas, VA Manufacturing Holiday Inn -- Topeka........................ 605 Fairlawn Hotel Topeka, KS
AUTOZONE LOCATIONS 8102 North Davis Highway Pensacola, FL 1301 W. 15th Street Panama City, FL 3520 Main Street Jacksonville, FL 10418 Florida Boulevard Baton Rouge, LA 6152 Plank Road Baton Rouge, LA 2740 Highway 190 West Hammond, LA 129 Centre Pointe Drive St. Peters, MO 35 E. Mexico Road St. Peters, MO 721 South Lafayette St. Shelby, NC 399 E. Cannon Boulevard Kannapolis, NC 220 Fleming Drive Morgantown, NC 5317 Ringold Road East Ridge, TN 3315 Chapman Highway Knoxville, TN 18 277 CORPORATE PROPERTY ASSOCIATES 8 PORTFOLIO SUMMARY MARCH 31, 1997
PROPERTY PROPERTY NAME ADDRESS TYPE - -------------------------------------------------- --------------------------- -------------- Policy Management................................. One ASA Plaza Office Bloomingdale, IL Sybron/Kerr Manufacturing......................... 28200 Wick Road Industrial/ Romulus, MI Manufacturing Sybron/Barnstead.................................. 2555 Kerper Boulevard Industrial/ Dubuque, IA Manufacturing Sybron/Erie Scientific............................ Post Road Industrial/ Portsmouth, NH Manufacturing Sybron/Nalge...................................... 75 Panorama Creek Drive Industrial/ Rochester, NY Manufacturing Sybron/Ormco...................................... 1308 South Lone Hill Ave. Office/R&D Glendora, CA NVR -- Thurmont................................... 210 N. Carroll Street Industrial Thurmont, MD NVR -- Farmington................................. 1043 Hook Road Industrial Farmington, NY Stair Plans America............................... 29 Synan Road Industrial Fredericksburg, VA Allied Plywood.................................... 7891 Notes Drive Industrial Manasas, VA American Signature -- Olive Branch................ 8649 Hacks Cross Industrial Olive Branch, MS American Signature -- Doraville................... 3101 McCall Boulevard Industrial Doraville, GA Autozone (11 properties).......................... See Footnote 1 below Retail Wozniak Industries................................ 3700 N. Rose Street Industrial Schiller Park, IL General Electric.................................. 720 Vanderburg Road Office/R&D King of Prussia, PA United Stationers (3 properties).................. See Footnote 2 below Distribution/ Warehouse Furon Buildings (6 properties).................... See Footnote 3 below 5-Industrial 1-Office High Voltage...................................... 13 Pratt Junction Industrial Sterling, MA Datcon Instrument................................. 1811 Rohrerstown Road Industrial Lancaster, PA Federal Express................................... 3205 Longmire Drive Distribution/ College Station, TX Warehouse Dr. Pepper Buildings.............................. See Footnote 4 below Distribution/ Warehouse Orbital Sciences.................................. 3380 S. Price Road Industrial Chandler, AZ Detroit Diesel.................................... 13400 Outer Drive W. Industrial Detroit, MI
19 278 CORPORATE PROPERTY ASSOCIATES 8 PORTFOLIO SUMMARY -- (CONTINUED) MARCH 31, 1997
PROPERTY PROPERTY NAME ADDRESS TYPE - -------------------------------------------------- --------------------------- -------------- Winn-Dixie *...................................... Douglas Avenue/Route 31 Retail Brenton, AL Holiday Inn -- Topeka............................. 605 Fairlawn Hotel Topeka, KS
- --------------- * Property is subject to a ground lease. (1) The locations of the facilities leased to Autozone are as follows: 7035 Atlantic Boulevard 4909 Central Avenue Jacksonville, FL Albuquerque, NM 5350 Beach Boulevard 760 Broadway Jacksonville, FL Farmington, NM 209 S. Slappey Boulevard 6126 St. Andrews Road Albany, GA Lexington, SC 2616 Community Road 5320 W. Bellfort Avenue Brunswick, GA Houston, TX 2318 Milledgeville Road 5615 Babcock Road Augusta, GA San Antonio, TX 2215 Pio Nono Avenue Macon, GA
(2) The three locations of facilities leased to United Stationers are: 3615 Highpoint Drive, San Antonio, TX; 2483 Harbor Ave., Memphis, TN; and Elmwood/Plauche Industrial Park, New Orleans, LA. (3) The six locations of facilities leased to Furon are: 407 East Street, New Haven, CT; Interstate 295 & Harmony Road, Mickleton, NJ; 1199 S. Chillicothe Road, Aurora, OH; 10585 Main Street, Mantua, OH; 386 Metacoro Ave., Bristol, RI; and 1395 Danner Drive, Aurora, OH. (4) The two locations of facilities leased to Dr. Pepper Bottling are: 2304 Century Center Blvd., Irving, TX and 2400 Holly Hill Drive, Houston, TX. 20 279 CORPORATE PROPERTY ASSOCIATES 9 PORTFOLIO SUMMARY MARCH 31, 1997
PROPERTY PROPERTY NAME ADDRESS TYPE - ------------------------------------------------- ----------------------- ---------------- American Signature -- Doraville.................. 3101 McCall Blvd. Industrial Doraville, GA General Electric................................. 720 Vanderburg Road Office/R&D King of Prussia, PA Furon Buildings (6 properties)................... See Footnote 1 below 5 -- Industrial 1 -- Office Dr. Pepper (2 properties)........................ See Footnote 2 below Distribution/ Warehouse Orbital Sciences................................. 3380 S. Price Road Industrial Chandler, AZ Detroit Diesel................................... 13400 Outer Drive W. Industrial Detroit, MI Childtime (12 properties)........................ See Footnote 3 below Retail Federal Express.................................. 201 S. Padre Island Dr. Distribution/ Corpus Christi, TX Warehouse NV Ryan -- Pittsburgh............................ 100 Ryan Court & 111 Office Ryan Court, Pittsburgh, PA Pepsi............................................ 15180 Grand Point Dr. Distribution/ Houston, TX Warehouse Titan............................................ 3033 Science Park Road Office/R&D San Diego, CA Vacant Facility *................................ 835 Hope Street Office/R&D Stanford, CT Information Resources............................ 150 N. Clinton Street & Office 564 West Randolph Chicago, IL Red Bank Distribution............................ 4000 Red Bank Road Distribution/ Cincinnati, OH Warehouse
- --------------- * Management has represented that the property is being given to lender in satisfaction of nonrecourse debt obligation. (1) The locations of the six buildings leased to Furon are as follows: 407 East Street, New Haven, CT; Interstate 295 & Harmony Road, Mickletown, NJ; 1199 S. Chillicothe Road, Aurora, OH; 10585 Main Street, Mantua, OH; 386 Metacon Ave., Bristol, RI; and 1395 Danner Drive, Aurora, OH. (2) The locations of the two buildings leased to Dr. Pepper Bottling are as follows: 2304 Century Center Blvd., Irving, TX and 2400 Holly Hill Drive, Houston, TX. (3) The locations of the twelve buildings leased to Childtime are as follows: 5792 W. Oakland Street, Chandler, AZ; 7090 N. Thornydale Road, Tucson, AZ; 1485 Vega Street, Alhambra, CA; 3656 Riverside Drive, Chino, CA; 12421 Springdale Street, Garden Grove, CA; 13881 N. Prospect Ave., Tustin, CA; 34203 Ford Road, Westland, MI; 2171 Fifteen Mile Road, Sterling Heights, MI; 32503 Ann Arbor Trail, Westland, MI; 1028 MacArthur Drive, Carrolton, TX; 550 W. Danieldale Road, Duncanville, TX and 1597 Glencairn Lane, Lewisville, TX. 21 280 ASSUMPTIONS AND LIMITING CONDITIONS This appraisal report is subject to the assumptions and limiting conditions as set forth below. 1. No responsibility is assumed for matters of a legal nature affecting the portfolio properties or the titles thereto. Titles to the properties are assumed to be good and marketable and the properties are assumed free and clear of all liens unless otherwise stated. 2. The Portfolio Valuations assume (a) responsible ownership and competent management of the properties; (b) there are no hidden or unapparent conditions of the properties' subsoil or structures that render the properties more or less valuable (no responsibility is assumed for such conditions or for arranging for engineering studies that may be required to discover them); (c) full compliance with all applicable federal, state and local zoning, access and environmental regulations and laws, unless noncompliance is stated, defined and considered in the Portfolio Valuations; and (d) all required licenses, certificates of occupancy and other governmental consents have been or can be obtained and renewed for any use on which the value estimates contained in the Portfolio Valuations are based. 3. The Appraiser shall not be required to give testimony or appear in court because of having made the appraisal with reference to the portfolio in question, unless arrangements have been previously made therefore. 4. The information contained in the Portfolio Valuations or upon which the Portfolio Valuations are based has been provided by or gathered from sources assumed to be reliable and accurate. Some of such information has been provided by the owner of the properties. The Appraiser shall not be responsible for the accuracy or completeness of such information, including the correctness of estimates, opinions, dimensions, exhibits and other factual matters. The Portfolio Valuations and the opinion of value stated therein are as of the date stated in the Portfolio Valuations. Changes since that date in portfolios, external and market factors can significantly affect property values. 5. Disclosure of the contents of the appraisal report is governed by the Bylaws and Regulations of the professional appraisal organization with which the Appraiser is affiliated. 6. Neither all, nor any part of the content of the report, or copy thereof (including conclusions as to the portfolios' values, the identity of the Appraiser, professional designations, reference to any professional appraisal organizations, or the firm with which the Appraiser is connected) shall be used for any purpose by anyone other than the client specified in the report, including, but not limited to, the mortgagee or its successors and assignees, mortgage insurers, consultants, professional appraisal organizations, any state or federally approved financial institution, any department, agency or instrumentality without the previous written consent of the Appraiser; nor shall it be conveyed by anyone to the public through advertising, public relations, news sales or other media, without the written consent and approval of the Appraiser. 7. On all appraisals subject to completion, repairs or alterations, the appraisal report and value conclusions are contingent upon completion of the improvements in a workmanlike manner. 8. The physical condition of the improvements considered by the Portfolio Valuations are based on visual inspection by the Appraiser or other representatives of Stanger and on representations by the owner. Stanger assumes no responsibility for the soundness of structural members or for the condition of mechanical equipment, plumbing or electrical components. The Appraiser has made no survey of the properties. 9. The projections of income and expenses and the valuation parameters utilized are not predictions of the future. Rather, they are the Appraiser's best estimate of current market thinking relating to future income and expenses. The Appraiser makes no warranty or representations that these projections will materialize. The real estate market is constantly fluctuating and changing. It is not the Appraiser's task to predict or in any way warrant the conditions of a future real estate market; the Appraiser can only reflect what the investment community, as of the date of the appraisal, envisions for the future in terms of rental rates, expenses, supply and demand. We have used methods and assumptions deemed appropriate in our professional judgment; however, future events may demonstrate that the assumptions were incorrect or that other different methods or assumptions may have been more appropriate. 22 281 ASSUMPTIONS AND LIMITING CONDITIONS -- (CONTINUED) 10. The Portfolio Valuations represent normal consideration for the properties sold based on the buyer's assumption of existing third-party indebtedness and unaffected by special terms, services, fees, costs, or credits incurred in the transaction. 11. Unless otherwise stated in the report, the existence of hazardous materials, which may or may not be present on the properties, was not disclosed to the Appraiser by the owner. The Appraiser has no knowledge of the existence of such materials on or in the properties. However, the Appraiser is not qualified to detect such substances. The presence of substances such as asbestos, ureaformaldehyde foam insulation, oil spills, or other potentially hazardous materials may affect the values of the portfolios. The portfolio value estimates are predicated on the assumption that there is no such material on or in the portfolio properties that would cause a loss of value. No responsibility is assumed for such conditions, or for any expertise or engineering knowledge required to discover them. The client is urged to retain an expert in this field, if desired. 12. For purposes of this report, it is assumed that each property is free of any negative impact with regard to the Environmental Cleanup Responsibility Act (ECRA) or any other environmental problems or with respect to non-compliance with the Americans with Disabilities Act (ADA). No investigation has been made by the Appraiser with respect to any potential environmental or ADA problems. Environmental and ADA compliance studies are not within the scope of this report. 13. Pursuant to the Engagement Agreement, the Portfolio Valuations have been prepared on a limited scope basis in conformity with the departure provisions of the Uniform Standards of Professional Appraisal Practice and the Standards of Professional Appraisal Practice of the Appraisal Institute, relying solely on the income approach to value primarily utilizing discounted cash flow analysis assuming leases and debt in place. Further, the engagement calls for delivery of a summary appraisal report in which the content has been limited to that data presented herein. As such, the summary appraisal report is not designed to meet the requirements of Title XI of the Federal Financial Institutions Reform, Recovery and Enforcement Act of 1989. Therefore, federally regulated institutions should not rely on this report for financing purposes. 14. The Portfolio Valuations reported herein may not reflect the premium or discount a potential buyer may assign to an assembled portfolio of properties or to a group of properties in a particular local market which provides opportunities for enhanced market presence and penetration. In addition, where properties are owned jointly with other entities affiliated with the general partner, minority interest discounts were not applied. 15. The appraisal is solely for the purpose of providing our opinion of the values of the Portfolios, and we make no representation as to the adequacy of such a review for any other purpose. The properties in the portfolios are generally leased to corporate tenants under long-term triple net leases. The owner has directed that the leased fee interests be valued based on existing lease contracts and debt in place using a discounted cash flow analysis. The use of other valuation methodologies might produce a higher or lower value. 16. In addition to these general assumptions and limiting conditions, any assumptions and conditions applicable to specific properties have been retained in our files. 23 282 APPENDIX C 283 Exhibit 99.3 CONSENT CARD -------------------------------------------------------------------- CAREY DIVERSIFIED, LLC CONSENT VOTE OF UNITHOLDERS AS OF RECORD DATE OCTOBER 7, 1997 CONSENT This Consent is solicited by the General Partners on behalf of the Unitholders or holders of votes of Corporate Property Associates 1-9 ("CPA(R):1-9"). (Continued, and to be dated and signed, on reverse side.) ELECTION FORM ------------------------------------------------------------------------- ELECTION FORM (Continued, and to be dated and signed, on reverse side.) 284 CONSENT CARD INSTRUCTIONS (Please read carefully and follow instructions) Please note that if you fail to properly complete your CONSENT CARD, your vote(s) will be cast AGAINST the proposed consolidation. If you fail to return your CONSENT CARD your inaction has the same effect as a vote cast AGAINST the proposed consolidation. If the consolidation is approved, you will not participate in the Election Process and you will receive Listed Shares. Carefully read and follow these instructions: * Your ownership positions in CPA(R); 1-9 are listed to the right of your name and address on your Consent Card. * To vote all your holdings in the same manner, simply mark an "X" in the appropriate box that appears in the top right corner of your Consent Card (your choices are FOR, AGAINST or ABSTAIN). If you wish to withhold your vote as to any individual CPA(R) in which you own partnership interests, simply draw a line through the appropriate partnership listing that appears to the middle right of your Consent card. * SIGN AND DATE YOUR COMPLETED CONSENT CARD. * Place your Consent Card along with your Election Form into the postage paid envelope provided. This envelope is addressed to ChaseMellon Shareholder Services, LLC. - -------------------------------------------------------------------------------- ELECTION FORM INSTRUCTIONS (Please read carefully and follow instructions) Please note that if you fail to property complete and or return your ELECTION FORM and the consolidation is approved, you will receive LISTED SHARES for all your holdings. If you fail to return your CONSENT CARD, and the consolidation is approved, you will not participate in the Election Process and you will receive Listed Shares. Carefully read and follow these instructions: * Your ownership positions in CPA(R); 1-9 are listed to the right of your name and address on your Election Form. * You may receive either LISTED SHARES or SUBSIDIARY PARTNERSHIP UNITS for your holdings. * To receive LISTED SHARES for all your holdings, simply indicate by drawing an "X" in the appropriate box located on the middle left side of your Election Form. If you wish to receive Subsidiary Partnership Units for your holdings in any particular Limited Partnership, simply mark an "X" in the appropriate box next to the appropriate partnership listing that appears to the middle of your Election Form. * SIGN AND DATE YOUR COMPLETED ELECTION FORM. * Place your Election Form along with your Consent Card into the postage paid envelope provided. This envelope is addressed to ChaseMellon Shareholder Services, LLC. 285 CONSENT CARD THE GENERAL PARTNERS OF CORPORATE PROPERTY ASSOCIATES 1-9 ("CPA(R):1-9") RECOMMEND THAT YOU VOTE FOR (FOR THE CONSOLIDATION). PROPOSAL: To adopt the Partnership Agreement Amendments and approve the Plan of Consolidation and all related transactions, all as described in the Prospectus, in which CPA(R):1-9 will be consolidated into a newly-formed Delaware limited liability company, Carey Diversified LLC ("CD"), which will trade publicly on the New York Stock Exchange. Investors in CPA(R):1-9 will be offered the opportunity to exchange current partnership units for listed shares of CD. FOR AGAINST ABSTAIN [ ] [ ] [ ] You may withhold your vote as to any individual CPA(R) Partnership in which you own partnership interests by drawing a line through that partnership as listed to the right. (Please note our records indicate you have the ownership positions as indicated to the right of your name and address below.) CPA(R):1 CPA(R):4 CPA(R):7 CPA(R):2 CPA(R):5 CPA(R):8 CPA(R):3 CPA(R):6 CPA(R):9 SIGNATURE Dated , 1997 ------------------------------------------- ---------------- Please sign exactly as your name appears above. PLEASE MARK, SIGN, DATE AND MAIL THIS CONSENT CARD PROMPTLY, USING THE ENCLOSED ENVELOPE. + FOLD CARD HERE + ELECTION FORM THE GENERAL PARTNERS OF CORPORATE PROPERTY ASSOCIATES 1-9 ("CPA(R):1-9") RECOMMEND THAT YOU ELECT TO RECEIVE LISTED SHARES FOR ALL YOUR HOLDINGS. SUBSIDIARY LISTED PARTNERSHIP SHARES UNITS I ELECT TO RECEIVE LISTED SHARES For my CPA(R):1 [ ] [ ] FOR ALL MY HOLDINGS EXCEPT AS holdings, I elect STATED TO THE RIGHT. to receive: [ ] For my CPA(R):2 [ ] [ ] holdings, I elect to receive: For my CPA(R):3 [ ] [ ] holdings, I elect to receive: For my CPA(R):4 [ ] [ ] holdings, I elect to receive: For my CPA(R):5 [ ] [ ] holdings, I elect to receive: For my CPA(R):6 [ ] [ ] holdings, I elect to receive: For my CPA(R):7 [ ] [ ] holdings, I elect to receive: For my CPA(R):8 [ ] [ ] holdings, I elect to receive: For my CPA(R):9 [ ] [ ] holdings, I elect to receive: SIGNATURE Dated , 1997 ------------------------------------------- ---------------- Please sign exactly as your name appears above. PLEASE MARK, SIGN, DATE AND MAIL THIS ELECTION FORM PROMPTLY, USING THE ENCLOSED ENVELOPE. 286 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Indemnification is provided for in Article VIII of the Amended and Restated Limited Liability Company Agreement of the Registrant and such provisions are incorporated herein by reference. Reference is hereby made to the captions "FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION -- Indemnification of Directors and Officers of the Company" and "FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION -- Directors and Officers Insurance" in the Prospectus, which is part of this Registration Statement, for a more detailed description of indemnification and insurance arrangements between the Company and its officers and directors. ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS (a) 1. Consolidated Financial Statements The following combined financial statements are filed as part of this Report: Report of Independent Accountants. ASSUMING 100% PARTICIPATION WITHOUT THE ISSUANCE OF PARTNERSHIP SHARES: Pro Forma Condensed Consolidated Balance Sheet of Carey Diversified LLC as of June 30, 1997. Pro Forma Notes to Condensed Consolidated Balance Sheet. Pro Forma Condensed Consolidated Statements of Income of Carey Diversified LLC for the year ended December 31, 1996 and six months ended June 30, 1997. Pro Forma Notes to Condensed Consolidated Statements of Income. ASSUMING 100% PARTICIPATION WITH THE ISSUANCE OF PARTNERSHIP SHARES: Pro Forma Condensed Consolidated Balance Sheet of Carey Diversified LLC as of June 30, 1997. Pro Forma Notes to Condensed Consolidated Balance Sheet. Pro Forma Condensed Consolidated Statements of Income of Carey Diversified LLC for the year ended December 31, 1996 and six months ended June 30, 1997. Pro Forma Notes to Condensed Consolidated Statements of Income. ASSUMING MINIMUM PARTICIPATION WITHOUT THE ISSUANCE OF PARTNERSHIP SHARES: Pro Forma Condensed Consolidated Balance Sheet of Carey Diversified LLC as of June 30, 1997. Pro Forma Notes to Condensed Consolidated Balance Sheet. Pro Forma Condensed Consolidated Statements of Income of Carey Diversified LLC for the year ended December 31, 1996 and six months ended June 30, 1997. Pro Forma Notes to Condensed Consolidated Statements of Income. ASSUMING MINIMUM PARTICIPATION WITH THE ISSUANCE OF PARTNERSHIP SHARES: Pro Forma Condensed Consolidated Balance Sheet of Carey Diversified LLC as of June 30, 1997. Pro Forma Notes to Condensed Consolidated Balance Sheet. Pro Forma Condensed Consolidated Statements of Income of Carey Diversified LLC for the year ended December 31, 1996 and six months ended June 30, 1997. Pro Forma Notes to Condensed Consolidated Statement of Income. II-1 287 Report of Independent Accountants. Historical Balance Sheet of Carey Diversified LLC as of August 31, 1997. Notes to Balance Sheet. Report of Independent Accountants. Combined Balance Sheets of the Corporate Property Associates Partnerships as of December 31, 1995 and 1996 and (unaudited) as of June 30, 1997. Combined Statements of Income of the Corporate Property Associates Partnerships for the years ended December 31, 1994, 1995 and 1996 and (unaudited) for the three months ended June 30, 1996 and 1997. Combined Statements of Partners' Capital of the Corporate Property Associates Partnerships for the years ended December 31, 1994, 1995 and 1996 and (unaudited) for the six months ended June 30, 1997. Combined Statements of Cash Flows of the Corporate Property Associates Partnerships for the years ended December 31, 1994, 1995 and 1996 and (unaudited) for the six months ended June 30, 1996 and 1997. Notes to Combined Financial Statements. Schedule III - Real Estate and Accumulated Depreciation (b) Exhibits
EXHIBIT NO. EXHIBIT - ----------- ---------------------------------------------------------------------------------- 2.1 Form of Certificate of Merger of CPA(R):1 2.2 Form of Certificate of Merger of CPA(R):2 2.3 Form of Certificate of Merger of CPA(R):3 2.4 Form of Certificate of Merger of CPA(R):4 2.5 Form of Certificate of Merger of CPA(R):5 2.6 Form of Certificate of Merger of CPA(R):6 2.7 Form of Certificate of Merger of CPA(R):7 2.8 Form of Certificate of Merger of CPA(R):8 2.9 Form of Certificate of Merger of CPA(R):9 2.10 Form of Agreement of Merger of CPA(R):1 2.11 Form of Agreement of Merger of CPA(R):2 2.12 Form of Agreement of Merger of CPA(R):3 2.13 Form of Agreement of Merger of CPA(R):4 2.14 Form of Agreement of Merger of CPA(R):5 2.15 Form of Agreement of Merger of CPA(R):6 2.16 Form of Agreement of Merger of CPA(R):7 2.17 Form of Agreement of Merger of CPA(R):8 2.18 Form of Agreement of Merger of CPA(R):9 3.1 Form of Amended and Restated Limited Liability Company Agreement of Carey Diversified LLC 3.2 Bylaws of Carey Diversified LLC 4.1 Form of Listed Share Stock Certificate 5.1 Opinion of Delaware Counsel, Richards, Layton & Finger 8.1 Opinion of Reed Smith Shaw & McClay LLP as to Certain Tax Matters 8.2 Opinion of Reed Smith Shaw & McClay LLP as to Certain ERISA Matters 10.1 Form of Management Agreement Between Carey Management LLC and the Company 10.2 Non-Employee Directors' Incentive Plan 10.3 1997 Share Incentive Plan 10.4 Investment Banking Engagement Letter between W.P. Carey & Co. and the Company
II-2 288 10.5 Non-Statutory Listed Share Option Agreement 21 List of Registrant Subsidiaries 23.1 Consent of Coopers & Lybrand, LLP 23.2 Consent of Richards, Layton & Finger (included in Exhibit 5.1) 23.3 Consent of Reed Smith Shaw & McClay LLP (included in Exhibit 8.1) 23.4 Consent of Barclay G. Jones 23.5 Consent of Steven M. Berzin 23.6 Consent of Gordon Dugan 23.7 Consent of Donald Nickelson 23.8 Consent of Eberhard Faber 23.9 Consent of Charles C. Townsend, Jr. 23.10 Consent of Lawrence R. Klein 23.11 Consent of Reginald Winssinger 99.1 Fairness Opinion of Robert A. Stanger & Co., Inc. 99.2 Independent Appraisal of Fair Market Value of the CPA(R) Partnerships' Real Estate Portfolios 99.3 Consolidation Consent Card, Election Form and Instructions 99.4 Amendment to the Amended Agreement of Limited Partnership of CPA(R):1 99.5 Amendment to the Amended Agreement of Limited Partnership of CPA(R):2 99.6 Amendment to the Amended Agreement of Limited Partnership of CPA(R):3 99.7 Amendment to the Amended Agreement of Limited Partnership of CPA(R):4 99.8 Amendment to the Amended Agreement of Limited Partnership of CPA(R):5 99.9 Amendment to the Amended Agreement of Limited Partnership of CPA(R):6 99.10 Amendment to the Amended Agreement of Limited Partnership of CPA(R):7 99.11 Amendment to the Amended Agreement of Limited Partnership of CPA(R):8 99.12 Amendment to the Amended Agreement of Limited Partnership of CPA(R):9 99.13 Amended and Restated Agreement of Limited Partnership of CPA(R):1 99.14 Amended and Restated Agreement of Limited Partnership of CPA(R):2 99.15 Amended and Restated Agreement of Limited Partnership of CPA(R):3 99.16 Amended and Restated Agreement of Limited Partnership of CPA(R):4 99.17 Amended and Restated Agreement of Limited Partnership of CPA(R):5 99.18 Amended and Restated Agreement of Limited Partnership of CPA(R):6 99.19 Amended and Restated Agreement of Limited Partnership of CPA(R):7 99.20 Amended and Restated Agreement of Limited Partnership of CPA(R):8 99.21 Amended and Restated Agreement of Limited Partnership of CPA(R):9 99.22 Listed Share Purchase Warrant
- --------------- II-3 289 ITEM 22. UNDERTAKINGS (a)(1) The undersigned registrant undertakes as follows: that prior to any public reoffering of the securities registered hereunder through the use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form. (2) The registrant undertakes that every prospectus (i) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet the requirements of section 10(a)(3) of the Securities Act of 1933 and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, or purposes of determining liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (c) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the Company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-4 290 Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-4 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York on the 14th day of October, 1997. CAREY DIVERSIFIED LLC By: /s/ FRANCIS J. CAREY ------------------------------------ Francis J. Carey, Chairman and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints William P. Carey, Francis J. Carey and Steven M. Berzin his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Registration Statement, and to file the same, with all exhibits thereto, and any other documents in connection therewith, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities indicated.
NAME TITLE - -------------------------------------------------------- Francis J. Carey Chairman of the Board and By: /s/ FRANCIS J. CAREY Chief Executive Officer --------------------------------- (Principal Executive October 14, 1997 Officer) of the Registrant William P. Carey Director of the Registrant By: /s/ WILLIAM P. CAREY --------------------------------- October 14, 1997 Gordon F. Dugan President of the By: /s/ GORDON F. DUGAN Registrant --------------------------------- October 14, 1997 Steven M. Berzin Vice Chairman of the By: /s/ STEVEN M. BERZIN Registrant --------------------------------- October 14, 1997 Claude Fernandez Executive Vice President, By: /s/ CLAUDE FERNANDEZ --------------------------------- October 14, 1997 John J. Park Executive Vice President By: /s/ JOHN J. PARK and Chief Financial --------------------------------- Officer of the Registrant October 14, 1997 (Principal Financial Officer)
II-5 291 EXHIBIT INDEX
SEQUENTIALLY NUMBERED EXHIBIT NO. EXHIBIT PAGES - ----------- ----------------------------------------------------------------------- ------------ 2.1 Form of Certificate of Merger of CPA(R):1.............................. 2.2 Form of Certificate of Merger of CPA(R):2.............................. 2.3 Form of Certificate of Merger of CPA(R):3.............................. 2.4 Form of Certificate of Merger of CPA(R):4.............................. 2.5 Form of Certificate of Merger of CPA(R):5.............................. 2.6 Form of Certificate of Merger of CPA(R):6.............................. 2.7 Form of Certificate of Merger of CPA(R):7.............................. 2.8 Form of Certificate of Merger of CPA(R):8.............................. 2.9 Form of Certificate of Merger of CPA(R):9.............................. 2.10 Form of Agreement of Merger of CPA(R):1................................ 2.11 Form of Agreement of Merger of CPA(R):2................................ 2.12 Form of Agreement of Merger of CPA(R):3................................ 2.13 Form of Agreement of Merger of CPA(R):4................................ 2.14 Form of Agreement of Merger of CPA(R):5................................ 2.15 Form of Agreement of Merger of CPA(R):6................................ 2.16 Form of Agreement of Merger of CPA(R):7................................ 2.17 Form of Agreement of Merger of CPA(R):8................................ 2.18 Form of Agreement of Merger of CPA(R):9................................ 3.1 Form of Amended and Restated Limited Liability Company Agreement of Carey Diversified LLC.................................................. 3.2 Bylaws of Carey Diversified LLC........................................ 4.1 Form of Listed Share Stock Certificate................................. 5.1 Opinion of Delaware Counsel, Richards, Layton & Finger................. 8.1 Opinion of Reed Smith Shaw & McClay LLP as to Certain Tax Matters...... 8.2 Opinion of Reed Smith Shaw & McClay LLP as to Certain ERISA Matters.... 10.1 Form of Management Agreement Between Carey Management LLC and the Company................................................................ 10.2 Non-Employee Directors' Incentive Plan................................. 10.3 1997 Share Incentive Plan.............................................. 10.4 Investment Banking Engagement Letter between W.P. Carey & Co. and the Company................................................................ 10.5 Non-Statutory Listed Share Option Agreement............................ 21 List of Registrant Subsidiaries........................................ 23.1 Consent of Coopers & Lybrand........................................... 23.2 Consent of Richards, Layton & Finger (included in Exhibit 5.1)......... 23.3 Consent of Reed Smith Shaw & McClay LLP (included in Exhibit 8.1)...... 23.4 Consent of Barclay G. Jones............................................ 23.5 Consent of Steven M. Berzin............................................ 23.6 Consent of Gordon Dugan................................................ 23.7 Consent of Donald Nickelson............................................ 23.8 Consent of Eberhard Faber.............................................. 23.9 Consent of Charles C. Townsend, Jr..................................... 23.10 Consent of Lawrence R. Klein........................................... 23.11 Consent of Reginald Winssinger......................................... 99.1 Fairness Opinion of Robert A. Stanger & Co., Inc.......................
292
SEQUENTIALLY NUMBERED EXHIBIT NO. EXHIBIT PAGES - ----------- ----------------------------------------------------------------------- ------------ 99.2 Independent Appraisal of Fair Market Value of the CPA(R) Partnerships' Real Estate Portfolios................................................. 99.3 Consolidation Consent Card Election Form and Instructions.............. 99.4 Amendment to the Amended Agreement of Limited Partnership of CPA(R):1............................................................... 99.5 Amendment to the Amended Agreement of Limited Partnership of CPA(R):2............................................................... 99.6 Amendment to the Amended Agreement of Limited Partnership of CPA(R):3............................................................... 99.7 Amendment to the Amended Agreement of Limited Partnership of CPA(R):4............................................................... 99.8 Amendment to the Amended Agreement of Limited Partnership of CPA(R):5............................................................... 99.9 Amendment to the Amended Agreement of Limited Partnership of CPA(R):6............................................................... 99.10 Amendment to the Amended Agreement of Limited Partnership of CPA(R):7............................................................... 99.11 Amendment to the Amended Agreement of Limited Partnership of CPA(R):8............................................................... 99.12 Amendment to the Amended Agreement of Limited Partnership of CPA(R):9............................................................... 99.13 Amended and Restated Agreement of Limited Partnership of CPA(R):1...... 99.14 Amended and Restated Agreement of Limited Partnership of CPA(R):2...... 99.15 Amended and Restated Agreement of Limited Partnership of CPA(R):3...... 99.16 Amended and Restated Agreement of Limited Partnership of CPA(R):4...... 99.17 Amended and Restated Agreement of Limited Partnership of CPA(R):5...... 99.18 Amended and Restated Agreement of Limited Partnership of CPA(R):6...... 99.19 Amended and Restated Agreement of Limited Partnership of CPA(R):7...... 99.20 Amended and Restated Agreement of Limited Partnership of CPA(R):8...... 99.21 Amended and Restated Agreement of Limited Partnership of CPA(R):9...... 99.22 Listed Share Purchase Warrant..........................................
- --------------- EX-2.1 2 FORM OF CERTIFICATE OF MERGER OF CPA :1 1 Exhibit 2.1 STATE OF CALIFORNIA [CALIFORNIA SEAL] SECRETARY OF STATE CERTIFICATE OF MERGER Form LP-9 IMPORTANT--READ INSTRUCTIONS ON BACK BEFORE COMPLETING THIS FORM THIS CERTIFICATE IS PRESENTED FOR FILING PURSUANT TO SECTION 15678.4 AND 1113(g), CALIFORNIA CORPORATIONS CODE. _______________________________________________________________________________ 1. NAME OF SURVIVING [X] LIMITED PARTNERSHIP [ ] CORPORATION [ ] OTHER ____ Corporate Property Associates - a California limited partnership _______________________________________________________________________________ 2. FILE NO. _______________________________________________________________________________ 3. ADDRESS: 50 Rockefeller Plaza CITY: New York STATE: NY ZIP CODE: 10020 _______________________________________________________________________________ 4. STATE/COUNTRY OF FORMATION California _______________________________________________________________________________ 5. NAME OF DISAPPEARING [X] LIMITED PARTNERSHIP [ ] CORPORATION [ ] OTHER ___ First Subsidiary, L.P. _______________________________________________________________________________ 6. FILE NO. _______________________________________________________________________________ 7. STATE/COUNTRY OF FORMATION California _______________________________________________________________________________ 8. THIS MERGER IS EFFECTIVE: (NOT TO EXCEED 90 DAYS FROM DATE OF FILING) Upon Filing (IF NO DATE IS INDICATED, THIS MERGER WILL MONTH DAY YEAR BE EFFECTIVE UPON FILING WITH THIS OFFICE.) _______________________________________________________________________________ 9. IF A VOTE OF THE BUSINESS ENTITIES IS REQUIRED UNDER SECTION 15678.4(a)(2) AND/OR SECTION 1113(g), COMPLETE THE FOLLOWING: NAME(S) Corporate Property Associates-a California limited partnership First Subsidiary, L.P. PERCENTAGE OF VOTE REQUIRED majority NO. SHARES EACH CLASS ENTITLED TO VOTE _______________________________________________________________________________ SECTION APPLICABLE ONLY IF SURVIVING ENTITY IS A CALIFORNIA LIMITED PARTNERSHIP =============================================================================== ENTER CHANGES ONLY IN ITEM 10 =============================================================================== 10. CHANGES TO THE SURVIVING LIMITED PARTNERSHIP RECORD RESULTING FROM THIS MERGER ARE AS FOLLOWS: (COMPLETE APPROPRIATE SUB-SECTIONS. CONTINUE ON SECOND PAGE IF NECESSARY). A. THE LIMITED PARTNERSHIP NAME IS CHANGED TO: _______________________________________________________________________________ B. PRINCIPAL EXECUTIVE OFFICE C. CALIFORNIA OFFICE ADDRESS CHANGE: ADDRESS CHANGE: (FOR FOREIGN LIMITED PARTNERSHIPS ONLY) ADDRESS: ADDRESS: CITY: STATE: CITY: STATE: ZIP CODE: ZIP CODE: _______________________________________________________________________________ D. GENERAL PARTNER(S) WITHDRAWN: E. GENERAL PARTNER ADDED: NAME: William Polk Carey NAME: Carey Diversified LLC NAME: W.P. Carey & Co., Inc. ADDRESS: 50 Rockefeller Plaza CITY: New York STATE: NY ZIP CODE: 10020 _______________________________________________________________________________ F. GENERAL PARTNER ADDRESS CHANGE: G. INFORMATION CONCERNING THE AGENT FOR SERVICE OF PROCESS HAS BEEN CHANGED TO: NAME: NAME: ADDRESS: ADDRESS: CITY: STATE: CITY: STATE: CA ZIP CODE: ZIP CODE: ________________________________________________________________________________ H. THE NUMBER OF GENERAL PARTNERS REQUIRED TO ACKNOWLEDGE AND FILE CERTIFICATES IS CHANGED TO: 11. NUMBER OF PARGES ATTACHED, (PLEASE INDICATE NUMBER ONLY) [1] IF ANY: [ ] ________________________________________________________________________________ 12. IT IS HEREBY DECLARED THAT WE ARE THE PERSONS WHO EXECUTED THIS CERTIFICATE OF MERGER WHICH EXECUTION IS OUR ACT AND DEED. (SEE INSTRUCTIONS) Corporate Property Associates a California limited partnership First Subsidiary, L.P. _____________________________________ ______________________________________ NAME OF SURVIVING BUSINESS ENTITY NAME OF DISAPPEARING BUSINESS ENTITY _____________________________________ ______________________________________ SIGNATURE SIGNATURE W.P. Carey & Co., Inc. Carey Diversified LLC - General Partner General Partner _____________________________________ ______________________________________ POSITION POSITION OR TITLE _____________________________________ ______________________________________ SECOND SIGNATURE (IF REQUIRED) SECOND SIGNATURE (IF REQUIRED) General Partner _____________________________________ ______________________________________ POSITION OR TITLE POSITION OR TITLE =============================================================================== 13. RETURN ACKNOWLEDGMENT TO: NAME ADDRESS CITY STATE ZIP CODE =============================================================================== THIS SPACE FOR FILING OFFICER USE =============================================================================== SEC/STATE REV. 1/96 FORM LP-9-FILING FEE. SEE INSTRUCTIONS EX-2.2 3 FORM OF CERTIFICATE OF MERGER OF CPA :2 1 Exhibit 2.2 STATE OF CALIFORNIA [CALIFORNIA SEAL] SECRETARY OF STATE CERTIFICATE OF MERGER Form LP-9 IMPORTANT--READ INSTRUCTIONS ON BACK BEFORE COMPLETING THIS FORM THIS CERTIFICATE IS PRESENTED FOR FILING PURSUANT TO SECTION 15678.4 AND 1113(g), CALIFORNIA CORPORATIONS CODE. _______________________________________________________________________________ 1. NAME OF SURVIVING [X] LIMITED PARTNERSHIP [ ] CORPORATION [ ] OTHER ____ Corporate Property Associates 2 - a California limited partnership _______________________________________________________________________________ 2. FILE NO. _______________________________________________________________________________ 3. ADDRESS: 50 Rockefeller Plaza CITY: New York STATE: NY ZIP CODE: 10020 _______________________________________________________________________________ 4. STATE/COUNTRY OF FORMATION California _______________________________________________________________________________ 5. NAME OF DISAPPEARING [X] LIMITED PARTNERSHIP [ ] CORPORATION [ ] OTHER ___ Second Subsidiary, L.P. _______________________________________________________________________________ 6. FILE NO. _______________________________________________________________________________ 7. STATE/COUNTRY OF FORMATION California _______________________________________________________________________________ 8. THIS MERGER IS EFFECTIVE: (NOT TO EXCEED 90 DAYS FROM DATE OF FILING) Upon Filing (IF NO DATE IS INDICATED, THIS MERGER WILL MONTH DAY YEAR BE EFFECTIVE UPON FILING WITH THIS OFFICE.) _______________________________________________________________________________ 9. IF A VOTE OF THE BUSINESS ENTITIES IS REQUIRED UNDER SECTION 156786.4(a)(2) AND/OR SECTION 1113(g), COMPLETE THE FOLLOWING: NAME(S) Corporate Property Associates 2 - a California limited partnership Second Subsidiary, L.P. PERCENTAGE OF VOTE REQUIRED majority NO. SHARES EACH CLASS ENTITLED TO VOTE _______________________________________________________________________________ SECTION APPLICABLE ONLY IF SURVIVING ENTITY IS A CALIFORNIA LIMITED PARTNERSHIP =============================================================================== ENTER CHANGES ONLY IN ITEM 10 =============================================================================== 10. CHANGES TO THE SURVIVING LIMITED PARTNERSHIP RECORD RESULTING FROM THIS MERGER ARE AS FOLLOWS: (COMPLETE APPROPRIATE SUB-SECTIONS. CONTINUE ON SECOND PAGE IF NECESSARY). A. THE LIMITED PARTNERSHIP NAME IS CHANGED TO: _______________________________________________________________________________ B. PRINCIPAL EXECUTIVE OFFICE C. CALIFORNIA OFFICE ADDRESS CHANGE: ADDRESS CHANGE: (FOR FOREIGN LIMITED PARTNERSHIPS ONLY) ADDRESS: ADDRESS: CITY: STATE: CITY: STATE: ZIP CODE: ZIP CODE: _______________________________________________________________________________ D. GENERAL PARTNER(S) WITHDRAWN: E. GENERAL PARTNER ADDED: NAME: William Polk Carey NAME: Carey Diversified LLC NAME: W.P. Carey & Co., Inc. ADDRESS: 50 Rockefeller Plaza CITY: New York STATE: NY ZIP CODE: 10020 _______________________________________________________________________________ F. GENERAL PARTNER ADDRESS CHANGE: G. INFORMATION CONCERNING THE AGENT FOR SERVICE OF PROCESS HAS BEEN CHANGED TO: NAME: NAME: ADDRESS: ADDRESS: CITY: STATE: CITY: STATE: CA ZIP CODE: ZIP CODE: ________________________________________________________________________________ H. THE NUMBER OF GENERAL PARTNERS REQUIRED TO ACKNOWLEDGE AND FILE CERTIFICATES IS CHANGED TO: 11. NUMBER OF PAGES ATTACHED, (PLEASE INDICATE NUMBER ONLY) [1] IF ANY: [ ] ________________________________________________________________________________ 12. IT IS HEREBY DECLARED THAT WE ARE THE PERSONS WHO EXECUTED THIS CERTIFICATE OF MERGER WHICH EXECUTION IS OUR ACT AND DEED. (SEE INSTRUCTIONS) Corporate Property Associates 2 - a California limited partnership Second Subsidiary, L.P. _____________________________________ ______________________________________ NAME OF SURVIVING BUSINESS ENTITY NAME OF DISAPPEARING BUSINESS ENTITY _____________________________________ ______________________________________ SIGNATURE SIGNATURE W.P. Carey & Co., Inc. Carey Diversified LLC General Partner - General Partner _____________________________________ ______________________________________ POSITION POSITION OR TITLE _____________________________________ ______________________________________ SECOND SIGNATURE (IF REQUIRED) SECOND SIGNATURE (IF REQUIRED) General Partner _____________________________________ ______________________________________ POSITION OR TITLE POSITION OR TITLE =============================================================================== 13. RETURN ACKNOWLEDGMENT TO: NAME ADDRESS CITY STATE ZIP CODE =============================================================================== THIS SPACE FOR FILING OFFICER USE =============================================================================== SEC/STATE REV. 1/96 FORM LP-9-FILING FEE. SEE INSTRUCTIONS APPROVED BY SECRETARY OF STATE EX-2.3 4 FORM OF CERTIFICATE OF MERGER OF CPA :3 1 EXHIBIT 2.3 STATE OF CALIFORNIA [CALIFORNIA SEAL] SECRETARY OF STATE Form LP-9 CERTIFICATE OF MERGER IMPORTANT--READ INSTRUCTIONS ON BACK BEFORE COMPLETING THIS FORM THIS CERTIFICATE IS PRESENTED FOR FILING PURSUANT TO SECTION 15678.4 AND 1113(g), CALIFORNIA CORPORATIONS CODE. _______________________________________________________________________________ 1. NAME OF SURVIVING [X] LIMITED PARTNERSHIP [ ] CORPORATION [ ] OTHER ____ Corporate Property Associates 3- a California limited partnership _______________________________________________________________________________ 2. FILE NO. _______________________________________________________________________________ 3. ADDRESS: 50 Rockefeller Plaza CITY: New York STATE: NY ZIP CODE: 10020 _______________________________________________________________________________ 4. STATE/COUNTRY OF FORMATION California _______________________________________________________________________________ 5. NAME OF DISAPPEARING [X] LIMITED PARTNERSHIP [ ] CORPORATION [ ] OTHER ___ Third Subsidiary, L.P. _______________________________________________________________________________ 6. FILE NO. _______________________________________________________________________________ 7. STATE/COUNTRY OF FORMATION California _______________________________________________________________________________ 8. THIS MERGER IS EFFECTIVE: (NOT TO EXCEED 90 DAYS FROM DATE OF FILING) Upon Filing (IF NO DATE IS INDICATED, THIS MERGER WILL MONTH DAY YEAR BE EFFECTIVE UPON FILING WITH THIS OFFICE.) _______________________________________________________________________________ 9. IF A VOTE OF THE BUSINESS ENTITIES IS REQUIRED UNDER SECTION 15678.4(a)(2) AND/OR SECTION 1113(g), COMPLETE THE FOLLOWING: NAME(S) Corporate Property Associates 3- a California limited partnership Third Subsidiary, L.P. PERCENTAGE OF VOTE REQUIRED majority NO. SHARES EACH CLASS ENTITLED TO VOTE _______________________________________________________________________________ SECTION APPLICABLE ONLY IF SURVIVING ENTITY IS A CALIFORNIA LIMITED PARTNERSHIP =============================================================================== ENTER CHANGES ONLY IN ITEM 10 =============================================================================== 10. CHANGES TO THE SURVIVING LIMITED PARTNERSHIP RECORD RESULTING FROM THIS MERGER ARE AS FOLLOWS: (COMPLETE APPROPRIATE SUB-SECTIONS, CONTINUE ON SECOND PAGE IF NECESSARY). A. THE LIMITED PARTNERSHIP NAME IS CHANGED TO: _______________________________________________________________________________ B. PRINCIPAL EXECUTIVE OFFICE C. CALIFORNIA OFFICE ADDRESS CHANGE: ADDRESS CHANGE: (FOR FOREIGN LIMITED PARTNERSHIPS ONLY) ADDRESS: ADDRESS: CITY: STATE: CITY: STATE: ZIP CODE: ZIP CODE: _______________________________________________________________________________ D. GENERAL PARTNER(S) WITHDRAWN: E. GENERAL PARTNER ADDED: NAME: WILLIAM POLK CAREY NAME: CAREY DIVERSIFIED LLC NAME: W.P. CAREY & CO., INC. ADDRESS: 50 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP CODE: 10020 _______________________________________________________________________________ F. GENERAL PARTNER ADDRESS CHANGE: G. INFORMATION CONCERNING THE AGENT FOR SERVICE OF PROCESS HAS BEEN CHANGED TO: NAME: NAME: ADDRESS: ADDRESS: CITY: STATE: CITY: STATE: CA ZIP CODE: ZIP CODE: ________________________________________________________________________________ H. THE NUMBER OF GENERAL PARTNERS REQUIRED TO ACKNOWLEDGE AND FILE CERTIFICATES IS CHANGED TO: 11. NUMBER OF PAGES ATTACHED, (PLEASE INDICATE NUMBER ONLY) [1] IF ANY: [ ] ________________________________________________________________________________ 12. IT IS HEREBY DECLARED THAT WE ARE THE PERSONS WHO EXECUTED THIS CERTIFICATE OF MERGER WHICH EXECUTION IS OUR ACT AND DEED. (SEE INSTRUCTIONS) Corporate Property Associates 3- a California limited partnership Third Subsidiary, L.P. _____________________________________ ______________________________________ NAME OF SURVIVING BUSINESS ENTITY NAME OF DISAPPEARING BUSINESS ENTITY _____________________________________ ______________________________________ SIGNATURE SIGNATURE W.P. Carey & Co., Inc. Carey Diversified LLC General Partner - General Partner _____________________________________ ______________________________________ POSITION POSITION OR TITLE _____________________________________ ______________________________________ SECOND SIGNATURE (IF REQUIRED) SECOND SIGNATURE (IF REQUIRED) General Partner _____________________________________ ______________________________________ POSITION OR TITLE POSITION OR TITLE =============================================================================== 13. RETURN ACKNOWLEDGMENT TO: NAME ADDRESS CITY STATE ZIP CODE =============================================================================== THIS SPACE FOR FILING OFFICER USE =============================================================================== SEC/STATE REV. 1/96 FORM LP-9-FILING FEE: SEE INSTRUCTIONS APPROVED BY SECRETARY OF STATE EX-2.4 5 FORM OF CERTIFICATE OF MERGER OF CPA :4 1 Exhibit 2.4 STATE OF CALIFORNIA [CALIFORNIA SEAL] SECRETARY OF STATE Form LP-9 CERTIFICATE OF MERGER IMPORTANT--READ INSTRUCTIONS ON BACK BEFORE COMPLETING THIS FORM THIS CERTIFICATE IS PRESENTED FOR FILING PURSUANT TO SECTION 15678.4 AND 1113(g), CALIFORNIA CORPORATIONS CODE. _______________________________________________________________________________ 1. NAME OF SURVIVING [X] LIMITED PARTNERSHIP [ ] CORPORATION [ ] OTHER ____ Corporate Property Associates 4- a California limited partnership _______________________________________________________________________________ 2. FILE NO. _______________________________________________________________________________ 3. ADDRESS: 50 Rockefeller Plaza CITY: New York STATE: NY ZIP CODE: 10020 _______________________________________________________________________________ 4. STATE/COUNTRY OF FORMATION California _______________________________________________________________________________ 5. NAME OF DISAPPEARING [X] LIMITED PARTNERSHIP [ ] CORPORATION [ ] OTHER ___ Fourth Subsidiary, L.P. _______________________________________________________________________________ 6. FILE NO. _______________________________________________________________________________ 7. STATE/COUNTRY OF FORMATION California _______________________________________________________________________________ 8. THIS MERGER IS EFFECTIVE: (NOT TO EXCEED 90 DAYS FROM DATE OF FILING) Upon Filing (IF NO DATE IS INDICATED, THIS MERGER WILL MONTH DAY YEAR BE EFFECTIVE UPON FILING WITH THIS OFFICE.) _______________________________________________________________________________ 9. IF A VOTE OF THE BUSINESS ENTITIES IS REQUIRED UNDER SECTION 15678.4(a)(2) AND/OR SECTION 1113(g), COMPLETE THE FOLLOWING: NAME(S) Corporate Property Associates 4 - a California limited partnership Fourth Subsidiary, L.P. PERCENTAGE OF VOTE REQUIRED majority NO. SHARES EACH CLASS ENTITLED TO VOTE _______________________________________________________________________________ SECTION APPLICABLE ONLY IF SURVIVING ENTITY IS A CALIFORNIA LIMITED PARTNERSHIP =============================================================================== ENTER CHANGES ONLY IN ITEM 10 =============================================================================== 10. CHANGES TO THE SURVIVING LIMITED PARTNERSHIP RECORD RESULTING FROM THIS MERGER ARE AS FOLLOWS: (COMPLETE APPROPRIATE SUB-SECTIONS. CONTINUE ON SECOND PAGE IF NECESSARY). A. THE LIMITED PARTNERSHIP NAME IS CHANGED TO: _______________________________________________________________________________ B. PRINCIPAL EXECUTIVE OFFICE C. CALIFORNIA OFFICE ADDRESS CHANGE: ADDRESS CHANGE: (FOR FOREIGN LIMITED PARTNERSHIPS ONLY) ADDRESS: ADDRESS: CITY: STATE: CITY: STATE: ZIP CODE: ZIP CODE: _______________________________________________________________________________ D. GENERAL PARTNER(S) WITHDRAWN: E. GENERAL PARTNER ADDED: NAME: William Polk Carey NAME: Carey Diversified LLC NAME: Carey Corporate Property, ADDRESS: 50 Rockefeller Plaza Inc. CITY: New York STATE: NY ZIP CODE: 10020 _______________________________________________________________________________ F. GENERAL PARTNER ADDRESS CHANGE: G. INFORMATION CONCERNING THE AGENT FOR SERVICE OF PROCESS HAS BEEN CHANGED TO: NAME: NAME: ADDRESS: ADDRESS: CITY: STATE: CITY: STATE: CA ZIP CODE: ZIP CODE: ________________________________________________________________________________ H. THE NUMBER OF GENERAL PARTNERS REQUIRED TO ACKNOWLEDGE AND FILE CERTIFICATES IS CHANGED TO: 11. NUMBER OF PAGES ATTACHED, (PLEASE INDICATE NUMBER ONLY) [1] IF ANY: [ ] ________________________________________________________________________________ 12. IT IS HEREBY DECLARED THAT WE ARE THE PERSONS WHO EXECUTED THIS CERTIFICATE OF MERGER WHICH EXECUTION IS OUR ACT AND DEED. (SEE INSTRUCTIONS) Corporate Property Associates 4- a California limited partnership Fourth Subsidiary, L.P. _____________________________________ ______________________________________ NAME OF SURVIVING BUSINESS ENTITY NAME OF DISAPPEARING BUSINESS ENTITY _____________________________________ ______________________________________ SIGNATURE SIGNATURE Carey Corporate Property, Inc. Carey Diversified LLC General Partner -- General Partner ___________________________________ ______________________________________ POSITION POSITION OR TITLE _____________________________________ ______________________________________ SECOND SIGNATURE (IF REQUIRED) SECOND SIGNATURE (IF REQUIRED) General Partner _____________________________________ ______________________________________ POSITION OR TITLE POSITION OR TITLE =============================================================================== 13. RETURN ACKNOWLEDGMENT TO: NAME ADDRESS CITY STATE ZIP CODE =============================================================================== THIS SPACE FOR FILING OFFICER USE =============================================================================== SEC/STATE REV. 1/96 FORM LP-9-FILING FEE: SEE INSTRUCTIONS APPROVED BY SECRETARY OF STATE EX-2.5 6 FORM OF CERTIFICATE OF MERGER OF CPA:5 1 Exhibit 2.5 STATE OF CALIFORNIA [CALIFORNIA SEAL] SECRETARY OF STATE CERTIFICATE OF MERGER Form LP-9 IMPORTANT--READ INSTRUCTIONS ON BACK BEFORE COMPLETING THIS FORM THIS CERTIFICATE IS PRESENTED FOR FILING PURSUANT TO SECTION 15678.4 AND 1113(g), CALIFORNIA CORPORATIONS CODE. _______________________________________________________________________________ 1. NAME OF SURVIVING [X] LIMITED PARTNERSHIP [ ] CORPORATION [ ] OTHER ____ Corporate Property Associates 5- a California limited partnership _______________________________________________________________________________ 2. FILE NO. _______________________________________________________________________________ 3. ADDRESS: 50 Rockefeller Plaza CITY: New York STATE: NY ZIP CODE: 10020 _______________________________________________________________________________ 4. STATE/COUNTRY OF FORMATION California _______________________________________________________________________________ 5. NAME OF DISAPPEARING [X] LIMITED PARTNERSHIP [ ] CORPORATION [ ] OTHER ___ Fifth Subsidiary, L.P. _______________________________________________________________________________ 6. FILE NO. _______________________________________________________________________________ 7. STATE/COUNTRY OF FORMATION California _______________________________________________________________________________ 8. THIS MERGER IS EFFECTIVE: (NOT TO EXCEED 90 DAYS FROM DATE OF FILING) Upon Filing (IF NO DATE IS INDICATED, THIS MERGER WILL MONTH DAY YEAR BE EFFECTIVE UPON FILING WITH THIS OFFICE.) _______________________________________________________________________________ 9. IF A VOTE OF THE BUSINESS ENTITIES IS REQUIRED UNDER SECTION 15678.4(a)(2) AND/OR SECTION 1113(g), COMPLETE THE FOLLOWING: NAME(S) Corporate Property Associates 5 - a California limited partnership Fifth Subsidiary, L.P. PERCENTAGE OF VOTE REQUIRED majority NO. SHARES EACH CLASS ENTITLED TO VOTE _______________________________________________________________________________ SECTION APPLICABLE ONLY IF SURVIVING ENTITY IS A CALIFORNIA LIMITED PARTNERSHIP =============================================================================== ENTER CHANGES ONLY IN ITEM 10 =============================================================================== 10. CHANGES TO THE SURVIVING LIMITED PARTNERSHIP RECORD RESULTING FROM THIS MERGER ARE AS FOLLOWS: (COMPLETE APPROPRIATE SUB-SECTIONS. CONTINUE ON SECOND PAGE IF NECESSARY). A. THE LIMITED PARTNERSHIP NAME IS CHANGED TO: _______________________________________________________________________________ B. PRINCIPAL EXECUTIVE OFFICE C. CALIFORNIA OFFICE ADDRESS CHANGE: ADDRESS CHANGE: (FOR FOREIGN LIMITED PARTNERSHIPS ONLY) ADDRESS: ADDRESS: CITY: STATE: CITY: STATE: ZIP CODE: ZIP CODE: _______________________________________________________________________________ D. GENERAL PARTNER(S) WITHDRAWN: E. GENERAL PARTNER ADDED: NAME: William Polk Carey NAME: Carey Diversified LLC NAME: Carey Corporate Property, ADDRESS: 50 Rockefeller Plaza Inc. CITY: New York STATE: NY ZIP CODE: 10020 _______________________________________________________________________________ F. GENERAL PARTNER ADDRESS CHANGE: G. INFORMATION CONCERNING THE AGENT FOR SERVICE OF PROCESS HAS BEEN CHANGED TO: NAME: NAME: ADDRESS: ADDRESS: CITY: STATE: CITY: STATE: CA ZIP CODE: ZIP CODE: ________________________________________________________________________________ H. THE NUMBER OF GENERAL PARTNERS REQUIRED TO ACKNOWLEDGE AND FILE CERTIFICATES IS CHANGED TO: 11. NUMBER OF PAGES ATTACHED, (PLEASE INDICATE NUMBER ONLY) [1] IF ANY: [ ] ________________________________________________________________________________ 12. IT IS HEREBY DECLARED THAT WE ARE THE PERSONS WHO EXECUTED THIS CERTIFICATE OF MERGER WHICH EXECUTION IS OUR ACT AND DEED. (SEE INSTRUCTIONS) Corporate Property Associates 5 a California limited partnership Fifth Subsidiary, L.P. _____________________________________ ______________________________________ NAME OF SURVIVING BUSINESS ENTITY NAME OF DISAPPEARING BUSINESS ENTITY _____________________________________ ______________________________________ SIGNATURE SIGNATURE Carey Corporate Property, Inc. Carey Diversified LLC General Partner -- General Partner _____________________________________ ______________________________________ POSITION POSITION OR TITLE _____________________________________ ______________________________________ SECOND SIGNATURE (IF REQUIRED) SECOND SIGNATURE (IF REQUIRED) General Partner _____________________________________ ______________________________________ POSITION OR TITLE POSITION OR TITLE =============================================================================== 13. RETURN ACKNOWLEDGMENT TO: NAME ADDRESS CITY STATE ZIP CODE =============================================================================== THIS SPACE FOR FILING OFFICER USE =============================================================================== SEC/STATE REV. 1/96 FORM LP-9-FILING FEE: SEE INSTRUCTIONS APPROVED BY SECRETARY OF STATE EX-2.6 7 FORM OF CERTIFICATE OF MERGER OF CPA:6 1 Exhibit 2.6 STATE OF CALIFORNIA [CALIFORNIA SEAL] SECRETARY OF STATE CERTIFICATE OF MERGER Form LP-9 IMPORTANT--READ INSTRUCTIONS ON BACK BEFORE COMPLETING THIS FORM THIS CERTIFICATE IS PRESENTED FOR FILING PURSUANT TO SECTION 15678.4 AND 1113(g), CALIFORNIA CORPORATIONS CODE. _______________________________________________________________________________ 1. NAME OF SURVIVING [X] LIMITED PARTNERSHIP [ ] CORPORATION [ ] OTHER ____ Corporate Property Associates 6- a California limited partnership _______________________________________________________________________________ 2. FILE NO. _______________________________________________________________________________ 3. ADDRESS: 50 Rockefeller Plaza CITY: New York STATE: NY ZIP CODE: 10020 _______________________________________________________________________________ 4. STATE/COUNTRY OF FORMATION California _______________________________________________________________________________ 5. NAME OF DISAPPEARING [X] LIMITED PARTNERSHIP [ ] CORPORATION [ ] OTHER ___ Sixth Subsidiary, L.P. _______________________________________________________________________________ 6. FILE NO. _______________________________________________________________________________ 7. STATE/COUNTRY OF FORMATION California _______________________________________________________________________________ 8. THIS MERGER IS EFFECTIVE: (NOT TO EXCEED 90 DAYS FROM DATE OF FILING) Upon Filing (IF NO DATE IS INDICATED, THIS MERGER WILL MONTH DAY YEAR BE EFFECTIVE UPON FILING WITH THIS OFFICE.) _______________________________________________________________________________ 9. IF A VOTE OF THE BUSINESS ENTITIES IS REQUIRED UNDER SECTION 15678.4(a)(2) AND/OR SECTION 1113(g), COMPLETE THE FOLLOWING: NAME(S) Corporate Property Associates 6-a California limited partnership Sixth Subsidiary, L.P. PERCENTAGE OF VOTE REQUIRED majority NO. SHARES EACH CLASS ENTITLED TO VOTE _______________________________________________________________________________ SECTION APPLICABLE ONLY IF SURVIVING ENTITY IS A CALIFORNIA LIMITED PARTNERSHIP =============================================================================== ENTER CHANGES ONLY IN ITEM 10 =============================================================================== 10. CHANGES TO THE SURVIVING LIMITED PARTNERSHIP RECORD RESULTING FROM THIS MERGER ARE AS FOLLOWS: (COMPLETE APPROPRIATE SUB-SECTIONS, CONTINUE ON SECOND PAGE IF NECESSARY). A. THE LIMITED PARTNERSHIP NAME IS CHANGED TO: _______________________________________________________________________________ B. PRINCIPAL EXECUTIVE OFFICE C. CALIFORNIA OFFICE ADDRESS CHANGE: ADDRESS CHANGE: (FOR FOREIGN LIMITED PARTNERSHIPS ONLY) ADDRESS: ADDRESS: CITY: STATE: CITY: STATE: ZIP CODE: ZIP CODE: _______________________________________________________________________________ D. GENERAL PARTNER(S) WITHDRAWN: E. GENERAL PARTNER ADDED: NAME: William Polk Carey NAME: Carey Diversified LLC NAME: Carey Corporate ADDRESS: 50 Rockefeller Plaza Property, Inc. CITY: New York STATE: NY ZIP CODE: 10020 _______________________________________________________________________________ F. GENERAL PARTNER ADDRESS CHANGE: G. INFORMATION CONCERNING THE AGENT FOR SERVICE OF PROCESS HAS BEEN CHANGED TO: NAME: NAME: ADDRESS: ADDRESS: CITY: STATE: CITY: STATE: CA ZIP CODE: ZIP CODE: ________________________________________________________________________________ H. THE NUMBER OF GENERAL PARTNERS REQUIRED TO ACKNOWLEDGE AND FILE CERTIFICATES IS CHANGED TO: 11. NUMBER OF PAGES ATTACHED, (PLEASE INDICATE NUMBER ONLY) [1] IF ANY: [ ] ________________________________________________________________________________ 12. IT IS HEREBY DECLARED THAT WE ARE THE PERSONS WHO EXECUTED THIS CERTIFICATE OF MERGER WHICH EXECUTION IS OUR ACT AND DEED. (SEE INSTRUCTIONS) Corporate Property Associates 6- California limited partnership Sixth Subsidiary, L.P. _____________________________________ ______________________________________ NAME OF SURVIVING BUSINESS ENTITY NAME OF DISAPPEARING BUSINESS ENTITY _____________________________________ ______________________________________ SIGNATURE SIGNATURE Carey Corproate Property, Inc. Carey Diversified LLC General Partner -- General Partner _____________________________________ ______________________________________ POSITION POSITION OR TITLE _____________________________________ ______________________________________ SECOND SIGNATURE (IF REQUIRED) SECOND SIGNATURE (IF REQUIRED) General Partner _____________________________________ ______________________________________ POSITION OR TITLE POSITION OR TITLE =============================================================================== 13. RETURN ACKNOWLEDGMENT TO: NAME ADDRESS CITY STATE ZIP CODE =============================================================================== THIS SPACE FOR FILING OFFICER USE =============================================================================== SEC/STATE REV. 1/96 FORM LP-9-FILING FEE: SEE INSTRUCTIONS APPROVED BY SECRETARY OF STATE EX-2.7 8 FORM OF CERTIFICATE OF MERGER OF CPA :7 1 Exhibit 2.7 STATE OF CALIFORNIA [CALIFORNIA SEAL] SECRETARY OF STATE CERTIFICATE OF MERGER Form LP-9 IMPORTANT--READ INSTRUCTIONS ON BACK BEFORE COMPLETING THIS FORM THIS CERTIFICATE IS PRESENTED FOR FILING PURSUANT TO SECTION 15678.4 AND 1113(g), CALIFORNIA CORPORATIONS CODE. _______________________________________________________________________________ 1. NAME OF SURVIVING [X] LIMITED PARTNERSHIP [ ] CORPORATION [ ] OTHER ____ Corporate Property Associates 7- a California limited partnership _______________________________________________________________________________ 2. FILE NO. _______________________________________________________________________________ 3. ADDRESS: 50 Rockefeller Plaza CITY: New York STATE: NY ZIP CODE: 10020 _______________________________________________________________________________ 4. STATE/COUNTRY OF FORMATION California _______________________________________________________________________________ 5. NAME OF DISAPPEARING [X] LIMITED PARTNERSHIP [ ] CORPORATION [ ] OTHER ___ Seventh Subsidiary, L.P. _______________________________________________________________________________ 6. FILE NO. _______________________________________________________________________________ 7. STATE/COUNTRY OF FORMATION California _______________________________________________________________________________ 8. THIS MERGER IS EFFECTIVE: (NOT TO EXCEED 90 DAYS FROM DATE OF FILING) Upon Filing (IF NO DATE IS INDICATED, THIS MERGER WILL MONTH DAY YEAR BE EFFECTIVE UPON FILING WITH THIS OFFICE.) _______________________________________________________________________________ 9. IF A VOTE OF THE BUSINESS ENTITIES IS REQUIRED UNDER SECTION 15678.4(a)(2) AND/OR SECTION 1113(g), COMPLETE THE FOLLOWING: NAME(S) Corporate Property Associates 7-a California limited partnership Seventh Subsidiary, L.P. PERCENTAGE OF VOTE REQUIRED majority NO. SHARES EACH CLASS ENTITLED TO VOTE _______________________________________________________________________________ SECTION APPLICABLE ONLY IF SURVIVING ENTITY IS A CALIFORNIA LIMITED PARTNERSHIP =============================================================================== ENTER CHANGES ONLY IN ITEM 10 =============================================================================== 10. CHANGES TO THE SURVIVING LIMITED PARTNERSHIP RECORD RESULTING FROM THIS MERGER ARE AS FOLLOWS: (COMPLETE APPROPRIATE SUB-SECTIONS, CONTINUE ON SECOND PAGE IF NECESSARY). A. THE LIMITED PARTNERSHIP NAME IS CHANGED TO: _______________________________________________________________________________ B. PRINCIPAL EXECUTIVE OFFICE C. CALIFORNIA OFFICE ADDRESS CHANGE: ADDRESS CHANGE: (FOR FOREIGN LIMITED PARTNERSHIPS ONLY) ADDRESS: ADDRESS: CITY: STATE: CITY: STATE: ZIP CODE: ZIP CODE: _______________________________________________________________________________ D. GENERAL PARTNER(S) WITHDRAWN: E. GENERAL PARTNER ADDED: NAME: William Polk Carey NAME: Carey Diversified LLC NAME: Seventh Carey ADDRESS: 50 Rockefeller Plaza Corporate Property, Inc. CITY: New York STATE: NY ZIP CODE: 10020 _______________________________________________________________________________ F. GENERAL PARTNER ADDRESS CHANGE: G. INFORMATION CONCERNING THE AGENT FOR SERVICE OF PROCESS HAS BEEN CHANGED TO: NAME: NAME: ADDRESS: ADDRESS: CITY: STATE: CITY: STATE: CA ZIP CODE: ZIP CODE: ________________________________________________________________________________ H. THE NUMBER OF GENERAL PARTNERS REQUIRED TO ACKNOWLEDGE AND FILE CERTIFICATES IS CHANGED TO: 11. NUMBER OF PAGES ATTACHED, (PLEASE INDICATE NUMBER ONLY) [1] IF ANY: [ ] ________________________________________________________________________________ 12. IT IS HEREBY DECLARED THAT WE ARE THE PERSONS WHO EXECUTED THIS CERTIFICATE OF MERGER WHICH EXECUTION IS OUR ACT AND DEED. (SEE INSTRUCTIONS) Corporate Property Associates 7- a California limited partnership Seventh Subsidiary, L.P. _____________________________________ ______________________________________ NAME OF SURVIVING BUSINESS ENTITY NAME OF DISAPPEARING BUSINESS ENTITY _____________________________________ ______________________________________ SIGNATURE SIGNATURE Seventh Carey Corporate Carey Diversified LLC Property, Inc. -- General Partner General Partner _____________________________________ ______________________________________ POSITION POSITION OR TITLE _____________________________________ ______________________________________ SECOND SIGNATURE (IF REQUIRED) SECOND SIGNATURE (IF REQUIRED) General Partner _____________________________________ ______________________________________ POSITION OR TITLE POSITION OR TITLE =============================================================================== 13. RETURN ACKNOWLEDGMENT TO: NAME ADDRESS CITY STATE ZIP CODE =============================================================================== THIS SPACE FOR FILING OFFICER USE =============================================================================== SEC/STATE REV. 1/96 FORM LP-9-FILING FEE: SEE INSTRUCTIONS APPROVED BY SECRETARY OF STATE EX-2.8 9 FORM OF CERTIFICATE OF MERGER OF CPA :8 1 Exhibit 2.8 CERTIFICATE OF MERGER OF EIGHTH SUBSIDIARY, L.P. into CORPORATE PROPERTY ASSOCIATES 8, L.P., a Delaware limited partnership dated: ______________, 19__ The undersigned limited partnership formed and existing under and by virtue of the Delaware Revised Uniform Limited Partnership Act, 6 Del.C. Section 17-101, et seq. (the "Act"), DOES HEREBY CERTIFY: FIRST: The name and jurisdiction of formation or organization of each of the constituent entities which is to merge are as follows:
Jurisdiction of Name Formation or Organization ---- ------------------------- Eighth Subsidiary, L.P. Delaware Corporate Property Associates 8, L.P., Delaware a Delaware limited partnership
SECOND: An Agreement of Merger has been approved and executed by Eighth Subsidiary, L.P. and Corporate Property Associates 8, L.P., a Delaware limited partnership ("CPA 8"). THIRD: The name of the surviving Delaware limited partnership is "Corporate Property Associates 8, L.P., a Delaware limited partnership". FOURTH: The merger of Eighth Subsidiary, L.P. into CPA 8 shall be effective upon the filing of this Certificate of Merger with the Secretary of State of the State of Delaware. FIFTH: The executed Agreement of Merger is on file at the principal place of business of the surviving limited partnership. The address of the principal place of business of the surviving limited partnership is 50 Rockefeller Plaza, New York, NY 10020. 2 SIXTH: A copy of the Agreement of Merger will be furnished by the surviving limited partnership, on request and without cost, to any partner of Eighth Subsidiary, L.P. and to any partner of CPA 8. CORPORATE PROPERTY ASSOCIATES 8, L.P., A DELAWARE LIMITED PARTNERSHIP By: Eighth Carey Corporate Property, Inc., its Managing General Partner By:_________________________________ Name: Title: -2- EX-2.9 10 FORM OF CERTIFICATE OF MERGER OF CPA :9 1 Exhibit 2.9 CERTIFICATE OF MERGER OF NINTH SUBSIDIARY, L.P. into CORPORATE PROPERTY ASSOCIATES 9, L.P., A DELAWARE LIMITED PARTNERSHIP dated: ______________, 19__ The undersigned limited partnership formed and existing under and by virtue of the Delaware Revised Uniform Limited Partnership Act, 6 Del.C. Section 17-101, et seq. (the "Act"). DOES HEREBY CERTIFY: FIRST: The name and jurisdiction of formation or organization of each of the constituent entities which is to merge are as follows:
Jurisdiction of Name Formation or Organization ---- ------------------------- Ninth Subsidiary, L.P. Delaware Corporate Property Associates 9, L.P., Delaware a Delaware limited partnership
SECOND: An Agreement of Merger has been approved and executed by Ninth Subsidiary, L.P. and Corporate Property Associates 9, L.P., a Delaware limited partnership ("CPA 9"). THIRD: The name of the surviving Delaware limited partnership is "Corporate Property Associates 9, L.P., a Delaware limited partnership". FOURTH: The merger of Ninth Subsidiary, L.P. into CPA 9 shall be effective upon the filing of this Certificate of Merger with the Secretary of State of the State of Delaware. FIFTH: The executed Agreement of Merger is on file at the principal place of business of the surviving limited partnership. The address of the principal place of business of the surviving limited partnership is 50 Rockefeller Plaza, New York, NY 10020. 2 SIXTH: A copy of the Agreement of Merger will be furnished by the surviving limited partnership, on request and without cost, to any partner of Ninth Subsidiary, L.P. and to any partner of CPA 9. CORPORATE PROPERTY ASSOCIATES 9, L.P., A DELAWARE LIMITED PARTNERSHIP By: Ninth Carey Corporate Property, Inc., its Managing General Partner By:__________________________________ Name: Title: -2- EX-2.10 11 FORM OF AGREEMENT OF MERGER OF CPA :1 1 Exhibit 2.10 AGREEMENT OF MERGER OF FIRST SUBSIDIARY, L.P. INTO CORPORATE PROPERTY ASSOCIATES AGREEMENT OF MERGER, dated as of ________________, 19__ (this "Agreement"), between FIRST SUBSIDIARY, L.P., a California limited partnership (the "Terminating Partnership"), and CORPORATE PROPERTY ASSOCIATES, a California limited partnership ("CPA 1"). WITNESSETH: WHEREAS, Section 15678.7(a) of the California Revised Limited Partnership Act (the "CRLPA"), authorizes the merger of a California limited partnership with and into another California limited partnership; WHEREAS, the Terminating Partnership and CPA 1 now desire to merge (the "Merger"), following which CPA 1 shall be the surviving limited partnership; WHEREAS, Carey Diversified LLC, in its capacity as the general partner of the Terminating Partnership (the "Subsidiary GP"), and Carey Property Advisors LP, as the sole limited partner of the Terminating Partnership, have approved this Agreement and the consummation of the Merger; WHEREAS, William Polk Carey, in his capacity as a general partner of CPA 1 (the "First GP"), and W.P. Carey & Co., Inc., in its capacity as a general partner of CPA 1 (the "Second GP"), have approved this Agreement and the consummation of the Merger: NOW THEREFORE, the parties hereto hereby agree as follows: 2 ARTICLE I THE MERGER SECTION 1.01. The Merger. (a) On _______________, 199__, after satisfaction or, to the extent permitted hereunder, waiver of all conditions to the Merger, as the Subsidiary GP and the Second GP shall determine, CPA 1, which shall be the surviving limited partnership, shall merge with the Terminating Partnership and shall file a certificate of merger substantially in the form of Exhibit 1 hereto (the "Certificate of Merger") with the Secretary of State of the State of California and make all other filings or recordings required by California law in connection with the Merger. The Merger shall become effective at such time as is specified in the Certificate of Merger (the "Effective Time"). (b) At the Effective Time, the Terminating Partnership shall be merged with and into CPA 1, whereupon the separate existence of the Terminating Partnership shall cease, and CPA 1 shall be the surviving limited partnership of the Merger (the "Surviving Partnership") in accordance with Section 15678.5(b) of the CRLPA. Section 1.02. Exchange of Interests. At the Effective Time: (a) The limited partner in the Terminating Partnership immediately prior to the Effective Time shall receive $100 in exchange for such limited partner interest; (b) The Subsidiary GP's interest in the Terminating Partnership shall be converted into (i) a general partner interest in the Surviving Partnership and (ii) one unit of limited partner interest in the Surviving Partnership for each unit converted to a limited liability company interest in the Company by a limited partner of CPA 1 pursuant hereto; (c) The First GP's interest in CPA 1 shall be converted into a limited liability company interest in Carey Diversified LLC (the "Company") consisting of 35 "Listed Shares" and units of special partner interest in CPA 1, and the First GP shall automatically become a member of the Company and a special partner of CPA 1; (d) The Second GP's interest in CPA 1 shall be converted into a limited liability company interest in the Company consisting of 314 "Listed Shares" and units of special partner interest in CPA 1, and the Second GP shall automatically become a member of the Company and a special partner of CPA 1; and 2 3 (e) Each limited partner interest in CPA 1 outstanding immediately prior to the Effective Time shall, at the election of such limited partner, be converted into either a limited liability company interest in the Company consisting of 52.59 "Listed Shares" or a limited partner interest in the Surviving Partnership equal to such limited partner's limited partner interest in CPA 1, and the holder of each such interest in CPA 1 shall automatically become a member of the Company or remain a limited partner of CPA 1, as the case may be. ARTICLE II THE SURVIVING PARTNERSHIP SECTION 2.01. Certificate of Limited Partnership. The Certificate of Limited Partnership of CPA 1 shall continue to be the Certificate of Limited Partnership of CPA 1, and, unless and until amended in accordance with the applicable law, shall be the Certificate of Limited Partnership of the Surviving Partnership. SECTION 2.02. Partnership Agreement. The Amended and Restated Agreement of Limited Partnership of the Surviving Partnership attached as Exhibit __ hereto shall be the partnership agreement of the Surviving Partnership unless and until amended in accordance with its terms and applicable law. The name of the Surviving Partnership shall be Corporate Property Associates. ARTICLE III TRANSFER AND CONVEYANCE OF ASSETS AND ASSUMPTION OF LIABILITIES SECTION 3.01. Transfer, Conveyance and Assumption. At the Effective Time, CPA 1 shall continue in existence as the Surviving Partnership, and without further transfer, succeed to and possess all of the rights, privileges and powers of the Terminating Partnership, and all of the assets and property of whatever kind and character of the Terminating Partnership shall vest in CPA 1 without further act or deed; thereafter, CPA 1, as the Surviving Partnership, shall be liable for all of the liabilities and obligations of the Terminating Partnership, and any claim or judgment against the Terminating Partnership may be enforced against CPA 1, as the Surviving Partnership, in accordance with Section 15678.6(a) of the CRLPA. SECTION 3.02. Further Assurances. If at any time CPA 1 shall consider or be advised that any further assignment, conveyance or assurance is necessary or advisable to vest, perfect or confirm of record in the Surviving Partnership the title to any property or right of the Terminating Partnership, or otherwise to carry out the provisions hereof, the proper representatives of the Terminating Partnership as of the 3 4 Effective Time shall execute and deliver any and all proper deeds, assignments, and assurances and do all things necessary or proper to vest, perfect or convey title to such property or right in the Surviving Partnership, and otherwise to carry out the provisions hereof. ARTICLE IV CONDITIONS TO THE MERGER SECTION 4.01 Conditions to the Obligations of Each Party. The obligations of CPA 1 and the Terminating Partnership to consummate the Merger are subject to the satisfaction of the following conditions as of the Effective Time; (i) no provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the consummation of the Merger; (ii) all actions by or in respect of or filings with any governmental body, agency, official or authority required to permit the consummation of the Merger shall have been obtained; (iii) approval of participation in the Consolidation by a majority of the limited partners of CPA 1 and a majority of the limited partners of CPA Partnerships representing an aggregate Exchange Value of $200,000,000; (iv) the fairness opinion of Robert A. Stanger & Co., Inc. regarding the actual allocation of the Listed Shares based on the outcome of the votes of the limited partners of each CPA Partnership; and (v) the approval of the Listed Shares for listing on the New York Stock Exchange. ARTICLE V TERMINATION SECTION 5.01. Termination. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time: (i) by mutual written consent of the Subsidiary GP, on behalf of the Terminating Partnership, and the Second GP, on behalf of CPA 1; (ii) if any conditions to the consummation of the Merger as set forth in this Agreement are not satisfied; or 4 5 (iii) if the Consolidation is not consummated prior to June 30, 1998 or such later date as mutually agreed in writing by the parties hereto. SECTION 5.02. Effect of Termination. If this Agreement is terminated pursuant to Section 5.01, this Agreement shall become void and of no effect with no liability on the part of either party hereto. ARTICLE VI MISCELLANEOUS SECTION 6.01. General Partner Authorization. The general partner of the Surviving Partnership shall be authorized, at such time in its sole discretion as it deems appropriate to execute, acknowledge, verify, deliver, file and record, for and in the name of CPA 1 and, to the extent necessary, the First GP, the Second GP, the limited partners of CPA 1, the Subsidiary GP and the sole limited partner of the Terminating Partnership, any and all documents and instruments including, without limitation, the Amended and Restated Agreement of Limited Partnership of the Surviving Partnership, and shall do and perform any and all acts required by applicable law which the general partner of the Surviving Partnership deems necessary or advisable, including, without limitation, delivering financial statements to the limited partners of CPA 1, in order to effectuate the Merger. SECTION 6.02. Waivers; Amendments. (a) Any provision of this Agreement may, subject to applicable law, be amended or waived prior to the Effective Time if, and only if, such amendment or waiver is in writing and signed by the Second GP, on behalf of CPA 1, and by the Subsidiary GP, on behalf of the Terminating Partnership; provided that after approval of the Merger by the limited partners of CPA 1 holding a majority of the limited partner interests of CPA 1, no amendment or waiver may be made that (i) materially and adversely affects the rights of the limited partners of CPA 1 without the approval of the limited partners of CPA 1 holding a majority of the limited partner interests of CPA 1; (ii) alters or changes (A) the amount or type of consideration which such limited partners will receive in the Merger, (B) the Amended and Restated Limited Liability Company Agreement of the Company, or (C) the terms and conditions of this Agreement if such alteration or change materially and adversely affects the limited partners of CPA 1 or the members of the Company; or (iii) waives the condition to the Merger that CPA Partnerships having an aggregate Exchange Value of $200,000,000 approve the Consolidation. (b) Except as provided in Section 6.02(a), no failure or delay by any party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, 5 6 power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 6.04. Integration. All prior or contemporaneous agreements, contracts, promises, representations, and statements, if any, between the Terminating Partnership and CPA 1, or their representatives, are merged into this Agreement, and this Agreement shall constitute the entire understanding between the Terminating Partnership and CPA 1 with respect to the subject matter hereof. SECTION 6.05. Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other party hereto. SECTION 6.06. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of California, without giving effect to principles of conflicts of law. SECTION 6.07. Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received the counterpart hereof signed by the other party hereto. ARTICLE VII DEFINED TERMS Capitalized terms used in this Agreement not otherwise defined herein shall have the meanings set forth below, except as otherwise expressly indicated or limited by the context in which they appear in this Agreement. "Consolidation" means the transaction whereby up to nine subsidiary partnerships of the Company merge with and into some or all of the CPA Partnerships. "CPA Partnerships" means Corporate Property Associates, a California limited partnership, Corporate Property Associates 2, a California limited partnership, Corporate Property Associates 3, a California limited partnership, Corporate Property Associates 4, a California limited partnership, Corporate Property Associates 5, a California limited partnership, Corporate Property Associates 6, a California limited partnership, Corporate Property Associates 7, a California limited partnership, Corporate Property Associates 8, 6 7 L.P., a Delaware limited partnership, and Corporate Property Associates 9, L.P., a Delaware limited partnership or any of them. "Exchange Value" means the appraised value of a CPA Partnership. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized representatives as of the day and year first above written. CORPORATE PROPERTY ASSOCIATES By: W. P. Carey & Co., Inc., its General Partner By:____________________________________ Name:_______________________________ Title:______________________________ By:____________________________________ William Polk Carey, its General Partner FIRST SUBSIDIARY, L.P. By: Carey Diversified LLC, its General Partner By:____________________________________ Name:_______________________________ Title:______________________________ 7 EX-2.11 12 FORM OF AGREEMENT OF MERGER OF CPA :2 1 Exhibit 2.11 AGREEMENT OF MERGER OF SECOND SUBSIDIARY, L.P. INTO CORPORATE PROPERTY ASSOCIATES 2 AGREEMENT OF MERGER, dated as of ________________, 19__ (this "Agreement"), between SECOND SUBSIDIARY, L.P., a California limited partnership (the "Terminating Partnership"), and CORPORATE PROPERTY ASSOCIATES 2, a California limited partnership ("CPA 2"). WITNESSETH: WHEREAS, Section 15678.7(a) of the California Revised Limited Partnership Act (the "CRLPA"), authorizes the merger of a California limited partnership with and into another California limited partnership; WHEREAS, the Terminating Partnership and CPA 2 now desire to merge (the "Merger"), following which CPA 2 shall be the surviving limited partnership; WHEREAS, Carey Diversified LLC, in its capacity as the general partner of the Terminating Partnership (the "Subsidiary GP"), and Carey Property Advisors LP, as the sole limited partner of the Terminating Partnership, have approved this Agreement and the consummation of the Merger; WHEREAS, William Polk Carey, in his capacity as a general partner of CPA 2 (the "First GP"), and W.P. Carey & Co., Inc., in its capacity as a general partner of CPA 2 (the "Second GP"), have approved this Agreement and the consummation of the Merger: NOW THEREFORE, the parties hereto hereby agree as follows: 2 ARTICLE I THE MERGER SECTION 1.01. The Merger. (a) On _______________, 199__, after satisfaction or, to the extent permitted hereunder, waiver of all conditions to the Merger, as the Subsidiary GP and the Second GP shall determine, CPA 2, which shall be the surviving limited partnership, shall merge with the Terminating Partnership and shall file a certificate of merger substantially in the form of Exhibit 1 hereto (the "Certificate of Merger") with the Secretary of State of the State of California and make all other filings or recordings required by California law in connection with the Merger. The Merger shall become effective at such time as is specified in the Certificate of Merger (the "Effective Time"). (b) At the Effective Time, the Terminating Partnership shall be merged with and into CPA 2, whereupon the separate existence of the Terminating Partnership shall cease, and CPA 2 shall be the surviving limited partnership of the Merger (the "Surviving Partnership") in accordance with Section 15678.5(b) of the CRLPA. Section 1.02. Exchange of Interests. At the Effective Time: (a) The limited partner in the Terminating Partnership immediately prior to the Effective Time shall receive $100 in exchange for such limited partner interest; (b) The Subsidiary GP's interest in the Terminating Partnership shall be converted into (i) a general partner interest in the Surviving Partnership and (ii) one unit of limited partner interest in the Surviving Partnership for each unit converted to a limited liability company interest in the Company by a limited partner of CPA 2 pursuant hereto; (c) The First GP's interest in CPA 2 shall be converted into a limited liability company interest in Carey Diversified LLC (the "Company") consisting of 1,306 "Listed Shares" and units of special partner interest in CPA 2, and the First GP shall automatically become a member of the Company and special partner of CPA 2; (d) The Second GP's interest in CPA 2 shall be converted into a limited liability company interest in the Company consisting of 156,885 "Listed Shares" and units of special partner interest in CPA 2, and the Second GP shall automatically become a member of the Company and a special partner of CPA 2; and 2 3 (e) Each limited partner interest in CPA 2 outstanding immediately prior to the Effective Time shall, at the election of such limited partner, be converted into either a limited liability company interest in the Company consisting of 55.91 "Listed Shares" or a limited partner interest in the Surviving Partnership, equal to such limited partner's limited partner interest in CPA 2, and the holder of each such interest in CPA 2 shall automatically become a member of the Company or remain a limited partner in CPA 2, as the case maybe. ARTICLE II THE SURVIVING PARTNERSHIP SECTION 2.01. Certificate of Limited Partnership. The Certificate of Limited Partnership of CPA 2 shall continue to be the Certificate of Limited Partnership of CPA 2, and, unless and until amended in accordance with the applicable law, shall be the Certificate of Limited Partnership of the Surviving Partnership. SECTION 2.02. Partnership Agreement. The Amended and Restated Agreement of Limited Partnership of the Surviving Partnership attached as Exhibit __ hereto shall be the partnership agreement of the Surviving Partnership unless and until amended in accordance with its terms and applicable law. The name of the Surviving Partnership shall be Corporate Property Associates 2. ARTICLE III TRANSFER AND CONVEYANCE OF ASSETS AND ASSUMPTION OF LIABILITIES SECTION 3.01. Transfer, Conveyance and Assumption. At the Effective Time, CPA 2 shall continue in existence as the Surviving Partnership, and without further transfer, succeed to and possess all of the rights, privileges and powers of the Terminating Partnership, and all of the assets and property of whatever kind and character of the Terminating Partnership shall vest in CPA 2 without further act or deed; thereafter, CPA 2, as the Surviving Partnership, shall be liable for all of the liabilities and obligations of the Terminating Partnership, and any claim or judgment against the Terminating Partnership may be enforced against CPA 2, as the Surviving Partnership, in accordance with Section 15678.6(a) of the CRLPA. SECTION 3.02. Further Assurances. If at any time CPA 2 shall consider or be advised that any further assignment, conveyance or assurance is necessary or advisable to vest, 3 4 perfect or confirm of record in the Surviving Partnership the title to any property or right of the Terminating Partnership, or otherwise to carry out the provisions hereof, the proper representatives of the Terminating Partnership as of the Effective Time shall execute and deliver any and all proper deeds, assignments, and assurances and do all things necessary or proper to vest, perfect or convey title to such property or right in the Surviving Partnership, and otherwise to carry out the provisions hereof. ARTICLE IV CONDITIONS TO THE MERGER SECTION 4.01 Conditions to the Obligations of Each Party. The obligations of CPA 2 and the Terminating Partnership to consummate the Merger are subject to the satisfaction of the following conditions as of the Effective Time; (i) no provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the consummation of the Merger; (ii) all actions by or in respect of or filings with any governmental body, agency, official or authority required to permit the consummation of the Merger shall have been obtained; (iii) approval of participation in the Consolidation by a majority of the limited partners of CPA 2 and a majority of the limited partners of CPA Partnerships representing an aggregate Exchange Value of $200,000,000; (iv) the fairness opinion of Robert A. Stanger & Co., Inc. regarding the actual allocation of the Listed Shares based on the outcome of the votes of the limited partners of each CPA Partnership; and (v) the approval of the Listed Shares for listing on the New York Stock Exchange. ARTICLE V TERMINATION SECTION 5.01. Termination. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time: (i) by mutual written consent of the Subsidiary GP, on behalf of the Terminating Partnership, and the Second GP, on behalf of CPA 2; 4 5 (ii) if any conditions to the consummation of the Merger as set forth in this Agreement are not satisfied; or (iii) if the Consolidation is not consummated prior to June 30, 1998 or such later date as mutually agreed in writing by the parties hereto. SECTION 5.02. Effect of Termination. If this Agreement is terminated pursuant to Section 5.01, this Agreement shall become void and of no effect with no liability on the part of either party hereto. ARTICLE VI MISCELLANEOUS SECTION 6.01. General Partner Authorization. The general partner of the Surviving Partnership shall be authorized, at such time in its sole discretion as it deems appropriate to execute, acknowledge, verify, deliver, file and record, for and in the name of CPA 2 and, to the extent necessary, the First GP, the Second GP, the limited partners of CPA 2, the Subsidiary GP and the sole limited partner of the Terminating Partnership, any and all documents and instruments including, without limitation, the Amended and Restated Agreement of Limited Partnership of the Surviving Partnership, and shall do and perform any and all acts required by applicable law which the general partner of the Surviving Partnership deems necessary or advisable, including, without limitation, delivering financial statements to the limited partners of CPA 2, in order to effectuate the Merger. SECTION 6.02. Waivers; Amendments. (a) Any provision of this Agreement may, subject to applicable law, be amended or waived prior to the Effective Time if, and only if, such amendment or waiver is in writing and signed by the Second GP, on behalf of CPA 2, and by the Subsidiary GP, on behalf of the Terminating Partnership; provided that after approval of the Merger by the limited partners of CPA 2 holding a majority of the limited partner interests of CPA 2, no amendment or waiver may be made that (i) materially and adversely affects the rights of the limited partners of CPA 2 without the approval of the limited partners of CPA 2 holding a majority of the limited partner interests of CPA 2; (ii) alters or changes (A) the amount or type of consideration which such limited partners will receive in the Merger, (B) the Amended and Restated Limited Liability Company Agreement of the Company, or (C) the terms and conditions of this Agreement if such alteration or change materially and adversely affects the limited partners of CPA 2 or the members of the Company; or (iii) waives the condition to the Merger that CPA Partnerships having an aggregate Exchange Value of $200,000,000 approve the Consolidation. 5 6 (b) Except as provided in Section 6.02(a), no failure or delay by any party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 6.04. Integration. All prior or contemporaneous agreements, contracts, promises, representations, and statements, if any, between the Terminating Partnership and CPA 2, or their representatives, are merged into this Agreement, and this Agreement shall constitute the entire understanding between the Terminating Partnership and CPA 2 with respect to the subject matter hereof. SECTION 6.05. Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other party hereto. SECTION 6.06. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of California, without giving effect to principles of conflicts of law. SECTION 6.07. Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received the counterpart hereof signed by the other party hereto. ARTICLE VII DEFINED TERMS Capitalized terms used in this Agreement not otherwise defined herein shall have the meanings set forth below, except as otherwise expressly indicated or limited by the context in which they appear in this Agreement. "Consolidation" means the transaction whereby up to nine subsidiary partnerships of the Company merge with and into some or all of the CPA Partnerships. "CPA Partnerships" means Corporate Property Associates, a California limited partnership, Corporate Property Associates 2, a California limited partnership, Corporate Property 6 7 Associates 3, a California limited partnership, Corporate Property Associates 4, a California limited partnership, Corporate Property Associates 5, a California limited partnership, Corporate Property Associates 6, a California limited partnership, Corporate Property Associates 7, a California limited partnership, Corporate Property Associates 8, L.P., a Delaware limited partnership, and Corporate Property Associates 9, L.P., a Delaware limited partnership or any of them. "Exchange Value" means the appraised value of a CPA Partnership. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized representatives as of the day and year first above written. CORPORATE PROPERTY ASSOCIATES 2 By: W. P. Carey & Co., Inc., its General Partner By:____________________________________ Name:_______________________________ Title:______________________________ By:____________________________________ William Polk Carey, its General Partner SECOND SUBSIDIARY, L.P. By: Carey Diversified LLC, its General Partner By:____________________________________ Name:_______________________________ Title:______________________________ 7 EX-2.12 13 FORM OF AGREEMENT OF MERGER OF CPA :3 1 Exhibit 2.12 AGREEMENT OF MERGER OF THIRD SUBSIDIARY, L.P. INTO CORPORATE PROPERTY ASSOCIATES 3 AGREEMENT OF MERGER, dated as of ________________, 19__ (this "Agreement"), between THIRD SUBSIDIARY, L.P., a California limited partnership (the "Terminating Partnership"), and CORPORATE PROPERTY ASSOCIATES 3, a California limited partnership ("CPA 3"). WITNESSETH: WHEREAS, Section 15678.7(a) of the California Revised Limited Partnership Act (the "CRLPA"), authorizes the merger of a California limited partnership with and into another California limited partnership; WHEREAS, the Terminating Partnership and CPA 3 now desire to merge (the "Merger"), following which CPA 3 shall be the surviving limited partnership; WHEREAS, Carey Diversified LLC, in its capacity as the general partner of the Terminating Partnership (the "Subsidiary GP"), and Carey Property Advisors LP, as the sole limited partner of the Terminating Partnership, have approved this Agreement and the consummation of the Merger; WHEREAS, William Polk Carey, in his capacity as a general partner of CPA 3 (the "First GP"), and W.P. Carey & Co., Inc., in its capacity as a general partner of CPA 3 (the "Second GP"), have approved this Agreement and the consummation of the Merger: NOW THEREFORE, the parties hereto hereby agree as follows: 2 ARTICLE I THE MERGER SECTION 1.01. The Merger. (a) On _______________, 199__, after satisfaction or, to the extent permitted hereunder, waiver of all conditions to the Merger, as the Subsidiary GP and the Second GP shall determine, CPA 3, which shall be the surviving limited partnership, shall merge with the Terminating Partnership and shall file a certificate of merger substantially in the form of Exhibit 1 hereto (the "Certificate of Merger") with the Secretary of State of the State of California and make all other filings or recordings required by California law in connection with the Merger. The Merger shall become effective at such time as is specified in the Certificate of Merger (the "Effective Time"). (b) At the Effective Time, the Terminating Partnership shall be merged with and into CPA 3, whereupon the separate existence of the Terminating Partnership shall cease, and CPA 3 shall be the surviving limited partnership of the Merger (the "Surviving Partnership") in accordance with Section 15678.5(b) of the CRLPA. Section 1.02. Exchange of Interests. At the Effective Time: (a) The limited partner in the Terminating Partnership immediately prior to the Effective Time shall receive $100 in exchange for such limited partner interest; (b) The Subsidiary GP's interest in the Terminating Partnership shall be converted into (i)a general partner interest in the Surviving Partnership and (ii) one unit of limited partner interest in the Surviving Partnership for each unit converted to a limited liability company interest in the Company by a limited partner of CPA 3 pursuant hereto; (c) The First GP's interest in CPA 3 shall be converted into a limited liability company interest in Carey Diversified LLC (the "Company") consisting of 2,253 "Listed Shares" and units of special partner interest in CPA 3, and the First GP shall automatically become a member of the Company and special partner of CPA 3; (d) The Second GP's interest in CPA 3 shall be converted into a limited liability company interest in the Company consisting of 293,075 "Listed Shares" and units of special partner interest in CPA 3, and the Second GP shall automatically become a member of the Company and a special partner of CPA 3; and 2 3 (e) Each limited partner interest in CPA 3 outstanding immediately prior to the Effective Time shall, at the election of such limited partner, be converted into either a limited liability company interest in the Company consisting of 75.85 "Listed Shares" or a limited partner interest in the Surviving Partnership equal to such limited partner's limited partner interest in CPA 3, and the holder of each such interest in CPA 3 shall automatically become a member of the Company or remain a limited partner in CPA 3, as the case may be. ARTICLE II THE SURVIVING PARTNERSHIP SECTION 2.01. Certificate of Limited Partnership. The Certificate of Limited Partnership of CPA 3 shall continue to be the Certificate of Limited Partnership of CPA 3, and, unless and until amended in accordance with the applicable law, shall be the Certificate of Limited Partnership of the Surviving Partnership. SECTION 2.02. Partnership Agreement. The Amended and Restated Agreement of Limited Partnership of the Surviving Partnership attached as Exhibit __ hereto shall be the partnership agreement of the Surviving Partnership unless and until amended in accordance with its terms and applicable law. The name of the Surviving Partnership shall be Corporate Property Associates 3. ARTICLE III TRANSFER AND CONVEYANCE OF ASSETS AND ASSUMPTION OF LIABILITIES SECTION 3.01. Transfer, Conveyance and Assumption. At the Effective Time, CPA 3 shall continue in existence as the Surviving Partnership, and without further transfer, succeed to and possess all of the rights, privileges and powers of the Terminating Partnership, and all of the assets and property of whatever kind and character of the Terminating Partnership shall vest in CPA 3 without further act or deed; thereafter, CPA 3, as the Surviving Partnership, shall be liable for all of the liabilities and obligations of the Terminating Partnership, and any claim or judgment against the Terminating Partnership may be enforced against CPA 3, as the Surviving Partnership, in accordance with Section 15678.6(a) of the CRLPA. SECTION 3.02. Further Assurances. If at any time CPA 3 shall consider or be advised that any further assignment, conveyance or assurance is necessary or advisable to vest, perfect or confirm of record in the Surviving Partnership the title to any property or right of the Terminating Partnership, or otherwise to carry out the provisions hereof, the proper representatives of the Terminating Partnership as of the 3 4 Effective Time shall execute and deliver any and all proper deeds, assignments, and assurances and do all things necessary or proper to vest, perfect or convey title to such property or right in the Surviving Partnership, and otherwise to carry out the provisions hereof. ARTICLE IV CONDITIONS TO THE MERGER SECTION 4.01 Conditions to the Obligations of Each Party. The obligations of CPA 3 and the Terminating Partnership to consummate the Merger are subject to the satisfaction of the following conditions as of the Effective Time; (i) no provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the consummation of the Merger; (ii) all actions by or in respect of or filings with any governmental body, agency, official or authority required to permit the consummation of the Merger shall have been obtained; (iii) approval of participation in the Consolidation by a majority of the limited partners of CPA 3 and a majority of the limited partners of CPA Partnerships representing an aggregate Exchange Value of $200,000,000; (iv) the fairness opinion of Robert A. Stanger & Co., Inc. regarding the actual allocation of the Listed Shares based on the outcome of the votes of the limited partners of each CPA Partnership; and (v) the approval of the Listed Shares for listing on the New York Stock Exchange. ARTICLE V TERMINATION SECTION 5.01. Termination. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time: (i) by mutual written consent of the Subsidiary GP, on behalf of the Terminating Partnership, and the Second GP, on behalf of CPA 3; (ii) if any conditions to the consummation of the Merger as set forth in this Agreement are not satisfied; or 4 5 (iii) if the Consolidation is not consummated prior to June 30, 1998 or such later date as mutually agreed in writing by the parties. SECTION 5.02. Effect of Termination. If this Agreement is terminated pursuant to Section 5.01, this Agreement shall become void and of no effect with no liability on the part of either party hereto. ARTICLE VI MISCELLANEOUS SECTION 6.01. General Partner Authorization. The general partner of the Surviving Partnership shall be authorized, at such time in its sole discretion as it deems appropriate to execute, acknowledge, verify, deliver, file and record, for and in the name of CPA 3 and, to the extent necessary, the First GP, the Second GP, the limited partners of CPA 3, the Subsidiary GP and the sole limited partner of the Terminating Partnership, any and all documents and instruments including, without limitation, the Amended and Restated Agreement of Limited Partnership of the Surviving Partnership, and shall do and perform any and all acts required by applicable law which the general partner of the Surviving Partnership deems necessary or advisable, including, without limitation, delivering financial statements to the limited partners of CPA 3, in order to effectuate the Merger. SECTION 6.02. Waivers; Amendments. (a) Any provision of this Agreement may, subject to applicable law, be amended or waived prior to the Effective Time if, and only if, such amendment or waiver is in writing and signed by the Second GP, on behalf of CPA 3, and by the Subsidiary GP, on behalf of the Terminating Partnership; provided that after approval of the Merger by the limited partners of CPA 3 holding a majority of the limited partner interests of CPA 3, no amendment or waiver may be made that (i) materially and adversely affects the rights of the limited partners of CPA 3 without the approval of the limited partners of CPA 3 holding a majority of the limited partner interests of CPA 3; (ii) alters or changes (A) the amount or type of consideration which such limited partners will receive in the Merger, (B) the Amended and Restated Limited Liability Company Agreement of the Company, or (C) the terms and conditions of this Agreement if such alteration or change materially and adversely affects the limited partners of CPA 3 or the members of the Company; or (iii) waives the condition to the Merger that CPA Partnerships having an aggregate Exchange Value of $200,000,000 approve the Consolidation. (b) Except as provided in Section 6.02(a), no failure or delay by any party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, 5 6 power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 6.04. Integration. All prior or contemporaneous agreements, contracts, promises, representations, and statements, if any, between the Terminating Partnership and CPA 3, or their representatives, are merged into this Agreement, and this Agreement shall constitute the entire understanding between the Terminating Partnership and CPA 3 with respect to the subject matter hereof. SECTION 6.05. Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other party hereto. SECTION 6.06. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of California, without giving effect to principles of conflicts of law. SECTION 6.07. Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received the counterpart hereof signed by the other party hereto. ARTICLE VII DEFINED TERMS Capitalized terms used in this Agreement not otherwise defined herein shall have the meanings set forth below, except as otherwise expressly indicated or limited by the context in which they appear in this Agreement. "Consolidation" means the transaction whereby up to nine subsidiary partnerships of the Company merge with and into some or all of the CPA Partnerships. "CPA Partnerships" means Corporate Property Associates, a California limited partnership, Corporate Property Associates 2, a California limited partnership, Corporate Property Associates 3, a California limited partnership, Corporate Property Associates 4, a California limited partnership, Corporate Property Associates 5, a California limited partnership, Corporate Property Associates 6, a California limited partnership, Corporate Property Associates 7, a 6 7 California limited partnership, Corporate Property Associates 8, L.P., a Delaware limited partnership, and Corporate Property Associates 9, L.P., a Delaware limited partnership or any of them. "Exchange Value" means the appraised value of a CPA Partnership. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized representatives as of the day and year first above written. CORPORATE PROPERTY ASSOCIATES 3 By: W. P. Carey & Co., Inc., its General Partner By:____________________________________ Name:_______________________________ Title:_________________________ By:____________________________________ William Polk Carey, its General Partner THIRD SUBSIDIARY, L.P. By: Carey Diversified LLC, its General Partner By:____________________________________ Name:_______________________________ Title:______________________________ 7 EX-2.13 14 FORM OF AGREEMENT OF MERGER OF CPA :4 1 Exhibit 2.13 AGREEMENT OF MERGER OF FOURTH SUBSIDIARY, L.P. INTO CORPORATE PROPERTY ASSOCIATES 4 A CALIFORNIA LIMITED PARTNERSHIP AGREEMENT OF MERGER, dated as of ________________, 19__ (this "Agreement"), between FOURTH SUBSIDIARY, L.P., a California limited partnership (the "Terminating Partnership"), and CORPORATE PROPERTY ASSOCIATES 4, a California limited partnership ("CPA 4"). WITNESSETH: WHEREAS, Section 15678.7(a) of the California Revised Limited Partnership Act (the "CRLPA"), authorizes the merger of a California limited partnership with and into another California limited partnership; WHEREAS, the Terminating Partnership and CPA 4 now desire to merge (the "Merger"), following which CPA 4 shall be the surviving limited partnership; WHEREAS, Carey Diversified LLC, in its capacity as the general partner of the Terminating Partnership (the "Subsidiary GP"), and Carey Property Associates LP, as the sole limited partner of the Terminating Partnership, have approved this Agreement and the consummation of the Merger; WHEREAS, William Polk Carey, in his capacity as a general partner of CPA 4 (the "First GP"), and Carey Corporate Property, Inc., in its capacity as a general partner of CPA 4 (the "Second GP"), have approved this Agreement and the consummation of the Merger: NOW THEREFORE, the parties hereto hereby agree as follows: 2 ARTICLE I THE MERGER SECTION 1.01. The Merger. (a) On _______________, 199__, after satisfaction or, to the extent permitted hereunder, waiver of all conditions to the Merger, as the Subsidiary GP and the Second GP shall determine, CPA 4, which shall be the surviving limited partnership, shall merge with the Terminating Partnership and shall file a certificate of merger substantially in the form of Exhibit 1 hereto (the "Certificate of Merger") with the Secretary of State of the State of California and make all other filings or recordings required by California law in connection with the Merger. The Merger shall become effective at such time as is specified in the Certificate of Merger (the "Effective Time"). (b) At the Effective Time, the Terminating Partnership shall be merged with and into CPA 4, whereupon the separate existence of the Terminating Partnership shall cease, and CPA 4 shall be the surviving limited partnership of the Merger (the "Surviving Partnership") in accordance with Section 15678.5(b) of the CRLPA. Section 1.02. Exchange of Interests. At the Effective Time: (a) The limited partner in the Terminating Partnership immediately prior to the Effective Time shall receive $100 in exchange for such limited partner interest; (b) The Subsidiary GP's interest in the Terminating Partnership shall be converted into (i) a general partner interest in the Surviving Partnership and (ii) one unit of limited partner interests in the Surviving Partnership for each unit converted to a limited liability company interest in the Company by a limited partner of CPA 4 pursuant hereto; (c) The First GP's interest in CPA 4 shall be converted into a limited liability company interest in Carey Diversified LLC (the "Company") consisting of 10,865 "Listed Shares" and units of special partner interest in CPA 4, and the First GP shall automatically become a member of the Company and special partner of CPA 4; (d) The Second GP's interest in CPA 4 shall be converted into a limited liability company interest in the Company consisting of 10,865 "Listed Shares" and units of special partner interests in CPA 4, and the Second GP shall automatically become a member of the Company and a special partner of CPA 4; and 2 3 (e) Each limited partner interest in CPA 4 outstanding immediately prior to the Effective Time shall, at the election of such limited partner, be converted into either a limited liability company interest in the Company consisting of 65.93 "Listed Shares" or a limited interest in Surviving Partnership equal to such limited partner's limited partner interest in CPA 4, and the holder of each such interest in CPA 4 shall automatically become a member of the Company or remain a limited partner of CPA 4, as the case may be. ARTICLE II THE SURVIVING PARTNERSHIP SECTION 2.01. Certificate of Limited Partnership. The Certificate of Limited Partnership of CPA 4 shall continue to be the Certificate of Limited Partnership of CPA 4, and, unless and until amended in accordance with the applicable law, shall be the Certificate of Limited Partnership of the Surviving Partnership. SECTION 2.02. Partnership Agreement. The Amended and Restated Agreement of Limited Partnership of the Surviving Partnership attached as Exhibit __ hereto shall be the partnership agreement of the Surviving Partnership unless and until amended in accordance with its terms and applicable law. The name of the Surviving Partnership shall be Corporate Property Associates 4. ARTICLE III TRANSFER AND CONVEYANCE OF ASSETS AND ASSUMPTION OF LIABILITIES SECTION 3.01. Transfer, Conveyance and Assumption. At the Effective Time, CPA 4 shall continue in existence as the Surviving Partnership, and without further transfer, succeed to and possess all of the rights, privileges and powers of the Terminating Partnership, and all of the assets and property of whatever kind and character of the Terminating Partnership shall vest in CPA 4 without further act or deed; thereafter, CPA 4, as the Surviving Partnership, shall be liable for all of the liabilities and obligations of the Terminating Partnership, and any claim or judgment against the Terminating Partnership may be enforced against CPA 4, as the Surviving Partnership, in accordance with Section 15678.6(a) of the CRLPA. SECTION 3.02. Further Assurances. If at any time CPA 4 shall consider or be advised that any further assignment, conveyance or assurance is necessary or advisable to vest, 3 4 perfect or confirm of record in the Surviving Partnership the title to any property or right of the Terminating Partnership, or otherwise to carry out the provisions hereof, the proper representatives of the Terminating Partnership as of the Effective Time shall execute and deliver any and all proper deeds, assignments, and assurances and do all things necessary or proper to vest, perfect or convey title to such property or right in the Surviving Partnership, and otherwise to carry out the provisions hereof. ARTICLE IV CONDITIONS TO THE MERGER SECTION 4.01 Conditions to the Obligations of Each Party. The obligations of CPA 4 and the Terminating Partnership to consummate the Merger are subject to the satisfaction of the following conditions as of the Effective Time; (i) no provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the consummation of the Merger; (ii) all actions by or in respect of or filings with any governmental body, agency, official or authority required to permit the consummation of the Merger shall have been obtained; (iii) approval of participation in the Consolidation by a majority of the limited partners of CPA 4 and a majority of the limited partners of CPA Partnerships representing an aggregate Exchange Value of $200,000,000; (iv) the fairness opinion of Robert A. Stanger & Co., Inc. regarding the actual allocation of the Listed Shares based on the outcome of the votes of the limited partners of each CPA Partnership; and (v) the approval of the Listed Shares for listing on the New York Stock Exchange. ARTICLE V TERMINATION SECTION 5.01. Termination. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time: 4 5 (i) by mutual written consent of the Subsidiary GP, on behalf of the Terminating Partnership, and the Second GP, on behalf of CPA 4; (ii) if any conditions to the consummation of the Merger as set forth in this Agreement are not satisfied; or (iii) if the Consolidation is not consummated prior to June 30, 1998 or such later date as mutually agreed in writing by the parties hereto. SECTION 5.02. Effect of Termination. If this Agreement is terminated pursuant to Section 5.01, this Agreement shall become void and of no effect with no liability on the part of either party hereto. ARTICLE VI MISCELLANEOUS SECTION 6.01. General Partner Authorization. The general partner of the Surviving Partnership shall be authorized, at such time in its sole discretion as it deems appropriate to execute, acknowledge, verify, deliver, file and record, for and in the name of CPA 4 and, to the extent necessary, the First GP, the Second GP, the limited partners of CPA 4, the Subsidiary GP and the sole limited partner of the Terminating Partnership, any and all documents and instruments including, without limitation, the Amended and Restated Agreement of Limited Partnership of the Surviving Partnership, and shall do and perform any and all acts required by applicable law which the general partner of the Surviving Partnership deems necessary or advisable, including without limitation, delivering financial statements to the limited partners of CPA 4, in order to effectuate the Merger. SECTION 6.02. Waivers; Amendments. (a) Any provision of this Agreement may, subject to applicable law, be amended or waived prior to the Effective Time if, and only if, such amendment or waiver is in writing and signed by the Second GP, on behalf of CPA 4, and by the Subsidiary GP, on behalf of the Terminating Partnership; provided that after approval of the Merger by the limited partners of CPA 4 holding a majority of the limited partner interests of CPA 4, no amendment or waiver may be made that (i) materially and adversely affects the rights of the limited partners of CPA 4 without the approval of the limited partners of CPA 4 holding a majority of the limited partner interests of CPA 4; (ii) alters or changes (A) the amount or type of consideration which such limited partners will receive in the Merger, (B) the Amended and Restated Limited Liability Company Agreement of the Company, or (C) the terms and conditions of this Agreement if such alteration or change materially and adversely 5 6 affects the limited partners of CPA 4 or the members of the Company; or (iii) waives the condition to the Merger that CPA Partnerships having an aggregate Exchange Value of $200,000,000 approve the Consolidation. (b) Except as provided in Section 6.02(a), no failure or delay by any party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 6.04. Integration. All prior or contemporaneous agreements, contracts, promises, representations, and statements, if any, between the Terminating Partnership and CPA 4, or their representatives, are merged into this Agreement, and this Agreement shall constitute the entire understanding between the Terminating Partnership and CPA 4 with respect to the subject matter hereof. SECTION 6.05. Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other party hereto. SECTION 6.06. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of California, without giving effect to principles of conflicts of law. SECTION 6.07. Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received the counterpart hereof signed by the other party hereto. ARTICLE VII DEFINED TERMS Capitalized terms used in this Agreement not otherwise defined herein shall have the meanings set forth below, except as otherwise expressly indicated or limited by the context in which they appear in this Agreement. 6 7 "Consolidation" means the transaction whereby up to nine subsidiary partnerships of the Company merge with and into some or all of the CPA Partnerships. "CPA Partnerships" means Corporate Property Associates, a California limited partnership, Corporate Property Associates 2, a California limited partnership, Corporate Property Associates 3, a California limited partnership, Corporate Property Associates 4, a California limited partnership, Corporate Property Associates 5, a California limited partnership, Corporate Property Associates 6, a California limited partnership, Corporate Property Associates 7, a California limited partnership, Corporate Property Associates 8, L.P., a Delaware limited partnership, and Corporate Property Associates 9, L.P., a Delaware limited partnership or any of them. "Exchange Value" means the appraised value of a CPA Partnership. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized representatives as of the day and year first above written. CORPORATE PROPERTY ASSOCIATES 4 By: Carey Corporate Property, Inc., its General Partner By:____________________________________ Name:_______________________________ Title:______________________________ By:____________________________________ William Polk Carey, its General Partner FOURTH SUBSIDIARY, L.P. By: Carey Diversified LLC, its General Partner By:____________________________________ Name:_______________________________ Title:______________________________ 7 EX-2.14 15 FORM OF AGREEMENT OF MERGER OF CPA :5 1 Exhibit 2.14 AGREEMENT OF MERGER OF FIFTH SUBSIDIARY, L.P. INTO CORPORATE PROPERTY ASSOCIATES 5 AGREEMENT OF MERGER, dated as of _______________________, 19__ (this "Agreement"), between FIFTH SUBSIDIARY, L.P., a California limited partnership (the "Terminating Partnership"), and CORPORATE PROPERTY ASSOCIATES 5, a California limited partnership ("CPA 5"). WITNESSETH: WHEREAS, Section 15678.7(a) of the California Revised Limited Partnership Act (the "CRLPA"), authorizes the merger of a California limited partnership with and into another California limited partnership; WHEREAS, the Terminating Partnership and CPA 5 now desire to merge (the "Merger"), following which CPA 5 shall be the surviving limited partnership; WHEREAS, Carey Diversified LLC, in its capacity as the general partner of the Terminating Partnership (the "Subsidiary GP"), and Carey Property Advisors LP, as the sole limited partner of the Terminating Partnership, have approved this Agreement and the consummation of the Merger; WHEREAS, William Polk Carey, in his capacity as a general partner of CPA 5 (the "First GP"), and Carey Corporate Property, Inc., in its capacity as a general partner of CPA 5 (the "Second GP"), have approved this Agreement and the consummation of the Merger: NOW THEREFORE, the parties hereto hereby agree as follows: 2 ARTICLE I THE MERGER SECTION 1.01. The Merger. (a) On , 199 , after satisfaction or, to the extent permitted hereunder, waiver of all conditions to the Merger, as the Subsidiary GP and the Second GP shall determine, CPA 5, which shall be the surviving limited partnership, shall merge with the Terminating Partnership and shall file a certificate of merger substantially in the form of Exhibit 1 hereto (the "Certificate of Merger") with the Secretary of State of the State of California and make all other filings or recordings required by California law in connection with the Merger. The Merger shall become effective at such time as is specified in the Certificate of Merger (the "Effective Time"). (b) At the Effective Time, the Terminating Partnership shall be merged with and into CPA 5, whereupon the separate existence of the Terminating Partnership shall cease, and CPA 5 shall be the surviving limited partnership of the Merger (the "Surviving Partnership") in accordance with Section 15678.5(b) of the CRLPA. SECTION 1.02. Exchange of Interests. At the Effective Time: (a) The limited partner in the Terminating Partnership immediately prior to the Effective Time shall receive $100 in exchange for such limited partner interest; (b) The Subsidiary GP's interest in the Terminating Partnership shall be converted into (i) a general partner interest in the Surviving Partnership and (ii) one unit of limited partner interest in the Surviving partnership for each unit converted to a limited liability company interest in the Company by a limited partner of CPA 5 pursuant hereto; (c) The First GP's and the Second GP's interests in CPA 5 shall be converted into units of special partner interests in CPA 5, and the First GP and Second GP shall automatically become special partners of CPA 5; and (e) Each limited partner interest in CPA 5 outstanding immediately prior to the Effective Time shall, at the election of such limited partner, be converted into either a limited liability company interest in the Company consisting of 36.74 "Listed Shares" or a limited partner interest in the Surviving Partnership equal to such limited partner's limited partner interest in CPA 5, and the holder of each such interest in CPA 5 shall automatically become a member of the Company or remain a limited partner in CPA 5, as the case may be. 2 3 ARTICLE II THE SURVIVING PARTNERSHIP SECTION 2.01. Certificate of Limited Partnership. The Certificate of Limited Partnership of CPA 5 shall continue to be the Certificate of Limited Partnership of CPA 5, and, unless and until amended in accordance with the applicable law, shall be the Certificate of Limited Partnership of the Surviving Partnership. SECTION 2.02. Partnership Agreement. The Amended and Restated Agreement of Limited Partnership of the Surviving Partnership attached as Exhibit hereto shall be the partnership agreement of the Surviving Partnership unless and until amended in accordance with its terms and applicable law. The name of the Surviving Partnership shall be Corporate Property Associates 5. ARTICLE III TRANSFER AND CONVEYANCE OF ASSETS AND ASSUMPTION OF LIABILITIES SECTION 3.01. Transfer, Conveyance and Assumption. At the Effective Time, CPA 5 shall continue in existence as the Surviving Partnership, and without further transfer, succeed to and possess all of the rights, privileges and powers of the Terminating Partnership, and all of the assets and property of whatever kind and character of the Terminating Partnership shall vest in CPA 5 without further act or deed; thereafter, CPA 5, as the Surviving Partnership, shall be liable for all of the liabilities and obligations of the Terminating Partnership, and any claim or judgment against the Terminating Partnership may be enforced against CPA 5, as the Surviving Partnership, in accordance with Section 15678.6(a) of the CRLPA. SECTION 3.02. Further Assurances. If at any time CPA 5 shall consider or be advised that any further assignment, conveyance or assurance is necessary or advisable to vest, perfect or confirm of record in the Surviving Partnership the title to any property or right of the Terminating Partnership, or otherwise to carry out the provisions hereof, the proper representatives of the Terminating Partnership as of the Effective Time shall execute and deliver any and all proper deeds, assignments, and assurances and do all things necessary or proper to vest, perfect or convey title to such property or right in the Surviving Partnership, and otherwise to carry out the provisions hereof. 3 4 ARTICLE IV CONDITIONS TO THE MERGER SECTION 4.01 Conditions to the Obligations of Each Party. The obligations of CPA 5 and the Terminating Partnership to consummate the Merger are subject to the satisfaction of the following conditions as of the Effective Time; (i) no provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the consummation of the Merger; (ii) all actions by or in respect of or filings with any governmental body, agency, official or authority required to permit the consummation of the Merger shall have been obtained; (iii) approval of participation in the Consolidation by a majority of the limited partners of CPA 5 and a majority of the limited partners of CPA Partnerships representing an aggregate Exchange Value of $200,000,000; (iv) the fairness opinion of Robert A. Stanger & Co., Inc. regarding the actual allocation of the Listed Shares based on the outcome of the votes of the limited partners of each CPA Partnership; and (v) the approval of the Listed Shares for listing on the New York Stock Exchange. ARTICLE V TERMINATION SECTION 5.01. Termination. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time: (i) by mutual written consent of the Subsidiary GP, on behalf of the Terminating Partnership, and the Second GP, on behalf of CPA 5; (ii) if any conditions to the consummation of the Merger as set forth in this Agreement are not satisfied; or (iii) if the Consolidation is not consummated prior to June 30, 1998 or such later date as mutually agreed in writing by the parties hereto. 4 5 SECTION 5.02. Effect of Termination. If this Agreement is terminated pursuant to Section 5.01, this Agreement shall become void and of no effect with no liability on the part of either party hereto. ARTICLE VI MISCELLANEOUS SECTION 6.01. General Partner Authorization. The general partner of the Surviving Partnership shall be authorized, at such time in its sole discretion as it deems appropriate to execute, acknowledge, verify, deliver, file and record, for and in the name of CPA 5 and, to the extent necessary, the First GP, the Second GP, the limited partners of CPA 5, the Subsidiary GP and the sole limited partner of the Terminating Partnership, any and all documents and instruments including, without limitation, the Amended and Restated Agreement of Limited Partnership of the Surviving Partnership, and shall do and perform any and all acts required by applicable law which the general partner of the Surviving Partnership deems necessary or advisable, including, without limitation, delivering financial statements to the limited partners of CPA 5, in order to effectuate the Merger. SECTION 6.02. Waivers; Amendments. (a) Any provision of this Agreement may, subject to applicable law, be amended or waived prior to the Effective Time if, and only if, such amendment or waiver is in writing and signed by the Second GP, on behalf of CPA 5, and by the Subsidiary GP, on behalf of the Terminating Partnership; provided that after approval of the Merger by the limited partners of CPA 5 holding a majority of the limited partner interests of CPA 5, no amendment or waiver may be made that (i) materially and adversely affects the rights of the limited partners of CPA 5 without the approval of the limited partners of CPA 5 holding a majority of the limited partner interests of CPA 5; (ii) alters or changes (A) the amount or type of consideration which such limited partners will receive in the Merger, (B) the Amended and Restated Limited Liability Company Agreement of the Company, or (C) the terms and conditions of this Agreement if such alteration or change materially and adversely affects the limited partners of CPA 5 or the members of the Company; or (iii) waives the condition to the Merger that CPA Partnerships having an aggregate Exchange Value of $200,000,000 approve the Consolidation. (b) Except as provided in Section 6.02(a), no failure or delay by any party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided 5 6 shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 6.04. Integration. All prior or contemporaneous agreements, contracts, promises, representations, and statements, if any, between the Terminating Partnership and CPA 5, or their representatives, are merged into this Agreement, and this Agreement shall constitute the entire understanding between the Terminating Partnership and CPA 5 with respect to the subject matter hereof. SECTION 6.05. Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other party hereto. SECTION 6.06. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of California, without giving effect to the principles of conflicts of law. SECTION 6.07. Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received the counterpart hereof signed by the other party hereto. ARTICLE VII DEFINED TERMS Capitalized terms used in this Agreement not otherwise defined herein shall have the meanings set forth below, except as otherwise expressly indicated or limited by the context in which they appear in this Agreement. "Consolidation" means the transaction whereby up to nine subsidiary partnerships of the Company merge with and into some or all of the CPA Partnerships. "CPA Partnerships" means Corporate Property Associates, a California limited partnership, Corporate Property Associates 2, a California limited partnership, Corporate Property Associates 3, a California limited partnership, Corporate Property Associates 4, a California limited partnership, Corporate Property Associates 5, a California limited partnership, Corporate Property Associates 6, a California 6 7 limited partnership, Corporate Property Associates 7, a California limited partnership, Corporate Property Associates 8, L.P., a Delaware limited partnership, and Corporate Property Associates 9, L.P., a Delaware limited partnership or any of them. "Exchange Value" means the appraised value of a CPA Partnership. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized representatives as of the day and year first above written. CORPORATE PROPERTY ASSOCIATES 5 By: Carey Corporate Property, Inc., its General Partner By: __________________________________ Name: ___________________________ Title: ___________________________ By: __________________________________ William Polk Carey, its General Partner FIFTH SUBSIDIARY, L.P. By: __________________________________ Name: ___________________________ Title: ___________________________ 7 EX-2.15 16 FORM OF AGREEMENT OF MERGER CPA:6 1 EXHIBIT 2.15 AGREEMENT OF MERGER OF SIXTH SUBSIDIARY, L.P. INTO CORPORATE PROPERTY ASSOCIATES 6 AGREEMENT OF MERGER, dated as of ________________, 19__ (this "Agreement"), between SIXTH SUBSIDIARY, L.P., a California limited partnership (the "Terminating Partnership"), and CORPORATE PROPERTY ASSOCIATES 6, a California limited partnership ("CPA 6"). WITNESSETH: WHEREAS, Section 15678.7(a) of the California Revised Limited Partnership Act (the "CRLPA"), authorizes the merger of a California limited partnership with and into another California limited partnership; WHEREAS, the Terminating Partnership and CPA 6 now desire to merge (the "Merger"), following which CPA 6 shall be the surviving limited partnership; WHEREAS, Carey Diversified LLC, in its capacity as the general partner of the Terminating Partnership (the "Subsidiary GP"), and Carey Property Advisors LP, as the sole limited partner of the Terminating Partnership, have approved this Agreement and the consummation of the Merger; WHEREAS, William Polk Carey, in his capacity as a general partner of CPA 6 (the "First GP"), and Carey Corporate Property, Inc., in its capacity as a general partner of CPA 6 (the "Second GP"), have approved this Agreement and the consummation of the Merger: NOW THEREFORE, the parties hereto hereby agree as follows: 2 ARTICLE I THE MERGER SECTION 1.01. The Merger. (a) On _______________, 199__, after satisfaction or, to the extent permitted hereunder, waiver of all conditions to the Merger, as the Subsidiary GP and the Second GP shall determine, CPA 6, which shall be the surviving limited partnership, shall merge with the Terminating Partnership and shall file a certificate of merger substantially in the form of Exhibit 1 hereto (the "Certificate of Merger") with the Secretary of State of the State of California and make all other filings or recordings required by California law in connection with the Merger. The Merger shall become effective at such time as is specified in the Certificate of Merger (the "Effective Time"). (b) At the Effective Time, the Terminating Partnership shall be merged with and into CPA 6, whereupon the separate existence of the Terminating Partnership shall cease, and CPA 6 shall be the surviving limited partnership of the Merger (the "Surviving Partnership") in accordance with Section 15678.5(b) of the CRLPA. Section 1.02. Exchange of Interests. At the Effective Time: (a) The limited partner in the Terminating Partnership immediately prior to the Effective Time shall receive $100 in exchange for such limited partner interest; (b) The Subsidiary GP's interest in the Terminating Partnership shall be converted into (i) a general partner interest in the Surviving Partnership and (ii) one unit of limited partner interest in the Surviving Partnership for each unit converted to a limited liability company interest in the Company by a limited partner of CPA 6 pursuant hereto; (c) The First GP's interest in CPA 6 shall be converted into a limited liability company interest in Carey Diversified LLC (the "Company") consisting of 8,847 "Listed Shares" and units of special partner interest in CPA 6, and the First GP shall automatically become a member of the Company and a special partner of CPA 6; (d) The Second GP's interest in CPA 6 shall be converted into a limited liability company interest in the Company consisting of 8,847 "Listed Shares" and units of special partner interest CPA 6, and the Second GP shall automatically become a member of the Company and a special partner of CPA 6; and 2 3 (e) Each limited partner interest in CPA 6 outstanding immediately prior to the Effective Time shall, at the election of such limited partner, be converted into either a limited liability company interest in the Company consisting of 69.03 "Listed Shares" or a limited partner interest in the Surviving Partnership equal to such limited partner's limited partner interest in CPA 6, and the holder of each such interest in CPA 6 shall automatically become a member of the Company or remain a limited partner in CPA 6, as the case may be. ARTICLE II THE SURVIVING PARTNERSHIP SECTION 2.01. Certificate of Limited Partnership. The Certificate of Limited Partnership of CPA 6 shall continue to be the Certificate of Limited Partnership of CPA 6, and, unless and until amended in accordance with the applicable law, shall be the Certificate of Limited Partnership of the Surviving Partnership. SECTION 2.02. Partnership Agreement. The Amended and Restated Agreement of Limited Partnership of the Surviving Partnership attached as Exhibit __ hereto shall be the partnership agreement of the Surviving Partnership unless and until amended in accordance with its terms and applicable law. The name of the Surviving Partnership shall be Corporate Property Associates 6. ARTICLE III TRANSFER AND CONVEYANCE OF ASSETS AND ASSUMPTION OF LIABILITIES SECTION 3.01. Transfer, Conveyance and Assumption. At the Effective Time, CPA 6 shall continue in existence as the Surviving Partnership, and without further transfer, succeed to and possess all of the rights, privileges and powers of the Terminating Partnership, and all of the assets and property of whatever kind and character of the Terminating Partnership shall vest in CPA 6 without further act or deed; thereafter, CPA 6, as the Surviving Partnership, shall be liable for all of the liabilities and obligations of the Terminating Partnership, and any claim or judgment against the Terminating Partnership may be enforced against CPA 6, as the Surviving Partnership, in accordance with Section 15678.6(a) of the CRLPA. SECTION 3.02. Further Assurances. If at any time CPA 6 shall consider or be advised that any further assignment, conveyance or assurance is necessary or advisable to vest, 3 4 perfect or confirm of record in the Surviving Partnership the title to any property or right of the Terminating Partnership, or otherwise to carry out the provisions hereof, the proper representatives of the Terminating Partnership as of the Effective Time shall execute and deliver any and all proper deeds, assignments, and assurances and do all things necessary or proper to vest, perfect or convey title to such property or right in the Surviving Partnership, and otherwise to carry out the provisions hereof. ARTICLE IV CONDITIONS TO THE MERGER SECTION 4.01 Conditions to the Obligations of Each Party. The obligations of CPA 6 and the Terminating Partnership to consummate the Merger are subject to the satisfaction of the following conditions as of the Effective Time; (i) no provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the consummation of the Merger; (ii) all actions by or in respect of or filings with any governmental body, agency, official or authority required to permit the consummation of the Merger shall have been obtained; (iii) approval of participation in the Consolidation by a majority of the limited partners of CPA 6 and a majority of the limited partners of CPA Partnerships representing an aggregate Exchange Value of $200,000,000; (iv) the fairness opinion of Robert A. Stanger & Co., Inc. regarding the actual allocation of the Listed Shares based on the outcome of the votes of the limited partners of each CPA Partnership; and (v) the approval of the Listed Shares for listing on the New York Stock Exchange. ARTICLE V TERMINATION SECTION 5.01. Termination. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time: 4 5 (i) by mutual written consent of the Subsidiary GP, on behalf of the Terminating Partnership, and the Second GP, on behalf of CPA 6; (ii) if any conditions to the consummation of the Merger as set forth in this Agreement are not satisfied; or (iii) if the Consolidation is not consummated prior to June 30, 1998 or such later date as is mutually agreed in writing by the parties hereto. SECTION 5.02. Effect of Termination. If this Agreement is terminated pursuant to Section 5.01, this Agreement shall become void and of no effect with no liability on the part of either party hereto. ARTICLE VI MISCELLANEOUS SECTION 6.01. General Partner Authorization. The general partner of the Surviving Partnership shall be authorized, at such time in its sole discretion as it deems appropriate to execute, acknowledge, verify, deliver, file and record, for and in the name of CPA 6 and, to the extent necessary, the First GP, the Second GP, the limited partners of CPA 6, the Subsidiary GP and the sole limited partner of the Terminating Partnership, any and all documents and instruments including, without limitation, the Amended and Restated Agreement of Limited Partnership of the Surviving Partnership, and shall do and perform any and all acts required by applicable law which the general partner of the Surviving Partnership deems necessary or advisable, including, without limitation, delivering financial statements to the limited partners of CPA 6, in order to effectuate the Merger. SECTION 6.02. Waivers; Amendments. (a) Any provision of this Agreement may, subject to applicable law, be amended or waived prior to the Effective Time if, and only if, such amendment or waiver is in writing and signed by the Second GP, on behalf of CPA 6, and by the Subsidiary GP, on behalf of the Terminating Partnership; provided that after approval of the Merger by the limited partners of CPA 6 holding a majority of the limited partner interests of CPA 6, no amendment or waiver may be made that (i) materially and adversely affects the rights of the limited partners of CPA 6 without the approval of the limited partners of CPA 6 holding a majority of the limited partner interests of CPA 6; (ii) alters or changes (A) the amount or type of consideration which such limited partners will receive in the Merger, (B) the Amended and Restated Limited Liability Company Agreement of the Company, or (C) the terms and conditions of this Agreement if such alteration or change materially and adversely 5 6 affects the limited partners of CPA 6 or the members of the Company; or (iii) waives the condition to the Merger that CPA Partnerships having an aggregate Exchange Value of $200,000,000 approve the Consolidation. (b) Except as provided in Section 6.02(a), no failure or delay by any party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 6.04. Integration. All prior or contemporaneous agreements, contracts, promises, representations, and statements, if any, between the Terminating Partnership and CPA 6, or their representatives, are merged into this Agreement, and this Agreement shall constitute the entire understanding between the Terminating Partnership and CPA 6 with respect to the subject matter hereof. SECTION 6.05. Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other party hereto. SECTION 6.06. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of California, without giving effect to principles of conflicts of law. SECTION 6.07. Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received the counterpart hereof signed by the other party hereto. ARTICLE VII DEFINED TERMS Capitalized terms used in this Agreement not otherwise defined herein shall have the meanings set forth below, except as otherwise expressly indicated or limited by the context in which they appear in this Agreement. 6 7 "Consolidation" means the transaction whereby up to nine subsidiary partnerships of the Company merge with and into some or all of the CPA Partnerships. "CPA Partnerships" means Corporate Property Associates, a California limited partnership, Corporate Property Associates 2, a California limited partnership, Corporate Property Associates 3, a California limited partnership, Corporate Property Associates 4, a California limited partnership, Corporate Property Associates 5, a California limited partnership, Corporate Property Associates 6, a California limited partnership, Corporate Property Associates 7, a California limited partnership, Corporate Property Associates 8, L.P., a Delaware limited partnership, and Corporate Property Associates 9, L.P., a Delaware limited partnership or any of them. "Exchange Value" means the appraised value of a CPA Partnership. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized representatives as of the day and year first above written. CORPORATE PROPERTY ASSOCIATES 6 By: Carey Corporate Property, Inc., its General Partner By: -------------------------- Name: -------------------------- Title: -------------------------- By: -------------------------- William Polk Carey, its General Partner SIXTH SUBSIDIARY, L.P. By: Carey Diversified LLC, its General Partner By: -------------------------- Name: -------------------------- Title: -------------------------- 7 EX-2.16 17 FORM OF AGREMENT OF MERGER CPA :8 1 EXHIBIT 2.16 AGREEMENT OF MERGER OF SEVENTH SUBSIDIARY, L.P. INTO CORPORATE PROPERTY ASSOCIATES 7 AGREEMENT OF MERGER, dated as of ________________, 19__ (this "Agreement"), between SEVENTH SUBSIDIARY, L.P., a California limited partnership (the "Terminating Partnership"), and CORPORATE PROPERTY ASSOCIATES 7, a California limited partnership ("CPA 7"). WITNESSETH: WHEREAS, Section 15678.7(a) of the California Revised Limited Partnership Act (the "CRLPA"), authorizes the merger of a California limited partnership with and into another California limited partnership; WHEREAS, the Terminating Partnership and CPA 7 now desire to merge (the "Merger"), following which CPA 7 shall be the surviving limited partnership; WHEREAS, Carey Diversified LLC, in its capacity as the general partner of the Terminating Partnership (the "Subsidiary GP"), and Carey Property Advisors LP, as the sole limited partner of the Terminating Partnership, have approved this Agreement and the consummation of the Merger; WHEREAS, William Polk Carey, in his capacity as a general partner of CPA 7 (the "First GP"), and Seventh Carey Corporate Property, Inc., in its capacity as a general partner of CPA 7 (the "Second GP"), have approved this Agreement and the consummation of the Merger: NOW THEREFORE, the parties hereto hereby agree as follows: 2 ARTICLE I THE MERGER SECTION 1.01. The Merger. (a) On _______________, 199__, after satisfaction or, to the extent permitted hereunder, waiver of all conditions to the Merger, as the Subsidiary GP and the Second GP shall determine, CPA 7, which shall be the surviving limited partnership, shall merge with the Terminating Partnership and shall file a certificate of merger substantially in the form of Exhibit 1 hereto (the "Certificate of Merger") with the Secretary of State of the State of California and make all other filings or recordings required by California law in connection with the Merger. The Merger shall become effective at such time as is specified in the Certificate of Merger (the "Effective Time"). (b) At the Effective Time, the Terminating Partnership shall be merged with and into CPA 7, whereupon the separate existence of the Terminating Partnership shall cease, and CPA 7 shall be the surviving limited partnership of the Merger (the "Surviving Partnership") in accordance with Section 15678.5(b) of the CRLPA. Section 1.02. Exchange of Interests. At the Effective Time: (a) The limited partner in the Terminating Partnership immediately prior to the Effective Time shall receive $100 in exchange for such limited partner interest; (b) The Subsidiary GP's interest in the Terminating Partnership shall be converted into (i) a general partner interest in the Surviving Partnership and (ii) one unit of limited partner interest in the Surviving Partnership for each unit converted to a limited liability company interest in the Company by a limited partner of CPA 7 pursuant hereto; (c) The First GP's interest in CPA 7 shall be converted into a limited liability company interest in Carey Diversified LLC (the "Company") consisting of 9,177 "Listed Shares" and units of special partner interest in CPA 7, and the First GP shall automatically become a member of the Company and a special partner of CPA 7; (d) The Second GP's interest in CPA 7 shall be converted into a limited liability company interest in the Company consisting of 36,709 "Listed Shares" and units of special partner interest in CPA 7, and the Second GP shall automatically become a member of the Company and a special partner of CPA 7; and 2 3 (e) Each limited partner interest in CPA 7 outstanding immediately prior to the Effective Time shall, at the election of such limited partner, be converted into either a limited liability company interest in the Company consisting of 55.39 "Listed Shares" or a limited partner interest in the Surviving partnership equal to such limited partner's limited partner interest in CPA 7, and the holder of each such interest in CPA 7 shall automatically become a member of the Company or remain a limited partner in CPA 7, as the case may be. ARTICLE II THE SURVIVING PARTNERSHIP SECTION 2.01. Certificate of Limited Partnership. The Certificate of Limited Partnership of CPA 7 shall continue to be the Certificate of Limited Partnership of CPA 7, and unless and until amended in accordance with the applicable law shall be the Certificate of Limited Partnership of the Surviving Partnership. SECTION 2.02. Partnership Agreement. The Amended and Restated Agreement of Limited Partnership of the Surviving Partnership attached as Exhibit __ hereto shall be the partnership agreement of the Surviving Partnership unless and until amended in accordance with its terms and applicable law. The name of the Surviving Partnership shall be Corporate Property Associates 7. ARTICLE III TRANSFER AND CONVEYANCE OF ASSETS AND ASSUMPTION OF LIABILITIES SECTION 3.01. Transfer, Conveyance and Assumption. At the Effective Time, CPA 7 shall continue in existence as the Surviving Partnership, and without further transfer, succeed to and possess all of the rights, privileges and powers of the Terminating Partnership, and all of the assets and property of whatever kind and character of the Terminating Partnership shall vest in CPA 7 without further act or deed; thereafter, CPA 7, as the Surviving Partnership, shall be liable for all of the liabilities and obligations of the Terminating Partnership, and any claim or judgment against the Terminating Partnership may be enforced against CPA 7, as the Surviving Partnership, in accordance with Section 15678.6(a) of the CRLPA. SECTION 3.02. Further Assurances. If at any time CPA 7 shall consider or be advised that any further assignment, conveyance or assurance is necessary or advisable to vest, 3 4 perfect or confirm of record in the Surviving Partnership the title to any property or right of the Terminating Partnership, or otherwise to carry out the provisions hereof, the proper representatives of the Terminating Partnership as of the Effective Time shall execute and deliver any and all proper deeds, assignments, and assurances and do all things necessary or proper to vest, perfect or convey title to such property or right in the Surviving Partnership, and otherwise to carry out the provisions hereof. ARTICLE IV CONDITIONS TO THE MERGER SECTION 4.01 Conditions to the Obligations of Each Party. The obligations of CPA 7 and the Terminating Partnership to consummate the Merger are subject to the satisfaction of the following conditions as of the Effective Time; (i) no provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the consummation of the Merger; (ii) all actions by or in respect of or filings with any governmental body, agency, official or authority required to permit the consummation of the Merger shall have been obtained; (iii) approval of participation in the Consolidation by a majority of the limited partners of CPA 7 and a majority of the limited partners of CPA Partnerships representing an aggregate Exchange Value of $200,000,000; (iv) the fairness opinion of Robert A. Stanger & Co., Inc. regarding the actual allocation of the Listed Shares based on the outcome of the votes of the limited partners of each CPA Partnership; and (v) the approval of the Listed Shares for listing on the New York Stock Exchange. ARTICLE V TERMINATION SECTION 5.01. Termination. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time: 4 5 (i) by mutual written consent of the Subsidiary GP, on behalf of the Terminating Partnership, and the Second GP, on behalf of CPA 7; (ii) if any conditions to the consummation of the Merger as set forth in this Agreement are not satisfied; or (iii) if the Consolidation is not consummated prior to June 30, 1998 or such later date as mutually agreed in writing by the parties hereto. SECTION 5.02. Effect of Termination. If this Agreement is terminated pursuant to Section 5.01, this Agreement shall become void and of no effect with no liability on the part of either party hereto. ARTICLE VI MISCELLANEOUS SECTION 6.01. General Partner Authorization. The general partner of the Surviving Partnership shall be authorized, at such time in its sole discretion as it deems appropriate to execute, acknowledge, verify, deliver, file and record, for and in the name of CPA 7 and, to the extent necessary, the First GP, the Second GP, the limited partners of CPA 7, the Subsidiary GP and the sole limited partner of the Terminating Partnership, any and all documents and instruments including, without limitation, the Amended and Restated Agreement of Limited Partnership of the Surviving Partnership, and shall do and perform any and all acts required by applicable law which the general partner of the Surviving Partnership deems necessary or advisable, including, without limitation, delivering financial statements to the limited partners of CPA 7, in order to effectuate the Merger. SECTION 6.02. Waivers; Amendments. (a) Any provision of this Agreement may, subject to applicable law, be amended or waived prior to the Effective Time if, and only if, such amendment or waiver is in writing and signed by the Second GP, on behalf of CPA 7, and by the Subsidiary GP, on behalf of the Terminating Partnership; provided that after approval of the Merger by the limited partners of CPA 7 holding a majority of the limited partner interests of CPA 7, no amendment or waiver may be made that (i) materially and adversely affects the rights of the limited partners of CPA 7 without the approval of the limited partners of CPA 7 holding a majority of the limited partner interests of CPA 7; (ii) alters or changes (A) the amount or type of consideration which such limited partners will receive in the Merger, (B) the Amended and Restated Limited Liability Company Agreement of the Company, or (C) the terms and conditions of this Agreement if such alteration or change materially and adversely 5 6 affects the limited partners of CPA 7 or the members of the Company; or (iii) waives the condition to the Merger that CPA Partnerships having an aggregate Exchange Value of $200,000,000 approve the Consolidation. (b) Except as provided in Section 6.02(a), no failure or delay by any party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 6.04. Integration. All prior or contemporaneous agreements, contracts, promises, representations, and statements, if any, between the Terminating Partnership and CPA 7, or their representatives, are merged into this Agreement, and this Agreement shall constitute the entire understanding between the Terminating Partnership and CPA 7 with respect to the subject matter hereof. SECTION 6.05. Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other party hereto. SECTION 6.06. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of California, without giving effect to principles of conflicts of law. SECTION 6.07. Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received the counterpart hereof signed by the other party hereto. ARTICLE VII DEFINED TERMS Capitalized terms used in this Agreement not otherwise defined herein shall have the meanings set forth below, except as otherwise expressly indicated or limited by the context in which they appear in this Agreement. 6 7 "Consolidation" means the transaction whereby up to nine subsidiary partnerships of the Company merge with and into some or all of the CPA Partnerships. "CPA Partnerships" means Corporate Property Associates, a California limited partnership, Corporate Property Associates 2, a California limited partnership, Corporate Property Associates 3, a California limited partnership, Corporate Property Associates 4, a California limited partnership, Corporate Property Associates 5, a California limited partnership, Corporate Property Associates 6, a California limited partnership, Corporate Property Associates 7, a California limited partnership, Corporate Property Associates 8, L.P., a Delaware limited partnership, and Corporate Property Associates 9, L.P., a Delaware limited partnership or any of them. "Exchange Value" means the appraised value of a CPA Partnership. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized representatives as of the day and year first above written. CORPORATE PROPERTY ASSOCIATES 7 By: Seventh Carey Corporate Property, Inc., its General Partner By: ------------------------------------ Name: --------------------------- Title: --------------------------- By: --------------------------------------- William Polk Carey, its General Partner SEVENTH SUBSIDIARY, L.P. By: Carey Diversified LLC, its General Partner By: ------------------------------------ Name: --------------------------- Title: --------------------------- 7 EX-2.17 18 FORM OF AGREEMENT OF MERGER OF CPA :8 1 EXHIBIT 2.17 AGREEMENT OF MERGER OF EIGHTH SUBSIDIARY, L.P. INTO CORPORATE PROPERTY ASSOCIATES 8, L.P., A DELAWARE LIMITED PARTNERSHIP AGREEMENT OF MERGER, dated as of ________________, 19__ (this "Agreement"), between EIGHTH SUBSIDIARY, L.P., a Delaware limited partnership (the "Terminating Partnership"), and Corporate Property Associates 8, L.P., A DELAWARE LIMITED PARTNERSHIP, a Delaware limited partnership ("CPA 8"). WITNESSETH: WHEREAS, Section 17-211 of the Delaware Revised Uniform Limited Partnership Act, 6 Del.C. Section17-101, et seq. (the "Delaware RULPA"), authorizes the merger of a Delaware limited partnership with and into another Delaware limited partnership; WHEREAS, the Terminating Partnership and CPA 8 now desire to merge (the "Merger"), following which CPA 8 shall be the surviving limited partnership; WHEREAS, Carey Diversified LLC, in its capacity as the general partner of the Terminating Partnership (the "Subsidiary GP"), and Carey Property Advisors LP, as the sole limited partner of the Terminating Partnership, have approved this Agreement and the consummation of the Merger; WHEREAS, William Polk Carey, in his capacity as a general partner of CPA 8 (the "First GP"), Eighth Carey Corporate Property, Inc., in its capacity as a general partner of CPA 8 (the "Second GP"), and the requisite number of the limited partners of CPA 8, have approved this Agreement and the consummation of the Merger: NOW THEREFORE, the parties hereto hereby agree as follows: 2 ARTICLE I THE MERGER SECTION 1.01. The Merger. (a) On _______________, 199__, after satisfaction or, to the extent permitted hereunder, waiver of all conditions to the Merger, as the Subsidiary GP and the Second GP shall determine, CPA 8, which shall be the surviving limited partnership, shall merge with the Terminating Partnership and shall file a certificate of merger substantially in the form of Exhibit 1 hereto (the "Certificate of Merger") with the Secretary of State of the State of Delaware and make all other filings or recordings required by Delaware law in connection with the Merger. The Merger shall become effective at such time as is specified in the Certificate of Merger (the "Effective Time"). (b) At the Effective Time, the Terminating Partnership shall be merged with and into CPA 8, whereupon the separate existence of the Terminating Partnership shall cease, and CPA 8 shall be the surviving limited partnership of the Merger (the "Surviving Partnership") in accordance with Section 17-211 of the Delaware RULPA. Section 1.02. Exchange of Interests. At the Effective Time: (a) The limited partner in the Terminating Partnership immediately prior to the Effective Time shall receive $100 in exchange for such limited partner interest; (b) The Subsidiary GP's interest in the Terminating Partnership shall be converted into a general partner interest in the Surviving Partnership and (ii) one unit of limited partner interest in the Surviving Partnership for each unit converted to a limited liability company interest in the Company by a limited partner of CPA 8 pursuant hereto; (c) The First GP's interest in CPA 8 shall be converted into a limited liability company interest in Carey Diversified LLC (the "Company") consisting of 38,756 "Listed Shares" and units of special partner interest in CPA 8, and the First GP shall automatically become a member of the Company and a special partner of CPA 8; (d) The Second GP's interest in CPA 8 shall be converted into a limited liability company interest in the Company consisting of 155,023 "Listed Shares" and units of special partner interest in CPA 8, and the Second GP shall automatically become a member of the Company and a special partner of CPA 8; and 2 3 (e) Each limited partner interest in CPA 8 outstanding immediately prior to the Effective Time shall, at the election of such limited partner, be converted into either a limited liability company interest in the Company consisting of 69.55 "Listed Shares" or a limited partner interest in the Surviving Partnership equal to such limited partners limited partner interest in CPA 8, and the holder of each such interest in CPA 8 shall automatically become a member of the Company or remain a limited partner in CPA 8, as the case may be ARTICLE II THE SURVIVING PARTNERSHIP SECTION 2.01. Certificate of Limited Partnership. The Certificate of Limited Partnership of CPA 8 shall continue to be the Certificate of Limited Partnership of CPA 8, and, unless and until amended in accordance with the applicable law, shall be the Certificate of Limited Partnership of the Surviving Partnership. SECTION 2.02. Partnership Agreement. The Amended and Restated Agreement of Limited Partnership of the Surviving Partnership attached as Exhibit __ hereto shall be the partnership agreement of the Surviving Partnership unless and until amended in accordance with its terms and applicable law. The name of the Surviving Partnership shall be Corporate Property Associates 8, L.P., a Delaware limited partnership. ARTICLE III TRANSFER AND CONVEYANCE OF ASSETS AND ASSUMPTION OF LIABILITIES SECTION 3.01. Transfer, Conveyance and Assumption. At the Effective Time, CPA 8 shall continue in existence as the Surviving Partnership, and without further transfer, succeed to and possess all of the rights, privileges and powers of the Terminating Partnership, and all of the assets and property of whatever kind and character of the Terminating Partnership shall vest in CPA 8 without further act or deed; thereafter, CPA 8, as the Surviving Partnership, shall be liable for all of the liabilities and obligations of the Terminating Partnership, and any claim or judgment against the Terminating Partnership may be enforced against CPA 8, as the Surviving Partnership, in accordance with Section 17-211 of the Delaware RULPA. SECTION 3.02. Further Assurances. If at any time CPA 8 shall consider or be advised that any further assignment, conveyance or assurance is necessary or advisable to vest, 3 4 perfect or confirm of record in the Surviving Partnership the title to any property or right of the Terminating Partnership, or otherwise to carry out the provisions hereof, the proper representatives of the Terminating Partnership as of the Effective Time shall execute and deliver any and all proper deeds, assignments, and assurances and do all things necessary or proper to vest, perfect or convey title to such property or right in the Surviving Partnership, and otherwise to carry out the provisions hereof. ARTICLE IV CONDITIONS TO THE MERGER SECTION 4.01 Conditions to the Obligations of Each Party. The obligations of CPA 8 and the Terminating Partnership to consummate the Merger are subject to the satisfaction of the following conditions as of the Effective Time; (i) no provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the consummation of the Merger; (ii) all actions by or in respect of or filings with any governmental body, agency, official or authority required to permit the consummation of the Merger shall have been obtained; (iii) approval of participation in the Consolidation by a majority of the limited partners of CPA Partnerships representing an aggregate Exchange Value of $200,000,000; (iv) the fairness opinion of Robert A. Stanger & Co., Inc. regarding the actual allocation of the Listed Shares based on the outcome of the votes of the limited partners of each CPA Partnership; and (v) the approval of the Listed Shares for listing on the New York Stock Exchange. ARTICLE V TERMINATION SECTION 5.01. Termination. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time: (i) by mutual written consent of the Subsidiary GP, on behalf of the Terminating Partnership, and the Second GP, on behalf of CPA 8; 4 5 (ii) if any conditions to the consummation of the Merger as set forth in this Agreement are not satisfied; or (iii) if the Consolidation is not consummated prior to June 30, 1998 or such later date as mutually agreed in writing by the parties hereto. SECTION 5.02. Effect of Termination. If this Agreement is terminated pursuant to Section 5.01, this Agreement shall become void and of no effect with no liability on the part of either party hereto. ARTICLE VI MISCELLANEOUS SECTION 6.01. General Partner Authorization. The general partner of the Surviving Partnership shall be authorized, at such time in its sole discretion as it deems appropriate to execute, acknowledge, verify, deliver, file and record, for and in the name of CPA 8 and, to the extent necessary, the First GP, the Second GP, the limited partners of CPA 8, the Subsidiary GP and the sole limited partner of the Terminating Partnership, any and all documents and instruments including, without limitation, the Amended and Restated Agreement of Limited Partnership of the Surviving Partnership, and shall do and perform any and all acts required by applicable law which the general partner of the Surviving Partnership deems necessary or advisable, including, without limitation, delivering financial statements to the limited partners of CPA 8, in order to effectuate the Merger. SECTION 6.02. Waivers; Amendments. (a) Any provision of this Agreement may, subject to applicable law, be amended or waived prior to the Effective Time if, and only if, such amendment or waiver is in writing and signed by the Second GP, on behalf of CPA 8, and by the Subsidiary GP, on behalf of the Terminating Partnership; provided that after approval of the Merger by the limited partners of CPA 8 holding a majority of the limited partner interests of CPA 8, no amendment or waiver may be made that (i) materially and adversely affects the rights of the limited partners of CPA 8 without the approval of the limited partners of CPA 8 holding a majority of the limited partner interests of CPA 8; (ii) alters or changes (A) the amount or type of consideration which such limited partners will receive in the Merger, (B) the Amended and Restated Limited Liability Company Agreement of the Company, or (C) the terms and conditions of this Agreement if such alteration or change materially and adversely affects the limited partners of CPA 8 or the members of the Company; or (iii) waives the condition to the Merger that CPA Partnerships having an aggregate Exchange Value of $200,000,000 approve the Consolidation. 5 6 (b) Except as provided in Section 6.02(a), no failure or delay by any party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 6.04. Integration. All prior or contemporaneous agreements, contracts, promises, representations, and statements, if any, between the Terminating Partnership and CPA 8, or their representatives, are merged into this Agreement, and this Agreement shall constitute the entire understanding between the Terminating Partnership and CPA 8 with respect to the subject matter hereof. SECTION 6.05. Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other party hereto. SECTION 6.06. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware, without giving effect to principles of conflicts of law. SECTION 6.07. Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received the counterpart hereof signed by the other party hereto. ARTICLE VII DEFINED TERMS Capitalized terms used in this Agreement not otherwise defined herein shall have the meanings set forth below, except as otherwise expressly indicated or limited by the context in which they appear in this Agreement. "Consolidation" means the transaction whereby up to nine subsidiary partnerships of the Company merge with and into some or all of the CPA Partnerships. "CPA Partnerships" means Corporate Property Associates, a California limited partnership, Corporate Property Associates 2, a California limited partnership, Corporate Property 6 7 Associates 3, a California limited partnership, Corporate Property Associates 4, a California limited partnership, Corporate Property Associates 5, a California limited partnership, Corporate Property Associates 6, a California limited partnership, Corporate Property Associates 7, a California limited partnership, Corporate Property Associates 8, L.P., a Delaware limited partnership, and Corporate Property Associates 9, L.P., a Delaware limited partnership or any of them. "Exchange Value" means the appraised value of a CPA Partnership. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized representatives as of the day and year first above written. CORPORATE PROPERTY ASSOCIATES 8, L.P., A DELAWARE LIMITED PARTNERSHIP By: Eighth Carey Corporate Property, Inc., its General Partner By: ---------------------------------- Name: ---------------------------------- Title: ---------------------------------- By: ---------------------------------- William Polk Carey, its General Partner EIGHTH SUBSIDIARY, L.P. By: Carey Diversified LLC, its General Partner By: ---------------------------------- Name: ---------------------------------- Title: ---------------------------------- 7 EX-2.18 19 FORM OF AGREEMENT OF MERGER OF CPA :9 1 Exhibit 2.18 AGREEMENT OF MERGER OF NINTH SUBSIDIARY, L.P. INTO CORPORATE PROPERTY ASSOCIATES 9, L.P., A DELAWARE LIMITED PARTNERSHIP AGREEMENT OF MERGER, dated as of ________________, 19__ (this "Agreement"), between NINTH SUBSIDIARY, L.P., a Delaware limited partnership (the "Terminating Partnership"), and CORPORATE PROPERTY ASSOCIATES 9, L.P., A DELAWARE LIMITED PARTNERSHIP, a Delaware limited partnership ("CPA 9"). WITNESSETH: WHEREAS, Section 17-211 of the Delaware Revised Uniform Limited Partnership Act, 6 Del.C. Section17-101, et seq. (the "Delaware RULPA"), authorizes the merger of a Delaware limited partnership with and into another Delaware limited partnership; WHEREAS, the Terminating Partnership and CPA 9 now desire to merge (the "Merger"), following which CPA 9 shall be the surviving limited partnership; WHEREAS, Carey Diversified LLC, in its capacity as the general partner of the Terminating Partnership (the "Subsidiary GP"), and Carey Property Advisors, LP, as the sole limited partner of the Terminating Partnership, have approved this Agreement and the consummation of the Merger; WHEREAS, William Polk Carey, in his capacity as a general partner of CPA 9 (the "First GP"), and Ninth Carey Corporate Property, Inc., in its capacity as a general partner of CPA 9 (the "Second GP"), have approved this Agreement and the consummation of the Merger: NOW THEREFORE, the parties hereto hereby agree as follows: 2 ARTICLE I THE MERGER SECTION 1.01. The Merger. (a) On _______________, 199__, after satisfaction or, to the extent permitted hereunder, waiver of all conditions to the Merger, as the Subsidiary GP and the Second GP shall determine, CPA 9, which shall be the surviving limited partnership, shall merge with the Terminating Partnership and shall file a certificate of merger substantially in the form of Exhibit 1 hereto (the "Certificate of Merger") with the Secretary of State of the State of Delaware and make all other filings or recordings required by Delaware law in connection with the Merger. The Merger shall become effective at such time as is specified in the Certificate of Merger (the "Effective Time"). (b) At the Effective Time, the Terminating Partnership shall be merged with and into CPA 9, whereupon the separate existence of the Terminating Partnership shall cease, and CPA 9 shall be the surviving limited partnership of the Merger (the "Surviving Partnership") in accordance with Section 17-211 of the Delaware RULPA. Section 1.02. Exchange of Interests. At the Effective Time: (a) The limited partner in the Terminating Partnership outstanding immediately prior to the Effective Time shall receive $100 in exchange for such limited partner interest; (b) The Subsidiary GP's interest in the Terminating Partnership shall be converted into (i) a general partner interest in the Surviving Partnership and (ii) one unit of limited partner interests in the Surviving Partnership for each unit converted to a limited liability company interest in the Company by a limited partner of CPA 9 pursuant hereto; (c) The First GP's interest in CPA 9 shall be converted into a limited liability company interest in Carey Diversified LLC (the "Company") consisting of 177 "Listed Shares" and units of special partner interest in CPA 7, and the First GP shall automatically become a member of the Company and a special partner of CPA 7; (d) The Second GP's interest in CPA 9 shall be converted into units of special partner interest in CPA 9, and the Second GP shall automatically become a special partner of CPA 9; and (e) Each limited partner interest in CPA 9 outstanding immediately prior to the Effective Time shall, at the election of such limited partner, be converted into either a limited 2 3 liability company interest in the Company consisting of 52.63 "Listed Shares" or a limited partner interest in the Surviving Partnership equal to such limited partner's limited partner interest in CPA 9, and the holder of each such interest in CPA 9 shall automatically become a member of the Company or remain a limited partner of CPA 9, as the case may be. ARTICLE II THE SURVIVING PARTNERSHIP SECTION 2.01. Certificate of Limited Partnership. The Certificate of Limited Partnership of CPA 9 shall continue to be the Certificate of Limited Partnership of CPA 9, and, unless and until amended in accordance with the applicable law, shall be the Certificate of Limited Partnership of the Surviving Partnership. SECTION 2.02. Partnership Agreement. The Amended and Restated Agreement of Limited Partnership of the Surviving Partnership attached as Exhibit __ hereto shall be the partnership agreement of the Surviving Partnership unless and until amended in accordance with its terms and applicable law. The name of the Surviving Partnership shall be Corporate Property Associates 9, L.P., a Delaware limited partnership. ARTICLE III TRANSFER AND CONVEYANCE OF ASSETS AND ASSUMPTION OF LIABILITIES SECTION 3.01. Transfer, Conveyance and Assumption. At the Effective Time, CPA 9 shall continue in existence as the Surviving Partnership, and without further transfer, succeed to and possess all of the rights, privileges and powers of the Terminating Partnership, and all of the assets and property of whatever kind and character of the Terminating Partnership shall vest in CPA 9 without further act or deed; thereafter, CPA 9, as the Surviving Partnership, shall be liable for all of the liabilities and obligations of the Terminating Partnership, and any claim or judgment against the Terminating Partnership may be enforced against CPA 9, as the Surviving Partnership, in accordance with Section 17-211 of the Delaware RULPA. SECTION 3.02. Further Assurances. If at any time CPA 9 shall consider or be advised that any further assignment, conveyance or assurance is necessary or advisable to vest, perfect or confirm of record in the Surviving Partnership the title to any property or right of the Terminating Partnership, or otherwise to carry out the provisions hereof, the proper representatives of the Terminating Partnership as of the Effective Time shall execute and deliver any and all proper deeds, assignments, and assurances and do all things necessary or proper to vest, perfect or convey title to such property or right 3 4 in the Surviving Partnership, and otherwise to carry out the provisions hereof. ARTICLE IV CONDITIONS TO THE MERGER SECTION 4.01 Conditions to the Obligations of Each Party. The obligations of CPA 9 and the Terminating Partnership to consummate the Merger are subject to the satisfaction of the following conditions as of the Effective Time; (i) no provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the consummation of the Merger; (ii) all actions by or in respect of or filings with any governmental body, agency, official or authority required to permit the consummation of the Merger shall have been obtained; (iii) approval of participation in the Consolidation by a majority of the limited partners of CPA 9 and a majority of the limited partners of the CPA Partnerships representing an aggregate Exchange Value of $200,000,000; (iv) the fairness opinion of Robert A. Stanger & Co., Inc. regarding the actual allocation of the Listed Shares based on the outcome of the votes of the limited partners of each CPA Partnership; and (v) the approval of the Listed Shares for listing on the New York Stock Exchange. ARTICLE V TERMINATION SECTION 5.01. Termination. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time: (i) by mutual written consent of the Subsidiary GP, on behalf of the Terminating Partnership, and the Second GP, on behalf of CPA 9; (ii) if any conditions to the consummation of the Merger as set forth in this Agreement are not satisfied; or (iii) if the Consolidation is not consummated prior to June 30, 1998 or such later date as mutually agreed in writing by the parties hereto. 4 5 SECTION 5.02. Effect of Termination. If this Agreement is terminated pursuant to Section 5.01, this Agreement shall become void and of no effect with no liability on the part of either party hereto. ARTICLE VI MISCELLANEOUS SECTION 6.01. General Partner Authorization. The general partner of the Surviving Partnership shall be authorized, at such time in its sole discretion as it deems appropriate to execute, acknowledge, verify, deliver, file and record, for and in the name of CPA 9 and, to the extent necessary, the First GP, the Second GP, the limited partners of CPA 9, the Subsidiary GP and the sole limited partner of the Terminating Partnership, any and all documents and instruments including, without limitation, the Amended and Restated Agreement of Limited Partnership of the Surviving Partnership, and shall do and perform any and all acts required by applicable law which the general partner of the Surviving Partnership deems necessary or advisable, including, without limitation, delivery of financial statements to the limited partners of CPA 9, in order to effectuate the Merger. SECTION 6.02. Waivers; Amendments. (a) Any provision of this Agreement may, subject to applicable law, be amended or waived prior to the Effective Time if, and only if, such amendment or waiver is in writing and signed by the Second GP, on behalf of CPA 9, and by the Subsidiary GP, on behalf of the Terminating Partnership; provided that after approval of the Merger by the limited partners of CPA 9 holding a majority of the limited partner interests of CPA 9, no amendment or waiver may be made that (i) materially and adversely affects the rights of the limited partners of CPA 9 without the approval of the limited partners of CPA 9 holding a majority of the limited partner interests of CPA 9; (ii) alters or changes (A) the amount or type of consideration which such limited partners will receive in the Merger, (B) the Amended and Restated Limited Liability Company Agreement of the Company, or (C) the terms and conditions of this Agreement if such alteration or change materially and adversely affects the limited partners of CPA 9 or the members of the Company; or (iii) waives the condition to the Merger that CPA Partnerships having an aggregate Exchange Value of $200,000,000 approve the Consolidation. (b) Except as provided in Section 6.02(a), no failure or delay by any party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. 5 6 SECTION 6.04. Integration. All prior or contemporaneous agreements, contracts, promises, representations, and statements, if any, between the Terminating Partnership and CPA 9, or their representatives, are merged into this Agreement, and this Agreement shall constitute the entire understanding between the Terminating Partnership and CPA 9 with respect to the subject matter hereof. SECTION 6.05. Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other party hereto. SECTION 6.06. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware, without giving effect to principles of conflicts of law. SECTION 6.07. Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received the counterpart hereof signed by the other party hereto. ARTICLE VII DEFINED TERMS Capitalized terms used in this Agreement not otherwise defined herein shall have the meanings set forth below, except as otherwise expressly indicated or limited by the context in which they appear in this Agreement. "Consolidation" means the transaction whereby up to nine subsidiary partnerships of the Subsidiary GP merge with and into some or all of the CPA Partnerships. "CPA Partnerships" means Corporate Property Associates, a California limited partnership, Corporate Property Associates 2, a California limited partnership, Corporate Property Associates 3, a California limited partnership, Corporate Property Associates 4, a California limited partnership, Corporate Property Associates 5, a California limited partnership, Corporate Property Associates 6, a California limited partnership, Corporate Property Associates 7, a California limited partnership, Corporate Property Associates 8, L.P., a Delaware limited partnership, and Corporate Property Associates 9, L.P., a Delaware limited partnership or any of them. 6 7 "Exchange Value" means the appraised value of a CPA Partnership. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized representatives as of the day and year first above written. CORPORATE PROPERTY ASSOCIATES 9, L.P., A DELAWARE LIMITED PARTNERSHIP By: Ninth Carey Corporate Property, Inc., its General Partner By: ---------------------------------- Name: ---------------------------------- Title: ---------------------------------- By: ---------------------------------- William Polk Carey, its General Partner NINTH SUBSIDIARY, L.P. By: Carey Diversified LLC, its General Partner By: ---------------------------------- Name: ---------------------------------- Title: ---------------------------------- 7 EX-3.1 20 FORM OF AMENDED AND RESTATED LIMITED LIABILITY AGT 1 Exhibit 3.1 AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF CAREY DIVERSIFIED LLC (a Delaware limited liability company) THIS AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT (the "Agreement") of CAREY DIVERSIFIED LLC, a Delaware limited liability company (the "Company"), dated as of [ ], 1997, is entered into by and among those Persons who have executed this Agreement or a counterpart hereof, or who become parties hereto pursuant to the terms of this Agreement. W I T N E S S E T H: WHEREAS, Carey Management LLC (the "Managing Member") and Carey Property Advisors LP (the "Initial Member") (together, the "Original Shareholders") have formed the Company and contributed to the Company, in consideration for their respective limited liability company interests in the Company, the consideration specified herein. WHEREAS, as part of a transaction (the "Consolidation") whereby the Subsidiary Partnerships (as defined herein) will be merged with and into the CPA Partnerships (as defined herein), resulting in certain of the limited partners of such CPA Partnerships becoming Shareholders (as defined herein). WHEREAS, this Agreement shall constitute the Limited Liability Company Agreement of the Company, and shall be binding upon all Persons (as defined herein) now or at any time hereafter who are Shareholders (as defined herein). NOW, THEREFORE, in consideration of the mutual covenants and obligations set forth in this Agreement, and of other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto, intending legally to be bound, hereby agree as follows: 2 ARTICLE 1 Definitions Capitalized terms used in this Agreement shall have the meanings set forth below or in the Section of this Agreement referred to below, except as otherwise expressly indicated or limited by the context in which they appear in this Agreement. All terms defined in this Article 1 or in the preamble to this Agreement in the singular have the same meanings when used in the plural and vice versa. 1.1. "Acquiring Person" shall have the meaning set forth in Section 13.1 of this Agreement. 1.2. "Act" means the Delaware Limited Liability Company Act, Del. Code Ann. tit. 6, ss.ss.18-101 et seq., as amended from time to time. 1.3. "Adjusted Capital Account Deficit" means with respect to any Shareholder, the negative balance, if any, in such Shareholder's Capital Account as of the end of any relevant Fiscal Year, determined after giving effect to the following adjustments: (a) credit to such Capital Account any portion of such negative balance which such Shareholder (i) is treated as obligated to restore to the Company pursuant to the provisions of Section 1.704-1(b)(2)(ii)(c) of the Treasury Regulations, or (ii) is deemed to be obligated to restore to the Shareholder pursuant to the penultimate sentences of Section 1.704-2(g)(1) and 1.704-2(i)(5) of the Treasury Regulations; and (b) debit to such Capital Account the items described in Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Treasury Regulations. 1.4. "Affiliate" means, with respect to any Person, (i) any Person directly or indirectly controlling, controlled by or under common control with such Person; (ii) any Person owning or controlling 10% or more of the outstanding voting securities of such Person; (iii) any officer, director or partner of such Person or of any Person specified in (i) or (ii) above; and (iv) any Person in which any officer, director or partner of any Person specified in (iii) above is an officer, director or partner. 1.5. "Agreement" means this Amended and Restated Limited Liability Company Agreement of the Company, as may be amended, -2- 3 restated, supplemented or otherwise modified from time to time as herein provided. 1.6. "Announcement Date" shall have the meaning set forth in Section 12.3 of this Agreement. 1.7. "Associate" shall have the meanings set forth in Sections 12.1 and 13.1 of this Agreement. 1.8. "Beneficial Owner" shall have the meaning set forth in Section 12.1 of this Agreement. 1.9. "Board of Directors" or "Board of Managers" or "Board" means the board on which all of the Company's Managers sit, in their capacities as Managers. 1.10. "Book Gain" or "Book Loss" means the gain or loss recognized by the Company for Section 704(b) book purposes in any Fiscal Year by reason of any sale or disposition with respect to any of the assets of the Company. Such Book Gain or Book Loss shall be computed by reference to the Book Value of such property or assets as of the date of such sale or disposition (determined in accordance with Section 1.12 of this Agreement), rather than by reference to the tax basis of such property or assets as of such date, and each and every reference herein to "gain" or "loss" shall be deemed to refer to Book Gain or Book Loss, rather than to tax gain or tax loss, unless the context manifestly otherwise requires. 1.11. "Book Value" means, with respect to any asset of the Company, such asset's adjusted basis for federal income tax purposes, except as follows: (a) the initial Book Value of any asset contributed by a Shareholder to the Company shall be the gross fair market value of such asset, without reduction for liabilities, as determined by the contributing Shareholder and the Company on the date of contribution thereof; (b) if the Managing Member reasonably determines that an adjustment is necessary or appropriate to reflect the relative economic interests of the Shareholders, the Book Values of all Company assets shall be adjusted in accordance with Sections 1.704-1(b)(2)(iv)(f) and (g) of the Treasury Regulations to equal their respective gross fair market values, without reduction for liabilities, as reasonably determined by the Managing Member, as of the following times: -3- 4 (1) a Capital Contribution (other than a de minimis Capital Contribution) to the Company by a new or existing Shareholder as consideration for a Share; or (2) the distribution by the Company to a Shareholder of more than a de minimis amount of Company assets as consideration for the repurchase of a Share; or (3) the liquidation of the Company within the meaning of Section 1.704-1(b)(2)(ii)(g) of the Treasury Regulations; (c) the Book Value of Company assets distributed to any Shareholder shall be the gross fair market values of such assets (taking Section 7701(g) of the Code into account) without reduction for liabilities, as reasonably determined by the Managing Member as of the date of distribution; and (d) The Book Value of Company assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Sections 734(b) or 743(b) of the Code, but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Section 1.704-1(b)(2)(iv)(m) of the Treasury Regulations (as set forth in Section 3.4); provided, however, that Book Values shall not be adjusted pursuant to this paragraph (d) to the extent the Managing Member reasonably determines that an adjustment pursuant to paragraph (b) above is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this paragraph (d). At all times, Book Value shall be adjusted by any Depreciation taken into account with respect to the Company's or a CPA Partnership's assets for purposes of computing Profit and Loss. 1.12. "Business Combination" shall have the meaning set forth in Section 12.1 of this Agreement. 1.13. "Bylaws" means the bylaws of the Company, as amended from time to time, governing various aspects of the operation of the Company and the rights and obligations of its Shareholders, Board of Directors, officers and other agents. The Bylaws shall be deemed an amendment and supplement to and part of this Agreement after they are adopted by the Board of Directors in accordance with Section 7.1(a). All provisions of the Bylaws not -4- 5 inconsistent with law or this Agreement shall be valid and binding. 1.14. "Capital Account" shall have the meaning ascribed thereto in Section 3.4 of this Agreement. 1.15. "Capital Contributions" means the total amount of cash and the fair market value of other property contributed to the Company by the Shareholders. 1.16. "Capital Transactions" means (a) any sale, exchange, taking by eminent domain, damage, destruction or other disposition of all or any part of the assets of the Company, other than tangible personal property disposed of in the ordinary course of business; or (b) any financing or refinancing of any Company indebtedness; provided, that the receipt by the Company of Capital Contributions shall not constitute Capital Transactions. 1.17. "Certificate" means the "Certificate of Formation" of the Company, as originally filed with the office of the Secretary of State of the State of Delaware, as amended, restated, supplemented or otherwise modified from time to time as herein provided. 1.18. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any subsequent federal law of similar import, and, to the extent applicable, any Treasury Regulations promulgated thereunder. 1.19. "Company" means the limited liability company heretofore formed and continued hereby in accordance with this Agreement by the parties hereto, as such limited liability company may from time to time be constituted. 1.20. "Company Interest" means a limited liability company interest in the Company, and, if the context so allows, the percentage of a limited liability company interest as compared to all of the aggregate Capital Accounts of all Shareholders (as such percentage may be changed from time to time to reflect adjustments as provided for in this Agreement); it being understood and agreed that this term shall not be deemed to apply to any debt incurred by the Company (directly or indirectly), including but not limited to through custodial, trust, or similar or other arrangements. 1.21. "Consent" means either the consent given by vote at a duly called and held meeting or the prior written consent, as the case may be, of a Person to do the act or thing for which the -5- 6 consent is solicited, or the act of granting such consent, as the context may require. 1.22. "Consolidation" shall have the meaning set forth in the recitals to this Agreement. 1.23. "Consolidation Date" means the date on which the Consolidation is consummated. 1.24. "Control Shares" shall have the meaning set forth in Section 13.1 of this Agreement. 1.25. "CPA Partnership" means Corporate Property Associates, a California limited partnership, Corporate Property Associates 2, a California limited partnership, Corporate Property Associates 3, a California limited partnership, Corporate Property Associates 4, a California limited partnership, Corporate Property Associates 5, a California limited partnership, Corporate Property Associates 6, a California limited partnership, Corporate Property Associates 7, a California limited partnership, Corporate Property Associates 8, L.P., a Delaware limited partnership, Corporate Property Associates 9, L.P., a Delaware limited partnership or any of them. 1.26. "Depreciation" means, for each Fiscal Year, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such year or other period for federal income tax purposes; provided, that if the Book Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of any such year or other period, Depreciation shall be an amount that bears the same relationship to the Book Value of such asset as the depreciation, amortization, or other cost recovery deduction computed for federal income tax purposes with respect to such asset for the applicable period bears to the adjusted tax basis of such asset at the beginning of such period, or if such asset has a zero adjusted tax basis, Depreciation shall be an amount determined under any reasonable method selected by the Board of Directors. 1.27. "Determination Date" shall have the meaning set forth in Section 12.3 of this Agreement. 1.28. "Director" shall have the same meaning as Manager. 1.29. "Distribution Payment Date" means each such date as the Board of Directors shall declare for a distribution to Shareholders. -6- 7 1.30. "Entity" means any general partnership, limited partnership, corporation, joint venture, trust, limited liability company, limited liability partnership, business trust, cooperative, or association. An Entity may or may not be an Affiliate of the Company or of a Company Affiliate. 1.31. "Exchange Value" means the appraised value of a CPA Partnership or any interest therein. 1.32. "Fiscal Year" means the fiscal year of the Company and shall be the same as its taxable year, which shall be the calendar year unless otherwise determined by the Board of Directors in accordance with the Code. 1.33. "Five Year Tolling Period" shall have the meaning set forth in Section 12.2 of this Agreement. 1.34. "Future Shares" shall have the meaning set forth in Section 3.1 of this Agreement. 1.35. "Independent Director" means a Director of the Company who, in the opinion of the Board of Directors of the Company, is free from any relationship that would interfere with the exercise of independent judgment. A Director of the Company who is an Affiliate of the Company or an officer or employee of the Company or its Subsidiaries or Affiliates would not qualify as an Independent Director. 1.36. "Initial Capital Contribution" means any Capital Contribution made in accordance with Section 3.2 hereof. 1.37. "Interested Shares" shall have the meaning set forth in Section 13.1 of this Agreement. 1.38. "Interested Party" shall have the meaning set forth in Section 12.1 of this Agreement. 1.39. "Limited Partner" means a limited partner of a CPA Partnership. 1.40. "Listed Shareholders" means the holders of Listed Shares. 1.41. "Listed Shares" shall have the meaning set forth in Section 3.1 of this Agreement. 1.42. "Managers" means those individuals serving on the Board of Directors of the Company, including successor or additional Managers duly elected in accordance with the terms of -7- 8 this Agreement in their capacities as "Managers" of the Company within the meaning of the Act. 1.43. "Market Value" shall have the meaning set forth in Section 12.1 of this Agreement. 1.44. "Members" means the Original Shareholders, together with all Persons who become Members as herein provided and who are listed as members of the Company in the books and records of the Company, in such Persons' capacity as "Members" of the Company within the meaning of the Act. 1.45. "Merger Agreement" means any of those certain agreements dated as of [ ], 1997, by which a Subsidiary Partnership is merged with and into a CPA Partnership. 1.46. "Nonrecourse Deductions" has the meaning set forth in Sections 1.704-2(b)(1) and 1.704-2(c) of the Treasury Regulations. 1.47. "Nonrecourse Liabilities" has the meaning set forth in Section 1.704-2(b)(3) of the Treasury Regulations. 1.48. "Original Member" or "Original Shareholder" has the meaning therefor set forth in the recitals to this Agreement. 1.49. "Partner Minimum Gain" means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Treasury Regulations Section 1.704-2(i)(3). 1.50. "Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulations Section 1.704-2(b)(4). 1.51. "Partner Nonrecourse Deductions" has the meaning set forth in Treasury Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a Company taxable year shall be determined in accordance with the rules of Treasury Regulations Section 1.704-2(i)(2). 1.52. "Partnership Assets" means collectively the properties and other assets originally held by a CPA Partnership. 1.53. "Partnership Agreement" means the Amended and Restated Agreement of Limited Partnership of a CPA Partnership. 1.54. "Partnership Interest" means a partnership interest in a CPA Partnership. -8- 9 1.55. "Partnership Minimum Gain" has the meaning set forth in Treasury Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in a Partnership Minimum Gain, for a Company taxable year shall be determined in accordance with the rules of Treasury Regulations. 1.56. "Permitted Selling Expenses" means the out-of-pocket expenses actually incurred directly by a CPA Partnership in the course of selling a particular Property, or by securing such Property; or, if no such actual sale has occurred in the case in question, the out-of-pocket expenses which would have been incurred directly by such CPA Partnership (based on local conditions and practices existing at the time) had such CPA Partnership sold a particular Property. 1.57. "Person" means any individual or Entity, and the heirs, executors, administrators, legal representatives, successors, and assigns of such Person where the context so admits. 1.58. "Profit" and "Loss" means, for each Fiscal Year or other period for which allocations to Shareholders are made, an amount equal to the Company's taxable income or loss for such year or period, determined in accordance with Section 703(a) of the Code (provided, that for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Section 703(a)(1) of the Code shall be included in taxable income or loss), with the following adjustments: (a) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profit or Loss pursuant to this provision shall be added to such taxable income or loss; (b) Any expenditure of the Company described in Section 705(a)(2)(B) of the Code or treated as Code Section 705(a)(2)(B)expenditures pursuant to Section 1.704-1(b)(2)(iv)(i) of the Treasury Regulations, and not otherwise taken into account in computing Profit or Loss pursuant to this provision, shall be subtracted from such taxable income or loss; (c) Book Gain or Book Loss from a Capital Transaction shall be taken into account in lieu of any tax gain or tax loss recognized by the Company by reason of such Capital Transaction; and -9- 10 (d) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Fiscal Year or other period, computed as provided in this Agreement. If the Company's taxable income or loss for such Fiscal Year or other period, as adjusted in the manner provided above, is a positive amount, such amount shall be the Company's Profit for such Fiscal Year or other period; and if a negative amount, such amount shall be the Company's Loss for such Fiscal Year or other period. 1.59. "Property" means the land and the buildings thereon which the Company or a CPA Partnership owns at a particular time. 1.60. "Relative" means, with respect to any Person, any parent, spouse, brother, sister, or natural or adopted lineal descendant or spouse of such descendant of such Person. 1.61. "Sale" means the sale or other disposition of a Partnership Property to a third party which is unaffiliated with the current CPA Partnership (or respective general partner) owning such Property; provided, however, that this term shall not include the pledge, mortgage or encumbrance of a Property, or of any interest therein, in connection with the financing, refinancing or other leveraging of such Property or otherwise or any assignment of any leases or rents related to such Property. 1.62. "Shareholders" means all Persons who hold Shares, and shall have the same meaning as the word "Members". 1.63. "Shares" means Company Interests and includes Listed Shares and Future Shares. 1.64. "Subsidiary" shall have the meaning set forth in Section 12.1 of this Agreement. 1.65. "Subsidiary Partnership" means any of the limited partnerships which are Subsidiaries of the Company which will merge into the CPA Partnerships in connection with the Consolidation. 1.66. "Tax Matters Partner" shall have the meaning ascribed thereto in Section 3.6 of this Agreement. 1.67. "Transfer" (or "Transferred") means to give, sell, assign, devise, bequeath, or otherwise dispose of, transfer, or permit to be transferred, during life or at death. The word -10- 11 "Transfer," when used as a noun, shall mean any Transfer transaction. 1.68. "Transferee" means any Person to whom Shares are Transferred by a Shareholder for any reason or by any means. 1.69. "Treasury Regulations" means the federal income tax regulations, including any temporary or proposed regulations, promulgated under the Code, as such Treasury Regulations may be amended from time to time (it being understood that all references herein to specific sections of the Treasury Regulations shall be deemed also to refer to any corresponding provisions of succeeding Treasury Regulations). 1.70. "Valuation Date" shall have the meaning set forth in Section 12.3 of this Agreement. 1.71. "Working Capital Reserves" means funds held in reserves which are maintained as working capital for the Company and available for any contingencies relating to the ownership of the Property and the operation of the Company. Amounts held in the Working Capital Reserves may at any time, in the discretion of the Board of Directors, be added to the liquidation proceeds allocable to the respective Shares (depending upon the characterization of such amounts when received by the Company), but may not be otherwise removed from the respective Working Capital Reserves. ARTICLE 2 Continuation, Purpose and Term 2.1. Continuation. The parties hereto hereby agree to continue the limited liability company known as Carey Diversified LLC, as a limited liability company under the provisions of the Act. 2.2. Company Name. The name of the Company is "Carey Diversified LLC". The business of the Company shall be conducted under such name or such other names as the Board of Directors or the Shareholders may from time to time determine on and pursuant to the terms of this Agreement. 2.3. The Certificate. The Managing Member, and any other Person designated as such by the Board of Directors, shall be an "Authorized Person" within the meaning of the Act and is hereby authorized to execute, file and record all such certificates and documents, including amendments to the Certificate, and to do such other acts as may be appropriate to comply with all -11- 12 requirements for the formation, continuation, and operation of a limited liability company, the ownership of property, and the conduct of business under the laws of the State of Delaware and any other jurisdiction in which the Company may own property or conduct business. 2.4. Principal Place of Business. The principal place of business shall be located at 50 Rockefeller Plaza, New York, New York 10020, or at such location as may hereafter be determined by the Board of Directors. The principal business office, as well as the registered office and the registered agent, of the Company may be changed by the Board of Directors from time to time in accordance with the then applicable provisions of the Act and any other applicable laws, as well as the terms and conditions of this Agreement. 2.5. Term of Company. The term of the Company commenced on the date of the filing of the Certificate and shall continue until the Company is dissolved pursuant to the provisions of Article 10 hereof. 2.6. Purposes. The purposes of the Company are (a) to own and invest in or engage in activities related to investment in net leased properties (including, without limitation, industrial, commercial, retail and warehouse distribution properties); provided, however, that the investment criteria shall be established by the Board of Directors from time to time in its sole discretion subject to the requirement that such criteria be consistent with the purposes of the Company; (b) to acquire, own and dispose of general and limited partner interests, and stock, warrants, options or other equity interests in Entities, and to exercise all rights and powers granted to the owner of any such interests; (c) to invest in any type of investment and to engage in any other lawful act or activity for which limited liability companies may be formed under the Act, and by such statement all lawful acts and activities shall be within the purposes of the Company, except for express limitations, if any; (d) to engage in any other activities relating to, and compatible with, the purposes set forth above; and (e) to take such other actions, or do such other things, as are necessary or appropriate (in the sole discretion of the Board of Directors) to carry out the provisions of this Agreement. 2.7. Powers. In furtherance of its purposes, but subject to all of the provisions of this Agreement, the Company shall have the power and is hereby authorized to (a) invest (at any time during the term of the Company) in real property for the purpose of engaging in net lease transactions with respect thereto and in other assets which are designed to accomplish the foregoing purpose or in any manner consistent with the Company's then-existing investment criteria and objectives, and to reinvest the proceeds (to the extent permitted by this Agreement) of any Sales by the Company of Company assets; (b) act as general or limited partner, member, joint venturer, manager or shareholder -12- 13 of any Entity, and to exercise all of the powers, duties, rights and responsibilities associated therewith; (c) take any and all actions necessary, convenient or appropriate as the holder of any such interests or positions; (d) make mortgage loans; (e) operate, purchase, maintain, finance, improve, own, sell, convey, assign, mortgage, lease, construct, demolish or otherwise dispose of any real property or personal property that may be necessary, convenient or incidental to the accomplishment of the purposes of the Company; (f) borrow money and issue evidences of indebtedness in furtherance of any or all of the purposes of the Company, and secure the same by mortgage, pledge or other lien or encumbrance on any assets of the Company; (g) invest any funds of the Company pending distribution or payment of the same pursuant to the provisions of this Agreement; (h) prepay in whole or in part, refinance, recast, increase, modify or extend any indebtedness of the Company and, in connection therewith, execute any extensions, renewals or modifications of any mortgage or security agreement securing such indebtedness; (i) enter into, perform and carry out contracts of any kind, including, without limitation, contracts with any Person affiliated with any of the Shareholders, necessary to, in connection with or incidental to the accomplishment of the purposes of the Company; (j) establish reserves for capital expenditures, working capital, debt service taxes, assessments, insurance premiums, repairs, improvements, depreciation, depletion, obsolescence and general maintenance of buildings or other property out of the rents, profits or other income received; (k) employ or otherwise engage employees, managers, contractors, advisors and consultants, and pay reasonable compensation for such services, and enter into employee benefit plans of any type; (l) purchase or repurchase Shares from any Person for such consideration as the Board of Directors may determine in its reasonable discretion (whether more or less than the original issuance price of such Share or the then trading price of such Share); (m) enter into rights plans or other plans relating to Shares, options or bonuses, and to issue Shares, options or warrants thereunder (or other derivatives relating thereto) for any consideration (even if such consideration is less than the market value of such Shares); and (n) do such other things and engage in such other activities as may be necessary, convenient or advisable with respect to the conduct of the business of the Company, and have and exercise all of the powers and rights conferred upon limited liability companies formed pursuant to the Act. 2.8. Effectiveness of this Agreement. This Agreement shall govern the operations of the Company and the rights and restrictions applicable to the Shareholders, to the extent permitted by law. Pursuant to Section 18-101(7)(a) of the Act, all Persons who become holders of Shares in the Company shall be bound by the provisions of this Agreement and shall be admitted as Members. The acceptance by a Person of a certificate issued to such Person evidencing the Shares acquired in connection with the Consolidation and the acceptance by a Person of a certificate issued to such Person evidencing the acquisition of Shares from -13- 14 the Company or another Shareholder shall be deemed to constitute a direction to the Managing Member to execute this Agreement on such Person's behalf and a request that the records of the Company reflect such admission; and shall be deemed to be a sufficient act to comply with the requirements of Section 18-101(7)(a) of the Act and to so cause that Person to become a Shareholder and to bind that Person to the terms and conditions of this Agreement (and to entitle that Person to the rights of a Shareholder hereunder). ARTICLE 3 Classes of Shares; Admissions of Shareholders; Capitalization 3.1. Classes of Shares. (a) The Company shall have the authority to issue the following classes and Series of Shares: (i) Shares which are designated "Listed Shares"; (ii) one or more other classes or series of Shares, as to which the Board of Directors shall have the exclusive authority, by resolution or resolutions providing for the issuance of Shares or of a particular class or series thereof, to fix and determine the voting powers, full or limited or no voting power, and such designations, preferences, and relative, participating, optional or other special rights, and qualifications, limitations, or restrictions thereof, as may be desired by the Board of Directors from time to time, to the fullest extent now or hereafter permitted by the laws of the State of Delaware (collectively, all such other classes and series to be referred to as the "Future Shares"). (b) Each Share shall have the rights and be governed by the provisions set forth in this Agreement or in the resolutions of the Board of Directors authorizing the issuance by the Company of such Shares; and none of such Shares shall have any preemptive rights, or give the holders thereof any rights to convert into any other securities of the Company, or give the holders thereof any cumulative voting rights, except as specifically set forth herein or in such resolutions. Except as otherwise provided herein or in a resolution of the Board of Directors, each Shareholder shall be entitled to one vote for each Share held by such Shareholder. (c) The Board of Directors may cause the Company to issue such numbers of Listed Shares and Future Shares from time to time as the Board of Directors may determine in its -14- 15 sole discretion, and the number of such Shares is not limited. (d) If the Board of Directors determines that it is necessary or desirable to amend this Agreement or to make any filings under the Act or otherwise in order to reference the existence or creation of a class or series of Future Shares, the Board of Directors may cause such amendments and filings to be made, which filings might take the form of amendments to the Certificate; provided, however, that, unless specifically required by the Act or this Agreement, no approval or consent of any Shareholders shall be required in connection with the making of any such filing or amendment. (e) The Board of Directors, without any Consent of any Shareholder required, may effect a split or reverse split of Shares of any Series or class, by adopting a resolution therefor. If the Board of Directors determines that it is necessary or desirable to make any filings under the Act or otherwise in order to reference the existence of such a split or reverse split, the Board of Directors may cause such filings to be made, which filings might take the form of amendments to the Certificate; provided, however, that, unless specifically required by the Act or this Agreement, no approval or consent of any Shareholders shall be required in connection with the making of any such filing. (f) Notwithstanding any other provisions of this Agreement, the Board of Directors may, without the consent of any Shareholder, amend this Agreement to the extent required to allow the Board of Directors to exercise the powers granted to it by this Section 3.1 3.2. Original Shareholders and their Affiliates; Initial and Subsequent Capital Contributions. (a) Prior to the Consolidation Date, the only Shareholders shall be the Original Shareholders. (b) Each of the Original Shareholders has contributed or caused to have been contributed to the Company, prior to the Consolidation Date, its Initial Capital Contribution, which amounts are as follows: Managing Member: $250 Initial Member: $250 In exchange for such contributions, each Original Shareholder has been issued one Listed Share. (c) Admission of Holders of Partnership Interests and Other Persons as Shareholders of the Company. On the -15- 16 Consolidation Date, and except as set forth in the next succeeding sentence and as provided under and in accordance with the terms of the Merger Agreements, each and every Person who is a Limited Partner of a CPA Partnership participating in the Consolidation shall automatically become a Shareholder. Such Person shall automatically receive Listed Shares in exchange for all of his, her or its interests in a CPA Partnership, unless such Person duly elected otherwise in the Consolidation voting and approval process conducted by the Company prior to the consummation of the Consolidation (whether or not such Person voted in favor of the Consolidation), in which case such Person shall not receive Shares but shall continue to hold a limited partner interest in surviving CPA Partnership of which such Person was a Limited Partner. The class and number of Shares or units of limited partner interests to be received or to be continued to be held by each such Person shall be as provided for in the Merger Agreements. Each such Person receiving Listed Shares shall be deemed to have contributed capital to the Company, in the form of such Person's Partnership Interest being converted to a Company Interest, as provided in Section 3.4 of this Agreement and each such Person shall have no other obligations to make contributions to the capital of the Company. 3.3. Additional Provisions Relating to Additional Shareholders. In the event that the Board of Directors determines that additional funds are required by the Company for any Company purpose, or that the Company should for any reason seek to raise additional capital or acquire Property, the Board may cause the Company to sell Future Shares for a price equal to what the Board of Directors determines to be the fair value of such Shares, in exchange for cash, other property, services or any other lawful consideration to be received by the Company in consideration of such Shares (to be valued by the Board of Directors in its discretion), or may cause the Company to obtain funds as a loan from any third party upon such terms and conditions as the Board of Directors deems appropriate, or any combination thereof from time to time. The Capital Contribution of any such additional Shareholders shall be specified by the Board of Directors at the time of admission of such additional Shareholders. 3.4. Capital Accounts. A separate capital account (a "Capital Account") shall be established and maintained for each Shareholder, including any substitute or additional Shareholder who shall hereafter acquire a Company Interest, in accordance with the following provisions: (a) To each Shareholder's Capital Account there shall be credited the amount of cash and fair market value of the property actually or deemed to be contributed to the Company by such Shareholder pursuant to Sections 3.2 and 3.3 hereof (which, in the case of the holders of Partnership Interests, -16- 17 shall initially be an amount equal to the Exchange Value for each Partnership Interest), such Shareholder's allocable share of Profit, and the amount of any Company liabilities that are assumed by such Shareholder or that are secured by any Company property distributed to such Shareholder. (b) To each Shareholder's Capital Account there shall be debited the amount of cash and the fair market value of any Company property distributed or deemed distributed to such Shareholder pursuant to any provision of this Agreement, such Shareholder's allocable share of Loss, and the amount of any liabilities of such Shareholder that are assumed by the Company or that are secured by any property contributed by such Shareholder to the Company. (c) If any asset of the Company is distributed in kind, the Company shall be deemed to have realized Profit or Loss thereon in the same manner as if the Company had sold such asset for an amount equal to the greater of (i) the fair market value of such asset, or (ii) the fair market value of any nonrecourse debts to which such asset is then subject, in each case as determined by the Board of Directors. If at any time after the date of this Agreement, the Book Value of any Company asset is adjusted pursuant to the last sentence of the definition of Book Value set forth in Article 1 hereof, the Capital Accounts of all Shareholders shall be adjusted simultaneously to reflect the aggregate net adjustments, as if the Company recognized Profit or Loss equal to the respective amounts of such aggregate net adjustments. (d) The provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Section 1.704-1(b)(2)(iv) and 1.704-2 of the Treasury Regulations, and shall be interpreted and applied in a manner consistent with such Treasury Regulations. (e) A Shareholder shall not be entitled to withdraw any part of its Capital Account or to receive any distributions from the Company, except as provided in Article 5 hereof, nor shall a Shareholder be entitled to make any loan or Capital Contribution to the Company other than as expressly provided herein. No loan made to the Company by any Shareholder shall constitute a capital contribution to the Company. (f) No Shareholder shall have any liability for the return of the Capital Contribution of any other Shareholder. A Shareholder who has more than one class of interest in the Company may have a separate Capital Account for each different class of interest owned. 3.5. Transfer of Capital Accounts. The original Capital Account established for each Transferee shall be in the same -17- 18 amount as the Capital Account or portion thereof of the Shareholder which such Transferee succeeds, at the time such Transferee is admitted to the Company. The Capital Account of any Shareholder whose Company Interest shall be increased by means of the Transfer to it of all or part of the Shares of another Shareholder shall be appropriately adjusted to reflect such Transfer. Any reference in this Agreement to a Capital Contribution of, or distribution to, a then-Shareholder shall include a Capital Contribution or distribution previously made by or to any prior Shareholder on account of the Shares of such then-Shareholder. 3.6. Tax Matters Partner. The Managing Member shall be the Company's "Tax Matters Partner" (as such term is defined in Section 6231(a)(7) of the Code), with all of the powers that accompany such status (except as otherwise provided in this Agreement). Promptly following the written request of the Tax Matters Partner, the Company shall, to the fullest extent permitted by law, reimburse and indemnify the Tax Matters Partner for all reasonable expenses, including reasonable legal and accounting fees, claims, liabilities, losses and damages incurred by the Tax Matters Partner in connection with any administrative or judicial proceeding with respect to the tax liability of the Shareholders. The provisions of this Section 3.6 shall survive the termination of the Company and shall remain binding on the Shareholders for as long a period of time as is necessary to resolve with the Internal Revenue Service any and all matters regarding the federal income taxation of the Company or the Shareholders. ARTICLE 4 Allocations 4.1. General Rules Concerning Allocations. Within 45 days after the end of each calendar month, the Company shall conduct an interim closing of books as of the end of the last day of that calendar month. On the basis of the closing of the books for each calendar month, Profit and Loss for such month shall be determined in accordance with the accounting methods followed by the Company for federal income tax purposes. 4.2. Allocations of Profits and Losses. All allocations to the Shareholders of items included within the Company's Profits and Losses attributable to each calendar month shall be allocated solely among the Shareholders recognized as Shareholders as of the last day of that calendar month, as follows: (a) The Profits and Losses shall be allocated to the holders of Shares. -18- 19 (b) The Tax Matters Partner is authorized to make reasonable determinations regarding the allocation of Profit and Loss under this Section 4.2, including determinations relating to the calculation of Profit or Loss, and such other items of the Company's income, gain, loss, deduction and credit as may be appropriate to carry out the intent of this Section 4.2. 4.3. Special Allocations. (a) Notwithstanding any other provision of this Agreement, to the extent an allocation of Profit or Loss or any item thereof to any Shareholder pursuant to Sections 4.1 or 4.2 of this Agreement would be in violation of the requirements of the Treasury Regulations under Section 704(b) of the Code, the Tax Matters Partner shall comply with the requirements of such Treasury Regulations and adjust such allocations to comply with such requirements in a manner that will, in the reasonable judgment of the Tax Matters Partner, have the least effect on the amounts to be allocated and distributed under this Agreement. The Shareholders agree that if this Section 4.3 becomes applicable, the Tax Matters Partner is authorized to review and adjust the allocations made pursuant to Sections 4.1 or 4.2 of this Agreement. (b) Qualified Income Offset. In the event a Shareholder unexpectedly receives any adjustment, allocation or distribution described in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) that causes or increases an Adjusted Capital Account Deficit, items of Profit shall be specially allocated to such Shareholder so as to eliminate such negative balance as quickly as possible. This subparagraph is intended to constitute a "qualified income offset" under Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith. (c) Minimum Gain Chargeback (Nonrecourse Liabilities). Except as otherwise provided in Section 1.704-2(f) of the Regulations, if there is a net decrease in Partnership Minimum Gain for any Fiscal Year, each Shareholder shall be specially allocated items of Company income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Shareholder's share of the net decrease in Partnership Minimum Gain to the extent required by Treasury Regulations Section 1.704-2(f). The items to be so allocated shall be determined in accordance with Sections 1.704-2(f) and (j)(2) of the Treasury Regulations. This subparagraph is intended to comply with the minimum gain chargeback requirement in said section of the Treasury Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph shall be made in -19- 20 proportion to the respective amounts required to be allocated to each Shareholder pursuant hereto. (d) Partner Minimum Gain Chargeback. Except as otherwise provided in Section 1.704-2(i)(4) of the Treasury Regulations, if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any Fiscal Year, each Shareholder who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the Treasury Regulations, shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to that Shareholder's share of the net decrease in the Partner Minimum Gain attributable to such Partner Nonrecourse Debt to the extent and in the manner required by Section 1.704-2(i) of the Treasury Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and (j)(2) of the Treasury Regulations. This subparagraph is intended to comply with the minimum gain chargeback requirement with respect to Partner Nonrecourse Debt contained in said section of the Treasury Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph shall be made in proportion to the respective amounts to be allocated to each Shareholder pursuant hereto. (e) Nonrecourse Deductions. Partner Nonrecourse Deductions for any Fiscal Year or other applicable period with respect to a Partner Nonrecourse Debt shall be specially allocated to the Shareholders that bear the economic risk of loss for such Partner Nonrecourse Debt (as determined under Sections 1.704-2(b)(4) and 1.704-2(i)(1) of the Treasury Regulations). 4.4. Additional Allocations. (a) The Tax Matters Partner, in order to preserve uniformity of Shares within a class, in its sole discretion, may make a special allocation of items of Company income, gain, loss or deduction but only if such allocations would not have a material adverse effect on the Shareholders and if they are consistent with the principles of Section 704 of the Code. (b) If, and to the extent that any Shareholder is deemed to recognize income as a result of any transaction between such Shareholder and the Company resulting from a compensatory transfer of Shares by the Company to such Shareholder or pursuant to Sections 482, 483, 1272-1274 and 7872 of the Code, or any similar provision now or hereafter in effect, any corresponding loss or deduction (or if unavailable, the next available loss or deduction) of the -20- 21 Company shall be allocated to the Shareholder who was charged with such income. (c) Adjustments to the Capital Accounts of Shareholders with respect to an adjustment to the Tax Basis of any asset of the Company pursuant to Section 734(b) or Section 743(b) of the Code shall be made in accordance with the provisions of Treasury Regulation Section 1.704-1(b)(2)(iv)(m). 4.5. Tax Allocations. (a) For federal income tax purposes, except as otherwise provided in this Section 4.5, each item of Profit, gain, Loss and deduction of the Company shall be allocated among the Shareholders in the same proportion as the corresponding items are allocated pursuant to Sections 4.2, 4.3 and Section 4.4 hereof. (b) In the event that the Book Value of any asset contributed to and held by the Company differs from its basis for federal income tax purposes ("Tax Basis"), allocations of income, gain, loss or deduction with respect to such asset shall, solely for tax purposes, be allocated among the Shareholders so as to take account of any variation between Book Value and Tax Basis in accordance with the provisions of Section 704(c) of the Code and Treasury Regulations thereunder. The Tax Matters Partner may elect any reasonable method or methods for making such allocations. (c) If the Book Value of any asset of the Company is adjusted pursuant to Section 1.12 hereof, subsequent allocations of Profit, gain, Loss and deductions with respect to such asset shall take into account any variation between Book Value and Tax Basis in accordance with the provisions of Section 704(c) of the Code and Treasury Regulations thereunder. The Tax Matters Partner shall have the sole discretion to make special allocations of items of income, gain, loss and deductions that are consistent with the principles of Section 704(c) of the Code and to amend the provisions of this Agreement (without Shareholder action, notwithstanding Section 14.D of this Agreement), as appropriate, to reflect the proposal or promulgation of Treasury Regulations under Subchapter K of the Code. The Tax Matters Partner may adopt and employ such methods for (A) the maintenance of capital accounts for book and tax purposes, (B) the determination and allocation of adjustments under Sections 704(c), 734 and 743 of the Code, (C) the determination and allocation of taxable income, tax loss and items thereof under this Agreement and pursuant to the Code, (D) the determination of the identities and tax classification of Shareholders, (E) the provision of tax information and reports to -21- 22 the Shareholders, (F) the adoption of reasonable conventions and methods for the valuation of assets and the determination of tax basis, (G) the allocation of asset values and Tax Basis, (H) conventions for the determination of depreciation, cost recovery and amortization deductions and the adoption and maintenance of accounting methods, (I) the recognition of the transfer of Shares, (J) tax compliance and other tax-related requirements, including without limitation, the use of computer software, and to use filing and reporting procedures similar to those employed by publicly-traded partnerships and limited liability companies, as it determines in its sole discretion are necessary and appropriate to execute the provisions of this Agreement and to comply with federal, state and local tax law, and to achieve uniformity of Shares within a class. The Tax Matters Partner shall be indemnified and held harmless by the Company for any expenses, penalties or other liabilities arising as a result of decision made in good faith on any of the matters referred to in the preceding sentence. If the Tax Matters Partner determines, based on advice of counsel, that no reasonable allowable convention or other method is available to preserve the uniformity of Shares within a class, or the Tax Matters Partner in its discretion so elects, Shares may be separately identified as distinct classes to reflect differences in tax consequences. ARTICLE 5 Distributions, Redemptions and Certain Permitted Conversions 5.1 Special Distributions; Distributions of Cash Flow from Operations or Financings. This Section 5.1 (except for Section 5.1(b)) applies only to distributions other than distributions upon the liquidation of the Company (such subject being governed by Section 5.2 of this Agreement). (a) If the Board of Directors declares a distribution payable on a Distribution Date, then the holders of Shares shall be entitled to receive all such distributions which the Board has declared, with each holder of Listed Shares entitled to receive a pro-rata portion (with reference to the number of Listed Shares then-held by such holder of Listed Shares and the total number of Listed Shares then-held by all Persons) of such available distributions. (b) Notwithstanding any other provision of this Agreement, neither the Company, nor the Board of Directors on behalf of the Company, shall make a distribution to any Shareholder on account of its Shares if such distribution would violate the Act or other applicable law. -22- 23 5.2 Distributions Relating to Liquidation Events. Upon the dissolution, liquidation or winding-up of the Company, after satisfaction of all of the Company's liabilities (whether by payment or the making of reasonable provision for payment therefor), each Shareholder shall be entitled to receive out of the assets of the Company, an amount in cash or in kind equal to the sum of (A) its pro-rata portion of all accrued and unpaid distributions on the Shares; plus (B) its pro-rata portion of any remaining assets of the Company. No distribution shall be made to any holder of Listed Shares that would result in such holder having a deficit balance in its Capital Account until such time as the balance of each such holder's Capital Account is zero. A consolidation or merger of the Company with or into any other Entity, or a sale, lease or exchange of any or all assets of the Company in consideration for the issuance of equity securities of another Entity, shall not be deemed to be a dissolution, liquidation or winding up of the Company, provided that the consolidation, merger, sale, lease or exchange has been approved by the majority vote of the Shareholders voting together as one class. 5.3 Priority. Notwithstanding any other provision of this Agreement, it is specifically acknowledged and agreed by each Shareholder that the Company's failure to pay any amounts to such Shareholder, whether as a distribution, redemption payment or otherwise, even if such payment is specifically required hereunder, shall not give such Shareholder creditor status with regard to such unpaid amount; but rather, such Shareholder shall be treated only as a Shareholder of whatever class such Person is a Shareholder, and not as a creditor, of the Company. This Section 5.3 is, as permitted by Section 18-606 of the Act, intended to override the provisions of Section 18-606 of the Act relating to a member's status and remedies as a creditor, to the extent that such provisions would be applicable in the absence of this Section 5.3. 5.4. Payments to Shareholders for Services. Any payments by the Company to a Shareholder for services rendered to or on behalf to the Company shall be treated as guaranteed payments for services under Section 707(c) of the Code. 5.5. Withholding. (a) With respect to any withholding tax or other similar tax liability or obligation to which the Company may be subject as a result of any act or status of any Shareholder or to which the Company becomes subject with respect to any Share, the Company shall have the right to withhold amounts distributable to such Shareholder or with respect to such Shares, to the extent of the amount of such withholding tax or other similar tax liability or obligation, pursuant to the provision contained in Section 5.5(b). -23- 24 (b) Each Shareholder hereby authorizes the Company to withhold from, or pay on behalf of or with respect to such Shareholder any amount of federal, state, local or foreign taxes that the Managing Member determines that the Company is required to withhold or pay with respect to any amount distributable or allocable to such Shareholder pursuant to this Agreement, including, without limitation, any taxes required to be withheld or paid by the Company pursuant to Sections 1441, 1442, 1445 or 1446 of the Code. Any amount paid on behalf of or with respect to a Shareholder shall constitute a loan by the Company to such Shareholder, which loan shall be repaid by such Shareholder within fifteen (15) days after notice from the Managing Member that such payment must be made unless (i) the Company withholds such payment from a distribution which would otherwise be made to the Shareholder; or (ii) the Managing Member determines, in its sole and absolute discretion, that such payment may be satisfied out of the available funds of the Company which would, but for such payment, be distributed to the Shareholder. Any amounts withheld pursuant to the foregoing clauses (i) or (ii) shall be treated as having been distributed to such Shareholder. In the event that a Shareholder fails to pay when due any amounts owed to the Company pursuant to this Section 5.5(b),the Managing Member, in its sole and absolute discretion, may elect to make the payment to the Company on behalf of such defaulting Shareholder, and in such event shall be deemed to have loaned such amount to such defaulting Shareholder and shall succeed to all rights and remedies of the Company as against such defaulting Shareholder. ARTICLE 6 Shareholders 6.1. Limited Liability Except as otherwise provided by the Act, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and the Shareholders shall not be obligated personally for any such debt, obligation or liability of the Company solely by reason of being a Shareholder of the Company. The Shareholders shall not be required to lend any funds to the Company. Each of the Shareholders shall be liable to make payment of his, her or its respective contributions as and when due hereunder and other payments as expressly provided in this Agreement. If and to the extent a Shareholder's contribution shall be fully paid, such Shareholder shall not, except as required by the express provisions of the Act regarding repayment of sums wrongfully distributed to Shareholders, be required to make any further contributions. -24- 25 6.2. Voting Rights of Shareholders; Authority of Board of Directors. (a) The Board of Directors, in its sole discretion, has full, complete and exclusive right, power and authority in the management and control of the Company business to do any and all things necessary to effectuate the purpose of the Company; except, however, as expressly set forth herein. The members of the Board of Directors shall devote such time as is necessary to the affairs of the Company, and shall receive such compensation from the Company and such reimbursement for expenses as is permitted by the Bylaws. No Person dealing with the Board of Directors shall be required to determine its authority to make any undertaking on behalf of the Company or to determine any facts or circumstances bearing upon the existence of such authority. (b) Notwithstanding Section 6.2(a) above, but subject to Section 10.1(a), Article 12 and Article 13 hereof, any sale or other disposition of all or substantially all of the assets of the Company at any one time, any merger or consolidation of the Company (where the Company is not the surviving Entity) or vote to dissolve the Company must, (i) receive the approval of the Board of Directors, and (ii) receive the vote, at a duly held meeting, of more than 50% in interest of the total then issued and outstanding Shares (or, in the case of a written Consent without a meeting, more than 50% in interest of the total of such then-issued and outstanding Shares) (or such greater percentage as is then required under the Act. (c) Subject to Sections 7.2(a) and 7.2(b) and Articles 12 and 13 hereof, the vote, at a duly held meeting, of more than 50% interest of the total then issued and outstanding Shares (or, in the case of a written Consent without a meeting, more than 50% in interest of the total of such then-issued and outstanding Shares) shall be able to remove any Director and elect a replacement therefor. If such Shareholders intend to vote to remove a Director pursuant to this Section 6.2(c), they shall provide the removed Director with notice thereof, which notice shall set forth the date upon which such removal is to become effective. (d) The annual meeting of the holders of Shares of the Company for the election of Directors and for the transaction of such other business as properly may come before such meeting shall be held in accordance with the Bylaws. Subject to the provisions of Article 13 relating to meetings of Shareholders and related subjects, the Bylaws shall govern matters relating to, among other things, annual and special meetings, notice, waiver of notice, adjournment, proxies, written consents, procedures, and telephonic meetings, to the extent not inconsistent with this Agreement. -25- 26 (e) Notwithstanding any other provision of this Agreement, Shareholders have voting rights with respect to a particular matter (to the extent provided herein with regard to categories of Shareholders permitted to vote on particular matters, and otherwise) only after such matter has first been approved by the Board of Directors, except with regard to (i) the removal of a Director (and the election of a replacement therefor) as provided in this Agreement, (ii) the amendment of this Agreement, (iii) any matter as to which any Share plan or Share incentive plan adopted by the Company provides otherwise, and (iv) any matter presented at a special meeting of Shareholders called upon the written request of holders of at least 10% of the outstanding Shares. (f) For purposes of this Agreement, in order for a meeting of Shareholders to be considered duly held with regard to a particular question, a quorum of more than 50% in interest of the Shares which are entitled to vote at such meeting on the particular question must be present (in person or by proxy). ARTICLE 7 Directors and Officers 7.1. General Powers of Directors. (a) Except as may otherwise be provided by the Act or by this Agreement, the property, affairs and business of the Company shall be managed by or under the direction of the Board of Directors, the Board of Directors may exercise all the powers of the Company (including but not limited to deciding whether to make various tax elections), and the Shareholders shall have no right to act on behalf of or bind the Company. The Board of Directors shall have the power and authority, on behalf of the Company, to (i) hire employees and such other agents, who may be designated as officers, consultants and Persons necessary or appropriate to effectuate the purpose of the Company, and (ii) delegate to one or more Persons (or to committees of the Board of Directors) its rights and powers to manage and control the affairs of the Company. Such delegation may be in the Bylaws or by a management agreement or other agreement with such Persons and such delegation shall not cause the Directors to cease to be "managers" (within the meaning of the Act) of the Company. The management agreement or other agreement may designate a Person or Persons to be "managers" (within the meaning of the Act) of the Company. The officers shall not be "managers" (within the meaning of the Act) of the Company. At its initial meeting at which a -26- 27 quorum is present, the Board of Directors, on behalf of the Company, by a majority of the Directors present, shall (i) designate a person as the chief executive officer of the Company and (ii) adopt the Bylaws. The Directors shall act only as a Board, and the individual Directors shall have no power as such. Subject to the provisions of this Agreement and the Bylaws with regard to Board of Directors, the approval of a matter by a majority of the Directors present at a meeting at which a quorum is present shall constitute approval by the Board of Directors (or, in the case of a written Consent without a meeting, the approval of a matter by all of the Directors shall constitute approval by the Board of Directors.) (b) No contract or transaction among the Company and one or more of its Affiliates, Directors or officers, or among the Company and any other Entity in which one or more of the Company's Affiliates, Directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the Director or officer is present at or participates in the meeting of the Board of Directors or of a committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (i) The material facts as to such Affiliate's, Director's or officer's relationship or interest as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested Directors, even though the disinterested Directors be less than a quorum; or (ii) The contract or transaction is fair as to the Company. Interested Directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. Notwithstanding, and instead of, the foregoing provisions of this Section 7.1(b), the Company shall enter into or renew no agreement pursuant to which any Affiliate of any Director would provide management services for any Property, unless such agreement is approved by a majority of the Independent Directors; and, if such approval is obtained in the case of a particular contract, such approval shall be deemed to satisfy the requirements of this Section 7.1(b). Furthermore, notwithstanding the foregoing, the Company may acquire property as tenants-in-common, in joint ventures, or -27- 28 in other joint ownership arrangements with Affiliates of the Company without approval of the Board other than that which would be required for transactions with non-Affiliates. 7.2. Number and Term of Office of Directors. (a) The number of seats constituting the entire Board of Directors shall be at least two, and, following the listing of the Listed Shares on the New York Stock Exchange, at least five and no more than 15, with the exact number of seats on the Board of Directors to be determined from time to time by resolution of the Board of Directors. At least two of the Directors in office at any point in time after the listing of the Listed Shares on the New York Stock Exchange must be Independent Directors. Each Director (whenever elected) shall hold office until his or her successor has been duly elected and qualified, or until his or her earlier death, resignation, or removal. A Director shall not be required to be a Shareholder or a resident of the State of Delaware. (b) At all times the Board of Directors shall be divided into three classes, as nearly equal in numbers as the then total number of Directors constituting the entire Board of Directors permits, with the term of office of one class expiring each year (with the first such class expiration to occur at the first annual meeting of Shareholders); and the Board of Directors shall have sole power to make such determinations. At the first annual meeting of the Shareholders, only the Directors of the first class shall be elected by the Shareholders (in accordance with Section 6.2 hereof), and such Persons shall hold office thereafter for a term expiring at the third succeeding annual meeting. At the second annual meeting of Shareholders, only the Directors of the second class shall be elected by the Shareholders (in accordance with Section 6.2 hereof), and such Persons shall hold office thereafter for a term expiring at the third succeeding annual meeting. At the third annual meeting of Shareholders, only the Directors of the third class shall be elected by the Shareholders (in accordance with Section 6.2 hereof), and such Persons shall hold office thereafter for a term expiring at the third succeeding annual meeting. At each subsequent annual meeting of Shareholders thereafter, the successors to any class of Directors whose term shall then expire shall be elected by the Shareholders (in accordance with Section 6.2 hereof) to hold office for a term expiring at the third succeeding annual meeting. (c) Notwithstanding any other provision of this Agreement, the original Shareholders, by written consent, shall appoint the initial Board of Directors. Each initial Director shall serve until the first meeting of the Shareholders, or until his successor is duly elected. -28- 29 7.3. Officers. Pursuant to the Bylaws, the Company will have officers, who need not be employees of the Company, who will have the rights and be subject to the restrictions provided therein. ARTICLE 8 Limitations on Liability of, and Indemnification of, Directors and Officers. (a) No Directors or officers of the Company shall be liable, responsible or accountable in damages or otherwise to the Company or any of the Shareholders for any act or omission performed or omitted by him or her, or for any decision, except in the case of fraudulent or illegal conduct of such Person. For purposes of this Article 8, the fact that an action, omission to act or decision is taken on the advice of counsel for the Company shall be evidence of good faith and lack of fraudulent conduct. (b) To the fullest extent permitted by law, all Directors and officers of the Company shall be entitled to indemnification from the Company for any loss, damage or claim (including any reasonable attorney's fees incurred by such person in connection therewith) due to any act or omission made by him or her, except in the case of fraudulent or illegal conduct of such Person; provided, that any indemnity shall be paid out of the assets of the Company only (or any insurance proceeds available therefor), and no Shareholder shall have any personal liability on account thereof. (c) The termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Person acted fraudulently or illegally. (d) The indemnification provided by this Article 8 shall not be deemed exclusive of any other rights to which those indemnified maybe entitled under any agreement, vote of Shareholders or Directors, or otherwise, and shall inure to the benefit of the heirs, executors and administrators of such a Person. (e) Any repeal or modification of this Article 8 shall not adversely affect any right or protection of a Director or officer of the Company existing at the time of such repeal of modifications. -29- 30 The Company may, if the Board of Directors of the Company deems it appropriate in its sole discretion, obtain insurance for the benefit of the Company's Directors and officers, or enter into indemnification agreements with such Directors and officers, relating to the liability of such Persons. ARTICLE 9 Transfers of Interests; Admission of New Shareholders 9.1. Transfers. The Listed Shares shall be freely transferable. Subject to the foregoing and in accordance with Section 2.8, any Person who is a Transferee of Shares shall, upon acceptance of a certificate evidencing the Shares, (a) automatically become a Shareholder of the Company with no further action being required on such Person's part, and (b) automatically be bound to the terms and conditions of this Agreement (and be entitled to the rights of a Shareholder hereunder). 9.2. New Shareholders. The Company may issue Future Shares pursuant to Sections 3.1; and, in accordance with Section 2.8, any Person acquiring Future Shares from the Company shall, upon acceptance of a certificate evidencing the Shares, (a) automatically become a Shareholder of the Company with no future action being required on such Person's part, and (b) automatically be bound to the terms and conditions of the Agreement (and be entitled to the rights of a Shareholder hereunder). 9.3 Lender Ownership Limit. (a) No Lender, as defined in Section 9.3(c), may own Shares nor shall Shares be accepted, purchased, or in any manner acquired by any Lender if such issuance or transfer would result in a Lender owning Shares. (b) If any Shares are accepted, purchased, or in any manner acquired by any Lender resulting in a violation of Section 9.3(a) hereof, any such purchase or acquisition shall be null and void with respect to such Shares ("Excess Shares"). If the last clause of the foregoing sentence is determined to be invalid by virtue of any legal decision, statute, rule or regulation, such Lender shall be conclusively deemed to have acted as an agent on behalf of the Company in acquiring the Excess Shares and to hold such Excess Shares on behalf of the ultimate owner of such Excess Shares. Any Lender who receives dividends, interest or any other distribution paid on account of Excess Shares shall hold and retain these dividends, interest or any other distribution an agent for the ultimate owner of such Excess Shares. -30- 31 While the Excess Shares are so held on behalf of the ultimate owner of such Excess Shares, such Excess Shares shall not have any voting rights and shall not be considered for purposes of any Shareholder vote and/or for determining a quorum for such a vote. The Excess Shares shall be treated as outstanding Shares. In the event that a Shareholder knowingly holds Excess Shares and the other Shareholders' basis for federal income tax purposes is reduced, such Shareholder shall be required to indemnify the Company for the full amount of any damages and expenses (including the Company's estimate of the costs (including tax costs) to the other Shareholders, reasonable attorneys' fees and administrative costs) resulting from the shift of basis for federal income tax purposes. Upon discovering the ownership of any Excess Shares, the Managing Member may (i) cause the Company to immediately redeem such Excess Shares at the Redemption Price (as defined below) or (ii) grant the Shareholder 30 days to transfer such Excess Shares to any Person whose ownership of such Excess Shares would not result in a violation of Section 9.3(a) hereof. Upon such permitted transfer, the Company shall pay or distribute to the transferee any dividends on the Excess Shares not previously paid or distributed. If such Excess Shares are not transferred within such 30 day period, the Company will redeem such Shares at the Redemption Price (as defined below). For purposes of this Section 9.3, the "Redemption Price" shall mean the lesser of the price paid for such Excess Shares by the Shareholder in whose possession the redeemed Shares were Excess Shares or the fair market value of the Excess Shares. (c) For purposes of this Section 9.3, the term "Lender" shall mean (i) any Person who is currently owed money by the Company or any one or more of the CPA Partnerships in an amount exceeding $1,000,000 and (ii) any Person related to a Person described in (i) under the rules of Treas. Reg ss. 1.752-4(b). (d) The Managing Member may exempt a Lender from the provisions of this Section 9.3 upon receipt of an opinion of counsel that other Shareholders will not suffer any material negative affects as a consequence of such Lender owning Shares. (e) If any provision of this Section 9.3 or any application thereof is determined to be invalid by any federal or state court having jurisdiction over the issue, the validity of the remaining provisions shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court. -31- 32 ARTICLE 10 Dissolution and Termination 10.1. Events of Dissolution. (a) In accordance with Section 18-801 of the Act, and the provisions therein permitting this Agreement to specify the events of the Company's dissolution, the Company has perpetual existence but shall be dissolved and the affairs of the Company wound up upon the occurrence of any of the following events: (i) expulsion, bankruptcy (as defined in Section 18-304 of the Act) or insolvency or dissolution of the Managing Member, absent a vote of Shareholders holding interests in more than 50% of the profits and capital of the Company to continue the Company within 90 days following such event; (ii) the vote of the Shareholders pursuant to Sections 6.2(b) and (e) hereof; or (iii) the entry of a decree of judicial dissolution under Section 18-802 of the Act. The death, retirement, resignation, expulsion, bankruptcy (as defined in Section 18-304 of the Act) or dissolution of a Shareholder or the occurrence of any other event that terminates the continued membership of a Shareholder in the Company, shall not cause the dissolution of the Company except to the extent specified above in this Section 10.1(a). (b) Dissolution of the Company shall be effective on the day on which the event occurs which gives rise to the dissolution, but the Company shall not terminate until the assets of the Company shall have been distributed as provided herein and a certificate of cancellation of the Certificate has been filed with the Secretary of State of the State of Delaware. 10.2. Application of Assets. In the event of dissolution, the Company shall conduct only such activities as are necessary to wind up its affairs (including the sale of the assets of the Company in an orderly manner), and the assets of the Company shall be applied, first, as required by Section 18-804(a)(1) of the Act, and then in the manner, and in the order of priority, set forth in Article 5. Notwithstanding anything herein to the contrary, in the event the Company is liquidated within the meaning of Treasury Regulation ss.1.704-1(b)(2)(ii)(g), liquidation -32- 33 distributions shall be made by the end of the taxable year in which the Company liquidates or, if later, within 90 days of the date of such liquidation. Distributions may be made to a trust for the purposes of an orderly liquidation of the Company by the trust in accordance with the Act. 10.3. Gain or Losses in Process of Liquidation. Any gain or loss on the disposition of Company property in the process of liquidation shall be credited or charged to the Capital Accounts of Shareholders in accordance with the provisions of Article 3. Any property distributed in kind in the liquidation shall be valued and treated as though the property were sold at its fair market value and the cash proceeds were distributed. The difference between the fair market value of property distributed in kind and its Book Value shall be treated as a gain or loss on the sale of such property and shall be credited or charged to the Capital Account of Shareholders in accordance with Article 3; provided, that no Shareholder shall have the right to request or require the distribution of the assets of the Company in kind. 10.4. Procedural and Other Matters. (a) Upon dissolution of the Company and until the filing of a certificate of cancellation as provided in Section 10.4(b), the Persons winding up the affairs of the Company may, in the name of, and for and on behalf of, the Company, prosecute and defend suits, whether civil, criminal or administrative, settle and close the business of the Company, dispose of and convey the property of the Company, discharge or make reasonable provision for the liabilities of the Company, and distribute to the Shareholders any remaining assets of the Company, in accordance with this Article 10 and all without affecting the liability of Shareholders and Directors and without imposing liability on a liquidating trustee. (b) The Certificate may be canceled upon the dissolution and the completion of winding up of the Company, by any Person authorized to cause such cancellation in connection with such dissolution and winding up. ARTICLE 11 Appointment of Attorney-in-Fact 11.1 Appointment and Powers. (a) Each Shareholder hereby irrevocably constitutes and appoints the Managing Member, with full power of substitution, as his, her or its true and lawful attorney-in-fact, with full power and authority in his, her or its name, place and stead to execute, acknowledge, deliver, -33- 34 swear to, file and record at the appropriate public offices such documents, instruments and conveyances as may be necessary or appropriate to carry out the provisions or purposes of this Agreement, including, without limitation, the following: (i) the Certificate; (ii) all other certificates and instruments and amendments thereto that the Board of Directors deems appropriate to qualify or continue the Company as a limited liability company in the jurisdiction in which the Company may conduct business; (iii) all instruments that the Board of Directors deems appropriate to reflect a change or modification of this Agreement in accordance with the terms of this Agreement; (iv) all conveyances and other instruments that the Board of Directors deems appropriate to reflect the dissolution and termination of the Company; (v) all fictitious or assumed name certificates required or permitted to be filed on behalf of the Company; (vi) any and all documents necessary to admit Shareholders to the Company, or to reflect any change or transfer of a Shareholder's Shares, or relating to the admission or increased Capital Contribution of a Shareholder; (vii) any amendment or other document to be filed as referenced in Section 3.1(d) or 3.1(f) of this Agreement; and (viii) all other instruments that may be required or permitted by law to be filed on behalf of or relating to the Company and that are not inconsistent with this Agreement. The authority granted by this Section 11.1(i) is a special power of attorney coupled with an interest, is irrevocable, and shall not be affected by the subsequent incapacity or disability of the Shareholder; (ii) may be exercised by a signature for each Shareholder or by a single signature of any such Person acting as attorney-in-fact for all of them; and (iii) shall survive the Transfer by a Shareholder of the whole or any portion of his, her or its Shares. 11.2 Presumption of Authority. Any Person dealing with the Company may conclusively presume and rely upon the fact that any instrument referred to above, executed by such Person acting as attorney-in-fact, is authorized, regular and binding, without further inquiry. ARTICLE 12 Certain Provisions Relating to Changes in Control and Business Combinations 12.1. Definitions. For purposes of this Article 12, the following definitions shall apply: "Associate" when used to indicate a relationship with any Person, means: -34- 35 (a) Any Entity (other than the Company or a Subsidiary of the Company) of which such Person is an officer, manager, member, director or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of equity securities of such Entity; (b) Any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity; and (c) Any Relative of such Person, or any Relative of a spouse of such Person, who has the same home as such Person or who is a Director or officer of the Company or a manager, member, director or officer of any of its Affiliates. "Beneficial Owner" When used with respect to Shares, means a Person: (a) That, individually or with any of its Affiliates or Associates, beneficially owns Shares directly or indirectly; or (b) That, individually or with any of its Affiliates or Associates, has (i) the right to acquire Shares(whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement, or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; or (ii) the right to vote Shares pursuant to any agreement, arrangement or understanding; or (c) That has any agreement, arrangement, or understanding for the purpose of acquiring, holding, voting, or disposing of Shares with any other Person that beneficially owns, or whose Affiliates or Associates beneficially own, directly or indirectly, such Shares. "Business Combination" means: (a) Unless the merger, consolidation or exchange of Shares does not alter the contract rights of the Shares as expressly set forth in this Agreement or change or convert in whole or in part the outstanding Shares, any merger, consolidation or exchange of Shares or any interests in a Subsidiary with (i) any Interested Party or (ii) any other Entity (whether or not itself an Interested Party) which is, or after the merger, consolidation or exchange of interests would be, an Affiliate of an Interested Party that was an Interested Party prior to the transaction; (b) Any sale, lease, transfer or other disposition, other than in the ordinary course of business or pursuant to a distribution or any other method affording substantially -35- 36 proportionate treatment to the Shareholders, in one transaction or a series of transactions in any 12-month period, to any Interested Party or any Affiliate of any Interested Party (other than the Company or any of its Subsidiaries) of any assets of the Company or any Subsidiary having, measured at the time the transaction or transactions are approved by the Board of Directors of the Company, an aggregate Book Value as of the end of the Company's most recently ended fiscal quarter of 10 percent or more of (i) the total Market Value of the outstanding Shares or (ii) the Company's net worth as of the end of its most recently ended fiscal quarter; (c) The issuance or transfer by the Company or any Subsidiary, in one transaction or a series of transactions, of any Shares or any equity securities of a Subsidiary which have an aggregate Market Value of five percent or more of the total Market Value of the outstanding Shares to any Interested Party or any Affiliate of any Interested Party (other than the Company or any of its Subsidiaries) except pursuant to the exercise of warrants or rights to purchase securities pro-rata to all Shareholders or any other method affording substantially proportionate treatment to those Shareholders; (d) The adoption of any plan or proposal for the liquidation or dissolution of the Company in which anything other than cash will be received by an Interested Party or any Affiliate of any Interested Party; (e) Any reclassification of securities or recapitalization of the Company, or any merger, consolidation or exchange of Shares with any of its Subsidiaries which has the effect, directly or indirectly, in one transaction or series of transactions, of increasing by five percent or more of the total number of outstanding Shares, the proportionate amount of the outstanding Shares or the outstanding number of any class of equity securities of any Subsidiary which is directly or indirectly owned by any Interested Party or any Affiliate of any Interested Party; or (f) The receipt by any Interested Party or any Affiliate of any Interested Party (other than the Company or any of its Subsidiaries) of the benefit, directly or indirectly (except proportionately as a holder of Shares of any loan, advance, guarantee, pledge or other financial assistance or any tax credit or other tax advantage provided by the Company or any of its Subsidiaries. "Interested Party" means any Person (other than (i) the Company, (ii) any Subsidiary of the Company, (iii) the Original -36- 37 Shareholders, and (iv) any Affiliate or Associate of the Original Shareholders) that: (a) Is the beneficial owner, directly or indirectly, of 10 percent or more of the outstanding Shares; (b) Is an Affiliate or Associate of the Company and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10 percent or more of the then outstanding Shares; or (c) Is an Affiliate or Associate of any Person described in clause (a) or (b) above. For purposes of determining whether a Person is an Interested Party, the number of Shares deemed to be outstanding shall include Shares deemed beneficially owned by the Person through the definitions of Beneficial Owner set forth above but may not include any other Shares which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. "Market Value" means: (a) In the case of Shares, the highest closing sale price of Shares during the 30-day period immediately preceding the date in question on the composite tape of the New York Stock Exchange-listed stocks, and (b) In the case of property other than cash or stock, the fair market value of such property on the date in question as determined by the Board of Directors in good faith. "Subsidiary" means any Person (other than an individual) in which the Company, directly or indirectly, holds a majority of the voting securities. 12.2 Business Combinations. (a) Unless an exemption under Section 12.3 hereunder applies, the Company may not engage in any Business Combination with an Interested Party or any Affiliate of an Interested Party for a period of five years following the most recent date on which such Interested Party became an Interested Party (the "Five Year Tolling Period"), unless: (1) In addition to any vote otherwise required by law or this Agreement, the Board of Directors of the Company, prior to the most recent date upon which the Interested Party became an Interested Party, approved either the Business Combination or the transaction -37- 38 which resulted in the Interested Party becoming an Interested Party; and (2) On or subsequent to the date upon which the Interested Party became an Interested Party, the Business Combination is (A) approved by at least two-thirds of the Persons who are then members of the Board of Directors and (B) authorized at an annual or special meeting of the Shareholders (and not by written consent) by the affirmative vote of at least two-thirds in interest of the Listed Shareholders, excluding the Shares held by an Interested Party who will be (or whose Affiliate will be) a party to the Business Combination or by an Affiliate or Associate of that Interested Party, voting together as a single class. (b) Unless an exemption under Section 12.3 applies, in addition to any vote otherwise required by law or this Agreement, a Business Combination proposed by an Interested Party or an Affiliate of the Interested Party after the Five Year Tolling Period shall be permitted only if recommended by the Board of Directors who are present at a duly-called meeting at which a quorum is present and approved by the affirmative vote of at least: (i) 80% in interest of all Listed Shareholders, voting together as a single voting group; and (ii) Two-thirds in interest of the Listed Shareholders, excluding Shares held by an Interested Party who will (or whose Affiliate will) be a party to the Business Combination or by an Affiliate or Associate of the Interested Party. 12.3 Exemptions. (a) For purposes of this Section 12.3: "Announcement Date" means the first general public announcement of the proposal or intentions to make a proposal of the Business Combination or its first communication generally to the Shareholders, whichever is earlier; "Determination Date" means the most recent date on which the Interested Party became an Interested Party; and "Valuation Date" means: (i) For a Business Combination voted upon by the Shareholders, the later of the day prior to the date of the vote or the day 20 days prior to the consummation of the Business Combination; and -38- 39 (ii) For a Business Combination not voted upon by the Shareholders, the date of the consummation of the Business Combination. (b) The vote required by Section 12.2(b) does not apply to a Business Combination if (1) the Business Combination or the transaction which resulted in the Interested Party becoming an Interested Party shall have been approved by the Board of Directors prior to the Determination Date or (2) each of the conditions in items (i) through (iii) below is met: (i) The aggregate amount of the cash and the Market Value as of the Valuation Date of consideration other than cash to be received for each Share in such Business Combination (whether or not the Interested Party has previously acquired the particular class or series of Shares in question) is at least equal to the highest of the following: (A) The highest per Share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Party for any Shares acquired by it within the five-year period immediately prior to the Announcement Date of the proposal of the Business Combination, plus an amount equal to interest compounded annually from the earliest date on which the highest per Share acquisition price was paid through the Valuation Date at the rate for one-year United States Treasury obligations from time to time in effect, less the aggregate amount of any cash distributions paid and the Market Value of any distributions paid in other than cash, per Share from the earliest date through the Valuation Date, up to the amount of the interest compounded annually for such period; or (B) The highest per Share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Party for any Share acquired by it on, or within the five-year period immediately before, the Determination Date, plus an amount equal to interest compounded annually from the earliest date on which the highest per Share acquisition price was paid to the same class or series through the Valuation Date at the rate for one-year United States Treasury obligations from time to time in effect, less the aggregate amount of any cash distributions paid and the Market Value of any distributions paid in other than cash, per Share from the earliest date through the Valuation Date, up to the amount of the interest compounded annually for such period; or -39- 40 (C) The highest preferential amount per Share to which the holders of Shares are entitled in the event of any voluntary or involuntary dissolution or winding up of the Company; or (D) The Market Value per Share on the Announcement Date, plus an amount equal to interest compounded annually from that date through the Valuation Date at the rate for one-year United Sates Treasury obligations from time to time in effect, less the aggregate amount of any cash distributions paid and the Market Value of any distributions paid in other than cash, per Share from that date through the Valuation Date, up to the amount of the interest compounded annually for such period; or (E) The Market Value per Share on the Determination Date, plus an amount equal to interest compounded annually from that date through the Valuation Date at the rate for one-year United States Treasury obligations from time to time in effect, less the aggregate amount of any cash distributions paid and the Market Value of any distributions paid and the Market Value of any distributions paid in other than cash, per Share from that date through the Valuation Date, up to the amount of the interest; or (F) The price per Share equal to the Market Value per Share on the Announcement Date or on the Determination Date, whichever is higher, multiplied by the fraction of: (1) The highest per Share price (including any brokerage commissions, transfer taxes and solicitation dealers' fees) paid by the Interested Party for any Shares acquired by it within the five-year period immediately prior to the Announcement Date, over (2) The Market Value per Share on the first day in such five-year period on which the Interested Party acquired the Shares. (ii) The consideration to be received in such Business Combination by the holders of any Shares is to be in cash or in the same form as the Interested Party has previously paid for such Shares, except to the extent that the Shareholders otherwise elect in connection with their approval of the proposed transaction under Section 12.2 of this Agreement. If -40- 41 the Interested Party has paid for Shares with varying forms of consideration, the form of consideration for such Shares shall be either cash or the form used to acquire the largest number of Shares previously acquired by it, except to the extent that the Shareholders otherwise elect. (iii) After the Determination Date and prior to the consummation of such Business Combination: (A) There shall have been no failure to declare and pay at the regular date therefor (if applicable) any full periodic distributions (whether or not cumulative) on any outstanding Shares; (B) There shall have been: (1) No reduction in the annual rate of distributions made with respect to the Shares; and (2) An increase in such annual rate of distributions as necessary to reflect any reclassification, recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding Shares; and (C) The Interested Party did not become the Beneficial Owner of any additional Shares except as part of the transaction which resulted in such Interested Party becoming an Interested Party or by virtue of proportionate Share splits or distributions. The provisions of items (A) and (B) of this subsection (b)(iii) do not apply if (I) no Interested Party or Affiliate or Associate of the Interested Party voted as a member of the Board of Directors of the Company in a manner inconsistent with such items (A) and (B) and (II) the Interested Party, within 10 days after any act or failure to act inconsistent with such items, notifies the Board of Directors of the Company in writing that the Interested Party disapproves thereof and requests in good faith that the Board of Directors rectify such act or failure to act. (c) The provisions of Section 12.2 do not apply to any Business Combination of the Company with an Interested Party that became an Interested Party inadvertently, if the Interested Party: -41- 42 (i) As soon as practicable (but not more than 10 days after the Interested Party knew or should have known it had become an Interested Party) divests itself of a sufficient amount of Shares to avoid being an Interested Party; and (ii) Would not at any time within the five-year period preceding the Announcement Date with respect to the Business Combinations have been an Interested Party except by inadvertence. 12.4. Amendment. Notwithstanding any other provisions of this Agreement, this Article 12 may be amended or repealed only by a vote of 80% in interest of all Shareholders, excluding Shares held by any Interested Party or any Affiliate of an Interested Party. 12.5. Certain Determinations with Respect to this Article 12. The Board of Directors shall have the power to determine for the purposes of this Article 12, on the basis of information known to the Directors: (i) the number of Shares of which any Person is the Beneficial Owner, (ii) whether a Person is an Affiliate or Associate of another, (iii) whether a Person has an agreement, arrangement or understanding with another as to the matters referred to in the definition of "Beneficial Owner" as hereinabove defined, (iv) whether two or more transactions constitute a "series of transactions," and (v) such other matters with respect to which a determination is required under this Article 12. ARTICLE 13 Voting Rights of Certain Control Shares 13.1 Definitions. For purposes of this Article 13, the following definitions shall apply: "Acquiring Person" means a Person who makes or proposes to make a Control Shares Acquisition, or such Person's Affiliate or Associate. "Associate" when used to indicate a relationship with any Person means: (a) An "Associate" as defined in Section 12.1; or (b) A Person that: (i) Directly or indirectly controls, or is controlled by, or is under common control with, the Person specified; or -42- 43 (ii) Is acting or intends to act jointly or in concert with the Person specified. "Control Shares" means Shares that, except for this Article 13, would, if aggregated with all other Shares (including Shares the acquisition of which is excluded from the definition "Control Shares Acquisition" below) owned by a Person or in respect of which that Person is entitled to exercise or direct the exercise of voting power, except solely by virtue of a revocable proxy, entitle that Person, directly or indirectly, to exercise or direct the exercise of the voting power of Shares within any of the following ranges of voting power: (a) One-fifth or more, but less than one-third of all voting power; (b) One-third or more, but less than a majority of all voting power; or (c) A majority or more of all voting power. but such definition includes Shares only to the extent that the Acquiring Person, following the acquisition of the Shares, is entitled, directly or indirectly, to exercise or direct the exercise of voting power within any level of voting power set forth in this section for which approval has not been obtained previously under Section 13.2. "Control Shares Acquisition" means the acquisition, directly or indirectly, by any Person (other than (i) the Company, (ii) any Subsidiary of the Company, (iii) the Original Shareholders, and (iv) any Affiliate or Associate of any Person described in clause (iii) above), of ownership of, or the power to direct the exercise of voting power with respect to, issued and outstanding Control Shares. Control Shares Acquisition does not include the acquisition of Control Shares: (a) Under the laws of descent and distribution; (b) Under the satisfaction of a pledge or other security interest created in good faith and not for the purpose of circumventing this Article 13; or (c) Under a merger, consolidation or exchange of interests if the Company is a party to the merger, consolidation or exchange of interests. Unless the acquisition entitles any Person, directly or indirectly, to exercise or direct the exercise of voting power of Shares in excess of the range of voting power previously authorized or attained under an acquisition that is exempt under items (a), (b), or (c) of this definition, "Control Shares Acquisition" does not include the acquisition of Shares in good -43- 44 faith and not for the purpose of circumventing this Article 13, by or from any Person whose voting rights have previously been authorized by the Shareholders in compliance with this Article 13 or any Person whose previous acquisition of Shares would have constituted a Control Shares Acquisition but for the exclusions in items (a) through (c) of this definition. "Interested Shares" means Shares in respect of which an Acquiring Person is entitled to exercise or direct the exercise of the voting power of Shares in the election of Directors or otherwise. B. Voting Rights. 1. Control Shares acquired in a Control Shares Acquisition have no voting rights except to the extent approved by the Shareholders at a meeting held under Section 13.4 by the affirmative vote of two-thirds in interest of all Shareholders, excluding any votes cast with respect to Interested Shares. 2. For purposes of this Section 13.2: a. Shares acquired within 180 days of Shares acquired under a plan to make a Control Shares Acquisition are considered to have been acquired in the same acquisition; and b. A Person may be deemed to be entitled to exercise or direct the exercise of voting power with respect to Shares held for the benefit of others if the Person: (1) Is acting in the ordinary course of business, in good faith and not for the purpose of circumventing the provisions of this Section of the Agreement; and (2) Is not entitled to exercise or to direct the exercise of the voting power of the Shares unless the Person first seeks to obtain the instruction of another Person. C. Acquiring Person Statement. Any Person who proposes to make or who has made a Control Shares Acquisition may deliver an Acquiring Person statement to the Company at the Company's principal office. The Acquiring Person statement shall set forth all of the following: 1. The identity of the Acquiring Person and each other member of any group of which the Person is a part for purposes of determining Control Shares; -44- 45 2. A statement that the Acquiring Person statement is given under this Article 13; 3. The number of Shares owned (directly or indirectly) by the Acquiring Person and each other member of any group; 4. The applicable range of voting power as set forth in the definition of "Control Shares"; and 5. If the Control Shares Acquisition has not occurred: a. A description in reasonable detail of the terms of the proposed Control Shares Acquisition; and b. Representations of the Acquiring Person, together with a statement in reasonable detail of the facts on which they are based, that: (1) The proposed Control Shares Acquisition, if consummated, will not be contrary to law; and (2) The Acquiring Person has the financial capacity, through financing to be provided by the Acquiring Person, and any additional specified sources of financing required under Section 13.5, to make the proposed Control Shares Acquisition. D. Special Meeting. 1. Except as provided in Section 13.5, if the Acquiring Person requests, at the time of delivery of an Acquiring Person statement, and gives a written undertaking to pay the Company's expenses of a special meeting, except the expenses of opposing approval of the voting rights, within ten days after the day on which the Company receives both the request and undertaking, the Board of Directors of the Company shall call a special meeting of the Shareholders, to be held within 50 days after receipt of the Acquiring Person statement and undertaking, for the purpose of considering the voting rights to be accorded the Shares acquired in the Control Shares Acquisition. 2. The Board of Directors may require the Acquiring Person to give bond, with sufficient surety, to reasonably assure the Company that this undertaking will be satisfied. 3. Unless the Acquiring Person agrees in writing to another date, the special meeting of Shareholders shall be held within 50 days after the day on which the Company has received the Acquiring Person statement. -45- 46 4. If no request is made under subsection (a) of this Section 13.4, the issue of the voting rights to be accorded the Shares acquired in the Control Shares Acquisition may, at the option of the Company, be presented for consideration at any meeting of the Shareholders. If no request is made under subsection (a) of this Section 13.4 and the Company proposes to present the issue of the voting rights to be accorded the Shares acquired in a Control Shares Acquisition for consideration at any meeting of the Shareholders, the Company shall provide the Acquiring Person with written notice of the proposal not less than 20 days before the date on which notice of the meeting is given. E. Calls. 1. A call of a special meeting of the Shareholders is not required to be made under Section 13.4 unless, at the time of delivery of an Acquiring Person statement an Acquiring Person has: a. Entered into a definitive financing agreement or agreements with one or more responsible financial institutions or other entities that have the necessary financial capacity, providing for any amount of financing of the Control Shares Acquisition not provided by the Acquiring Person; and b. Delivered a copy of the agreements to the Company. F. Notice of Meeting. 1. If a special meeting of the Shareholders is requested, notice of the special meeting shall be given as promptly as reasonably practicable by the Company to all Shareholders of record as of the record date set for the meeting, whether or not such Shareholder is entitled to vote at the meeting. 2. Notice of the special or annual meeting at which the voting rights are to be considered shall include or be accompanied by the following: a. A copy of the Acquiring Person statement delivered to the Company under Section 13.3; and b. A statement by the Board of Directors setting forth its position or recommendation, or stating that it is taking no position or making no recommendation, with respect to the issue of voting rights to be accorded the Control Shares. G. Redemption Rights. -46- 47 1. If an Acquiring Person statement has been delivered on or before the 10th day after the Control Shares Acquisition, the Company may, at its option, redeem any or all Control Shares, except Control Shares for which voting rights have been previously approved under Section 13.2, at any time during a 60-day period commencing on the day of a meeting at which voting rights are considered under Section 13.4 and are not approved. 2. In addition to the redemption rights authorized under subsection (a) of this Section 13.7, if an Acquiring Person statement has not been delivered on or before the 10th day after the Control Shares Acquisition, the Company may, at its option, redeem any or all Control Shares for which voting rights have been previously approved under Section 13.2, at any time during a period commencing on the 11th day after the Control Shares Acquisition and ending 60 days after the Acquiring Person statement has been delivered. 3. Any redemption of Control Shares under this Section shall be at the fair value of the Control Shares. For purposes of this section, "fair value" shall be determined: a. As of the date of the last acquisition of Control Shares by the Acquiring Person in a Control Shares Acquisition or, if a meeting is held under Section 13.4, as of the date of the meeting; and b. Without regard to the absence of voting rights for the Control Shares. H. Amendment. Notwithstanding any other provision of this Agreement, this Article 13 may only be amended or repealed by a vote of 80% in interest of all Shareholders, excluding any votes cast with respect to Interested Shares. ARTICLE 14 Miscellaneous Provisions A. Notices. 1. Except as otherwise provided in this Agreement or in the Bylaws, any and all notices, consents, offers, elections and other communications required or permitted under this Agreement shall be deemed adequately given only if in writing and the same shall be delivered either in hand, by telecopy, or by mail or Federal Express or similar expedited commercial carrier, addressed to the recipient of the notice, postage prepaid and registered or certified with -47- 48 return receipt requested (if by mail), or with all freight charges prepaid (if by Federal Express or similar carrier). 2. All notices, demands, and requests to be sent hereunder shall be deemed to have been given for all purposes of this Agreement upon the date of receipt or refusal. 3. All such notices, demands and requests shall be addressed as follows: (i) if to the Company, to its principal place of business, as set forth in Article 2 hereof and (ii) if to a Shareholder, to the address of such Shareholder listed on the Company's Shareholder register. 4. By giving to the other parties written notice thereof, parties hereto and their respective successors and assigns shall have the right from time to time and at any time during the term of this Agreement to change their respective addresses effective upon receipt by the other parties of such notice and each shall have the right to specify as its address any other address. B. Word Meanings. The words such as "herein", "hereinafter", "hereof" and "hereunder" refer to this Agreement as a whole and not merely to the subdivision in which such words appear unless the context otherwise requires. The singular shall include the plural and the masculine gender shall include the feminine and neuter, and vice versa, unless the context otherwise requires. C. Binding Provisions. The covenants and agreements contained herein shall be binding upon, and insure to the benefit of, the heirs, legal representatives, successors and assigns of the respective parties hereto. D. Amendment and Modification. Unless otherwise specifically provided in this Agreement, this Agreement may be amended, modified or supplemented only by the vote, at a duly held meeting, of more than 50% in interest of the then-outstanding Shares (or, in the case of a written Consent without a meeting, more than 50% in interest of the aggregate then-outstanding Shares) voting or acting as one class (and not as separate classes, notwithstanding the fact that there may be Shareholders of more than one class voting); provided, however, that Article 8 shall not be amended, modified or supplemented, unless such amendment, modification or supplement receives the Consent of at least 80% in interest of the holders of then-outstanding Shares. Notwithstanding anything to the contrary contained herein, the Bylaws may be amended by the affirmative vote of a majority of all members of the Board of Directors as provided in the Bylaws without any further vote, consent or approval of any Shareholder or other Person. -48- 49 E. Waiver. The waiver by any party hereto of a breach of any provisions contained herein shall be in writing, signed by the waiving party, and shall in no way be construed as a waiver of any succeeding breach of such provision or the waiver of the provision itself. F. Applicable Law. This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware, without regard to such state's laws concerning conflicts of laws. In the event of a conflict between any provisions of this Agreement and any nonmandatory provisions of the Act, the provision of this Agreement shall control and take precedence. G. Severability of Provisions. Each provision of this Agreement shall be deemed severable, and if any part of any provision is held to be illegal, void, voidable, invalid, nonbinding or unenforceable in its entirety or partially or as to any party, for any reason, such provision may be changed, consistent with the intent of the parties hereto, to the extent reasonably necessary to make the provision, as so changed, legal, valid, binding and enforceable. If any provision of this Agreement is held to be illegal, void, voidable, invalid, nonbinding or unenforceable in its entirety or partially or as to any party, for any reason, and if such provision cannot be changed consistent with the intent of the parties hereto to make it fully legal, valid, binding and enforceable, then such provision shall be stricken from this Agreement, and the remaining provisions of this Agreement shall not in any way be affected or impaired, but shall remain in full force and effect. H. Headings. The headings contained in this Agreement have been inserted for the convenience of reference only, and neither such headings nor the placement of any term hereof under any particular heading shall in any way restrict or modify any of the terms or provisions hereof. I. Further Assurances. The Shareholders shall execute and deliver such further instruments and do such further acts and things as may be required to carry out the intent and purposes of this Agreement. J. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all of which taken together shall constitute one and the same instrument. K. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the transactions contemplated herein, and supersedes all prior understandings or agreements, oral or written, between the parties. -49- 50 IN WITNESS WHEREOF, the parties hereto, being the sole current Members of the Company, have executed and delivered this Amended and Restated Limited Liability Company Agreement as of the day and year first-above written. CAREY MANAGEMENT LLC By: --------------------------------------- Name: ---------------------------------- Title: --------------------------------- CAREY PROPERTY ADVISORS LP By: Carey Fiduciary Advisors, Inc., its General Partner By: --------------------------------------- Name: ---------------------------------- Title: --------------------------------- All Persons becoming Shareholders in accordance with Section 2.8: By: Carey Management LLC By: ------------------------------------ Name: ------------------------------- Title: ------------------------------ -50- EX-3.2 21 BYLAWS OF CAREY DIVERSIFIED LLC 1 Exhibit 3.2 BYLAWS OF CAREY DIVERSIFIED LLC (a Delaware limited liability company) All capitalized words and terms used in these Bylaws and not defined herein shall have the respective meanings ascribed to them in the Amended and Restated Limited Liability Company Agreement of Carey Diversified LLC (the "Company"), as amended (the "Limited Liability Company Agreement"). These Bylaws shall be deemed an amendment and supplement to and part of the Limited Liability Company Agreement. ARTICLE I Offices and Fiscal Year 1.1 Registered Office. The registered office of the Company shall be in the City of Wilmington, County of New Castle, State of Delaware until a change in such office is established by resolution of the Board of Directors and a statement of such change is filed in the manner provided by applicable law. 1.2 Other Offices. The Company may also have offices and keep its books, documents and records at such other places within or without the State of Delaware as the Board of Directors may from time to time determine or the business of the Company may require. 1.3 Fiscal Year. The fiscal year of the Company shall end on the last day of December in each year or on such other date as the Board of Directors may designate by resolution. ARTICLE II Meetings of Shareholders 2.1 Annual and Special Meetings. (a) The annual meeting of Shareholders of the Company entitled to vote thereon for the election of the appropriate class and number of Directors, pursuant to the terms of the Limited Liability Company Agreement, and for the transaction of such other business as properly may come before such meeting, shall be held at such place, either within or without the State of Delaware, and at such time and on such date as shall be fixed from time to time by resolution of the Board of Directors and set forth in the notice or waiver of notice of the meeting. 2 (b) A special meeting of the Shareholders of the Company may be called by the Board of Directors or upon receipt by the Company of a written request for a special meeting, setting forth the purpose or purposes for which such meeting is called, signed by the holders of at least 10% of the outstanding Shares. 2.2 Notice of Meetings; Waiver. (a) Subject to the provisions of Article 13 of the Limited Liability Company Agreement, the Secretary or any Assistant Secretary shall cause written, telephonic or telecopied notice of the place, date, and hour of each meeting of Shareholders, and, in the case of a special meeting, the purpose or purposes for which such meeting is called, to be given personally or by telephone, facsimile, other electronic transmission, or mail, not less than ten nor more than 60 days prior to the meeting, to each Shareholder entitled to vote at such meeting. If such notice is mailed, it shall be deemed to have been given to a Shareholder when deposited in the United States mail, postage prepaid, directed to the Shareholder at his, her, or its address as it appears on the record of Shareholders of the Company, or, if he, she or it shall have duly filed with the Secretary of the Company a written request that notices to him, her, or it be mailed to some other address, then directed to such other address. Such further notice shall be given as may be required by law. (b) No notice of any meeting of Shareholders need be given to any Shareholder who submits a signed waiver of notice, whether before or after the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of Shareholders need be specified in a written waiver of notice. The attendance of any Shareholder at a meeting of Shareholders shall constitute a waiver of notice of such meeting, except when the Shareholder attends a meeting for the sole and express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting is not lawfully called or convened. 2.4 Quorum. The required number of Shareholders to be present at any meeting of Shareholders so to constitute a quorum thereat shall be as set forth in the Limited Liability Company Agreement. 2.5 Voting. Shareholders shall be entitled to vote on such actions as are specified in the Limited Liability Company Agreement, and the required vote of Shareholders to approve any such actions shall be as is set forth in the Limited Liability Company Agreement. 2.6 Adjournment. If a quorum is not present at any meeting of Shareholders, the Shareholders present in person or by proxy shall have the power to adjourn any such meeting from time to time until a quorum is present. Notice of any adjourned meeting of Shareholders of the Company need not be given if the -2- 3 place, date, and hour thereof are announced at the meeting at which the adjournment is taken; provided, that if the adjournment is for more than 30 days, a notice of the adjourned meeting, conforming to the requirements of Section 2.3 hereof, shall be given to each Shareholder entitled to vote at such meeting. At any adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted on the original date of the meeting. 2.7 Proxies (a) Any Shareholder entitled to vote at a meeting of Shareholders or to express consent to or dissent from action without a meeting may, by a written instrument signed by such Shareholder or his, her or its attorney-in-fact, authorize another Person to vote at any such meeting and express such consent or dissent for him, her or it by proxy. Execution may be accomplished by the Shareholder or his, her or its authorized officer, director, employee or agent signing such writing or causing his, her or its signature to be affixed to such writing by any reasonable means including, but not limited to, facsimile signature. A Shareholder may authorize another Person to act for him, her or it as proxy by transmitting or authorizing the transmission of a telegram, facsimile or other means of electronic transmission to the Person who will be the holder of the proxy; provided, that any such telegram, facsimile or other means of electronic transmission must either set forth or be submitted with information from which it can be determined that the telegram, facsimile or other electronic transmission was authorized by the Shareholder. (b) No such proxy shall be voted or acted upon after the expiration of three years from the date of such proxy, unless such proxy provides for a longer period. Every proxy shall be revocable at the pleasure of the Shareholder executing it, except in those cases where applicable law provides that a proxy shall be irrevocable. A Shareholder may revoke any proxy that is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or by filing another duly executed proxy bearing a later date with the Secretary. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. -3- 4 2.8 Organization; Procedure. At every meeting of Shareholders, the presiding officer shall be the Chairman of the Board or, in the event of his or her absence or disability, the President or, in the event of his or her absence or disability, a presiding officer chosen by the Board of Directors prior to or at such meeting. The Secretary, any Assistant Secretary, or any appointee of the presiding officer shall act as secretary of the meeting. The order of business and all other matters of procedure at every meeting of Shareholders may be determined by such presiding officer. 2.9 Inspectors. The presiding officer of the meeting of Shareholders shall appoint one or more inspectors to act at any meeting of Shareholders. Such inspectors shall perform such duties as shall be specified by the presiding officer of the meeting. Inspectors need not be Shareholders. No Director or nominee for the office of Director shall be appointed to be such inspector. -4- 5 2.10 Consent of Shareholders in Lieu of Meeting. (a) To the fullest extent permitted by the Delaware Limited Liability Company Act, DEL. CODE ANN. tit. 6, ch. 18, as amended from time to time (the "Act"), but subject to the terms of the Limited Liability Company Agreement (which limit, define or modify such rights in certain circumstances), whenever the vote of Shareholders at a meeting is required or permitted to be taken for or in connection with any action, such action may be taken without a meeting, without prior notice, and without a vote of Shareholders, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of such percentage of the Shares entitled to vote as would be necessary under the terms of the Limited Liability Company Agreement to authorize or take such action and shall be delivered to the Company by delivery to its registered office in the State of Delaware, its principal place of business, or a Director, officer, or agent of the Company having custody of the books in which proceedings of meetings of Shareholders are recorded. (b) Prompt written or telephonic notice of the taking of any action without a meeting by less than unanimous written consent of the Shareholders entitled to vote shall be given to those Shareholders (entitled to vote thereon) who have not consented in writing. 2.11 Action by Telephonic Communications. Shareholders may participate in a meeting of Shareholders by means of conference telephone or similar communications equipment by means of which all Persons participating in the meeting can hear each other, and participation in a meeting pursuant to this provision shall constitute presence in person at such meeting. -5- 6 2.12 Shareholder Proposals. For any Shareholder proposal to be presented in connection with an annual meeting of Shareholders of the Company, as permitted by these Bylaws or required by applicable law, including any proposal relating to the nomination of a person to be elected to the Board of Directors of the Company, the Shareholders must have given timely notice thereof in writing to the Secretary of the Company. To be timely, a Shareholder's notice shall be delivered to the Secretary at the principal business offices of the Company not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the Shareholder to be timely must be so delivered not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. Such Shareholder's notice shall set forth (a) as to each person whom the Shareholder proposes to nominate for election or reelection as a Director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); (b) as to any other business that the Shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such Shareholder and of the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the Shareholder giving the notice and the beneficial owner , if any, on whose behalf the nomination or proposal is made, (i) the name and address of such Shareholder, as they may appear on the Company's books, and of such beneficial owner and (ii) the class and number of Shares of the Company which are owned beneficially and of record by such Shareholder and such beneficial owner. ARTICLE III Board of Directors 3.1 General Powers. Except as may otherwise be provided by the Act or by the terms of the Limited Liability Company Agreement, the property, affairs and business of the Company shall be managed by or under the direction of the Board of Directors, and the Board of Directors may exercise all the powers of the Company as set forth in the Limited Liability Company Agreement. The Directors shall act only as a Board or by designated committees, and the individual Directors shall have no power as such. -6- 7 3.2 Number and Term of Office. The number and classes of Directors constituting the entire Board of Directors shall be as provided by the terms of the Limited Liability Company Agreement. Each Director (whenever elected) shall, subject to the terms of the Limited Liability Company Agreement, hold office until his or her earlier death, resignation, or removal. A Director shall not be required to be a Shareholder or a resident of the State of Delaware. 3.3 Election of Directors. Except as provided in Section 3.12 hereof, or as otherwise provided in the Limited Liability Company Agreement, the appropriate class and number of Directors shall be elected at each annual meeting of Shareholders. At each meeting of Shareholders for the election of Directors, provided a quorum is present, the appropriate class and number of Directors to be elected thereat shall be elected by the vote of Shareholders (entitled to vote thereon) set forth in the Limited Liability Company Agreement. The Limited Liability Company Agreement shall govern the election of specific classes of Directors. 3.4 Annual and Regular Meetings. The annual meeting of the Board of Directors for the purpose of electing officers and for the transaction of such other business as may come before the meeting shall be held as soon as possible following adjournment of the annual meeting of Shareholders at the place of such annual meeting of Shareholders or at such other place as the Board of Directors may determine. Notice of such annual meeting of the Board of Directors need not be given. The Board of Directors from time to time may by resolution provide for the holding of regular meetings and fix the place (which may be within or without the State of Delaware) and the date and hour of such meeting. Notice of regular meetings need not be given; provided, that if the Board of Directors shall fix or change the time or place of any regular meeting, notice of such action shall be mailed, given by telephone, hand delivered or sent by facsimile promptly, to each Director who shall not have been present at the time of the meeting at which such action was taken. Notice of such action need not be given to any Director who attends the first regular meeting after such action is taken without protesting the lack of notice to him or her, prior to or at the commencement of such meeting, or to any Director who submits a signed waiver of notice, whether before or after such meeting. 3.5 Special Meetings; Notice. Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board, by the President or by a majority of the members of the Board of Directors, at such place (within or without the State of Delaware), date and hour as may be specified in the respective notices or waivers of notice of such meetings. Special meetings of the Board of Directors may be called on 24 hours' notice, if notice is given to each Director personally or by telephone or facsimile, or on three days' notice, if notice is -7- 8 mailed to each Director. Unless otherwise indicated in the notice thereof, and subject to the terms of Limited Liability Company Agreement, any and all business may be transacted at any special meeting of the Board of Directors. Notice of any special meeting need not be given to any Director who attends such meeting without protesting the lack of notice to him or her, prior to or at the commencement of such meeting, or to any Director who submits a signed waiver of notice, whether before or after such meeting. 3.6. Quorum; Voting. Subject to the terms of the Limited Liability Company Agreement and these Bylaws with respect to matters on which action may be taken without the presence of a quorum, at all meetings of the Board of Directors, the presence of a majority of the total authorized number of members of the Board shall constitute a quorum for the transaction of business. Except as otherwise required by law, and subject to the terms of the Limited Liability Company Agreement and these Bylaws (with respect to the required vote of disinterested Directors on certain specified matters or otherwise), the vote of a majority of the Directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. 3.7 Adjournment. A majority of the Directors present, whether or not a quorum is present, may adjourn any meeting of the Board of Directors to another time or place. No notice need be given of any adjourned meeting unless the time and place of the adjourned meeting are not announced at the time of adjournment, in which case notice conforming to the requirements of Section 3.5 hereof shall be given to each Director. 3.8 Action Without a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if all members of the Board of Directors consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board of Directors. 3.9 Regulations; Manner of Acting. To the extent consistent with applicable law and the terms of the Limited Liability Company Agreement, the Board of Directors may adopt such rules and regulations for the conduct of meetings of the Board of Directors and for the management of the property, affairs and business of the Company as the Board of Directors may deem appropriate. 3.10 Action by Telephonic Communications. Members of the Board of Directors may participate in a meeting of the Board of Directors by means of conference telephone or similar communications equipment by means of which all Persons participating in the meeting can hear each other, and participation in a meeting pursuant to this provision shall constitute presence in person at such meeting. -8- 9 3.11 Resignations; Removal. Subject to the terms of the Limited Liability Company Agreement, a Director may resign at any time upon 60 days' prior written notice to the Company. A Director may be removed, with or without cause at any time pursuant to the terms of the Limited Liability Company Agreement. 3.12 Vacancies and Newly Created Directorships. Subject to the terms of the Limited Liability Company Agreement, if any vacancies shall occur in the Board of Directors, by reason of death, resignation, removal or otherwise, or if the authorized number of Directors shall be increased by the Board of Directors, the Directors then in office shall continue to act, and such vacancies and newly created directorships may be filled by a majority of the Directors then in office, although less than a quorum. A Director elected to fill a vacancy or a newly created position on the Board shall hold office until his or her successor has been elected and qualified or until his or her earlier death, resignation or removal. Any such vacancy or newly created position on the Board of Directors also may be filled at any time by vote of Shareholders pursuant to the terms of the Limited Liability Company Agreement and Section 3.3 hereof. In the event that a vacancy on the Board of Directors is filled pursuant to the terms of this Section 3.12, any such replacement shall assume the term of his/her predecessor. 3.13 Books and Records. (a) The Board of Directors shall cause to be kept complete and accurate books and records of account of the Company. The books of the Company (other than books required to maintain Capital Accounts) shall be kept on a basis that permits the preparation of financial statements in accordance with generally accepted accounting principles, and shall be made available to the Board of Directors for review from time to time, at the principal business office of the Company, for a purpose reasonably related to a Director's position as a "manager" (within the meaning of the Act) of the Company. (b) In addition to the foregoing, and for purposes of fully complying with the Act so to allow Shareholders access to certain information relating to the Company (for any purpose reasonably related to the requesting Shareholder's interest as a Shareholder of the Company), the Company shall maintain at its principal business office the following information: (i) a current list of the full name and last known business or mailing address of each Shareholder and Director, set forth in alphabetical order, (ii) a copy of the Certificate, the Limited Liability Company Agreement and Bylaws including all amendments thereto, and executed copies of all powers of attorney pursuant to which the Limited Liability Company Agreement or any amendment thereto has been executed, (iii) copies of the Company's federal, state and local income tax returns and reports, for each fiscal year of the Company, (iv) copies of any financial statements of the Company for the three most recent years (or for such number of years as shall be necessary to afford a Shareholder full information regarding the financial condition of the Company), -9- 10 (v) true and full information regarding the status of the business of the Company, (vi) true and full information regarding the amount of cash and a description and statement of the agreed value of any other property or services contributed by each Shareholder and which each Shareholder has agreed to contribute in the future, and the date on which each became a Shareholder, and (vii) all other records and information required to be maintained pursuant to the Act. A Shareholder desiring to review any of the foregoing information must, prior to being given access to such information, make a written request on the Board of Directors or President of the Company for permission to review such information. The Shareholders' rights to obtain any of the foregoing information shall be subject to such reasonable standards (including standards governing what information and documents are to be furnished at what time and location and at whose expense) as shall be established by the Board of Directors from time to time. (c) Notwithstanding anything contained in the foregoing to the contrary, but subject to the provisions of the Act, the Board of Directors each has the right to keep confidential from the Shareholders, for such period of time as the Board of Directors or President deems reasonable, any information which the Board of Directors or President reasonably believes to be in the nature of trade secrets or other information the disclosure of which the Board of Directors or President in good faith believes is not in the best interest of the Company or could damage the Company or its business or which the Company is required by law or by agreement with a third party to keep confidential. 3.14 Reports. Forthwith upon request, the Board of Directors shall, at the cost and expense of the Company, cause the officers of the Company to furnish to each Director such information bearing on the financial condition and operations of the Company as any such Director may from time to time reasonably request for a purpose reasonably related to a Director's position as a "manager" (within the meaning of the Act) of the Company, provided however, that such Director shall hold and maintain all such information in confidence unless otherwise approved in advance by the Board of Directors. 3.15 Compensation to Directors. Compensation for any Director shall be determined by the affirmative vote of a majority of the Directors. Upon submission of appropriate documentation, the Company shall reimburse Directors for all reasonable costs and expenses incurred by each Director in the performance of his/her duties as a Director of the Company. 3.16 Reserves. The Board of Directors may from time to time in its discretion establish reasonable cash reserves. -10- 11 3.17 Committees of the Board of Directors. The Board of Directors may, from time to time, establish committees of the Board of Directors to exercise such powers and authorities of the Board of Directors and to perform such other functions, as the Board of Directors may from time to time determine by resolution. Such committees shall initially include the Executive Committee and the Audit Committee. Such committees shall be composed of two or more Directors, and , in the case of the Audit Committee, such Directors shall be Independent Directors. The Chairman of the Board shall appoint the chairman of each such committee, and the Board of Directors shall appoint the remaining members of the committee. ARTICLE IV Officers 4.1 Number. The officers of the Company shall consist of a Chairman of the Board, a President, one or more Vice-Presidents, a Secretary , and, if deemed necessary, expedient, or desirable by the Board of Directors, one or more Assistant Secretaries, one or more Assistant Financial Officers, and such other officers with such titles as the resolution of the Board of Directors choosing them shall designate. 4.2 Election. Unless otherwise determined by the Board of Directors, officers of the Company shall be elected by the Board of Directors at the annual meeting of the Board of Directors, and shall be elected to hold office until the next succeeding annual meeting of the Board of Directors. In the event of the failure to elect officers at such annual meeting, officers may be elected at any regular or special meeting of the Board of Directors. Each officer shall hold office until his or her successor has been elected and qualified, or until his or her earlier death, resignation or removal. 4.3 Salaries. The salaries of all officers, employees and other agents of the Company shall be fixed by the Board of Directors, or by the officer or officers designated by the Board of Directors to establish such salaries. 4.4 Resignation, Vacancies and Removal. Subject to any employment contractual arrangements that may be in place with the Company, any officer may resign at any time by giving written notice of resignation, signed by such officer, to the Board of Directors, at the Company's principal office. Unless otherwise specified therein, such resignation shall take effect upon delivery. Any vacancy occurring in any office of the Company by death, resignation, removal or otherwise, shall, subject to the terms of the Limited Liability Company Agreement, be filled by the Board of Directors. Subject to any employment contractual arrangements that may be in place with the Company, all officers, agents and employees of the Company shall be subject to removal with or without cause at any time by the -11- 12 affirmative vote of a majority of all members of the Board of Directors then in office. 4.5 Authority and Duties of Officers. The officers of the Company shall have such authority and shall exercise such powers and perform such duties as may be specified in the Limited Liability Company Agreement, in these Bylaws or from time to time by the Board of Directors, except that in any event each officer shall exercise such powers and perform such duties as may be required by law. The express powers and duties set forth below for each officer shall not restrict nor be in limitation of any powers or duties that may be delegated to any such officer by the Board of Directors or the President. 4.6 The Chairman of the Board. The Chairman of the Board shall be the chief executive officer of the Company and shall preside at all meetings of the Shareholders and of the Board of Directors at which he or she is present. The Chairman of the Board (a) shall perform all of the duties usually incident to such office (analogizing to the office of chairman of the board of directors of a Delaware corporation), subject to the direction of the Board of Directors and (b) shall perform such other duties as may from time to time be assigned by the Board of Directors to the Chairman of the Board. 4.7 The President. The President shall be the chief operating officer of the Company, shall have general control and supervision of the policies and operations of the Company, and shall see that all orders and resolutions of the Board of Directors are carried into effect. He or she shall manage and administer the Company's business and affairs. In the event of the absence or disability of the Chairman of the Board, the President shall preside at all meetings of the Shareholders and of the Directors at which he or she is present. He or she shall have the authority to sign, in the name and on behalf of the Company, checks, orders, contracts, leases, notes, drafts and other documents and instruments in connection with the business of the Company, and together with the Secretary or an Assistant Secretary, conveyances of real estate and other documents and instruments to which the seal of the Company, if any, is affixed, subject to any requirements for prior approval of the Board of Directors and/or the Shareholders contained in the Act or in the Limited Liability Company Agreement. He or she shall have the authority to cause the employment or appointment of such employees and agents of the Company as the conduct of the business of the Company may require, and to remove or suspend any employee or agent elected or appointed by him or her. The President shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. 4.8 The Vice President. If one or more Vice-Presidents is elected, he/they shall perform the duties of the President in his absence (in their order of rank) and such other -12- 13 duties as may from time to time be assigned to them by the Board of Directors or the President. 4.9 The Secretary. The Secretary shall have the following powers and duties: (a) keep or cause to be kept a record of all the proceedings of the meetings of Shareholders and of the Board of Directors in books provided for that purpose; (b) cause all notices to be duly given in accordance with the provisions of these Bylaws and as required by law; (c) be the custodian of the records of the Company; (d) properly maintain and file all books, reports, statements, certificates and all other documents and records required by law, the terms of the Limited Liability Company Agreement or these Bylaws; (e) have charge of the books and ledgers of the Company and cause the books to be kept in such manner as to show at any time the Shares of all Shareholders, the names (alphabetically arranged) and the addresses of the Shareholders, the Shares held by such Shareholders, and the date as of which each became a Shareholder; (f) sign (unless the Chief Financial Officer, an Assistant Financial Officer or Assistant Secretary shall have signed) certificates (if any) representing Shares, the issuance of which shall have been authorized by the Limited Liability Company Agreement; and (g) perform, in general, all duties incident to the office of Secretary (analogizing to the office of secretary of a Delaware corporation) and such other duties as may be assigned to him or her from time to time by the Board of Directors or the President. 4.11 Additional Officers. The Board of Directors may appoint such other officers and agents as it may deem appropriate, and such other officers and agents shall hold their offices for such terms and shall exercise such powers and perform such duties as may be determined from time to time by the Board of Directors. The Board of Directors from time to time may delegate to any officer or agent the power to appoint subordinate officers or agents and to prescribe their respective rights, terms of office, authorities and duties. Any such officer or agent may remove any such subordinate officer or agent appointed by him or her, for or without cause. 4.12 Failure to Elect. A failure to elect officers shall not dissolve or otherwise affect the Company. ARTICLE V Notice; Waivers of Notice 5.1 Notice, What Constitutes. Except as otherwise provided by applicable law, any provision of the Limited Liability Company Agreement or these Bylaws which requires notice to be given to any Director or Shareholder of the Company shall not be deemed or construed to require personal notice (unless otherwise expressly provided therein), such notice may be given in writing and delivered by telecopy, first or second class mail -13- 14 or Federal Express or similar expedited commercial carrier, addressed to such Director or Shareholder at his address as it appears on the records of the Company, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same is received or deposited in the U.S. mail or with Federal Express or similar expedited commercial carrier or at the time it is telecopied. Whenever any notice is required to be given by the terms of the Limited Liability Company Agreement or these Bylaws to any Shareholder, to whom (a) notice of two consecutive annual meetings, and all notices of meetings or of the taking of action by written consent without a meeting to such Shareholder during the period between such two consecutive annual meetings, or (b) all, and at least two, distributions (if sent by first class mail, Federal Express or similar expedited commercial carrier) during a twelve-month period, have been mailed addressed to such Shareholder at his address as shown on the records of the Company and have been returned undeliverable, the giving of such notice to such Shareholder shall not thereafter be required. Any action or meeting which shall be taken or held without notice to such Shareholder shall have the same force and effect as if such notice had been duly given. If any such Shareholder shall deliver to the Company a written notice setting forth his then current address, the requirement that notice be given to such Shareholder shall be reinstated. 5.2. Waivers of Notice. Except as otherwise provided by the terms of these Bylaws, whenever any notice is required to be given under the terms of the Limited Liability Company Agreement or these Bylaws, a written waiver thereof, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Except as otherwise provided by applicable law, the terms of the Limited Liability Company Agreement or these Bylaws, neither the business to be transacted at, nor the purpose of, any regular or special meeting of Shareholders, Directors or members of a committee of Directors need be specified in any written waiver of notice of such meeting. ARTICLE VI Certificates of Shares, Transfer, etc. 6.1 Issuance. Each Shareholder shall be entitled to a certificate or certificates for Shares of the Company owned by him, her or it. The Share certificates of the Company shall be registered in the Share ledger and transfer books of the Company as they are issued. They shall be signed by (i) the Chairman of the Board, the President or a Vice-President, and (ii) the Secretary or an Assistant Secretary, if any, or by the Chief Financial Officer or an Assistant Financial Officer, if -14- 15 any; and shall bear the Company's seal, if any, which may be a facsimile, engraved or printed. Any or all of the signatures upon such certificate may be a facsimile, engraved or printed. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon, any certificate shall have ceased to be such officer, transfer agent or registrar before the certificate is issued, it may be issued with the same effect as if he or she were such officer, transfer agent or registrar at the date of its issue. 6.2 Transfer, Legend, etc. Upon surrender to the Company or the transfer agent of the Company of a certificate for Shares duly endorsed or accompanied by proper evidence of succession, assessment or authority to transfer, the Company shall issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction upon its books. Subject to applicable law, the Board of Directors may, by resolution, (a) impose restrictions on transfer or registration of transfer of Shares of the Company, and (b) require as a condition to the issuance or transfer of such Shares that the person or persons to whom such Shares are to be issued or transferred agree in writing to such restrictions. In the event that any such restrictions on transfer or registration of transfer are so imposed, the Company shall require that such restrictions be conspicuously noted on all certificates representing such Shares. 6.3 Certificates. Certificates of the Company shall be in such forms as is required or authorized by statute and approved by the Board of Directors. The Share record books and the blank Share certificate books shall be kept by the Secretary or an Assistant Secretary, if any, or by any agent designated by the Board of Directors or Secretary for that purpose. 6.4. Lost, Stolen, Defaced, Worn Out, or Destroyed. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Company alleged to have been lost, stolen, defaced, worn out or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen, defaced, worn out or destroyed. When authorizing such issuance of a new certificate or certificates, the Company may, as a condition precedent thereto, (a) require the owner of any defaced or worn out certificate to deliver such certificate to the Company and order the cancellation of the same, and (b) require the owner of any lost, stolen, or destroyed certificate or certificates, or his, her or its legal representative, to advertise the same in such manner as the Company shall require and to give the Company a bond in such sum as it may direct as indemnity against any claim that may be made against the Company with respect to the certificate alleged to have been lost, stolen, or destroyed. Thereupon, the Company may cause to be issued to such person a new certificate in -15- 16 replacement for the certificate alleged to have been lost, stolen, defaced, worn out or destroyed. Upon the stub of every new certificate so issued shall be noted the fact of such issue and the number, date and name of the registered owner of the lost, stolen, defaced, worn out or destroyed certificate in lieu of which the new certificate is issued. Every certificate issued hereunder shall be issued without payment to the Company for such certificate; provided, that there shall be paid to the Company a sum equal to any exceptional expenses incurred by the Company in providing for or obtaining any such indemnity and security as is referred to herein. 6.5. Record Holder of Shares. Except as otherwise provided by applicable law, the terms of the Limited Liability Company Agreement, or the Bylaws, the Company (a) shall be entitled to recognize the exclusive right of a person registered on its books as the owner of Shares to receive distributions and to vote as such owner and (b) shall not be bound to recognize any equitable or other claim to or interest in such Share or Shares on the part of any other person, whether or not it shall have express or other notice thereof. The Company may treat a fiduciary as having capacity and authority to exercise all rights of ownership in respect of Shares held by such fiduciary in the name of a decedent holder, a person, firm or corporation in conservation, receivership or bankruptcy, a minor, an incompetent person, or a person under disability, as the case may be, for whom such fiduciary is acting, and the Company, its transfer agent and its registrar, if any, upon presentation of evidence of appointment of such fiduciary shall be under no duty to inquire as to the powers of such fiduciary and shall not be liable for any loss caused by any act done or omitted to be done by the Company or its transfer agent or registrar, if any, in reliance thereon. 6.6 Determination of Shareholders of Record. In order that the Company may determine the Shareholders entitled to notice of or to vote at any meeting of Shareholders or any adjournment thereof, or to express consent to the Company's actions in writing without a meeting, or entitled to exercise any rights in respect of any change, conversion or exchange of Shares, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) calendar days before the date of such meeting, nor more than sixty (60) calendar days prior to any other action. If no record date is fixed: (a) The record date for determining Shareholders entitled to notice of or to vote at a meeting of Shareholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of -16- 17 business on the day next preceding the day on which the meeting is held. (b) The record date for determining Shareholders entitled to express consent to limited liability company action in writing without a meeting, when no proper action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed. (c) The record date for determining Shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of Shareholders of record entitled to notice of or to vote at a meeting of Shareholders shall apply to any adjournment of the meeting; provided, that the Board of Directors may fix a new record date for the adjourned meeting. 6.7 Appointment of Transfer Agents, Registrars, etc. The Board of Directors may from time to time by resolution appoint (a) one or more transfer agents and registrars for the Shares of the Company, (b) a plan agent to administer any employee benefit, distribution reinvestment, or similar plan of the Company, and (c) a distribution disbursing agent to disburse any and all distributions authorized by the Board and payable with respect to the Shares of the Company. The Board of Directors shall also have authority to make such other rules and regulations, not inconsistent with applicable law, the terms of the Limited Liability Company Agreement or these Bylaws, as it seems necessary or advisable with respect to the issuance, transfer and registration of certificates for Shares and the Shares represented thereby. ARTICLE VII General Provisions 7.1. Contracts etc. Except as otherwise provided by applicable law, the terms of the Limited Liability Company Agreement or these Bylaws, the Board of Directors may authorize any officer or officers, any employee or employees, or any agent or agents, to enter into any contract or to execute, acknowledge or deliver any agreement, deed, mortgage, bond or other instrument in the name of an on behalf of the Company, and to affix the Company's seal, if any, thereon. Such authority may be general or confined to specific instances. 7.2. Checks. All checks, notes, obligations, bills of exchange, acceptances or other orders in writing shall be signed by such person or persons as the Board of Directors may from time to time designate by resolution, or by those officers -17- 18 of the Company given such express authority by the terms of these Bylaws. 7.3. Company's Seal. The Company's seal, if any such seal is approved by the Board of Directors, shall have inscribed thereon the name of the Company and the year of its formation. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. 7.4. Deposits. All funds of the Company shall be deposited from time to time to the credit of the Company in such banks, trust companies or other depositories as the Board of Directors may approve or designate, and all such funds shall be withdrawn only upon checks or other orders signed by such one or more officers, employees or agents as designated in the Limited Liability Company Agreement, in these Bylaws or from time to time by the Board of Directors. 7.5. Amendment of Bylaws. Except as otherwise provided by the terms of the Limited Liability Company Agreement, these Bylaws may be amended, modified or repealed, or new Bylaws may be adopted, by the affirmative vote of a majority of all members of the Board of Directors then in office at any regular meeting of the Board of Directors, or at any special meeting thereof, if notice of such amendment, modification, repeal, or adoption of new Bylaws is contained in the notice of such special meeting. 7.6. Limited Liability Company Agreement. In the event of a conflict between the provisions of these Bylaws and the provisions of the Limited Liability Company Agreement or of applicable law or regulation, the terms of the Limited Liability Company Agreement, such law or such regulation respectively, shall control. -18- EX-4.1 22 FORM OF LISTED SHARE STOCK CERTIFICATE 1 EXHIBIT 4.1 LISTED SHARES [PICTURE] LISTED SHARES NUMBER SHARES CD CUSIP 000000 00 0 SEE REVERSE FOR CERTAIN DEFINITIONS CD CAREY DIVERSIFIED LLC FORMED UNDER THE LAWS OF THE STATE OF DELAWARE This Certifies that is the owner of FULLY PAID AND NON-ASSESSABLE LISTED SHARES OF CERTIFICATE OF SHARES Carey Diversified LLC, (hereinafter called the "Company"), transferable on the books of the Company by the registered holder hereof in person or by duly authorized Attorney upon surrender of this Certificate Listed Shares, this Certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. In Witness Whereof, the Company has caused the facsimile signatures of its duly authorized officers and its facsimile seal to be affixed hereto. Dated: Chief Financial Officer [CAREY DIVERSIFIED COMPANY SEAL] Chairman Countersigned and Registered: ChaseMellon Shareholder Services, L.L.C. Transfer Agent and Registrar By - ------------------------------------------------- Authorized Signature 2 CAREY DIVERSIFIED LLC The Company will furnish to any shareholder on request and without charge a full statement of the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to distributions, qualifications, and terms and conditions of redemption of the shares of each class which the Company is authorized to issue, of the differences in the relative rights and preferences between the shares of each series of a preferred or special class in series which the Company is authorized to issue, to the extent they have been set, and of the authority of the Board of Directors to set the relative rights and preferences of subsequent series of a preferred or special class of shares. Such request may be made to the secretary of the Company or to its transfer agent. The registered holder's acceptance of this certificate from the Company shall be deemed to constitute (i) a direction to the Managing Member to execute the Amended and Restated Limited Liability Company Agreement of the Company, dated as of October , 1997, as amended from time to time (the "Agreement") on such Person's behalf and (ii) a request that the records of the Company reflect such Person's admission to the Company as a Shareholder, and shall cause the registered holder to become a Shareholder and to be bound by the terms and conditions of the Agreement (and to entitle the registered holder to the rights of a Shareholder thereunder). Capitalized terms used herein and not otherwise defined are used as defined in the Agreement. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT___________Custodian________ (Cust) (Minor) TEN ENT - as tenants in common under Uniform Gifts to Minors Act OT TEN - as joint tenants with right of survivorship and not as _____________________ tenants in common (State) Additional abbreviations may also be used though not in the above list. For value received, ______________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE _______________________________________________________________________________ _______________________________________________________________________________ (Please print or typewrite name and address including postal zip code of assignee) _______________________________________________________________________________ __________________________________________________________________Listed Shares represented by the within Certificate, and do hereby irrevocably constitute and appoint _______________________________________________________________________Attorney to tranfer the said shares on the books of the within-named Company with full power of substitution in the premises. Dated:_______________ Signature(s)______________________________ NOTICE: The signature(s) to this assignment must correspond with the name as written upon the face of the Certificate, in every particular, without alteration or enlargement or any change whatever. Signature Guaranteed By: _____________________________________ By THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. _______________________________________________________________________________ BANKNOTE CORP. OF AMERICA-BROWNS SUMMIT-WALL STREET-CAREY DIVERSIFIED, LLC 7100003-942 - PROOF #1 - 10/03/97 - ALW EX-5.1 23 OPINION OF DELAWARE COUNSEL 1 Exhibit 5.1 [Letterhead of Richards, Layton & Finger] October 15, 1997 Carey Diversified LLC 50 Rockefeller Plaza New York, NY 10020 Re: Carey Diversified LLC Ladies and Gentlemen: We have acted as special Delaware counsel for Carey Diversified LLC, a Delaware limited liability company (the "Company"), in connection with the matters set forth herein. At your request, this opinion is being furnished to you. For purposes of giving the opinions hereinafter set forth, our examination of documents has been limited to the examination of executed or conformed counterparts, or copies otherwise proved to our satisfaction, of the following: (a) The Certificate of Formation of the Company, dated October 14, 1996 (the "Original Certificate"), as filed in the office of the Secretary of State of the State of Delaware (the "Secretary of State") on October 15, 1996; (b) The Limited Liability Company Agreement of the Company, dated as of October 15, 1996; 2 Carey Diversified LLC October 15, 1997 Page 2 (c) The Certificate of Amendment to Certificate of Formation of the Company, dated July 15, 1997 (the "Amendment"), as filed in the office of the Secretary of State on July 15, 1997 (the Original Certificate as amended by the Amendment is hereinafter referred to as the "Certificate"); (d) The First Amendment to the Limited Liability Company Agreement of the Company, dated as of July 15, 1997; (e) The Registration Statement (the "Registration Statement") on Form S-4, including a consent solicitation statement/prospectus (the "Prospectus"), relating to up to 23,654,898 Limited Liability Company Listed Shares, each representing limited liability company interests in the Company (each, a "Share" and collectively, the "Shares"), as proposed to be filed by the Company and others as set forth therein with the Securities and Exchange Commission on October 15, 1997; (f) The Amended and Restated Limited Liability Company Agreement of the Company, dated as of October 15, 1997 (the "Agreement"); (g) The Bylaws of the Company, (the "Bylaws") (the Agreement, as amended and supplemented by the Bylaws is hereinafter referred to as the "LLC Agreement"); (h) A certificate of Carey Management LLC, a Delaware limited liability company (the "Managing Member"), dated the date hereof, as to certain matters; and (i) A Certificate of Good Standing for the Company, dated October 14, 1997, obtained from the Secretary of State. Initially capitalized terms used herein and not otherwise defined are used as defined in the LLC Agreement. For purposes of this opinion, we have not reviewed any documents other than the documents listed in paragraphs (a) through (i) above. In particular, we have not reviewed any document (other than the documents listed in paragraphs (a) through (i) above) that is referred to in or incorporated by reference into any document reviewed by us. We have assumed that there exists no provision in any document that we have not reviewed that is inconsistent with the opinions stated herein. We have 3 Carey Diversified LLC October 15, 1997 Page 3 conducted no independent factual investigation of our own but rather have relied solely upon the foregoing documents, the statements and information set forth therein and the additional matters recited or assumed herein, all of which we have assumed to be true, complete and accurate in all material respects. With respect to all documents examined by us, we have assumed that (i) all signatures on documents examined by us are genuine, (ii) all documents submitted to us as originals are authentic, and (iii) all documents submitted to us as copies conform with the original copies of those documents. For purposes of this opinion, we have assumed (i) that the LLC Agreement constitutes the entire agreement among the parties thereto with respect to the subject matter thereof, including with respect to the admission of members to, and the creation, operation, management and termination of, the Company, and that the LLC Agreement has not been amended, (ii) except to the extent provided in paragraph 1 below, the due organization or due formation, as the case may be, and valid existence in good standing of each party to the documents examined by us under the laws of the jurisdiction governing its organization or formation, (iii) the legal capacity of natural persons who are signatories to the documents examined by us, (iv) that each of the parties (other than the Company and its officers and directors) to the documents examined by us has the power and authority to execute and deliver, and to perform its obligations under, such documents, (v) the due authorization, execution and delivery by all parties thereto (other than the Company and its officers and directors) of all documents examined by us, including the LLC Agreement by the Managing Member and Carey Property Advisors LP, a Delaware limited partnership, (vi) the acceptance by each Person who acquires Shares in connection with the Consolidation (collectively, the "Shareholders") of a certificate evidencing the Shares acquired, in accordance with the LLC Agreement and the Registration Statement, (vii) that the Shares are issued and sold to the Shareholders in accordance with the LLC Agreement and the Registration Statement, and (viii) that the Shareholders will not engage in tortious or wrongful conduct and will fulfill all of their obligations as set forth in the LLC Agreement. We have not participated in the preparation of the Registration Statement and assume no responsibility for its contents. This opinion is limited to the laws of the State of Delaware (excluding the securities laws of the State of Delaware), and we have not considered and express no opinion on the laws of any other jurisdiction, including federal laws and rules and regulations relating thereto. Our opinions are rendered only with respect to Delaware laws and rules, regulations and orders thereunder which are currently in effect. 4 Carey Diversified LLC October 15, 1997 Page 4 Based upon the foregoing, and upon our examination of such questions of law and statutes of the State of Delaware as we have considered necessary or appropriate, and subject to the assumptions, qualifications, limitations and exceptions set forth herein, we are of the opinion that: 1. The Company has been duly formed and is validly existing in good standing as a limited liability company under the Act. 2. the Shares to be issued to the Shareholders will be validly issued and, subject to the qualifications set forth in paragraph 3 below, fully paid and nonassessable limited liability company interests in the Company. 3. The Shareholders shall not be obligated personally for any of the debts, obligations or liabilities of the Company, whether arising in contract, tort or otherwise, solely by reason of being a member of the Company, except as a Shareholder may be obligated to repay any funds wrongfully distributed to it. We consent to the filing of this opinion with the Securities and Exchange Commission as an exhibit to the Registration Statement. In addition, we hereby consent to the use of our name under the heading "Legal Matters" in the Prospectus. In giving the foregoing consents, we do not thereby admit that we come within the category of Persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission thereunder. Very truly yours, /s/ Richards, Layton & Finger PMA/GWL/jj EX-8.1 24 OPINION RE TAX MATTERS 1 [REED SMITH SHAW & MCCLAY LETTERHEAD] October 10, 1997 Exhibit 8.1 Carey Diversified LLC 50 Rockefeller Plaza New York, New York 10020 Gentlemen: You have requested our opinions with respect to certain Federal income tax matters in connection with the consolidation by merger (the "Consolidation") of nine public limited partnerships in the Corporate Property Associates series of limited partnerships as more fully described in the Registration Statement on Form S-4, Registration No. 333-________ (the "Registration Statement"), and the Prospectus included therein filed by Carey Diversified Properties LLC (the "Company" or "LLC") with the Securities and Exchange Commission. All terms used herein have the respective meanings set forth in the Prospectus. We have acted as counsel to the Company and the Partnerships with respect to the Consolidation. This letter is for delivery in connection with the proposed Consolidation as described in the Prospectus and is intended to confirm as of the date hereof certain opinions described in the "Income Tax Consequences" section of the Prospectus. This letter and the opinions expressed or confirmed herein are for delivery to the Company and the Partnerships and may be relied upon only by those investors who own or acquire partnership Units on or before the Consolidation described in the Registration Statement. In rendering or confirming the opinions stated below and referred to in the Prospectus, we have examined and relied upon the following: 1. Forms of Amended and Restated Agreements of Limited Partnership for the Partnerships; 2. Amended and Restated Limited Liability Company Agreement of Carey Diversified Properties LLC (hereinafter the "Operating Agreement"); 3. Form of Certificate of Merger of the Partnerships; 2 [REED SMITH SHAW & MCCLAY LETTERHEAD] Carey Diversified LLC October 10, 1997 Page 2 4. Form of Bylaws of Carey Diversified Properties LLC; 5. The Prospectus and the Registration Statement; 6. Combined Balance Sheets of the Partnerships as of December 31, 1995 and 1996, and for the three months ended June 30, 1997 (Unaudited), and related notes thereto, prepared by Coopers & Lybrand, LLP, Certified Public Accountants; 7. Combined Statements of Cash Flows of the Partnerships for the years ended December 31, 1994, 1995 and 1996 and for the three months ended June 30, 1996 and 1997 (Unaudited), and related notes thereto, prepared by Coopers & Lybrand, LLP, Certified Public Accountants; 8. Combined Statements of Partners' Capital of the Partnerships for the years ended December 31, 1994, 1995 and 1996 and for the three months ended June 30, 1997 (Unaudited), and related notes thereto, prepared by Coopers & Lybrand, LLP, Certified Public Accountants; 9. Balance Sheet of the Company as of August 31, 1997 (Audited), prepared by Coopers & Lybrand, LLP, Certified Public Accountants; 10. Such other documents, records and instruments as we have deemed necessary in order to permit us to render and confirm the opinions referred to herein. In our examination, in those cases in which we have not been involved directly in the preparation, execution or the filing of a document, we have assumed that (i) the document reviewed by us is an original document, or a true and accurate copy of the original document, and has not been subsequently amended, (ii) the signatures on each original document are genuine, and (iii) each party who executed the document had proper authority and capacity. For purposes of rendering and confirming the opinions stated below and referred to in the Prospectus, we have assumed and have relied on the following: (a) The truth and accuracy of the statements contained in the Prospectus; (b) The truth and accuracy of the Balance Sheets and related Notes thereto of the Partnerships and the Company as of the date thereof, and their preparation in accordance with 3 REED SMITH SHAW & MCCLAY Carey Diversified LLC October 10, 1997 Page 3 generally accepted accounting principles and the applicable standards of the American Institute of Certified Public Accountants, respectively; and (c) The representations, views and beliefs of the General Partners referred to in the "Income Tax Consequences" section and elsewhere in the Prospectus are true, correct and accurate. With respect to opinion (1) rendered below, we have additionally assumed and have relied on the following: (a) That the Partnerships have been organized and have been and will be operated at all times during their existence in accordance with the provisions of the Partnership Agreements, the description of their organization and operation contained in the Prospectus, and all applicable state statutes pertaining to limited partnerships, and the Partnership Agreements will not be amended or modified in any manner which would adversely affect the classification of the Partnerships as a partnership for Federal income tax purposes; (b) That the Company will be organized and operated at all times during its existence in accordance with the provisions of the Operating Agreement, the description of its organization and operation contained in the Prospectus, and all applicable state statutes pertaining to Limited Liability Companies, and the Operating Agreement will not be amended or modified in any manner which would adversely affect the classification of the Company as a partnership for Federal income tax purposes; and (c) That the Company will satisfy the gross income requirements of Code Section 7704(c)(2). Our opinions stated below and confirming those referred to in the Prospectus are based upon the California Revised Limited Partnership Act, the Delaware Limited Liability Company Act, the Delaware Revised Uniform Limited Partnership Act, the Code, final and proposed Treasury Regulations, legislative history, published administrative positions of the IRS and court decisions, all as of the date of this letter. We can furnish no assurance that changes in the relevant statutes, regulations, administrative positions or court decisions will not be made in the future which would modify or supersede our opinions. Additionally, our opinions are not binding on the IRS or the courts and there can be no assurance that the IRS will not 4 REED SMITH SHAW & MCCLAY Carey Diversified LLC October 10, 1997 Page 4 assert positions contrary to our opinions or that a court considering the issues would not agree with the IRS. Our opinions represent our conclusions based upon the documents, facts and assumptions referred to above, any modifications to or changes of which might affect our opinions. Although we have made such inquiries and performed such investigation as we have deemed necessary to fulfill our professional responsibilities as counsel, we have not attempted to verify independently each of the facts and assumptions referred to above. On the other hand, nothing has come to our attention which would cause us to question such facts and assumptions. In rendering our opinions stated below and confirming those referred to in the Prospectus, we have considered the relevant professional standards, including those expressed in American Bar Association Formal Opinion 346 (Revised), January 29, 1982, and have considered all material tax issues which have a reasonable probability of being challenged by the IRS. Furthermore, although we believe that the Prospectus contains full and fair disclosure of such material tax issues, we can provide no assurance that the IRS will not challenge the Federal income tax positions taken by the Company, the Partnership or the Partners on grounds not disclosed in the Prospectus. Finally, we express no opinion on any Federal income tax matter or other matter except those set forth or confirmed below. Specifically, for the reasons set forth in the Prospectus, it is not possible for us to reach a conclusion as to the likely outcome (either favorable or unfavorable) of certain Federal income tax matters, including but not limited to: (1) whether the sale or disposition of any asset of the Partnership might, at that time, be treated as being to a customer of the Partnership and in the ordinary course of the Partnership's trade or business, thereby resulting in the entire gain recognized upon such sale or disposition being treated as ordinary income rather than capital gain; (2) whether the Partnership's allocation of basis between land and depreciable improvements will be respected for purposes of computing depreciation or cost recovery (ACRS) deductions and whether the Partnership's allocation between real estate assets and stock or warrants will be respected; (3) whether expenses incurred by the Partnership prior to the time it was or is engaged in an active trade or business will be deductible or required to be capitalized, and if the latter, whether amortizable; and (4) whether the Company's or the Partnerships' allocations of tax items have substantial economic effect. Based upon and subject to the foregoing: 5 REED SMITH SHAW & McCLAY Carey Diversified LLC October 10, 1997 Page 5 1. We are of the opinion that the Company and the Partnerships will be classified as partnerships and not as associations taxable as corporations for Federal income tax purposes. 2. No Partnership will be treated as a corporation for Federal income tax purposes pursuant to Section 7704 of the Code if, in each of its taxable years, either it is not a "publicly traded partnership", as that term is defined in Section 7704(b) of the Code, or 90% or more of the Partnership's gross income consists of "qualifying income", as defined in Section 7704(d) of the Code. 3. The Company will not be treated as a corporation for Federal income tax purposes pursuant to Section 7704 of the Code if, in each of its taxable years, 90% or more of the Company's gross income consists of "qualifying income," as defined in Section 7704(d) of the Code. 4. Unitholders who become Shareholders will not recognize gain or loss as a consequence of the Consolidation, except to the extent by which (a) the excess of (i) a Unitholder's share of his Participating Partnership's liabilities immediately before the Consolidation over (ii) that Unitholder's share of the liabilities of the Company immediately after the Consolidation exceeds (b) the Unitholder's basis in his Partnership interest immediately before the Consolidation. 5. Subsidiary Partnership Unitholders will not recognize gain or loss as a consequence of the Consolidation, except to the extent by which (a) the excess of (i) a Subsidiary Partnership Unitholder's share of his Participating Partnership's liabilities immediately before the Consolidation over (ii) that Subsidiary Partnership Unitholder's share of the liabilities of his Participating Partnership immediately after the Consolidation exceeds (b) the Subsidiary Partnership Unitholder's basis for his Partnership interest immediately before the Consolidation. 6. We are of the opinion that the "Income Tax Consequences" section of the Prospectus accurately reflects the material Federal income tax considerations of the Consolidation and of investing in Shares and that, in the aggregate, the remaining Federal income tax consequences of owning Shares in the Company referred to in the Prospectus will occur or be realized by the Shareholders. 6 [REED SMITH SHAW & MCCLAY LETTERHEAD] Carey Diversified LLC October 10, 1997 Page 6 7. We hereby confirm that each of the statements in the Prospectus in which it is stated that counsel has advised the Company or Partnerships of an opinion as to the probable outcome of an issue if the issue were fully litigated in court accurately reflects our current opinion as to such issue. We hereby consent to the use of this letter as an exhibit to the Registration Statement and to the reference of this firm in the Prospectus in "Legal Matters." Very truly yours, /s/ Reed Smith Shaw & McClay REED SMITH SHAW & McCLAY WLK/dz EX-8.2 25 OPINION RE ERISA MATTERS 1 Exhibit 8.2 [REED SMITH SHAW & MCCLAY LLP LETTERHEAD] October 14, 1997 Carey Diversified Properties LLC 50 Rockefeller Plaza New York, New York 10020 Re: Carey Diversified LLC Gentlemen: Carey Diversified LLC (the "Company") is a Delaware limited liability company. In connection with a proposed consolidation by merger, the Company intends to offer up to 23,654,898 of its Listed Shares (the "Listed Shares"). The Company has requested our opinion as to whether pursuant to the Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. Sections 1001-1461 ("ERISA"), the assets of the Company would be treated as the assets of an employee benefit plan by virtue of that plan's purchase of Listed Shares. In rendering our opinion, we have reviewed the draft registration statement dated October 14, 1997 (the "Registration Statement"), and the Prospectus included therein, to be filed by the Company with the Securities and Exchange Commission, the Company's Certificate of Formation and Operating Agreement, and the Company's Bylaws, each as amended (if amended). We have assumed the authenticity of the documents provided and have not attempted to verify independently any factual information. Based on and subject to the foregoing, we are of the opinion that as of the date hereof: 1) Assuming the offering takes place as described in the Prospectus with regard to the resulting public ownership and transferability of the Listed Shares, the Listed Shares should constitute "publicly-offered securities," as that term is used in a regulation promulgated by the Department of Labor (the 2 [REED SMITH SHAW & MCCLAY LLP LETTERHEAD] Carey Diversified Properties LLC October 14, 1997 Page 2 "Department") and codified at 29 C.F.R. Section 2510.3-101, and the underlying assets of the Company should not be considered to be plan assets by virtue of an employee benefit plan's purchase of Listed Shares; and 2) The discussion contained in the portion of the Registration Statement entitled "Status of the Company Under ERISA" (which is incorporated by reference into this opinion) accurately reflects the relevant state of the law affecting employee benefit plans and their fiduciaries. This opinion is based on existing law which is to a large extent the result of a regulation and administrative interpretations by the Department. No assurance can be given that administrative opinions or judicial decisions may not be forthcoming which would modify the conclusions expressed in this opinion. We consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this opinion under the caption "Status of the Company Under ERISA" therein concerning this opinion. Sincerely, REED SMITH SHAW & McCLAY EX-10.1 26 FORM OF MANAGEMENT AGREEMENT 1 Exhibit 10.1 MANAGEMENT AGREEMENT THIS MANAGEMENT AGREEMENT, dated as of _______ _, 1997 is between CAREY DIVERSIFIED LLC, a Delaware limited liability company (the "Company"), and CAREY MANAGEMENT LLC, a Delaware limited liability company (the "Manager"). W I T N E S S E T H: WHEREAS, the Company has been formed to succeed to the net lease business of the Corporate Property Associates series of limited partnerships and to expand and grow the business for the benefit of its shareholders; WHEREAS, the Company desires to avail itself of the experience, sources of information, advice and assistance of, and certain facilities available to, the Manager and to have the Manager undertake the duties and responsibilities hereinafter set forth, on behalf of, and subject to the supervision of the Board of Directors of, the Company, all as provided herein; and WHERE AS, the Manager is willing to render such services, subject to the supervision of the Board of Directors, on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. Definitions. As used in this Agreement, the following terms have the definitions hereinafter indicated: Acquisition Expenses. Those expenses of the Company related to the selection and acquisition of properties by the Company, including but not limited to legal fees and expenses, travel and communications expenses, costs of appraisals and fairness letters, nonrefundable option payments on Property not acquired, accounting fees and expenses, costs of title reports and title insurance, transfer and recording taxes and miscellaneous expenses. Affiliate. With respect to any Person, (i) any Person directly or indirectly controlling, controlled by or under common control with such Person; (ii) any Person owning or controlling 10% or more of the outstanding voting securities of such Person; (iii) any officer, director or partner of such Person or of any Person specified in (i) or (ii) above; and (iv) any entity in which any officer, director or partner of any Person specified in (iii) above is an officer, director or partner. Appraised Value. Value according to an appraisal made by an Independent Appraiser. 2 Average Market Capitalization. For the relevant period, the closing price of the Listed Shares on each trading day of the period multiplied by the total number of Listed Shares and Listed Share Equivalent Units outstanding on each trading day, adding the product for each day and dividing the sum by the number of trading days in the period; provided, however, that this definition may be adjusted to account for charges to the capital structure of the Company. For purposes of this calculation, the number of "Listed Share Equivalent Units" for each Subsidiary Partnership is equal to the product of (i) the number of Subsidiary Partnership Units outstanding for each Subsidiary Partnership and (ii) the Exchange Ratio for each Subsidiary Partnership. Board or Board of Directors. The Board of Directors of the Company. Bylaws. The Bylaws of the Company. Cash from Financings. Net cash proceeds realized by the Company from the financing of Properties or the refinancing of any Company indebtedness. Cash from Sales. Net cash proceeds realized by the Company from the sale, exchange or other disposition of any of its assets after deduction of all expenses incurred in connection therewith. Cash from Sales shall not include Cash from Financings. Cash from Sales and Financings. The total sum of Cash from Sales and Cash from Financings. Cause. With respect to the termination of this Agreement, (a) an act of fraud, embezzlement or theft constituting a felony or an act intentionally against the interests of the Company which causes it material injury, (ii) a final determination by a court of competent jurisdiction that the Manager has committed a material breach of this Agreement, (iii) a petition shall have been filed against the Manager for an involuntary proceeding under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, and such petition shall not have been dismissed within 60 days of filing; or a court having jurisdiction shall have appointed a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Manager for any substantial portion of its property, or ordered the winding up or liquidation of its affairs, or (iv) the Manager shall have commenced a voluntary proceeding under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall have made any general assignment for the benefit of creditors, or shall have failed generally to pay its debts as they become due. Change of Control. A change of control of the Company of a nature that would be required to be reported in response to the disclosure requirements of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, as enacted and in force on the date hereof, whether or not the Company is then subject to such -2- 3 reporting requirements; provided, however, that, without limitation, a Change of Control shall be deemed to have occurred if: (i) any "person", as such term is used in Sections 13(d) and 14(d) of the Act (other than the Company, any of its subsidiaries, any trustee, fiduciary or other person or entity holding securities under any employee benefit plan of the Company or any of its subsidiaries), together with all "affiliates" and "associates" (as such terms are defined in Rule 12b-2 under the Act) of such person, shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 25% or more of either (A) the combined voting power of the Company's then outstanding securities having the right to vote in an election of the Company's Board of Eligible Directors ("Voting Securities") or (B) the then outstanding shares of Listed Shares of the Company (in either such case other than as a result of acquisition of securities directly from the Company); (ii) persons who, as of the date of the closing of the Company's initial public offering, constitute the Company's Board of Eligible Directors (the "Incumbent Eligible Directors") cease for any reason, including without limitation, as a result of a tender offer, proxy contest, merger or similar transaction, to constitute at least a majority of the Board, provided that any person becoming a Eligible Director of the Company subsequent to the Closing of the Company's initial public offering whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Eligible Directors shall, for purposes of this Agreement, be considered an Incumbent Eligible Director; or (iii) the Listed Shareholders of the Company shall approve (A) any consolidation or merger of the Company or any subsidiary where the Listed Shareholders of the Company, immediately prior to the consolidation or merger, would not, immediately after the consolidation or merger, beneficially own (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, shares representing in the aggregate 50% or more of the voting equity of the entity issuing cash or securities in the consolidation or merger (or of its ultimate parent entity, if any), (B) any sale, lease, exchange or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of the Company or (C) any plan or proposal for the liquidation or dissolution of the Company. Notwithstanding the foregoing, a "Change of Control" shall not be deemed to have occurred for purposes of the foregoing clause (i) solely as the result of an acquisition of securities by the Company which, by reducing the number of shares of Listed Shares outstanding, increases (x) the proportionate number of Listed Shares beneficially owned by any person to 25% or more of the Listed Shares then outstanding or (y) the proportionate voting power represented by the Listed Shares beneficially owned by any person to 25% or more of the combined voting power of all then outstanding voting Securities; provided, however, that if any person referred to in clause (x) or (y) of this sentence shall thereafter become the beneficial owner of any additional Listed Shares or other Voting Securities (other than pursuant to a Listed Shares split, Listed Shares dividend, or similar transaction), then a "Change of Control" shall be deemed to have occurred for purposes of the foregoing clause (i). -3- 4 Code. Internal Revenue Code of 1986, as amended. Company. Carey Diversified LLC, a limited liability company organized under the laws of the State of Delaware. Consolidation. The merger of the Subsidiary Partnerships (each as defined in the Prospectus) of the Company with and into up to nine CPA(R) Partnerships. Consolidation Expense. All of the costs and expenses incurred by the Company or the CPA(R) Partnerships in connection with the Consolidation including such expenses as: (i) the preparing, printing, filing and delivering of the Registration Statement and the Prospectus (including any amended partnership agreements thereof or supplements thereto); (ii) the preparing and printing of the Prospectus, other solicitation material and related documents and the filing and/or recording of such certificates or other documents necessary to comply with the laws of the States of Delaware and/or California for the formation of a limited partnership, the merger of a limited partnership into another limited partnership and for the continued good standing of a limited partnership; (iii) the qualification or registration of the limited partner interests under state securities or "Blue Sky" laws; (iv) any costs and fees of any transfer agent, solicitation agent or financial advisor retained by the Company in connection with the Consolidation; (v) the filing fees payable to the United States Securities and Exchange Commission and to the National Association of Securities Dealers, Inc.; (vi) the fees of the Company's counsel; and (vii) all solicitation expenses incurred in connection therewith, including the cost of all sales literature and the costs related to investor and broker/dealer sales information meetings and the cost of solicitation and tabulation of the consents and elections. Contract Purchase Price. The amount actually paid for or allocated (as of the date of purchase) to the purchase, development, construction or improvement of a Property, exclusive of Acquisition Fees and Acquisition Expenses. Contract Sales Price. The total consideration received by the Company for the sale of a Property. Directors. The persons holding such office, as of any particular time. Distributions. Distributions made by the Company as declared by the Board. Good Reason. With respect to the termination of this Agreement, (i) any failure to obtain a satisfactory agreement from any successor to the Company to assume and agree to perform the Company's obligations under this Agreement; (ii) any material breach of this Agreement of any nature whatsoever by the Company; or (iii) a Change in Control of the Company. -4- 5 Independent Appraiser. A qualified appraiser of real estate as determined by the Board, who is not affiliated, directly or indirectly, with the Company, the Manager or their respective Affiliates. Membership in a nationally recognized appraisal society such as the American Institute of Real Estate Appraisers or the Society of Real Estate Appraisers shall be conclusive evidence of such qualification. Independent Director. A Director who, in the opinion of the Board, is free from any relationship that would interfere with the exercise of independent judgment. A Director who is as Affiliate of the Company or an officer or employee of the Company or the Manager or any of their subsidiaries or Affiliates would not qualify as an Independent Director. Investment Committee. The committee of the board of directors of the Manager primarily responsible for the approval of investments to be made by the Company. Listed Shares. A limited liability company interest in the Company representing a share of all of the income, loss and capital of the Company. Loans. The notes and other evidences of indebtedness or obligations acquired or entered into by the Company as lender which are secured or collateralized by personal property, or fee or leasehold interests in real estate or other assets, including but not limited to first or subordinate mortgage loans, construction loans, development loans, loans secured by capital stock or any other assets or form of equity interest and any other type of loan or financial arrangement, such as providing or arranging for letters of credit, providing guarantees of obligations to third parties, or providing commitments for loans. The term "Loans" shall not include leases which are not recognized as leases for federal income tax reporting purposes. Manager. Carey Management LLC, a limited liability company organized under the laws of the State of Delaware. Management Fee. The Management Fee as defined in Section 9(a) hereof. NYSE. The New York Stock Exchange. Organizational Documents. The Certificate of Formation, the Operating Agreement and Bylaws of the Company, as amended from time to time. Operating Expenses. All operating, general and administrative expenses paid or incurred by the Company, as determined under generally accepted accounting principles, except the following: (i) interest and discounts and other cost of borrowed money; (ii) taxes (including state and Federal income tax, property taxes and assessments, franchise taxes and taxes of any other nature); (iii) expenses of raising capital, including Consolidation Expenses, printing, engraving, and other expenses, and taxes incurred in -5- 6 connection with the issuance, distribution, transfer, registration and stock exchange listing of the Company's Shares and Securities; (iv) expenses connected with the acquisition, disposition, ownership and operation of real estate interests, mortgage loans, or other property, including the costs of foreclosure, insurance premiums, legal services, brokerage and sales commissions, maintenance, repair and improvement of property; (v) any fees payable to the Manager or any other party; and (vi) non-cash items, such as depreciation, amortization, depletion, and additions to reserves for depreciation, amortization, depletion, losses and bad debts. Notwithstanding anything herein to the contrary, Operating Expenses shall include the Management Fee and all other expenses reimbursable to the Manager under the Management Agreement, the Performance Fee and the Loan Refinancing Fee. Performance Fee. The Performance Fee as defined in Section 9(b). Person. An natural person, corporation, partnership, joint venture, association, limited liability company, trust, bank, or other entity, or government or any agency or political subdivision of a government. Property or Properties. The Company's partial or entire interest in real property (including leasehold interests) and personal or mixed property connected therewith. Prospectus. The final prospectus and consent solicitation of the Company which describes the Consolidation and the issuance of Shares. Registration Statement. The Registration Statement on Form S-4 which includes the Prospectus. Restricted Shares. Restricted Shares as defined in Section 9(b). Securities. Any stock, shares (other than currently outstanding Shares and subsequently issued Shares of the Company), voting trust certificates, bonds, debentures, notes or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise or in general any instruments commonly known as "securities" or any certificate of interest, shares or participation in temporary or interim certificates for receipts (or guarantees of, or warrants, options or rights to subscribe to, purchase or acquire any of the foregoing), which subsequently may be issued by the Company. Shareholders. Those Persons who at any particular time are shown as holders of record of Shares on the books and records of the Company. Shares. The Listed Shares and any other limited liability company interests issued by the Company subsequent to the Consolidation. Termination Date. The effective date of any termination of this Agreement. -6- 7 Termination Fee. An amount equal to the sum of (A) any fees that would be earned by the Manager upon the disposition of the assets of the Company and the Subsidiary Partnerships at their appraised value measured as of the Termination Date, and (B)(1) if the agreement is terminated by the Company after a change in control, $50 million if the change in control occurs on or before December 31, 1998 and thereafter, five times the total fees paid to the Manager in the 12 months preceding the change in control and (2) if the agreement is terminated without Cause or Good Reason, $50 million if the agreement is terminated before December 31, 1999; $40 million if the agreement is terminated before December 31, 2000; $30 million if the agreement is terminated before December 31, 2001; $20 million if the agreement is terminated before December 31, 2002 and $10 million is the agreement is terminated before December 31, 2003. Total Capitalization. For a specified period, the sum of (i) the average of the total principal amount of the debt outstanding (measured as of the first and last day of each period) and (ii) the Average Market Capitalization of the Company over the same period. Total Property Cost. With regard to any Property, an amount equal to the sum of the Contract Purchase Price of such Property plus the Acquisition Fees paid in connection with such Property. Valuation. An estimate of value of the assets of the Company as determined by a Person approved by the Independent Directors, which Person shall be independent of the Company and the Manager. 2. Appointment. The Company hereby appoints the Manager to serve as its manager on the terms and conditions set forth in this Agreement, and the Manager hereby accepts such appointment. The Manager shall be a "manager," within the meaning of the Delaware Limited Liability Company Act, of the Company. 3. Duties of the Manager. The Manager undertakes to provide both strategic and day-to-day management for the Company consistent with the investment objectives and policies of the Company as determined and adopted from time to time by the Board. In performance of this undertaking, subject to the oversight of the Board, the Manager shall, either directly or by engaging an Affiliate: (a) provide the daily management of the Company and perform and supervise the various administrative functions reasonably necessary for the management of the Company; (b) investigate, select, and, on behalf of the Company, engage and conduct business with such Persons as the Manager deems necessary to the proper performance of its obligations hereunder, including but not limited to consultants, accountants, correspondents, lenders, technical advisors, attorneys, brokers, underwriters, corporate fiduciaries, escrow agents, depositaries, custodians, agents for collection, insurers, insurance agents, banks, builders, developers, property owners, mortgagors and any and all agents for any of the foregoing, -7- 8 including Affiliates of the Manager, and Persons acting in any other capacity deemed by the Manager necessary or desirable for the performance of any of the foregoing services, including but not limited to entering into contracts in the name of the Company with any of the foregoing; (c) consult with the officers and Directors of the Company and assist the Directors in the formulation and implementation of the Company's policies, and, as necessary, furnish the Directors with advice and recommendations with respect to the making of investments consistent with the investment objectives and policies of the Company and in connection with any borrowings proposed to be undertaken by the Company; (d) subject to the provisions of Sections 3(f) and 4 hereof, (i) locate, analyze and select potential investments in Property and Loans; (ii) structure and negotiate the terms and conditions of transactions pursuant to which investments in Properties and Loans will be made, purchased or acquired by the Company; (iii) make investments in Property on behalf of the Company in compliance with the investment objectives and policies of the Company; (iv) arrange for financing, and refinancing and make other changes in the asset or capital structure of, and dispose of, reinvest the proceeds from the sale of or otherwise deal with the investments in Property and Loans; and (v) enter into leases and service contracts for Properties and, to the extent necessary, perform all other operational functions for the maintenance and administration of such Properties; (e) provide the Directors with periodic reports regarding prospective investments in Properties and Loans and its performance of services to the Company under this Agreement; (f) negotiate on behalf of the Company with banks or lenders for loans to be made to the Company, and negotiate on behalf of the Company with investment banking firms and broker-dealers or negotiate private sales of Shares and Securities or obtain loans for the Company, but in no event in such a way so that the Manager shall be acting as broker-dealer or underwriter; and provided, further, that any fees and costs payable to third parties incurred by the Manager in connection with the foregoing shall be the responsibility of the Company; (g) obtain for, or provide to, the Company such services as may be required in acquiring, managing and disposing of Company Property and/or Loans, including, but not limited to: (i) the negotiating, making and servicing of Loans; (ii) the disbursement and collection of Company monies; (iii) the payment of debts of and fulfillment of the obligations of the Company; and (iv) the handling, prosecuting and settling of any claims of or against the Company, including, but not limited to, foreclosing and otherwise enforcing mortgages and other liens securing the Loans; (h) communicate on behalf of the Company with Shareholders and third parties as required to satisfy the reporting and other requirements of any governmental bodies or agencies and otherwise as requested by the Company; -8- 9 (i) provide or arrange for administrative services, office space, office furnishings, personnel and other overhead items necessary and incidental to the Company's business and operations; (j) maintain the books and records of the Company and provide the Company with such accounting data and any other information so requested concerning the investment activities of the Company as shall be required to prepare and to file all periodic financial reports and returns required to be filed with the Securities and Exchange Commission and any other regulatory agency, including annual financial statements; (k) consult with the officers and Directors of the Company and provide recommendations to the Directors of the Company with respect to any offering of Securities by the Company; (l) provide the Company with all necessary cash management services; (m) retain for and on behalf of the Company such services of accountants, legal counsel, appraisers, insurers, brokers, transfer agents, registrars, developers, banks and other lenders and others as the Manager deems necessary or advisable in connection with the management and operations of the Company and the fulfillment of the Manager's duties as set forth herein. (n) provide services to the Company in connection with negotiations by the Company with investment banking firms, securities brokers or dealers and other institutions or investors in connection with the sale of securities of the Company and the securing of loans for the Company, provided, however, that the Manager shall not share in any fees paid by the Company to third parties for such services. (o) perform such other services as may be required from time to time for management and other activities relating to the assets of the Company as the Manager shall deem advisable under the particular circumstances. 4. Authority of Manager. (a) Any investment in Property, including the acquisition of any Property by the Company (as well as any financing acquired by the Company in connection with such acquisition), will require the prior approval of the Manager's Investment Committee. (b) Notwithstanding the foregoing, the prior approval of the Board, including a majority of the Independent Directors, will be required for transactions involving (i) the allocation of interests in investments made through joint venture arrangements with Affiliates of the Manager that are public companies; (ii) the terms of any investment made with the Manager or any Affiliate of the Manager that is not a public company; (iii) transactions that present issues which involve conflicts of interest for the Manager (other than conflicts involving the payment of fees or the -9- 10 reimbursement of expenses or joint investments); and (iv) the lease of assets to the Manager, any director of an Affiliate of the Manager. The Directors may, at any time upon the giving of notice to the Manager, modify or revoke the authority set forth in this Section 4, provided, however, that such modification or revocation shall be effective upon receipt by the Manager and shall not be applicable to investment transactions to which the Manager has committed the Company prior to the date of receipt by the Manager of such notification. If a transaction requires approval by the Independent Directors, the Manager will deliver to the Independent Directors all documents required by them to properly evaluate the proposed investment in such Property or such Loan. (c) The Manager shall act as agent of the Company in making, acquiring, financing and disposing of investments, disbursing and collecting the Company's funds, paying the debts and fulfilling the obligations of the Company and handling, prosecuting and settling any claims of or against the Company, the Board or holders of securities of the Company. 5. Bank Accounts. The Manager may establish and maintain one or more bank accounts in its own name for the account of the Company or in the name of the Company and may collect and deposit into any such account or accounts, and disburse from any such account or accounts, any money on behalf of the Company, provided that no funds shall be commingled with the funds of the Manager; and the Manager shall from time to time render appropriate accountings of such collections and payments to the Directors and to the auditors of the Company. 6. Records; Access. The Manager shall maintain appropriate records of all its activities hereunder and, subject to the Delaware Limited Liability Company Act, make such records available for inspection by the Directors and by counsel, auditors and authorized agents of the Company, at any time or from time to time during normal business hours. The Manager shall at all reasonable times have access to the books and records of the Company for a purpose reasonably related to the Manager's position as a manager. 7. Limitations on Activities. Anything else in this Agreement to the contrary notwithstanding, the Manager shall refrain from taking any action which, in its sole judgment made in good faith, would adversely affect the status of the Company as a limited liability company, subject the Company to taxation other than as a partnership, subject the Company to regulation under the Investment Company Act of 1940, would violate any law, rule, regulation or statement of policy of any governmental body or agency having jurisdiction over the Company, its Shares or its Securities, or otherwise not be permitted by the Organizational Documents, except if such action shall be ordered by the Directors, in which case the Manager shall notify promptly the Directors of the Manager's judgment of the potential impact of such action and shall refrain from taking such action until it receives further clarification or instructions from the Directors. In such event, the Manager shall have no liability for acting in accordance with the specific instructions of the Directors so given. Notwithstanding the foregoing, the Manager, its members and employees, -10- 11 and partners, stockholders, directors and officers of the Manager's members shall not be liable to the Company, or to the Directors or Shareholders for any act or omission by the Manager, its members or employees, or partners, stockholders, directors or officers of the Manager's members except as provided in Section 21 hereof. 8. Relationship with Directors. Members and employees of the Manager or any corporate parent of a member, and directors, officers and stockholders of any member or corporate parent of a member may serve as Directors and as officers of the Company, except that no member in or employee of the Manager or any of its Affiliates who also is a Director or officer of the Company shall receive any compensation from the Company for serving as a Director or officer other than for reasonable reimbursement for travel and related expenses incurred in attending meetings of the Directors. 9. Fees. (a) Management Fee. The Company shall pay to the Manager as compensation for the advisory services rendered to the Company hereunder an amount equal to .5% per annum of Total Capitalization of the Company (the "Management Fee"). The Management Fee shall be calculated each month and one-twelfth of the annual fee calculated shall be payable monthly on the last day of such month, or the first business day following the last day of such month; (b) Performance Fee. The Company shall also pay to the Manager as compensation for the services rendered to the Company hereunder a monthly performance fee in an amount equal to .5% per annum of the Total Capitalization of the Company (the "Performance Fee"). The Performance Fee shall be calculated each month and one-twelfth of the annual fee calculated shall be payable monthly on the last day of such month, or the first business day following the last day of such month. The Performance Fee shall be payable in the form of Listed Shares, the value of which shall be the closing price or the last trading day of the month for which the fee is being paid. Such Listed Shares so payable (the "Restricted Shares") shall vest ratably over a five-year period, with ownership of 20% of such Restricted Shares so awarded vesting in the Manager on each anniversary of the date on which they were awarded to the Manager, provided that this Agreement has not been terminated on or before such date. Upon the termination of this Agreement for any reason other than a termination for Cause under Paragraph 16 hereof, all Restricted Shares granted to the Manager hereunder shall vest immediately. Prior to the vesting of the ownership of such Restricted Shares in the Manager, such Restricted Shares shall not be transferable by the Manager. (c) Other Fees. The Managers will be paid fees by the Company on a transactional basis for acquisitions, dispositions and other similar transactions. The terms of such fees will be negotiated by the Manager and the Board of Directors. (d) Credit for Fees Paid by Subsidiary Partnerships. The Management Fee and the Performance Fee payable to the Manager pursuant to Section 9(a) and 9(b) shall be -11- 12 reduced equally by one-half of the amount of any amounts received by the Manager or its Affiliates from any of the Subsidiary Partnerships for property management or leasing fees and distributions of cash generated by the Subsidiary Partnerships excluding Cash From Sales and Financings. 10. Loans from Affiliates. If any loans are made to the Company by the Manager or an Affiliate of the Manager, the interest charged by such Affiliate to the Company on such loan shall be at a commercially reasonable rate. The terms of any such loans shall be no less favorable than the terms available between non-Affiliated Persons for similar commercial loans. 11. Expenses. In addition to the compensation paid to the Manager pursuant to Section 9 hereof, the Company shall pay directly or reimburse the Manager for the following expenses: (a) Consolidation Expenses; (b) Acquisition Expenses and other expenses incurred in connection with the investment of the funds of the Company; (c) interest and other costs for borrowed money, including discounts, points and other similar fees; (d) taxes and assessments on income or Property and taxes as an expense of doing business; (e) costs associated with insurance required in connection with the business of the Company or by the Directors; (f) expenses of managing and operating Properties owned by the Company, whether payable to an Affiliate of the Company or a non-affiliated Person; (g) fees and expenses of legal counsel for the Company; (h) fees and expense of non-affiliated auditors and accountants for the Company; (i) all expenses in connection with payments to the Directors and meetings of the Directors and Shareholders; (j) the annual cost of goods and materials used by the Company and obtained from entities not affiliated with the Manager; (k) expenses connected with payments made to Shareholders; -12- 13 (l) expenses of organizing, revising, amending, converting, modifying, or terminating the Company or the Organizational Documents; (m) expenses of maintaining communications with Shareholders, including the cost of preparation, printing and mailing annual reports and other Shareholder reports, proxy statements and other reports required by governmental entities; (n) expenses related to the Properties and Loans and other fees relating to making investments including personnel and other costs incurred in Property or Loan transactions where a fee is not payable to the Manager; (o) expenses related to fees paid to the NYSE or any other exchange in connection with the Listed Shares; and (p) all other expenses the Manager incurs in connection with providing services to the Company including reimbursement to the Manager or its Affiliates for the cost of rent, goods, materials and personnel incurred by them based upon the compensation of the Persons involved and an appropriate share of overhead allocable to those Persons. No reimbursement shall be made for the cost of personnel to the extent that such personnel are used in transactions for which the Manager receives a separate transactional fee. Expenses incurred by the Manager on behalf of the Company and payable by the Company pursuant to this Section 11 shall be reimbursed quarterly to the Manager within 60 days after the end of each quarter. The Manager shall prepare a statement documenting the expenses of the Company during each quarter, and shall deliver such statement to the Company within 45 days after the end of each quarter. 12. Other Services. Should the Board request that the Manager or any member or employee thereof render services for the Company other than set forth in Section 3 hereof, such services shall be separately compensated and shall not be deemed to be services pursuant to the terms of this Agreement. 13. Other Activities of the Manager. Nothing herein contained shall prevent the Manager from engaging in other activities, including without limitation the rendering of advice to other investors and the management of other programs advised, sponsored or organized by the Manager or its Affiliates; nor shall this Agreement limit or restrict the right of any director, officer, employee, member or shareholder of the Manager or its Affiliates to engage in any other business or to render services of any kind to any other partnership, corporation, firm, limited liability company, individual, trust or association. The Manager may, with respect to any investment in which the Company is a participant, also render advice and service to each and every other participant therein. The Manager shall report to the Board the existence of any condition or circumstance, existing or anticipated, of which it has knowledge, which creates or could create a conflict of interest between the Manager's obligations to the Company and its obligations to or its -13- 14 interest in any other partnership, corporation, firm, limited liability company, individual, trust or association. The Manager or its Affiliates shall promptly disclose to the Board knowledge of such condition or circumstance. If the Manager or its Affiliates have sponsored other investment programs with similar investment objectives which have investment funds available at the same time as the Company, it shall be the duty of the Manager to adopt a reasonable method by which properties are to be allocated to the competing investment entities and to use their best efforts to apply such method fairly to the Company. In applying any such method, the Manager shall consider the investment portfolio of each entity, cash flow of each entity, the effect of the acquisition on the diversification of each entity's portfolio, rental payments during any renewal period, the estimated income tax effects of the purchase on each entity, the policies of each entity relating to leverage, the funds of each entity available for investment, the amount of equity required to make the investment and the length of time such funds have been available for investment. To the extent that a Property might be suitable for the Company and for another investment entity which is advised or managed by the Manager, the investment will be made by the most appropriate investment entity after consideration of the factors identified above. The Manager may consider the Property for private placement only if such Property is deemed inappropriate for any investment entity which is advised or managed by the Manager, including the Company. The Manager shall be required to present a continuing and suitable investment program to the Company which is consistent with the investment policies and objectives of the Company, but neither the Manager nor any Affiliate of the Manager shall be obligated generally to present any particular investment opportunity to the Company even if the opportunity is of character which, if presented to the Company, could be taken by the Company. 14. Relationship of Manager and Company. The Company and the Manager agree that they have not created and do not intend to create by this Agreement a joint venture or partnership relationship between them and nothing in this Agreement shall be construed to make them partners or joint venturers or impose any liability as partners or joint venturers on either of them. 15. Term; Termination of Agreement. This Agreement shall continue in force until December 31, 1998, and thereafter shall be automatically renewed from year to year, unless either party shall give notice in writing of non-renewal to the other party not less than 60 days before the end of any such year. 16. Termination by Company. At the sole option of a majority of the Independent Directors, this Agreement may be terminated immediately by written notice of termination from the Company to the Manager upon the occurrence of events which would constitute Cause. Any notice of termination under Section 16 or 17 shall be effective on the date specified in such notice, which may be the day on which such notice is given or any date thereafter. The Manager agrees that if any of the events specified in clause (ii) of the definition of -14- 15 Good Reason shall occur, it shall give written notice thereof to the Board within 15 days after the occurrence of such event. 17. Termination by Manager. This Agreement may be terminated immediately without penalty by the Manager by written notice of termination to the Company upon the occurrence of events which would constitute Good Reason. 18. Assignment Prohibition. This Agreement may not be assigned by the Manager without the approval of the Board (including a majority of the Independent Directors); provided, however, that such approval shall not be required in the case of an assignment to a corporation, partnership, association, trust, limited liability company or organization which may take over the assets and carry on the affairs of the Manager, provided (i) that at the time of such assignment, such successor organization shall be owned substantially by the then members of the Manager or their Affiliates, only if such entity has a net worth of at least $3,000,000 and (ii) that the then members of the Manager shall deliver to the Board a statement in writing indicating the ownership structure and net worth of the successor organization and a certification from the assignee as to its net worth. Such an assignment shall bind the assignees hereunder in the same manner as the Manager is bound by this Agreement. The Manager may assign any rights to receive fees or other payments under this Agreement without obtaining the approval of the Directors. This Agreement shall not be assigned by the Company without the consent of the Manager, except in the case of an assignment by the Company to an organization which is a successor to the Company, in which case such successor organization shall be bound hereunder and by the terms of said assignment in the same manner as the Company is bound by this Agreement. 19. Payments to and Duties of Manager Upon Termination. (a) After the Termination Date, the Manager shall not be entitled to compensation for further services hereunder except it shall be entitled to receive from the Company within 30 days after the effective date of such termination the following: (i) all unpaid reimbursements of Consolidation Expenses and any other expenses for which the Manager is entitled to reimbursement; (ii) all earned but unpaid Management Fees and Performance Fees payable to the Manager prior to the termination of this Agreement; (iii) all earned but unpaid transactional fees. All amounts payable to the Manager in the event of a termination shall be paid by the Company in cash to the Manager within 30 days of the Termination Date. (b) If this Agreement is terminated by either party in connection with a Change of Control, by the Company for any reason other than Cause, or by the Manager for Good -15- 16 Reason, the Manager shall be entitled to payment by the Company in cash of the Termination Fee within 30 days of the Termination Date, and ownership of any Restricted Shares owned by the Manager which has not yet vested in the Manager shall immediately vest upon such termination. (c) The Manager shall promptly upon termination: (i) pay over to the Company all money collected and held for the account of the Company pursuant to this Agreement, after deducting any accrued compensation and reimbursement for its expenses to which it is then entitled; (ii) deliver to the Directors a full accounting, including a statement showing all payments collected by it and a statement of all money held by it, covering the period following the date of the last accounting furnished to the Directors; (iii) deliver to the Directors all assets, including Properties and Loans, and documents of the Company then in the custody of the Manager; and (iv) cooperate with the Company to provide an orderly management transition. 20. Limitation on Liability. The Manager shall have no responsibility other than to render the services and take the actions described herein in good faith and with the exercise of due care and shall not be responsible for any action of the Board in following or declining to follow any advice or recommendation of the Manager. The Manager, except by reason of its own gross negligence, bad faith or willful misconduct, shall not be liable for any action taken, omitted or suffered to be taken by it in good faith and believed by it to be authorized or within its discretion or rights or powers conferred upon it by this Agreement or in reasonable reliance upon the written opinion of counsel of recognized expertise. 21. Indemnification by the Company. (a) The Company shall indemnify and hold harmless the Manager and its Affiliates, including their respective officers, directors, members and employees, from all liability, claims, damages or losses arising in the performance of their duties hereunder, and related expenses, including reasonable attorneys' fees, to the extent such liability, claims, damages or losses and related expenses are not fully reimbursed by insurance, subject to any limitations imposed by the laws of the State of Delaware or the Organizational Documents of the Company and except with respect to losses, claims, damages or liabilities with respect to or arising out of the Manager's gross negligence, bad faith or willful misconduct. Notwithstanding the foregoing, the Manager shall not be entitled to indemnification or be held harmless pursuant to this Section 21 for any activity which the Manager shall be required to indemnify or hold harmless the Company pursuant to Section 22. -16- 17 (b) Promptly after receipt by an Indemnified Party of notice of the commencement of any action, such Indemnified Party shall, if a claim in respect thereof is to be made against the Company, notify the Company in writing of the commencement thereof; but the omission so to notify the Company shall not relieve it from any liability that it may have to any Indemnified Party pursuant to Section 21(a) hereof, unless the failure to so notify would itself constitute gross negligence, bad faith or willful misconduct. The indemnifying party shall assume the defense of such action with counsel chosen by it and approved by the indemnified parties defendant in such action, unless such indemnified parties reasonably object to such assumption on the ground that there may be legal defenses available to them which are different from or in addition to those available to such indemnifying party. Any indemnified party shall have the right to employ a separate counsel in any such action and to participate in the defense thereof but the fees and expenses of such counsel shall be borne by such party unless such party has objected in accordance with the preceding sentence. If an indemnifying party assumes the defense of such action, the indemnifying party shall not be liable for any fees and expenses of separate counsel for the indemnified parties incurred thereafter in connection with such action. In no event shall the indemnifying parties be liable for the fees and expenses of more than one 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. An indemnifying party shall not be liable to an indemnified party on account of any settlement of any claim or action effected without the consent of such indemnifying party. 22. Indemnification by Manager. The Manager shall indemnify and hold harmless the Company from liability, claims, damages, taxes or losses and related expenses including attorneys' fees, to the extent that such liability, claims, damages, taxes or losses and related expenses are not fully reimbursed by insurance and are incurred by reason of the Manager's bad faith, fraud, willful misfeasance, willful misconduct, willful negligence or reckless disregard of its duties. 23. Notices. Any notice, report or other communication required or permitted to be given hereunder shall be in writing unless some other method of giving such notice, report or other communication is accepted by the party to whom it is given, and shall be given by being delivered by hand or by overnight mail or other overnight delivery service to the addresses set forth herein: -17- 18 To the Board and to the Company: Carey Diversified LLC 50 Rockefeller Plaza New York, NY 10020 To the Manager: Carey Management LLC 50 Rockefeller Plaza New York, NY 10020 Either party may at any time give notice in writing to the other party of a change in its address for the purposes of this Section 23. 24. Modification. This Agreement shall not be changed, modified, terminated or discharged, in whole or in part, except by an instrument in writing signed by both parties hereto, or their respective successors or assignees. 25. Severability. The provisions of this Agreement are independent of and severable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. 26. Construction. This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of New York. 27. Entire Agreement. This Agreement contains the entire agreement and understanding among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducements and conditions, express or implied, oral or written, of any nature whatsoever with respect to the subject matter hereof. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing. 28. Indulgences, Not Waivers. Neither the failure nor any delay on the part of a party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. -18- 19 29. Gender. Words used herein regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context requires. 30. Titles Not to Affect Interpretation. The titles of Sections and subsections contained in this Agreement are for convenience only, and they neither form a part of this Agreement nor are they to be used in the construction or interpretation hereof. 31. Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. 32. Name. W.P. Carey & Co., Inc. has a proprietary interest in the name "Carey Diversified", "Corporate Property Associates" and "CPA(R)." Accordingly, and in recognition of this right, if at any time the Company ceases to retain Carey Management LLC or an Affiliate thereof to perform the services of Manager, the Directors of the Company will, promptly after receipt of written request from the Manager or W.P. Carey & Co., Inc., cease to conduct business under or use the name "Carey Diversified", "Corporate Property Associates" or "CPA(R)" or any diminutive thereof and the Company shall use its best efforts to change the name of the Company to a name that does not contain the name "Carey", "Carey Diversified", "Corporate Property Associates" or "CPA(R)" or any other word or words that might, in the sole discretion of the Manager, be susceptible of indication of some form of relationship between the Company and the Manager or any Affiliate thereof. Consistent with the foregoing, it is specifically recognized that the Manager or one or more of its Affiliates has in the past and may in the future organize, sponsor or otherwise permit to exist other investment vehicles (including vehicles for investment in real estate) and financial and service organizations having "Carey", "Carey Diversified", "Corporate Property Associates" or "CPA(R)" as a part of their name, all without the need for any consent (and without the right to object thereto) by the Company or its Directors. IN WITNESS WHEREOF, the parties hereto have executed this Management Agreement as of the day and year first above written. CAREY DIVERSIFIED LLC By: -------------------------------------- Name: -------------------------------- Title: -------------------------------- CAREY MANAGEMENT LLC -19- 20 By: -------------------------------------- Name: -------------------------------- Title: -------------------------------- -20- EX-10.2 27 NON-EMPLOYEE DIRECTORS' INCENTIVE PLAN 1 Exhibit 10.2 CAREY DIVERSIFIED LLC 1997 NON-EMPLOYEE DIRECTORS' INCENTIVE PLAN The purposes of the 1997 Non-Employee Directors' Incentive Plan (the "Plan") are to promote the long-term success of Carey Diversified LLC (the "Company") by creating a long-term mutuality of interests between the Non-Employee Directors and shareholders of the Company, to provide an additional inducement for such Directors to remain associated with the Company and to provide a means through which the Company may attract able persons to serve as Directors of the Company. SECTION 1 Administration The Plan shall be administered by the Compensation Committee (the "Committee") appointed by the Board of Directors of the Company (the "Board") and consisting of not less than three members of the Board. The Committee shall keep records of actions taken at its meetings. A majority of the Committee shall constitute a quorum at any meeting, and the acts of a majority of the members present at any meeting at which a quorum is present shall be the acts of the Committee. The Committee may also take action by approval in writing of all members of the Committee. The Committee shall interpret the Plan and prescribe such rules, regulations and procedures in connection with the operation of the Plan as it shall deem to be necessary and advisable for the administration of the Plan consistent with the purposes of the Plan. All questions of interpretation and application of the Plan, as to options ("Listed Share Options") to purchase interests in the Company known as listed shares ("Listed Shares") and as to Listed Shares subject to restrictions as to transferability or other rights of ownership ("Restricted Listed Shares") granted under the Plan, shall be subject to the determination of the Committee, which shall be final and binding. Notwithstanding the above, the selection of the Directors to whom Listed Share Options or Restricted Shares are to be granted, the timing of such grants, the number of Listed Shares subject to any Listed Share Option, the exercise price of any Listed Share Option, the periods during which any Listed Share Option may be exercised and the term of any Listed Share Option or Restricted Listed Share grant shall be as hereinafter provided, and the Committee shall have no discretion as to such matters. 2 SECTION 2 Listed Shares Available under the Plan The aggregate net number of Listed Shares which may either be issued pursuant to or be subject to outstanding Listed Share Options or granted as Restricted Listed Shares under the Plan is limited to 300,000 Listed Shares of the Company, subject to adjustment and substitution as set forth in Section 6. If any Listed Share Option is exercised by delivering previously owned Listed Shares in payment of the option price, the number of Listed Shares so delivered to the Company shall again be available for purposes of the Plan. If any Listed Share Option granted under the Plan is canceled by mutual consent or terminates or expires for any reason without having been exercised in full, the number of Listed Shares subject thereto shall again be available for purposes of the Plan. SECTION 3 Grant of Listed Share Options or Restricted Shares On the first day the Listed Shares are traded on the New York Stock Exchange, each person who is then a member of the Board and who is not then an employee of the Company or any of its subsidiaries (a "Non-Employee Director") shall be granted a "nonstatutory Listed Share Option" (i.e., a Listed Share Option which does not qualify under Section 422 of the Internal Revenue Code of 1986) to purchase 4,000 Listed Shares at $20 per Listed Share and will be granted 1,250 Restricted Listed Shares. On January 1, April 1, July 1 and October 1 of each of the years 1999 through 2002, each Non-Employee Director on such date may be granted Restricted Listed Shares and Listed Share Options with a total value of $6,250. The composition of the award shall be at the option of the Non-Employee Director. If the number of Listed Shares then remaining available for the grant of Listed Share Options or Restricted Listed Shares under the Plan is not sufficient for each Non-Employee Director to be granted a Listed Share Option or Restricted Shares with a total value of $6,250, then each Non-Employee Director shall be granted an award for a number of whole Listed Shares or Restricted Listed Shares equal to the number of Listed Shares then remaining available divided by the number of Non-Employee Directors, disregarding any fractions of a share. SECTION 4 Terms and Conditions of Listed Share Options Listed Share Options granted under the Plan shall be subject to the following terms and conditions: (A) The purchase price at which each Listed Share Option may be exercised (the "option price") shall be one hundred percent (100%) of the fair market value per share of -2- 3 the Listed Shares covered by the Listed Share Option on the date of grant, determined as provided in Section 4(G). (B) Method of Exercise. Listed Share Options may be exercised in whole or in part, by giving written notice of exercise to the Company, specifying the number of Listed Shares to be purchased. Payment of the purchase price may be made by one or more of the following methods: (i) In cash (by certified, bank check, money order or other instrument acceptable to the Committee); (ii) In the form of Listed Shares that are not then subject to restrictions under any Company plan, if permitted by the Committee in its discretion. Such surrendered shares shall be valued at Fair Market Value on the exercise date; or (iii) Any combination of cash and such shares, in the amount of the full purchase price for the number of Listed Shares as to which the Option is exercised; provided, however, that any portion of the option price representing a fraction of a share shall be paid by the Optionee in cash and no already-owned Listed Shares which have been held for less than six months may be delivered in payment of the option price. (iv) By the optionee delivering to the Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company to pay the purchase price; provided that in the event the optionee chooses to pay the purchase price as so provided, the optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Committee shall prescribe as a condition of such payment procedure. Payment instruments will be received subject to collection. The delivery of certificates representing Listed Shares to be purchased pursuant to the exercise of the Listed Share Option will be contingent upon receipt from the Optionee (or a purchaser acting in his stead in accordance with the provisions of the Listed Share Option) by the Company of the full purchase price for such shares and the fulfillment of any other requirements contained in the Listed Share Option or applicable provisions of laws. (C) Except as otherwise provided in Section 7(B), no Listed Share Option granted under Section 3 shall be exercisable while the grantee is a Director prior to the first anniversary of the date of grant, and no Listed Share Option shall be exercisable in any event during the first six months of its term except in case of death or disability of the grantee as provided in Section 4(E). Listed Share Options granted hereunder shall be exercisable as follows: options with respect to one-third of the Listed Shares shall be exercisable on each of the first, second and third anniversary of the date of grant. No Listed Share Option shall be exercisable after the expiration of ten years from the date of -3- 4 grant. A Listed Share Option, to the extent exercisable, may be exercised in whole or in part. (D) If and to the extent required for Listed Share Options granted under the Plan to qualify for the exemption provided by Rule 16b-3 under the Securities Exchange Act of 1934 (the "1934 Act"), (i) no Listed Share Option shall be transferable by the grantee otherwise than by will, or if the grantee dies intestate, by the laws of descent and distribution of the state of domicile of the grantee at the time of death and (ii) all Listed Share Options shall be exercisable during the lifetime of the grantee only by the grantee or the grantee's guardian or legal representative. (E) If a grantee ceases to be a Director of the Company for any reason, any outstanding Listed Share Options of the grantee (whether or not then held by the grantee) shall be exercisable and shall terminate according to the following provisions: (i) If a grantee ceases to be a Director of the Company for any reason other than resignation, removal for cause or death, any then outstanding Listed Share Option of such grantee (whether or not exercisable immediately prior to the grantee ceasing to be a Director) shall be exercisable at any time prior to the expiration date of such Listed Share Option or within one year after the date the grantee ceases to be a Director, whichever is the shorter period; provided that, except in the case of a grantee who is disabled within the meaning of Section 422(c)(6) of the Code (a "Disabled Grantee"), in no event shall the option be exercisable during the first six months of its term; (ii) If during his term of office as a Director, a grantee resigns from the Board or is removed from office for cause, any outstanding Listed Share Option of the grantee which is not exercisable immediately prior to resignation or removal shall terminate as of the date of resignation or removal, and any outstanding Listed Share Option of the grantee which is exercisable immediately prior to resignation or removal shall be exercisable at any time prior to the expiration date of such Listed Share Option or within 90 days after the date of resignation or removal, whichever is the shorter period; (iii) Following the death of a grantee during service as a Director of the Company, any Listed Share Option of the grantee outstanding at the time of death (whether or not exercisable immediately prior to death of the grantee) shall be exercisable by the person entitled to do so under the Will of the grantee, or, if the grantee shall fail to make testamentary disposition of the Listed Share Option or shall die intestate, by the legal representative of the grantee (or, if then permitted under the Plan and the applicable Listed Share Option agreement, by the grantee's inter vivos transferee) at any time prior to the expiration date of such Listed Share Option or within one year after the date of death of the grantee, whichever is the shorter period; -4- 5 (iv) Following the death of a grantee after ceasing to be a Director and during a period when a Listed Share Option remains outstanding, any Listed Share Option of the grantee outstanding and exercisable at the time of death shall be exercisable by such person entitled to do so under the Will of the grantee or by such legal representative (or, if then permitted under the Plan, by such inter vivos transferee) at any time prior to the expiration date of such Listed Share Option or within one year after the date of death of the grantee, whichever is the shorter period. Whether a grantee is a Disabled Grantee shall be determined, in its discretion, by the Committee, and any such determination by the Committee shall be final and binding. (F) All Listed Share Options shall be confirmed by an agreement, or an amendment thereto, which shall be executed on behalf of the Company by the Chief Executive Officer (if other than the President), the President or any Vice President and by the grantee. (G) Fair market value of the Listed Shares shall be the mean between the following prices, as applicable, for the date as of which fair market value is to be determined as quoted in The Wall Street Journal (or in such other reliable publication as the Committee, in its discretion, may determine to rely upon): (a) if the Listed Shares are listed on the New York Stock Exchange, the highest and lowest sales prices per share of the Listed Shares as quoted in the NYSE-Composite Transactions listing for such date, (b) if the Listed Shares are not listed on such exchange, the highest and lowest sales prices per share of Listed Shares for such date on (or on any composite index including) the principal United States securities exchange registered under the 1934 Act on which the Listed Shares are listed, or (c) if the Listed Shares are not listed on any such exchange, the highest and lowest sales prices per share of the Listed Shares for such date on the National Association of Securities Dealers Automated Quotations System or any successor system then in use ("Nasdaq"). If there are no such sale price quotations for the date as of which fair market value is to be determined but there are such sale price quotations within a reasonable period both before and after such date, then fair market value shall be determined by taking a weighted average of the means between the highest and lowest sales prices per share of the Listed Shares as so quoted on the nearest date before and the nearest date after the date as of which fair market value is to be determined. The average should be weighted inversely by the respective numbers of trading days between the selling dates and the date as of which fair market value is to be determined. If there are no such sale price quotations on or within a reasonable period both before and after the date as of which fair market value is to be determined, then fair market value of the Listed Shares shall be the mean between the bona fide bid and asked prices per Listed Share as so quoted for such date on Nasdaq, or if none, the weighted average of the means between such bona fide bid and asked prices on the nearest trading date before and the nearest trading date after the date as of which fair market value is to be determined, if both such dates are within a reasonable period. The average is to be determined in the manner described above in this Section 4(G). If the fair market value of the Listed Shares cannot -5- 6 be determined on the basis previously set forth in this Section 4(G) for the date as of which fair market value is to be determined, the Committee shall in good faith determine the fair market value of the Listed Shares on such date. Fair market value shall be determined without regard to any restriction other than a restriction which, by its terms, will never lapse. (H) The obligation of the Company to issue Listed Shares under the Plan shall be subject to (i) the effectiveness of a registration statement under the Securities Act of 1933, as amended, with respect to such Listed Shares, if deemed necessary or appropriate by counsel for the Company, (ii) the condition that the Listed Shares shall have been listed (or authorized for listing upon official notice of issuance) upon each stock exchange, if any, on which the Listed Shares Listed Shares may then be listed and (iii) all other applicable laws, regulations, rules and orders which may then be in effect. (I) The Fair Market Value of Listed Share Options and Restricted Listed Shares shall be determined by the Board of Directors using customary pricing models for such securities. Subject to the foregoing provisions of this Section 4 and the other provisions of the Plan, any Listed Share Option or Restricted Listed Share granted under the Plan may be subject to such restrictions and other terms and conditions, if any, as shall be determined, in its discretion, by the Committee and set forth in the agreement referred to in Section 4(F), or an amendment thereto. SECTION 5 Restricted Listed Shares Awards (A) Nature of Restricted Listed Share Award. A Restricted Listed Share Award is an Award entitling the recipient to acquire, at no cost or for a purchase price determined by the Committee, Listed Shares subject to such restrictions and conditions as the Committee may determine at the time of grant. Conditions may be based on continuing service and/or achievement of pre-established performance goals and objectives. (B) Acceptance of Award. A participant who is granted a Restricted Listed Share Award shall have no rights with respect to such Award unless the participant shall have accepted the Award within 60 days (or such shorter date as the Committee may specify) following the award date by making payment to the Company, if required, by certified or bank check or other instrument or form of payment acceptable to the Committee in an amount equal to the specified purchase price, if any, of the Listed Shares, covered by the Award and by executing and delivering to the Company a written instrument that sets forth the terms and conditions of the Restricted Listed Shares in such form as the Committee shall determine. (C) Rights as a Shareholder. Upon complying with Section 6(b) above, a participant shall have all the rights of a shareholder with respect to the Restricted Listed Shares -6- 7 including voting and dividend rights, subject to transferability restrictions and Company repurchase or forfeiture rights described in this Section 5 and subject to such other conditions contained in the written instrument evidencing the Restricted Listed Share Award. Unless the Committee shall otherwise determine, certificates evidencing shares of Restricted Listed Shares shall remain in the possession of the Company until such shares are vested as provided in Section 5(e) below. (D) Restrictions. Restricted Listed Shares may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of until the restrictions thereon lapse pursuant to the provisions of Section 5(e). (E) Vesting of Restricted Listed Shares. The Restricted Listed Shares issued under this Plan shall vest ratably over the three-year period with the restrictions relating to such shares lapsing with respect to one-third of the Restricted Listed Shares in each grant on each of the first, second and third anniversary of the date of grant. Subsequent to such date or dates, the Listed Shares on which all restrictions have lapsed shall no longer be Restricted Listed Shares and shall be deemed "vested". (F) Waiver, Deferral and Reinvestment of Dividends. The written instrument evidencing the Restricted Listed Share Award may require or permit the immediate payment, waiver, deferral or investment of dividends paid on the Restricted Listed Shares. SECTION 6 Adjustment and Substitution of Listed Shares If a dividend or other distribution shall be declared upon the Listed Shares payable in Listed Shares, the number of Listed Shares then subject to any outstanding Listed Share Options, the number of Listed Shares to be subject to any Listed Share Option thereafter granted and the number of Listed Shares which may be issued under the Plan but are not then subject to outstanding Listed Share Options shall be adjusted by adding thereto the number of Listed Shares which would have been distributable thereon if such Listed Shares had been outstanding on the date fixed for determining the shareholders entitled to receive such dividend or distribution. If the outstanding Listed Shares shall be changed into or exchangeable for a different number or kind of Listed Shares or other securities of the Company or another Company, whether through reorganization, reclassification, recapitalization, stock split-up, combination of Listed Shares, merger or consolidation, then there shall be substituted for each share of the Listed Shares subject to any then outstanding Listed Share Option, for each Listed Share which would otherwise be subject to any Listed Share Option thereafter granted for each share of the Listed Shares which may be issued under the Plan but which is not then subject to any outstanding Listed Share Option and for each Restricted Share, the number and kind of Listed Shares or other -7- 8 securities into which each outstanding share Listed Share shall be so changed or for which each such share shall be exchangeable. In case of any adjustment or substitution as provided for in this Section 6, the aggregate option price for all Listed Shares subject to each then outstanding Listed Share Option prior to such adjustment or substitution shall be the aggregate option price for all Listed Shares of stock or other securities (including any fraction) to which such Listed Shares shall have been adjusted or which shall have been substituted for such Listed Shares. Any new option price per share shall be carried to at least three decimal places with the last decimal place rounded upwards to the nearest whole number. No adjustment or substitution provided for in this Section 6 shall require the Company to issue or sell a fraction of a share or other security. Accordingly, all fractional Listed Shares or other securities which result from any such adjustment or substitution shall be eliminated and not carried forward to any subsequent adjustment or substitution. SECTION 7 Additional Rights in Certain Events (A) Definitions. For purposes of this Section 7, the term "Change of Control" shall mean the occurrence of any one of the following events: (i) any "person", as such term is used in Sections 13(d) and 14(d) of the Act (other than the Company, any of its Subsidiaries, any trustee, fiduciary or other person or entity holding securities under any employee benefit plan of the Company or any of its Subsidiaries), together with all "affiliates" and "associates" (as such terms are defined in Rule 12b-2 under the Act) of such person, shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 25% or more of either (A) the combined voting power of the Company's then outstanding securities having the right to vote in an election of the Company's Board of Eligible Directors ("Voting Securities") or (B) the then outstanding shares of Listed Shares of the Company (in either such case other than as a result of acquisition of securities directly from the Company); or (ii) persons (as defined in subsection (i) above) who, as of the date of the closing of the first day of trading of the Listed Shares on the New York Stock Exchange, constitute the Company's Board of Eligible Directors (the "Incumbent Eligible Directors") cease for any reason, including without limitation, as a result of a tender offer, proxy contest, merger or similar transaction, to constitute at least a majority of the Board, provided that any person becoming a Eligible Director of the Company subsequent to the Closing of the Company's initial public offering whose election or nomination for election was approved by a vote of at least a -8- 9 majority of the Incumbent Eligible Directors shall, for purposes of this Plan, be considered an Incumbent Eligible Director; or (iii) the Listed Shareholders of the Company shall approve (A) any consolidation or merger of the Company or any Subsidiary where the Listed Shareholders of the Company, immediately prior to the consolidation or merger, would not, immediately after the consolidation or merger, beneficially own (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, shares representing in the aggregate 50% or more of the voting equity of the entity issuing cash or securities in the consolidation or merger (or of its ultimate parent entity, if any), (B) any sale, lease, exchange or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of the Company or (C) any plan or proposal for the liquidation or dissolution of the Company; Notwithstanding the foregoing, a "Change of Control" shall not be deemed to have occurred for purposes of the foregoing clause (i) solely as the result of an acquisition of securities by the Company which, by reducing the number of shares of Listed Shares outstanding, increases (x) the proportionate number of Listed Shares beneficially owned by any person to 25% or more of the Listed Shares then outstanding or (y) the proportionate voting power represented by the Listed Shares beneficially owned by any person to 25% or more of the combined voting power of all then outstanding voting Securities; provided, however, that if any person referred to in clause (x) or (y) of this sentence shall thereafter become the beneficial owner of any additional Listed Shares or other Voting Securities (other than pursuant to a Listed Shares split, Listed Shares dividend, or similar transaction), then a "Change of Control" shall be deemed to have occurred for purposes of the foregoing clause (i). (B) Acceleration of the Exercise Date of Listed Share Options Notwithstanding any other provision contained in the Plan, in case Change of Control occurs, all outstanding Listed Share Options shall become immediately and fully exercisable, whether or not otherwise exercisable by their terms and any restrictions on Restricted Listed Shares shall lapse immediately. SECTION 8 Effect of the Plan on the Rights of Company and Shareholders Nothing in the Plan, in any Listed Share Option or Restricted Listed Share granted under the Plan, or in any Listed Share Option agreement shall confer any right to any person to continue as a Director of the Company or interfere in any way with the rights of the shareholders of the Company or the Board to elect and remove Directors. -9- 10 SECTION 9 Amendment and Termination The right to amend the Plan at any time and from time to time and the right to terminate the Plan at any time are hereby specifically reserved to the Board; provided always that no such termination shall terminate any outstanding Listed Share Options or Restricted Listed Shares granted under the Plan; and provided further that no amendment of the Plan shall (a) be made without shareholder approval if shareholder approval of the amendment is at the time required for Listed Share Options or Restricted Listed Shares under the Plan to qualify for the exemption from Section 16(b) of the 1934 Act provided by Rule 16b-3 or by the rules of the National Market System or any stock exchange on which the Listed Shares may then be listed, (b) amend more than once every six months the provisions of the Plan relating to the selection of the Directors to whom Listed Share Options or Restricted Listed Shares are to be granted, the timing of such grants, the number of Listed Shares subject to any Listed Share Option, the exercise price of any Listed Share Option, the periods during which any Listed Share Option may be exercised and the term of any Listed Share Option or Restricted Listed Shares other than to comport with changes in the Internal Revenue Code or the rules and regulations thereunder or (c) otherwise amend the Plan in any manner that would cause Listed Share Options or Restricted Listed Shares under the Plan not to qualify for the exemption provided by Rule 16b-3. No amendment or termination of the Plan shall, without the written consent of the holder of a Listed Share Option or Restricted Listed Shares theretofore awarded under the Plan, adversely affect the rights of such holder with respect thereto. Notwithstanding anything contained in the preceding paragraph or any other provision of the Plan or any Listed Share Option agreement, the Board shall have the power to amend the Plan in any manner deemed necessary or advisable for Listed Share Options or Restricted Listed Shares granted under the Plan to qualify for the exemption provided by Rule 16b-3 (or any successor rule relating to exemption from Section 16(b) of the 1934 Act), and any such amendment shall, to the extent deemed necessary or advisable by the Board, be applicable to any outstanding Listed Share Options theretofore or Restricted Listed Shares granted under the Plan notwithstanding any contrary provisions contained in any Listed Share Option agreement. In the event of any such amendment to the Plan, the holder of any Listed Share Option outstanding under the Plan shall, upon request of the Committee and as a condition to the exercisability of such option, execute a conforming amendment in the form prescribed by the Committee to the Listed Share Option agreement referred to in Section 4(F) within such reasonable time as the Committee shall specify in such request. SECTION 10 Effective Date and Duration of Plan The effective date and date of adoption of the Plan shall be ______________, the date of adoption of the Plan by the Board, provided that such adoption of the Plan by the Board is -10- 11 approved by the affirmative vote of the holders of at least a majority of the Listed Shares represented in person or by proxy and entitled to vote at a duly called and convened meeting of such holders. Notwithstanding any other provision contained in the Plan, no Listed Share Option granted under the Plan may be exercised until after such shareholder approval. No Listed Share Option or Restricted Listed Share may be granted under Section 3 of the Plan subsequent to _________, 200_. SECTION 11 Governing Law This Plan shall be governed by, and construed and enforced in accordance with, the laws of the State of New York to the extent applicable. -11- EX-10.3 28 1997 SHARE INCENTIVE PLAN 1 Exhibit 10.3 CAREY DIVERSIFIED LLC 1997 SHARE INCENTIVE PLAN The name of the plan is the Carey Diversified LLC 1997 Share Incentive Plan (the "Plan"). The purpose of the Plan is to encourage and enable the officers, employees and Eligible Directors of Carey Diversified LLC (the "Company") and its Affiliates upon whose judgment, initiative and efforts the Company largely depends for the successful conduct of its business to acquire a proprietary interest in the Company. It is anticipated that providing such persons with a direct stake in the Company's welfare will assure a closer identification of their interests with those of the Company, thereby stimulating their efforts on the Company's behalf and strengthening their desire to remain with the Company. SECTION 1 Definitions The following terms shall be defined as set forth below: "Act" means the Securities Exchange Act of 1934, as amended. "Affiliate" means any entity other than the Company and its Subsidiaries that is designated by the Board or the Committee as a participating employer under the Plan. "Award" or "Awards", except where referring to a particular category of grant under the Plan, shall include Incentive Listed Share Options, Non-Qualified Listed Share Options, Restricted Listed Shares Awards, Performance Share Awards and Dividend Equivalent Rights. "Board" means the Board of Directors of the Company. "Cause" means and shall be limited to a vote of the Board to the effect that the participant should be dismissed as a result of (i) any material breach by the participant of any agreement to which the participant and the Company or an Affiliate are parties, (ii) any act (other than retirement) or omission to act by the participant, including without limitation, the commission of any crime (other than ordinary traffic violations) that may have a material and adverse effect on the business of the Company or any Affiliate or on the participant's ability to perform services for the Company or any Affiliate, or (iii) any material misconduct or neglect of duties by the participant in connection with the business or affairs of the Company or any Affiliate. "Change of Control" is defined in Section 13. 2 "Code" means the Internal Revenue Code of 1986, as amended, and any successor Code, and related rules, regulations and interpretations. "Committee" means any Committee of the Board referred to in Section 2. "Disability" means disability as set forth in Section 22(e)(3) of the Code. "Dividend Equivalent Right" means a right, granted under Section 9, to receive cash, Listed Shares or other property equal in value to dividends paid with respect to a specified number of Listed Shares or the excess of dividends paid over a specified rate of return. Dividend Equivalent Rights may be awarded on a free-standing basis or in connection with another Award, and may be paid currently or on a deferred basis. "Effective Date" means the date on which the Plan is approved by the Board as set forth in Section 16. "Eligible Director" means members of the Board who are employees of the Company, its Subsidiaries or their Affiliates and who are not Non-Employee Directors. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the related rules, regulations and interpretations. "Fair Market Value" on any given date means the last reported sale price at which Listed Share is traded on such date or, if no Listed Shares is traded on such date, the most recent date on which Listed Shares was traded, as reflected on the New York Stock Exchange or, if applicable, any other national stock exchange which is the principal trading market for the Listed Shares. "Incentive Listed Share Option" means any Listed Share option designated and qualified as an "Incentive Stock Option" as defined in Section 422 of the Code. "Listed Shares" means the Listed Shares of the Company, subject to adjustment pursuant to Section 3. "Non-Employee Director" means a member of the Board who: (i) is not currently an officer of the Company or any Affiliate; (ii) does not receive compensation for services rendered to the Company or any Affiliate in any capacity other than as a Director; (iii) does not possess an interest in any transaction with the Company for which disclosure would be required under the securities laws; or (iv) is not engaged in a business relationship with the Company for which disclosure would be required under the securities laws. "Non-Qualified Listed Share Option" means any Listed Share Option that is not an Incentive Listed Share Option. 3 "Option" or "Listed Share Option" means any option to purchase Listed Shares granted pursuant to Section 5. "Parent" means a "parent corporation" as defined in Section 424(e) of the Code. "Performance Share Award" means Awards granted pursuant to Section 7. "Restricted Listed Share Award" means Awards granted pursuant to Section 6. "Subsidiary" means any entity (other than the Company) in an unbroken chain of entities, beginning with the Company if each of the entities (other than the last entity in the unbroken chain) owns equity possessing 50% or more of the total combined voting power of all classes of equity in one of the other entities in the chain. SECTION 2 Administration of Plan; Committee Authority to Select Participants and Determine Awards (a) Committee. The Plan shall be administered by a committee of not less than two Non-Employee Directors, as appointed by the Board from time to time (the "Committee"). (b) Powers of Committee. The Committee shall have the power and authority to grant Awards consistent with the terms of the Plan, including the power and authority: (i) to select the officers, employees and Eligible Directors of the Company and Affiliates to whom Awards may from time to time be granted; (ii) to determine the time or times of grant, and the extent, if any, of Incentive Listed Share Options, Non-Qualified Listed Share Options, Restricted Listed Shares, Performance Shares and Dividend Equivalent Rights, or any combination of the foregoing, granted to any officer, employee or Eligible Director; (iii) to determine the number of Listed Shares to be covered by any Award granted to an officer, employee, Eligible Director or Affiliate; (iv) to determine and modify the terms and conditions, including restrictions, not inconsistent with the terms of the Plan, of any Award granted to an officer, employee or Director, which terms and conditions may differ among individual Awards and participants, and to approve the form of written instruments evidencing the Awards; (v) to accelerate the exercisability or vesting of all or any portion of any Award granted to a participant; 4 (vi) subject to the provisions of Section 5(ii), to extend the period in which Listed Share Options granted may be exercised; (vii) to determine whether, to what extent and under what circumstances Listed Shares and other amounts payable with respect to an Award granted to a participant shall be deferred either automatically or at the election of the participant and whether and to what extent the Company will pay or credit amounts equal to interest (at rates determined by the Committee) or dividends or deemed dividends on such deferrals; and (viii) to adopt, alter and repeal such rules, guidelines administration of the Plan and for its own acts and shall deem advisable; to interpret the terms and Plan and any Award (including related written instruments) granted to a participant; and to decide all disputes arising in connection with and make all determinations it deems advisable for the administration of the Plan. All decisions and interpretations of the Committee shall be binding on all persons, including the Company and Plan participants. SECTION 3 Shares Issuable under the Plan; Mergers; Substitution (a) Shares Issuable. The maximum number of Listed Shares reserved and available for issuance under the Plan shall be 700,000. For purposes of this limitation, the Listed Shares underlying any Awards which are forfeited, canceled, reacquired by the Company, satisfied without the issuance of Listed Shares or otherwise terminated (other than by exercise) shall be added back to the Listed Shares available for issuance under the Plan so long as the participants to whom such Awards had been previously granted received no benefits of ownership of the underlying Listed Shares to which the Award related. Listed Shares issued under the Plan may be unissued Listed Shares or Listed Shares reacquired by the Company. (b) Listed Shares, Dividends, Mergers, etc. In the event of any recapitalization, reclassification, split-up or consolidation of Listed Shares, separation (including a spin-off), dividend on Listed Shares payable in securities of the Company (including Listed Shares), or other similar change in capitalization of the Company or a merger or consolidation of the Company or sale by the Company of all or a portion of its assets or other similar event, the Committee shall make such appropriate adjustments in the exercise prices of Awards, including Awards then outstanding, in the number and kind of securities, cash or other property which may be issued pursuant to Awards under the Plan, including Awards then outstanding, and in the number of Listed Shares with respect to which Awards may be granted (in the aggregate and to individual participants) as the Committee deems equitable with a view toward maintaining the proportionate interest of the participant and preserving the value of the Awards. (c) Substitute Awards. The Committee may grant Awards under the Plan in substitution for share and share-based awards held by employees of another corporation who concurrently become employees of the Company or an Affiliate as the result of a merger or 5 consolidation of the employing corporation with the Company or an Affiliate or the acquisition by the Company or an Affiliate of property or Listed Shares of the employing corporation. The Committee may direct that the substitute awards be granted on such terms and conditions as the Committee considers appropriate in the circumstances. SECTION 4 Eligibility Participants in the Plan will be Eligible Directors and such full or part-time officers and other employees of the Company and its Affiliates who are responsible for or contribute to the management, growth or profitability of the Company and its Affiliates and who are selected from time to time by the Committee, in its sole discretion. SECTION 5 Listed Share Options Any Listed Share Option granted under the Plan shall be in such form as the Committee may from time to time approve. Listed Share Options granted under the Plan may be either Incentive Listed Share Options, subject to any required approval of the holders of Listed Shares, or Non-Qualified Listed Share Options. To the extent that any option does not qualify as an Incentive Listed Share Option, it shall constitute a Non-Qualified Listed Share Option. No Incentive Listed Share Option may be granted under the Plan after the tenth anniversary of the Effective Date. The Committee in its discretion may grant Listed Share Options to employees of the Company or any Affiliate. Listed Share Options granted to Eligible Directors and employees pursuant to this Section 5 shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable: (i) Exercise Price. The per share exercise price of a Listed Share Option granted pursuant to this Section 5 shall be determined by the Committee at the time of grant. The per share exercise price of an Incentive Listed Share Option shall not be less than 100% of Fair Market Value on the date of grant. If an employee owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) more than 10% of the combined voting power of all classes of equity of the Company or any Subsidiary or Parent corporation and an Incentive Listed Share Option is granted to such employee, the option price shall be not less than 110% of Fair Market Value on the grant date. (ii) Option Term. The term of each Listed Share Option shall be fixed by the Committee, but no Incentive Listed Share Option shall be exercisable more than ten years after the date the option is granted. If an employee owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10% of the combined voting power of all classes of equity of the Company or any Subsidiary or Parent and an Incentive Listed Share 6 Option is granted to such employee, the term of such option shall be no more than five years from the date of grant. (iii) Exercisability; Rights of a Shareholder. Listed Share Options shall become exercisable at such time or times, whether or not in installments, as shall be determined by the Committee at or after the grant date. The Committee may at any time accelerate the exercisability of all or any portion of any Listed Share Option. An optionee shall have the rights of a shareholder only as to Listed Shares acquired upon the exercise of a Listed Share Option and not as to unexercised Listed Share Options. (iv) Method of Exercise. Listed Share Options may be exercised in whole or in part, by giving written notice of exercise to the Company, specifying the number of Listed Shares to be purchased. Payment of the purchase price may be made by one or more of the following methods: (A) In cash (by certified, bank check, money order or other instrument acceptable to the Committee); (B) In the form of Listed Shares that are not then subject to restrictions under any Company plan, if permitted by the Committee in its discretion. Such surrendered shares shall be valued at Fair Market Value on the exercise date; or (C) Any combination of cash and such shares, in the amount of the full purchase price for the number of Listed Shares as to which the Option is exercised; provided, however, that any portion of the option price representing a fraction of a share shall be paid by the Optionee in cash and no already-owned Listed Shares which have been held for less than six months may be delivered in payment of the option price. (D) By the optionee delivering to the Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company to pay the purchase price; provided that in the event the optionee chooses to pay the purchase price as so provided, the optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Committee shall prescribe as a condition of such payment procedure. Payment instruments will be received subject to collection. The delivery of certificates representing Listed Shares to be purchased pursuant to the exercise of the Listed Share Option will be contingent upon receipt from the Optionee (or a purchaser acting in his stead in accordance with the provisions of the Listed Share Option) by the Company of the full purchase price for such shares and the fulfillment of any other requirements contained in the Listed Share Option or applicable provisions of laws. (v) Non-transferability of Options. No Listed Share Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution, except that a Non-Qualified Listed Share Option may be transferred by gifting for the benefit of a 7 participant's descendants for estate planning purposes or pursuant to a certified domestic relations order, and all Listed Share Options shall be exercisable, during the optionee's lifetime, only by the optionee. (vi) Termination by Death. If any optionee's service with the Company and its Affiliates terminates by reason of death, the Listed Share Option may thereafter be exercised, to the extent exercisable at the date of death, or to the full extent of the option, at the Committee's discretion, by the legal representative or legatee of the optionee, for a period of six months (or such longer period as the Committee shall specify at any time) from the date of death, or until the expiration of the stated term of the Option, if earlier. (vii) Termination by Reason of Disability. (A) Any Listed Share Option held by an optionee whose service with the Company and its Affiliates has terminated by reason of Disability may thereafter be exercised, to the extent it was exercisable at the time of such termination or to the full extent of the option, at the Committee's discretion, for a period of twelve months (or such longer period as the Committee shall specify at any time) from the date of such termination of service, or until the expiration of the stated term of the Option, if earlier. (B) The Committee shall have sole authority and discretion to determine whether a participant's service has been terminated by reason of Disability. (C) Except as otherwise provided by the Committee at the time of grant or otherwise, the death of an optionee during a period provided in this Section 5(vii) for the exercise of a Non-Qualified Listed Share Option shall extend such period for six months from the date of death, subject to termination on the expiration of the stated term of the Option, if earlier. (viii) Termination for Cause. If any optionee's service with the Company or its Affiliates has been terminated for Cause, any Listed Share Option held by such optionee shall immediately terminate and be of no further force and effect; provided, however, that the Committee may, in its sole discretion, provide that such Listed Share Option can be exercised for a period of up to 30 days from the date of termination of service or until the expiration of the stated term of the Option, if earlier. (ix) Other Termination. Unless otherwise determined by the Committee, if an optionee's service with the Company and its Affiliates terminates for any reason other than death, Disability, or for Cause, any Listed Share Option held by such optionee may thereafter be exercised for such period, as the Committee shall specify at any time but in no event later than the expiration of the stated term of the option. (x) Annual Limit on Incentive Listed Share Options. To the extent required for "Incentive Stock Option" treatment under Section 422 of the Code, the aggregate Fair Market Value (determined as of the time of grant) of the Listed Shares with respect to which Incentive Listed Share Options granted under this Plan and any other plan of the Company or its 8 Subsidiaries become exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. (xi) Restrictions on Listed Shares. Listed Shares issued upon exercise of a Listed Share Option shall be free of all restrictions under the Plan, except as otherwise provided herein. SECTION 6 Restricted Listed Share Awards (a) Nature of Restricted Listed Share Award. The Committee may grant Restricted Listed Share Awards to Eligible Directors and employees of the Company or any Affiliate. A Restricted Listed Share Award is an Award entitling the recipient to acquire, at no cost or for a purchase price determined by the Committee, Listed Shares subject to such restrictions and conditions as the Committee may determine at the time of grant ("Restricted Listed Shares"). Conditions may be based on continuing service and/or achievement of pre-established performance goals and objectives. In addition, a Restricted Listed Share Award may be granted to a Eligible Director or employee by the Committee in lieu of, or in addition to, any compensation due to such Eligible Director or employee. (b) Acceptance of Award. A participant who is granted a Restricted Listed Share Award shall have no rights with respect to such Award unless the participant shall have accepted the Award within 60 days (or such shorter date as the Committee may specify) following the award date by making payment to the Company, if required, by certified or bank check or other instrument or form of payment acceptable to the Committee in an amount equal to the specified purchase price, if any, of the Listed Shares, covered by the Award and by executing and delivering to the Company a written instrument that sets forth the terms and conditions of the Restricted Listed Shares in such form as the Committee shall determine. (c) Rights as a Shareholder. Upon complying with Section 6(b) above, a participant shall have all the rights of a shareholder with respect to the Restricted Listed Shares including voting and dividend rights, subject to transferability restrictions and Company repurchase or forfeiture rights described in this Section 6 and subject to such other conditions contained in the written instrument evidencing the Restricted Listed Share Award. Unless the Committee shall otherwise determine, certificates evidencing shares of Restricted Listed Shares shall remain in the possession of the Company until such shares are vested as provided in Section 6(e) below. (d) Restrictions. Restricted Listed Shares may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of except as specifically provided herein. (e) Vesting of Restricted Listed Shares. The Committee at the time of grant shall specify the date or dates and/or the attainment of pre-established performance goals, objectives and other conditions on which the non-transferability of the Restricted Listed Shares 9 and the Company's right of repurchase or forfeiture shall lapse. Subsequent to such date or dates and/or the attainment of such pre-established performance goals, objectives and other conditions, the Listed Shares on which all restrictions have lapsed shall no longer be Restricted Listed Shares and shall be deemed "vested." (f) Waiver, Deferral and Reinvestment of Dividends. The written instrument evidencing the Restricted Listed Share Award may require or permit the immediate payment, waiver, deferral or investment of dividends paid on the Restricted Listed Shares. SECTION 7 Performance Share Awards (a) Nature of Performance Shares. A Performance Share Award is an award entitling the recipient to acquire Listed Shares upon the attainment of specified performance goals. The Committee may make Performance Share Awards independent of or in connection with the granting of any other Award under the Plan. Performance Share Awards may be granted under the Plan to Eligible Directors and employees of the Company or any Affiliate, including those who qualify for awards under other performance plans of the Company. The Committee in its sole discretion shall determine whether and to whom Performance Share Awards shall be made, the performance goals applicable under each such Award, the periods during which performance is to be measured, and all other limitations and conditions applicable to the awarded Performance Shares; provided, however, that the Committee may rely on the performance goals and other standards applicable to other performance based plans of the Company in setting the standards for Performance Share Awards under the Plan. (b) Restrictions on Transfer. Performance Share Awards and all rights with respect to such Awards may not be sold, assigned, transferred, pledged or otherwise encumbered. (c) Rights as a Shareholder. A participant receiving a Performance Share Award shall have the rights of a shareholder only as to Listed Shares actually received by the participant under the Plan and not with respect to Listed Shares subject to the Award but not actually received by the participant. A participant shall be entitled to receive a Listed Share certificate evidencing the acquisition of Listed Shares under a Performance Share Award only upon satisfaction of all conditions specified in the written instrument evidencing the Performance Share Award (or in a performance plan adopted by the Committee). (d) Termination. Except as may otherwise be provided by the Committee at any time prior to termination of service, a participant's rights in all Performance Share Awards shall automatically terminate upon the participant's termination of service with the Company and its Affiliates for any reason (including, without limitation, death, Disability and for Cause). (e) Acceleration, Waiver, Etc. At any time prior to the participant's termination of service with the Company and its Affiliates, the Committee may in its sole discretion accelerate, waive or, subject to Section 12, amend any or all of the goals, restrictions or conditions imposed under any Performance Share Award; provided, however, that in no event 10 shall any provision of the Plan be construed as granting to the Committee any discretion to increase the amount of compensation payable under any Performance Share Award to the extent such an increase would cause the amounts payable pursuant to the Performance Share Award to be nondeductible in whole or in part pursuant to Section 162(m) of the Code and the regulations thereunder, and the Committee shall have no such discretion notwithstanding any provision of the Plan to the contrary. SECTION 8 Dividend Equivalent Rights A Dividend Equivalent Right is an Award entitling the recipient to receive credits based on cash dividends that would be paid on the Listed Shares specified in the Dividend Equivalent Right (or other award to which it relates) if such shares were held by the recipient. A Dividend Equivalent Right may be granted hereunder to any participant as a component of another Award or as a freestanding Award. The terms and conditions of Dividend Equivalent Rights shall be specified in the grant. Dividend Equivalent Rights credited to a participant may be paid currently or may be deemed to be reinvested in additional Listed Shares. Any such reinvestment shall be at Fair Market Value on the date of reinvestment or such other price as may then apply under a dividend reinvestment plan sponsored by the Company, if any. Dividend Equivalent Rights may be settled in cash or Listed Shares or a combination thereof, in a single installment or installments. A Dividend Equivalent Right granted as a component of another Award may provide that such Dividend Equivalent Right shall be settled upon exercise, settlement, or payment of, or lapse of restrictions on, such other award, and that such Dividend Equivalent Right shall expire or be forfeited or annulled under the same conditions as such other award. A Dividend Equivalent Right granted as a component or another Award may also contain terms and conditions different from such other award. SECTION 9 Tax Withholding (a) Payment by Participant. Each participant shall, no later than the date as of which the value of an Award or of any Listed Shares or other amounts received thereunder first becomes includible in the gross income of the participant for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to such income. The Company and its Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. (b) Payment in Shares. A participant may elect to have such tax withholding obligation satisfied, in whole or in part, by (i) authorizing the Company to withhold from Listed Shares to be issued pursuant to any Award a number of shares with an aggregate Fair Market Value (as of the date the withholding is effected) that would satisfy the withholding amount due, or (ii) transferring to the Company Listed Shares owned by the participant with an aggregate Fair Market Value (as of the date the withholding is effected) that would satisfy the withholding 11 amount due. With respect to any participant who is subject to Section 16 of the Act, the following additional restrictions shall apply: (1) the election to satisfy tax withholding obligations relating to an Award in the manner permitted by this Section 9(b) and the actual tax withholding shall be made during the period beginning on the third business day following the date of release of quarterly or annual summary statements of revenues and earnings of the Company and ending on the twelfth business day following such date. Alternatively, such election may be made at least six months prior to the date as of which the receipt of such an Award first becomes a taxable event for Federal income tax purposes; (2) such election shall be irrevocable; (3) such election shall be subject to the consent or disapproval of the Committee; and (4) the Listed Shares withheld to satisfy tax withholding, if granted at the discretion of the Committee, must pertain to an Award which has been held by the participant for at least six months from the date of grant of the Award. SECTION 10 Transfer, Leave of Absence, Etc. For purposes of the Plan, the following events shall not be deemed a termination of service: (a) a transfer to the employment of the Company from an Affiliate or from the Company to an Affiliate, or from one Affiliate to another; and (b) an approved leave of absence for military service or sickness, or for any other purpose approved by the Company, if the employee's right to re-employment is guaranteed either by a statute or by contract or under the policy pursuant to which the leave of absence was granted or if the Committee otherwise so provides in writing. SECTION 11 Amendments and Termination The Board may at any time amend or discontinue the Plan and the Committee may at any time amend or cancel any outstanding Award (or provide substitute Awards at the same or reduced exercise or purchase price or with no exercise or purchase price, but such price, if any, must satisfy the requirements which would apply to the substitute or amended Award if it were then initially granted under this Plan) for the purpose of satisfying changes in law or for any 12 other lawful purpose, but no such action shall adversely affect rights under any outstanding Award without the holder's consent. SECTION 12 Status of Plan With respect to the portion of any Award which has not been exercised and any payments in cash, Listed Shares or other consideration not received by a participant, a participant shall have no rights greater than those of a general unsecured creditor of the Company unless the Committee shall otherwise expressly determine in connection with any Award or Awards. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the Company's obligations to deliver Listed Shares or make payments with respect to Awards hereunder, provided that the existence of such trusts or other arrangements is consistent with the provision of the foregoing sentence. SECTION 13 Change of Control Provisions Upon the occurrence of a Change of Control as defined in this Section 13: (a) Each Listed Share Option shall automatically become fully exercisable unless the Committee shall otherwise expressly provide at the time of grant. (b) Restrictions and conditions on Awards of Restricted Listed Shares, Performance Shares and Dividend Equivalent Rights shall automatically be deemed waived, and the recipients of such Awards shall become entitled to receipt of the maximum amount of Listed Shares subject to such Awards unless the Committee shall otherwise expressly provide at the time of grant. (c) Unless otherwise expressly provided at the time of grant, participants who hold Listed Share Options shall have the right, in lieu of exercising the Option, to elect to surrender all or part of such Option to the Company and to receive cash in an amount equal to the excess of (i) the higher of (x) the Fair Market Value of a Listed Share on the date such right is exercised and (y) the highest price paid for Listed Shares or, in the case of securities convertible into Listed Shares or carrying a right to acquire Listed Shares, the highest effective price (based on the prices paid for such securities) at which such securities are convertible into Listed Shares or at which Listed Shares may be acquired, by any person or group whose acquisition of voting securities has resulted in a Change of Control of the Company over (ii) the exercise price per share under the Option, multiplied by the number of shares of Listed Shares with respect to which such right is exercised. (d) "Change of Control" shall mean the occurrence of any one of the following events: 13 (i) any "person", as such term is used in Sections 13(d) and 14(d) of the Act (other than the Company, any of its Subsidiaries, any trustee, fiduciary or other person or entity holding securities under any employee benefit plan of the Company or any of its Subsidiaries), together with all "affiliates" and "associates" (as such terms are defined in Rule 12b-2 under the Act) of such person, shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 25% or more of either (A) the combined voting power of the Company's then outstanding securities having the right to vote in an election of the Company's Board of Eligible Directors ("Voting Securities") or (B) the then outstanding shares of Listed Shares of the Company (in either such case other than as a result of acquisition of securities directly from the Company); or (ii) persons (as defined in the previous subsection) who, as of the first day of trading of the Listed Shares on the New York Stock Exchange, constitute the Company's Board of Eligible Directors (the "Incumbent Eligible Directors") cease for any reason, including without limitation, as a result of a tender offer, proxy contest, merger or similar transaction, to constitute at least a majority of the Board, provided that any person becoming a Eligible Director of the Company subsequent to the Closing of the Company's initial public offering whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Eligible Directors shall, for purposes of this Plan, be considered an Incumbent Eligible Director; or (iii) the Listed Shareholders of the Company shall approve (A) any consolidation or merger of the Company or any Subsidiary where the Listed Shareholders of the Company, immediately prior to the consolidation or merger, would not, immediately after the consolidation or merger, beneficially own (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, shares representing in the aggregate 50% or more of the voting equity of the entity issuing cash or securities in the consolidation or merger (or of its ultimate parent entity, if any), (B) any sale, lease, exchange or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of the Company or (C) any plan or proposal for the liquidation or dissolution of the Company; Notwithstanding the foregoing, a "Change of Control" shall not be deemed to have occurred for purposes of the foregoing clause (i) solely as the result of an acquisition of securities by the Company which, by reducing the number of shares of Listed Shares outstanding, increases (x) the proportionate number of Listed Shares beneficially owned by any person to 25% or more of the Listed Shares then outstanding or (y) the proportionate voting power represented by the Listed Shares beneficially owned by any person to 25% or more of the combined voting power of all then outstanding voting Securities; provided, however, that if any person referred to in clause (x) or (y) of this sentence shall thereafter become the beneficial owner of any additional Listed Shares or other Voting Securities (other than pursuant to a Listed Shares split, Listed Shares dividend, or similar transaction), then a "Change of Control" shall be deemed to have occurred for purposes of the foregoing clause (i). 14 SECTION 14 General Provisions (a) No Distribution; Compliance with Legal Requirements. The Committee may require each person acquiring shares pursuant to an Award to represent to and agree with the Company in writing that such person is acquiring the shares without a view to distribution thereof. No shares of Listed Shares shall be issued pursuant to an Award until all applicable securities laws and other legal and Listed Shares exchange requirements have been satisfied. The Committee may require the placing of such stop-orders and restrictive legends on certificates for Listed Shares and Awards as it deems appropriate. (b) Delivery of Listed Shares Certificates. Delivery of Listed Shares certificates to participants under this Plan shall be deemed effected for all purposes when the Company or a Listed Shares transfer agent of the Company shall have delivered such certificates in the United States mail, addressed to the participant, at the participant's last known address on file with the Company. (c) Other Compensation Arrangements; No Employment Rights. Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, including trusts, subject to Listed Shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of the Plan and the grant of Awards do not confer upon any employee any right to continued employment with the Company or any Subsidiary. SECTION 15 Effective Date of Plan The Plan shall become effective upon approval by the Board, or any committee thereof with such authority. The ability to grant Incentive Listed Share Option Awards requires approval by the Listed Shareholders, and no such Awards may be issued hereunder prior to such approval. SECTION 16 Governing Law This plan shall be governed by, and construed and enforced in accordance with, the laws of the State of New York, to the extent applicable. EX-10.4 29 INVESTMENT BANKING ENGAGEMENT LETTER 1 Exhibit 10.4 [CAREY DIVERSIFIED LLC LETTERHEAD] October , 1997 Mr. William P. Carey Chairman W.P. Carey & Co., Inc. 50 Rockefeller Plaza New York, NY 10020 Dear Bill: This will confirm the understanding and agreement (the "Agreement") between W.P. Carey & Co., Inc. ("W.P. Carey") and Carey Diversified LLC (the "Company") as follows: 1. The Company hereby engages W.P. Carey as the Company's exclusive financial advisor for the purpose of providing financial advisory services to the Company in connection with the consolidation by merger of nine subsidiary limited partnerships of the Company into nine public limited partnerships in the Corporate Property Associates series of limited partnerships, hereinafter referred to as the "Consolidation" or the "Transaction." 2. In connection with its services as financial advisor hereunder, W.P. Carey agrees to: (a) assist in the preparation of any registration statement, consent solicitation statement, prospectus, private placement memorandum or other offering documents, including any amendments or supplements thereto (the "Offering Documents"), in connection with the Transaction, which Offering Documents will not be made available to or used in discussions with prospective investors until the Offering Documents and their use for that purpose have been approved by the Company; 2 Mr. William P. Carey W.P. Carey & Co., Inc. Page 2 (b) assist the Company in preparing descriptive materials including sales literature for presentation in connection with the Consolidation; all matters of form and content in respect of such materials shall be subject to approval by the Company, which shall be responsible for the accuracy and completeness of such materials; (c) advise and assist the Company, and any legal counsel engaged by the Company, in structuring any Transaction. 3. (a) The Company hereby engages W.P. Carey to act as its consultant with respect to each offering of Equity Securities made in connection with the Transaction. In the event a Transaction involves a Public Offering, the Company shall: (i) with the advice and assistance of W.P. Carey, prepare a registration statement (the "Registration Statement") relating to the Securities, which conforms with the requirements of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations of the Securities and Exchange Commission (the "SEC") thereunder and any other laws applicable to the Public Offering, and contains the disclosures required thereunder; (ii) file the Registration Statement with the SEC as soon as practicable thereafter. (b) With respect to any Public Offering or Private Placement of Securities, the Company will cooperate fully with W.P. Carey and provide all information and take all actions reasonably requested by W.P. Carey to effect the issuance and sale of the Securities, including, but not limited to, the registration or qualification of the Securities in such jurisdictions as W.P. Carey 3 Mr. William P. Carey W.P. Carey & Co., Inc. Page 3 and the Company may mutually agree; provided, however, that the Company will not be obligated to execute or file any general consent to service of process. 4. The Company shall make available to W.P. Carey all information concerning the business, assets, operations, financial condition and prospects of the Company, the Properties or the owners thereof, which W.P. Carey reasonably requests in connection with the performance of its obligations hereunder. All such information provided by or on behalf of the Company shall be complete and accurate and not misleading, and W.P. Carey shall be entitled to rely upon the accuracy and completeness of all such information without independent verification. The Company shall continue to advise W.P. Carey regarding any material developments or matters relating to the Company or the Properties which occur during the term of W.P. Carey engagement hereunder. 5. As compensation for the services rendered by W.P. Carey hereunder upon completion of the consolidation the Company shall pay W.P. Carey in the form of warrants to purchase shares of the Company (the "Listed Shares"). If all the CPA(R) Partnerships participate in the consolidation, W.P. Carey will receive warrants to purchase 2,284,800 Listed Shares at $21 per Share and 725,930 Listed Shares at $23 Per Share. The Warrants will be exercisable 10 years beginning one year after the date the consolidation is complete. 4 Mr. William P. Carey W.P. Carey & Co., Inc. Page 4 6. The Company shall: a) indemnify W.P. Carey and hold it harmless against any and all losses, claims, damages or liabilities to which W.P. Carey may become subject arising in any manner out of or in connection with the rendering of services by W.P. Carey hereunder, unless it is finally judicially determined that such losses, claims, damages or liabilities resulted directly from the gross negligence or willful misconduct of W.P. Carey; and b) reimburse W.P. Carey immediately for any legal or other expenses reasonably incurred by it in connection with investigating, preparing to defend or defending, or providing evidence in or preparing to serve or serving as a witness with respect to, any lawsuits, investigations, claims or other proceedings arising in any manner out of or in connection with the rendering of services by W.P. Carey hereunder (including, without limitation, in 5 Mr. William P. Carey W.P. Carey & Co., Inc. Page 5 connection with the enforcement of this Agreement and the indemnification obligations set forth herein); provided, however, that in the event a final judicial determination is made to the effect specified in subparagraph 6(a) above, Lehman Brothers will remit to the Company any amounts reimbursed under this subparagraph 6(b). The Company agrees that the indemnification and reimbursement commitments set forth in this paragraph 8 and the contribution obligations set forth in paragraph 7 shall apply whether or not W.P. Carey is a formal party to any such lawsuits, claims or other proceedings, that Lehman Brothers is entitled to retain separate counsel of its choice, subject to the reasonable approval of the Company, in connection with any of the matters to which such commitments relate and that such commitments shall extend upon the terms set forth in this paragraph to any controlling person, affiliate, director, officer, employee or agent of W.P. Carey (each, with Lehman Brothers, an "Indemnified Person"). The Company further agrees that, unless a final judicial determination is made to the effect specified in subparagraph 7(a) above, any settlement of a lawsuit, claim or other proceeding against the Company arising out of the transactions contemplated by this Agreement which is entered into by the Company shall include an explicit and unconditional release from the party bringing such lawsuit, claim or other proceeding of all Indemnified Persons, which release shall be reasonably satisfactory to W.P. Carey. 7. The Company and W.P. Carey agree that if any indemnification or reimbursement sought pursuant to the preceding paragraph is judicially determined to be unavailable for a reason other than the gross negligence or willful misconduct of Lehman Brothers, then, whether or not W.P. Carey is the Indemnified Person, the Company and W.P. Carey shall contribute to the losses, claims, damages, liabilities and expenses for which such indemnification or reimbursement is held unavailable: (i) in such proportion as is appropriate to reflect the relative benefits to the Company on the one hand and W.P. Carey on the other hand, in connection with the transactions to which such indemnification or reimbursement relates; or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative faults of the Company on the one hand, and W.P. Carey on the other hand, as well as any other equitable considerations; provided, however, that in no event shall the amount to be contributed by W.P. Carey pursuant to this paragraph 8 exceed the amount of the fees actually received by W.P. Carey hereunder. 6 Mr. William P. Carey W.P. Carey & Co., Inc. Page 6 8. Except as contemplated by the terms hereof or as required by applicable law or pursuant to an order entered or subpoena issued by a court of competent jurisdiction, W.P. Carey shall keep confidential all material nonpublic information provided to it by the Company and shall not disclose such information to any third party, other than such of its employees and advisors as W.P. Carey reasonably determines to have a need to know. 9. Except as required by applicable law, any advice to be provided by W.P. Carey under this Agreement shall not be disclosed publicly or made available to third parties without the prior approval of W.P. Carey and, accordingly, such advice shall not be relied upon by any person or entity other than the Company. 10. The Company agrees that W.P. Carey has the right following the closing of a Transaction to place advertisements in financial and other newspapers and journals at its own expense describing its services to the Company hereunder, provided that W.P. Carey will submit a copy of any such advertisements to the Company for its approval, which approval shall not be unreasonably withheld. 11. The term of W.P. Carey engagement hereunder shall extend from the date hereof for a period of months. Subject to the provisions of paragraphs 6 through 15, which shall survive any termination or expiration of this Agreement (including by operation of the preceding sentence), either party may terminate W.P. Careys' engagement hereunder by giving the other party at least 10 days' prior written notice. 12. At W.P. Carey option, some or all of its services hereunder may be performed by, and some or all of its fees may be paid to, an affiliate or affiliates of W.P. Carey and the term "W.P. Carey" as used in this Agreement shall include such affiliate or affiliates wherever appropriate W.P. Carey may retain the services of any third party to assist in performing its duties under this Agreement, including due diligence, provided that no such third party shall take any action on behalf of the Company without the prior approval of the Company. 13. Nothing in this Agreement, expressed or implied, is intended to confer or does confer on any person or entity other than the parties hereto or their respective successors and assigns, and to the extent expressly set forth herein, the Indemnified Persons, any rights or remedies under or by reason of this Agreement or as a result 7 Mr. William P. Carey W.P. Carey & Co., Inc. Page 7 of the services to be rendered by W.P. Carey hereunder. The Company further agrees that neither W.P. Carey nor any of its controlling persons, affiliates, directors, officers, employees or agents shall have any liability to the Company for any losses, claims, damages, liabilities or expenses arising out of or relating to this Agreement or the services to be rendered by W.P. Carey hereunder, unless it is finally judicially determined that such losses, claims, damages, liabilities or expenses resulted directly from the gross negligence or willful misconduct of W.P. Carey. 15. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. 16. (a) This Agreement may not be amended or modified except in writing signed by each of the parties and shall be governed by and construed and enforced in accordance with the laws of the State of New York. The Company and W.P. Carey hereby irrevocably and unconditionally consent to submit to the exclusive jurisdiction of the courts of the State of New York and of the United States District Courts located in the City of New York for any lawsuits, claims or other proceedings arising out of or relating to this Agreement and agree not to commence any such law suit, claim or other proceeding except in such courts. (b) The Company and W.P. Carey hereby irrevocably and unconditionally waive any objection to the laying of venue of any lawsuit, claim, or other proceeding arising out of or relating to this Agreement in the courts or the State of New York or the United States District Courts located in the City of New York, and hereby further irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such lawsuit, claim or other proceeding brought in any such court has been brought in an inconvenient forum. (c) Any right to trial by jury with respect to any lawsuit, claim or other proceeding arising out of or relating to this Agreement or the services to be rendered by W.P. Carey hereunder is expressly and irrevocably waived by W.P. Carey and the Company. 8 Mr. William P. Carey W.P. Carey & Co., Inc. Page 8 If the foregoing correctly sets forth the understanding and agreement between W.P. Carey and the Company, please so indicate in the space provided for that purpose below, whereupon this letter shall constitute a binding agreement as of the date first above written. W.P. Carey & Co. Inc. By: ------------------------ AGREED: Carey Diversified LLC By: ------------------------- Francis J. Carey Chairman EX-10.5 30 NON-STATUTORY LISTED SHARE OPTION AGREEMENT 1 Exhibit 10.5 1997 Options Carey Diversified LLC 50 Rockefeller Plaza New York, NY 10020 NONSTATUTORY LISTED SHARE OPTION AGREEMENT CAREY DIVERSIFIED LLC, a Delaware limited liability company (the "Company"), and _______________, a non-employee Director of the Company (the "Optionee"), for good and valuable consideration the receipt and adequacy of which are hereby acknowledged and intending to be legally bound hereby, agree as follows: 1. Grant of Option. The Company hereby confirms the grant to the Optionee on _______________, 1997 (the "Date of Grant") of an option (the "Option") to purchase 4,000 Listed Shares of the Company (the "Listed Shares" or "Shares") at an option price of $20.00 per Share, under and subject to the terms and conditions of the Company's 1997 Non-Employee Directors' Incentive Plan (the "Plan") and this Agreement. The Plan is incorporated herein by reference and made a part hereof as though set forth in full herein. Terms which are capitalized herein but which are not defined herein have the same meaning as in the Plan unless the context otherwise requires. The Option confirmed hereby is a "nonstatutory Listed Share Option", i.e., a Listed Share Option which does not qualify under Section 422 of the Internal Revenue Code of 1986, as amended. Subject to the provisions of (i) Sections 4(C) and 4(E) of the Plan regarding the periods during which Listed Share Options may be exercised upon the optionee ceasing to be a Director of the Company (including death of the Optionee) and (ii) Section 6(B) of the Plan regarding the exercise of Listed Share Options following a Change in Control Event (as defined in the Plan), the Option is exercisable as follows: On and after __________________, 1998 as to one-third of the shares subject to the Option; On and after __________________, 1999 as to an additional one-third of the shares subject to the Option; and On and after __________________, 2000 as to the final one-third of the shares subject to the Option. 2. Acceptance of Grant of Option. The Optionee accepts the grant of the Option confirmed hereby, acknowledges having received a copy of the Plan and agrees to be bound by the terms and provisions of the Plan, as the Plan may be amended from time to time; provided, however, that no amendment or termination of the Plan shall, without the written consent of the Optionee, adversely affect the rights of the Optionee with respect to the Option. 3. Option Not Transferable. Unless otherwise determined by the Committee, (a) the Option shall not be transferable otherwise than by will or by the laws of descent and distribution, and (b) the Option shall be exercisable during the lifetime of the Optionee only by the Optionee or the Optionee's guardian or legal representative. 4. Procedure for Exercise of Option. (a) The Option may be exercised only by delivery by the Optionee of written notice to the Company in the form contained in Exhibit B attached hereto. Each exercise form must set forth the number of Listed Shares as to 2 which the Option is exercised, must be dated and signed by the person exercising the Option and must be accompanied by (i) a cash payment (which may be made by means of a check, bank draft or money order) in United States dollars, (ii) shares of already-owned Listed Shares at the fair market value of such shares on the date of exercise, (iii) the optionee delivering to the Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company to pay the purchase price; provided that in the event the optionee chooses to pay the purchase price as so provided, the optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Committee shall prescribe as a condition of such payment procedure, or (iv) any combination of cash and such shares, in the amount of the full purchase price for the number of Listed Shares as to which the Option is exercised; provided, however, that any portion of -------- ------- the option price representing a fraction of a share shall be paid by the Optionee in cash and no already-owned Listed Shares which have been held for less than six months may be delivered in payment of the option price. The Optionee may choose to exercise an Option by participating in a broker or other agent-sponsored exercise or financing program. If the Optionee so chooses, the Company will deliver the Listed Shares acquired pursuant to the exercise of the Option to the broker or other agent, as designated by the Optionee, and will cooperate with all other reasonable procedures of the broker or other agent to permit participation by the Optionee in the sponsored exercise or financing program. Notwithstanding any procedures of the broker or other agent-sponsored exercise or financing program, if the option price is paid in cash, no exercise of an Option shall be deemed to occur and no Listed Shares will be issued until the Company has received full payment in cash (including check, bank draft, or money order) for the option price from the broker or other agent. The Company shall advise any person exercising the Option in whole or in part with shares of already-owned Listed Shares as to the amount of any cash required to be paid to the Company representing a fraction of a share, and such person will be required to pay any such cash directly to the Company before any distribution of certificates representing Listed Shares will be made. The person exercising the Option should execute the form of assignment on the back of the certificate or should deliver an executed Assignment Separate from Certificate with respect to each share certificate delivered in payment of the option price. Delivery of shares of already-owned Listed Shares in payment of the option price may also be accomplished through the effective transfer to the Company of shares held through a broker or other agent. If a person other than the Optionee exercises the Option, the exercise material must include proof satisfactory to the Company of the right of such person to exercise the Option, and the signature on all certificates or Assignments Separate from Certificate for shares delivered in payment of the option price must be guaranteed by a member of an approved Signature Guarantee Medallion Program. The date of exercise of the Option is the date on which the exercise form or forms, proof of right to exercise (if required) and payment of the option price in cash or already-owned Listed Shares are received by the Company at the address set forth on the cover page of this Agreement, Attention: Chief Financial Officer (or in the case of cash or shares, by effective transfer to the Company's account). For purposes of determining the date of exercise where payment of the option price is made in already-owned Listed Shares, any cash required to be paid to the Company with respect to a fraction of a share shall not be taken into account in determining whether payment of the option price has been made. 3 5. Issuance of Certificates. Subject to this Section 5, the Company will issue a certificate or ------------------------ certificates representing the number of Listed Shares for which the Option is exercised as soon as practicable after the date of exercise. In lieu of certificates, the Company may cause all or part of such shares to be transferred to an account of the person exercising the option with a broker or other agent. Unless the person exercising the Option otherwise directs the Company in writing, the certificate or certificates will be registered in the name of the person exercising the Option and delivered to such person. If the option price is paid in whole or in part with of already-owned Listed Shares, the Company will issue at the same time and return to the person exercising the Option a certificate representing the number of any excess shares included in any certificate or certificates delivered to the Company at the time of exercise. 6. Interpretation of Plan and Agreement. This Agreement is the Listed Share Option agreement referred to in Section 4(F) of the Plan. If there is any conflict between the Plan and this Agreement, the provisions of the Plan shall control. Any dispute or disagreement which shall arise under or in any way relate to the interpretation or construction of the Plan or this Agreement shall be resolved by the Committee, and the decision of the Committee shall be final, binding and conclusive for all purposes. 7. Effect of Agreement on Rights of Company and Shareholders. This Agreement does not confer any right on the Optionee to continue as a Director of the Company or interfere in any way with the rights of the shareholders of the Company or the Board of Directors to elect and remove Directors. 8. Binding Effect. This Agreement shall be binding upon the successors and assigns of the Company and upon the legal representatives, heirs and legatees of the Optionee. 9. Entire Agreement. This Agreement (including the Plan which is incorporated hereby by reference) constitutes the entire agreement between the Company and the Optionee and supersedes all prior agreements and understandings, oral or written, between the Company and the Optionee with respect of the subject matter of this Agreement. 10. Amendment. This Agreement may be amended only by a written instrument signed by the Company and the Optionee. 11. Section Headings. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of any of the provisions of this Agreement. 12. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York, to the extent applicable. IN WITNESS WHEREOF, the Company and the Optionee have executed this Agreement as of the Date of Grant. CAREY DIVERSIFIED LLC By ------------------------------- Chairman OPTIONEE: 4 ------------------------------- 5 Notice of Exercise Form (To be executed only upon partial or full exercise of the Listed Share Options) The undersigned hereby represents and warrants that he or she is the registered holder of a Listed Share Option granted under the terms of the Carey Diversified LLC 1997 Non-Employee Director's Incentive Plan, and hereby irrevocably exercises such Listed Share Option with respect to the portion of the Listed Share Option hereinafter specified:________________ __________________________________________ (number of Listed Shares. Payment of the aggregate corresponding Exercise Price is enclosed. I agree and understand that this exercise is subject to the terms and conditions specified in the agreement governing this Listed Share Option and the Carey Diversified LLC 1997 Non-Employee Director's Incentive Plan. The undersigned requests that, if a certificate for the Listed Shares is issued by the Company on account of or with respect to this exercise, such certificate be issued in the name of (choose one) ___ (a) the undersigned or ___ (b) the undersigned and _________________________. Dated:______________________,___ By:____________________________ (Signature of Registered Holder) EX-21 31 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21 LIST OF REGISTRANT SUBSIDIARIES First Subsidiary, L.P. Second Subsidiary, L.P. Third Subsidiary, L.P. Fourth Subsidiary, L.P. Fifth Subsidiary, L.P. Sixth Subsidiary, L.P. Seventh Subsidiary, L.P. Eighth Subsidiary, L.P. Ninth Subsidiary, L.P. EX-23.1 32 CONSENT OF COOPERS AND LYBRAND 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Consent Solicitation Statement of our report dated March 22, 1997, on our audits of the combined financial statements and financial statement schedule of Corporate Property Associates Partnerships and our report dated October 10, 1997, on our audit of the balance sheet of Carey Diversified LLC. We also consent to the incorporation by reference in the Consent Solicitation Statement of our reports dated March 17, 1997, March 17, 1997, March 17, 1997, March 21, 1997, March 21, 1997, March 21, 1997, March 21, 1997, March 22, 1997, and March 21, 1997, on our audits of the financial statements and related financial statement schedules of Corporate Property Associates, Corporate Property Associates 2, Corporate Property Associates 3, Corporate Property Associates 4, Corporate Property Associates 5, Corporate Property Associates 6, Corporate Property Associates 7, Corporate Property Associates 8 and Corporate Property Associates 9, respectively, each as of December 31, 1995 and 1996 and for the years ended December 31, 1994, 1995 and 1996, which reports are included in their respective Annual Reports on Form 10-K. We also consent to the reference to our firm under the caption "Experts". Coopers & Lybrand L.L.P. New York, New York October 14, 1997 EX-23.4 33 CONSENT OF BARCLAY G. JONES 1 Exhibit 23.4 CONSENT I, Barclay G. Jones, hereby consent to serve as a director of Carey Diversified LLC. /s/ Barclay G. Jones -------------------------------------- Barclay G. Jones EX-23.5 34 CONSENT OF STEVEN M. BERZIN 1 Exhibit 23.5 CONSENT I, Steven M. Berzin, hereby consent to serve as a director of Carey Diversified LLC. /s/ Steven M. Berzin -------------------------------------- Steven M. Berzin EX-23.6 35 CONSENT OF GORDON DUGAN 1 Exhibit 23.6 CONSENT I, Gordon F. DuGan, hereby consent to serve as a director of Carey Diversified LLC. /s/ Gordon F. DuGan -------------------------------------- Gordon F. DuGan EX-23.7 36 CONSENT OF DONALD NICKELSON 1 Exhibit 23.7 CONSENT I, Donald Nickelson, hereby consent to serve as a director of Carey Diversified LLC. /s/ Donald Nickelson -------------------------------------- Donald Nickelson EX-23.8 37 CONSENT OF EBERHARD FABER 1 Exhibit 23.8 CONSENT I, Eberhard Faber, hereby consent to serve as a director of Carey Diversified LLC. /s/ Eberhard Faber -------------------------------------- Eberhard Faber EX-23.9 38 CONSENT OF CHARLES TOWNSEND JR 1 Exhibit 23.9 CONSENT I, Charles C. Townsend, Jr. hereby consent to serve as a director of Carey Diversified LLC. /s/ Charles C. Townsend, Jr. -------------------------------------- Charles C. Townsend, Jr. EX-23.10 39 CONSENT OF LAWRENCE R. KLEIN 1 Exhibit 23.10 CONSENT I, Lawrence R. Klein, hereby consent to serve as a director of Carey Diversified LLC. /s/ Lawrence R. Klein -------------------------------------- Lawrence R. Klein EX-23.11 40 CONSENT OF REGINALD WINSSINGER 1 Exhibit 23.11 CONSENT I, Reginald Winssinger, hereby consent to serve as a director of Carey Diversified LLC. /s/ Reginald Winssinger -------------------------------------- Reginald Winssinger EX-99.1 41 FAIRNESS OPINION 1 Exhibit 99.1 Corporate Property Associates Corporate Property Associates 2 Corporate Property Associates 3 Corporate Property Associates 4 Corporate Property Associates 5 Corporate Property Associates 6 Corporate Property Associates 7 Corporate Property Associates 8 Corporate Property Associates 9 50 Rockefeller Center New York, New York 10020 Gentlemen: You have requested that Robert A. Stanger & Co., Inc. ("Stanger") provide an opinion to Corporate Property Associates, Corporate Property Associates 2, Corporate Property Associates 3, Corporate Property Associates 4, Corporate Property Associates 5, Corporate Property Associates 6, Corporate Property Associates 7, Corporate Property Associates 8 and Corporate Property Associates 9 (the "CPA Partnerships") as to the fairness from a financial point of view to the limited partners of the CPA Partnerships (the "Unitholders") of certain allocations of shares (the "Listed Shares") which would be effective following the approval by the CPA Partnerships of a proposed consolidation (the "Consolidation") of the CPA Partnerships into Carey Diversified LLC, a newly formed limited liability company organized in Delaware (the "Company"). We have been advised by the General Partners and the CPA Partnerships that 24,388,032 or 10,172,692 Listed Shares will be issued in the Consolidation assuming Maximum or Minimum Participation as defined below, and that such Listed Shares will be allocated to the CPA Partnerships as summarized on Exhibit I hereto, subject to certain closing adjustments; and (ii) Unitholders in each CPA Partnership may elect to retain their economic interest in the CPA Partnership in which they are limited partners through the receipt of subsidiary partnership units (the "Subsidiary Partnership Units") which will be issued in nine series. We have been advised that the distributions to the holders of each series of Subsidiary Partnership Units will be 1 2 measured by reference to the performance of those properties that are attributable to the respective CPA Partnerships as they existed prior to the Consolidation. Stanger, founded in 1978, provides information, research, investment banking and consulting services to clients throughout the United States, including major New York Stock Exchange member firms and insurance companies and over seventy companies engaged in the management and operation of partnerships and real estate investment trusts. The investment banking activities of Stanger include financial advisory services, asset and securities valuations, industry and company research and analysis, litigation support and expert witness services, and due diligence investigations in connection with both publicly registered and privately placed securities transactions. Stanger, as part of its investment banking business, is regularly engaged in the valuation of businesses and their securities in connection with mergers, acquisitions, and reorganizations and for estate, tax, corporate and other purposes. In particular, Stanger's valuation practice principally involves partnerships, partnership securities and assets typically owned through partnerships including, but not limited to, real estate, mortgages secured by real estate, oil and gas reserves, cable television systems, and equipment leasing assets. In arriving at the opinion set forth below, we have: - - Performed appraisals of each Partnership's portfolio of real properties pursuant to a separate engagement between Stanger and the Partnerships; - - Reviewed a draft of the Consent Solicitation Statement/Prospectus in substantially the form which will be filed with the Securities & Exchange Commission (the "SEC") and provided to Unitholders by the CPA Partnerships and the Company; - - Reviewed the financial statements of the CPA Partnerships contained in Forms 10-K, as amended, filed with the SEC for the CPA Partnerships' 1995 and 1996 fiscal years and Forms 10-Q, as amended, filed with the SEC for the quarter ended June 30, 1997; - - Reviewed certain operating and financial information (including property level financial data) relating to the business, financial condition and results of operations of the CPA Partnerships, and discussed with management of the CPA Partnerships the operations, business plan, historical financial statements, budgets and future prospects of the CPA Partnerships; - - Reviewed the methodology used by the General Partners to allocate Listed Shares among the CPA Partnerships; and - - Conducted such other studies, analyses and inquiries as we deemed appropriate. 2 3 The CPA Partnerships requested that Stanger opine as to the fairness, from a financial point of view, of the allocation of the Listed Shares among the CPA Partnerships assuming all CPA Partnerships elect to participate in the Consolidation (the "Maximum Participation Scenario") and the minimum number of CPA Partnerships participate in the Consolidation (the "Minimum Participation Scenario"). The Minimum Participation Scenario assumes the consolidation of CPA 1, CPA 2, CPA 3, CPA 5, and CPA 7. To evaluate the fairness, from a financial point of view, of the allocation of Listed Shares among the CPA Partnerships, we compared the estimated net asset value to be contributed to the Company by each CPA Partnership to the estimated net asset value of the CPA Partnerships as a group. We observed that Total Exchange Values were assigned to the CPA Partnerships by the General Partners based on: (i) appraisals provided by Stanger of the estimated value of the real estate portfolio of each CPA Partnership as of March 31, 1997; (ii) valuations made by the General Partners of each CPA Partnership's other assets and liabilities as of June 30, 1997; (iii) adjustments made by the General Partners to the foregoing values to reflect cash distributions made by the CPA Partnership in July 1997, the estimated value of certain litigation claims of certain CPA Partnerships, the General Partners' 1% interest in sale/financing proceeds which will be retained in the Consolidation, certain returns due to the General Partners which relate to properties which have previously been sold by the CPA Partnerships, the estimated change in the value of two properties as a result of material events occurring subsequent to the appraisal date, and estimated transfer taxes associated with each CPA Partnership's portfolio; and (iv) the costs of the Consolidation to be allocated among the CPA Partnerships in proportion to their Total Exchange Value before such cost allocation. We further observed that the General Partners intend to make such pre-consolidation cash distributions to Unitholders in each CPA Partnership as may be necessary to cause the relative Total Exchange Values of each of the CPA Partnerships as of the closing date to be substantially equivalent to the relative Total Exchange Values as of June 30, 1997. Relying on these Total Exchange Values, we observed that the allocation of Listed Shares offered to each CPA Partnership reflects the net value of the assets contributed to the Company by each CPA Partnership after deducting a pro rata share of the costs associated with the Consolidation. In rendering this opinion, Stanger relied, without independent verification, on the accuracy and completeness of all financial and other information contained in the Consent Solicitation Statement/Prospectus or that was otherwise publicly available or furnished or otherwise communicated to us. Stanger has not made an independent evaluation or appraisal of the determinations of the non-real estate assets and liabilities of the CPA Partnerships. Stanger relied upon the balance sheet value determinations for the CPA Partnerships and the adjustments made by the General Partners to arrive at the Total Exchange Values. We have also relied upon the assurance of the CPA Partnerships and the General Partners that the calculations made to determine all allocations among the CPA Partnerships and within each CPA Partnership between the General Partners and the Unitholders are consistent with the provisions of each CPA Partnership's Partnership Agreement, that any financial projections or pro forma statements or adjustments provided to us were reasonably prepared and adjusted on bases consistent with actual historical experience and reflect the best currently available estimates and good faith judgments, 3 4 that no material changes have occurred in the CPA Partnerships' asset or liability values subsequent to valuation dates cited above or in the real estate portfolio values subsequent to March 31, 1997 which are not reflected in the CPA Partnerships' Exchange Values, and that the CPA Partnerships and the General Partners are not aware of any information or facts regarding the CPA Partnerships that would cause the information supplied to us to be incomplete or misleading. We were not asked to and therefore did not perform an analysis with respect to any combinations of CPA Partnership participation other than those noted above. Further, we are not opining as to whether or not any specified combination will result from the Consolidation. We were not requested to and did not: (a) select the method of determining the allocation of the Listed Shares or Subsidiary Partnership Units or establish the allocation; (b) make any recommendations to the Unitholders, General Partners or the CPA Partnerships with respect to whether to approve or reject the Consolidation or whether to elect to receive Listed Shares or Subsidiary Partnership Units; or (c) express any opinion as to (i) the impact of the Consolidation with respect to combinations of participating CPA Partnerships other than those specifically identified herein; (ii) the tax consequences of the Consolidation for Unitholders or for the Company; (iii) the potential impact of any preferential return on Subsidiary Partnership Units or the Company's fee structure on the cash flow received from, or the market value of, Listed Shares of the Company received by the CPA Partnerships; (iv) the potential capital structure of the Company or its impact on the financial performance of the Listed Shares or the Subsidiary Partnership Units; (v) the potential impact on the fairness of the allocations of any subsequently discovered environmental or contingent liability; or (vi) whether or not alternative methods of determining the relative amounts of Listed Shares and Subsidiary Partnership Units to be issued would have also provided fair results or results substantially similar to those of the allocation methodology used. Further, we are not expressing any opinion as to (a) the fairness of any terms of the Consolidation (other than the fairness of the allocations of the Listed Shares for the combinations of participating CPA Partnerships as described above) or the amounts or allocations of Consolidation costs or the amounts of Consolidation costs borne by Unitholders at various levels of participation in the Consolidation; (b) the relative value of the Listed Shares and the Subsidiary Partnership Units to be issued in the Consolidation; (c) the prices at which the Listed Shares or Subsidiary Partnership Units may trade following the Consolidation or the trading value of the Listed Shares or Subsidiary Partnership Units to be received compared with the current fair market value of the CPA Partnerships' portfolios or other assets if liquidated in real estate markets; and (d) alternatives to the Consolidation. Based upon and subject to the foregoing, it is our opinion that the allocation of the Listed Shares among the CPA Partnerships pursuant to the Consolidation assuming the participation scenarios cited herein is fair to the Unitholders of the CPA Partnerships from a financial point of view. 4 5 The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. We have advised the CPA Partnerships and the General Partners that our entire analysis must be considered as a whole and that selecting portions of analyses and the factors considered, without considering all analyses and factors, could create an incomplete view of the evaluation process underlying this opinion. Our opinion is based on business, economic, real estate market, and other conditions as of the date of our analysis and addresses the Consolidation in the context of information available as of the date of our analysis. Events occurring after that date could affect the value of the assets of the CPA Partnerships or the assumptions used in preparing the opinion. Very truly yours, /s/ Robert A. Stanger & Co., Inc. Robert A. Stanger & Co., Inc. Shrewsbury, New Jersey October 15, 1997 5 6 EXHIBIT 1 ALLOCATION OF LISTED SHARES
Allocation of Listed Shares ------------- Corporate Property Associates 1,052,185 Corporate Property Associates 2 1,692,873 Corporate Property Associates 3 2,798,430 Corporate Property Associates 4 2,841,138 Corporate Property Associates 5 2,079,320 Corporate Property Associates 6 3,326,115 Corporate Property Associates 7 2,549,884 Corporate Property Associates 8 4,894,290 Corporate Property Associates 9 3,153,797
EX-99.2 42 INDEPENDENT APPRAISAL OF FAIR MARKET VALUE 1 PORTFOLIO APPRAISAL REPORT CORPORATE PROPERTY ASSOCIATES 1 CORPORATE PROPERTY ASSOCIATES 2 CORPORATE PROPERTY ASSOCIATES 3 CORPORATE PROPERTY ASSOCIATES 4 CORPORATE PROPERTY ASSOCIATES 5 CORPORATE PROPERTY ASSOCIATES 6 CORPORATE PROPERTY ASSOCIATES 7 CORPORATE PROPERTY ASSOCIATES 8 CORPORATE PROPERTY ASSOCIATES 9 2 TABLE OF CONTENTS
PAGE ---- Letter of Transmittal................................................................. 1 Identification of Subject Portfolios.................................................. 4 Property Ownership and History........................................................ 4 Purpose of Appraisal.................................................................. 4 Function of Appraisal................................................................. 4 Scope of Appraisal.................................................................... 4 Date of Valuation..................................................................... 6 Value Definition...................................................................... 6 Valuation Methodology................................................................. 7 Site Inspections and Data Gathering................................................. 8 Lease Review........................................................................ 9 Market Rental Rates................................................................. 9 Highest and Best Use................................................................ 9 Operational Projections............................................................. 10 Reversion........................................................................... ... Selection of Discount Rates......................................................... 11 Portfolio Value Conclusions........................................................... 13 Portfolio Summaries................................................................... 14 Assumptions and Limiting Conditions................................................... 32
i 3 May 15, 1997 W. P. Carey & Co., Inc. 620 Park Avenue, 4th Floor New York, NY 10020 Gentlemen: You have engaged Robert A. Stanger & Co., Inc. ("Stanger") to estimate the value of the real property portfolios (the "Portfolios") owned by Corporate Property Associates 1, Corporate Property Associates 2, Corporate Property Associates 3, Corporate Property Associates 4, Corporate Property Associates 5, Corporate Property Associates 6, Corporate Property Associates 7, Corporate Property Associates 8 and Corporate Property Associates 9, (hereinafter the "Partnerships"). Such appraisal reflects the estimated market value of the leased fee interests or, where appropriate, fee simple interests in the portfolios of real property owned by the Partnerships (the "Portfolio Valuations") as of March 31, 1997. This report is prepared in accordance with an agreement between Robert A. Stanger & Co., Inc. and W. P. Carey & Co., Inc. ("Carey") and the Partnership, dated April 7, 1997. Pursuant to the agreement, Stanger has been engaged to perform the appraisal on a limited scope basis using a summary report format in conformity with the departure provisions of the Uniform Standards of Professional Appraisal Practice of the Appraisal Institute, relying solely upon the Income Approach to value. As such, the report differs from a self-contained appraisal report in that (i) the data is limited to the summary data and conclusions presented, and (ii) the cost and market approaches were excluded and the conclusions were based upon the income approach. Due to the type of the real estate owned by the Partnerships and the nature of the lease terms, the engagement calls for these assets to be valued utilizing a discounted cash flow analysis, subject to existing leases and debt in place. We have therefore valued the net cash flows related to triple net leases with reversion to underlying real estate value only after the primary lease term and any renewal options deemed favorable to the tenant have been exhausted. Our valuation has been based in part upon information supplied to us by Carey and the Partnerships including but not limited to: lease abstracts; renewal and purchase option status; information relating to the creditworthiness of tenants; schedules of current lease rates, income, expenses, cash flow and related financial information; property descriptive information, physical condition of improvements and acquisition appraisals; information relating to mortgage encumbrances; and, where appropriate, proposed sales terms, sales agreements and supporting documentation. We have also visited the offices of Carey and the Partnerships in New York, New York and have interviewed relevant management personnel. We have relied upon such information and have assumed that the information provided by Carey and the Partnerships is accurate and complete. We have not attempted to independently verify such information. We are advised by Carey and the Partnerships that the purpose of the appraisals is to estimate the value of the leased fee interests or, where appropriate, fee simple interests in the Portfolios under market conditions as of the appraisal date and subject to existing leases and debt in place, and that the Portfolio Valuations will be used in connection with a proposed merger of Partnerships in exchange for shares of a newly formed limited liability company (the "LLC") and assumption of existing indebtedness (the "Transaction"). Stanger understands that the Portfolio Valuations may be reviewed and utilized in connection with the Transaction and Stanger agrees to the use of the Portfolio Valuations for this purpose subject to the terms and conditions of the agreements related thereto. For these purposes, this summary appraisal report was prepared stating our opinion as to the market value of the Portfolios as of March 31, 1997. This report may be summarized and referenced in the proxy statement for the Partnerships relating to the Transaction, subject to prior review by Stanger. However, the attached summary appraisal report should be reviewed in its entirety and is subject to the assumptions and limiting 1 4 conditions contained herein. Background information and analysis upon which value conclusions are based has been retained in our files. Our review was undertaken solely for the purpose of providing an opinion of value, and we make no representation as to the adequacy of such review for any other purpose. Our opinion is expressed with respect to the total value of each of the real estate portfolios, assuming existing financing and lease contracts, in which the Partnerships have an interest and not with respect to limited partners' allocations. Stanger has no present or contemplated future interest in the properties, the Partnerships, the proposed LLC or Carey. The appraisal is only an estimate of the aggregate market value of the leased fee interests or, where appropriate, fee simple interests in the Portfolios as of the date of valuation and should not be relied upon as being the equivalent of the price that would necessarily be received in the event of a sale or other disposition of the properties in the Portfolios. Changes in corporate financing rates generally, changes in individual tenant creditworthiness, changes in tenant motivation with respect to the exercise of renewal or purchase options, or changes in real estate property markets may result in higher or lower values of real property. The use of other valuation methodologies might produce a higher or lower value. However, in our opinion, the use of the discounted cash flow methodology and, where appropriate, the income capitalization method, is appropriate and reasonable. Our opinion is subject to the assumptions and limiting conditions set forth herein. We have used methods and assumptions deemed appropriate in our professional judgment; however, future events may demonstrate that the assumptions were incorrect or that other, different methods or assumptions may have been more appropriate. This abbreviated valuation report provides our value conclusion with respect to the Portfolios, definitions of value, and discussions of the valuation methodology employed, assumptions, and limiting conditions. Sincerely, /s/ ROBERT A. STANGER & CO., INC. -------------------------------------- Robert A. Stanger & Co., Inc. Shrewsbury, New Jersey 2 5 IDENTIFICATION OF SUBJECT PORTFOLIOS The subjects of this appraisal are the real property portfolios (the "Portfolios") in which Corporate Property Associates, Corporate Property Associates 1, Corporate Property Associates 2, Corporate Property Associates 3, Corporate Property Associates 4, Corporate Property Associates 5, Corporate Property Associates 6, Corporate Property Associates 7, Corporate Property Associates 8 and Corporate Property Associates 9 (the "Partnerships") own leased fee or fee simple interests. The Portfolios include office, industrial/warehouse facilities, retail and hotel properties. A listing of the properties in each Portfolio is provided in the "Portfolio Summaries" section of this report. PROPERTY OWNERSHIP AND HISTORY During the past three years, the properties have been owned continuously by the Partnerships, with the exception of the Furon property located at 1395 Danner Drive, Aurora, Ohio, which we have been advised will be acquired during the second quarter of 1997 by Corporate Property Associates 8 and Corporate Property Associates 9 through an exchange for two other properties currently owned and leased to the Furon Company by Corporate Property Associates 8 and 9. PURPOSE OF APPRAISAL The purpose of this appraisal is to estimate the market value of the leased fee or, where appropriate, fee simple interests in the real property Portfolios subject, as appropriate, to existing leases and debt in place under market conditions as of March 31, 1997. FUNCTION OF APPRAISAL The function of this appraisal is to provide a current estimate of market value of the Portfolios for use solely by the Partnerships in connection with the proposed merger of the Partnerships in exchange for shares of a newly formed limited liability company and the assumption of existing indebtedness. No representation is made as to the adequacy of this appraisal for any other purpose. SCOPE OF APPRAISAL The Portfolio Valuations have been prepared on a limited scope basis using a summary report format in conformity with the departure provisions of the Uniform Standards of Professional Appraisal Practice of the Appraisal Institute, in accordance with agreements between Robert A. Stanger & Co., Inc. and Carey and the Partnerships, dated April 7, 1997. Pursuant to the agreements, Stanger has relied solely upon the income approach to value and did not employ the "cost" or "sales comparison" approaches (as described below). In estimating the value of a property, appraisers typically consider three approaches to value: the cost approach, the market data or sales comparison approach, and the income approach. The value estimate by the cost approach incorporates separate estimates of the value of the unimproved site under its highest and best use and the value of the improvements less observed accrued depreciation resulting from physical wear and tear and functional and/or economic obsolescence. The market data or sales comparison approach involves a comparative analysis of the subject property with other similar properties that have sold recently or that are currently offered for sale in the market. The income approach involves an economic analysis of the property based on its potential to provide future net annual income. With respect to leased properties and the valuation of leased fee interests, a discounted cash flow analysis ("DCF") is commonly utilized. The DCF method ascribes a present value to the future cash flows associated with operating the property and the ultimate reversion value of the property, based upon a discount rate commensurate with the risks inherent in ownership of the property and with rates of return offered by alternative investment opportunities. Pursuant to the terms of our engagement, the Portfolio Valuations were performed solely using the income approach. Since a primary buyer group for properties of the type appraised herein is investors, the 3 6 income approach was deemed an appropriate valuation methodology. Further, given the primary criteria used by buyers of properties of the type appraised herein and the existence of generally long-term net leases on the properties, the cost approach was considered less reliable than the income approach. The sales comparison approach was also considered less reliable than the income approach given the primary criteria used by buyers of properties of the type appraised herein, the existence of generally long-term net leases on the properties, and the relative lack of sufficient reliable data from recent transactions involving properties comparable to the subject properties. Consequently, given these factors, the income approach was considered a reasonable approach to valuation for the subject Portfolio. In addition, unless otherwise noted in this report, the leased fee interests have been valued utilizing a discounted cash flow analysis applied to equity cash flows after debt service based on existing financing, which financing has been represented by the owner as being assumable. We have therefore valued net cash flows related to the lease without reversion to underlying real estate value until the primary lease term and any renewal or purchase options deemed favorable to the tenant have been exhausted. Fee simple property interests were valued utilizing either the income capitalization and/or the discounted cash flow method. Changes in corporate financing rates generally, in individual tenant creditworthiness, in tenant motivation with respect to the exercise of renewal options, or in real estate property markets may result in higher or lower values of real property. The use of other valuation methodologies might produce a higher or lower value. Our opinion is subject to the assumptions and limiting conditions set forth herein. Departures -- Uniform Standards of Professional Practice -- With respect to limited appraisals, the departure provisions of the Uniform Standards of Professional Appraisal Practice permit departures from the specific guidelines of Standard 1. In this report the following departures were taken: Standard Rule 1-4 (a) The cost and market approaches are excluded, and the conclusions are based solely on the income approach (see Valuation Methodology).
DATE OF VALUATION The date of valuation for the Portfolios is March 31, 1997. VALUE DEFINITION Market value, as defined by the Appraisal Institute, is the most probable price as of a specified date, in cash, in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably and for self-interest, and assuming that neither is under undue duress. As used in this report, market value is based on a sale of the subject property rights for cash and the assumption of existing third-party indebtedness encumbering the properties. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (a) buyer and seller are typically motivated; (b) both parties are well informed or well advised, and each acts in a manner he considers in his own best interest; (c) a reasonable time is allowed for exposure in the open market; (d) payment is made in terms of cash in U.S. dollars or the substantial equivalent thereof, and the assumption of existing indebtedness; (e) the price represents the normal consideration for the property sold unaffected by special sales concessions granted by anyone associated with the sale. 4 7 The property rights appraised in this report are leased fee interests and, where appropriate, fee simple interests. Leased fee interest is defined as an ownership interest held by a landlord with the right to use and occupancy conveyed by lease to others, and usually consists of the right to receive rent and the right to repossession at the termination of the lease. Fee simple interest is defined as absolute ownership unencumbered by any other interest or estate, subject only to the limitations of eminent domain, escheat, police power, and taxation. The appraisal includes the value of land, land improvements such as paving, fencing, on-site sewer and water lines, the buildings and, with respect to the hotel properties only, furniture fixtures and equipment necessary to achieve the operating results which formed the basis of the valuation as of March 31, 1997. Except for the hotel furniture, fixtures and equipment, as noted above, the appraisal does not include supplies, materials on hand, inventories, furniture, equipment or other personal property, company records, or current or intangible assets that may exist; it pertains only to items considered as real estate. VALUATION METHODOLOGY Pursuant to the terms of this engagement, Stanger has estimated the aggregate value of the Partnerships' leased fee or, where appropriate, fee simple interests in the Portfolios based solely on the income approach to valuation. (Appraisers typically consider three approaches in valuing real property: the cost approach, the income approach, and the sales comparison, or market data, approach. The type and age of a property, the nature of the leases, market conditions and the quantity and quality of data affect the applicability of each approach in a specific appraisal situation.) The income approach is based on the assumption that the value of a property or portfolio of properties can be represented by the present worth of future cash flows. In these Portfolio Valuations, a discounted cash flow ("DCF") analysis is used to determine the value of the leased fee interests in the portfolios of properties based upon the lease and financing that encumber each property, reflecting representations by the owner that such financing is assumable. Fee simple property interests are valued utilizing either the income capitalization and/or the discounted cash flow method. The indicated value by the income approach represents the amount an investor might reasonably be expected to pay for the expectation of receiving the net cash flow after debt service from each Portfolio's properties during the subject lease terms and the proceeds from the ultimate sale of each Portfolio's properties after repayment of remaining mortgage debt. Unless otherwise noted herein, in applying the DCF analysis, we utilized pro forma statements of operations for each of the properties prepared in accordance with the leases and financing which currently encumber the properties. The properties are assumed to be sold after the expiration of the initial lease term and any renewal terms deemed favorable to the tenants (i.e., where the tenant has an option to renew at a rental rate materially below the projected market rate rent at the time of the renewal option, it is assumed that such option will be exercised). The reversion value of the properties which can be realized upon sale is calculated based on the current economic rental rate deemed reasonable for each property, escalated at a rate indicative of current expectations in the marketplace for the property. The market-rate net income of the properties at the year of sale is then capitalized at an appropriate rate reflecting the age, anticipated functional and economic obsolescence and competitive position of the properties to determine the reversion value of the properties. Where properties were deemed to have reached the limit of functional utility and useful life at the time of lease expiration, the reversion was computed based on estimated land value. Net proceeds to equity owners were determined by deducting estimated costs of sale and principal and any accrued interest balances due on the properties' mortgage debt in the projected year of sale based on each mortgage's amortization schedule. Finally, (i) the discounted present value of the equity cash flow stream from operations (after debt service) and the discounted present value of net proceeds from sale, and (ii) the outstanding debt balance as of March 31, 1997 for each property were summed to arrive at a total estimated value for each Portfolio. The resulting Portfolio Values were then adjusted for any joint venture interests in the properties based on information provided by Carey and the Partnerships to arrive at the final Portfolio Values. 5 8 The following describes more fully the steps involved in the valuation methodology. SITE INSPECTIONS AND DATA GATHERING In conducting the Portfolio Valuations, representatives of Stanger performed site inspections of the properties during 1995 and 1996 in the context of a prior appraisal of the Portfolios. In the course of these site visits, the physical facilities of each property were inspected, current market rental rates for competing properties were obtained, information on the local market was gathered, and where possible, the tenant's facilities manager was interviewed concerning the property, its role in company operations, and other factors. Information gathered during the site inspection was supplemented by a review of published information concerning economic, demographic and real estate trends in local, regional and national markets, and by information updates provided by management and obtained through telephonic interviews of local market information sources. In conducting the appraisals, Stanger also interviewed and relied upon Carey management personnel to obtain information relating to the condition of each property, including any deferred maintenance, capital budgets, known environmental conditions, status of on-going or newly planned property additions, reconfigurations, improvements, and other factors affecting the physical condition of the property improvements. Stanger also interviewed Carey's management and acquisitions personnel regarding competitive conditions in net lease property markets, tenant credit trends affecting the properties, certain lease and financing factors, and historical and anticipated lease revenues and expenses. Stanger also reviewed historical operating statements for each of the properties in the subject Portfolios. In addition, Stanger reviewed the acquisition criteria and projection parameters used by real estate investors. Such reviews included a search of real estate data sources and publications concerning real estate buyer's criteria, interviews with sources deemed appropriate in certain local markets (including local appraisers and real estate brokers) to confirm acquisition criteria used, and direct telephonic interviews with major national investors, owners and managers of net lease property portfolios and financing sources for net lease transactions in the marketplace, to investigate the interaction of such factors as required equity rates of return, initial equity yield requirements, tenant credit profile, type of property, and the terms of available financing. Stanger also compiled data on actual transactions involving net leased properties, from which acquisition criteria and parameters were extracted. Information on actual property transactions was obtained during the site inspections and from direct telephonic interviews of local appraisers and real estate brokers, and major national investors, owners and managers of net leased properties, and from other publicly available sources. In addition, Stanger reviewed data provided by Carey on actual acquisitions and sales involving Carey and affiliated entities. LEASE REVIEW Lease abstracts were provided by Carey and the Partnerships and were relied upon in the preparation of operational projections for each property (as discussed below). Stanger reviewed such lease abstracts and interviewed Carey management personnel to ascertain any renegotiated terms and modifications and the status of various options and other factors. Provisions considered and incorporated into the operational projections included current lease rate, escalation factors, percentage rent provisions, renewal options and terms, and purchase options and terms. MARKET RENTAL RATES Representatives of Stanger collected available data on rental rates at competing properties in each local or regional market. Data collected at the time of the site inspection was updated with published data and direct telephonic contacts with local brokers and leasing agents. 6 9 HIGHEST AND BEST USE Highest and best use is defined as: The reasonable probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum profitability. In conformity with the provisions of its engagement, Stanger evaluated each site's highest and best use as currently improved. Based upon the review of each of the sites, the highest and best use of each of the properties remains as currently improved, unless otherwise noted herein. OPERATIONAL PROJECTIONS Based on the lease and market rent analysis, rental revenue projections were developed for each property in each of the Portfolios based on the terms of existing leases (or, in the case of property not subject to long-term net leases, based on analysis of market rents and historical rents achieved at the property). Where lease terms included percentage rent provisions, available sales data were reviewed for each property and sales levels were projected based on escalation factors deemed appropriate in light of the current level of sales, area trends and parameters utilized by buyers of similar properties. Percentage rents were then calculated based on the resulting sales levels and contract provisions relating to sales breakpoints and percentage rent participations. Lease renewals were analyzed based on escalated current market rental rates. The annual market rent escalation rates utilized were based on local market conditions in the area of each property, inflation rates, the projected holding period of the property and rental rate growth parameters applied by investors in similar type properties. Where projected market rental rates at the time of a renewal option materially exceeded the contractual lease renewal rate, the renewal option was assumed to be exercised. Where appropriate, vacancy and collection losses were factored into the analysis. A property management fee deemed appropriate for retaining a professional real estate organization to manage the specific type of property was included in the projections. In the case of net leased properties, the fee utilized was 1% of rental revenues. Expenses relating solely to partnership investor reporting and accounting were excluded. Debt service payments were deducted from net operating income for each property consistent with the terms of the existing financing. For properties where existing debt matures during the lease term, the refinancing capability of the property was reviewed based upon lending criteria utilized by financing sources, including loan-to-value ratios and debt service coverage requirements. For properties meeting such lending criteria, debt balances at maturity of the existing mortgage were considered refinanced at interest rates and amortization schedules deemed appropriate for the property. Finally, where a capital expense reserve, deferred maintenance or extraordinary capital expenditures were required for an individual property, the cash flows and value were adjusted accordingly. REVERSION In the course of performing the appraisals, Stanger reviewed available sales transactions of similar investment properties as well as market data relating to overall capitalization rates for similar properties in the general location of the subject properties. As described above, acquisition criteria used by buyers of similar properties were also reviewed. Based upon these reviews and considering such factors as age, quality, anticipated functional and economic obsolescence, competitive position of the property, the projected date of sale, and buyers' acquisition criteria, appropriate terminal capitalization rates were selected. Where properties were deemed to have reached the limit of functional utility and useful life at the time of lease expiration, the reversion was computed based on escalated land value. Based upon current market rate rents, estimated escalation factors, and the estimated vacancy rate and other property operating expenses incurred by the owner, net operating income during the twelve months following the lease expiration was estimated. The resulting net operating income estimate was capitalized to 7 10 determine residual value. The residual value was discounted, after deducting appropriate sales expenses and mortgage balances, if any, outstanding at the time of sale, to a present value. The discount rate employed was based on current acquisition criteria and target rates of return among commercial property investors. Where any property lease included a purchase option for the lessee, the purchase option price was compared to the projected value of the property based on projected market rental rates (and where appropriate, contractual rent under the lease agreement). Where the purchase option price was less than the projected market value of the property or the purchase option provided a significant financial benefit to the tenant relative to its remaining lease obligation, the purchase option was deemed exercised; otherwise the purchase option was deemed expired. SELECTION OF DISCOUNT RATES Distinct discount rates were then applied to the operating cash flow projections and the reversion values. - OPERATING CASH FLOW -- The selection of the appropriate discount rate for determining the present value of future operating cash flow streams from each net leased property was based primarily upon such factors as the creditworthiness of the tenant, the length of the lease term, and the general interest rate environment. Specifically, Stanger conducted an analytical review of the financial statements of the tenants/guarantors under the subject leases. In the course of this review, Stanger analyzed the most recent available financial statements of the tenants/guarantors, focusing primarily on the balance sheet, profit and loss statement, cash flow statement and management's discussion of capital resources and liquidity. Various measures of financial strength were derived and reviewed to evaluate the tenant's ability to fulfill the lease obligation. These factors encompassed size, leverage, capital structure, profitability, cash flow, debt service and fixed charges coverage and liquidity. Stanger also investigated each tenant's/guarantor's corporate debt ratings, if any, issued by Nationally Recognized Statistical Rating Organizations (for example, Standard & Poors and/or Moody's), and financial strength ratings assigned by Value Line. Stanger also reviewed the interest rate environment as of the date of the Portfolio Valuations, including long-term corporate bond yields. In particular, data sources were screened to determine the yield-to-maturity among corporate bonds based on various maturities and credit ratings. This analysis was conducted to establish a base discount rate, determined by the marketplace, to reflect the risk of holding corporate debt with credit quality commensurate with the lease guarantor's creditworthiness and a term approximately equal to the remaining lease term for each property. Premiums deemed appropriate were then added to the base discount rate to reflect the risks associated with real estate, leverage, and, where appropriate, above-market lease rates or factors unique to the individual lease or tenant. In particular, where contract rent exceeded market rent, the base discount rate used to value the operating cash flow stream was adjusted to reflect the creditworthiness of the tenant and the risk associated in realizing such excess rent. Where operating cash flows were comprised of base rent and percentage rent components, distinct discount rates were applied to the base rent and percentage rent reflective of the relative risk associated with each cash flow stream. - REVERSION VALUE -- To determine appropriate discount rates to apply to the reversion value of the real estate upon final lease expiration, the acquisition criteria and projection parameters in use in the marketplace by real estate investors for various property types (e.g. industrial/warehouse, retail, office, etc.) were reviewed (as described above). Discount rates deemed appropriate were applied to the reversion value of each property after adjusting for such factors as property age, quality, anticipated functional and economic obsolescence, competitive position, and any unique property-related factors. The resulting discounted present value of operating cash flows and the discounted present value of net sale proceeds were added to outstanding debt balances as of March 31, 1997 for each property. The resulting values were adjusted for any joint venture interests in the properties (based on information provided by Carey) and were summed to arrive at a total estimated value for each Portfolio. 8 11 PORTFOLIO VALUE CONCLUSIONS Based upon the review as described above, it is our opinion that the market value of the leased fee interests or, where appropriate, fee simple interests in the Portfolios as encumbered by existing indebtedness and lease agreements as of March 31, 1997 is as follows:
PORTFOLIO VALUE PARTNERSHIP NAME CONCLUSION ------------------------------------------------------------- ------------ Corporate Property Associates 1.............................. $ 33,390,000 Corporate Property Associates 2.............................. 40,680,000 Corporate Property Associates 3.............................. 52,750,000 Corporate Property Associates 4.............................. 49,880,000 Corporate Property Associates 5.............................. 54,640,000 Corporate Property Associates 6.............................. 104,300,000 Corporate Property Associates 7.............................. 70,300,000 Corporate Property Associates 8.............................. 136,670,000 Corporate Property Associates 9.............................. 139,890,000 ------------ TOTAL.............................................. $682,500,000 ============
9 12 CORPORATE PROPERTY ASSOCIATES PORTFOLIO SUMMARY MARCH 31, 1997
PROPERTY PROPERTY NAME ADDRESS TYPE - -------------------------------------------- --------------------------- ----------------- Broomfield Tech............................. 3400 Industrial Lane Office/Warehouse Broomfield, CO Broomfield Tech............................. 3401 Industrial Lane Office/Warehouse Broomfield, CO Chief Auto Parts -- Stockton................ 1339 S. Sutter Street Retail Stockton, CA Southland -- Merced......................... 1414 R Street Retail Merced, CA Payless Shoes -- Rialto..................... 681 Foothill Road Retail Rialto, CA Payless Shoes -- Fontana.................... 9780 Sierra Avenue Retail Fontana, CA Chief Auto Parts -- Sacramento.............. 3121 Marysville Boulevard Retail (Marysville) Sacramento, CA Chief Auto Parts -- Sacramento.............. 1900 Broadway Retail (Broadway) Sacramento, CA Payless Shoes -- Cuyahoga Falls............. 1965 State Road Retail Cuyahoga Falls, OH Payless Shoes -- Talmadge................... 355 West Avenue Retail Talmadge, OH Payless Shoes -- Freemont................... 111 East State Street Retail Freemont, OH Payless Shoes -- Reynoldsburg............... 6736 East Main Street Retail Reynoldsburg, OH Payless Shoes -- Marion..................... 1240 Mt. Vernon Avenue Retail Marion, OH Payless Shoes -- Anderson................... 1816 E. 53rd Street Retail Anderson, IN Varo -- Walnut.............................. 2201-2203 Walnut Street Light Industrial Garland, TX Vacant Facility............................. 553 & 555 N. 5th Street Light Industrial Garland, TX The Gap..................................... 3434 Mineola Pike Distribution/ Erlanger, KY Warehouse Unisource Worldwide......................... 1930 Spur Avenue Distribution/ Anchorage, AK Warehouse Winn-Dixie.................................. 1211 Broadway West Retail Louisville, KY PreFinish Metals............................ 30610 East Broadway Industrial Walbridge, OH
10 13 CORPORATE PROPERTY ASSOCIATES 2 PORTFOLIO SUMMARY MARCH 31, 1997
PROPERTY PROPERTY NAME ADDRESS TYPE - ---------------------------------------------------- ------------------------- -------------- Pre-Finish Metals................................... 30610 East Broadway Industrial Walbridge, OH Unisource Worldwide................................. 2600 S.W. Commerce Way Industrial Commerce,CA Arthur L. Jones..................................... 2729 Ring Road Retail Greensboro, NC Kinko's of Ohio..................................... 4032 Belden Village Ave. Retail Canton, OH Wexler.............................................. 9890 Lake Forrest Ave. Retail New Orleans, LA Color Tile.......................................... 4030 Belden Village Ave. Retail Canton, OH Maybelline/B&G...................................... 1401 Murphy Drive Distribution/ Maumelle, AR Warehouse EXCEL............................................... 5205 Mill Street Office/R&D Reno, NV AT&T................................................ 12976 Hollenberg Road Office/R&D Bridgeton, MO Western Union....................................... 13022 Hollenberg Road Office/R&D Bridgeton, MO Sports & Recreation................................. 308 West Route 38 Retail Moorestown, NJ Gibson Greetings -- Cincinnati...................... 2100 Section Road Industrial Cincinnati, OH Cleo................................................ 4025 Viscount Road Industrial Memphis, TN Gibson Greetings -- Berea........................... Walnut Meadow Lane Industrial Berea,KY
11 14 CORPORATE PROPERTY ASSOCIATES 3 PORTFOLIO SUMMARY MARCH 31, 1997
PROPERTY PROPERTY NAME ADDRESS TYPE - ------------------------------------------------------- ---------------------- ----------- EXCEL.................................................. 5205 Mill Street Office/R&D Reno, NV AT&T................................................... 12976 Hollenberg Road Office/R&D Bridgeton, MO Western Union.......................................... 13022 Hollenberg Road Office/R&D Bridgeton, MO Sports & Recreation.................................... 308 West Route 38 Retail Moorestown, NJ Gibson Greetings -- Cincannati......................... 2100 Section Road Industrial Cincinnati, OH Cleo................................................... 4025 Viscount Road Industrial Memphis, TN Gibson Greetings -- Berea.............................. Walnut Meadow Lane Industrial Berea, KY Santee Dairies......................................... 231 East 23rd Street Dairy Los Angeles, CA
12 15 CORPORATE PROPERTY ASSOCIATES 4 PORTFOLIO SUMMARY MARCH 31, 1997
PROPERTY PROPERTY NAME ADDRESS TYPE - -------------------------------------------------- ------------------------- ----------------- Santee Dairies.................................... 231 East 23rd Street Dairy Los Angeles, CA Simplicity Manufacturing.......................... (2 buildings) 500 North Spring Street Industrial Port Washington, WI Brodart Company................................... 500 Arch Street & Industrial (2 buildings) 1609 Memorial Avenue Williamsport, PA Petrocon Engineering.............................. 3115 Executive Boulevard Office Beaumont, TX Agency Management................................. 3001 East By-Pass Office/ College Station, TX Light Industrial Family Dollar..................................... Airport & Distribution/ Cedar Springs Road Warehouse Salisbury, NC Winn-Dixie........................................ U.S. 411 & Retail Courson Boulevard Leeds, AL
13 16 CORPORATE PROPERTY ASSOCIATES 5 PORTFOLIO SUMMARY MARCH 31, 1997
PROPERTY PROPERTY NAME ADDRESS TYPE - ------------------------------------- ------------------------- -------------------- Spreckles/Duff-Norton................ Hwy. 1 North Industrial Forrest City, AR Rochester Button -- Kenbridge........ 221 Main Street Industrial Kenbridge, VA Rochester Button -- So. Boston....... 1100 Noblin Avenue & Industrial 315 Edmund Street South Boston, VA Arley -- Columbia.................... 3130 Bluff Road Warehouse/ Columbia, SC Light Manufacturing Arley -- Sumter...................... Shaw Street Industrial Sumter, SC Penn Virginia -- Duffield............ U.S. Hwy. 58 -- 421 West Office Duffield, VA Penn Virginia -- Broomall............ 600 Abbott Drive Office/Warehouse Broomall, PA Penn Virginia -- Cuyahoga Falls...... 601 Munroe Falls Ave. Industrial Cuyahoga Falls, OH Exide Electronics.................... 3201 Spring Forrest Road Office Raleigh, NC General Cinema....................... 43555 Ford Road Cinema Canton, MI Inno Tech............................ 154 Olive Street Industrial Elyria, OH Sunds Defibrator..................... 571 West End Avenue Industrial/ Woodhandling Carthage, NY Manufacturing Gould (Spectramed)................... 1900 Williams Drive Office/R&D Oxnard, CA Holiday Inn -- Petoskey.............. U.S. Hwy. 131 South Hotel Petoskey, MI Holiday Inn -- Alpena................ 1000 U.S. 23 North Hotel Alpena, MI DeVlieg-Bullard -- McMinnville....... Morrison Street Industrial McMinnville, TN Penberthy Products................... Lincoln & Locust Street Industrial Prophetstown, IL DeVlieg-Bullard -- Frankenmuth....... 126 North Main Street Industrial Frankenmuth, MI Stoody Deloro........................ 1201 Eisenhower Drive Industrial North Goshen, IN Winn-Dixie........................... 2252 Mt. Meigs Road Retail Montgomery, AL
14 17 CORPORATE PROPERTY ASSOCIATES 6 PORTFOLIO SUMMARY MARCH 31, 1997
PROPERTY PROPERTY NAME ADDRESS TYPE - ------------------------------------------------ ------------------------- ------------------ Holiday Inn -- Petoskey......................... U.S. Highway 131 South Hotel Petoskey, MI Holiday Inn -- Alpena........................... 1000 U.S. 23 North Hotel Alpena, MI Stoody Deloro................................... 16425 Gale Avenue Industrial Industry, CA Yale Security................................... 16300 W. 103rd Street Industrial Lemont, IL Motorola........................................ 1101 East University Ave. Office/R&D Urbana, IL Autozone (31 properties)........................ See Attached Schedule Retail Lockheed Martin................................. 6721 Baymeadow Drive Office/Industrial Glen Burnie, MD Peerless Chain.................................. 1416 E. Sanborn Street Industrial Winona, MN General Cinema.................................. 14551 Burnhaven Circle Cinema Burnsville, MN Wal-Mart (Sams Club)............................ 2930 Lebanon Church St. Retail West Mifflin, PA Armel/Kinney Shoes.............................. 3499 N.W. 53rd Street Office/Warehouse Ft. Lauderdale, FL A.P. Parts -- Toledo............................ 315-543 Matzinger Street Industrial Toledo, OH A.P. Parts -- Pinconning........................ 401 E. 5th Street Industrial Pinconning, MI Anthony's Manufacturing......................... See Note (1) below Industrial San Fernando, CA Holiday Inn -- Livonia.......................... 17123 Laurel Park Drive Hotel Livonia, MI Winn-Dixie...................................... 1315 West 15th Street Retail Panama City, FL
- --------------- (1) Anthony's Manufacturing is located at the following addresses: 12400 and 12918 Gladstone, San Fernando, CA; 12391 Montero Avenue, San Fernando, CA; 12812 Arroyo Street, San Fernando, CA; and 12354 Gladstone Avenue, San Fernando, CA. 15 18 CORPORATE PROPERTY ASSOCIATES 6 PORTFOLIO SUMMARY -- (CONTINUED) MARCH 31, 1997 AUTOZONE LOCATIONS 2006 West Franklin Avenue 295 Craft Highway 1001 Sixth Avenue S.E. Gastonia, NC Chickasaw, AL Decatur, AL 5136 N. Tyron Street 2501 South Boulevard 1030 Ninth Avenue Charlotte, NC Montgomery, AL Bessemer, AL 421 South Center Street 950 32nd Street 1420 14th Street Statesville, NC Columbus, GA Phenix City, AL 1214 Morgantown Blvd 1400 Vandalia Road 407 Holcomb Avenue Lenoir, NC Collinsville, IL Mobile, AL 2602 South Congress 2609 Washington Avenue 1300 E. Prien Lake Road Austin, TX Alton, IL Lake Charles, LA 1925 Waco Drive 310 E. Edwardsville Road 2905 Big Bend Boulevard Waco, TX Wood River, IL Maplewood, MO 2321 Horne Road 521 Carlyle Road 9710 Page Avenue Corpus Christi, TX Belleville, IL Overland, MO 3201 Leopard Street 3011-3013 Cypress Drive 3405 Gravois Avenue Corpus Christi, TX West Monroe, LA St. Louis, MO 1211 Rio Grande 9007 Greenwell Springs Rd. 9644 St. Charles Rock Road Victoria, TX Baton Rouge, LA Breckenridge, MO 1411 Pleasanton Road E. Medorm St. & Hwy. 171 2003 Mac Arthur Drive San Antonio, TX Lake Charles, LA West Orange, TX 1819 Nederland Avenue Nederland, TX
16 19 CORPORATE PROPERTY ASSOCIATES 7 PORTFOLIO SUMMARY MARCH 31, 1997
PROPERTY NAME ADDRESS PROPERTY TYPE - --------------------------------------------- ------------------------- -------------------- Holiday Inn -- Livonia....................... 17123 N. Laurel Avenue Hotel Livonia, MI Seven-Up Bottling............................ 555 McDonnell Boulevard Distribution/ St. Louis, MO Warehouse Winn-Dixie................................... Highway 59 & W. 53rd St. Retail Bay Minette, AL M-Tex, Travelers Rest........................ Highway 25 Industrial Travelers Rest, SC M-Tex, Liberty............................... Peachtree Street Industrial Liberty, SC Autozone (13 properties)..................... See Attached Schedule Retail Northern Auto/Popular Stores................. 7214 E. Thomas Road Retail Scottsdale, AZ Northern Automotive/Scallon's................ 310 E. Florence Blvd. Retail Casa Grande, AZ Northern Automotive/Building 7............... 555 W. U.S. Highway 60 Retail Apache Junction, AZ Northern Auto/Crafters Mall.................. 4322 W. Bell Road Retail Glendale, AZ Northern Auto/Advanced Paper................. 1255 W. Guadalupe Retail Mesa, AZ Capin Mercantile Corp........................ 1410 Pinos Altos Road Retail Silver City, NM Northern Automotive.......................... 2953 West 30th Avenue Retail Denver, CO Family Bargain Center........................ 1150 Main Street Retail Colville, WA NYNEX........................................ Catamount Drive Office/R&D Milton, VT The Gap...................................... 1500 Jamike Avenue Distribution/ Erlanger, KY Warehouse Policy Management Systems.................... One ASA Plaza Office Bloomingdale, IL Sybron/Kerr Manufacturing.................... 28200 Wick Road Industrial/ Romulus, MI Manufacturing Sybron/Barnstead............................. 2555 Kerper Boulevard Industrial/ Dubuque, IA Manufacturing Sybron/Erie Scientific....................... Post Road Industrial/ Portsmouth, NH Manufacturing Sybron/Nalge................................. 75 Panorama Creek Drive Industrial/ Rochester, NY Manufacturing Sybron/Ormco................................. 1308 South Lone Hill Ave. Office/R&D Glendora, CA NVR -- Thurmont.............................. 210 N. Carroll Street Industrial Thurmont, MD NVR -- Farmington............................ 1043 Hook Road Industrial Farmington, NY
17 20 CORPORATE PROPERTY ASSOCIATES 7 PORTFOLIO SUMMARY -- (CONTINUED) MARCH 31, 1997
PROPERTY NAME ADDRESS PROPERTY TYPE - --------------------------------------------- ------------------------- -------------------- Stair Plans America.......................... 29 Synan Road Industrial Fredericksburg, VA Allied Plywood............................... 7891 Notes Drive Industrial/Light Manasas, VA Manufacturing Holiday Inn -- Topeka........................ 605 Fairlawn Hotel Topeka, KS
AUTOZONE LOCATIONS 8102 North Davis Highway Pensacola, FL 1301 W. 15th Street Panama City, FL 3520 Main Street Jacksonville, FL 10418 Florida Boulevard Baton Rouge, LA 6152 Plank Road Baton Rouge, LA 2740 Highway 190 West Hammond, LA 129 Centre Pointe Drive St. Peters, MO 35 E. Mexico Road St. Peters, MO 721 South Lafayette St. Shelby, NC 399 E. Cannon Boulevard Kannapolis, NC 220 Fleming Drive Morgantown, NC 5317 Ringold Road East Ridge, TN 3315 Chapman Highway Knoxville, TN 18 21 CORPORATE PROPERTY ASSOCIATES 8 PORTFOLIO SUMMARY MARCH 31, 1997
PROPERTY PROPERTY NAME ADDRESS TYPE - -------------------------------------------------- --------------------------- -------------- Policy Management................................. One ASA Plaza Office Bloomingdale, IL Sybron/Kerr Manufacturing......................... 28200 Wick Road Industrial/ Romulus, MI Manufacturing Sybron/Barnstead.................................. 2555 Kerper Boulevard Industrial/ Dubuque, IA Manufacturing Sybron/Erie Scientific............................ Post Road Industrial/ Portsmouth, NH Manufacturing Sybron/Nalge...................................... 75 Panorama Creek Drive Industrial/ Rochester, NY Manufacturing Sybron/Ormco...................................... 1308 South Lone Hill Ave. Office/R&D Glendora, CA NVR -- Thurmont................................... 210 N. Carroll Street Industrial Thurmont, MD NVR -- Farmington................................. 1043 Hook Road Industrial Farmington, NY Stair Plans America............................... 29 Synan Road Industrial Fredericksburg, VA Allied Plywood.................................... 7891 Notes Drive Industrial Manasas, VA American Signature -- Olive Branch................ 8649 Hacks Cross Industrial Olive Branch, MS American Signature -- Doraville................... 3101 McCall Boulevard Industrial Doraville, GA Autozone (11 properties).......................... See Footnote 1 below Retail Wozniak Industries................................ 3700 N. Rose Street Industrial Schiller Park, IL General Electric.................................. 720 Vanderburg Road Office/R&D King of Prussia, PA United Stationers (3 properties).................. See Footnote 2 below Distribution/ Warehouse Furon Buildings (6 properties).................... See Footnote 3 below 5-Industrial 1-Office High Voltage...................................... 13 Pratt Junction Industrial Sterling, MA Datcon Instrument................................. 1811 Rohrerstown Road Industrial Lancaster, PA Federal Express................................... 3205 Longmire Drive Distribution/ College Station, TX Warehouse Dr. Pepper Buildings.............................. See Footnote 4 below Distribution/ Warehouse Orbital Sciences.................................. 3380 S. Price Road Industrial Chandler, AZ Detroit Diesel.................................... 13400 Outer Drive W. Industrial Detroit, MI
19 22 CORPORATE PROPERTY ASSOCIATES 8 PORTFOLIO SUMMARY -- (CONTINUED) MARCH 31, 1997
PROPERTY PROPERTY NAME ADDRESS TYPE - -------------------------------------------------- --------------------------- -------------- Winn-Dixie *...................................... Douglas Avenue/Route 31 Retail Brenton, AL Holiday Inn -- Topeka............................. 605 Fairlawn Hotel Topeka, KS
- --------------- * Property is subject to a ground lease. (1) The locations of the facilities leased to Autozone are as follows: 7035 Atlantic Boulevard 4909 Central Avenue Jacksonville, FL Albuquerque, NM 5350 Beach Boulevard 760 Broadway Jacksonville, FL Farmington, NM 209 S. Slappey Boulevard 6126 St. Andrews Road Albany, GA Lexington, SC 2616 Community Road 5320 W. Bellfort Avenue Brunswick, GA Houston, TX 2318 Milledgeville Road 5615 Babcock Road Augusta, GA San Antonio, TX 2215 Pio Nono Avenue Macon, GA
(2) The three locations of facilities leased to United Stationers are: 3615 Highpoint Drive, San Antonio, TX; 2483 Harbor Ave., Memphis, TN; and Elmwood/Plauche Industrial Park, New Orleans, LA. (3) The six locations of facilities leased to Furon are: 407 East Street, New Haven, CT; Interstate 295 & Harmony Road, Mickleton, NJ; 1199 S. Chillicothe Road, Aurora, OH; 10585 Main Street, Mantua, OH; 386 Metacoro Ave., Bristol, RI; and 1395 Danner Drive, Aurora, OH. (4) The two locations of facilities leased to Dr. Pepper Bottling are: 2304 Century Center Blvd., Irving, TX and 2400 Holly Hill Drive, Houston, TX. 20 23 CORPORATE PROPERTY ASSOCIATES 9 PORTFOLIO SUMMARY MARCH 31, 1997
PROPERTY PROPERTY NAME ADDRESS TYPE - ------------------------------------------------- ----------------------- ---------------- American Signature -- Doraville.................. 3101 McCall Blvd. Industrial Doraville, GA General Electric................................. 720 Vanderburg Road Office/R&D King of Prussia, PA Furon Buildings (6 properties)................... See Footnote 1 below 5 -- Industrial 1 -- Office Dr. Pepper (2 properties)........................ See Footnote 2 below Distribution/ Warehouse Orbital Sciences................................. 3380 S. Price Road Industrial Chandler, AZ Detroit Diesel................................... 13400 Outer Drive W. Industrial Detroit, MI Childtime (12 properties)........................ See Footnote 3 below Retail Federal Express.................................. 201 S. Padre Island Dr. Distribution/ Corpus Christi, TX Warehouse NV Ryan -- Pittsburgh............................ 100 Ryan Court & 111 Office Ryan Court, Pittsburgh, PA Pepsi............................................ 15180 Grand Point Dr. Distribution/ Houston, TX Warehouse Titan............................................ 3033 Science Park Road Office/R&D San Diego, CA Vacant Facility *................................ 835 Hope Street Office/R&D Stanford, CT Information Resources............................ 150 N. Clinton Street & Office 564 West Randolph Chicago, IL Red Bank Distribution............................ 4000 Red Bank Road Distribution/ Cincinnati, OH Warehouse
- --------------- * Management has represented that the property is being given to lender in satisfaction of nonrecourse debt obligation. (1) The locations of the six buildings leased to Furon are as follows: 407 East Street, New Haven, CT; Interstate 295 & Harmony Road, Mickletown, NJ; 1199 S. Chillicothe Road, Aurora, OH; 10585 Main Street, Mantua, OH; 386 Metacon Ave., Bristol, RI; and 1395 Danner Drive, Aurora, OH. (2) The locations of the two buildings leased to Dr. Pepper Bottling are as follows: 2304 Century Center Blvd., Irving, TX and 2400 Holly Hill Drive, Houston, TX. (3) The locations of the twelve buildings leased to Childtime are as follows: 5792 W. Oakland Street, Chandler, AZ; 7090 N. Thornydale Road, Tucson, AZ; 1485 Vega Street, Alhambra, CA; 3656 Riverside Drive, Chino, CA; 12421 Springdale Street, Garden Grove, CA; 13881 N. Prospect Ave., Tustin, CA; 34203 Ford Road, Westland, MI; 2171 Fifteen Mile Road, Sterling Heights, MI; 32503 Ann Arbor Trail, Westland, MI; 1028 MacArthur Drive, Carrolton, TX; 550 W. Danieldale Road, Duncanville, TX and 1597 Glencairn Lane, Lewisville, TX. 21 24 ASSUMPTIONS AND LIMITING CONDITIONS This appraisal report is subject to the assumptions and limiting conditions as set forth below. 1. No responsibility is assumed for matters of a legal nature affecting the portfolio properties or the titles thereto. Titles to the properties are assumed to be good and marketable and the properties are assumed free and clear of all liens unless otherwise stated. 2. The Portfolio Valuations assume (a) responsible ownership and competent management of the properties; (b) there are no hidden or unapparent conditions of the properties' subsoil or structures that render the properties more or less valuable (no responsibility is assumed for such conditions or for arranging for engineering studies that may be required to discover them); (c) full compliance with all applicable federal, state and local zoning, access and environmental regulations and laws, unless noncompliance is stated, defined and considered in the Portfolio Valuations; and (d) all required licenses, certificates of occupancy and other governmental consents have been or can be obtained and renewed for any use on which the value estimates contained in the Portfolio Valuations are based. 3. The Appraiser shall not be required to give testimony or appear in court because of having made the appraisal with reference to the portfolio in question, unless arrangements have been previously made therefore. 4. The information contained in the Portfolio Valuations or upon which the Portfolio Valuations are based has been provided by or gathered from sources assumed to be reliable and accurate. Some of such information has been provided by the owner of the properties. The Appraiser shall not be responsible for the accuracy or completeness of such information, including the correctness of estimates, opinions, dimensions, exhibits and other factual matters. The Portfolio Valuations and the opinion of value stated therein are as of the date stated in the Portfolio Valuations. Changes since that date in portfolios, external and market factors can significantly affect property values. 5. Disclosure of the contents of the appraisal report is governed by the Bylaws and Regulations of the professional appraisal organization with which the Appraiser is affiliated. 6. Neither all, nor any part of the content of the report, or copy thereof (including conclusions as to the portfolios' values, the identity of the Appraiser, professional designations, reference to any professional appraisal organizations, or the firm with which the Appraiser is connected) shall be used for any purpose by anyone other than the client specified in the report, including, but not limited to, the mortgagee or its successors and assignees, mortgage insurers, consultants, professional appraisal organizations, any state or federally approved financial institution, any department, agency or instrumentality without the previous written consent of the Appraiser; nor shall it be conveyed by anyone to the public through advertising, public relations, news sales or other media, without the written consent and approval of the Appraiser. 7. On all appraisals subject to completion, repairs or alterations, the appraisal report and value conclusions are contingent upon completion of the improvements in a workmanlike manner. 8. The physical condition of the improvements considered by the Portfolio Valuations are based on visual inspection by the Appraiser or other representatives of Stanger and on representations by the owner. Stanger assumes no responsibility for the soundness of structural members or for the condition of mechanical equipment, plumbing or electrical components. The Appraiser has made no survey of the properties. 9. The projections of income and expenses and the valuation parameters utilized are not predictions of the future. Rather, they are the Appraiser's best estimate of current market thinking relating to future income and expenses. The Appraiser makes no warranty or representations that these projections will materialize. The real estate market is constantly fluctuating and changing. It is not the Appraiser's task to predict or in any way warrant the conditions of a future real estate market; the Appraiser can only reflect what the investment community, as of the date of the appraisal, envisions for the future in terms of rental rates, expenses, supply and demand. We have used methods and assumptions deemed appropriate in our professional judgment; however, future events may demonstrate that the assumptions were incorrect or that other different methods or assumptions may have been more appropriate. 22 25 ASSUMPTIONS AND LIMITING CONDITIONS -- (CONTINUED) 10. The Portfolio Valuations represent normal consideration for the properties sold based on the buyer's assumption of existing third-party indebtedness and unaffected by special terms, services, fees, costs, or credits incurred in the transaction. 11. Unless otherwise stated in the report, the existence of hazardous materials, which may or may not be present on the properties, was not disclosed to the Appraiser by the owner. The Appraiser has no knowledge of the existence of such materials on or in the properties. However, the Appraiser is not qualified to detect such substances. The presence of substances such as asbestos, ureaformaldehyde foam insulation, oil spills, or other potentially hazardous materials may affect the values of the portfolios. The portfolio value estimates are predicated on the assumption that there is no such material on or in the portfolio properties that would cause a loss of value. No responsibility is assumed for such conditions, or for any expertise or engineering knowledge required to discover them. The client is urged to retain an expert in this field, if desired. 12. For purposes of this report, it is assumed that each property is free of any negative impact with regard to the Environmental Cleanup Responsibility Act (ECRA) or any other environmental problems or with respect to non-compliance with the Americans with Disabilities Act (ADA). No investigation has been made by the Appraiser with respect to any potential environmental or ADA problems. Environmental and ADA compliance studies are not within the scope of this report. 13. Pursuant to the Engagement Agreement, the Portfolio Valuations have been prepared on a limited scope basis in conformity with the departure provisions of the Uniform Standards of Professional Appraisal Practice and the Standards of Professional Appraisal Practice of the Appraisal Institute, relying solely on the income approach to value primarily utilizing discounted cash flow analysis assuming leases and debt in place. Further, the engagement calls for delivery of a summary appraisal report in which the content has been limited to that data presented herein. As such, the summary appraisal report is not designed to meet the requirements of Title XI of the Federal Financial Institutions Reform, Recovery and Enforcement Act of 1989. Therefore, federally regulated institutions should not rely on this report for financing purposes. 14. The Portfolio Valuations reported herein may not reflect the premium or discount a potential buyer may assign to an assembled portfolio of properties or to a group of properties in a particular local market which provides opportunities for enhanced market presence and penetration. In addition, where properties are owned jointly with other entities affiliated with the general partner, minority interest discounts were not applied. 15. The appraisal is solely for the purpose of providing our opinion of the values of the Portfolios, and we make no representation as to the adequacy of such a review for any other purpose. The properties in the portfolios are generally leased to corporate tenants under long-term triple net leases. The owner has directed that the leased fee interests be valued based on existing lease contracts and debt in place using a discounted cash flow analysis. The use of other valuation methodologies might produce a higher or lower value. 16. In addition to these general assumptions and limiting conditions, any assumptions and conditions applicable to specific properties have been retained in our files. 23 EX-99.3 43 CONSOLIDATION CONSENT CARD ELECTION FORM & INSTRUC 1 Exhibit 99.3 CONSENT CARD -------------------------------------------------------------------- CAREY DIVERSIFIED, LLC CONSENT VOTE OF UNITHOLDERS AS OF RECORD DATE OCTOBER 7, 1997 CONSENT This Consent is solicited by the General Partners on behalf of the Unitholders or holders of votes of Corporate Property Associates 1-9 ("CPA(R):1-9"). (Continued, and to be dated and signed, on reverse side.) ELECTION FORM ------------------------------------------------------------------------- ELECTION FORM (Continued, and to be dated and signed, on reverse side.) 2 CONSENT CARD INSTRUCTIONS (Please read carefully and follow instructions) Please note that if you fail to properly complete your CONSENT CARD, your vote(s) will be cast AGAINST the proposed consolidation. If you fail to return your CONSENT CARD your inaction has the same effect as a vote cast AGAINST the proposed consolidation. If the consolidation is approved, you will not participate in the Election Process and you will receive Listed Shares. Carefully read and follow these instructions: * Your ownership positions in CPA(R); 1-9 are listed to the right of your name and address on your Consent Card. * To vote all your holdings in the same manner, simply mark an "X" in the appropriate box that appears in the top right corner of your Consent Card (your choices are FOR, AGAINST or ABSTAIN). If you wish to withhold your vote as to any individual CPA(R) in which you own partnership interests, simply draw a line through the appropriate partnership listing that appears to the middle right of your Consent card. * SIGN AND DATE YOUR COMPLETED CONSENT CARD. * Place your Consent Card along with your Election Form into the postage paid envelope provided. This envelope is addressed to ChaseMellon Shareholder Services, LLC. - -------------------------------------------------------------------------------- ELECTION FORM INSTRUCTIONS (Please read carefully and follow instructions) Please note that if you fail to property complete and or return your ELECTION FORM and the consolidation is approved, you will receive LISTED SHARES for all your holdings. If you fail to return your CONSENT CARD, and the consolidation is approved, you will not participate in the Election Process and you will receive Listed Shares. Carefully read and follow these instructions: * Your ownership positions in CPA(R); 1-9 are listed to the right of your name and address on your Election Form. * You may receive either LISTED SHARES or SUBSIDIARY PARTNERSHIP UNITS for your holdings. * To receive LISTED SHARES for all your holdings, simply indicate by drawing an "X" in the appropriate box located on the middle left side of your Election Form. If you wish to receive Subsidiary Partnership Units for your holdings in any particular Limited Partnership, simply mark an "X" in the appropriate box next to the appropriate partnership listing that appears to the middle of your Election Form. * SIGN AND DATE YOUR COMPLETED ELECTION FORM. * Place your Election Form along with your Consent Card into the postage paid envelope provided. This envelope is addressed to ChaseMellon Shareholder Services, LLC. 3 CONSENT CARD THE GENERAL PARTNERS OF CORPORATE PROPERTY ASSOCIATES 1-9 ("CPA(R):1-9") RECOMMEND THAT YOU VOTE FOR (FOR THE CONSOLIDATION). PROPOSAL: To adopt the Partnership Agreement Amendments and approve the Plan of Consolidation and all related transactions, all as described in the Prospectus, in which CPA(R):1-9 will be consolidated into a newly-formed Delaware limited liability company, Carey Diversified LLC ("CD"), which will trade publicly on the New York Stock Exchange. Investors in CPA(R):1-9 will be offered the opportunity to exchange current partnership units for listed shares of CD. FOR AGAINST ABSTAIN [ ] [ ] [ ] You may withhold your vote as to any individual CPA(R) Partnership in which you own partnership interests by drawing a line through that partnership as listed to the right. (Please note our records indicate you have the ownership positions as indicated to the right of your name and address below.) CPA(R):1 CPA(R):4 CPA(R):7 CPA(R):2 CPA(R):5 CPA(R):8 CPA(R):3 CPA(R):6 CPA(R):9 SIGNATURE Dated , 1997 ------------------------------------------- ---------------- Please sign exactly as your name appears above. PLEASE MARK, SIGN, DATE AND MAIL THIS CONSENT CARD PROMPTLY, USING THE ENCLOSED ENVELOPE. + FOLD CARD HERE + ELECTION FORM THE GENERAL PARTNERS OF CORPORATE PROPERTY ASSOCIATES 1-9 ("CPA(R):1-9") RECOMMEND THAT YOU ELECT TO RECEIVE LISTED SHARES FOR ALL YOUR HOLDINGS. SUBSIDIARY LISTED PARTNERSHIP SHARES UNITS I ELECT TO RECEIVE LISTED SHARES For my CPA(R):1 [ ] [ ] FOR ALL MY HOLDINGS EXCEPT AS holdings, I elect STATED TO THE RIGHT. to receive: [ ] For my CPA(R):2 [ ] [ ] holdings, I elect to receive: For my CPA(R):3 [ ] [ ] holdings, I elect to receive: For my CPA(R):4 [ ] [ ] holdings, I elect to receive: For my CPA(R):5 [ ] [ ] holdings, I elect to receive: For my CPA(R):6 [ ] [ ] holdings, I elect to receive: For my CPA(R):7 [ ] [ ] holdings, I elect to receive: For my CPA(R):8 [ ] [ ] holdings, I elect to receive: For my CPA(R):9 [ ] [ ] holdings, I elect to receive: SIGNATURE Dated , 1997 ------------------------------------------- ---------------- Please sign exactly as your name appears above. PLEASE MARK, SIGN, DATE AND MAIL THIS ELECTION FORM PROMPTLY, USING THE ENCLOSED ENVELOPE. EX-99.4 44 AMEND TO THE AGREEMENT OF LIMITED PARTNERSHIP CPA1 1 EXHIBIT 99.4 AMENDMENT TO THE AMENDED AGREEMENT OF LIMITED PARTNERSHIP OF CORPORATE PROPERTY ASSOCIATES THIS AMENDMENT (this "Amendment") TO THE AMENDED AGREEMENT OF LIMITED PARTNERSHIP of CORPORATE PROPERTY ASSOCIATES, a California limited partnership (the "Partnership"), which amends the Amended Agreement of Limited Partnership of the Partnership, dated as of October 20, 1978 (the "Agreement"), is made and entered into as of the __th day of __________, 1997 by and between W. P. CAREY & CO., INC., a New York corporation, as general partner and Corporate General Partner, WILLIAM POLK CAREY, as general partner and Individual General Partner and all persons and entities admitted as Limited Partners as provided in the Agreement and amends the Agreement as follows: 1. "ARTICLE X -- MANAGEMENT AND OPERATION OF BUSINESS" is hereby amended by adding to Section (G) "Specific Transactions Authorized" thereof the following paragraphs: 10. Notwithstanding anything to the contrary contained in this Agreement, the Partnership may, upon the approval of holders of a majority of the limited partner interests of the Partnership, merge itself with First Subsidiary, L.P. (the "Subsidiary Partnership") pursuant to an Agreement of Merger (the "Merger Agreement") to be entered into by the Partnership and the Subsidiary Partnership, following which the Partnership shall be the surviving limited partnership, and shall pay all expenses incurred in connection with the formation and qualification of the Subsidiary Partnership and the exchange of the Partners' Partnership Interests pursuant to the Merger Agreement. In accordance with Section 15678.2 of the Act (including Section 15678.2(e)), notwithstanding anything to the contrary contained in this Agreement, the Merger Agreement may (i) effect any amendment to this Agreement or (ii) effect the adoption of a new partnership agreement for the Partnership. Any amendment to this Agreement or adoption of a new partnership agreement made pursuant to the foregoing sentence shall be effective at the effective time or date of the merger. The provisions of this Paragraph (G)(10) of Article X shall not be construed to limit the accomplishment of a merger or of any of 2 the matters referred to herein by any other means otherwise permitted by law. 11. The Partnership, and the Corporate General Partner on behalf of the Partnership, may enter into and perform all documents that are necessary, appropriate, proper, advisable, incidental or convenient to consummate a merger approved in accordance with Paragraph (G)(10) above (including the Merger Agreement and a certificate of merger), as determined by the Corporate General Partner, in its sole discretion, all without any further act, vote or approval of any other Partner notwithstanding any other provision of this Agreement. The General Partners hereby approve of the merger of the Subsidiary Partnership with and into the Partnership pursuant to the Merger Agreement. 2. Successors and Assigns. This Amendment shall be binding upon, and shall enure to the benefit of, the parties hereto and their respective successors and assigns. 3. Full Force and Effect. Except to the extent modified hereby, the Agreement shall remain in full force and effect. 4. Counterparts. This Amendment may be executed in counterparts, all of which together shall constitute one agreement binding on all parties hereto, notwithstanding that all such parties are not signatories to the original or same counterpart. 5. Headings. The headings in this Amendment are included for convenience and identification only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Amendment or any provisions hereof. 6. Governing Law. This Amendment shall be interpreted in accordance with the laws of the State of Delaware (without regard to conflict of laws principles), all rights and remedies being governed by such laws. Initially capitalized terms used herein and not otherwise defined are used as defined in the Agreement. 3 IN WITNESS WHEREOF, the parties hereto have hereunto set their respective hands as of the day and year first above written. GENERAL PARTNERS: _____________________________ William Polk Carey W. P. CAREY & CO., INC. By: ___________________________________ LIMITED PARTNERS: All Limited Partners now admitted as limited partners of the Partnership pursuant to powers of attorney and authorizations previously executed in favor of and granted and delivered to the Corporate General Partner By: W. P. CAREY & CO., INC. Corporate General Partner By:___________________________ Francis J. Carey, President EX-99.5 45 AMEND TO AGREEMENT OF LIMITED PARTNERSHIP CPA2 1 EXHIBIT 99.5 AMENDMENT TO THE AMENDED AGREEMENT OF LIMITED PARTNERSHIP OF CORPORATE PROPERTY ASSOCIATES 2 THIS AMENDMENT (this "Amendment") TO THE AMENDED AGREEMENT OF LIMITED PARTNERSHIP of CORPORATE PROPERTY ASSOCIATES 2, a California limited partnership (the "Partnership"), which amends the Amended Agreement of Limited Partnership of the Partnership, dated as November 1, 1979, and as amended and restated on July 1, 1980 and as amended on December 24, 1980 (the "Agreement"), is made and entered into as of the __th day of __________, 1997 by and between W. P. CAREY & CO., INC., a New York corporation, as general partner and Corporate General Partner, WILLIAM POLK CAREY, as general partner and Individual General Partner and all persons and entities admitted as Limited Partners as provided in the Agreement and amends the Agreement as follows: 1. "ARTICLE X -- MANAGEMENT AND OPERATION OF BUSINESS" is hereby amended by adding to Section (G) "Specific Transactions Authorized" thereof the following paragraphs: 10. Notwithstanding anything to the contrary contained in this Agreement, the Partnership may, upon the approval of holders of a majority of the limited partner interests of the Partnership, merge itself with Second Subsidiary, L.P. (the "Subsidiary Partnership") pursuant to an Agreement of Merger (the "Merger Agreement") to be entered into by the Partnership and the Subsidiary Partnership, following which the Partnership shall be the surviving limited partnership, and shall pay all expenses incurred in connection with the formation and qualification of the Subsidiary Partnership and the exchange of the Partners' Partnership Interests pursuant to the Merger Agreement. In accordance with Section 15678.2 of the Act (including Section 15678.2(e)), notwithstanding anything to the contrary contained in this Agreement, the Merger Agreement may (i) effect any amendment to this Agreement or (ii) effect the adoption of a new partnership agreement for the Partnership. Any amendment to this Agreement or adoption of a new partnership agreement made pursuant to the foregoing sentence shall be effective at the effective time or date of the merger. The 2 provisions of this Paragraph (G)(10) of Article X shall not be construed to limit the accomplishment of a merger or of any of the matters referred to herein by any other means otherwise permitted by law. 11. The Partnership, and the Corporate General Partner on behalf of the Partnership, may enter into and perform all documents that are necessary, appropriate, proper, advisable, incidental or convenient to consummate a merger approved in accordance with Paragraph (G)(10) above (including the Merger Agreement and a certificate of merger), as determined by the Corporate General Partner, in its sole discretion, all without any further act, vote or approval of any other Partner notwithstanding any other provision of this Agreement. The General Partners hereby approve of the merger of the Subsidiary Partnership with and into the Partnership pursuant to the Merger Agreement. 2. Successors and Assigns. This Amendment shall be binding upon, and shall enure to the benefit of, the parties hereto and their respective successors and assigns. 3. Full Force and Effect. Except to the extent modified hereby, the Agreement shall remain in full force and effect. 4. Counterparts. This Amendment may be executed in counterparts, all of which together shall constitute one agreement binding on all parties hereto, notwithstanding that all such parties are not signatories to the original or same counterpart. 5. Headings. The headings in this Amendment are included for convenience and identification only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Amendment or any provisions hereof. 6. Governing Law. This Amendment shall be interpreted in accordance with the laws of the State of Delaware (without regard to conflict of laws principles), all rights and remedies being governed by such laws. Initially capitalized terms used herein and not otherwise defined are used as defined in the Agreement. 3 IN WITNESS WHEREOF, the parties hereto have hereunto set their respective hands as of the day and year first above written. GENERAL PARTNERS: _____________________________ William Polk Carey W. P. CAREY & CO., INC. By: ___________________________________ LIMITED PARTNERS: All Limited Partners now admitted as limited partners of the Partnership pursuant to powers of attorney and authorizations previously executed in favor of and granted and delivered to the Corporate General Partner By: W. P. CAREY & CO., INC. Corporate General Partner By:___________________________ Francis J. Carey, President EX-99.6 46 AMEN TO AGREEMENT OF LIMITED PARTNERSHIP CPA3 1 EXHIBIT 99.6 AMENDMENT TO THE AMENDED AGREEMENT OF LIMITED PARTNERSHIP OF CORPORATE PROPERTY ASSOCIATES 3 THIS AMENDMENT (this "Amendment") TO THE AMENDED AGREEMENT OF LIMITED PARTNERSHIP of CORPORATE PROPERTY ASSOCIATES 3, a California limited partnership (the "Partnership"), which amends the Amended Agreement of Limited Partnership of the Partnership, dated as June 1, 1981 (the "Agreement"), is made and entered into as of the __th day of __________, 1997 by and between W. P. CAREY & CO., INC., a New York corporation, as general partner and Corporate General Partner, WILLIAM POLK CAREY, as general partner and Individual General Partner and all persons and entities admitted as Limited Partners as provided in the Agreement and amends the Agreement as follows: 1. "ARTICLE X -- MANAGEMENT AND OPERATION OF BUSINESS" is hereby amended by adding to Section (G) "Specific Transactions Authorized" thereof the following paragraphs: 10. Notwithstanding anything to the contrary contained in this Agreement, the Partnership may, upon the approval of holders of a majority of the limited partner interests of the Partnership, merge itself with Third Subsidiary, L.P. (the "Subsidiary Partnership") pursuant to an Agreement of Merger (the "Merger Agreement") to be entered into by the Partnership and the Subsidiary Partnership, following which the Partnership shall be the surviving limited partnership, and shall pay all expenses incurred in connection with the formation and qualification of the Subsidiary Partnership and the exchange of the Partners' Partnership Interests pursuant to the Merger Agreement. In accordance with Section 15678.2 of the Act (including Section 15678.2(e)), notwithstanding anything to the contrary contained in this Agreement, the Merger Agreement may (i) effect any amendment to this Agreement or (ii) effect the adoption of a new partnership agreement for the Partnership. Any amendment to this Agreement or adoption of a new partnership agreement made pursuant to the foregoing sentence shall be effective at the effective time or date of the merger. The provisions of this Paragraph (G)(10) of Article X shall not be construed to limit the accomplishment of a merger or of any of 2 the matters referred to herein by any other means otherwise permitted by law. 11. The Partnership, and the Corporate General Partner on behalf of the Partnership, may enter into and perform all documents that are necessary, appropriate, proper, advisable, incidental or convenient to consummate a merger approved in accordance with Paragraph (G)(10) above (including the Merger Agreement and a certificate of merger), as determined by the Corporate General Partner, in its sole discretion, all without any further act, vote or approval of any other Partner notwithstanding any other provision of this Agreement. The General Partners hereby approve of the merger of the Subsidiary Partnership with and into the Partnership pursuant to the Merger Agreement. 2. Successors and Assigns. This Amendment shall be binding upon, and shall enure to the benefit of, the parties hereto and their respective successors and assigns. 3. Full Force and Effect. Except to the extent modified hereby, the Agreement shall remain in full force and effect. 4. Counterparts. This Amendment may be executed in counterparts, all of which together shall constitute one agreement binding on all parties hereto, notwithstanding that all such parties are not signatories to the original or same counterpart. 5. Headings. The headings in this Amendment are included for convenience and identification only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Amendment or any provisions hereof. 6. Governing Law. This Amendment shall be interpreted in accordance with the laws of the State of Delaware (without regard to conflict of laws principles), all rights and remedies being governed by such laws. Initially capitalized terms used herein and not otherwise defined are used as defined in the Agreement. 3 IN WITNESS WHEREOF, the parties hereto have hereunto set their respective hands as of the day and year first above written. GENERAL PARTNERS: ____________________________ William Polk Carey W. P. CAREY & CO., INC. By: ___________________________________ LIMITED PARTNERS: All Limited Partners now admitted as limited partners of the Partnership pursuant to powers of attorney and authorizations previously executed in favor of and granted and delivered to the Corporate General Partner By: W. P. CAREY & CO., INC. Corporate General Partner By:___________________________ Francis J. Carey, President EX-99.7 47 AMEN TO THE AGREEMENT OF LIMITED PARTNERSHIP CPA 4 1 EXHIBIT 99.7 AMENDMENT TO THE AMENDED AGREEMENT OF LIMITED PARTNERSHIP OF CORPORATE PROPERTY ASSOCIATES 4 THIS AMENDMENT (this "Amendment") TO THE AMENDED AGREEMENT OF LIMITED PARTNERSHIP of CORPORATE PROPERTY ASSOCIATES 4, a California limited partnership (the "Partnership"), which amends the Amended Agreement of Limited Partnership of the Partnership, dated as of September 30, 1982 as amended July 7, 1988 (the "Agreement"), is made and entered into as of the __th day of __________, 1997 by and between CAREY CORPORATE PROPERTY, INC., a Delaware corporation, as general partner and Corporate General Partner, WILLIAM POLK CAREY, as general partner and Individual General Partner and all persons and entities admitted as Limited Partners as provided in the Agreement and amends the Agreement as follows: 1. "ARTICLE X -- MANAGEMENT AND OPERATION OF BUSINESS" is hereby amended by adding to Section (G) "Specific Transactions Authorized" thereof the following paragraphs: 10. Notwithstanding anything to the contrary contained in this Agreement, the Partnership may, upon the approval of holders of a majority of the limited partner interests of the Partnership, merge itself with Fourth Subsidiary, L.P. (the "Subsidiary Partnership") pursuant to an Agreement of Merger (the "Merger Agreement") to be entered into by the Partnership and the Subsidiary Partnership, following which the Partnership shall be the surviving limited partnership, and shall pay all expenses incurred in connection with the formation and qualification of the Subsidiary Partnership and the exchange of the Partners' Partnership Interests pursuant to the Merger Agreement. In accordance with Section 15678.2 of the Act (including Section 15678.2(e)), notwithstanding anything to the contrary contained in this Agreement, the Merger Agreement may (i) effect any amendment to this Agreement or (ii) effect the adoption of a new partnership agreement for the Partnership. Any amendment to this Agreement or adoption of a new partnership agreement made pursuant to the foregoing sentence shall be effective at the effective time or date of the merger. The provisions of this Paragraph (G)(10) of Article X shall not be 2 construed to limit the accomplishment of a merger or of any of the matters referred to herein by any other means otherwise permitted by law. 11. The Partnership, and the Corporate General Partner on behalf of the Partnership, may enter into and perform all documents that are necessary, appropriate, proper, advisable, incidental or convenient to consummate a merger approved in accordance with Paragraph (G)(10) above (including the Merger Agreement and a certificate of merger), as determined by the Corporate General Partner, in its sole discretion, all without any further act, vote or approval of any other Partner notwithstanding any other provision of this Agreement. The General Partners hereby approve of the merger of the Subsidiary Partnership with and into the Partnership pursuant to the Merger Agreement. 2. Successors and Assigns. This Amendment shall be binding upon, and shall enure to the benefit of, the parties hereto and their respective successors and assigns. 3. Full Force and Effect. Except to the extent modified hereby, the Agreement shall remain in full force and effect. 4. Counterparts. This Amendment may be executed in counterparts, all of which together shall constitute one agreement binding on all parties hereto, notwithstanding that all such parties are not signatories to the original or same counterpart. 5. Headings. The headings in this Amendment are included for convenience and identification only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Amendment or any provisions hereof. 6. Governing Law. This Amendment shall be interpreted in accordance with the laws of the State of Delaware (without regard to conflict of laws principles), all rights and remedies being governed by such laws. Initially capitalized terms used herein and not otherwise defined are used as defined in the Agreement. 3 IN WITNESS WHEREOF, the parties hereto have hereunto set their respective hands as of the day and year first above written. GENERAL PARTNERS: _____________________________ William Polk Carey CAREY CORPORATE PROPERTY, INC. By: ___________________________________ LIMITED PARTNERS: All Limited Partners now admitted as limited partners of the Partnership pursuant to powers of attorney and authorizations previously executed in favor of and granted and delivered to the Corporate General Partner By: CAREY CORPORATE PROPERTY, INC. Corporate General Partner By:___________________________ Francis J. Carey, President EX-99.8 48 AMEN TO AGREEMENT OF LIMITED PARTNERSHIP OF CPA 5 1 EXHIBIT 99.8 AMENDMENT TO THE AMENDED AGREEMENT OF LIMITED PARTNERSHIP OF CORPORATE PROPERTY ASSOCIATES 5 THIS AMENDMENT (this "Amendment") TO THE AMENDED AGREEMENT OF LIMITED PARTNERSHIP of CORPORATE PROPERTY ASSOCIATES 5, a California limited partnership (the "Partnership"), which amends the Amended Agreement of Limited Partnership of the Partnership, dated as of June 1, 1983(the "Agreement"), is made and entered into as of the __th day of __________, 1997 by and between CAREY CORPORATE PROPERTY, INC., a Delaware corporation, as general partner and Corporate General Partner, WILLIAM POLK CAREY, as general partner and Individual General Partner and all persons and entities admitted as Limited Partners as provided in the Agreement and amends the Agreement as follows: 1. "ARTICLE X -- MANAGEMENT AND OPERATION OF BUSINESS" is hereby amended by adding to Section (G) "Specific Transactions Authorized" thereof the following paragraphs: 10. Notwithstanding anything to the contrary contained in this Agreement, the Partnership may, upon the approval of holders of a majority of the limited partner interests of the Partnership, merge itself with Fifth Subsidiary, L.P. (the "Subsidiary Partnership") pursuant to an Agreement of Merger (the "Merger Agreement") to be entered into by the Partnership and the Subsidiary Partnership, following which the Partnership shall be the surviving limited partnership, and shall pay all expenses incurred in connection with the formation and qualification of the Subsidiary Partnership and the exchange of the Partners' Partnership Interests pursuant to the Merger Agreement. In accordance with Section 15678.2 of the Act (including Section 15678.2(e)), notwithstanding anything to the contrary contained in this Agreement, the Merger Agreement may (i) effect any amendment to this Agreement or (ii) effect the adoption of a new partnership agreement for the Partnership. Any amendment to this Agreement or adoption of a new partnership agreement made pursuant to the foregoing sentence shall be effective at the effective time or date of the merger. The provisions of this Paragraph (G)(10) of Article X shall not be construed to limit the accomplishment of a merger or of any of 2 the matters referred to herein by any other means otherwise permitted by law. 11. The Partnership, and the Corporate General Partner on behalf of the Partnership, may enter into and perform all documents that are necessary, appropriate, proper, advisable, incidental or convenient to consummate a merger approved in accordance with Paragraph (G)(10) above (including the Merger Agreement and a certificate of merger), as determined by the Corporate General Partner, in its sole discretion, all without any further act, vote or approval of any other Partner notwithstanding any other provision of this Agreement. The General Partners hereby approve of the merger of the Subsidiary Partnership with and into the Partnership pursuant to the Merger Agreement. 2. Successors and Assigns. This Amendment shall be binding upon, and shall enure to the benefit of, the parties hereto and their respective successors and assigns. 3. Full Force and Effect. Except to the extent modified hereby, the Agreement shall remain in full force and effect. 4. Counterparts. This Amendment may be executed in counterparts, all of which together shall constitute one agreement binding on all parties hereto, notwithstanding that all such parties are not signatories to the original or same counterpart. 5. Headings. The headings in this Amendment are included for convenience and identification only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Amendment or any provisions hereof. 6. Governing Law. This Amendment shall be interpreted in accordance with the laws of the State of Delaware (without regard to conflict of laws principles), all rights and remedies being governed by such laws. Initially capitalized terms used herein and not otherwise defined are used as defined in the Agreement. 3 IN WITNESS WHEREOF, the parties hereto have hereunto set their respective hands as of the day and year first above written. GENERAL PARTNERS: _____________________________ William Polk Carey CAREY CORPORATE PROPERTY, INC. By: ___________________________________ LIMITED PARTNERS: All Limited Partners now admitted as limited partners of the Partnership pursuant to powers of attorney and authorizations previously executed in favor of and granted and delivered to the Corporate General Partner By: CAREY CORPORATE PROPERTY, INC., Corporate General Partner By:___________________________ Francis J. Carey, President EX-99.9 49 AMEND TO AGREEMENT OF LIMITED PARTNERSHIP CPA 6 1 EXHIBIT 99.9 AMENDMENT TO THE AMENDED AGREEMENT OF LIMITED PARTNERSHIP OF CORPORATE PROPERTY ASSOCIATES 6 THIS AMENDMENT (this "Amendment") TO THE AMENDED AGREEMENT OF LIMITED PARTNERSHIP of CORPORATE PROPERTY ASSOCIATES 6, a California limited partnership (the "Partnership"), which amends the Amended Agreement of Limited Partnership of the Partnership, dated as of November 26, 1984 as amended November 30, 1984 (the "Agreement"), is made and entered into as of the __th day of __________, 1997 by and between CAREY CORPORATE PROPERTY, INC., a Delaware corporation, as general partner and Corporate General Partner, WILLIAM POLK CAREY, as general partner and Individual General Partner and all persons and entities admitted as Limited Partners as provided in the Agreement and amends the Agreement as follows: 1. "ARTICLE X -- MANAGEMENT AND OPERATION OF BUSINESS" is hereby amended by adding to Section (G) "Specific Transactions Authorized" thereof the following paragraphs: 11. Notwithstanding anything to the contrary contained in this Agreement, the Partnership may, upon the approval of holders of a majority of the limited partner interests of the Partnership, merge itself with Sixth Subsidiary, L.P. (the "Subsidiary Partnership") pursuant to an Agreement of Merger (the "Merger Agreement") to be entered into by the Partnership and the Subsidiary Partnership, following which the Partnership shall be the surviving limited partnership, and shall pay all expenses incurred in connection with the formation and qualification of the Subsidiary Partnership and the exchange of the Partners' Partnership Interests pursuant to the Merger Agreement. In accordance with Section 15678.2 of the Act (including Section 15678.2(e)), notwithstanding anything to the contrary contained in this Agreement, the Merger Agreement may (i) effect any amendment to this Agreement or (ii) effect the adoption of a new partnership agreement for the Partnership. Any amendment to this Agreement or adoption of a new partnership agreement made pursuant to the foregoing sentence shall be effective at the effective time or date of the merger. The provisions of this Paragraph (G)(11) of Article X shall not be 2 construed to limit the accomplishment of a merger or of any of the matters referred to herein by any other means otherwise permitted by law. 12. The Partnership, and the Corporate General Partner on behalf of the Partnership, may enter into and perform all documents that are necessary, appropriate, proper, advisable, incidental or convenient to consummate a merger approved in accordance with Paragraph (G)(11) above (including the Merger Agreement and a certificate of merger), as determined by the Corporate General Partner, in its sole discretion, all without any further act, vote or approval of any other Partner notwithstanding any other provision of this Agreement. The General Partners hereby approve of the merger of the Subsidiary Partnership with and into the Partnership pursuant to the Merger Agreement. 2. Successors and Assigns. This Amendment shall be binding upon, and shall enure to the benefit of, the parties hereto and their respective successors and assigns. 3. Full Force and Effect. Except to the extent modified hereby, the Agreement shall remain in full force and effect. 4. Counterparts. This Amendment may be executed in counterparts, all of which together shall constitute one agreement binding on all parties hereto, notwithstanding that all such parties are not signatories to the original or same counterpart. 5. Headings. The headings in this Amendment are included for convenience and identification only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Amendment or any provisions hereof. 6. Governing Law. This Amendment shall be interpreted in accordance with the laws of the State of Delaware (without regard to conflict of laws principles), all rights and remedies being governed by such laws. Initially capitalized terms used herein and not otherwise defined are used as defined in the Agreement. 3 IN WITNESS WHEREOF, the parties hereto have hereunto set their respective hands as of the day and year first above written. GENERAL PARTNERS: ______________________________ William Polk Carey CAREY CORPORATE PROPERTY, INC. By: ___________________________________ LIMITED PARTNERS: All Limited Partners now admitted as limited partners of the Partnership pursuant to powers of attorney and authorizations previously executed in favor of and granted and delivered to the Corporate General Partner By: CAREY CORPORATE PROPERTY, INC. Corporate General Partner By:___________________________ Francis J. Carey, President EX-99.10 50 AMEND TO AGREEMENT OF LIMITED PARTNERSHIP CPA 7 1 EXHIBIT 99.10 AMENDMENT TO THE AMENDED AGREEMENT OF LIMITED PARTNERSHIP OF CORPORATE PROPERTY ASSOCIATES 7 THIS AMENDMENT (this "Amendment") TO THE AMENDED AGREEMENT OF LIMITED PARTNERSHIP of CORPORATE PROPERTY ASSOCIATES 7, a California limited partnership (the "Partnership"), which amends the Amended Agreement of Limited Partnership of the Partnership, dated as of April 10, 1986 as amended April 14, 1988 (the "Agreement"), is made and entered into as of the __th day of __________, 1997 by and between SEVENTH CAREY CORPORATE PROPERTY, INC., a Delaware corporation, as general partner and Managing General Partner, WILLIAM POLK CAREY, as general partner and Individual General Partner and all persons and entities admitted as Limited Partners as provided in the Agreement and amends the Agreement as follows: 1. "ARTICLE X -- MANAGEMENT AND OPERATION OF BUSINESS" is hereby amended by adding to Section (G) "Specific Transactions Authorized" thereof the following paragraphs: 14. Notwithstanding anything to the contrary contained in this Agreement, the Partnership may, upon the approval of holders of a majority of the limited partner interests of the Partnership, merge itself with Seventh Subsidiary, L.P. (the "Subsidiary Partnership") pursuant to an Agreement of Merger (the "Merger Agreement") to be entered into by the Partnership and the Subsidiary Partnership, following which the Partnership shall be the surviving limited partnership, and shall pay all expenses incurred in connection with the formation and qualification of the Subsidiary Partnership and the exchange of the Partners' Partnership Interests pursuant to the Merger Agreement. In accordance with Section 15678.2 of the Act (including Section 15678.2(e)), notwithstanding anything to the contrary contained in this Agreement, the Merger Agreement may (i) effect any amendment to this Agreement or (ii) effect the adoption of a new partnership agreement for the Partnership. Any amendment to this Agreement or adoption of a new partnership agreement made pursuant to the foregoing sentence shall be effective at the effective time or date of the merger. The provisions of this Paragraph (G)(14) of Article X shall not be 2 construed to limit the accomplishment of a merger or of any of the matters referred to herein by any other means otherwise permitted by law. 15. The Partnership, and the Managing General Partner on behalf of the Partnership, may enter into and perform all documents that are necessary, appropriate, proper, advisable, incidental or convenient to consummate a merger approved in accordance with Paragraph (G)(14) above (including the Merger Agreement and a certificate of merger), as determined by the Managing General Partner, in its sole discretion, all without any further act, vote or approval of any other Partner notwithstanding any other provision of this Agreement. The General Partners hereby approve of the merger of the Subsidiary Partnership with and into the Partnership pursuant to the Merger Agreement. 2. Successors and Assigns. This Amendment shall be binding upon, and shall enure to the benefit of, the parties hereto and their respective successors and assigns. 3. Full Force and Effect. Except to the extent modified hereby, the Agreement shall remain in full force and effect. 4. Counterparts. This Amendment may be executed in counterparts, all of which together shall constitute one agreement binding on all parties hereto, notwithstanding that all such parties are not signatories to the original or same counterpart. 5. Headings. The headings in this Amendment are included for convenience and identification only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Amendment or any provisions hereof. 6. Governing Law. This Amendment shall be interpreted in accordance with the laws of the State of Delaware (without regard to conflict of laws principles), all rights and remedies being governed by such laws. Initially capitalized terms used herein and not otherwise defined are used as defined in the Agreement. 3 IN WITNESS WHEREOF, the parties hereto have hereunto set their respective hands as of the day and year first above written. GENERAL PARTNERS: ______________________________ William Polk Carey SEVENTH CAREY CORPORATE PROPERTY, INC. By: ___________________________________ LIMITED PARTNERS: All Limited Partners now admitted as limited partners of the Partnership pursuant to powers of attorney and authorizations previously executed in favor of and granted and delivered to the Managing General Partner By: SEVENTH CAREY CORPORATE PROPERTY, INC., Managing General Partner By:___________________________ Francis J. Carey, President EX-99.11 51 AMEND TO AGREEMENT OF LIMITED PARTNERSHIP CPA 8 1 Exhibit 99.11 AMENDMENT TO THE AMENDED AGREEMENT OF LIMITED PARTNERSHIP OF CORPORATE PROPERTY ASSOCIATES 8, L.P., A DELAWARE LIMITED PARTNERSHIP THIS AMENDMENT (this "Amendment") TO THE AMENDED AGREEMENT OF LIMITED PARTNERSHIP of CORPORATE PROPERTY ASSOCIATES 8, L.P., A DELAWARE LIMITED PARTNERSHIP (the "Partnership"), which amends the Amended Agreement of Limited Partnership of the Partnership, dated as of February 12, 1988 (the "Agreement"), is made and entered into as of the __th day of __________, 1997 by and between EIGHTH CAREY CORPORATE PROPERTY, INC., a Delaware corporation, as general partner and Managing General Partner, WILLIAM POLK CAREY, as general partner and Individual General Partner and all persons and entities admitted as Limited Partners as provided in the Agreement and amends the Agreement as follows: 1. "ARTICLE X -- MANAGEMENT AND OPERATION OF BUSINESS" is hereby amended by adding to Section (G) "Specific Transactions Authorized" thereof the following paragraphs: 15. Notwithstanding anything to the contrary contained in this Agreement, the Partnership may, upon the approval of holders of a majority of the limited partner interests of the Partnership, merge itself with Eighth Subsidiary, L.P. (the "Subsidiary Partnership") pursuant to an Agreement of Merger (the "Merger Agreement") to be entered into by the Partnership and the Subsidiary Partnership, following which the Partnership shall be the surviving limited partnership, and shall pay all expenses incurred in connection with the formation and qualification of the Subsidiary Partnership and the exchange of the Partners' Partnership Interests pursuant to the Merger Agreement. In accordance with Section 17-211 of the Act (including Section 17-211(g)), notwithstanding anything to the contrary contained in this Agreement, the Merger Agreement may (i) effect any amendment to this Agreement or (ii) effect the adoption of a new partnership agreement for the Partnership. Any amendment to this Agreement or adoption of a new partnership agreement made pursuant to the foregoing sentence shall be effective at the effective time or date of the merger. The provisions of this Paragraph (G)(15) of Article X shall not be 2 construed to limit the accomplishment of a merger or of any of the matters referred to herein by any other means otherwise permitted by law. 16. The Partnership, and the Managing General Partner on behalf of the Partnership, may enter into and perform all documents that are necessary, appropriate, proper, advisable, incidental or convenient to consummate a merger approved in accordance with Paragraph (G)(15) above (including the Merger Agreement and a certificate of merger), as determined by the Managing General Partner, in its sole discretion, all without any further act, vote or approval of any other Partner notwithstanding any other provision of this Agreement. The General Partners hereby approve of the merger of the Subsidiary Partnership with and into the Partnership pursuant to the Merger Agreement. 2. Successors and Assigns. This Amendment shall be binding upon, and shall enure to the benefit of, the parties hereto and their respective successors and assigns. 3. Full Force and Effect. Except to the extent modified hereby, the Agreement shall remain in full force and effect. 4. Counterparts. This Amendment may be executed in counterparts, all of which together shall constitute one agreement binding on all parties hereto, notwithstanding that all such parties are not signatories to the original or same counterpart. 5. Headings. The headings in this Amendment are included for convenience and identification only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Amendment or any provisions hereof. 6. Governing Law. This Amendment shall be interpreted in accordance with the laws of the State of Delaware (without regard to conflict of laws principles), all rights and remedies being governed by such laws. Initially capitalized terms used herein and not otherwise defined are used as defined in the Agreement. 3 IN WITNESS WHEREOF, the parties hereto have hereunto set their respective hands as of the day and year first above written. GENERAL PARTNERS: ________________________________________ William Polk Carey EIGHTH CAREY CORPORATE PROPERTY, INC. By: ___________________________________ LIMITED PARTNERS: All Limited Partners now admitted as limited partners of the Partnership pursuant to powers of attorney and authorizations previously executed in favor of and granted and delivered to the Managing General Partner By: EIGHTH CAREY CORPORATE PROPERTY, INC., Managing General Partner By:___________________________ Francis J. Carey, President EX-99.12 52 AMEND TO AGREEMENT OF LIMITED PARTNERSHIP CPA 9 1 Exhibit 99.12 AMENDMENT TO THE AMENDED AGREEMENT OF LIMITED PARTNERSHIP OF CORPORATE PROPERTY ASSOCIATES 9, L.P., A DELAWARE LIMITED PARTNERSHIP THIS AMENDMENT (this "Amendment") TO THE AMENDED AGREEMENT OF LIMITED PARTNERSHIP of CORPORATE PROPERTY ASSOCIATES 9, L.P., A DELAWARE LIMITED PARTNERSHIP (the "Partnership"), which amends the Amended Agreement of Limited Partnership of the Partnership, dated as of March 17, 1989 (the "Agreement"), is made and entered into as of the __th day of __________, 1997 by and between NINTH CAREY CORPORATE PROPERTY, INC., a Delaware corporation, as general partner and Managing General Partner, WILLIAM POLK CAREY, as general partner and Individual General Partner and all persons and entities admitted as Limited Partners as provided in the Agreement and amends the Agreement as follows: 1. "ARTICLE X -- MANAGEMENT AND OPERATION OF BUSINESS" is hereby amended by adding to Section (G) "Specific Transactions Authorized" thereof the following paragraphs: 16. Notwithstanding anything to the contrary contained in this Agreement, the Partnership may, upon the approval of holders of a majority of the limited partner interests of the Partnership, merge itself with Ninth Subsidiary, L.P. (the "Subsidiary Partnership") pursuant to an Agreement of Merger (the "Merger Agreement") to be entered into by the Partnership and the Subsidiary Partnership, following which the Partnership shall be the surviving limited partnership, and shall pay all expenses incurred in connection with the formation and qualification of the Subsidiary Partnership and the exchange of the Partners' Partnership Interests pursuant to the Merger Agreement. In accordance with Section 17-211 of the Act (including Section 17-211(g)), notwithstanding anything to the contrary contained in this Agreement, the Merger Agreement may (i) effect any amendment to this Agreement or (ii) effect the adoption of a new partnership agreement for the Partnership. Any amendment to this Agreement or adoption of a new partnership agreement made pursuant to the foregoing sentence shall be effective at the effective time or date of the merger. The provisions of this Paragraph (G)(16) of Article X shall not be 2 construed to limit the accomplishment of a merger or of any of the matters referred to herein by any other means otherwise permitted by law. 17. The Partnership, and the Managing General Partner on behalf of the Partnership, may enter into and perform all documents that are necessary, appropriate, proper, advisable, incidental or convenient to consummate a merger approved in accordance with Paragraph (G)(16) above (including the Merger Agreement and a certificate of merger), as determined by the Managing General Partner, in its sole discretion, all without any further act, vote or approval of any other Partner notwithstanding any other provision of this Agreement. The General Partners hereby approve of the merger of the Subsidiary Partnership with and into the Partnership pursuant to the Merger Agreement. 2. Successors and Assigns. This Amendment shall be binding upon, and shall enure to the benefit of, the parties hereto and their respective successors and assigns. 3. Full Force and Effect. Except to the extent modified hereby, the Agreement shall remain in full force and effect. 4. Counterparts. This Amendment may be executed in counterparts, all of which together shall constitute one agreement binding on all parties hereto, notwithstanding that all such parties are not signatories to the original or same counterpart. 5. Headings. The headings in this Amendment are included for convenience and identification only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Amendment or any provisions hereof. 6. Governing Law. This Amendment shall be interpreted in accordance with the laws of the State of Delaware (without regard to conflict of laws principles), all rights and remedies being governed by such laws. Initially capitalized terms used herein and not otherwise defined are used as defined in the Agreement. 3 IN WITNESS WHEREOF, the parties hereto have hereunto set their respective hands as of the day and year first above written. GENERAL PARTNERS: ________________________________________ William Polk Carey NINTH CAREY CORPORATE PROPERTY, INC. By: ___________________________________ LIMITED PARTNERS: All Limited Partners now admitted as limited partners of the Partnership pursuant to powers of attorney and authorizations previously executed in favor of and granted and delivered to the Managing General Partner By: NINTH CAREY CORPORATE PROPERTY, INC., Managing General Partner By: _____________________________ Francis J. Carey, President EX-99.13 53 AMEND & RESTATED AGREEMENT OF LTD PARTNERSHIP CPA1 1 Exhibit 99.13 AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF CORPORATE PROPERTY ASSOCIATES (A California Limited Partnership) THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP of CORPORATE PROPERTY ASSOCIATES, a California limited partnership (the "Partnership"), which amends and restates the Amended Agreement of Limited Partnership dated as of October 20, 1978, as amended as of _________, 1997, is made and entered into as of the ____ day of _______, 1997 by and between CAREY DIVERSIFIED LLC, a Delaware limited liability company as General Partner and as Limited Partner, CAREY MANAGEMENT LLC, as Corporate Special Partner, WILLIAM POLK CAREY, as Individual Special Partner and W.P. CAREY & CO., INC., as Limited Partner, those Persons set forth on Schedule A hereto, as Limited Partners, and all persons and entities admitted as Limited Partners as provided herein. ARTICLE I CONTINUATION OF PARTNERSHIP The parties hereby continue the Partnership under the provisions of the California Revised Limited Partnership Act (the "Act") and the rights and liabilities of the Partners shall be as provided in such law and as herein expressly provided. In the event that it shall be necessary for the Partnership to exist in or qualify to do business under the laws of any state or states other than or in addition to the State of California, the parties hereby agree that the Partnership shall take such action as may be necessary to exist or qualify to do business in any state in which such existence or qualification shall be required, provided that in any such event the Partnership shall at all times continue to be a limited partnership formed under and governed by the provisions of the Uniform Partnership Act of the State of California. ARTICLE II NAME The business of the Partnership shall be conducted under the name "Corporate Property Associates" or under the name "Corporate Property Associates - - A California Limited Partnership" in any state or other jurisdiction which requires that the term "limited partnership" be a part of the Partnership's name or under such other name as the General Partner shall hereafter designate in writing to the other Partners. 2 ARTICLE III DEFINITIONS "Acquisition Expenses" means the expenses of the Partnership related to the selection and acquisition of properties by the Partnership, whether or not such properties are acquired, including but not limited to legal fees and expenses, travel and communications expenses, costs of appraisals, non-refundable option payments on property not acquired, accounting fees and expenses, costs of title reports and title insurance, transfer and recording taxes and miscellaneous expenses. Acquisition Expenses shall not include Acquisition Fees. "Acquisition Fees" means the total of all fees and commissions paid by any party in connection with the purchase or development of property by the Partnership, except a development fee paid to a person not an Affiliate of the Partnership in connection with the actual development of a project after the Partnership's acquisition of the land. Included in the computation of such fees or commissions shall be any real estate commission, selection fee, development fee, nonrecurring management fee, or any fee of a similar nature, however designated but not any loan fee ("points"). Acquisition Fees should not include Acquisition Expenses. "Affiliate" means, with respect to any party hereto, (i) any person directly or indirectly controlling, controlled by or under common control with such party, (ii) any person owning or controlling 10% or more of the outstanding voting securities of such party. (iii) any officer, director or partner of such party or of any person specified in (i) or (ii) above and (iv) any company in which any officer, director or partner of any person specified in (iii) above is an officer. director or partner; provided, however, that for purposes of this definition the term "Affiliate" shall not be deemed to include any person providing legal, underwriting or financial or investment advisory services to the Partnership, the General Partner, or any Affiliate of any of them from time to time. "Agreement" means this Amended and Restated Agreement of Limited Partnership as hereafter amended from time to time. "Appraisal Date" means December 31, 1998. "Cash From Financings" means the net cash proceeds realized by the Partnership from the financing of Partnership property or the refinancing of any Partnership indebtedness. "Cash From Sales" means the net cash proceeds realized by the Partnership from the sale, exchange or other disposition of any of its assets. Cash From Sales shall not include net cash proceeds realized from the financing of Partnership property or the refinancing of any Partnership indebtedness. 2 3 "Code" means the Internal Revenue Code of 1986. "Consolidation and Offering Expenses" means all expenses incurred in connection with the formation and qualification of the Subsidiary Partnership, the Merger and in offering the Shares to the former limited partners of the Partnership in exchange for their Partnership Interests under applicable Federal and state law, and any other expenses actually incurred and directly related to the offering of the Shares, including such expenses as: (i) the preparing, printing, filing and delivering of the Registration Statement and the Prospectus (including any amendments thereof or supplements thereto), (ii) the preparing and printing of this Agreement, other solicitation material and related documents and the filing and/or recording of such certificates or other documents necessary to comply with the laws of the State of California for the formation of a limited partnership, the merger of a limited partnership into another limited partnership and for the continued good standing of a limited partnership, (iii) the qualification or registration of the limited liability company interests under state securities or "Blue Sky" laws, (iv) any escrow arrangements, including any compensation to an escrow agent, (v) the filing fees payable to the United States Securities and Exchange Commission and to the National Association of Securities Dealers, Inc. and any costs payable to the NYSE for the listing of the Listed Shares, (vi) the fees of the Partnership's counsel, (vii) all advertising expenses incurred in connection therewith, including the cost of all sales literature and the costs related to investor and broker/dealer sales and information meetings and marketing incentive programs and (viii) selling commissions and wholesaling expenses incurred in connection with the sale of the Shares. "Contribution" means any money, property or services rendered, or a promissory note or other binding obligations to contribute money or property, or to render services as permitted by Section 15651 of the Act, which a Partner contributes to the Partnership as capital in that Partner's capacity as Partner pursuant to this Partnership Agreement or any other agreement among the Partners, including any agreement as to value. "Corporate Special Partner" means Carey Management LLC, a Delaware limited liability company. "CPA Partnership" means Corporate Property Associates 2, a California limited partnership, Corporate Property Associates 3, a California limited partnership, Corporate Property Associates 4, a California limited partnership, Corporate Property Associates 5, a California limited partnership, Corporate Property Associates 6, a California limited partnership, Corporate Property Associates 7, a California limited partnership, Corporate Property Associates 8, L.P., a Delaware limited partnership, Corporate Property 3 4 Associates 9, L.P., a Delaware limited partnership, the Partnership and any other real estate limited partnerships sponsored by W.P. Carey & Co., Inc. or its Affiliates with investment objectives substantially similar to the Partnership's. "Distributable Cash From Operations" means cash receipts from the ordinary day-to-day operations of the Partnership (including all interest on Partnership investments and mortgages held by the Partnership) without deduction for the management fee authorized by Paragraph G(3) of Article X payable to an Affiliate of the General Partner or for depreciation and amortization of intangibles such as organization, underwriting and debt placement costs but after deducting all other expenses, debt amortization and provisions for reserves established by the General Partner which it deems to be reasonably required for the proper operation of the business of the Partnership. "Distributable Cash from Operations" shall not include cash proceeds realized from the sale, exchange or other disposition of assets of the Partnership or from financing of Partnership property or the refinancing of any Partnership indebtedness. "Fiscal Quarter" means the three-month period ending on the last day of the third. sixth. ninth and twelfth calendar months of each Fiscal Year of the Partnership. "Fiscal Year' means the Fiscal Year specified in Article XIII. "Front-End Fees" means all fees and expenses paid by any party for any services rendered in connection with the organizational or acquisition phase of the Partnership, including Consolidation and Offering Expenses, Acquisition Fees, Acquisition Expenses and any other similar fees, however designated. "Individual Special Partner" means William Polk Carey. "Investment in Properties" means the amount of gross proceeds of the Offering actually paid or allocated to the purchase, development, construction or improvement of properties acquired by the Partnership, including the purchase of properties, working capital reserves (except that working capital reserves in excess of 5% of the gross proceeds of the Offering shall not be included) and other cash payments such as interest, closing costs, financing fees, taxes and other similar items, but excluding Front-End Fees. "Limited Partner" means any person or entity in his, her or its capacity as a limited partner of the Partnership and whose name and address are set forth on the books and records of the Partnership. "Mandatory Distribution Event" means (a) the sale or disposition of a Partnership property to a third party 4 5 unaffiliated with the Partnership or the General Partner, not including the pledge, mortgage or encumbrance of a property, or of any interest therein, in connection with the financing, refinancing or other leveraging of such property or otherwise or any assignment of any leases or rents related to such property, or (b) the mandatory distribution to holders of Partnership Interests following the Appraisal Date. "Merger" means the merger of the Subsidiary Partnership into the Partnership. "Merger Agreement" means the Agreement of Merger pursuant to which the Subsidiary Partnership is merged with and into the Partnership. "Minimum Gain" shall mean and refer to, at any time, the excess, if any, of the outstanding principal balance of all nonrecourse debt of the Partnership that is secured by an interest in Partnership assets, over the adjusted basis of such assets to the Partnership for Federal income tax purposes. For purposes of the preceding sentence, the term "nonrecourse debt" shall mean a liability of the Partnership with respect to which no Partner has any personal liability. "Nonrecourse Deductions" has the meaning set forth in Sections 1.704-2(b)(1) and 1.704-2(c) of the Treasury Regulations. "Nonrecourse Liabilities" has the meaning set forth in Section 1.704-2(b)(3) of the Treasury Regulations. "Net Lease" means a lease in which the tenant undertakes to pay all or substantially all the cash expenses, excluding debt service, related to the leased property. "Offering" means the offering of the Shares made pursuant to the Prospectus. "Partner" means the General Partner, the Corporate Special Partner, the Individual Special Partner and any Limited Partner where no distinction is required by the context in which the term is used. "Partner Minimum Gain" means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a nonrecourse Liability, determined in accordance with Treasury Regulations Section 1.704-2(i)(4). "Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulations Section 1.704-2(b)(4). 5 6 "Partner Nonrecourse Deductions" has the meaning set forth in Treasury Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Debt for the Partnership taxable year shall be determined in accordance with the rules of Treasury Regulations Section 1.704-2(i)(2). "Partnership" means Corporate Property Associates - a California limited partnership. "Partnership Interest" means the interest of each Partner in the profits, losses, distributions, capital and assets of the Partnership. "Partnership Minimum Gain" has the meaning set forth in Treasury Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in Partnership Minimum Gain, for a Partnership taxable year shall be determined in accordance with the rules of the Treasury Regulations. "Prospectus" means the final prospectus of the General Partner pursuant to which the Partnership will offer up to 23,654,898 Shares as the same may at any time and from time to time be amended or supplemented after the effective date of the Registration Statement. "Proxy" means a written authorization signed by a Partner or the Partner's attorney-in-fact giving another person the power to vote with respect to the Partnership Interest of that Partner. "Signed," for the purpose of this paragraph, means the placing of the Partner's name on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the Partner or the Partner's attorney-in-fact. "Registration Statement" means the General Partner's Registration Statement on Form S-4 filed with the Securities and Exchange Commission in the form in which it becomes effective, as the same may at any time and from time to time thereafter be amended or supplemented. "Shares" means the Shares of the General Partner. "Special Partners" means the Corporate Special Partner and the Individual Special Partner. "Subsidiary Partnership" means First Subsidiary, L.P., a California limited partnership, which is a subsidiary of the General Partner. ARTICLE IV PURPOSE 6 7 The business and purpose of the Partnership is to invest in and own real property or interests therein (including leasehold estates) or appurtenances thereto as well as personal or mixed property connected therewith which is income-producing or capable of improvement to become income-producing within a reasonable time after acquisition. The Partnership may enter into ventures, partnerships and other business arrangements with respect to real property as deemed prudent by the General Partner in order to achieve successful operations for the Partnership. Operations of the Partnership may be conducted wherever, in the opinion of the General Partner and not in violation of the general restrictions described in Paragraph H of Article X the factors involved appear to be favorable for the Partnership and the Partners. ARTICLE V NAMES AND ADDRESSES OF PARTNERS The General Partner of the Partnership shall be Carey Diversified LLC, a Delaware limited liability company having an office at 50 Rockefeller Plaza, New York, New York 10020. The names and addresses of the Limited Partners of the Partnership shall be as set forth on the books and records of the Partnership and shall be kept at the principal place of business of the Partnership and a copy of which shall be kept at the Partnership's California office. ARTICLE VI PRINCIPAL PLACE OF BUSINESS; CALIFORNIA OFFICE The principal place of business of the Partnership shall be 50 Rockefeller Plaza, New York, New York 10020. The Partnership shall also maintain an office in California at Transamerica Pyramid, 600 Montgomery Street, San Francisco, California 94111. The General Partner may from time to time change the principal place of business of the Partnership or its California office and, in either such event, the General Partner shall notify the Partners in writing within ten days after the effective date of such change; provided, however, that no such change shall be effected unless the General Partner determines that such change is in the best interests of the Partnership after giving consideration to any material adverse state or local income, estate or inheritance tax consequences to the Partners, or any adverse effect on the limited liability of the Limited Partners, as a result of such change. The General Partner may establish additional places of business of the Partnership when and where required by the business of the Partnership. The Partnership shall at all times maintain in California an agent for service of process upon the Partnership. ARTICLE VII CAPITAL CONTRIBUTIONS 7 8 The Partnership is authorized to issue and sell up to $160,000 of limited partner interests. No interest shall be paid on any contribution to the capital of the Partnership. Loans by a Partner to the Partnership shall not be considered contributions to the capital of the Partnership. Any Partner, including any additional or substituted Partner, who shall acquire a Partnership Interest or whose Partnership Interest is increased by means of a transfer to him of all or a part of the Partnership Interest of another Partner, shall succeed to the Capital Account, or portion thereof, in respect of the Partnership Interest received. ARTICLE VIII PROFITS AND LOSSES A. Determination of Profits and Losses. The profits and losses of the Partnership shall be determined for each Fiscal Year of the Partnership in accordance with generally accepted accounting principles and procedures applied in a consistent manner and for federal income tax purposes, by additionally making such adjustments as are necessary to include other items of income, expense, deduction and allowance as are permitted and required under the Code and the regulations promulgated thereunder. Except as otherwise provided herein, whenever a proportionate part of the Partnership profit or loss is credited or charged to a Capital Account every item of income, gain, loss or deduction entering into the computation of such profit or loss shall be considered either credited or charged, as the case may be, to such Capital Account and every item of credit or tax preference related to such profit or loss and applicable to the period during which such profit or loss was realized shall be allocated to such Partner in the same proportion. Any increase or decrease in the amount of any item of income, gain,. loss or deduction attributable to an adjustment to the basis of Partnership assets made pursuant to a valid election under sections 734, 743 and 754 of the Code, and pursuant to corresponding provisions of applicable state and local income tax laws shall be charged or credited, as the case may be, and any increase or decrease in the amount of any item of credit or tax preference attributable to any such adjustment shall be allocated, to the Partners entitled thereto under such laws. Profits and losses allocated, to a particular class of Partnership Interests shall be allocated among the holders of record of such class of Partnership Interests at the end of each Fiscal Year (or such shorter period as may be provided herein) of the Partnership in proportion to their respective Partnership Interests; provided however, that any such profits and losses attributable to a limited partner interest assigned during such Fiscal Year of the Partnership shall be allocated among the holders of such limited 8 9 partner interests during such Fiscal Year in proportion to the number of months (for purposes of such allocation ownership of limited partner interests for each month will be determined on the fifteenth day of each month) that each such holder was recognized as the owner of such limited partner interest during such Fiscal Year, without regard to the results of Partnership operations during the period in which each such holder was recognized as the owner thereof and without regard to the date, amount or recipient of any distributions which may have been made with respect to such limited partner interest. B. Allocation of Profits and Losses. 1. Except as provided in subparagraph 4 of this paragraph B, the profits and losses of the Partnership (other than gains or losses from the sale, exchange or other disposition of Partnership assets) shall be allocated to the Partners as follows and in the following order to priority: a. An amount of net income equal to the excess, if any, of the aggregate negative balance of the Capital Accounts of the Partners over the Minimum Gain (determined as of the end of such year or fraction thereof), shall first be allocated among the Partners whose Capital Accounts are negative as a result of nonrecourse debt in proportion to the negative amounts attributable to such nonrecourse debt. b. Any remaining balance of net income shall be allocated 1% to the General Partner, 0.9% to the Corporate Special Partner, 0.1% to the Individual Special Partner and 98% to the Limited Partners. c. Net losses of the Partnership shall be allocated 1% to the General Partner, 0.9% to the Corporate Special Partner, 0.1% to the Individual Special Partner and 98% to the Limited Partners. 2. Except as provided in subparagraph 4 of this Paragraph B, net losses arising from sales, exchanges or other dispositions of Partnership assets shall be allocated 1% to the General Partner, 0.9% to the Corporate Special Partner, 0.1% to the Individual Special Partner and 98% to the Limited Partners. For purposes of this subparagraph 2, Capital Accounts shall be determined after applying the allocations provided in subparagraphs 1 and 5 of this Paragraph B, and after applying subparagraphs 6 and 7 of this Paragraph B. 3. Net gains arising from sales, exchanges or other dispositions of Partnership assets shall be allocated to the Partners as follows and in the following order to priority: 9 10 a. An amount of such gains equal to the excess, if any, of the aggregate negative balance of the Capital Accounts of the General Partner over the Minimum Gain; b. If each Partner's Capital Account is negative and the gains are less than the aggregate negative amounts in the Capital Accounts, in the ratio that the Capital Accounts bear to each other; c. If each Partner's Capital Account is negative and the gains are greater than the aggregate negative amounts in the Capital Accounts (i) first in an amount to bring each Partner's Capital Account to zero, and (ii) then to the Partners in the percentage by which Cash From Sales and Cash From Financings is then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; d. If certain Partner's Capital Accounts are positive and other Partner's Capital Accounts are negative (i) first in an amount to bring the Capital Account of each Partner whose Capital Accounts which are negative to zero (or if gains are less than the aggregate negative amounts of the Capital Accounts which are negative, to such Partners in the ratio that such negative Capital Accounts bear to each other), and (ii) then to the Partners in the percentage by which Cash From Sales and Cash From Financings is then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; e. If each Partner's Capital Account is positive, in the percentages by which Cash From Sales and Cash From Financings is then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; For purposes of this subparagraph 3, Capital Accounts shall be determined after applying the allocations provided in subparagraphs 1 and 2 of this Paragraph B and after applying subparagraphs 6 and 7 of Paragraph B. 4. No loss or deduction or item thereof under subparagraph 1 or 2 of this Paragraph B shall be allocated to the General Partner if, or to the extent, such allocation would create or increase a deficit in the General Partner's Capital Account, unless: a. Such allocation of loss or deduction is attributable to nonrecourse debt of the Partnership; and b. Such allocation does not cause the deficit capital account of the General Partner to exceed the amount of Minimum Gain attributable to such nonrecourse debt, determined as of the last day of the taxable year to which such allocation is attributable. 10 11 5. To the extent that any amount paid to a Limited Partner or its Affiliates pursuant to the provisions of Paragraphs G(2), (4),(5),(6), or (7) of Article X hereof, or as Front-End Fees, is treated as a distributive share of Partnership income to the Limited Partner for Federal income tax purposes, the Limited Partner affected shall be allocated gross income of the Partnership at a time and in an amount equal to the amount of such payment, and the Capital Account of the Limited Partner so affected shall be adjusted to reflect such allocation and payment. If the Partnership's gross income for a Fiscal Year is less than the amount of such payment, the Limited Partner so affected shall be allocated gross income in each succeeding Fiscal Year until the total amount so allocated equals the total amount of such payment. 6. For purposes of subparagraphs 1(a), 2 and 3 of this Paragraph B, distributions to the Partners pursuant to Paragraphs A and E of Article IX hereof shall be treated as having been made and charged to the Capital Accounts of the Partners prior to the allocations of income, gains and losses provided therein. 7. Solely for purposes of this Paragraph B, the Capital Accounts of each Partner shall be reduced by such Partner's share of any Partnership expenditure which would be treated as it were an expenditure described under Section 705(a)(2)(B) of the Code, and shall be reduced or increased by any other amount required by the then applicable regulations under Section 704 of the Code. 8. Notwithstanding anything to the contrary in this Article VIII, if any Partner receives an adjustment, allocation or distribution described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), such Partner shall be specially allocated a pro rata portion of each item of Partnership income, including gross income, and gain in an amount and manner sufficient to eliminate, as quickly as possible, any deficit balance in such Partner's Capital Account created by such adjustment, allocation or distribution in excess of the sum of (i) the amount such Partner is obligated to restore pursuant to any provision of this Agreement and (ii) the amount such Limited Partner is deemed to be obligated to restore pursuant to the penultimate sentence of Treasury Regulations Section 1.704-1(b)(2)(iv)(f) (as amended in 1986). This subparagraph 8 of Paragraph B is intended to constitute a "qualified income offset" within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(3). 9. Except as otherwise provided in Section 1.704-2(f) of the Treasury Regulations, if there is a net decrease in Partnership Minimum Gain for any Partnership fiscal year, each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary subsequent years) in an amount equal to such Partner's share of the net decrease in 11 12 Partnership Minimum Gain to the extent required by Treasury Regulations Section 1.704-2(f). The items to be so allocated shall be determined in accordance with Section 1.704-2(f) and (i) of the Treasury Regulations. This subparagraph is intended to comply with the minimum gain chargeback requirement in said section of the Treasury Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant hereto. 10. Except as otherwise provided in Section 1.704-2(i)(4) of the Treasury Regulations, if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any fiscal year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the Treasury Regulations, shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to that Partner's share of the net decrease in the Partner Minimum Gain attributable to such Partner Nonrecourse Debt to the extent and in the manner required by Section 1.704-2(i) of the Treasury Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i) of the Treasury Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and (j)(2) of the Treasury Regulations. This subparagraph is intended to comply with the minimum gain chargeback requirement with respect to Partner Nonrecourse Debt contained in said section of the Treasury Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph shall be made in proportion to the respective amounts to be allocated to each Partner pursuant hereto. 11. To the extent any Partner has an Adjusted Capital Account Deficit at the end of any Partnership Fiscal Year, each such Partner shall be specially allocated items of Partnership income (including gross income) and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Paragraph 8(B)(11) shall be made if and only to the extent that such Partners would have an Adjusted Capital Account Deficit after all other allocations provided for in this Section have been tentatively made as if this Paragraph 8(B)(11) were not in the Agreement. 12. Partner Nonrecourse Deductions for any fiscal year or other applicable period with respect to a Partner Nonrecourse Debt shall be specially allocated to the Partners that bear the economic risk of loss for such Partner Nonrecourse Debt (as determined under Sections 1.704-2(b)(4) and 1.704-2(i)(1) of the Treasury Regulations). 12 13 C. Power of the Partner to Vary Allocations of Profits and Losses. It is the intent of the Partners that each Partner's distributive share of income, gains, losses, deductions and credits shall be determined and allocated in accordance with this Article VII to the fullest extent permitted by Section 704(b) of the Code. If the Partnership is advised that the allocations provided in this Article VIII are unlikely to be respected for Federal income tax purposes, the General Partner has been granted power in Paragraph B(2) of Article XVI of this Agreement to amend the allocation provisions of this Agreement, on advice of accountants and legal counsel, to the minimum extent necessary to effect the plan of allocations and distributions provided in this Agreement. D. Allocations of Profits and Losses Among Limited Partners. Except as otherwise provided in this Article VIII, profits and losses shall be allocated among the Limited Partners in the same manner as distributions are allocated in Paragraph D of Article IX hereof. E. Consent of Partners to Allocation of Profits and Losses. The methods hereinabove set forth by which profits and losses of the Partnership are determined and allocated are hereby consented to by each Partner as a condition to becoming a Partner. ARTICLE IX DISTRIBUTIONS A. Distributable Cash From Operations. The General Partner shall distribute as soon after the close of each Fiscal Quarter as is reasonably feasible all of the Distributable Cash From Operations for such Fiscal Quarter in the following manner: 1% to the General Partner, 0.9% to the Corporate Special Partner, 0.1% to the Individual Special Partner and 98% to the Limited Partners. B. Cash From Sales. The General Partner shall distribute, as soon after the close of each Fiscal Quarter as is reasonably feasible, all Cash From Sales realized by the Partnership during such Fiscal Quarter in accordance with the provisions of Paragraph E of this Article IX. C. Cash From Financings. The General Partner shall distribute, as soon after the close of each Fiscal Quarter as is reasonably feasible, all of the Cash From Financings realized by the Partnership during such Fiscal Quarter in accordance with the provisions of Paragraph E of this Article IX. D. Allocation of Distributions Among Limited Partners. Distributions of cash to the Limited Partners shall be apportioned among the holders of record of limited partner interests in the ratio in which the number of limited partner interests held of 13 14 record by each of them bears to the number of limited partner interests held of record by all the Limited Partners as of the first day of the Fiscal Quarter with respect to which such distribution is made E. Distributions of Cash From Sales and Cash From Financings The General Partner shall distribute Cash From Sales and Cash From Financings in the following manner: 1% to the General Partner, 0.9% to the Corporate Special Partner, 0.1% to the Individual Special Partner and 98% to the Limited Partners, until such time as $198,740 has been distributed to the Special Partners pursuant to this Paragraph E of Article IX. Thereafter, Cash From Sales and Cash From Financings shall be distributed 1% to the General Partner and 99% to the Limited Partners. F. Return of Capital Contributions. To the extent that, at the end of any Fiscal Quarter, the total cash distributions to the Limited Partners made pursuant to this Article IX exceed the profits of the Partnership for such Fiscal Quarter, such excess shall be charged to each Limited Partners' Account and shall be regarded as a rightful return of capital contributions. G. Consent of Partners to Allocation of Distributions. The methods hereinabove set forth by which Cash From Operations, Cash From Sales and Cash From Financings are allocated and distributed are hereby consented to by each Partner as a condition to becoming a Partner. ARTICLE X MANAGEMENT AND OPERATION OF BUSINESS A. Management of Business. The Partnership shall be managed by the General Partner and the conduct of the Partnership's business shall be controlled and conducted by the General Partner in accordance with this Agreement. B. Authority of General Partner. In addition to and not in limitation of any rights and powers conferred by law or other provisions of this Agreement, the General Partner shall have and may exercise on behalf of the Partnership all powers and rights necessary, proper, convenient or advisable to effectuate and carry out the purposes, business and objectives of the Partnership. Such powers shall include, without limitation, the following powers: 1. To acquire, hold and dispose of any real property, (or interests therein, including leasehold estates) and appurtenances thereto as well as personal or mixed property connected therewith, including the purchase, lease, development, improvement, maintenance, exchange, trade or sale of such property at such price, rental or amount, for cash, securities or other 14 15 property and upon such terms, as the General Partner deem to be in the best interests of the Partnership; 2. Subject to the provisions of Paragraph H(10) of this Article X to borrow money and, if security is required therefor, to mortgage or subject to any other security device any portion of the assets of the Partnership, to obtain replacements of any mortgage or other security device, and to prepay, in whole or in part, refinance, increase, modify, consolidate or extend any mortgage or other security device; 3. To deposit, withdraw, invest, pay, retain and distribute the Partnership's funds in any manner consistent with the provisions of this Agreement; 4. To bring and defend actions at law or in equity. 5. To employ persons in the operation and management of the Partnership's business. including but not limited to supervisory managing agents, building management agents. real property developers and real estate brokers; 6. To place record title to, or the right to use, Partnership assets in the name or names of a non-operating nominee or nominees, including an Affiliate of the General Partner, for any purpose convenient or beneficial to the Partnership; 7. To perform all acts and file all documents, including tax returns and registration statements, necessary to comply with Federal, state and local laws, rules and regulations applicable to the Partnership or the conduct of the Partnership's business; 8. To enter into and carry out contracts and agreements and any or all documents and instruments and to do and perform all such other things as may be in furtherance of Partnership purposes or necessary or appropriate to the conduct of Partnership activities; 9. To execute, acknowledge, deliver, seal, file, record and vote any and all instruments which may be deemed necessary or convenient to effect the foregoing; and 10. To designate Carey Diversified LLC, the General Partner, as the "Tax Matters Partner" in accordance with Section 6231(a)(7) of the Code and, as such, the General Partner shall have all powers necessary to so perform including, without limitation, the power to retain attorneys and accountants of its choice and the right to settle any audits without the consent of the Limited Partners, except as otherwise required by the Code. the designation provided for herein is expressly consented to by each Partner as an express condition to becoming a Partner; and 15 16 C. Restrictions on Authority of General Partner. In addition to other acts expressly prohibited or restricted by this Agreement or by law, the General Partner shall have no authority to act on behalf of the Partnership with respect to, and are expressly prohibited from undertaking, the following: 1. Doing any act in contravention of this Agreement; 2. Except as provided in this Agreement and except in connection with the liquidation and winding up of the business of the Partnership upon its termination and dissolution, doing any act which would make it impossible to carry on the ordinary business of the Partnership; 3. Confessing a judgment against the Partnership in connection with any threatened or pending legal action, 4. Possessing Partnership property or assigning the rights of the Partnership in specific Partnership property for other than a Partnership purpose; 5. Admitting a person as a Limited Partner except as provided in this Agreement; 6. Except as provided in this Agreement and except in connection with the liquidation and winding up of business of the Partnership upon its termination and dissolution or a Mandatory Distribution Event, selling substantially all the assets of the Partnership at a single sale or in multiple sales in the same 12-month period without the prior written consent of Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI; 7. Pledging or encumbering substantially all the properties of the Partnership at one time or from time to time in a series of related transactions, unless the lien of such pledge or encumbrance arises in connection with the acquisition or improvement of properties or the initial financing of properties acquired free and clear of encumbrances or the refinancing of previous obligations and such lien is limited to the properties so acquired, improved, financed or refinanced; 8. Obtaining any loan or any mortgage loan on any residential property made or guaranteed by any Federal, state or local government or municipality or any agency of any Federal. state or local government or municipality; 9. Performing any act (other than an act required by this Agreement or any act taken in good faith in reliance upon counsel's opinion) which would, at the time such act occurred, subject any Limited Partner to liability as a general partner in any jurisdiction; 16 17 10. Prepaying any interest on any Partnership indebtedness; provided that the payment of any amount commonly referred to as "points" shall not be deemed a prepayment of interest; or D. Fiduciary Obligations of General Partner. The General Partner shall act at all times as a fiduciary with respect to the Partnership, the Limited Partners and the Partnership property and assets. E. Obligations of General Partner. The General Partner shall: 1. Devote such of their time to the business of the Partnership as they shall, in its discretion, exercised in good faith, determine to be necessary to conduct the business of the Partnership for the benefit of the Partnership and the Limited Partners; 2. File and publish all certificates, statements or other instruments required by law for formation, qualification and operation of the Partnership and for the conduct of its business in all appropriate jurisdictions; 3. Use its best efforts to cause the Partnership and the Partners to be protected by adequate public liability, property damage and other insurance; 4. Employ attorneys to represent the Partnership, which attorneys may also serve as counsel to the General Partner and any of its Affiliates; and 5. Use their best efforts to maintain the status of the Partnership as a "partnership" for federal income tax purposes. F. Limitation on Liability of General Partner Indemnification. 1. The General Partner shall have no liability, responsibility or accountability in damages or otherwise to any other Partner or the Partnership for, and the Partnership agrees to indemnify, pay, protect and hold harmless the General Partner (on the demand of and to the satisfaction of the General Partner) from and against, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, proceedings, costs, expenses and disbursements of any kind or nature whatsoever (including without limitation all costs and expenses of defense, appeal and settlement of any and all suits, actions or proceedings instituted against the General Partner or the Partnership and all costs of investigation in connection therewith) which may be imposed on, incurred by or asserted against the General Partner or 17 18 the Partnership in any way relating to or arising out of, or alleged to relate to or arise out of, any action or inaction on the part of the Partnership or on the part of the General Partner as a General Partner of the Partnership; provided, that the General Partner shall be liable, responsible and accountable, and the Partnership shall not be liable to the General Partner, for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, proceedings, costs, expenses and disbursements resulting from the General Partner's own fraud, bad faith, negligence, misconduct or other breach of fiduciary duty to the Partnership or any Partner. If any action, suit or proceeding shall be pending or threatened against the Partnership or the General Partner relating to or arising, or alleged to relate to or arise, out of any such action or inaction the General Partner shall have the right to employ, at the expense of the Partnership, separate counsel of the General Partner's choice in such action, suit or proceeding. The satisfaction of the obligations of the Partnership under this Section 1 shall be from and limited to the assets of the Partnership and no Partner shall have any personal liability on account thereof. The General Partner shall have the right to bill the Partnership for, or otherwise request the Partnership to pay, at any time and from time to time after the General Partner has become obligated to make payment therefor, any and all amounts for which the General Partner believes in good faith that the General Partner is entitled to indemnification for under this Section. 2. The Partnership shall pay any and all such bills and honor any and all such requests for payment within 60 days after such bill or request is received by the General Partner. In the event that a final determination is made that the Partnership is not so obligated in respect of any amount paid by it to the General Partner, the General Partner will refund such amount within 180 days of such determination. 3. The Partnership shall indemnify to the extent of the Partnership assets each Limited Partner against any claims of liability asserted against a Limited Partner solely because he is a Limited Partner in the Partnership. G. Specific Transactions Authorized. The General Partner is hereby authorized to enter into, on behalf of the Partnership, the following specific transactions: 1. The Partnership may purchase property from any Affiliate of the General Partner provided (i) the property was acquired by such Affiliate for the purpose of facilitating its purchase by the Partnership, facilitating the borrowing of money or the obtaining of financing for the Partnership or any other purpose related to the business of the Partnership, (ii) the property is purchased by the Partnership for a price no greater than the acquisition and out-of-pocket carrying cost of the property to such Affiliate, (iii) there is no adverse difference 18 19 in the interest rates of the loans secured by the property at the time acquired by such Affiliate and at the time purchased by the Partnership nor any other benefit arising out of such transaction to the General Partner and (iv) no compensation is paid by the Partnership or by any non-affiliated person to any Affiliate of the General Partner in connection with the purchase of the property by the Partnership. 2. The Partnership may contract (i) with Affiliates of the General Partner to serve as real estate brokers and mortgage placement brokers in connection with the investment of the Partnership assets and (ii) with Affiliates of the General Partner to serve as real estate brokers in connection with the sale of property by the Partnership. The amount of real estate commissions payable to Affiliates of the General Partner upon a sale of property by the Partnership where such Affiliates have provided a substantial amount of services in the sales effort (A) with respect to any property may not exceed the lesser of (1) the normal and competitive rate for similar services in the locality where the services are performed, (2) 50% of the Standard Commission (as hereinafter defined) or (3) if any Acquisition Fees were paid in connection with the acquisition of such property, 50% of the Acquisition Fees permitted under Paragraph H of this Article X to be paid in connection with such acquisition and (B) with respect to all properties may not exceed 9% of the gross proceeds of the sale of all Partnership Interests. No Affiliate of the General Partner may receive payment of a real estate commission with respect to the sale of any property by the Partnership unless total consideration received by the Partnership upon such sale exceeds the amounts actually paid by the Partnership for the purchase, development, construction or improvement, of the property and any fees and commissions paid by the Partnership in connection therewith. For purposes of this clause (G), "Standard Commission" shall mean the real estate or brokerage commission paid for the purchase or sale of property which is reasonable, customary and competitive in view of the size, type and location of the property. 3. Affiliates of the General Partner may receive insurance premiums and brokerage commissions with respect to insurance on property owned by the Partnership only when the cost of such insurance is paid by tenants who net lease such properties from the Partnership. No such Net Lease shall provide that the lessee is required to purchase insurance through an Affiliate of the General Partner. 4. At any time, the Partnership may borrow money on a short-term basis from an Affiliate of the General Partner in connection therewith pay interest to such Affiliate at a rate equal to the lesser of (i) one percent above the prime interest rate at the Bank of New York or (ii) the rate that would be charged to the Partnership by unrelated lending institutions on comparable loans for the same purpose in the locality of the 19 20 property. Such borrowings shall be non-recourse to the Partnership, unless the General Partner shall otherwise consent in writing. 5. All of the Partnership's expenses shall be billed directly to and paid by the Partnership. The Partnership shall reimburse the General Partner or its Affiliates for: (a) the actual cost to the General Partner or its Affiliates of goods and materials used for and by the Partnership and obtained from unaffiliated parties and (b) the costs incurred by the General Partner or its Affiliates in performing administrative services necessary to the prudent operation of the Partnership; provided, however, that the amounts charged to the Partnership for services performed pursuant to this clause (c) shall not exceed the lesser of (1) the actual cost of such services, or (2) the amount which the Partnership would be required to pay to independent parties for comparable services in the same geographic location. No reimbursement shall be made to the General Partner or its Affiliates for: (x) services for which the General Partner or its Affiliates are entitled to compensation by way of a separate fee, or (y) any of the salaries, fringe benefits, travel expenses, and other administrative items incurred by or allocated to any controlling person (as defined herein) of the General Partner or its Affiliates; provided, however, that the Partnership may reimburse the General Partner or its Affiliates for any travel expenses incurred by any controlling person of the General Partner or its Affiliates where such travel expenses are for the evaluation by such controlling person of a property owned or being considered for acquisition by the Partnership or for visits to executives of tenants to discuss current financial results. The Partnership's annual report to the Limited Partners shall contain a breakdown of the costs reimbursed to the General Partner or its Affiliates. Within the scope of the annual audit of the General Partner's (or such Affiliates) financial statement, the independent certified public accountant shall verify the allocation of such costs to the Partnership. The method of review shall at minimum provide (1) a review of time records of individual employees, the costs of whose services were reimbursed; and (2) a review of the specific nature of the work performed by each such employee. The methods of review shall be in accordance with generally accepted auditing standards and shall accordingly include such tests of the accounting records and such other auditing procedures which the General Partner's (or such Affiliate's) independent certified public accountants consider appropriate in the circumstance. The additional costs of such review shall be itemized by such accountants on a partnership by partnership basis and may be reimbursed to the General Partner (or such Affiliate) in accordance with this Paragraph G(5) only to the extent that such reimbursement, when added to the cost for administrative services rendered, does not exceed the competitive rate for such services as determined in this Paragraph G(5). 20 21 As used herein, the term "controlling person" shall mean any person, whatever his title, who performs executive or senior management functions for the General Partner or Affiliate similar to those of executive or senior management officers, directors or partners, or those holding 5% or more equity interest in the General Partner or Affiliate or a person having the power to direct or cause the direction of the management level employees and policies of the General Partner or Affiliate, whether through the ownership of voting securities, by contract, or otherwise. For the purposes of this Paragraph G(5), not every person who carries a title such as vice president or senior vice president, corporate secretary or treasurer, shall be considered a controlling person, unless such person performs the functions or has the powers described above, and even in the absence of a specific title, an executive in a truly senior management position shall be considered a controlling person. H. General Restrictions. 1. The Partnership shall obtain a written evaluation report signed by an independent appraiser prior to the purchase of any real property by the Partnership and shall not purchase any such real property if the purchase price and all Acquisition Fees paid by the Partnership in connection with the acquisition exceed the appraised value set forth in such report. All such appraisals whether or not the real property which is the subject of such appraisal is purchased by the Partnership, shall be at the Partnership's expense or at the expense of the seller, shall be retained for five years and shall be available for inspection and duplication by the Limited Partners. 2. The Partnership shall not own any land where the buildings and improvements thereon are owned by an Affiliate of the General Partner. 3. The Partnership may not acquire property in exchange for interests in the Partnership. 4. The Partnership shall not give an Affiliate of the General Partner the exclusive right to sell property for the Partnership. 5. The Partnership shall not purchase or sell any property where the total Acquisition Fees paid to all parties (including but not limited to Affiliates of the General Partner) by the Partnership and by non-affiliated persons in connection with such acquisition (including financing) or sale exceed with respect to each acquisition or sale (a) 6% of the respective purchase or sales price or (b) the normal and competitive rate for similar services in the location where the services are performed; provided, however, the Partnership may not sell any property in a transaction in which an Affiliate of the General Partner acts as a real estate broker unless the provisions of Paragraph G of this 21 22 Article X are complied with. Points and prepaid interest shall be excluded in determining the purchase price of a property for purposes of this Paragraph 5. 6. The Partnership shall not pay, directly or indirectly, any Acquisition Fee to an Affiliate of the General Partner in connection with the purchase of property acquired with proceeds obtained from Cash From Sales or Cash From Financings. 7. The aggregate borrowings of the Partnership shall not exceed 80% of the purchase price of all properties purchased by the Partnership on a combined basis. The foregoing restriction may be waived or lessened by the General Partner without the approval of the Limited Partners, but only with the prior written consent of the Commissioner of Corporations of the Sate of California or pursuant to a change in the published Rules of the Commissioner. In no event, however, shall the aggregate borrowings of the Partnership exceed the sum of 85% of the purchase price of all properties which have not been refinanced and 85% of the aggregate fair market value of all refinanced properties. 8. Except as set forth in Paragraph G(5) of this Article X, all expenses of the Partnership shall be billed directly to and paid by the Partnership. Except for the expenses set forth in Paragraph G(5) of this Article X, reimbursements to the General Partner or any Affiliate of the General Partner for indirect expenses incurred in performing services for the Partnership such as salaries of officers and directors are prohibited; provided, however, that, the General Partner and its Affiliates may seek reimbursement for services such as accounting, secretarial, transfer agent and other services which could be performed directly for the Partnership by independent parties. The Partnership's costs for such services would be based upon the compensation of the persons involved plus an appropriate share of overhead allocable to each such person (rent, utilities, etc.), which would be converted into an hourly rate for the persons involved. The amounts charged to the Partnership would not exceed those which the Partnership would be required to pay the independent parties for comparable services. 9. The Partnership funds shall not be commingled with the funds of any other natural person. partnership, corporation, association or other legal entity. 10. The Partnership shall not finance the purchase of real property by use of a wrap around note and mortgage "all-inclusive" note and deed of trust) unless (a) neither the General Partner nor any Affiliate of the General Partner receives interest on the amount of the underlying encumbrance in excess of that payable to the lender on such underlying encumbrance, (b) the Partnership receives credit on its obligation under the all-inclusive note for payments made directly on the underlying encumbrance and (c) all payments on the underlying encumbrance 22 23 shall be made by the Partnership or, in the alternative, payments by the Partnership on the wrap around note are made to a third party collecting agent which in turn disburses such payment, first to the holder of such underlying encumbrance, and thereafter to the holder of the wrap around note. 11. The Partnership shall not create or assume any indebtedness for borrowed money unless the documents pursuant to which such indebtedness is created or assumed provide, and the General Partner shall cause any and all such documents assumed or entered into by or on behalf of the Partnership to provide, that the parties thereto other than the Partnership (including any Affiliates of the General Partner) shall look only to the assets of the Partnership for satisfaction of the liabilities and obligations of the Partnership under such documents (including without limitation those arising from representations, warranties, covenants and agreements made in or in connection with such documents) and that such other parties shall have no recourse to the Partners or the separate assets of the Partners for the satisfaction of such liabilities and obligations. The Partnership shall not incur any indebtedness including indebtedness under a shared appreciation or similar mortgage wherein the lender will have or acquire, at any time as a result of making the loan, any direct or indirect interest in the profit, capital or property of the Partnership other than as a creditor. 12. The Partnership shall not enter into any contracts with the General Partner or with any Affiliates of the General Partner to construct or develop Partnership properties or to render any services in connection with such construction or development. 13. The Partnership shall not acquire any property which is under construction unless completion of the improvements on the property is guaranteed at the contracted price by an adequate completion bond or other satisfactory arrangements. 14. Unimproved or non-income producing property shall not be acquired except in amounts and upon terms which can be financed by the net proceeds derived from the sale of limited partner interests. No more than 10% of the net proceeds derived from Distributable Cash from Operations. 15. No portion of the net proceeds derived from the sale of limited partner interests may be invested in junior mortgages or deeds of trust; provided, however, that the acquisition or granting of a junior mortgage or deed of trust in connection with the sale, purchase, financing or refinancing of real property of the Partnership shall not be deemed to be investing in junior mortgages or deeds of trust. 23 24 16. Any agreement entered into between the Partnership and the General Partner or its Affiliates must be terminable by the Partnership, without penalty, upon 60 days' notice. 17. The Partnership shall not sell any property to the General Partner or an Affiliate of the General Partner unless the Partnership shall have obtained a written evaluation report signed by an independent appraiser and the sales price shall be not less than the appraised value set forth in such report. I. Compensation of General Partner. The General Partner shall not, in its capacity as General Partner, receive any salary, fees, profits or distributions from the Partnership except profits, distributions, fees and allocations to which they may be entitled under Articles VIII and IX. J. Other Business of Partners. Except as otherwise specifically provided herein, any of the Partners and any shareholder, officer, director, employee or other person holding a legal or beneficial interest in an entity which is a Partner may engage in or possess an interest in other business ventures of every nature and description, independently or with others, including, but not limited to, the ownership, financing, leasing, operation, management, syndication, brokerage and development of real property and neither the Partnership nor the Partners shall have any right by virtue of this Agreement in and to such independent ventures or to the income or profits derived therefrom. ARTICLE XI STATUS OF LIMITED PARTNERS AND SPECIAL PARTNERS The Limited Partners and Special Partners shall not participate in the management or control of the Partnership's business nor shall they transact any business for the Partnership nor shall they have the power to sign for or bind the Partnership, said powers being vested solely and exclusively in the General Partner. The Limited Partners and Special Partners shall not be bound by, or be personally liable for the expenses, liabilities or obligations of the Partnership, except to the extent of their Capital Accounts. The Partnership Interest owned by a Limited Partner or Special Partner shall be fully paid and nonassessable. In addition to those described elsewhere in the Partnership Agreement, the Limited Partners and Special Partners shall have the following rights, powers, privileges, duties and liabilities: (a) The Limited Partners and Special Partners shall have the right to have full and true information of all things 24 25 affecting the Partnership and shall be entitled to such reports as are set forth in Article XII hereof. (b) The Limited Partners and Special Partners shall receive from the Partnership the share of the distributions provided for in this Agreement in the manner and at the times provided for in this Agreement. (c) A Limited Partner or a Special Partner shall have the right to demand the return of his Capital Account only on the dissolution and winding up of the Partnership in accordance with Article XVIII hereof. No Limited Partner shall have priority over any other Limited Partner either as to the return of capital or as to profits, losses or distributions. No Limited Partner or Special Partner shall have right to bring an action for partition against the Partnership. (d) Limited Partners holding more than fifty percent (50%) of the outstanding Limited Partner Interests may (1) remove the General Partner and (2) in the event that a vacancy shall occur in the office of General Partner, subject to the provisions B(5) of Article XV, elect a successor General Partner upon retirement, removal, death, adjudication of incompetence to manage his person or estate, adjudication of bankruptcy under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in lieu thereof), dissolution or other cessation to exist as a legal entity of the General Partner. (e) Each Limited Partner and Special Partner shall have the right to a complete list of names and addresses and interests of all Limited Partners as set forth in the records of the Partnership, upon written request to the Partnership, provided such request is for a purpose reasonably related to such Partner's interest in the Partnership. A reasonable charge for copy work may be charged by the Partnership. ARTICLE XII BOOKS OF ACCOUNT AND REPORTS Proper books of account shall be kept by the General Partner wherein shall be entered all transactions, matters and things relating to the Partnership's business as are usually entered into books of account kept by persons engaged in a business of a like character. The books of account shall be kept at the principal place of business of the Partnership and each Partner (or any duly constituted designee of a Partner) shall at all times during reasonable business hours have free access to and the right to inspect and copy the same. There shall be established for each Partner on the books of the Partnership a Capital Account which shall show the amount of each capital contribution made by such Partner (or his, her or 25 26 its predecessor in the case of an assignment of a Partnership Interest),. adjusted to reflect such Partner's proportion of profits and losses (determined according to Paragraph B of Article VIII) and of withdrawals and distributions and other items to the extent properly creditable to or chargeable against such Capital Account. Within 75 days after the end of each Fiscal Year, the General Partner shall deliver to each Limited Partner adequate information to enable each Limited Partner to complete and file his Federal tax return. Copies of each such report shall be distributed to each Limited Partner within 60 days after the end of any such quarter. If deemed appropriate by the General Partner such notice may be prepared and distributed to Limited Partners more frequently than quarterly. The General Partner shall send such other reports and information, if any, to the Limited Partners as the General Partner may deem necessary or appropriate, including but not limited to reports containing the name and address of each person who has had an unconditional written offer to purchase Partnership property rejected by the Partnership (such report shall also contain the price and terms offered). Copies of each report distributed to the Limited Partners shall, to the extent required by applicable law, be filed concurrently with relevant state "Blue Sky" authorities ARTICLE XIII FISCAL YEAR The Fiscal Year of the Partnership shall begin on the first day of January and end on the thirty-first day of December in each year. ARTICLE XIV PARTNERSHIP FUNDS The funds of the Partnership shall be deposited in such account or accounts as shall be designated by the General Partner and all withdrawals against such accounts shall be made only by one of the General Partner or by his or its properly delegated agents. ARTICLE XV TRANSFER OF PARTNERSHIP INTEREST A. In General. A Limited Partner or Special Partner may not sell, assign, transfer or otherwise dispose of, or pledge, 26 27 hypothecate or in any manner encumber, his interest in the Partnership or any part thereof except as permitted in this Article, and any act in violation of this Paragraph A shall not be binding upon or recognized by the Partnership regardless of whether the General Partner shall have knowledge thereof B. General Partner. 1. Upon the vote of Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, pursuant to Paragraph (d) of Article XI and with the same proportionate vote as provided therein, may remove the General Partner from the Partnership. Written notice of the removal of the General Partner shall be served upon the General Partner either by certified or by registered mail, return receipt requested. or by personal service. Said notice shall set forth the day upon which the removal is to become effective. Upon receipt of notice, the General Partner shall cause an accounting to be prepared covering the transactions of the Partnership since the end of the previous Fiscal Year, and it shall not thereafter sell or dispose of or allow the sale or disposition of any Partnership asset unless such sale or disposition was the subject of a contract entered into by and binding upon the Partnership prior to the date upon which the notice was received by the General Partner. 2. Until the dissolution of the Partnership otherwise occurs, the General Partner shall not voluntarily take any steps to dissolve itself nor shall the General Partner voluntarily retire; provided, however, that nothing in this Partnership Agreement shall be deemed to prevent the merger or reorganization of Carey Diversified Properties LLC into or with any other entity organized under the laws of the United States or any state thereof or the transfer of all the limited liability company interests of Carey Diversified Properties LLC and the assumption of the rights and duties of the General Partner by, in the case of a merger, reorganization or consolidation, the surviving entity by operation of law. 3. Upon the removal, adjudication of bankruptcy or insolvency, dissolution or other cessation to exist as a legal entity of the General Partner, the General Partner's Partnership Interest and interest in Distributable Cash From Operations and its subordinated interest in Cash From Sales and Cash From Financings shall be purchased by the Partnership for a purchase price equal to the fair market value thereof determined pursuant to the provisions of Section 4 of this Paragraph B. The purchase price of such interest shall be paid by the Partnership to the General Partner by the promissory note of the Partnership, payable to the General Partner or its order, having a face amount equal to such purchase price, containing provisions as would be usual and customary in a commercial promissory note, bearing interest at a rate per annum equal to one percent above the prime interest rate 27 28 at The Bank of New York, payable annually, with principal and all unpaid accrued interest subject to mandatory prepayment from all Cash From Sales and Cash From Financings, and the remaining unpaid principal balance and unpaid accrued interest on such promissory note due and payable five years from the date of the General Partner's retirement, expulsion, adjudication of bankruptcy or insolvency, dissolution or other cessation to exist as a legal entity. 4. The fair market value of the General Partner's interest purchased by the Partnership pursuant to Section 3 of this Paragraph B shall be determined by agreement between the General Partner and the Partnership (which agreement shall require the approval of the Limited Partners holding more than fifty percent (50%) of the outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI). If the General Partner and the Partnership cannot agree upon the fair market value of such Partnership Interest within 30 days after the occurrence of the event upon which such interest of the General Partner is to be purchased by the Partnership, the fair market value thereof shall be determined in the manner provided by the laws of the State of California for the determination of controversies by arbitration, the General Partner to choose one arbitrator, the Partnership to choose one arbitrator and the two arbitrators so chosen to choose a third arbitrator. The decision of a majority of said arbitrators as to the fair market value of such Partnership interest shall be final and binding and may be enforced by legal proceedings. The General Partner and the Partnership shall each compensate the arbitrator appointed by it and the compensation of the third arbitrator shall be borne equally by such parties. C. Limited Partners and Special Partners. 1. The General Partner may, pursuant to this Article XV, (a) admit as a substituted Limited Partner or Special Partner any successor in interest to a Limited Partner or Special Partner either deceased or under legal disability, and (b) admit as substituted Limited Partners or Special Partners assignees of Limited Partners or Special Partners. 2. A substituted Limited Partner or Special Partner is a person admitted to all the rights of a Limited Partner or Special Partner . An assignee is a person to whom a Limited Partner or Special Partner has assigned his interest in the Partnership but who has not become a substituted Limited Partner or Special Partner. An assignee shall have no right to require any information or account of the Partnership's transactions or to inspect the Partnership's books but shall only be entitled to receive the share of the profits, or the return of the capital contribution, to which his assignor would otherwise be entitled as set forth in Section 5 of this Paragraph C. 28 29 3. No assignee of the whole or any portion of a Limited Partner's or Special Partner's interest in the Partnership shall have the right to become a substituted Limited Partner or Special Partner in place of his assignor unless all of the following conditions are satisfied: (a) The written consent of the General Partner to such substitution shall be obtained, the granting or denial of which shall be within the absolute discretion of the General Partner; (b) The duly executed written instrument of assignment setting forth the intention of the assignor that the assignee become a substituted Limited Partner or Special Partner in his place shall have been filed with the Partnership; (c) The interests in the Partnership being acquired by the assignee shall consist of at least five (5) percent of the limited partner or special partner interest (and unless otherwise prohibited by any applicable "Blue Sky" laws, a minimum of three (3) percent of the limited partner or special partner interest may be acquired or retained by an Individual Retirement Account ("IRA") established under section 408 of the Internal Revenue Code of 1954, as amended) and, if the assignor shall retain any limited partner or special partner interest, such retention shall consist of at least five (5) percent of the limited partner or special partner interest (provided, however, unless prohibited by any applicable "Blue Sky" laws, three (3) percent of the limited partner or special partner interest may be retained by an IRA); (d) The assignor and assignee shall execute and acknowledge such other instruments as the General Partner may deem necessary or desirable to effect such assignment and admission, including the written acceptance and adoption by the assignee of the provisions of this Agreement and his execution, acknowledgment and delivery to the General Partner of a Power of Attorney, the form and content of which are more fully described in Article XIX hereof; and (e) The assignee shall pay a transfer fee not to exceed $50.00 per transaction to the Partnership. 4. Any person admitted to the Partnership as a Partner shall be subject to all of the provisions; of this Agreement as if originally a party to it. 5. Subject to the provisions of Section 11 of this Paragraph C. compliance with the suitability standards imposed by the Partnership, applicable "Blue Sky" laws and the applicable rules of any other governmental authority, a Limited Partner or Special Partner shall have the right to assign the whole or any portion (not less than five (5) percent of the limited partner or special partner interest and, if he shall retain any limited partner or special partner interest, subject to his retaining not 29 30 less than five (5) percent of the limited partner or special partner interest provided, however, unless prohibited by any applicable "Blue Sky" laws, three (3) percent of the limited partner or special partner interest may be acquired or retained by an IRA) of his Partnership Interest by a written assignment the terms of which are not in contravention of any of the provisions of this Agreement, which assignment has been executed by the assignor and received by the Partnership and recorded on the books thereof. Any assignment in contravention of any of the provisions of this Section 5 shall be of no force and effect and shall not be binding upon or recognized by the Partnership. (a) Except as provided in Subsection (c) below, Paragraph A of Article VIII hereof and Paragraph D or Article IX hereof, an assignee of a Partner's Partnership Interest shall be entitled to receive distributions of cash or other property from the Partnership attributable to the interest acquired by reason of such assignment from and after the effective date of the assignment of such interest to him. The "effective date" of an assignment of an interest in the Partnership as used in this Subsection shall be the last day of the month in which the written instrument of assignment, in form and substance satisfactory to the General Partner, is received by the General Partner. (b) The net profits and net losses attributable to an interest in the Partnership assigned during any year shall be divided among and allocated in accordance with the provisions of Paragraph A of Article VIII hereof. (c) Anything herein to the contrary notwithstanding. both the Partnership and the General Partner shall be entitled to treat the assignor of such interest as the absolute owner thereof in all respects, and shall incur no liability for distributions of cash or other property made in good faith to him, until such time as the written assignment has been received by, and recorded in books of, the Partnership. 6. The General Partner may elect to treat an assignee who has not become a substituted Limited Partner or Special Partner as a substituted Limited Partner or Special Partner in the place of his assignor should they deem, in its absolute discretion, that such treatment is in the best interests of the Partnership for any of its purposes or for any of the purposes of this Agreement. 7. No consent of any of the Limited Partners or Special Partners is required to effect the substitution of a Limited Partner or Special Partner, except that a Limited Partner or Special Partner who assigns his interest in the Partnership must evidence his intention that his assignee be admitted as a substituted Limited Partner or Special Partner in his place and must execute such instruments as the General Partner may in its 30 31 absolute discretion determine to be necessary or desirable in connection therewith. 8. Upon the admission of a Limited Partner or Special Partner (whether as a result of his purchase of limited partner or special partner interests from the Partnership or his admission as a substituted Limited Partner or Special Partner), the General Partner shall make an appropriate amendment to the list of the Partner's names, addresses, Contributions and Capital Accounts referred to in Article XII hereof. 9. Upon the death or legal incompetency of an individual Limited Partner or Special Partner, his personal representative shall have all of the rights of a Limited Partner or Special Partner for the purpose of settling or managing his estate, and such power as the decedent or incompetent possessed to constitute a successor as an assignee of its interest in the Partnership and to join with such assignee in making application to substitute such assignee as a Limited Partner or Special Partner. However, such personal representative shall not have the right to become a substituted Limited Partner or Special Partner in the place of his predecessor in interest unless the conditions of Section 2 of this Paragraph C (other than the requirement that the assignor execute and acknowledge instruments) are first satisfied. 10. Upon the adjudication of bankruptcy or insolvency, dissolution or other cessation to exist as a legal entity of a Limited Partner or Special Partner not an individual, the authorized representative of such entity shall have all of the rights of a Limited Partner or Special Partner for the purpose of effecting the orderly winding up and disposition of the business of such entity and such power as such entity possessed to constitute a successor as an assignee of its interest in the Partnership and to join with such assignee in making application to substitute such assignee as a Limited Partner or Special Partner. However, such authorized representative shall not have the right to become a substituted Limited Partner or Special Partner in the place of his predecessor in interest unless the conditions of Section 2 of this Paragraph C (other than the requirement that the assignor execute and acknowledge instruments) are first satisfied. 11. (a) No assignment or transfer of an interest in the Partnership may be made which would result in Limited Partners or Special Partners and assignees of Limited Partners or Special Partners owning, directly or indirectly, individually or in the aggregate, more than twenty percent (20%) of the equity interests of the General Partner or any Affiliate of the General Partner as defined in Section 1504(a)) of the Code. If any such assignment or transfer would otherwise be made by bequest, inheritance or operation of law, the transferee shall not become a Partner and the interest in the Partnership transferred shall be automatically 31 32 redeemed by the Partnership immediately prior to such transfer in the same manner as provided in Subsection (b)(4) of this Section 11. (b) Anything to the contrary contained herein notwithstanding: (1) Except in the case of the Merger, in any twelve (12) consecutive month period no assignment or transfer of a limited partner interest may be made if as a result thereof the aggregate total of limited partner interests assigned and/or transferred in such period would exceed forty percent (40%) of the outstanding limited partner interests. This limitation is hereinafter referred to as the "forty percent (40%) limitation". (2) A Limited Partner may assign or transfer his Partnership Interest to: (i) his spouse (unless legally separated), child or ancestor, or (ii) a corporation, partnership, trust or other entity, fifty-one percent (51%) of the equity interest of which is owned by such Limited Partner and/or any of the persons specified in clause (i) so related to such Limited Partner, provided, however, that such transfers are subject to the forty percent (40%) limitation. (3) Subsection (b)(1) of this Section 11 shall not apply to a transfer by gift, bequest or inheritance or a transfer to the Partnership and, for purposes of the forty percent (40%) limitation, any such transfer shall not be treated as such. (4) If, after the forty percent (40%) limitation is reached in any consecutive twelve (12) month period, a transfer of a Partnership Interest would otherwise take place by operation of law (but not including any transfer referred to in Subsection (b)(3) of this Section 11), then the transferee shall not become a Limited Partner and such Partnership Interest shall be automatically redeemed by the Partnership immediately prior to such transfer for a price equal to the fair market value of said interest on such date of transfer. The price shall be paid within ninety (90) days after the date of the transfer and redemption. If the Partnership and the transferor do not agree upon the fair market value of the Partnership Interest, the purchase price shall be determined by arbitration. The purchase price shall be paid in cash within ten (10) days after such determination. (c) No transfer or assignment of any limited partner interest shall be made if it would result in the Partnership's being treated as an association taxable as a corporation for tax purposes. The General Partner, in its sole discretion, may, on behalf of the Partnership, impose any restrictions or transfers or assignments of limited partner interests it may deem appropriated to give effect to the preceding sentence. The General Partner shall incur no liability to any Limited Partner, prospective investor or assignee for any action or inaction in connection with 32 33 the foregoing, provided that the General Partner acted in good faith and such course of conduct did not constitute negligence or misconduct of the General Partner. 12. The General Partner, in its absolute discretion, may cause the Partnership to make, refrain from making, or once having made, to revoke, the election referred to in Proportionate of the Code, and any similar election provided by state or local law, or any similar provision enacted in lieu thereof. 13. Until the dissolution of the Partnership, the General Partner shall not take any voluntary steps to dissolve itself nor shall the General Partner voluntarily withdraw or resign. ARTICLE XVI MEETINGS AND AMENDMENT OF LIMITED PARTNERSHIP CERTIFICATE AND AGREEMENT A. Amendment of Limited Partnership Certificate The General Partner shall amend and record the Certificate of Limited Partnership of the Partnership without additional consent of Limited Partners when, pursuant to the terms of this Partnership Agreement: 1. There is a change in the name of the Partnership; 2. The General Partner withdraws, is removed, is adjudicated bankrupt under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in lieu thereof), is adjudicated incompetent to manage his person or estate or dies, or a person is admitted as the General Partner; 3. There is a false or erroneous statement in the Certificate; 4. A time is fixed for dissolution of the Partnership or the return of contributions and such time has not been specified in the Certificate; 5. The Partners desire to make a change in any other statement in the Certificate in order that it shall accurately represent the agreement among them; 6. There is a change in the character of the business of the Partnership; 7. There is a change in the address of the Partnership's principal place of business or its California office; 33 34 8. There is a change in the time as stated in the Certificate for the dissolution of the Partnership or for the return of a contribution; and There is a change in the address of the California agent for service of process designated in the Certificate of Limited Partnership (unless such agent is a corporation) or a new agent for service of process is appointed. B. Amendments to the Agreement. 1. Amendments to this Partnership Agreement may be proposed by the General Partner or by Limited Partners holding ten percent (10%) or more of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. Following such proposal, the General Partner shall submit to the Partners a verbatim statement of any proposed amendment and an opinion of counsel, who may be counsel to the Partnership, as to the legality of such amendment and the effect of such amendment on the liability of Limited Partners for the debts of the Partnership. The General Partner shall include in any such submission the General Partner's recommendations as to the proposed amendment. The amendment shall become effective only upon the written consent or affirmative vote of Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. 2. Any provision to the contrary herein notwithstanding, the General Partner may, without the consent of the Limited Partners, make the following amendments to this Agreement: a. Any amendments to Article VIII and/or Article IX of this Agreement if the Partnership is advised by its accountants or legal counsel at any time that the allocations provided in those Articles are not likely to be respected for Federal income tax purposes, either because of the promulgation of Treasury Regulations under Section 704 of the Code or other developments in the law. The General Partner is empowered to amend such provisions to the minimum extent necessary in accordance with the advice of the accountants and counsel to effect the allocations provided in this Agreement . New allocations made by the General Partner in reliance upon the advice of the accountants or counsel described above shall be deemed to be made pursuant to the fiduciary obligation of the General Partner to the Partnership and the Limited Partners, and no such new allocation shall give rise to any claim or cause of action by any Limited Partner, provided that the General Partner acted in good faith; and b. In the event that the State of California amends the California Revised Limited Partnership Act in any manner and, as a result of such amendment, counsel to the Partnership is 34 35 unable to give the Partnership an opinion to the effect that the Partnership will be treated as a partnership for Federal income tax purposes and not as an association taxable as a corporation, then the General Partner may decide in its sole discretion to reconstitute the Partnership under the laws of another state. 3. Any provision to the contrary contained herein notwithstanding, the General Partner may, without the consent of the Limited Partners, amend this Agreement (a) to add to the representations, duties or obligations of a General Partner or to surrender any right or power granted to a General Partner herein, for the benefit of the Limited Partners, (b) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein or to make any other provision with respect to matters or questions arising under this Agreement which will not be inconsistent with the provisions of this Agreement, (c) to delete any provision from this Agreement or to add any provision to this Agreement required to be so deleted or added by the Staff of the Securities and Exchange Commission or by a State "Blue Sky" Commissioner or similar such official, which addition or deletion is deemed by such Commission or official to be for the benefit or protection of the Limited Partners, and (d) to change administrative or other provisions of this Agreement in a manner which, in the opinion of the General Partner, will permit the most profitable and/or efficient operation of the Partnership; provided, however, that no amendment shall be adopted pursuant to this Section 3 unless the adoption thereof (i) is for the benefit of, or not adverse to, the interests of the Limited Partners, (ii) is consistent with Article IV and Paragraph A of Article X hereof, (iii) does not affect the distribution of Distributable Cash From Operations, Cash From Sales and Cash From Financings or the allocation of profits and losses among the Limited Partners or between the Limited Partners and the General Partner and (iv) does not affect the limited liability of the Limited Partners or the status of the Partnership as a partnership for Federal income tax purposes. 4. Upon amendment of this Agreement, the Certificate of Limited Partnership shall also be amended if necessary to reflect such change. 5. Any amendment to the Partnership Agreement which modifies the compensation or distributions to which a General Partner is entitled or which affects the duties of a General Partner must be consented to by the General Partner before becoming effective. 6. In the event there is a change in the Federal income tax laws or regulations which result in the Partnership being taxed as an association taxable as a corporation, the General Partner may cause the Partnership to conduct its business so as to be treated as a real estate investment trust for Federal income tax purposes. 35 36 C. Meetings of the Partnership. Meetings of the Partnership may be called by the General Partner and shall be called by them upon the written request of Limited Partners holding ten percent (10%) or more of the then Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. Upon receipt of such a written request, stating the purpose of the proposed meeting, the General Partner shall provide each Partner within 10 days of such request, written notice (either by personal service or certified mail or by express or other overnight delivery service) of a meeting and the purpose of such meeting. Such meeting shall be held not less than 10 days nor more than 60 days after the receipt of such request. Included with the notice shall be a detailed statement of the action proposed, including a verbatim statement of the wording of any resolution proposed for adoption by the Limited Partners and of any proposed amendment to the Partnership Agreement. The Partnership will provide for Proxies or written consents which specify a choice between approval or disapproval of each matter to be acted upon at the meeting. Holders of a majority of the Limited Partner Interests entitled to vote, represented in person or by Proxy, shall constitute a quorum at a meeting of the Limited Partners. To the extent not consistent with this Paragraph C, all meetings shall be governed by the provisions of Section 15637 of the Act. The General Partner may establish a record date for any meeting, subject to the limitations of Section 15637(j) of the Act. ARTICLE XVII TERM The Partnership shall terminate on December 31, 2016, unless sooner dissolved pursuant to the provisions of Article XVIII hereof as otherwise provided by law. ARTICLE XVIII DISSOLUTION A. Events Requiring Dissolution. The Partnership shall be dissolved upon the happening of any of the following events: 1. The retirement, removal, adjudication of bankruptcy under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in lieu thereof), of the General Partner, the dissolution or other cessation to exist as a legal entity of the General Partner, unless the Limited Partners agree in writing to continue the business of the Partnership and to admit one or more General Partners. 36 37 2. The Partnership is adjudicated bankrupt under Chapter 7 of the Federal Bankruptcy Code (or any similar law or provision enacted in lieu thereof). 3. The vote of Limited Partners holding more than fifty percent (50%) of the then outstanding limited partner interests held by all Limited Partners, with the same proportionate vote as provided in paragraph (d) of Article XI. 4. The disposition of all interests in the real, personal and mixed property and other assets of the Partnership. 5. December 31, 2016. B. Distributions on Dissolution. Upon the dissolution of the Partnership the General Partner who has not wrongfully dissolved the Partnership shall wind up the affairs of the Partnership. If there is no such General Partner, the Limited Partners shall wind up the affairs of the Partnership. The Partners winding up the affairs of the Partnership shall take full account of the Partnership assets and liabilities and all assets shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom shall be applied and distributed in the following order: (1) to creditors (including Partners who are creditors to the extent permitted by law), in the order of priority as provided by law, (2) to the Partners in accordance with their respective Capital Accounts, determined after the application of Articles VIII and IX hereof and (3) to the Partners in accordance with the provisions of Paragraph E of Article IX hereof. Notwithstanding anything to the contrary, in the event the Partnership is "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), liquidating distributions shall be made pursuant to the previous sentence by the end of the taxable year in which the Partnership is liquidated, or, if later, within 90 days after the date of such liquidation. Distributions pursuant to the preceding sentence may be made to a trust for the purposes of an orderly liquidation of the Partnership by the trust in accordance with the Act. C. Contributions by the General Partner. In the event that, upon the liquidation of the Partnership, a General Partner shall have a negative balance in the General Partner's Capital Account then the General Partner shall contribute to the capital of the Partnership an amount equal to such negative balance in the General Partner's Capital Account. ARTICLE XIX POWER OF ATTORNEY Concurrently with the written acceptance and adoption of the provisions of this Agreement, each Limited Partner and Special Partner shall execute and deliver to the General Partner a Power 37 38 of Attorney in form acceptable to the General Partner in which the General Partner is constituted and appointed as the attorney-in-fact for such Limited Partner or Special Partner with power and authority to act in his name and on his behalf in the execution, acknowledgment and filing of documents, which will include but not be limited to a Certificate of Limited Partnership, as well as amendments thereto, under the laws of the State of California and under the laws of any other state in which the General Partner deems it advisable to file such a certificate; any other instrument which may be required to be filed by the Partnership under the laws of any state or by any governmental agency, or which the General Partner deems it advisable to file; and any documents which may be required to effect the continuation of the Partnership, the admission of an additional or substituted Limited Partner or Special Partner or the dissolution and termination of the Partnership, provided such continuation, admission or dissolution and termination are in accordance with the terms of this Agreement. The Power of Attorney so granted by each Limited Partner and Special Partner to the General Partner is a Special Power of Attorney coupled with an interest, is irrevocable and shall survive the death or legal incapacity of the Limited Partner or Special Partner; may be exercised by the General Partner for each Limited Partner or Special Partner by a facsimile signature of one of its officers or by listing all the Limited Partners and Special Partners executing any instrument with a single signature of one of its officers acting as attorney-in-fact for all of them; and shall survive the delivery of any assignment by a Limited Partner or Special Partner of the whole or any portion of his interest in the Partnership; except that where the assignee thereof has been approved by the General Partner for admission to the Partnership as a substituted Limited Partner or Special Partner, the Power of Attorney shall survive the delivery of such assignment for the sole purpose of enabling the General Partner to execute, acknowledge and file any instrument necessary to effect such substitution. The Power of Attorney so granted by each Limited Partner to the General Partner shall not authorize the General Partner to act on behalf of Limited Partners in any situation in which this Agreement requires the consent of Limited Partners. ARTICLE XX LIMITATIONS ON LIABILITY; LITIGATION Except as provided in his Subscription Agreement, no Limited Partner or Special Partner shall be liable (i) as a General Partner unless. in addition to the exercise of his rights and powers as a Limited Partner or Special Partner, he takes part in the management or control of the Partnership's business or (ii) to the Partnership or to a General Partner unless a liability of 38 39 the Partnership or of the General Partner, as the case may be, is founded upon the unauthorized activity of such Limited Partner or Special Partner in attempting to take part in the control of the Partnership's business or misstatements contained in such Partner's Subscription Agreement delivered in connection with his purchase of limited partner interests. The General Partner is hereby authorized to prosecute. defend, settle or compromise actions or claims at law or in equity at the Partnership's expense as may be necessary or proper to enforce or protect the Partnership's interests. The General Partner shall satisfy any judgment, decree or decision of any court, board or authority having jurisdiction or any settlement of any suit or claim prior to judgment or final decision thereon first, out of any insurance proceeds available therefor, next out of the Partnership's assets and income and finally out of the assets and income of the General Partner. ARTICLE XXI MISCELLANEOUS All notices under this Agreement shall be in writing and shall, except as otherwise expressly provided herein, be given to the Partner entitled thereto by personal service or by certified or registered mail, return receipt requested, to the address set forth in this Agreement for such Partner or at such other address as he may specify in writing. Article titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. Whenever the singular number is used in this Agreement and when required by the context, the same shall include the plural, and the masculine gender shall include the feminine and neuter genders and the word "persons" shall include individuals, corporations, firms, partnerships, trusts or other forms of associations. This Agreement may be executed in several counterparts, and all so executed shall constitute one agreement, binding on all of the parties hereto, notwithstanding that all the parties are not signatory to the original or the same counterpart. Subject to the provisions of Article XV, the terms and provisions of this Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, successors and assigns of the respective Partners. 39 40 Whenever the vote of the Limited Partners is referred to in this Agreement, the General Partner may vote on behalf of such Limited Partners who have by written proxy authorized the General Partner so to do. This agreement and amendments hereof shall be governed by the laws of the State of California. 40 41 IN WITNESS WHEREOF, the parties hereto have hereunto set their respective hands as of the day and year first above written. GENERAL PARTNER: CAREY DIVERSIFIED LLC By: --------------------------------------- CORPORATE SPECIAL PARTNER: CAREY MANAGEMENT LLC By: --------------------------------------- INDIVIDUAL SPECIAL PARTNER ------------------------------------------ William Polk Carey LIMITED PARTNERS: CAREY DIVERSIFIED LLC By: --------------------------------------- W.P. CAREY & CO., INC. By: --------------------------------------- 41 42 All Limited Partners now and hereafter admitted as limited partners of the Partnership pursuant to powers of attorney and authorizations now and hereafter executed in favor of and granted and delivered to the General Partner By: CAREY DIVERSIFIED LLC, General Partner By: ----------------------------------- EX-99.14 54 AMEND & RESTATED AGREEMENT OF LTD PARTNERSHIP CPA2 1 Exhibit 99.14 AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF CORPORATE PROPERTY ASSOCIATES 2 (A California Limited Partnership) THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP of CORPORATE PROPERTY ASSOCIATES 2, a California limited partnership (the "Partnership"), which amends and restates the Amended Agreement of Limited Partnership dated as of November 1, 1979, as amended as of _________, 1997, is made and entered into as of the ____ day of _______, 1997 by and between CAREY DIVERSIFIED LLC, a Delaware limited liability company, as General Partner and as Limited Partner, CAREY MANAGEMENT LLC, as Corporate Special Partner, WILLIAM POLK CAREY, as Individual Special Partner, and W.P. CAREY & CO., INC., as Limited Partner, those Persons set forth on Schedule A hereto, as Limited Partners, and all persons and entities admitted as Limited Partners as provided herein. ARTICLE I CONTINUATION OF PARTNERSHIP The parties hereby continue the Partnership under the provisions of the California Revised Limited Partnership Act (the "Act") and the rights and liabilities of the Partners shall be as provided in such law and as herein expressly provided. In the event that it shall be necessary for the Partnership to exist in or qualify to do business under the laws of any state or states other than or in addition to the State of California, the parties hereby agree that the Partnership shall take such action as may be necessary to exist or qualify to do business in any state in which such existence or qualification shall be required, provided that in any such event the Partnership shall at all times continue to be a limited partnership formed under and governed by the provisions of the Uniform Partnership Act of the State of California. ARTICLE II NAME The business of the Partnership shall be conducted under the name "Corporate Property Associates 2" or under the name "Corporate Property Associates 2 - A California Limited Partnership" in any state or other jurisdiction which requires that the term "limited partnership" be a part of the Partnership's name or under such other name as the General Partner shall hereafter designate in writing to the other Partners. 2 ARTICLE III DEFINITIONS "Acquisition Expenses" means the expenses of the Partnership related to the selection and acquisition of properties by the Partnership, whether or not such properties are acquired, including but not limited to legal fees and expenses, travel and communications expenses, costs of appraisals, non-refundable option payments on property not acquired, accounting fees and expenses, costs of title reports and title insurance, transfer and recording taxes and miscellaneous expenses. Acquisition Expenses shall not include Acquisition Fees. "Acquisition Fees" means the total of all fees and commissions paid by any party in connection with the purchase or development of property by the Partnership, except a development fee paid to a person not an Affiliate of the Partnership in connection with the actual development of a project after the Partnership's acquisition of the land. Included in the computation of such fees or commissions shall be any real estate commission, selection fee, development fee, nonrecurring management fee, or any fee of a similar nature, however designated but not any loan fee ("points"). Acquisition Fees should not include Acquisition Expenses. "Affiliate" means, with respect to any party hereto, (i) any person directly or indirectly controlling, controlled by or under common control with such party, (ii) any person owning or controlling 10% or more of the outstanding voting securities of such party. (iii) any officer, director or partner of such party or of any person specified in (i) or (ii) above and (iv) any company in which any officer, director or partner of any person specified in (iii) above is an officer. director or partner; provided, however, that for purposes of this definition the term "Affiliate" shall not be deemed to include any person providing legal, underwriting or financial or investment advisory services to the Partnership, the General Partner, or any Affiliate of any of them from time to time. "Agreement" means this Amended and Restated Agreement of Limited Partnership as hereafter amended from time to time. "Appraisal Date" means December 31, 1998. "Cash From Financings" means the net cash proceeds realized by the Partnership from the financing of Partnership property or the refinancing of any Partnership indebtedness. "Cash From Sales" means the net cash proceeds realized by the Partnership from the sale, exchange or other disposition of any of its assets. Cash From Sales shall not include net cash 2 3 proceeds realized from the financing of Partnership property or the refinancing of any Partnership indebtedness. "Code" means the Internal Revenue Code of 1986. "Consolidation and Offering Expenses" means all expenses incurred in connection with the formation and qualification of the Subsidiary Partnership, the Merger and in offering the Shares to the former limited partners of the Partnership in exchange for their Partnership Interests under applicable Federal and state law, and any other expenses actually incurred and directly related to the offering of the Shares, including such expenses as: (i) the preparing, printing, filing and delivering of the Registration Statement and the Prospectus (including any amendments thereof or supplements thereto), (ii) the preparing and printing of this Agreement, other solicitation material and related documents and the filing and/or recording of such certificates or other documents necessary to comply with the laws of the State of California for the formation of a limited partnership, the merger of a limited partnership into another limited partnership and for the continued good standing of a limited partnership, (iii) the qualification or registration of the limited liability company interests under state securities or "Blue Sky" laws, (iv) any escrow arrangements, including any compensation to an escrow agent, (v) the filing fees payable to the United States Securities and Exchange Commission and to the National Association of Securities Dealers, Inc. and any costs payable to the NYSE for the listing of the Listed Shares, (vi) the fees of the Partnership's counsel, (vii) all advertising expenses incurred in connection therewith, including the cost of all sales literature and the costs related to investor and broker/dealer sales and information meetings and marketing incentive programs and (viii) selling commissions and wholesaling expenses incurred in connection with the sale of the Shares. "Contribution" means any money, property or services rendered, or a promissory note or other binding obligations to contribute money or property, or to render services as permitted by Section 15651 of the Act, which a Partner contributes to the Partnership as capital in that Partner's capacity as Partner pursuant to this Partnership Agreement or any other agreement among the Partners, including any agreement as to value. "Corporate Special Partner" means Carey Management LLC, a Delaware limited liability company. "CPA Partnership" means Corporate Property Associates, a California limited partnership, Corporate Property Associates 3, a California limited partnership, Corporate Property Associates 4, a California limited partnership, Corporate Property Associates 5, a California limited partnership, Corporate Property Associates 6, a California limited partnership, Corporate Property Associates 7, a 3 4 California limited partnership, Corporate Property Associates 8, L.P., a Delaware limited partnership, Corporate Property Associates 9, L.P., a Delaware limited partnership, the Partnership and any other real estate limited partnerships sponsored by W.P. Carey & Co., Inc. or its Affiliates with investment objectives substantially similar to the Partnership's. "Distributable Cash From Operations" means cash receipts from the ordinary day-to-day operations of the Partnership (including all interest on Partnership investments and mortgages held by the Partnership) without deduction for the management fee authorized by Paragraph G(3) of Article X payable to an Affiliate of the General Partner or for depreciation and amortization of intangibles such as organization, underwriting and debt placement costs but after deducting all other expenses, debt amortization and provisions for reserves established by the General Partner which it deems to be reasonably required for the proper operation of the business of the Partnership. "Distributable Cash from Operations" shall not include cash proceeds realized from the sale, exchange or other disposition of assets of the Partnership or from financing of Partnership property or the refinancing of any Partnership indebtedness. "Fiscal Quarter" means the three-month period ending on the last day of the third. sixth. ninth and twelfth calendar months of each Fiscal Year of the Partnership. "Fiscal Year' means the Fiscal Year specified in Article XIII. "Front-End Fees" means all fees and expenses paid by any party for any services rendered in connection with the organizational or acquisition phase of the Partnership, including Consolidation and Offering Expenses, Acquisition Fees, Acquisition Expenses and any other similar fees, however designated. "Individual General Partner" means William Polk Carey. "Investment in Properties" means the amount of gross proceeds of the Offering actually paid or allocated to the purchase, development, construction or improvement of properties acquired by the Partnership, including the purchase of properties, working capital reserves (except that working capital reserves in excess of 5% of the gross proceeds of the Offering shall not be included) and other cash payments such as interest, closing costs, financing fees, taxes and other similar items, but excluding Front-End Fees. "Limited Partner" means any person or entity in his, her or its capacity as a limited partner of the Partnership and whose name and address are set forth on the books and records of the Partnership. 4 5 "Mandatory Distribution Event" means (a) the sale or disposition of a Partnership property to a third party unaffiliated with the Partnership or the General Partner, not including the pledge, mortgage or encumbrance of a property, or of any interest therein, in connection with the financing, refinancing or other leveraging of such property or otherwise or any assignment of any leases or rents related to such property, or (b) the mandatory distribution to holders of Partnership Interests following the Appraisal Date. "Merger" means the merger of the Subsidiary Partnership into the Partnership. "Merger Agreement" means the Agreement of Merger pursuant to which the Subsidiary Partnership is merged with and into the Partnership. "Minimum Gain" shall mean and refer to, at any time, the excess, if any, of the outstanding principal balance of all nonrecourse debt of the Partnership that is secured by an interest in Partnership assets, over the adjusted basis of such assets to the Partnership for Federal income tax purposes. For purposes of the preceding sentence, the term "nonrecourse debt" shall mean a liability of the Partnership with respect to which no Partner has any personal liability. "Nonrecourse Deductions" has the meaning set forth in Sections 1.704-2(b)(1) and 1.704-2(c) of the Treasury Regulations. "Nonrecourse Liabilities" has the meaning set forth in Section 1.704-2(b)(3) of the Treasury Regulations. "Net Lease" means a lease in which the tenant undertakes to pay all or substantially all the cash expenses, excluding debt service, related to the leased property. "Offering" means the offering of the Shares made pursuant to the Prospectus. "Partner" means the General Partner, the Corporate Special Partner, the Individual Special Partner and any Limited Partner where no distinction is required by the context in which the term is used. "Partner Minimum Gain" means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a nonrecourse Liability, determined in accordance with Treasury Regulations Section 1.704-2(i)(4). 5 6 "Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulations Section 1.704-2(b)(4). "Partner Nonrecourse Deductions" has the meaning set forth in Treasury Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Debt for the Partnership taxable year shall be determined in accordance with the rules of Treasury Regulations Section 1.704-2(i)(2). "Partnership" means Corporate Property Associates 2 - a California limited partnership. "Partnership Interest" means the interest of each Partner in the profits, losses, distributions, capital and assets of the Partnership. "Partnership Minimum Gain" has the meaning set forth in Treasury Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in Partnership Minimum Gain, for a Partnership taxable year shall be determined in accordance with the rules of the Treasury Regulations. "Prospectus" means the final prospectus of the General Partner pursuant to which the Partnership will offer up to 23,654,898 Shares as the same may at any time and from time to time be amended or supplemented after the effective date of the Registration Statement. "Proxy" means a written authorization signed by a Partner or the Partner's attorney-in-fact giving another person the power to vote with respect to the Partnership Interest of that Partner. "Signed," for the purpose of this paragraph, means the placing of the Partner's name on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the Partner or the Partner's attorney-in-fact. "Registration Statement" means the General Partner's Registration Statement on Form S-4 filed with the Securities and Exchange Commission in the form in which it becomes effective, as the same may at any time and from time to time thereafter be amended or supplemented. "Shares" means the Shares of the General Partner. "Special Partners" means the Corporate Special Partner and the Individual Special Partner. "Subsidiary Partnership" means Second Subsidiary, L.P., a California limited partnership, which is a subsidiary of the General Partner. 6 7 ARTICLE IV PURPOSE The business and purpose of the Partnership is to invest in and own real property or interests therein (including leasehold estates) or appurtenances thereto as well as personal or mixed property connected therewith which is income-producing or capable of improvement to become income-producing within a reasonable time after acquisition. The Partnership may enter into ventures, partnerships and other business arrangements with respect to real property as deemed prudent by the General Partner in order to achieve successful operations for the Partnership. Operations of the Partnership may be conducted wherever, in the opinion of the General Partner and not in violation of the general restrictions described in Paragraph H of Article X the factors involved appear to be favorable for the Partnership and the Partners. ARTICLE V NAMES AND ADDRESSES OF PARTNERS The General Partner of the Partnership shall be Carey Diversified LLC, a Delaware limited liability company having an office at 50 Rockefeller Plaza, New York, New York 10020. The names and addresses of the Limited Partners of the Partnership shall be as set forth on the books and records of the Partnership and shall be kept at the principal place of business of the Partnership and a copy of which shall be kept at the Partnership's California office. ARTICLE VI PRINCIPAL PLACE OF BUSINESS; CALIFORNIA OFFICE The principal place of business of the Partnership shall be 50 Rockefeller Plaza, New York, New York 10020. The Partnership shall also maintain an office in California at Transamerica Pyramid, 600 Montgomery Street, San Francisco, California 94111. The General Partner may from time to time change the principal place of business of the Partnership or its California office and, in either such event, the General Partner shall notify the Partners in writing within ten days after the effective date of such change; provided, however, that no such change shall be effected unless the General Partner determines that such change is in the best interests of the Partnership after giving consideration to any material adverse state or local income, estate or inheritance tax consequences to the Partners, or any adverse effect on the limited liability of the Limited Partners, as a result of such change. The General Partner may establish additional places of business of the Partnership when 7 8 and where required by the business of the Partnership. The Partnership shall at all times maintain in California an agent for service of process upon the Partnership. ARTICLE VII CAPITAL CONTRIBUTIONS The Partnership is authorized to issue and sell up to $160,000 of limited partner interests. No interest shall be paid on any contribution to the capital of the Partnership. Loans by a Partner to the Partnership shall not be considered contributions to the capital of the Partnership. Any Partner, including any additional or substituted Partner, who shall acquire a Partnership Interest or whose Partnership Interest is increased by means of a transfer to him of all or a part of the Partnership Interest of another Partner, shall succeed to the Capital Account, or portion thereof, in respect of the Partnership Interest received. ARTICLE VIII PROFITS AND LOSSES A. Determination of Profits and Losses. The profits and losses of the Partnership shall be determined for each Fiscal Year of the Partnership in accordance with generally accepted accounting principles and procedures applied in a consistent manner and for federal income tax purposes, by additionally making such adjustments as are necessary to include other items of income, expense, deduction and allowance as are permitted and required under the Code and the regulations promulgated thereunder. Except as otherwise provided herein, whenever a proportionate part of the Partnership profit or loss is credited or charged to a Capital Account every item of income, gain, loss or deduction entering into the computation of such profit or loss shall be considered either credited or charged, as the case may be, to such Capital Account and every item of credit or tax preference related to such profit or loss and applicable to the period during which such profit or loss was realized shall be allocated to such Partner in the same proportion. Any increase or decrease in the amount of any item of income, gain,. loss or deduction attributable to an adjustment to the basis of Partnership assets made pursuant to a valid election under sections 734, 743 and 754 of the Code, and pursuant to corresponding provisions of applicable state and local income tax laws shall be charged or credited, as the case may be, and any increase or decrease in the amount of any item of credit or tax preference attributable to any such adjustment shall be allocated, 8 9 to the Partners entitled thereto under such laws. Profits and losses allocated, to a particular class of Partnership Interests shall be allocated among the holders of record of such class of Partnership Interests at the end of each Fiscal Year (or such shorter period as may be provided herein) of the Partnership in proportion to their respective Partnership Interests; provided however, that any such profits and losses attributable to a limited partner interest assigned during such Fiscal Year of the Partnership shall be allocated among the holders of such limited partner interests during such Fiscal Year in proportion to the number of months (for purposes of such allocation ownership of limited partner interests for each month will be determined on the fifteenth day of each month) that each such holder was recognized as the owner of such limited partner interest during such Fiscal Year, without regard to the results of Partnership operations during the period in which each such holder was recognized as the owner thereof and without regard to the date, amount or recipient of any distributions which may have been made with respect to such limited partner interest. B. Allocation of Profits and Losses. 1. Except as provided in subparagraph 4 of this paragraph B, the profits and losses of the Partnership (other than gains or losses from the sale, exchange or other disposition of Partnership assets) shall be allocated to the Partners as follows and in the following order to priority: a. An amount of net income equal to the excess, if any, of the aggregate negative balance of the Capital Accounts of the Partners over the Minimum Gain (determined as of the end of such year or fraction thereof), shall first be allocated among the Partners whose Capital Accounts are negative as a result of nonrecourse debt in proportion to the negative amounts attributable to such nonrecourse debt. b. Any remaining balance of net income shall be allocated 1% of the General Partner, 0.9% to the Corporate Special Partner, 0.1% to the Individual Special Partner and 98% to the Limited Partners. c. Net losses of the Partnership shall be allocated 1% to the General Partner, 0.9% to the Corporate Special Partner, 0.1% to the Individual Special Partner and 98% to the Limited Partners. 2. Except as provided in subparagraph 4 of this Paragraph B, net losses arising from sales, exchanges or other dispositions of Partnership assets shall be allocated 1% to the General Partner and 0.1% to the Individual Special Partner, 0.9% to the Corporate Special Partner and 98% to the Limited Partners. For purposes of this subparagraph 2, Capital Accounts shall be determined after 9 10 applying the allocations provided in subparagraphs 1 and 5 of this Paragraph B, and after applying subparagraphs 6 and 7 of this Paragraph B. 3. Net gains arising from sales, exchanges or other dispositions of Partnership assets shall be allocated to the Partners as follows and in the following order to priority: a. An amount of such gains equal to the excess, if any, of the aggregate negative balance of the Capital Accounts of the General Partner over the Minimum Gain; b. If each Partner's Capital Account is negative and the gains are less than the aggregate negative amounts in the Capital Accounts, in the ratio that the Capital Accounts bear to each other; c. If each Partner's Capital Account is negative and the gains are greater than the aggregate negative amounts in the Capital Accounts (i) first in an amount to bring each Partner's Capital Account to zero, and (ii) then to the Partners in the percentage by which Cash From Sales and Cash From Financings is then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; d. If certain Partner's Capital Accounts are positive and other Partner's Capital Accounts are negative (i) first in an amount to bring the Capital Account of each Partner whose Capital Accounts which are negative to zero (or if gains are less than the aggregate negative amounts of the Capital Accounts which are negative, to such Partners in the ratio that such negative Capital Accounts bear to each other), and (ii) then to the Partners in the percentage by which Cash From Sales and Cash From Financings is then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; e. If each Partner's Capital Account is positive, in the percentages by which Cash From Sales and Cash From Financings is then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; For purposes of this subparagraph 3, Capital Accounts shall be determined after applying the allocations provided in subparagraphs 1 and 2 of this Paragraph B and after applying subparagraphs 6 and 7 of Paragraph B. 4. No loss or deduction or item thereof under subparagraph 1 or 2 of this Paragraph B shall be allocated to the General Partner if, or to the extent, such allocation would create or increase a deficit in the General Partner's Capital Account, unless: 10 11 a. Such allocation of loss or deduction is attributable to nonrecourse debt of the Partnership; and b. Such allocation does not cause the deficit capital account of the General Partner to exceed the amount of Minimum Gain attributable to such nonrecourse debt, determined as of the last day of the taxable year to which such allocation is attributable. 5. To the extent that any amount paid to a Limited Partner or its Affiliates pursuant to the provisions of Paragraphs G(2), (4),(5),(6), or (7) of Article X hereof, or as Front-End Fees, is treated as a distributive share of Partnership income to the Limited Partner for Federal income tax purposes, the Limited Partner affected shall be allocated gross income of the Partnership at a time and in an amount equal to the amount of such payment, and the Capital Account of the Limited Partner so affected shall be adjusted to reflect such allocation and payment. If the Partnership's gross income for a Fiscal Year is less than the amount of such payment, the Limited Partner so affected shall be allocated gross income in each succeeding Fiscal Year until the total amount so allocated equals the total amount of such payment. 6. For purposes of subparagraphs 1(a), 2 and 3 of this Paragraph B, distributions to the Partners pursuant to Paragraphs A and E of Article IX hereof shall be treated as having been made and charged to the Capital Accounts of the Partners prior to the allocations of income, gains and losses provided therein. 7. Solely for purposes of this Paragraph B, the Capital Accounts of each Partner shall be reduced by such Partner's share of any Partnership expenditure which would be treated as it were an expenditure described under Section 705(a)(2)(B) of the Code, and shall be reduced or increased by any other amount required by the then applicable regulations under Section 704 of the Code. 8. Notwithstanding anything to the contrary in this Article VIII, if any Partner receives an adjustment, allocation or distribution described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), such Partner shall be specially allocated a pro rata portion of each item of Partnership income, including gross income, and gain in an amount and manner sufficient to eliminate, as quickly as possible, any deficit balance in such Partner's Capital Account created by such adjustment, allocation or distribution in excess of the sum of (i) the amount such Partner is obligated to restore pursuant to any provision of this Agreement and (ii) the amount such Limited Partner is deemed to be obligated to restore pursuant to the penultimate sentence of Treasury Regulations Section 1.704-1(b)(2)(iv)(f) (as amended in 1986). This subparagraph 8 of Paragraph B is intended to constitute a "qualified income offset" 11 12 within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(3). 9. Except as otherwise provided in Section 1.704-2(f) of the Treasury Regulations, if there is a net decrease in Partnership Minimum Gain for any Partnership fiscal year, each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary subsequent years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain to the extent required by Treasury Regulations Section 1.704-2(f). The items to be so allocated shall be determined in accordance with Section 1.704-2(f) and (i) of the Treasury Regulations. This subparagraph is intended to comply with the minimum gain chargeback requirement in said section of the Treasury Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant hereto. 10. Except as otherwise provided in Section 1.704-2(i)(4) of the Treasury Regulations, if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any fiscal year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the Treasury Regulations, shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to that Partner's share of the net decrease in the Partner Minimum Gain attributable to such Partner Nonrecourse Debt to the extent and in the manner required by Section 1.704-2(i) of the Treasury Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i) of the Treasury Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and (j)(2) of the Treasury Regulations. This subparagraph is intended to comply with the minimum gain chargeback requirement with respect to Partner Nonrecourse Debt contained in said section of the Treasury Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph shall be made in proportion to the respective amounts to be allocated to each Partner pursuant hereto. 11. To the extent any Partner has an Adjusted Capital Account Deficit at the end of any Partnership Fiscal Year, each such Partner shall be specially allocated items of Partnership income (including gross income) and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Paragraph 8(B)(11) shall be made if and only to the extent that such Partners would have an Adjusted Capital Account Deficit after all other allocations provided for in this Section have been tentatively made as if this Paragraph 8(B)(11) were not in the Agreement. 12 13 12. Partner Nonrecourse Deductions for any fiscal year or other applicable period with respect to a Partner Nonrecourse Debt shall be specially allocated to the Partners that bear the economic risk of loss for such Partner Nonrecourse Debt (as determined under Sections 1.704-2(b)(4) and 1.704-2(i)(1) of the Treasury Regulations). C. Power of the Partner to Vary Allocations of Profits and Losses. It is the intent of the Partners that each Partner's distributive share of income, gains, losses, deductions and credits shall be determined and allocated in accordance with this Article VII to the fullest extent permitted by Section 704(b) of the Code. If the Partnership is advised that the allocations provided in this Article VIII are unlikely to be respected for Federal income tax purposes, the General Partner has been granted power in Paragraph B(2) of Article XVI of this Agreement to amend the allocation provisions of this Agreement, on advice of accountants and legal counsel, to the minimum extent necessary to effect the plan of allocations and distributions provided in this Agreement. D. Allocations of Profits and Losses Among Limited Partners. Except as otherwise provided in this Article VIII, profits and losses shall be allocated among the Limited Partners in the same manner as distributions are allocated in Paragraph D of Article IX hereof. E. Consent of Partners to Allocation of Profits and Losses. The methods hereinabove set forth by which profits and losses of the Partnership are determined and allocated are hereby consented to by each Partner as a condition to becoming a Partner. ARTICLE IX DISTRIBUTIONS A. Distributable Cash From Operations. The General Partner shall distribute as soon after the close of each Fiscal Quarter as is reasonably feasible all of the Distributable Cash From Operations for such Fiscal Quarter in the following manner: 1% to the General Partner, 0.9% to the Corporate Special Partner, 0.1% to the Individual Special Partner and 98% to the Limited Partners. B. Cash From Sales. The General Partner shall distribute, as soon after the close of each Fiscal Quarter as is reasonably feasible, all Cash From Sales realized by the Partnership during such Fiscal Quarter in accordance with the provisions of Paragraph E of this Article IX. 13 14 C. Cash From Financings. The General Partner shall distribute, as soon after the close of each Fiscal Quarter as is reasonably feasible, all of the Cash From Financings realized by the Partnership during such Fiscal Quarter in accordance with the provisions of Paragraph E of this Article IX. D. Allocation of Distributions Among Limited Partners. Distributions of cash to the Limited Partners shall be apportioned among the holders of record of limited partner interests in the ratio in which the number of limited partner interests held of record by each of them bears to the number of limited partner interests held of record by all the Limited Partners as of the first day of the Fiscal Quarter with respect to which such distribution is made E. Distributions of Cash From Sales and Cash From Financings. The General Partner shall distribute Cash From Sales and Cash From Financings in the following manner: 1% to the General Partner, 0.1% to the Individual Special Partner, 0.9% to the Corporate Special Partner and 98% to the Limited Partners, until such time as the Special Partners have received $39,081 pursuant to this Paragraph E of Article IX. Thereafter, Cash From Sales and Cash From Financings shall be distributed 1% to the General Partner and 99% to the Limited Partners. F. Return of Capital Contributions. To the extent that, at the end of any Fiscal Quarter, the total cash distributions to the Limited Partners made pursuant to this Article IX exceed the profits of the Partnership for such Fiscal Quarter, such excess shall be charged to each Limited Partners' Account and shall be regarded as a rightful return of capital contributions. G. Consent of Partners to Allocation of Distributions. The methods hereinabove set forth by which Cash From Operations, Cash From Sales and Cash From Financings are allocated and distributed are hereby consented to by each Partner as a condition to becoming a Partner. ARTICLE X MANAGEMENT AND OPERATION OF BUSINESS A. Management of Business. The Partnership shall be managed by the General Partner and the conduct of the Partnership's business shall be controlled and conducted by the General Partner in accordance with this Agreement. B. Authority of General Partner. In addition to and not in limitation of any rights and powers conferred by law or other provisions of this Agreement, the General Partner shall have and may exercise on behalf of the Partnership all powers and 14 15 rights necessary, proper, convenient or advisable to effectuate and carry out the purposes, business and objectives of the Partnership. Such powers shall include, without limitation, the following powers: 1. To acquire, hold and dispose of any real property, (or interests therein, including leasehold estates) and appurtenances thereto as well as personal or mixed property connected therewith, including the purchase, lease, development, improvement, maintenance, exchange, trade or sale of such property at such price, rental or amount, for cash, securities or other property and upon such terms, as the General Partner deem to be in the best interests of the Partnership; 2. Subject to the provisions of Paragraph H(10) of this Article X to borrow money and, if security is required therefor, to mortgage or subject to any other security device any portion of the assets of the Partnership, to obtain replacements of any mortgage or other security device, and to prepay, in whole or in part, refinance, increase, modify, consolidate or extend any mortgage or other security device; 3. Pending investment of the Partnership's funds in real estate, to invest the Partnership's funds in United States Government securities, certificates of deposit in United States banks with a net worth of at least $20,000,000, bank repurchase agreements covering securities of the United States Government or governmental agencies, bankers' acceptances or other similar short-term highly liquid investments; to invest any working capital or other reserves retained by the General Partner for the operation of the Partnership in like manner; and to deposit, withdraw, invest, pay, retain and distribute the Partnership's funds in any manner consistent with the provisions of this Agreement; 4. To bring and defend actions at law or in equity. 5. To employ persons in the operation and management of the Partnership's business. including but not limited to supervisory managing agents, building management agents. real property developers and real estate brokers; 6. To place record title to, or the right to use, Partnership assets in the name or names of a non-operating nominee or nominees, including an Affiliate of the General Partner, for any purpose convenient or beneficial to the Partnership; 7. To perform all acts and file all documents, including tax returns and registration statements, necessary to comply with Federal, state and local laws, rules and regulations applicable to the Partnership or the conduct of the Partnership's business; 15 16 8. To enter into and carry out contracts and agreements and any or all documents and instruments and to do and perform all such other things as may be in furtherance of Partnership purposes or necessary or appropriate to the conduct of Partnership activities; 9. To execute, acknowledge, deliver, seal, file, record and vote any and all instruments which may be deemed necessary or convenient to effect the foregoing; and 10. To designate Carey Diversified LLC, the General Partner, as the "Tax Matters Partner" in accordance with Section 6231(a)(7) of the Code and, as such, the General Partner shall have all powers necessary to so perform including, without limitation, the power to retain attorneys and accountants of its choice and the right to settle any audits without the consent of the Limited Partners, except as otherwise required by the Code. the designation provided for herein is expressly consented to by each Partner as an express condition to becoming a Partner; and C. Restrictions on Authority of General Partner. In addition to other acts expressly prohibited or restricted by this Agreement or by law, the General Partner shall have no authority to act on behalf of the Partnership with respect to, and are expressly prohibited from undertaking, the following: 1. Doing any act in contravention of this Agreement; 2. Except as provided in this Agreement and except in connection with the liquidation and winding up of the business of the Partnership upon its termination and dissolution, doing any act which would make it impossible to carry on the ordinary business of the Partnership; 3. Confessing a judgment against the Partnership in connection with any threatened or pending legal action, 4. Possessing Partnership property or assigning the rights of the Partnership in specific Partnership property for other than a Partnership purpose; 5. Admitting a person as a Limited Partner except as provided in this Agreement; 6. Except as provided in this Agreement and except in connection with the liquidation and winding up of business of the Partnership upon its termination and dissolution or a Mandatory Distribution Event, selling substantially all the assets of the Partnership at a single sale or in multiple sales in the same 12-month period without the prior written consent of Limited Partners holding more than fifty percent (50%) of the then outstanding 16 17 Limited Partner Interests, with the same relative vote as provided in paragraph (d) of Article XI; 7. Pledging or encumbering substantially all the properties of the Partnership at one time or from time to time in a series of related transactions, unless the lien of such pledge or encumbrance arises in connection with the acquisition or improvement of properties or the initial financing of properties acquired free and clear of encumbrances or the refinancing of previous obligations and such lien is limited to the properties so acquired, improved, financed or refinanced; 8. Obtaining any loan or any mortgage loan on any residential property made or guaranteed by any Federal, state or local government or municipality or any agency of any Federal. state or local government or municipality; 9. Performing any act (other than an act required by this Agreement or any act taken in good faith in reliance upon counsel's opinion) which would, at the time such act occurred, subject any Limited Partner to liability as a general partner in any jurisdiction; 10. Prepaying any interest on any Partnership indebtedness; provided that the payment of any amount commonly referred to as "points" shall not be deemed a prepayment of interest; or 11. Assessing any partner for an additional capital contribution. D. Fiduciary Obligations of General Partner. The General Partner shall act at all times as a fiduciary with respect to the Partnership, the Limited Partners and the Partnership property and assets. E. Obligations of General Partner. The General Partner shall: 1. Devote such of their time to the business of the Partnership as they shall, in its discretion, exercised in good faith, determine to be necessary to conduct the business of the Partnership for the benefit of the Partnership and the Limited Partners; 2. File and publish all certificates, statements or other instruments required by law for formation, qualification and operation of the Partnership and for the conduct of its business in all appropriate jurisdictions; 17 18 3. Use its best efforts to cause the Partnership and the Partners to be protected by adequate public liability, property damage and other insurance; 4. Employ attorneys to represent the Partnership, which attorneys may also serve as counsel to the General Partner and any of its Affiliates; and 5. Use their best efforts to maintain the status of the Partnership as a "partnership" for federal income tax purposes. F. Limitation on Liability of General Partner Indemnification. 1. The General Partner shall have no liability, responsibility or accountability in damages or otherwise to any other Partner or the Partnership for, and the Partnership agrees to indemnify, pay, protect and hold harmless the General Partner (on the demand of and to the satisfaction of the General Partner) from and against, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, proceedings, costs, expenses and disbursements of any kind or nature whatsoever (including without limitation all costs and expenses of defense, appeal and settlement of any and all suits, actions or proceedings instituted against the General Partner or the Partnership and all costs of investigation in connection therewith) which may be imposed on, incurred by or asserted against the General Partner or the Partnership in any way relating to or arising out of, or alleged to relate to or arise out of, any action or inaction on the part of the Partnership or on the part of the General Partner as a General Partner of the Partnership; provided, that the General Partner shall be liable, responsible and accountable, and the Partnership shall not be liable to the General Partner, for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, proceedings, costs, expenses and disbursements resulting from the General Partner's own fraud, bad faith, negligence, misconduct or other breach of fiduciary duty to the Partnership or any Partner. If any action, suit or proceeding shall be pending or threatened against the Partnership or the General Partner relating to or arising, or alleged to relate to or arise, out of any such action or inaction the General Partner shall have the right to employ, at the expense of the Partnership, separate counsel of the General Partner's choice in such action, suit or proceeding. The satisfaction of the obligations of the Partnership under this Section 1 shall be from and limited to the assets of the Partnership and no Partner shall have any personal liability on account thereof. The General Partner shall have the right to bill the Partnership for, or otherwise request the Partnership to pay, at any time and from time to time after the General Partner has become obligated to make payment therefor, any and all amounts for which the General 18 19 Partner believes in good faith that the General Partner is entitled to indemnification for under this Section. 2. The Partnership shall pay any and all such bills and honor any and all such requests for payment within 60 days after such bill or request is received by the General Partner. In the event that a final determination is made that the Partnership is not so obligated in respect of any amount paid by it to the General Partner, the General Partner will refund such amount within 180 days of such determination. 3. The Partnership shall indemnify to the extent of the Partnership assets each Limited Partner against any claims of liability asserted against a Limited Partner solely because he is a Limited Partner in the Partnership. 4. Notwithstanding the foregoing, neither the General Partner nor any officer, director, employee, agent, subsidiary or assign of the General Partner or of the Partnership shall be indemnified from any liability, loss or damage incurred by them in connection with (i) any claim or settlement involving allegations that the Securities Act of 1933 was violated by the General Partner or by any such other person or entity unless: (a) the General Partner or other persons or entities seeking indemnification are successful in defending such action; and (b) such indemnification is specifically approved by a court of law which shall have been advised as to the current position of the Securities and Exchange Commission and the California Commission of Corporations regarding indemnification for violations of securities laws or (ii) any liability imposed by law, including liability for fraud, bad faith or negligence. G. Specific Transactions Authorized. The General Partner is hereby authorized to enter into, on behalf of the Partnership, the following specific transactions: 1. The Partnership may purchase property from any Affiliate of the General Partner provided (i) the property was acquired by such Affiliate for the purpose of facilitating its purchase by the Partnership, facilitating the borrowing of money or the obtaining of financing for the Partnership or any other purpose related to the business of the Partnership, (ii) the property is purchased by the Partnership for a price no greater than the acquisition and out-of-pocket carrying cost of the property to such Affiliate, (iii) there is no adverse difference in the interest rates of the loans secured by the property at the time acquired by such Affiliate and at the time purchased by the Partnership nor any other benefit arising out of such transaction to the General Partner and (iv) no compensation is paid by the Partnership or by any non-affiliated person to any Affiliate of the General Partner in connection with the purchase of the property by the Partnership. 19 20 2. The Partnership may contract (i) with Affiliates of the General Partner to serve as real estate brokers and mortgage placement brokers in connection with the investment of the Partnership assets and (ii) with Affiliates of the General Partner to serve as real estate brokers in connection with the sale of property by the Partnership. The amount of real estate commissions payable to Affiliates of the General Partner upon a sale of property by the Partnership where such Affiliates have provided a substantial amount of services in the sales effort (A) with respect to any property may not exceed the lesser of (1) the normal and competitive rate for similar services in the locality where the services are performed, (2) 50% of the Standard Commission (as hereinafter defined) or (3) if any Acquisition Fees were paid in connection with the acquisition of such property, 50% of the Acquisition Fees permitted under Paragraph H of this Article X to be paid in connection with such acquisition and (B) with respect to all properties may not exceed 9% of the gross proceeds of the sale of all Partnership Interests. No Affiliate of the General Partner may receive payment of a real estate commission with respect to the sale of any property by the Partnership unless total consideration received by the Partnership upon such sale exceeds the amounts actually paid by the Partnership for the purchase, development, construction or improvement, of the property and any fees and commissions paid by the Partnership in connection therewith. For purposes of this clause (G), "Standard Commission" shall mean the real estate or brokerage commission paid for the purchase or sale of property which is reasonable, customary and competitive in view of the size, type and location of the property. 3. Affiliates of the General Partner may receive insurance premiums and brokerage commissions with respect to insurance on property owned by the Partnership only when the cost of such insurance is paid by tenants who net lease such properties from the Partnership. No such Net Lease shall provide that the lessee is required to purchase insurance through an Affiliate of the General Partner. 4. At any time, the Partnership may borrow money on a short-term basis from an Affiliate of the General Partner in connection therewith pay interest to such Affiliate at a rate equal to the lesser of (i) one percent above the prime interest rate at the Bank of New York or (ii) the rate that would be charged to the Partnership by unrelated lending institutions on comparable loans for the same purpose in the locality of the property. Such borrowings shall be non-recourse to the Partnership, unless the General Partner shall otherwise consent in writing. 5. All of the Partnership's expenses shall be billed directly to and paid by the Partnership. The Partnership shall 20 21 reimburse the General Partner or its Affiliates for: (a) the actual cost to the General Partner or its Affiliates of goods and materials used for and by the Partnership and obtained from unaffiliated parties and (b) the costs incurred by the General Partner or its Affiliates in performing administrative services necessary to the prudent operation of the Partnership; provided, however, that the amounts charged to the Partnership for services performed pursuant to this clause (c) shall not exceed the lesser of (1) the actual cost of such services, or (2) the amount which the Partnership would be required to pay to independent parties for comparable services in the same geographic location. No reimbursement shall be made to the General Partner or its Affiliates for: (x) services for which the General Partner or its Affiliates are entitled to compensation by way of a separate fee, or (y) any of the salaries, fringe benefits, travel expenses, and other administrative items incurred by or allocated to any controlling person (as defined herein) of the General Partner or its Affiliates; provided, however, that the Partnership may reimburse the General Partner or its Affiliates for any travel expenses incurred by any controlling person of the General Partner or its Affiliates where such travel expenses are for the evaluation by such controlling person of a property owned or being considered for acquisition by the Partnership or for visits to executives of tenants to discuss current financial results. The Partnership's annual report to the Limited Partners shall contain a breakdown of the costs reimbursed to the General Partner or its Affiliates. Within the scope of the annual audit of the General Partner's (or such Affiliates) financial statement, the independent certified public accountant shall verify the allocation of such costs to the Partnership. The method of review shall at minimum provide (1) a review of time records of individual employees, the costs of whose services were reimbursed; and (2) a review of the specific nature of the work performed by each such employee. The methods of review shall be in accordance with generally accepted auditing standards and shall accordingly include such tests of the accounting records and such other auditing procedures which the General Partner's (or such Affiliate's) independent certified public accountants consider appropriate in the circumstance. The additional costs of such review shall be itemized by such accountants on a partnership by partnership basis and may be reimbursed to the General Partner (or such Affiliate) in accordance with this Paragraph G(5) only to the extent that such reimbursement, when added to the cost for administrative services rendered, does not exceed the competitive rate for such services as determined in this Paragraph G(5). As used herein, the term "controlling person" shall mean any person, whatever his title, who performs executive or senior management functions for the General Partner or Affiliate similar to those of executive or senior management officers, directors or partners, or those holding 5% or more equity interest in the General Partner or Affiliate or a person having the power to 21 22 direct or cause the direction of the management level employees and policies of the General Partner or Affiliate, whether through the ownership of voting securities, by contract, or otherwise. For the purposes of this Paragraph G(5), not every person who carries a title such as vice president or senior vice president, corporate secretary or treasurer, shall be considered a controlling person, unless such person performs the functions or has the powers described above, and even in the absence of a specific title, an executive in a truly senior management position shall be considered a controlling person. H. General Restrictions. 1. The Partnership shall obtain a written evaluation report signed by an independent appraiser prior to the purchase of any real property by the Partnership and shall not purchase any such real property if the purchase price and all Acquisition Fees paid by the Partnership in connection with the acquisition exceed the appraised value set forth in such report. All such appraisals whether or not the real property which is the subject of such appraisal is purchased by the Partnership, shall be at the Partnership's expense or at the expense of the seller, shall be retained for five years and shall be available for inspection and duplication by the Limited Partners. 2. The Partnership shall not own any land where the buildings and improvements thereon are owned by an Affiliate of the General Partner. 3. The Partnership may not acquire property in exchange for interests in the Partnership. 4. The Partnership shall not give an Affiliate of the General Partner the exclusive right to sell property for the Partnership. 5. The Partnership shall not purchase or sell any property where the total Acquisition Fees paid to all parties (including but not limited to Affiliates of the General Partner) by the Partnership and by non-affiliated persons in connection with such acquisition (including financing) or sale exceed with respect to each acquisition or sale (a) 6% of the respective purchase or sales price or (b) the normal and competitive rate for similar services in the location where the services are performed; provided, however, the Partnership may not sell any property in a transaction in which an Affiliate of the General Partner acts as a real estate broker unless the provisions of Paragraph G of this Article X are complied with. Points and prepaid interest shall be excluded in determining the purchase price of a property for purposes of this Paragraph 5. 22 23 6. The Partnership shall not pay, directly or indirectly, any Acquisition Fee to an Affiliate of the General Partner in connection with the purchase of property acquired with proceeds obtained from Cash From Sales or Cash From Financings. 7. The aggregate borrowings of the Partnership shall not exceed 80% of the purchase price of all properties purchased by the Partnership on a combined basis. The foregoing restriction may be waived or lessened by the General Partner without the approval of the Limited Partners, but only with the prior written consent of the Commissioner of Corporations of the Sate of California or pursuant to a change in the published Rules of the Commissioner. In no event, however, shall the aggregate borrowings of the Partnership exceed the sum of 85% of the purchase price of all properties which have not been refinanced and 85% of the aggregate fair market value of all refinanced properties. 8. Except as set forth in Paragraph G(5) of this Article X, all expenses of the Partnership shall be billed directly to and paid by the Partnership. Except for the expenses set forth in Paragraph G(5) of this Article X, reimbursements to the General Partner or any Affiliate of the General Partner for indirect expenses incurred in performing services for the Partnership such as salaries of officers and directors are prohibited. 9. The Partnership funds shall not be commingled with the funds of any other natural person. partnership, corporation, association or other legal entity. 10. The Partnership shall not finance the purchase of real property by use of a wrap around note and mortgage "all-inclusive" note and deed of trust) unless (a) neither the General Partner nor any Affiliate of the General Partner receives interest on the amount of the underlying encumbrance in excess of that payable to the lender on such underlying encumbrance, (b) the Partnership receives credit on its obligation under the all-inclusive note for payments made directly on the underlying encumbrance and (c) all payments on the underlying encumbrance shall be made by the Partnership or, in the alternative, payments by the Partnership on the wrap around note are made to a third party collecting agent which in turn disburses such payment, first to the holder of such underlying encumbrance, and thereafter to the holder of the wrap around note. 11. The Partnership shall not create or assume any indebtedness for borrowed money unless the documents pursuant to which such indebtedness is created or assumed provide, and the General Partner shall cause any and all such documents assumed or entered into by or on behalf of the Partnership to provide, that the parties thereto other than the Partnership (including any 23 24 Affiliates of the General Partner) shall look only to the assets of the Partnership for satisfaction of the liabilities and obligations of the Partnership under such documents (including without limitation those arising from representations, warranties, covenants and agreements made in or in connection with such documents) and that such other parties shall have no recourse to the Partners or the separate assets of the Partners for the satisfaction of such liabilities and obligations. The Partnership shall not incur any indebtedness including indebtedness under a shared appreciation or similar mortgage wherein the lender will have or acquire, at any time as a result of making the loan, any direct or indirect interest in the profit, capital or property of the Partnership other than as a creditor. 12. The Partnership shall not enter into any contracts with the General Partner or with any Affiliates of the General Partner to construct or develop Partnership properties or to render any services in connection with such construction or development. 13. The Partnership shall not acquire any property which is under construction unless completion of the improvements on the property is guaranteed at the contracted price by an adequate completion bond; a letter of credit issued by a bank organized and doing business under the laws of the United States or any State or of the District of Columbia which is subject to supervision by Federal, State or District of Columbia authority and which has a combined capital and surplus of not less than $5,000,000; or a completion guarantee by a third person, provided that such person has a net worth of at least $10,000,000 and had in the fiscal year last ended prior to the giving of such guarantee net income of at least $2,000,000. 14. Unimproved or non-income producing property shall not be acquired except in amounts and upon terms which can be financed by the net proceeds derived from the sale of limited partner interests. No more than 10% of the net proceeds derived from Distributable Cash from Operations. 15. No portion of the net proceeds derived from the sale of limited partner interests may be invested in junior mortgages or deeds of trust; provided, however, that the acquisition or granting of a junior mortgage or deed of trust in connection with the sale, purchase, financing or refinancing of real property of the Partnership shall not be deemed to be investing in junior mortgages or deeds of trust. 16. Any agreement entered into between the Partnership and the General Partner or its Affiliates must be terminable by the Partnership, without penalty, upon 60 days' notice. 24 25 I. Compensation of General Partner. The General Partner shall not, in its capacity as General Partner, receive any salary, fees, profits or distributions from the Partnership except profits, distributions, fees and allocations to which they may be entitled under Articles VIII and IX. J. Other Business of Partners. Except as otherwise specifically provided herein, any of the Partners and any shareholder, officer, director, employee or other person holding a legal or beneficial interest in an entity which is a Partner may engage in or possess an interest in other business ventures of every nature and description, independently or with others, including, but not limited to, the ownership, financing, leasing, operation, management, syndication, brokerage and development of real property and neither the Partnership nor the Partners shall have any right by virtue of this Agreement in and to such independent ventures or to the income or profits derived therefrom. ARTICLE XI STATUS OF LIMITED PARTNERS AND SPECIAL PARTNERS The Limited Partners and Special Partners shall not participate in the management or control of the Partnership's business nor shall they transact any business for the Partnership nor shall they have the power to sign for or bind the Partnership, said powers being vested solely and exclusively in the General Partner. The Limited Partners and Special Partners shall not be bound by, or be personally liable for, the expenses, liabilities or obligations of the Partnership, except to the extent of their Capital Accounts. The Partnership Interest owned by a Limited Partner or Special Partner shall be fully paid and nonassessable. In addition to those described elsewhere in the Partnership Agreement, the Limited Partners and Special Partners shall have the following rights, powers, privileges, duties and liabilities: (a) The Limited Partners and Special Partners shall have the right to have full and true information of all things affecting the Partnership and shall be entitled to such reports as are set forth in Article XII hereof. (b) The Limited Partners and Special Partners shall receive from the Partnership the share of the distributions provided for in this Agreement in the manner and at the times provided for in this Agreement. (c) A Limited Partner or Special Partner shall have the right to demand the return of his Capital Account only on the dissolution and winding up of the Partnership in accordance with 25 26 Article XVIII hereof. No Limited Partner shall have priority over any other Limited Partner either as to the return of capital or as to profits, losses or distributions. No Limited Partner or Special Partner shall have right to bring an action for partition against the Partnership. (d) Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests may (1) remove the General Partner and (2) in the event that a vacancy shall occur in the office of General Partner, subject to the provisions B(5) of Article XV, elect a successor General Partner upon retirement, removal, death, adjudication of incompetence to manage his person or estate, adjudication of bankruptcy under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in lieu thereof), dissolution or other cessation to exist as a legal entity of the General Partner. (e) Each of the Limited Partners by the execution of this Agreement hereby consents to the admission of any person as a successor General Partner who succeeds or is appointed pursuant to Paragraph B(2) or B(5) of Article XV or elected pursuant to Paragraph (d) of this Article XI. Upon such succession, appointment or election of such successor General Partner, such admission shall, without any further consent or approval of the Limited Partners, or holders of Series 2 Partnership Shares be an act of all of the Limited Partners. (f) Each Limited Partner and Special Partner shall have the right to a complete list of names and addresses and interests of all Limited Partners as set forth in the records of the Partnership, upon written request to the Partnership, provided such request is for a purpose reasonably related to such Partner's interest in the Partnership. A reasonable charge for copy work may be charged by the Partnership. ARTICLE XII BOOKS OF ACCOUNT AND REPORTS Proper books of account shall be kept by the General Partner wherein shall be entered all transactions, matters and things relating to the Partnership's business as are usually entered into books of account kept by persons engaged in a business of a like character. The books of account shall be kept at the principal place of business of the Partnership and each Partner (or any duly constituted designee of a Partner) shall at all times during reasonable business hours have free access to and the right to inspect and copy the same. There shall be established for each Partner on the books of the Partnership a Capital Account which shall show the amount of each capital contribution made by such Partner (or his, her or 26 27 its predecessor in the case of an assignment of a Partnership Interest),. adjusted to reflect such Partner's proportion of profits and losses (determined according to Paragraph B of Article VIII) and of withdrawals and distributions and other items to the extent properly creditable to or chargeable against such Capital Account. Within 75 days after the end of each Fiscal Year, the General Partner shall deliver to each Limited Partner adequate information to enable each Limited Partner to complete and file his Federal tax return. Copies of each such report shall be distributed to each Limited Partner within 60 days after the end of any such quarter. If deemed appropriate by the General Partner such notice may be prepared and distributed to Limited Partners more frequently than quarterly. The General Partner shall send such other reports and information, if any, to the Limited Partners as the General Partner may deem necessary or appropriate, including but not limited to reports containing the name and address of each person who has had an unconditional written offer to purchase Partnership property rejected by the Partnership (such report shall also contain the price and terms offered). Copies of each report distributed to the Limited Partners shall, to the extent required by applicable law, be filed concurrently with relevant state "Blue Sky" authorities ARTICLE XIII FISCAL YEAR The Fiscal Year of the Partnership shall begin on the first day of January and end on the thirty-first day of December in each year. ARTICLE XIV PARTNERSHIP FUNDS The funds of the Partnership shall be deposited in such account or accounts as shall be designated by the General Partner and all withdrawals against such accounts shall be made only by one of the General Partner or by his or its properly delegated agents. ARTICLE XV TRANSFER OF PARTNERSHIP INTEREST A. In General. A Limited Partner or Special Partner may not sell, assign, transfer or otherwise dispose of, or pledge, hypothecate or in any manner encumber, his interest in the 27 28 Partnership or any part thereof except as permitted in this Article, and any act in violation of this Paragraph A shall not be binding upon or recognized by the Partnership regardless of whether the General Partner shall have knowledge thereof. B. General Partner. 1. Upon the vote of Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, pursuant to Paragraph (d) of Article XI and with the same proportionate vote as provided therein, may remove the General Partner from the Partnership. Written notice of the removal of the General Partner shall be served upon the General Partner either by certified or by registered mail, return receipt requested. or by personal service. Said notice shall set forth the day upon which the removal is to become effective. Upon receipt of notice, the General Partner shall cause an accounting to be prepared covering the transactions of the Partnership since the end of the previous Fiscal Year, and it shall not thereafter sell or dispose of or allow the sale or disposition of any Partnership asset unless such sale or disposition was the subject of a contract entered into by and binding upon the Partnership prior to the date upon which the notice was received by the General Partner. 2. Until the dissolution of the Partnership otherwise occurs, the General Partner shall not voluntarily take any steps to dissolve itself nor shall the General Partner voluntarily retire; provided, however, that nothing in this Partnership Agreement shall be deemed to prevent the merger or reorganization of Carey Diversified LLC into or with any other entity organized under the laws of the United States or any state thereof or the transfer of all the limited liability company interests of Carey Diversified LLC and the assumption of the rights and duties of the General Partner by, in the case of a merger, reorganization or consolidation, the surviving entity by operation of law. 3. Upon the removal, adjudication of bankruptcy or insolvency, dissolution or other cessation to exist as a legal entity of the General Partner, the General Partner's Partnership Interest and interest in Distributable Cash From Operations and its subordinated interest in Cash From Sales and Cash From Financings shall be purchased by the Partnership for a purchase price equal to the fair market value thereof determined pursuant to the provisions of Section 4 of this Paragraph B. The purchase price of such interest shall be paid by the Partnership to the General Partner by the promissory note of the Partnership, payable to the General Partner or its order, having a face amount equal to such purchase price, containing provisions as would be usual and customary in a commercial promissory note, bearing interest at a rate per annum equal to one percent above the prime interest rate at The Bank of New York, payable annually, with principal and all 28 29 unpaid accrued interest subject to mandatory prepayment from all Cash From Sales and Cash From Financings, and the remaining unpaid principal balance and unpaid accrued interest on such promissory note due and payable five years from the date of the General Partner's retirement, expulsion, adjudication of bankruptcy or insolvency, dissolution or other cessation to exist as a legal entity. 4. The fair market value of the General Partner's interest purchased by the Partnership pursuant to Section 3 of this Paragraph B shall be determined by agreement between the General Partner and the Partnership (which agreement shall require the approval of the Limited Partners holding more than fifty percent (50%) of the outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI). If the General Partner and the Partnership cannot agree upon the fair market value of such Partnership Interest within 30 days after the occurrence of the event upon which such interest of the General Partner is to be purchased by the Partnership, the fair market value thereof shall be determined in the manner provided by the laws of the State of California for the determination of controversies by arbitration, the General Partner to choose one arbitrator, the Partnership to choose one arbitrator and the two arbitrators so chosen to choose a third arbitrator. The decision of a majority of said arbitrators as to the fair market value of such Partnership interest shall be final and binding and may be enforced by legal proceedings. The General Partner and the Partnership shall each compensate the arbitrator appointed by it and the compensation of the third arbitrator shall be borne equally by such parties. C. Limited Partners. 1. The General Partner may, pursuant to this Article XV, (a) admit as a substituted Limited Partner or Special Partner any successor in interest to a Limited Partner or Special Partner either deceased or under legal disability, and (b) admit as substituted Limited Partners or Special Partners assignees of Limited Partners or Special Partners. 2. A substituted Limited Partner or Special Partner is a person admitted to all the rights of a Limited Partner or Special Partner. An assignee is a person to whom a Limited Partner or Special Partner has assigned his interest in the Partnership but who has not become a substituted Limited Partner or Special Partner. An assignee shall have no right to require any information or account of the Partnership's transactions or to inspect the Partnership's books but shall only be entitled to receive the share of the profits, or the return of the capital contribution, to which his assignor would otherwise be entitled as set forth in Section 5 of this Paragraph C. 29 30 3. No assignee of the whole or any portion of a Limited Partner's or Special Partner's interest in the Partnership shall have the right to become a substituted Limited Partner or Special Partner in place of his assignor unless all of the following conditions are satisfied: (a) The written consent of the General Partner to such substitution shall be obtained, the granting or denial of which shall be within the absolute discretion of the General Partner; (b) The duly executed written instrument of assignment setting forth the intention of the assignor that the assignee become a substituted Limited Partner or Special Partner in his place shall have been filed with the Partnership; (c) The interests in the Partnership being acquired by the assignee shall consist of at least five (5) percent of the limited partner or special partner interest (and unless otherwise prohibited by any applicable "Blue Sky" laws, a minimum of three (3) percent of the limited partner or special partner interest may be acquired or retained by an Individual Retirement Account ("IRA") established under section 408 of the Internal Revenue Code of 1954, as amended) and, if the assignor shall retain any limited partner or special partner interest, such retention shall consist of at least five (5) percent of the limited partner interest (provided, however, unless prohibited by any applicable "Blue Sky" laws, three (3) percent of the limited partner or special partner interest may be retained by an IRA); (d) The assignor and assignee shall execute and acknowledge such other instruments as the General Partner may deem necessary or desirable to effect such assignment and admission, including the written acceptance and adoption by the assignee of the provisions of this Agreement and his execution, acknowledgment and delivery to the General Partner of a Power of Attorney, the form and content of which are more fully described in Article XIX hereof; and (e) The assignee shall pay a transfer fee not to exceed $50.00 per transaction to the Partnership. 4. Any person admitted to the Partnership as a Partner shall be subject to all of the provisions; of this Agreement as if originally a party to it. 5. Subject to the provisions of Section 11 of this Paragraph C. compliance with the suitability standards imposed by the Partnership, applicable "Blue Sky" laws and the applicable rules of any other governmental authority, a Limited Partner or Special Partner shall have the right to assign the whole or any portion (not less than five (5) percent of the limited partner or special partner interest and, if he shall retain any limited 30 31 partner or special partner interest, subject to his retaining not less than five (5) percent of the limited partner or special partner interest provided, however, unless prohibited by any applicable "Blue Sky" laws, three (3) percent of the limited partner or special partner interest may be acquired or retained by an IRA) of his Partnership Interest by a written assignment the terms of which are not in contravention of any of the provisions of this Agreement, which assignment has been executed by the assignor and received by the Partnership and recorded on the books thereof. Any assignment in contravention of any of the provisions of this Section 5 shall be of no force and effect and shall not be binding upon or recognized by the Partnership. (a) Except as provided in Subsection (c) below, Paragraph A of Article VIII hereof and Paragraph D or Article IX hereof, an assignee of a Partner's Partnership Interest shall be entitled to receive distributions of cash or other property from the Partnership attributable to the interest acquired by reason of such assignment from and after the effective date of the assignment of such interest to him. The "effective date" of an assignment of an interest in the Partnership as used in this Subsection shall be the last day of the month in which the written instrument of assignment, in form and substance satisfactory to the General Partner, is received by the General Partner. (b) The net profits and net losses attributable to an interest in the Partnership assigned during any year shall be divided among and allocated in accordance with the provisions of Paragraph A of Article VIII hereof. (c) Anything herein to the contrary notwithstanding. both the Partnership and the General Partner shall be entitled to treat the assignor of such interest as the absolute owner thereof in all respects, and shall incur no liability for distributions of cash or other property made in good faith to him, until such time as the written assignment has been received by, and recorded in books of, the Partnership. 6. The General Partner may elect to treat an assignee who has not become a substituted Limited Partner or Special Partner as a substituted Limited Partner or Special Partner in the place of his assignor should they deem, in its absolute discretion, that such treatment is in the best interests of the Partnership for any of its purposes or for any of the purposes of this Agreement. 7. No consent of any of the Limited Partners or Special Partners is required to effect the substitution of a Limited Partner or Special Partner, except that a Limited Partner or Special Partner who assigns his interest in the Partnership must evidence his intention that his assignee be admitted as a substituted Limited Partner or Special Partner in his place and 31 32 must execute such instruments as the General Partner may in its absolute discretion determine to be necessary or desirable in connection therewith. 8. Upon the admission of a Limited Partner or Special Partner (whether as a result of his purchase of limited partner interests from the Partnership or his admission as a substituted Limited Partner or Special Partner), the General Partner shall make an appropriate amendment to the list of the Partner's names, addresses, Contributions and Capital Accounts referred to in Article XII hereof. 9. Upon the death or legal incompetency of an individual Limited Partner or Special Partner, his personal representative shall have all of the rights of a Limited Partner or Special Partner for the purpose of settling or managing his estate, and such power as the decedent or incompetent possessed to constitute a successor as an assignee of its interest in the Partnership and to join with such assignee in making application to substitute such assignee as a Limited Partner or Special Partner. However, such personal representative shall not have the right to become a substituted Limited Partner or Special Partner in the place of his predecessor in interest unless the conditions of Section 2 of this Paragraph C (other than the requirement that the assignor execute and acknowledge instruments) are first satisfied. 10. Upon the adjudication of bankruptcy or insolvency, dissolution or other cessation to exist as a legal entity of a Limited Partner or Special Partner not an individual, the authorized representative of such entity shall have all of the rights of a Limited Partner or Special Partner for the purpose of effecting the orderly winding up and disposition of the business of such entity and such power as such entity possessed to constitute a successor as an assignee of its interest in the Partnership and to join with such assignee in making application to substitute such assignee as a Limited Partner or Special Partner. However, such authorized representative shall not have the right to become a substituted Limited Partner or Special Partner in the place of his predecessor in interest unless the conditions of Section 2 of this Paragraph C (other than the requirement that the assignor execute and acknowledge instruments) are first satisfied. 11. (a) No assignment or transfer of an interest in the Partnership may be made which would result in Limited Partners or Special Partners and assignees of Limited Partners or Special Partners owning, directly or indirectly, individually or in the aggregate, more than twenty percent (20%) of the equity interests of the General Partner or any Affiliate of the General Partner as defined in Section 1504(a)) of the Code. If any such assignment or transfer would otherwise be made by bequest, inheritance or 32 33 operation of law, the transferee shall not become a Partner and the interest in the Partnership transferred shall be automatically redeemed by the Partnership immediately prior to such transfer in the same manner as provided in Subsection (b)(4) of this Section 11. (b) Anything to the contrary contained herein notwithstanding: (1) Except in the case of the Merger, in any twelve (12) consecutive month period no assignment or transfer of a limited partner interest may be made if as a result thereof the aggregate total of limited partner interests assigned and/or transferred in such period would exceed forty percent (40%) of the outstanding limited partner interests. This limitation is hereinafter referred to as the "forty percent (40%) limitation". (2) A Limited Partner may assign or transfer his Partnership Interest to: (i) his spouse (unless legally separated), child or ancestor, or (ii) a corporation, partnership, trust or other entity, fifty-one percent (51%) of the equity interest of which is owned by such Limited Partner and/or any of the persons specified in clause (i) so related to such Limited Partner, provided, however, that such transfers are subject to the forty percent (40%) limitation. (3) Subsection (b)(1) of this Section 11 shall not apply to a transfer by gift, bequest or inheritance or a transfer to the Partnership and, for purposes of the forty percent (40%) limitation, any such transfer shall not be treated as such. (4) If, after the forty percent (40%) limitation is reached in any consecutive twelve (12) month period, a transfer of a Partnership Interest would otherwise take place by operation of law (but not including any transfer referred to in Subsection (b)(3) of this Section 11), then the transferee shall not become a Limited Partner and such Partnership Interest shall be automatically redeemed by the Partnership immediately prior to such transfer for a price equal to the fair market value of said interest on such date of transfer. The price shall be paid within ninety (90) days after the date of the transfer and redemption. If the Partnership and the transferor do not agree upon the fair market value of the Partnership Interest, the purchase price shall be determined by arbitration. The purchase price shall be paid in cash within ten (10) days after such determination. (c) No transfer or assignment of any limited partner interest shall be made if it would result in the Partnership's being treated as an association taxable as a corporation for tax purposes. The General Partner, in its sole discretion, may, on behalf of the Partnership, impose any restrictions or transfers or assignments of limited partner interests it may deem appropriated 33 34 to give effect to the preceding sentence. The General Partner shall incur no liability to any Limited Partner, prospective investor or assignee for any action or inaction in connection with the foregoing, provided that the General Partner acted in good faith and such course of conduct did not constitute negligence or misconduct of the General Partner. 12. The General Partner, in its absolute discretion, may cause the Partnership to make, refrain from making, or once having made, to revoke, the election referred to in Section 754 of the Code, and any similar election provided by state or local law, or any similar provision enacted in lieu thereof. 13. Until the dissolution of the Partnership, the General Partner shall not take any voluntary steps to dissolve itself nor shall the General Partner voluntarily withdraw or resign. ARTICLE XVI MEETINGS AND AMENDMENT OF LIMITED PARTNERSHIP CERTIFICATE AND AGREEMENT A. Amendment of Limited Partnership Certificate The General Partner shall amend and record the Certificate of Limited Partnership of the Partnership without additional consent of Limited Partners when, pursuant to the terms of this Partnership Agreement: 1. There is a change in the name of the Partnership; 2. The General Partner withdraws, is removed, is adjudicated bankrupt under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in lieu thereof), is adjudicated incompetent to manage his person or estate or dies, or a person is admitted as the General Partner; 3. There is a false or erroneous statement in the Certificate; 4. A time is fixed for dissolution of the Partnership or the return of contributions and such time has not been specified in the Certificate; 5. The Partners desire to make a change in any other statement in the Certificate in order that it shall accurately represent the agreement among them; 6. There is a change in the character of the business of the Partnership; 34 35 7. There is a change in the address of the Partnership's principal place of business or its California office; 8. There is a change in the time as stated in the Certificate for the dissolution of the Partnership or for the return of a contribution; and There is a change in the address of the California agent for service of process designated in the Certificate of Limited Partnership (unless such agent is a corporation) or a new agent for service of process is appointed. B. Amendments to the Agreement. 1. Amendments to this Partnership Agreement may be proposed by the General Partner or by Limited Partners holding ten percent (10%) or more of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. Following such proposal, the General Partner shall submit to the Partners a verbatim statement of any proposed amendment and an opinion of counsel, who may be counsel to the Partnership, as to the legality of such amendment and the effect of such amendment on the liability of Limited Partners for the debts of the Partnership. The General Partner shall include in any such submission the General Partner's recommendations as to the proposed amendment. The amendment shall become effective only upon the written consent or affirmative vote of Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. 2. Any provision to the contrary herein notwithstanding, the General Partner may, without the consent of the Limited Partners, make the following amendments to this Agreement: a. Any amendments to Article VIII and/or Article IX of this Agreement if the Partnership is advised by its accountants or legal counsel at any time that the allocations provided in those Articles are not likely to be respected for Federal income tax purposes, either because of the promulgation of Treasury Regulations under Section 704 of the Code or other developments in the law. The General Partner is empowered to amend such provisions to the minimum extent necessary in accordance with the advice of the accountants and counsel to effect the allocations provided in this Agreement . New allocations made by the General Partner in reliance upon the advice of the accountants or counsel described above shall be deemed to be made pursuant to the fiduciary obligation of the General Partner to the Partnership and the Limited Partners, and no such new allocation shall give rise 35 36 to any claim or cause of action by any Limited Partner, provided that the General Partner acted in good faith; and b. In the event that the State of California amends the California Revised Limited Partnership Act in any manner and, as a result of such amendment, counsel to the Partnership is unable to give the Partnership an opinion to the effect that the Partnership will be treated as a partnership for Federal income tax purposes and not as an association taxable as a corporation, then the General Partner may decide in its sole discretion to reconstitute the Partnership under the laws of another state. 3. Any provision to the contrary contained herein notwithstanding, the General Partner may, without the consent of the Limited Partners, amend this Agreement (a) to add to the representations, duties or obligations of a General Partner or to surrender any right or power granted to a General Partner herein, for the benefit of the Limited Partners, (b) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein or to make any other provision with respect to matters or questions arising under this Agreement which will not be inconsistent with the provisions of this Agreement, (c) to delete any provision from this Agreement or to add any provision to this Agreement required to be so deleted or added by the Staff of the Securities and Exchange Commission or by a State "Blue Sky" Commissioner or similar such official, which addition or deletion is deemed by such Commission or official to be for the benefit or protection of the Limited Partners, and (d) to change administrative or other provisions of this Agreement in a manner which, in the opinion of the General Partner, will permit the most profitable and/or efficient operation of the Partnership; provided, however, that no amendment shall be adopted pursuant to this Section 3 unless the adoption thereof (i) is for the benefit of, or not adverse to, the interests of the Limited Partners, (ii) is consistent with Article IV and Paragraph A of Article X hereof, (iii) does not affect the distribution of Distributable Cash From Operations, Cash From Sales and Cash From Financings or the allocation of profits and losses among the Limited Partners or between the Limited Partners and the General Partner and (iv) does not affect the limited liability of the Limited Partners or the status of the Partnership as a partnership for Federal income tax purposes. 4. Upon amendment of this Agreement, the Certificate of Limited Partnership shall also be amended if necessary to reflect such change. 5. Any amendment to the Partnership Agreement which modifies the compensation or distributions to which a General Partner is entitled or which affects the duties of a General Partner must be consented to by the General Partner before becoming effective. 36 37 6. In the event there is a change in the Federal income tax laws or regulations which result in the Partnership being taxed as an association taxable as a corporation, the General Partner may cause the Partnership to conduct its business so as to be treated as a real estate investment trust for Federal income tax purposes. C. Meetings of the Partnership. Meetings of the Partnership may be called by the General Partner and shall be called by them upon the written request of Limited Partners holding ten percent (10%) or more of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. Upon receipt of such a written request, stating the purpose of the proposed meeting, the General Partner shall provide each Partner, within 10 days of such request, written notice (either by personal service or certified mail or by express or other overnight delivery service) of a meeting and the purpose of such meeting. Such meeting shall be held not less than 10 days nor more than 60 days after the receipt of such request. Included with the notice shall be a detailed statement of the action proposed, including a verbatim statement of the wording of any resolution proposed for adoption by the Limited Partners and of any proposed amendment to the Partnership Agreement. The Partnership will provide for Proxies or written consents which specify a choice between approval or disapproval of each matter to be acted upon at the meeting. Holders of a majority of the Limited Partner Interests entitled to vote, represented in person or by Proxy, shall constitute a quorum at a meeting of the Limited Partners. To the extent not consistent with this Paragraph C, all meetings shall be governed by the provisions of Section 15637 of the Act. The General Partner may establish a record date for any meeting, subject to the limitations of Section 15637(j) of the Act. ARTICLE XVII TERM The Partnership shall terminate on December 31, 2017, unless sooner dissolved pursuant to the provisions of Article XVIII hereof as otherwise provided by law. ARTICLE XVIII DISSOLUTION A. Events Requiring Dissolution. The Partnership shall be dissolved upon the happening of any of the following events: 37 38 1. The retirement, removal, adjudication of bankruptcy under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in lieu thereof), of the General Partner, the dissolution or other cessation to exist as a legal entity of the General Partner, unless the Limited Partners agree in writing to continue the business of the Partnership and to admit one or more General Partners. 2. The Partnership is adjudicated bankrupt under Chapter 7 of the Federal Bankruptcy Code (or any similar law or provision enacted in lieu thereof). 3. The vote of Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests held by all Limited Partners, with the same proportionate vote as provided in paragraph (d) of Article XI. 4. The disposition of all interests in the real, personal and mixed property and other assets of the Partnership. 5. December 31, 2016. B. Distributions on Dissolution. Upon the dissolution of the Partnership the General Partner who has not wrongfully dissolved the Partnership shall wind up the affairs of the Partnership. If there is no such General Partner, the Limited Partners shall wind up the affairs of the Partnership. The Partners winding up the affairs of the Partnership shall take full account of the Partnership assets and liabilities and all assets shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom shall be applied and distributed in the following order: (1) to creditors (including Partners who are creditors to the extent permitted by law), in the order of priority as provided by law, (2) to the Partners in accordance with their respective Capital Accounts, determined after the application of Articles VIII and IX hereof and (3) to the Partners in accordance with the provisions of Paragraph E of Article IX hereof. Notwithstanding anything to the contrary, in the event the Partnership is "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), liquidating distributions shall be made pursuant to the previous sentence by the end of the taxable year in which the Partnership is liquidated, or, if later, within 90 days after the date of such liquidation. Distributions pursuant to the preceding sentence may be made to a trust for the purposes of an orderly liquidation of the Partnership by the trust in accordance with the Act. C. Contributions by the General Partner. In the event that, upon the liquidation of the Partnership, a General Partner shall have a negative balance in the General Partner's Capital Account then the General Partner shall contribute to the capital 38 39 of the Partnership an amount equal to such negative balance in the General Partner's Capital Account. ARTICLE XIX POWER OF ATTORNEY Concurrently with the written acceptance and adoption of the provisions of this Agreement, each Limited Partner and Special Partner shall execute and deliver to the General Partner a Power of Attorney in form acceptable to the General Partner in which the General Partner is constituted and appointed as the attorney-in-fact for such Limited Partner or Special Partner with power and authority to act in his name and on his behalf in the execution, acknowledgment and filing of documents, which will include but not be limited to a Certificate of Limited Partnership, as well as amendments thereto, under the laws of the State of California and under the laws of any other state in which the General Partner deems it advisable to file such a certificate; any other instrument which may be required to be filed by the Partnership under the laws of any state or by any governmental agency, or which the General Partner deems it advisable to file; and any documents which may be required to effect the continuation of the Partnership, the admission of an additional or substituted Limited Partner or Special Partner or the dissolution and termination of the Partnership, provided such continuation, admission or dissolution and termination are in accordance with the terms of this Agreement. The Power of Attorney so granted by each Limited Partner and Special Partner to the General Partner is a Special Power of Attorney coupled with an interest, is irrevocable and shall survive the death or legal incapacity of the Limited Partner or Special Partner; may be exercised by the General Partner for each Limited Partner or Special Partner by a facsimile signature of one of its officers or by listing all the Limited Partners and Special Partners executing any instrument with a single signature of one of its officers acting as attorney-in-fact for all of them; and shall survive the delivery of any assignment by a Limited Partner or Special Partner of the whole or any portion of his interest in the Partnership; except that where the assignee thereof has been approved by the General Partner for admission to the Partnership as a substituted Limited Partner or Special Partner, the Power of Attorney shall survive the delivery of such assignment for the sole purpose of enabling the General Partner to execute, acknowledge and file any instrument necessary to effect such substitution. The Power of Attorney so granted by each Limited Partner to the General Partner shall not authorize the General Partner to 39 40 act on behalf of Limited Partners in any situation in which this Agreement requires the consent of Limited Partners. ARTICLE XX LIMITATIONS ON LIABILITY; LITIGATION Except as provided in his Subscription Agreement, no Limited Partner or Special Partner shall be liable (i) as a General Partner unless, in addition to the exercise of his rights and powers as a Limited Partner or Special Partner, he takes part in the management or control of the Partnership's business or (ii) to the Partnership or to a General Partner unless a liability of the Partnership or of the General Partner, as the case may be, is founded upon the unauthorized activity of such Limited Partner or Special Partner in attempting to take part in the control of the Partnership's business or misstatements contained in such Partner's Subscription Agreement delivered in connection with his purchase of limited partner interests. The General Partner is hereby authorized to prosecute. defend, settle or compromise actions or claims at law or in equity at the Partnership's expense as may be necessary or proper to enforce or protect the Partnership's interests. The General Partner shall satisfy any judgment, decree or decision of any court, board or authority having jurisdiction or any settlement of any suit or claim prior to judgment or final decision thereon first, out of any insurance proceeds available therefor, next out of the Partnership's assets and income and finally out of the assets and income of the General Partner. ARTICLE XXI MISCELLANEOUS All notices under this Agreement shall be in writing and shall, except as otherwise expressly provided herein, be given to the Partner entitled thereto by personal service or by certified or registered mail, return receipt requested, to the address set forth in this Agreement for such Partner or at such other address as he may specify in writing. Article titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. Whenever the singular number is used in this Agreement and when required by the context, the same shall include the plural, and the masculine gender shall include the feminine and neuter genders and the word "persons" shall include individuals, 40 41 corporations, firms, partnerships, trusts or other forms of associations. This Agreement may be executed in several counterparts, and all so executed shall constitute one agreement, binding on all of the parties hereto, notwithstanding that all the parties are not signatory to the original or the same counterpart. Subject to the provisions of Article XV, the terms and provisions of this Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, successors and assigns of the respective Partners. Whenever the vote of the Limited Partners is referred to in this Agreement, the General Partner may vote on behalf of such Limited Partners who have by written proxy authorized the General Partner so to do. This agreement and amendments hereof shall be governed by the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have hereunto set their respective hands as of the day and year first above written. GENERAL PARTNER: CAREY DIVERSIFIED LLC By:___________________________________ CORPORATE SPECIAL PARTNER: CAREY MANAGEMENT LLC By:___________________________________ INDIVIDUAL SPECIAL PARTNER: ______________________________________ William Polk Carey LIMITED PARTNERS: 41 42 CAREY DIVERSIFIED LLC By:___________________________________ W.P. CAREY & CO., INC. By:___________________________________ All Limited Partners now and hereafter admitted as limited partners of the Partnership pursuant to powers of attorney and authorizations now and hereafter executed in favor of and granted and delivered to the General Partner By: CAREY DIVERSIFIED LLC, General Partner By:___________________________________ 42 EX-99.15 55 AMEND & RESTATED AGREEMENT OF LTD PARTNERSHIP CPA3 1 Exhibit 99.15 AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF CORPORATE PROPERTY ASSOCIATES 3 (A California Limited Partnership) THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP of CORPORATE PROPERTY ASSOCIATES 3, a California limited partnership (the "Partnership"), which amends and restates the Amended Agreement of Limited Partnership dated as of June 1, 1981, as amended as of _________, 1997, is made and entered into as of the ____ day of _______, 1997 by and between CAREY DIVERSIFIED LLC, a Delaware limited liability company as General Partner and as Limited Partner, CAREY MANAGEMENT LLC, as Corporate Special Partner, WILLIAM POLK CAREY, as Individual Special Partner, and W.P. CAREY & CO., INC., as Limited Partner, those persons set forth on Schedule A hereto, as Limited Partners and all persons and entities admitted as Limited Partners as provided herein. ARTICLE I CONTINUATION OF PARTNERSHIP The parties hereby continue the Partnership under the provisions of the California Revised Limited Partnership Act (the "Act") and the rights and liabilities of the Partners shall be as provided in such law and as herein expressly provided. In the event that it shall be necessary for the Partnership to exist in or qualify to do business under the laws of any state or states other than or in addition to the State of California, the parties hereby agree that the Partnership shall take such action as may be necessary to exist or qualify to do business in any state in which such existence or qualification shall be required, provided that in any such event the Partnership shall at all times continue to be a limited partnership formed under and governed by the provisions of the Uniform Partnership Act of the State of California. ARTICLE II NAME The business of the Partnership shall be conducted under the name "Corporate Property Associates 3" or under the name "Corporate Property Associates 3 - A California Limited Partnership" in any state or other jurisdiction which requires that the term "limited partnership" be a part of the Partnership's name or under such other name as the General Partner shall hereafter designate in writing to the other Partners. 2 ARTICLE III DEFINITIONS "Acquisition Expenses" means the expenses of the Partnership related to the selection and acquisition of properties by the Partnership, whether or not such properties are acquired, including but not limited to legal fees and expenses, travel and communications expenses, costs of appraisals, non-refundable option payments on property not acquired, accounting fees and expenses, costs of title reports and title insurance, transfer and recording taxes and miscellaneous expenses. Acquisition Expenses shall not include Acquisition Fees. "Acquisition Fees" means the total of all fees and commissions paid by any party in connection with the purchase or development of property by the Partnership, except a development fee paid to a person not an Affiliate of the Partnership in connection with the actual development of a project after the Partnership's acquisition of the land. Included in the computation of such fees or commissions shall be any real estate commission, selection fee, development fee, nonrecurring management fee, or any fee of a similar nature, however designated but not any loan fee ("points"). Acquisition Fees should not include Acquisition Expenses. "Affiliate" means, with respect to any party hereto, (i) any person directly or indirectly controlling, controlled by or under common control with such party, (ii) any person owning or controlling 10% or more of the outstanding voting securities of such party. (iii) any officer, director or partner of such party or of any person specified in (i) or (ii) above and (iv) any company in which any officer, director or partner of any person specified in (iii) above is an officer. director or partner; provided, however, that for purposes of this definition the term "Affiliate" shall not be deemed to include any person providing legal, underwriting or financial or investment advisory services to the Partnership, the General Partner, or any Affiliate of any of them from time to time. "Agreement" means this Amended and Restated Agreement of Limited Partnership as hereafter amended from time to time. "Appraisal Date" means December 31, 1998. "Cash From Financings" means the net cash proceeds realized by the Partnership from the financing of Partnership property or the refinancing of any Partnership indebtedness. "Cash From Sales" means the net cash proceeds realized by the Partnership from the sale, exchange or other disposition of any of its assets. Cash From Sales shall not include net cash proceeds realized from the financing of Partnership property or the refinancing of any Partnership indebtedness. 2 3 "Code" means the Internal Revenue Code of 1986. "Consolidation and Offering Expenses" means all expenses incurred in connection with the formation and qualification of the Subsidiary Partnership, the Merger and in offering the Shares to the former limited partners of the Partnership in exchange for their Partnership Interests under applicable Federal and state law, and any other expenses actually incurred and directly related to the offering of the Shares, including such expenses as: (i) the preparing, printing, filing and delivering of the Registration Statement and the Prospectus (including any amendments thereof or supplements thereto), (ii) the preparing and printing of this Agreement, other solicitation material and related documents and the filing and/or recording of such certificates or other documents necessary to comply with the laws of the State of California for the formation of a limited partnership, the merger of a limited partnership into another limited partnership and for the continued good standing of a limited partnership, (iii) the qualification or registration of the limited liability company interests under state securities or "Blue Sky" laws, (iv) any escrow arrangements, including any compensation to an escrow agent, (v) the filing fees payable to the United States Securities and Exchange Commission and to the National Association of Securities Dealers, Inc. and any costs payable to the NYSE for the listing of the Listed Shares, (vi) the fees of the Partnership's counsel, (vii) all advertising expenses incurred in connection therewith, including the cost of all sales literature and the costs related to investor and broker/dealer sales and information meetings and marketing incentive programs and (viii) selling commissions and wholesaling expenses incurred in connection with the sale of the Shares. "Contribution" means any money, property or services rendered, or a promissory note or other binding obligations to contribute money or property, or to render services as permitted by Section 15651 of the Act, which a Partner contributes to the Partnership as capital in that Partner's capacity as Partner pursuant to this Partnership Agreement or any other agreement among the Partners, including any agreement as to value. "Corporate Special Partner" means Carey Management LLC, a Delaware limited liability company. "CPA Partnership" means Corporate Property Associates, a California limited partnership, Corporate Property Associates 2, a California limited partnership, Corporate Property Associates 4, a California limited partnership, Corporate Property Associates 5, a California limited partnership, Corporate Property Associates 6, a California limited partnership, Corporate Property Associates 7, a California limited partnership, Corporate Property Associates 8, L.P., a Delaware limited partnership, Corporate Property Associates 9, L.P., a Delaware limited partnership, the 3 4 Partnership and any other real estate limited partnerships sponsored by W.P. Carey & Co., Inc. or its Affiliates with investment objectives substantially similar to the Partnership's. "Distributable Cash From Operations" means cash receipts from the ordinary day-to-day operations of the Partnership (including all interest on Partnership investments and mortgages held by the Partnership) without deduction for the management fee authorized by Paragraph G(3) of Article X payable to an Affiliate of the General Partner or for depreciation and amortization of intangibles such as organization, underwriting and debt placement costs but after deducting all other expenses, debt amortization and provisions for reserves established by the General Partner which they deem to be reasonably required for the proper operation of the business of the Partnership. "Distributable Cash from Operations" shall not include cash proceeds realized from the sale, exchange or other disposition of assets of the Partnership or from financing of Partnership property or the refinancing of any Partnership indebtedness. "Fiscal Quarter" means the three-month period ending on the last day of the third. sixth. ninth and twelfth calendar months of each Fiscal Year of the Partnership. "Fiscal Year' means the Fiscal Year specified in Article XIII. "Front-End Fees" means all fees and expenses paid by any party for any services rendered in connection with the organizational or acquisition phase of the Partnership, including Consolidation and Offering Expenses, Acquisition Fees, Acquisition Expenses and any other similar fees, however designated. "Individual Special Partner" means William Polk Carey. "Investment in Properties" means the amount of gross proceeds of the Offering actually paid or allocated to the purchase, development, construction or improvement of properties acquired by the Partnership, including the purchase of properties, working capital reserves (except that working capital reserves in excess of 5% of the gross proceeds of the Offering shall not be included) and other cash payments such as interest, closing costs, financing fees, taxes and other similar items, but excluding Front-End Fees. "Limited Partner" means any person or entity in his, her or its capacity as a limited partner of the Partnership and whose name and address are set forth on the books and records of the Partnership. "Mandatory Distribution Event" means (a) the sale or disposition of a Partnership property to a third party unaffiliated with the Partnership or the General Partner, not 4 5 including the pledge, mortgage or encumbrance of a property, or of any interest therein, in connection with the financing, refinancing or other leveraging of such property or otherwise or any assignment of any leases or rents related to such property, or (b) the mandatory distribution to holders of Partnership Interests following the Appraisal Date. "Merger" means the merger of the Subsidiary Partnership into the Partnership. "Merger Agreement" means the Agreement of Merger pursuant to which the Subsidiary Partnership is merged with and into the Partnership. "Minimum Gain" shall mean and refer to, at any time, the excess, if any, of the outstanding principal balance of all nonrecourse debt of the Partnership that is secured by an interest in Partnership assets, over the adjusted basis of such assets to the Partnership for Federal income tax purposes. For purposes of the preceding sentence, the term "nonrecourse debt" shall mean a liability of the Partnership with respect to which no Partner has any personal liability. "Nonrecourse Deductions" has the meaning set forth in Sections 1.704-2(b)(1) and 1.704-2(c) of the Treasury Regulations. "Nonrecourse Liabilities" has the meaning set forth in Section 1.704-2(b)(3) of the Treasury Regulations. "Net Lease" means a lease in which the tenant undertakes to pay all or substantially all the cash expenses, excluding debt service, related to the leased property. "Offering" means the offering of the Shares made pursuant to the Prospectus. "Partner" means the General Partner, the Corporate Special Partner, the Individual Special Partner and any Limited Partner where no distinction is required by the context in which the term is used. "Partner Minimum Gain" means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a nonrecourse Liability, determined in accordance with Treasury Regulations Section 1.704-2(i)(4). "Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulations Section 1.704-2(b)(4). "Partner Nonrecourse Deductions" has the meaning set forth in Treasury Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Debt for the Partnership taxable 5 6 year shall be determined in accordance with the rules of Treasury Regulations Section 1.704-2(i)(2). "Partnership" means Corporate Property Associates 3 - a California limited partnership. "Partnership Interest" means the interest of each Partner in the profits, losses, distributions, capital and assets of the Partnership. "Partnership Minimum Gain" has the meaning set forth in Treasury Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in Partnership Minimum Gain, for a Partnership taxable year shall be determined in accordance with the rules of the Treasury Regulations. "Prospectus" means the final prospectus of the General Partner pursuant to which the Partnership will offer up to 23,654,898 Shares as the same may at any time and from time to time be amended or supplemented after the effective date of the Registration Statement. "Proxy" means a written authorization signed by a Partner or the Partner's attorney-in-fact giving another person the power to vote with respect to the Partnership Interest of that Partner. "Signed," for the purpose of this paragraph, means the placing of the Partner's name on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the Partner or the Partner's attorney-in-fact. "Registration Statement" means the General Partner's Registration Statement on Form S-4 filed with the Securities and Exchange Commission in the form in which it becomes effective, as the same may at any time and from time to time thereafter be amended or supplemented. "Shares" means the Shares of the General Partner. "Special Partners" means the Corporate Special Partner and the Individual Special Partner. "Subsidiary Partnership" means Third Subsidiary, L.P., a California limited partnership, which is a subsidiary of the General Partner. ARTICLE IV PURPOSE The business and purpose of the Partnership is to invest in and own real property or interests therein (including leasehold estates) or appurtenances thereto as well as personal or mixed property connected therewith which is income-producing or capable 6 7 of improvement to become income-producing within a reasonable time after acquisition. The Partnership may enter into ventures, partnerships and other business arrangements with respect to real property as deemed prudent by the General Partner in order to achieve successful operations for the Partnership. Operations of the Partnership may be conducted wherever, in the opinion of the General Partner and not in violation of the general restrictions described in Paragraph H of Article X the factors involved appear to be favorable for the Partnership and the Partners. ARTICLE V NAMES AND ADDRESSES OF PARTNERS The General Partner of the Partnership shall be Carey Diversified LLC, a Delaware limited liability company having an office at 50 Rockefeller Plaza, New York, New York 10020. The names and addresses of the Limited Partners of the Partnership shall be as set forth on the books and records of the Partnership and shall be kept at the principal place of business of the Partnership and a copy of which shall be kept at the Partnership's California office. ARTICLE VI PRINCIPAL PLACE OF BUSINESS; CALIFORNIA OFFICE The principal place of business of the Partnership shall be 50 Rockefeller Plaza, New York, New York 10020. The Partnership shall also maintain an office in California at Transamerica Pyramid, 600 Montgomery Street, San Francisco, California 94111. The General Partner may from time to time change the principal place of business of the Partnership or its California office and, in either such event, the General Partner shall notify the Partners in writing within ten days after the effective date of such change; provided, however, that no such change shall be effected unless the General Partner determines that such change is in the best interests of the Partnership after giving consideration to any material adverse state or local income, estate or inheritance tax consequences to the Partners, or any adverse effect on the limited liability of the Limited Partners, as a result of such change. The General Partner may establish additional places of business of the Partnership when and where required by the business of the Partnership. The Partnership shall at all times maintain in California an agent for service of process upon the Partnership. ARTICLE VII CAPITAL CONTRIBUTIONS The Partnership is authorized to issue and sell up to $160,000 of limited partner interests. 7 8 No interest shall be paid on any contribution to the capital of the Partnership. Loans by a Partner to the Partnership shall not be considered contributions to the capital of the Partnership. Any Partner, including any additional or substituted Partner, who shall acquire a Partnership Interest or whose Partnership Interest is increased by means of a transfer to him of all or a part of the Partnership Interest of another Partner, shall succeed to the Capital Account, or portion thereof, in respect of the Partnership Interest received. ARTICLE VIII PROFITS AND LOSSES A. Determination of Profits and Losses. The profits and losses of the Partnership shall be determined for each Fiscal Year of the Partnership in accordance with generally accepted accounting principles and procedures applied in a consistent manner and for federal income tax purposes, by additionally making such adjustments as are necessary to include other items of income, expense, deduction and allowance as are permitted and required under the Code and the regulations promulgated thereunder. Except as otherwise provided herein, whenever a proportionate part of the Partnership profit or loss is credited or charged to a Capital Account every item of income, gain, loss or deduction entering into the computation of such profit or loss shall be considered either credited or charged, as the case may be, to such Capital Account and every item of credit or tax preference related to such profit or loss and applicable to the period during which such profit or loss was realized shall be allocated to such Partner in the same proportion. Any increase or decrease in the amount of any item of income, gain,. loss or deduction attributable to an adjustment to the basis of Partnership assets made pursuant to a valid election under sections 734, 743 and 754 of the Code, and pursuant to corresponding provisions of applicable state and local income tax laws shall be charged or credited, as the case may be, and any increase or decrease in the amount of any item of credit or tax preference attributable to any such adjustment shall be allocated, to the Partners entitled thereto under such laws. Profits and losses allocated, to a particular class of Partnership Interests shall be allocated among the holders of record of such class of Partnership Interests at the end of each Fiscal Year (or such shorter period as may be provided herein) of the Partnership in proportion to their respective Partnership Interests; provided however, that any such profits and losses attributable to a limited partner interest assigned during such Fiscal Year of the Partnership shall be allocated among the holders of such limited partner interests during such Fiscal Year in proportion to the number of months (for purposes of such allocation ownership of limited partner interests for each month will be determined on the 8 9 fifteenth day of each month) that each such holder was recognized as the owner of such limited partner interest during such Fiscal Year, without regard to the results of Partnership operations during the period in which each such holder was recognized as the owner thereof and without regard to the date, amount or recipient of any distributions which may have been made with respect to such limited partner interest. B. Allocation of Profits and Losses. 1. Except as provided in subparagraph 4 of this paragraph B, the profits and losses of the Partnership (other than gains or losses from the sale, exchange or other disposition of Partnership assets) shall be allocated to the Partners as follows and in the following order to priority: a. An amount of net income equal to the excess, if any, of the aggregate negative balance of the Capital Accounts of the Partners over the Minimum Gain (determined as of the end of such year or fraction thereof), shall first be allocated among the Partners whose Capital Accounts are negative as a result of nonrecourse debt in proportion to the negative amounts attributable to such nonrecourse debt. b. Any remaining balance of net income shall be allocated 1% to the General Partner, 1.9% to the Corporate Special Partner, 0.1% to the Individual Special Partner and 97% to the Limited Partners. c. Net losses of the Partnership shall be allocated 1% to the General Partner, 1.9% to the Corporate Special Partner, 0.1% to the Individual Special Partner and 97% to the Limited Partners. 2. Except as provided in subparagraph 4 of this Paragraph B, net losses arising from sales, exchanges or other dispositions of Partnership assets shall be allocated 1% to the General Partner, 1% to the Corporate Special Partner and 98% to the Limited Partners. For purposes of this subparagraph 2, Capital Accounts shall be determined after applying the allocations provided in subparagraphs 1 and 5 of this Paragraph B, and after applying subparagraphs 6 and 7 of this Paragraph B. 3. Net gains arising from sales, exchanges or other dispositions of Partnership assets shall be allocated to the Partners as follows and in the following order to priority: a. An amount of such gains equal to the excess, if any, of the aggregate negative balance of the Capital Accounts of the General Partner over the Minimum Gain; b. If each Partner's Capital Account is negative and the gains are less than the aggregate negative amounts in the 9 10 Capital Accounts, in the ratio that the Capital Accounts bear to each other; c. If each Partner's Capital Account is negative and the gains are greater than the aggregate negative amounts in the Capital Accounts (i) first in an amount to bring each Partner's Capital Account to zero, and (ii) then to the Partners in the percentage by which Cash From Sales and Cash From Financings is then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; d. If certain Partner's Capital Accounts are positive and other Partner's Capital Accounts are negative (i) first in an amount to bring the Capital Account of each Partner whose Capital Accounts which are negative to zero (or if gains are less than the aggregate negative amounts of the Capital Accounts which are negative, to such Partners in the ratio that such negative Capital Accounts bear to each other), and (ii) then to the Partners in the percentage by which Cash From Sales and Cash From Financings is then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; e. If each Partner's Capital Account is positive, in the percentages by which Cash From Sales and Cash From Financings is then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; For purposes of this subparagraph 3, Capital Accounts shall be determined after applying the allocations provided in subparagraphs 1 and 2 of this Paragraph B and after applying subparagraphs 6 and 7 of Paragraph B. 4. No loss or deduction or item thereof under subparagraph 1 or 2 of this Paragraph B shall be allocated to the General Partner if, or to the extent, such allocation would create or increase a deficit in the General Partner's Capital Account, unless: a. Such allocation of loss or deduction is attributable to nonrecourse debt of the Partnership; and b. Such allocation does not cause the deficit capital account of the General Partner to exceed the amount of Minimum Gain attributable to such nonrecourse debt, determined as of the last day of the taxable year to which such allocation is attributable. 5. To the extent that any amount paid to a Limited Partner or its Affiliates pursuant to the provisions of Paragraphs G(2), (4),(5),(6), or (7) of Article X hereof, or as Front-End Fees, is treated as a distributive share of Partnership income to the Limited Partner for Federal income tax purposes, the Limited Partner affected shall be allocated gross income of the 10 11 Partnership at a time and in an amount equal to the amount of such payment, and the Capital Account of the Limited Partner so affected shall be adjusted to reflect such allocation and payment. If the Partnership's gross income for a Fiscal Year is less than the amount of such payment, the Limited Partner so affected shall be allocated gross income in each succeeding Fiscal Year until the total amount so allocated equals the total amount of such payment. 6. For purposes of subparagraphs 1(a), 2 and 3 of this Paragraph B, distributions to the Partners pursuant to Paragraphs A and E of Article IX hereof shall be treated as having been made and charged to the Capital Accounts of the Partners prior to the allocations of income, gains and losses provided therein. 7. Solely for purposes of this Paragraph B, the Capital Accounts of each Partner shall be reduced by such Partner's share of any Partnership expenditure which would be treated as it were an expenditure described under Section 705(a)(2)(B) of the Code, and shall be reduced or increased by any other amount required by the then applicable regulations under Section 704 of the Code. 8. Notwithstanding anything to the contrary in this Article VIII, if any Partner receives an adjustment, allocation or distribution described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), such Partner shall be specially allocated a pro rata portion of each item of Partnership income, including gross income, and gain in an amount and manner sufficient to eliminate, as quickly as possible, any deficit balance in such Partner's Capital Account created by such adjustment, allocation or distribution in excess of the sum of (i) the amount such Partner is obligated to restore pursuant to any provision of this Agreement and (ii) the amount such Limited Partner is deemed to be obligated to restore pursuant to the penultimate sentence of Treasury Regulations Section 1.704-1(b)(2)(iv)(f) (as amended in 1986). This subparagraph 8 of Paragraph B is intended to constitute a "qualified income offset" within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(3). 9. Except as otherwise provided in Section 1.704-2(f) of the Treasury Regulations, if there is a net decrease in Partnership Minimum Gain for any Partnership fiscal year, each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary subsequent years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain to the extent required by Treasury Regulations Section 1.704-2(f). The items to be so allocated shall be determined in accordance with Section 1.704-2(f) and (i) of the Treasury Regulations. This subparagraph is intended to comply with the minimum gain chargeback requirement in said section of the Treasury Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph 11 12 shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant hereto. 10. Except as otherwise provided in Section 1.704-2(i)(4) of the Treasury Regulations, if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any fiscal year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the Treasury Regulations, shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to that Partner's share of the net decrease in the Partner Minimum Gain attributable to such Partner Nonrecourse Debt to the extent and in the manner required by Section 1.704-2(i) of the Treasury Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i) of the Treasury Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and (j)(2) of the Treasury Regulations. This subparagraph is intended to comply with the minimum gain chargeback requirement with respect to Partner Nonrecourse Debt contained in said section of the Treasury Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph shall be made in proportion to the respective amounts to be allocated to each Partner pursuant hereto. 11. To the extent any Partner has an Adjusted Capital Account Deficit at the end of any Partnership Fiscal Year, each such Partner shall be specially allocated items of Partnership income (including gross income) and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Paragraph 8(B)(11) shall be made if and only to the extent that such Partners would have an Adjusted Capital Account Deficit after all other allocations provided for in this Section have been tentatively made as if this Paragraph 8(B)(11) were not in the Agreement. 12. Partner Nonrecourse Deductions for any fiscal year or other applicable period with respect to a Partner Nonrecourse Debt shall be specially allocated to the Partners that bear the economic risk of loss for such Partner Nonrecourse Debt (as determined under Sections 1.704-2(b)(4) and 1.704-2(i)(1) of the Treasury Regulations). C. Power of the Partner to Vary Allocations of Profits and Losses. It is the intent of the Partners that each Partner's distributive share of income, gains, losses, deductions and credits shall be determined and allocated in accordance with this Article VII to the fullest extent permitted by Section 704(b) of the Code. If the Partnership is advised that the allocations provided in this Article VIII are unlikely to be respected for Federal income tax purposes, the General Partner has been granted power in Paragraph B(2) of Article XVI of this Agreement to amend 12 13 the allocation provisions of this Agreement, on advice of accountants and legal counsel, to the minimum extent necessary to effect the plan of allocations and distributions provided in this Agreement. D. Allocations of Profits and Losses Among Limited Partners. Except as otherwise provided in this Article VIII, profits and losses shall be allocated among the Limited Partners in the same manner as distributions are allocated in Paragraph D of Article IX hereof. E. Consent of Partners to Allocation of Profits and Losses. The methods hereinabove set forth by which profits and losses of the Partnership are determined and allocated are hereby consented to by each Partner as a condition to becoming a Partner. ARTICLE IX DISTRIBUTIONS A. Distributable Cash From Operations. The General Partner shall distribute as soon after the close of each Fiscal Quarter as is reasonably feasible all of the Distributable Cash From Operations for such Fiscal Quarter in the following manner: 1% to the General Partner, 1.9% to the Corporate Special Partner, 0.1% to the Individual Special Partner and 97% to the Limited Partners. B. Cash From Sales. The General Partner shall distribute, as soon after the close of each Fiscal Quarter as is reasonably feasible, all Cash From Sales realized by the Partnership during such Fiscal Quarter in accordance with the provisions of Paragraph E of this Article IX. C. Cash From Financings. The General Partner shall distribute, as soon after the close of each Fiscal Quarter as is reasonably feasible, all of the Cash From Financings realized by the Partnership during such Fiscal Quarter in accordance with the provisions of Paragraph E of this Article IX. D. Allocation of Distributions Among Limited Partners. Distributions of cash to the Limited Partners shall be apportioned among the holders of record of limited partner interests in the ratio in which the number of limited partner interests held of record by each of them bears to the number of limited partner interests held of record by all the Limited Partners as of the first day of the Fiscal Quarter with respect to which such distribution is made E. Distributions of Cash From Sales and Cash From Financings. The General Partner shall distribute Cash From Sales and Cash From Financings in the following manner: 1% to the General Partner, 1% to the Corporate Special Partner and 98% to 13 14 the Limited Partners, until such time as the Corporate Special Partner has received $48,843 pursuant to this Paragraph E of Article IX. Thereafter, Cash From Sales and Cash From Financings shall be distributed 1% to the General Partner and 99% to the Limited Partners. F. Return of Capital Contributions. To the extent that, at the end of any Fiscal Quarter, the total cash distributions to the Limited Partners made pursuant to this Article IX exceed the profits of the Partnership for such Fiscal Quarter, such excess shall be charged to each Limited Partners' Account and shall be regarded as a rightful return of capital contributions. G. Consent of Partners to Allocation of Distributions. The methods hereinabove set forth by which Cash From Operations, Cash From Sales and Cash From Financings are allocated and distributed are hereby consented to by each Partner as a condition to becoming a Partner. ARTICLE X MANAGEMENT AND OPERATION OF BUSINESS A. Management of Business. The Partnership shall be managed by the General Partner and the conduct of the Partnership's business shall be controlled and conducted by the General Partner in accordance with this Agreement. B. Authority of General Partner. In addition to and not in limitation of any rights and powers conferred by law or other provisions of this Agreement, the General Partner shall have and may exercise on behalf of the Partnership all powers and rights necessary, proper, convenient or advisable to effectuate and carry out the purposes, business and objectives of the Partnership. Such powers shall include, without limitation, the following powers: 1. To acquire, hold and dispose of any real property, (or interests therein, including leasehold estates) and appurtenances thereto as well as personal or mixed property connected therewith, including the purchase, lease, development, improvement, maintenance, exchange, trade or sale of such property at such price, rental or amount, for cash, securities or other property and upon such terms, as the General Partner deem to be in the best interests of the Partnership; 2. Subject to the provisions of Paragraph H(10) of this Article X to borrow money and, if security is required therefor, to mortgage or subject to any other security device any portion of the assets of the Partnership, to obtain replacements of any mortgage or other security device, and to prepay, in whole 14 15 or in part, refinance, increase, modify, consolidate or extend any mortgage or other security device; 3. Pending investment of the Partnership's funds in real property, to invest the Partnership's funds in United States Government securities, certificates of deposit of United States commercial banks with a net worth of at least $20,000,000, Eurodollar deposits in branches of United States bank with a net worth of at least $50,000,000, bank repurchase agreements covering securities of the United States Government or governmental agencies, bankers' acceptances, public no-load money market funds or other similar short-term highly liquid investments; to invest any working capital or other reserves retained by the General Partners for the operation of the Partnership in like manner; and to deposit, withdraw, invest, pay, retain and distribute the Partnership's funds in any manner consistent with the provisions of this Agreement; 4. To bring and defend actions at law or in equity. 5. To employ persons in the operation and management of the Partnership's business. including but not limited to supervisory managing agents, building management agents. real property developers and real estate brokers; 6. To place record title to, or the right to use, Partnership assets in the name or names of a non-operating nominee or nominees, including an Affiliate of the General Partner, for any purpose convenient or beneficial to the Partnership; 7. To perform all acts and file all documents, including tax returns and registration statements, necessary to comply with Federal, state and local laws, rules and regulations applicable to the Partnership or the conduct of the Partnership's business; 8. To enter into and carry out contracts and agreements and any or all documents and instruments and to do and perform all such other things as may be in furtherance of Partnership purposes or necessary or appropriate to the conduct of Partnership activities; 9. To execute, acknowledge, deliver, seal, file, record and vote any and all instruments which may be deemed necessary or convenient to effect the foregoing; and 10. To designate Carey Diversified LLC, the General Partner, as the "Tax Matters Partner" in accordance with Section 6231(a)(7) of the Code and, as such, the General Partner shall have all powers necessary to so perform including, without limitation, the power to retain attorneys and accountants of its choice and the right to settle any audits without the consent of the Limited Partners, except as otherwise required by the Code. 15 16 the designation provided for herein is expressly consented to by each Partner as an express condition to becoming a Partner; and C. Restrictions on Authority of General Partner. In addition to other acts expressly prohibited or restricted by this Agreement or by law, the General Partner shall have no authority to act on behalf of the Partnership with respect to, and are expressly prohibited from undertaking, the following: 1. Doing any act in contravention of this Agreement; 2. Except as provided in this Agreement and except in connection with the liquidation and winding up of the business of the Partnership upon its termination and dissolution, doing any act which would make it impossible to carry on the ordinary business of the Partnership; 3. Confessing a judgment against the Partnership in connection with any threatened or pending legal action, 4. Possessing Partnership property or assigning the rights of the Partnership in specific Partnership property for other than a Partnership purpose; 5. Admitting a person as a Limited Partner except as provided in this Agreement; 6. Except as provided in this Agreement and except in connection with the liquidation and winding up of business of the Partnership upon its termination and dissolution or a Mandatory Distribution Event, selling substantially all the assets of the Partnership at a single sale or in multiple sales in the same 12-month period without the prior written consent of Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, with the same relative vote as provided in paragraph (d) of Article XI; 7. Pledging or encumbering substantially all the properties of the Partnership at one time or from time to time in a series of related transactions, unless the lien of such pledge or encumbrance arises in connection with the acquisition or improvement of properties or the initial financing of properties acquired free and clear of encumbrances or the refinancing of previous obligations and such lien is limited to the properties so acquired, improved, financed or refinanced; 8. Obtaining any loan or any mortgage loan on any residential property made or guaranteed by any Federal, state or local government or municipality or any agency of any Federal. state or local government or municipality; 9. Performing any act (other than an act required by this Agreement or any act taken in good faith in reliance upon 16 17 counsel's opinion) which would, at the time such act occurred, subject any Limited Partner to liability as a general partner in any jurisdiction; 10. Prepaying any interest on any Partnership indebtedness; provided that the payment of any amount commonly referred to as "points" shall not be deemed a prepayment of interest; or D. Fiduciary Obligations of General Partner. The General Partner shall act at all times as a fiduciary with respect to the Partnership, the Limited Partners and the Partnership property and assets. E. Obligations of General Partner. The General Partner shall: 1. Devote such of their time to the business of the Partnership as they shall, in its discretion, exercised in good faith, determine to be necessary to conduct the business of the Partnership for the benefit of the Partnership and the Limited Partners; 2. File and publish all certificates, statements or other instruments required by law for formation, qualification and operation of the Partnership and for the conduct of its business in all appropriate jurisdictions; 3. Use its best efforts to cause the Partnership and the Partners to be protected by adequate public liability, property damage and other insurance; 4. Employ attorneys to represent the Partnership, which attorneys may also serve as counsel to the General Partner and any of its Affiliates; and 5. Use their best efforts to maintain the status of the Partnership as a "partnership" for federal income tax purposes. F. Limitation on Liability of General Partner Indemnification. 1. The General Partner shall have no liability, responsibility or accountability in damages or otherwise to any other Partner or the Partnership for, and the Partnership agrees to indemnify, pay, protect and hold harmless the General Partner (on the demand of and to the satisfaction of the General Partner) from and against, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, proceedings, costs, expenses and disbursements of any kind or nature whatsoever (including without limitation all costs and expenses of defense, appeal and settlement of any and all suits, actions or proceedings 17 18 instituted against the General Partner or the Partnership and all costs of investigation in connection therewith) which may be imposed on, incurred by or asserted against the General Partner or the Partnership in any way relating to or arising out of, or alleged to relate to or arise out of, any action or inaction on the part of the Partnership or on the part of the General Partner as a General Partner of the Partnership; provided, that the General Partner shall be liable, responsible and accountable, and the Partnership shall not be liable to the General Partner, for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, proceedings, costs, expenses and disbursements resulting from the General Partner's own fraud, bad faith, negligence, misconduct or other breach of fiduciary duty to the Partnership or any Partner. If any action, suit or proceeding shall be pending or threatened against the Partnership or the General Partner relating to or arising, or alleged to relate to or arise, out of any such action or inaction the General Partner shall have the right to employ, at the expense of the Partnership, separate counsel of the General Partner's choice in such action, suit or proceeding. The satisfaction of the obligations of the Partnership under this Section 1 shall be from and limited to the assets of the Partnership and no Partner shall have any personal liability on account thereof. The General Partner shall have the right to bill the Partnership for, or otherwise request the Partnership to pay, at any time and from time to time after the General Partner has become obligated to make payment therefor, any and all amounts for which the General Partner believes in good faith that the General Partner is entitled to indemnification for under this Section. 2. The Partnership shall pay any and all such bills and honor any and all such requests for payment within 60 days after such bill or request is received by the General Partner. In the event that a final determination is made that the Partnership is not so obligated in respect of any amount paid by it to the General Partner, the General Partner will refund such amount within 180 days of such determination. 3. The Partnership shall indemnify to the extent of the Partnership assets each Limited Partner against any claims of liability asserted against a Limited Partner solely because he is a Limited Partner in the Partnership. G. Specific Transactions Authorized. The General Partner is hereby authorized to enter into, on behalf of the Partnership, the following specific transactions: 1. The Partnership may purchase property from any Affiliate of the General Partner provided (i) the property was acquired by such Affiliate for the purpose of facilitating its purchase by the Partnership, facilitating the borrowing of money or the obtaining of financing for the Partnership or any other purpose related to the business of the Partnership, (ii) the 18 19 property is purchased by the Partnership for a price no greater than the acquisition and out-of-pocket carrying cost of the property to such Affiliate, (iii) there is no adverse difference in the interest rates of the loans secured by the property at the time acquired by such Affiliate and at the time purchased by the Partnership nor any other benefit arising out of such transaction to the General Partner and (iv) no compensation is paid by the Partnership or by any non-affiliated person to any Affiliate of the General Partner in connection with the purchase of the property by the Partnership. 2. The Partnership may contract (i) with Affiliates of the General Partner to serve as real estate brokers and mortgage placement brokers in connection with the investment of the Partnership assets and (ii) with Affiliates of the General Partner to serve as real estate brokers in connection with the sale of property by the Partnership. The amount of real estate commissions payable to Affiliates of the General Partner upon a sale of property by the Partnership where such Affiliates have provided a substantial amount of services in the sales effort (A) with respect to any property may not exceed the lesser of (1) the normal and competitive rate for similar services in the locality where the services are performed, (2) 50% of the Standard Commission (as hereinafter defined) or (3) if any Acquisition Fees were paid in connection with the acquisition of such property, 50% of the Acquisition Fees permitted under Paragraph H of this Article X to be paid in connection with such acquisition and (B) with respect to all properties may not exceed 9% of the gross proceeds of the sale of all Partnership Interests. No Affiliate of the General Partner may receive payment of a real estate commission with respect to the sale of any property by the Partnership unless total consideration received by the Partnership upon such sale exceeds the amounts actually paid by the Partnership for the purchase, development, construction or improvement, of the property and any fees and commissions paid by the Partnership in connection therewith. For purposes of this clause (G), "Standard Commission" shall mean the real estate or brokerage commission paid for the purchase or sale of property which is reasonable, customary and competitive in view of the size, type and location of the property. 3. Affiliates of the General Partner may receive insurance premiums and brokerage commissions with respect to insurance on property owned by the Partnership only when the cost of such insurance is paid by tenants who net lease such properties from the Partnership. No such Net Lease shall provide that the lessee is required to purchase insurance through an Affiliate of the General Partner. 4. At any time, the Partnership may borrow money on a short-term basis from an Affiliate of the General Partner in connection therewith pay interest to such Affiliate at a rate equal to the lesser of (i) one percent above the prime interest 19 20 rate at the Bank of New York or (ii) the rate that would be charged to the Partnership by unrelated lending institutions on comparable loans for the same purpose in the locality of the property. Such borrowings shall be non-recourse to the Partnership, unless the General Partner shall otherwise consent in writing. 5. All of the Partnership's expenses shall be billed directly to and paid by the Partnership. The Partnership shall reimburse the General Partner or its Affiliates for: (a) the actual cost to the General Partner or its Affiliates of goods and materials used for and by the Partnership and obtained from unaffiliated parties and (b) the costs incurred by the General Partner or its Affiliates in performing administrative services necessary to the prudent operation of the Partnership; provided, however, that the amounts charged to the Partnership for services performed pursuant to this clause (c) shall not exceed the lesser of (1) the actual cost of such services, or (2) the amount which the Partnership would be required to pay to independent parties for comparable services in the same geographic location. No reimbursement shall be made to the General Partner or its Affiliates for: (x) services for which the General Partner or its Affiliates are entitled to compensation by way of a separate fee, or (y) any of the salaries, fringe benefits, travel expenses, and other administrative items incurred by or allocated to any controlling person (as defined herein) of the General Partner or its Affiliates; provided, however, that the Partnership may reimburse the General Partner or its Affiliates for any travel expenses incurred by any controlling person of the General Partner or its Affiliates where such travel expenses are for the evaluation by such controlling person of a property owned or being considered for acquisition by the Partnership or for visits to executives of tenants to discuss current financial results. The Partnership's annual report to the Limited Partners shall contain a breakdown of the costs reimbursed to the General Partner or its Affiliates. Within the scope of the annual audit of the General Partner's (or such Affiliates) financial statement, the independent certified public accountant shall verify the allocation of such costs to the Partnership. The method of review shall at minimum provide (1) a review of time records of individual employees, the costs of whose services were reimbursed; and (2) a review of the specific nature of the work performed by each such employee. The methods of review shall be in accordance with generally accepted auditing standards and shall accordingly include such tests of the accounting records and such other auditing procedures which the General Partner's (or such Affiliate's) independent certified public accountants consider appropriate in the circumstance. The additional costs of such review shall be itemized by such accountants on a partnership by partnership basis and may be reimbursed to the General Partner (or such Affiliate) in accordance with this Paragraph G(5) only to the extent that such reimbursement, when added to the cost for 20 21 administrative services rendered, does not exceed the competitive rate for such services as determined in this Paragraph G(5). As used herein, the term "controlling person" shall mean any person, whatever his title, who performs executive or senior management functions for the General Partner or Affiliate similar to those of executive or senior management officers, directors or partners, or those holding 5% or more equity interest in the General Partner or Affiliate or a person having the power to direct or cause the direction of the management level employees and policies of the General Partner or Affiliate, whether through the ownership of voting securities, by contract, or otherwise. For the purposes of this Paragraph G(5), not every person who carries a title such as vice president or senior vice president, corporate secretary or treasurer, shall be considered a controlling person, unless such person performs the functions or has the powers described above, and even in the absence of a specific title, an executive in a truly senior management position shall be considered a controlling person. H. General Restrictions. 1. The Partnership shall obtain a written evaluation report signed by an independent appraiser prior to the purchase of any real property by the Partnership and shall not purchase any such real property if the purchase price and all Acquisition Fees paid by the Partnership in connection with the acquisition exceed the appraised value set forth in such report. All such appraisals whether or not the real property which is the subject of such appraisal is purchased by the Partnership, shall be at the Partnership's expense or at the expense of the seller, shall be retained for five years and shall be available for inspection and duplication by the Limited Partners. 2. The Partnership shall not own any land where the buildings and improvements thereon are owned by an Affiliate of the General Partner. 3. The Partnership may not acquire property in exchange for interests in the Partnership. 4. The Partnership shall not give an Affiliate of the General Partner the exclusive right to sell property for the Partnership. 5. The Partnership shall not purchase or sell any property where the total Acquisition Fees paid to all parties (including but not limited to Affiliates of the General Partner) by the Partnership and by non-affiliated persons in connection with such acquisition (including financing) or sale exceed with respect to each acquisition or sale (a) 6% of the respective purchase or sales price or (b) the normal and competitive rate for similar services in the location where the services are performed; 21 22 provided, however, the Partnership may not sell any property in a transaction in which an Affiliate of the General Partner acts as a real estate broker unless the provisions of Paragraph G of this Article X are complied with. Points and prepaid interest shall be excluded in determining the purchase price of a property for purposes of this Paragraph 5. 6. The Partnership shall not pay, directly or indirectly, any Acquisition Fee to an Affiliate of the General Partner in connection with the purchase of property acquired with proceeds obtained from Cash From Sales or Cash From Financings. 7. The Partnership shall not purchase or sell any property where the total Acquisition Fees paid to all parties (including but not limited to Affiliates of a General Partner) by the Partnership and by nonaffiliated persons in connection with such acquisition (including financing) or sale exceed with respect to each acquisition or sale the lesser of (a) 6% of the respective gross purchase or sales price or (b) the normal and competitive rate for similar services in the location where the services are performed; provided, however, the Partnership may not sell any property in a transaction in which an Affiliate of a General Partner acts as a real estate broker unless the provisions of Paragraph G(2) of this Article X are complied with. Points and prepaid interest shall be excluded in determining the purchase price of a property for purposes of this Section 7. 8. The aggregate borrowings of the Partnership shall not exceed 66 2/3% of the purchase price of all properties purchased by the Partnership on a combined basis. The foregoing restriction may be waived or lessened by the General Partner without the approval of the Limited Partners, but only with the prior written consent of the Commissioner of Corporations of the Sate of California or pursuant to a change in the published Rules of the Commissioner. In no event, however, shall the aggregate borrowings of the Partnership exceed the sum of 85% of the purchase price of all properties which have not been refinanced and 85% of the aggregate fair market value of all refinanced properties. 9. Except as set forth in Paragraph G(5) of this Article X, all expenses of the Partnership shall be billed directly to and paid by the Partnership. Except for the expenses set forth in Paragraph G(5) of this Article X, reimbursements to the General Partner or any Affiliate of the General Partner for indirect expenses incurred in performing services for the Partnership such as salaries of officers and directors are prohibited; provided, however, that, the General Partner and its Affiliates may seek reimbursement for services such as accounting, secretarial, transfer agent and other services which could be performed directly for the Partnership by independent parties. The Partnership's costs for such services would be based upon the compensation of the persons involved plus an appropriate share of 22 23 overhead allocable to each such person (rent, utilities, etc.), which would be converted into an hourly rate for the persons involved. The amounts charged to the Partnership would not exceed those which the Partnership would be required to pay the independent parties for comparable services. 10. The Partnership funds shall not be commingled with the funds of any other natural person. partnership, corporation, association or other legal entity. 11. The Partnership shall not finance the purchase of real property by use of a wrap around note and mortgage "all-inclusive" note and deed of trust) unless (a) neither the General Partner nor any Affiliate of the General Partner receives interest on the amount of the underlying encumbrance in excess of that payable to the lender on such underlying encumbrance, (b) the Partnership receives credit on its obligation under the all-inclusive note for payments made directly on the underlying encumbrance and (c) all payments on the underlying encumbrance shall be made by the Partnership or, in the alternative, payments by the Partnership on the wrap around note are made to a third party collecting agent which in turn disburses such payment, first to the holder of such underlying encumbrance, and thereafter to the holder of the wrap around note. 12. The Partnership shall not create or assume any indebtedness for borrowed money unless the documents pursuant to which such indebtedness is created or assumed provide, and the General Partner shall cause any and all such documents assumed or entered into by or on behalf of the Partnership to provide, that the parties thereto other than the Partnership (including any Affiliates of the General Partner) shall look only to the assets of the Partnership for satisfaction of the liabilities and obligations of the Partnership under such documents (including without limitation those arising from representations, warranties, covenants and agreements made in or in connection with such documents) and that such other parties shall have no recourse to the Partners or the separate assets of the Partners for the satisfaction of such liabilities and obligations. The Partnership shall not incur any indebtedness including indebtedness under a shared appreciation or similar mortgage wherein the lender will have or acquire, at any time as a result of making the loan, any direct or indirect interest in the profit, capital or property of the Partnership other than as a creditor. 13. The Partnership shall not enter into any contracts with the General Partner or with any Affiliates of the General Partner to construct or develop Partnership properties or to render any services in connection with such construction or development. 14. The Partnership shall not acquire any property which is under construction unless completion of the improvements 23 24 on the property is guaranteed at the contracted price by an adequate completion bond or other satisfactory arrangements. 15. Unimproved or non-income producing property shall not be acquired except in amounts and upon terms which can be financed by the net proceeds derived from the sale of limited partner interests. No more than 10% of the net proceeds derived from Distributable Cash from Operations. 16. No portion of the net proceeds derived from the sale of limited partner interests may be invested in junior mortgages or deeds of trust; provided, however, that the acquisition or granting of a junior mortgage or deed of trust in connection with the sale, purchase, financing or refinancing of real property of the Partnership shall not be deemed to be investing in junior mortgages or deeds of trust. 17. Any agreement entered into between the Partnership and the General Partner or its Affiliates must be terminable by the Partnership, without penalty, upon 60 days' notice. 18. The Partnership shall not sell any property to the General Partner or an Affiliate of the General Partner unless the Partnership shall have obtained a written evaluation report signed by an independent appraiser and the sales price shall be not less than the appraised value set forth in such report. 19. The Partnership shall not acquire any property which is under construction unless completion of the improvements on the property is guaranteed at the contracted price by an adequate completion bond; a letter of credit issued by a bank organized and doing business under the laws of the United States or any State or of the District of Columbia which is subject to supervision by Federal, State or District of Columbia authority and which has a combined capital and surplus of not less than $5,000,000; or a completion guarantee by a third person, provided that such person has a net worth of at least $10,000,000 and had in the most recent fiscal year or twelve month period prior to the giving of such guarantee net income of at least $2,000,000. I. Compensation of General Partner. The General Partner shall not, in its capacity as General Partner, receive any salary, fees, profits or distributions from the Partnership except profits, distributions, fees and allocations to which they may be entitled under Articles VIII and IX. J. Other Business of Partners. Except as otherwise specifically provided herein, any of the Partners and any shareholder, officer, director, employee or other person holding a legal or beneficial interest in an entity which is a Partner may engage in or possess an interest in other business ventures of every nature and description, independently or with others, including, but not limited to, the ownership, financing, leasing, 24 25 operation, management, syndication, brokerage and development of real property and neither the Partnership nor the Partners shall have any right by virtue of this Agreement in and to such independent ventures or to the income or profits derived therefrom. ARTICLE XI STATUS OF LIMITED PARTNERS AND SPECIAL PARTNERS The Limited Partners and Special Partners shall not participate in the management or control of the Partnership's business nor shall they transact any business for the Partnership nor shall they have the power to sign for or bind the Partnership, said powers being vested solely and exclusively in the General Partner. The Limited Partners and Special Partners shall not be bound by, or be personally liable for. the expenses, liabilities or obligations of the Partnership, except to the extent of their Capital Accounts. The Partnership Interest owned by a Limited Partner or Special Partner shall be fully paid and nonassessable. In addition to those described elsewhere in the Partnership Agreement, the Limited Partners and Special Partners shall have the following rights, powers, privileges, duties and liabilities: (a) The Limited Partners and Special Partners shall have the right to have full and true information of all things affecting the Partnership and shall be entitled to such reports as are set forth in Article XII hereof. (b) The Limited Partners and Special Partners shall receive from the Partnership the share of the distributions provided for in this Agreement in the manner and at the times provided for in this Agreement. (c) A Limited Partner or Special Partner shall have the right to demand the return of his Capital Account only on the dissolution and winding up of the Partnership in accordance with Article XVIII hereof. No Limited Partner shall have priority over any other Limited Partner either as to the return of capital or as to profits, losses or distributions. No Limited Partner or Special Partner shall have right to bring an action for partition against the Partnership. (d) Limited Partners holding more than fifty percent (50%) of the outstanding Limited Partner Interests may (1) remove the General Partner and (2) in the event that a vacancy shall occur in the office of General Partner, subject to the provisions B(5) of Article XV, elect a successor General Partner upon retirement, removal, death, adjudication of incompetence to manage his person or estate, adjudication of bankruptcy under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in 25 26 lieu thereof), dissolution or other cessation to exist as a legal entity of the General Partner. (e) Each Limited Partner and Special Partner shall have the right to a complete list of names and addresses and interests of all Limited Partners as set forth in the records of the Partnership, upon written request to the Partnership, provided such request is for a purpose reasonably related to such Partner's interest in the Partnership. A reasonable charge for copy work may be charged by the Partnership. ARTICLE XII BOOKS OF ACCOUNT AND REPORTS Proper books of account shall be kept by the General Partner wherein shall be entered all transactions, matters and things relating to the Partnership's business as are usually entered into books of account kept by persons engaged in a business of a like character. The books of account shall be kept at the principal place of business of the Partnership and each Partner (or any duly constituted designee of a Partner) shall at all times during reasonable business hours have free access to and the right to inspect and copy the same. There shall be established for each Partner on the books of the Partnership a Capital Account which shall show the amount of each capital contribution made by such Partner (or his, her or its predecessor in the case of an assignment of a Partnership Interest),. adjusted to reflect such Partner's proportion of profits and losses (determined according to Paragraph B of Article VIII) and of withdrawals and distributions and other items to the extent properly creditable to or chargeable against such Capital Account. Within 75 days after the end of each Fiscal Year, the General Partner shall deliver to each Limited Partner adequate information to enable each Limited Partner to complete and file his Federal tax return. Copies of each such report shall be distributed to each Limited Partner within 60 days after the end of any such quarter. If deemed appropriate by the General Partner such notice may be prepared and distributed to Limited Partners more frequently than quarterly. The General Partner shall send such other reports and information, if any, to the Limited Partners as the General Partner may deem necessary or appropriate, including but not limited to reports containing the name and address of each person who has had an unconditional written offer to purchase Partnership property rejected by the Partnership (such report shall also contain the price and terms offered). Copies of each report distributed to the Limited Partners shall, to the extent required 26 27 by applicable law, be filed concurrently with relevant state "Blue Sky" authorities ARTICLE XIII FISCAL YEAR The Fiscal Year of the Partnership shall begin on the first day of January and end on the thirty-first day of December in each year. ARTICLE XIV PARTNERSHIP FUNDS The funds of the Partnership shall be deposited in such account or accounts as shall be designated by the General Partner and all withdrawals against such accounts shall be made only by one of the General Partner or by his or its properly delegated agents. ARTICLE XV TRANSFER OF PARTNERSHIP INTEREST A. In General. A Limited Partner or Special Partner may not sell, assign, transfer or otherwise dispose of, or pledge, hypothecate or in any manner encumber, his interest in the Partnership or any part thereof except as permitted in this Article, and any act in violation of this Paragraph A shall not be binding upon or recognized by the Partnership regardless of whether the General Partner shall have knowledge thereof B. General Partner. 1. Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, pursuant to Paragraph (d) of Article XI and with the same relative vote as provided therein, may remove the General Partner from the Partnership. Written notice of the removal of the General Partner shall be served upon the General Partner either by certified or by registered mail, return receipt requested. or by personal service. Said notice shall set forth the day upon which the removal is to become effective. Upon receipt of notice, the General Partner shall cause an accounting to be prepared covering the transactions of the Partnership since the end of the previous Fiscal Year, and it shall not thereafter sell or dispose of or allow the sale or disposition of any Partnership asset unless such sale or disposition was the subject of a contract entered into by and binding upon the Partnership prior to the date upon which the notice was received by the General Partner. 27 28 2. Until the dissolution of the Partnership otherwise occurs, the General Partner shall not voluntarily take any steps to dissolve itself nor shall the General Partner voluntarily retire; provided, however, that nothing in this Partnership Agreement shall be deemed to prevent the merger or reorganization of Carey Diversified Properties LLC into or with any other entity organized under the laws of the United States or any state thereof or the transfer of all the limited liability company interests of Carey Diversified Properties LLC and the assumption of the rights and duties of the General Partner by, in the case of a merger, reorganization or consolidation, the surviving entity by operation of law. 3. Upon the removal, adjudication of bankruptcy or insolvency, dissolution or other cessation to exist as a legal entity of the General Partner, the General Partner's Partnership Interest and interest in Distributable Cash From Operations and its subordinated interest in Cash From Sales and Cash From Financings shall be purchased by the Partnership for a purchase price equal to the fair market value thereof determined pursuant to the provisions of Section 4 of this Paragraph B. The purchase price of such interest shall be paid by the Partnership to the General Partner by the promissory note of the Partnership, payable to the General Partner or its order, having a face amount equal to such purchase price, containing provisions as would be usual and customary in a commercial promissory note, bearing interest at a rate per annum equal to one percent above the prime interest rate at The Bank of New York, payable annually, with principal and all unpaid accrued interest subject to mandatory prepayment from all Cash From Sales and Cash From Financings, and the remaining unpaid principal balance and unpaid accrued interest on such promissory note due and payable five years from the date of the General Partner's retirement, expulsion, adjudication of bankruptcy or insolvency, dissolution or other cessation to exist as a legal entity. 4. The fair market value of the General Partner's interest purchased by the Partnership pursuant to Section 3 of this Paragraph B shall be determined by agreement between the General Partner and the Partnership (which agreement shall require the approval of Limited Partners holding more than fifty percent (50%) of the outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI). If the General Partner and the Partnership cannot agree upon the fair market value of such Partnership Interest within 30 days after the occurrence of the event upon which such interest of the General Partner is to be purchased by the Partnership, the fair market value thereof shall be determined in the manner provided by the laws of the State of California for the determination of controversies by arbitration, the General Partner to choose one arbitrator, the Partnership to choose one arbitrator and the two arbitrators so chosen to choose a third arbitrator. The decision of a majority of said arbitrators as to the fair market value of 28 29 such Partnership interest shall be final and binding and may be enforced by legal proceedings. The General Partner and the Partnership shall each compensate the arbitrator appointed by it and the compensation of the third arbitrator shall be borne equally by such parties. C. Limited Partners and Special Partners. 1. The General Partner may, pursuant to this Article XV, (a) admit as a substituted Limited Partner or Special Partner any successor in interest to a Limited Partner or Special Partner either deceased or under legal disability, and (b) admit as substituted Limited Partners or Special Partners assignees of Limited Partners or Special Partners. 2. A substituted Limited Partner or Special Partner is a person admitted to all the rights of a Limited Partner or Special Partner. An assignee is a person to whom a Limited Partner or Special Partner has assigned his interest in the Partnership but who has not become a substituted Limited Partner or Special Partner. An assignee shall have no right to require any information or account of the Partnership's transactions or to inspect the Partnership's books but shall only be entitled to receive the share of the profits, or the return of the capital contribution, to which his assignor would otherwise be entitled as set forth in Section 5 of this Paragraph C. 3. No assignee of the whole or any portion of a Limited Partner's or Special Partner's interest in the Partnership shall have the right to become a substituted Limited Partner or Special Partner in place of his assignor unless all of the following conditions are satisfied: (a) The written consent of the General Partner to such substitution shall be obtained, the granting or denial of which shall be within the absolute discretion of the General Partner; (b) The duly executed written instrument of assignment setting forth the intention of the assignor that the assignee become a substituted Limited Partner or Special Partner in his place shall have been filed with the Partnership; (c) The interests in the Partnership being acquired by the assignee shall consist of at least five (5) percent of the limited partner or special partner interest (and unless otherwise prohibited by any applicable "Blue Sky" laws, a minimum of three (3) percent of the limited partner or special partner interest may be acquired or retained by an Individual Retirement Account ("IRA") established under section 408 of the Internal Revenue Code of 1954, as amended) and, if the assignor shall retain any limited partner or special partner interest, such retention shall consist of at least five (5) percent of the limited partner or special partner interest (provided, however, unless prohibited by any 29 30 applicable "Blue Sky" laws, three (3) percent of the limited partner or special partner interest may be retained by an IRA); (d) The assignor and assignee shall execute and acknowledge such other instruments as the General Partner may deem necessary or desirable to effect such assignment and admission, including the written acceptance and adoption by the assignee of the provisions of this Agreement and his execution, acknowledgment and delivery to the General Partner of a Power of Attorney, the form and content of which are more fully described in Article XIX hereof; and (e) The assignee shall pay a transfer fee not to exceed $50.00 per transaction to the Partnership. 4. Any person admitted to the Partnership as a Partner shall be subject to all of the provisions; of this Agreement as if originally a party to it. 5. Subject to the provisions of Section 11 of this Paragraph C. compliance with the suitability standards imposed by the Partnership, applicable "Blue Sky" laws and the applicable rules of any other governmental authority, a Limited Partner or Special Partner shall have the right to assign the whole or any portion (not less than five (5) percent of the limited partner or special partner interest and, if he shall retain any limited partner or special partner interest, subject to his retaining not less than five (5) percent of the limited partner or special partner interest provided, however, unless prohibited by any applicable "Blue Sky" laws, three (3) percent of the limited partner or special partner interest may be acquired or retained by an IRA) of his Partnership Interest by a written assignment the terms of which are not in contravention of any of the provisions of this Agreement, which assignment has been executed by the assignor and received by the Partnership and recorded on the books thereof. Any assignment in contravention of any of the provisions of this Section 5 shall be of no force and effect and shall not be binding upon or recognized by the Partnership. (a) Except as provided in Subsection (c) below, Paragraph A of Article VIII hereof and Paragraph D or Article IX hereof, an assignee of a Partner's Partnership Interest shall be entitled to receive distributions of cash or other property from the Partnership attributable to the interest acquired by reason of such assignment from and after the effective date of the assignment of such interest to him. The "effective date" of an assignment of an interest in the Partnership as used in this Subsection shall be the last day of the month in which the written instrument of assignment, in form and substance satisfactory to the General Partner, is received by the General Partner. (b) The net profits and net losses attributable to an interest in the Partnership assigned during any year shall be 30 31 divided among and allocated in accordance with the provisions of Paragraph A of Article VIII hereof. (c) Anything herein to the contrary notwithstanding. both the Partnership and the General Partner shall be entitled to treat the assignor of such interest as the absolute owner thereof in all respects, and shall incur no liability for distributions of cash or other property made in good faith to him, until such time as the written assignment has been received by, and recorded in books of, the Partnership. 6. The General Partner may elect to treat an assignee who has not become a substituted Limited Partner or Special Partner as a substituted Limited Partner or Special Partner in the place of his assignor should they deem, in its absolute discretion, that such treatment is in the best interests of the Partnership for any of its purposes or for any of the purposes of this Agreement. 7. No consent of any of the Limited Partners or Special Partners is required to effect the substitution of a Limited Partner or Special Partner, except that a Limited Partner or Special Partner who assigns his interest in the Partnership must evidence his intention that his assignee be admitted as a substituted Limited Partner or Special Partner in his place and must execute such instruments as the General Partner may in its absolute discretion determine to be necessary or desirable in connection therewith. 8. Upon the admission of a Limited Partner or Special Partner (whether as a result of his purchase of partner interests from the Partnership or his admission as a substituted Limited Partner or Special Partner), the General Partner shall make an appropriate amendment to the list of the Partner's names, addresses, Contributions and Capital Accounts referred to in Article XII hereof. 9. Upon the death or legal incompetency of an individual Limited Partner or Special Partner, his personal representative shall have all of the rights of a Limited Partner or Special Partner for the purpose of settling or managing his estate, and such power as the decedent or incompetent possessed to constitute a successor as an assignee of its interest in the Partnership and to join with such assignee in making application to substitute such assignee as a Limited Partner or Special Partner. However, such personal representative shall not have the right to become a substituted Limited Partner or Special Partner in the place of his predecessor in interest unless the conditions of Section 2 of this Paragraph C (other than the requirement that the assignor execute and acknowledge instruments) are first satisfied. 31 32 10. Upon the adjudication of bankruptcy or insolvency, dissolution or other cessation to exist as a legal entity of a Limited Partner or Special Partner not an individual, the authorized representative of such entity shall have all of the rights of a Limited Partner or Special Partner for the purpose of effecting the orderly winding up and disposition of the business of such entity and such power as such entity possessed to constitute a successor as an assignee of its interest in the Partnership and to join with such assignee in making application to substitute such assignee as a Limited Partner or Special Partner. However, such authorized representative shall not have the right to become a substituted Limited Partner or Special Partner in the place of his predecessor in interest unless the conditions of Section 2 of this Paragraph C (other than the requirement that the assignor execute and acknowledge instruments) are first satisfied. 11. (a) No assignment or transfer of an interest in the Partnership may be made which would result in Limited Partners or Special Partners and assignees of Limited Partners or Special Partners owning, directly or indirectly, individually or in the aggregate, more than twenty percent (20%) of the equity interests of the General Partner or any Affiliate of the General Partner as defined in Section 1504(a)) of the Code. If any such assignment or transfer would otherwise be made by bequest, inheritance or operation of law, the transferee shall not become a Partner and the interest in the Partnership transferred shall be automatically redeemed by the Partnership immediately prior to such transfer in the same manner as provided in Subsection (b)(4) of this Section 11. (b) Anything to the contrary contained herein notwithstanding: (1) Except in the case of the Merger, in any twelve (12) consecutive month period no assignment or transfer of a limited partner interest may be made if as a result thereof the aggregate total of limited partner interests assigned and/or transferred in such period would exceed forty percent (40%) of the outstanding limited partner interests. This limitation is hereinafter referred to as the "forty percent (40%) limitation". (2) A Limited Partner may assign or transfer his Partnership Interest to: (i) his spouse (unless legally separated), child or ancestor, or (ii) a corporation, partnership, trust or other entity, fifty-one percent (51%) of the equity interest of which is owned by such Limited Partner and/or any of the persons specified in clause (i) so related to such Limited Partner, provided, however, that such transfers are subject to the forty percent (40%) limitation. (3) Subsection (b)(1) of this Section 11 shall not apply to a transfer by gift, bequest or inheritance or a transfer 32 33 to the Partnership and, for purposes of the forty percent (40%) limitation, any such transfer shall not be treated as such. (4) If, after the forty percent (40%) limitation is reached in any consecutive twelve (12) month period, a transfer of a Partnership Interest would otherwise take place by operation of law (but not including any transfer referred to in Subsection (b)(3) of this Section 11), then the transferee shall not become a Limited Partner and such Partnership Interest shall be automatically redeemed by the Partnership immediately prior to such transfer for a price equal to the fair market value of said interest on such date of transfer. The price shall be paid within ninety (90) days after the date of the transfer and redemption. If the Partnership and the transferor do not agree upon the fair market value of the Partnership Interest, the purchase price shall be determined by arbitration. The purchase price shall be paid in cash within ten (10) days after such determination. (c) No transfer or assignment of any limited partner interest shall be made if it would result in the Partnership's being treated as an association taxable as a corporation for tax purposes. The General Partner, in its sole discretion, may, on behalf of the Partnership, impose any restrictions or transfers or assignments of limited partner interests it may deem appropriated to give effect to the preceding sentence. The General Partner shall incur no liability to any Limited Partner, prospective investor or assignee for any action or inaction in connection with the foregoing, provided that the General Partner acted in good faith and such course of conduct did not constitute negligence or misconduct of the General Partner. 12. The General Partner, in its absolute discretion, may cause the Partnership to make, refrain from making, or once having made, to revoke, the election referred to in Section 754 of the Code, and any similar election provided by state or local law, or any similar provision enacted in lieu thereof. 13. Until the dissolution of the Partnership, the General Partner shall not take any voluntary steps to dissolve itself nor shall the General Partner voluntarily withdraw or resign. ARTICLE XVI MEETINGS AND AMENDMENT OF LIMITED PARTNERSHIP CERTIFICATE AND AGREEMENT A. Amendment of Limited Partnership Certificate The General Partner shall amend and record the Certificate of Limited Partnership of the Partnership, without additional consent of Limited Partners when, pursuant to the terms of this Partnership Agreement: 33 34 1. There is a change in the name of the Partnership; 2. The General Partner withdraws, is removed, is adjudicated bankrupt under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in lieu thereof), is adjudicated incompetent to manage his person or estate or dies, or a person is admitted as the General Partner; 3. There is a false or erroneous statement in the Certificate; 4. A time is fixed for dissolution of the Partnership or the return of contributions and such time has not been specified in the Certificate; 5. The Partners desire to make a change in any other statement in the Certificate in order that it shall accurately represent the agreement among them; 6. There is a change in the character of the business of the Partnership; 7. There is a change in the address of the Partnership's principal place of business or its California office; 8. There is a change in the time as stated in the Certificate for the dissolution of the Partnership or for the return of a contribution; and There is a change in the address of the California agent for service of process designated in the Certificate of Limited Partnership (unless such agent is a corporation) or a new agent for service of process is appointed. 34 35 B. Amendments to the Agreement. 1. Amendments to this Partnership Agreement may be proposed by the General Partner or by Limited Partners holding ten percent (10%) or more of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. Following such proposal, the General Partner shall submit to the Partners a verbatim statement of any proposed amendment and an opinion of counsel, who may be counsel to the Partnership, as to the legality of such amendment and the effect of such amendment on the liability of Limited Partners for the debts of the Partnership. The General Partner shall include in any such submission the General Partner's recommendations as to the proposed amendment. The amendment shall become effective only upon the written consent or affirmative vote of holders of Limited Partner Interests holding more than fifty percent (50%) of the then Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. 2. Any provision to the contrary herein notwithstanding, the General Partner may, without the consent of the Limited Partners, make the following amendments to this Agreement: a. Any amendments to Article VIII and/or Article IX of this Agreement if the Partnership is advised by its accountants or legal counsel at any time that the allocations provided in those Articles are not likely to be respected for Federal income tax purposes, either because of the promulgation of Treasury Regulations under Section 704 of the Code or other developments in the law. The General Partner is empowered to amend such provisions to the minimum extent necessary in accordance with the advice of the accountants and counsel to effect the allocations provided in this Agreement . New allocations made by the General Partner in reliance upon the advice of the accountants or counsel described above shall be deemed to be made pursuant to the fiduciary obligation of the General Partner to the Partnership and the Limited Partners, and no such new allocation shall give rise to any claim or cause of action by any Limited Partner, provided that the General Partner acted in good faith; and b. In the event that the State of California amends the California Revised Limited Partnership Act in any manner and, as a result of such amendment, counsel to the Partnership is unable to give the Partnership an opinion to the effect that the Partnership will be treated as a partnership for Federal income tax purposes and not as an association taxable as a corporation, then the General Partner may decide in its sole discretion to reconstitute the Partnership under the laws of another state. 3. Any provision to the contrary contained herein notwithstanding, the General Partner may, without the consent of the Limited Partners, amend this Agreement (a) to add to the 35 36 representations, duties or obligations of a General Partner or to surrender any right or power granted to a General Partner herein, for the benefit of the Limited Partners, (b) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein or to make any other provision with respect to matters or questions arising under this Agreement which will not be inconsistent with the provisions of this Agreement, (c) to delete any provision from this Agreement or to add any provision to this Agreement required to be so deleted or added by the Staff of the Securities and Exchange Commission or by a State "Blue Sky" Commissioner or similar such official, which addition or deletion is deemed by such Commission or official to be for the benefit or protection of the Limited Partners, and (d) to change administrative or other provisions of this Agreement in a manner which, in the opinion of the General Partner, will permit the most profitable and/or efficient operation of the Partnership; provided, however, that no amendment shall be adopted pursuant to this Section 3 unless the adoption thereof (i) is for the benefit of, or not adverse to, the interests of the Limited Partners, (ii) is consistent with Article IV and Paragraph A of Article X hereof, (iii) does not affect the distribution of Distributable Cash From Operations, Cash From Sales and Cash From Financings or the allocation of profits and losses among the Limited Partners or between the Limited Partners and the General Partner and (iv) does not affect the limited liability of the Limited Partners or the status of the Partnership as a partnership for Federal income tax purposes. 4. Upon amendment of this Agreement, the Certificate of Limited Partnership shall also be amended if necessary to reflect such change. 5. Any amendment to the Partnership Agreement which modifies the compensation or distributions to which a General Partner is entitled or which affects the duties of a General Partner must be consented to by the General Partner before becoming effective. 6. In the event there is a change in the Federal income tax laws or regulations which result in the Partnership being taxed as an association taxable as a corporation, the General Partner may cause the Partnership to conduct its business so as to be treated as a real estate investment trust for Federal income tax purposes. C. Meetings of the Partnership. Meetings of the Partnership may be called by the General Partner and shall be called by them upon the written request of Limited Partners holding ten percent (10%) or more of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. Upon receipt of such a written request, stating the purpose of the proposed meeting, the General Partner shall provide each Partner, within 10 days of such 36 37 request, written notice (either by personal service or certified mail or by express or other overnight delivery service) of a meeting and the purpose of such meeting. Such meeting shall be held not less than 10 days nor more than 60 days after the receipt of such request. Included with the notice shall be a detailed statement of the action proposed, including a verbatim statement of the wording of any resolution proposed for adoption by the Limited Partners and of any proposed amendment to the Partnership Agreement. The Partnership will provide for Proxies or written consents which specify a choice between approval or disapproval of each matter to be acted upon at the meeting. Holders of a majority of the Limited Partner Interests entitled to vote, represented in person or by Proxy, shall constitute a quorum at a meeting of the Limited Partners. To the extent not consistent with this Paragraph C, all meetings shall be governed by the provisions of Section 15637 of the Act. The General Partner may establish a record date for any meeting, subject to the limitations of Section 15637(j) of the Act. ARTICLE XVII TERM The Partnership shall terminate on December 31, 2018, unless sooner dissolved pursuant to the provisions of Article XVIII hereof as otherwise provided by law. ARTICLE XVIII DISSOLUTION A. Events Requiring Dissolution. The Partnership shall be dissolved upon the happening of any of the following events: 1. The retirement, removal, adjudication of bankruptcy under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in lieu thereof), of the General Partner, the dissolution or other cessation to exist as a legal entity of the General Partner, unless the Limited Partners agree in writing to continue the business of the Partnership and to admit one or more General Partners. 2. The Partnership is adjudicated bankrupt under Chapter 7 of the Federal Bankruptcy Code (or any similar law or provision enacted in lieu thereof). 3. The vote of Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests held by all Limited Partners, with the same proportionate vote as provided in paragraph (d) of Article XI. 37 38 4. The disposition of all interests in the real, personal and mixed property and other assets of the Partnership. B. Distributions on Dissolution. Upon the dissolution of the Partnership the General Partner who has not wrongfully dissolved the Partnership shall wind up the affairs of the Partnership. If there is no such General Partner, the Limited Partners shall wind up the affairs of the Partnership. The Partners winding up the affairs of the Partnership shall take full account of the Partnership assets and liabilities and all assets shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom shall be applied and distributed in the following order: (1) to creditors (including Partners who are creditors to the extent permitted by law), in the order of priority as provided by law, (2) to the Partners in accordance with their respective Capital Accounts, determined after the application of Articles VIII and IX hereof and (3) to the Partners in accordance with the provisions of Paragraph E of Article IX hereof. Notwithstanding anything to the contrary, in the event the Partnership is "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), liquidating distributions shall be made pursuant to the previous sentence by the end of the taxable year in which the Partnership is liquidated, or, if later, within 90 days after the date of such liquidation. Distributions pursuant to the preceding sentence may be made to a trust for the purposes of an orderly liquidation of the Partnership by the trust in accordance with the Act. C. Contributions by the General Partner. In the event that, upon the liquidation of the Partnership, a General Partner shall have a negative balance in the General Partner's Capital Account then the General Partner shall contribute to the capital of the Partnership an amount equal to such negative balance in the General Partner's Capital Account. ARTICLE XIX POWER OF ATTORNEY Concurrently with the written acceptance and adoption of the provisions of this Agreement, each Limited Partner and Special Partner shall execute and deliver to the General Partner a Power of Attorney in form acceptable to the General Partner in which the General Partner is constituted and appointed as the attorney-in-fact for such Limited Partner or Special Partner with power and authority to act in his name and on his behalf in the execution, acknowledgment and filing of documents, which will include but not be limited to a Certificate of Limited Partnership, as well as amendments thereto, under the laws of the State of California and under the laws of any other state in which the General Partner deems it advisable to file such a certificate; any other instrument which may be required to be filed by the Partnership under the laws of any state or by any governmental agency, or 38 39 which the General Partner deems it advisable to file; and any documents which may be required to effect the continuation of the Partnership, the admission of an additional or substituted Limited Partner or Special Partner or the dissolution and termination of the Partnership, provided such continuation, admission or dissolution and termination are in accordance with the terms of this Agreement. The Power of Attorney so granted by each Limited Partner and Special Partner to the General Partner is a Special Power of Attorney coupled with an interest, is irrevocable and shall survive the death or legal incapacity of the Limited Partner or Special Partner; may be exercised by the General Partner for each Limited Partner and Special Partner by a facsimile signature of one of its officers or by listing all the Limited Partners executing any instrument with a single signature of one of its officers acting as attorney-in-fact for all of them; and shall survive the delivery of any assignment by a Limited Partner or Special Partner of the whole or any portion of his interest in the Partnership; except that where the assignee thereof has been approved by the General Partner for admission to the Partnership as a substituted Limited Partner or Special Partner, the Power of Attorney shall survive the delivery of such assignment for the sole purpose of enabling the General Partner to execute, acknowledge and file any instrument necessary to effect such substitution. The Power of Attorney so granted by each Limited Partner to the General Partner shall not authorize the General Partner to act on behalf of Limited Partners in any situation in which this Agreement requires the consent of Limited Partners. ARTICLE XX LIMITATIONS ON LIABILITY; LITIGATION Except as provided in his Subscription Agreement, no Limited Partner or Special Partner shall be liable (i) as a General Partner unless, in addition to the exercise of his rights and powers as a Limited Partner or Special Partner, he takes part in the management or control of the Partnership's business or (ii) to the Partnership or to a General Partner unless a liability of the Partnership or of the General Partner, as the case may be, is founded upon the unauthorized activity of such Limited Partner or Special Partner in attempting to take part in the control of the Partnership's business or misstatements contained in such Partner's Subscription Agreement delivered in connection with his purchase of limited partner interests. The General Partner is hereby authorized to prosecute. defend, settle or compromise actions or claims at law or in equity at the Partnership's expense as may be necessary or proper to enforce or protect the Partnership's interests. The General 39 40 Partner shall satisfy any judgment, decree or decision of any court, board or authority having jurisdiction or any settlement of any suit or claim prior to judgment or final decision thereon first, out of any insurance proceeds available therefor, next out of the Partnership's assets and income and finally out of the assets and income of the General Partner. ARTICLE XXI MISCELLANEOUS All notices under this Agreement shall be in writing and shall, except as otherwise expressly provided herein, be given to the Partner entitled thereto by personal service or by certified or registered mail, return receipt requested, to the address set forth in this Agreement for such Partner or at such other address as he may specify in writing. Article titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. Whenever the singular number is used in this Agreement and when required by the context, the same shall include the plural, and the masculine gender shall include the feminine and neuter genders and the word "persons" shall include individuals, corporations, firms, partnerships, trusts or other forms of associations. This Agreement may be executed in several counterparts, and all so executed shall constitute one agreement, binding on all of the parties hereto, notwithstanding that all the parties are not signatory to the original or the same counterpart. Subject to the provisions of Article XV, the terms and provisions of this Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, successors and assigns of the respective Partners. Whenever the vote of the Limited Partners is referred to in this Agreement, the General Partner may vote on behalf of such Limited Partners who have by written proxy authorized the General Partner so to do. This agreement and amendments hereof shall be governed by the laws of the State of California. 40 41 IN WITNESS WHEREOF, the parties hereto have hereunto set their respective hands as of the day and year first above written. GENERAL PARTNER: CAREY DIVERSIFIED LLC By:___________________________________ CORPORATE SPECIAL PARTNER: CAREY MANAGEMENT LLC By:___________________________________ INDIVIDUAL SPECIAL PARTNER: _____________________________________ William Polk Carey LIMITED PARTNERS: W.P. CAREY & CO., INC. By:___________________________________ CAREY DIVERSIFIED LLC By:___________________________________ 41 42 All Limited Partners now and hereafter admitted as limited partners of the Partnership pursuant to powers of attorney and authorizations now and hereafter executed in favor of and granted and delivered to the General Partner By: CAREY DIVERSIFIED LLC, General Partner By:___________________________________ 42 EX-99.16 56 AMEND & RESTATED AGREEMENT OF LTD PARTNERSHIP CPA4 1 Exhibit 99.16 AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF CORPORATE PROPERTY ASSOCIATES 4 (A California Limited Partnership) THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP of CORPORATE PROPERTY ASSOCIATES 4, a California limited partnership (the "Partnership"), which amends and restates the Amended Agreement of Limited Partnership dated as of September 30, 1982, as amended as of September 8, 1983 and _________, 1997, is made and entered into as of the ____ day of _______, 1997 by and between CAREY DIVERSIFIED LLC, a Delaware limited liability company as general partner and as Limited Partner, CAREY MANAGEMENT LLC, as Corporate Special Partner, WILLIAM POLK CAREY, as Individual Special Partner, and CAREY CORPORATE PROPERTY, INC., as Limited Partner, those Persons set forth on Schedule A hereto, as Limited Partners, and all persons and entities admitted as Limited Partners as provided herein. ARTICLE I FORMATION OF PARTNERSHIP The parties hereby continue the Partnership under the provisions of the California Revised Limited Partnership Act (the "Act") and the rights and liabilities of the Partners shall be as provided in such law and as herein expressly provided. In the event that it shall be necessary for the Partnership to exist in or qualify to do business under the laws of any state or states other than or in addition to the State of California, the parties hereby agree that the Partnership shall take such action as may be necessary to exist or qualify to do business in any state in which such existence or qualification shall be required, provided that in any such event the Partnership shall at all times continue to be a limited partnership formed under and governed by the provisions of the Uniform Partnership Act of the State of California. ARTICLE II NAME The business of the Partnership shall be conducted under the name "Corporate Property Associates 4" or under the name "Corporate Property Associates 4 -A California Limited Partnership" in any state or other jurisdiction which requires that the term "limited partnership" be a part of the Partnership's name or under such other name as the General Partner shall hereafter designate in writing to the other Partners. 2 ARTICLE III DEFINITIONS "Acquisition Expenses" means the expenses of the Partnership related to the selection and acquisition of properties by the Partnership, whether or not such properties are acquired, including but not limited to legal fees and expenses, travel and communications expenses, costs of appraisals, non-refundable option payments on property not acquired, accounting fees and expenses, costs of title reports and title insurance, transfer and recording taxes and miscellaneous expenses. Acquisition Expenses shall not include Acquisition Fees. "Acquisition Fees" means the total of all fees and commissions paid by any party in connection with the purchase or development of property by the Partnership, except a development fee paid to a person not an Affiliate of the Partnership in connection with the actual development of a project after the Partnership's acquisition of the land. Included in the computation of such fees or commissions shall be any real estate commission, selection fee, development fee, nonrecurring management fee, or any fee of a similar nature, however designated but not any loan fee ("points"). Acquisition Fees should not include Acquisition Expenses. "Affiliate" means, with respect to any party hereto, (i) any person directly or indirectly controlling, controlled by or under common control with such party, (ii) any person owning or controlling 10% or more of the outstanding voting securities of such party. (iii) any officer, director or partner of such party or of any person specified in (i) or (ii) above and (iv) any company in which any officer, director or partner of any person specified in (iii) above is an officer, director or partner; provided, however, that for purposes of this definition the term "Affiliate" shall not be deemed to include any person providing legal, underwriting or financial or investment advisory services to the Partnership, the General Partner, or any Affiliate of any of them from time to time. "Agreement" means this Amended and Restated Agreement of Limited Partnership as hereafter amended from time to time. "Appraisal Date" means December 31, 1998. "Capital Account" means, in respect of any Partner, the account maintained for such Partner in accordance with Article XII. 3 "Cash From Financings" means the net cash proceeds realized by the Partnership from the financing of Partnership property or the refinancing of any Partnership indebtedness. "Cash From Sales" means the net cash proceeds realized by the Partnership from the sale, exchange or other disposition of any of its assets. Cash From Sales shall not include net cash proceeds realized from the financing of Partnership property or the refinancing of any Partnership indebtedness. "Code" means the Internal Revenue Code of 1986. "Consolidation and Offering Expenses" means all expenses incurred in connection with the formation and qualification of the Subsidiary Partnership, the Merger and in offering the Shares to the former limited partners of the Partnership in exchange for their Partnership Interests under applicable Federal and state law, and any other expenses actually incurred and directly related to the offering of the Shares, including such expenses as: (i) the preparing, printing, filing and delivering of the Registration Statement and the Prospectus (including any amendments thereof or supplements thereto), (ii) the preparing and printing of this Agreement, other solicitation material and related documents and the filing and/or recording of such certificates or other documents necessary to comply with the laws of the State of California for the formation of a limited partnership, the merger of a limited partnership into another limited partnership and for the continued good standing of a limited partnership, (iii) the qualification or registration of the limited liability company interests under state securities or "Blue Sky" laws, (iv) any escrow arrangements, including any compensation to an escrow agent, (v) the filing fees payable to the United States Securities and Exchange Commission and to the National Association of Securities Dealers, Inc. and any costs payable to the New York Stock Exchange for the listing of the Listed Shares, (vi) the fees of the Partnership's counsel, (vii) all advertising expenses incurred in connection therewith, including the cost of all sales literature and the costs related to investor and broker/dealer sales and information meetings and marketing incentive programs and (viii) selling commissions and wholesaling expenses incurred in connection with the sale of the Shares. "Contribution" means any money, property or services rendered, or a promissory note or other binding obligations to contribute money or property, or to render services as permitted by Section 15651 of the Act, which a Partner contributes to the Partnership as capital in that Partner's capacity as Partner pursuant to this Partnership Agreement or any other agreement among the Partners, including any agreement as to value. 4 "Corporate Special Partner" means Carey Management LLC, a Delaware limited liability company. "CPA Partnership" means Corporate Property Associates, a California limited partnership, Corporate Property Associates 2, a California limited partnership, Corporate Property Associates 3, a California limited partnership, Corporate Property Associates 5, a California limited partnership, Corporate Property Associates 6, a California limited partnership, Corporate Property Associates 7, a California limited partnership, Corporate Property Associates 8, L.P., a Delaware limited partnership, Corporate Property Associates 9, L.P., a Delaware limited partnership, the Partnership and any other real estate limited partnerships sponsored by W.P. Carey & Co., Inc. or its Affiliates with investment objectives substantially similar to the Partnership's. "Distributable Cash From Operations" means cash receipts from the ordinary day-to-day operations of the Partnership (including all interest on Partnership investments and mortgages held by the Partnership) without deduction for the management fee authorized by Paragraph G(3) of Article X payable to an Affiliate of the General Partner or for depreciation and amortization of intangibles such as organization, underwriting and debt placement costs but after deducting all other expenses, debt amortization and provisions for reserves established by the General Partner which it deems to be reasonably required for the proper operation of the business of the Partnership. "Distributable Cash from Operations" shall not include cash proceeds realized from the sale, exchange or other disposition of assets of the Partnership or from financing of Partnership property or the refinancing of any Partnership indebtedness. "Distribution" means any transfer of money or property by the Partnership to a Partner without consideration. "Fiscal Quarter" means the three-month period ending on the last day of the third. sixth. ninth and twelfth calendar months of each Fiscal Year of the Partnership. "Fiscal Year' means the Fiscal Year specified in Article XIII. "Front-End Fees" means all fees and expenses paid by any party for any services rendered in connection with the organizational or acquisition phase of the Partnership, including Consolidation and Offering Expenses, Acquisition Fees, Acquisition Expenses and any other similar fees, however designated. 5 "General Partner" means any person or entity in his, her or its capacity as general partner of the Partnership and whose name and address are set fourth in Article V, or any successor thereto appointed or elected hereunder. "Individual Special Partner" means William Polk Carey. "Investment in Properties" means the amount of gross proceeds of the Offering actually paid or allocated to the purchase, development, construction or improvement of properties acquired by the Partnership, including the purchase of properties, working capital reserves (except that working capital reserves in excess of 5% of the gross proceeds of the Offering shall not be included) and other such payments such as interest, closing costs, financing fees, taxes and other similar items, but excluding Front-End Fees. "Limited Partner" means any person or entity in his, her or its capacity as a limited partner of the Partnership and whose name and address are set forth on the books and records of the Partnership. "Mandatory Distribution Event" means (a) the sale or disposition of a Partnership property to a third party unaffiliated with the Partnership or the General Partner, not including the pledge, mortgage or encumbrance of a property, or of any interest therein, in connection with the financing, refinancing or other leveraging of such property or otherwise or any assignment of any leases or rents related to such property, or (b) the mandatory distribution to holders of Partnership Interests following the Appraisal Date. "Merger" means the merger of the Subsidiary Partnership into the Partnership. "Merger Agreement" means the Agreement of Merger pursuant to which the Subsidiary Partnership is merged with and into the Partnership. "Minimum Gain" shall mean and refer to, at any time, the excess, if any, of the outstanding principal balance of all nonrecourse debt of the Partnership that is secured by an interest in Partnership assets, over the adjusted basis of such assets to the Partnership for Federal income tax purposes. For purposes of the preceding sentence, the term "nonrecourse debt" shall mean a liability of the Partnership with respect to which no Partner has any personal liability. "Nonrecourse Deductions" has the meaning set forth in Sections 1.704-2(b)(1) and 1.704-2(c) of the Treasury Regulations. 6 "Nonrecourse Liabilities" has the meaning set forth in Section 1.704-2(b)(3) of the Treasury Regulations. "Net Lease" means a lease in which the tenant undertakes to pay all or substantially all the cash expenses, excluding debt service, related to the leased property. "Offering" means the offering of the Shares made pursuant to the Prospectus. "Partner" means the General Partner, the Corporate Special Partner, the Individual Special Partner and any Limited Partner where no distinction is required by the context in which the term is used. "Partner Minimum Gain" means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a nonrecourse Liability, determined in accordance with Treasury Regulations Section 1.704-2(i)(4). "Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulations Section 1.704-2(b)(4). "Partner Nonrecourse Deductions" has the meaning set forth in Treasury Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Debt for the Partnership taxable year shall be determined in accordance with the rules of Treasury Regulations Section 1.704-2(i)(2). "Partnership" means Corporate Property Associates 4 - a California limited partnership. "Partnership Interest" means the interest of each Partner in the profits, losses, distributions, capital and assets of the Partnership. "Partnership Minimum Gain" has the meaning set forth in Treasury Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in Partnership Minimum Gain, for a Partnership taxable year shall be determined in accordance with the rules of the Treasury Regulations. "Prospectus" means the final prospectus of the General Partner pursuant to which the Partnership will offer up to 23,654,898 Shares as the same may at any time and from time to time be amended or supplemented after the effective date of the Registration Statement. 7 "Proxy" means a written authorization signed by a Partner or the Partner's attorney-in-fact giving another person the power to vote with respect to the Partnership Interest of that Partner. "Signed," for the purpose of this paragraph, means the placing of the Partner's name on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the Partner or the Partner's attorney-in-fact. "Registration Statement" means the General Partner's Registration Statement on Form S-4 filed with the Securities and Exchange Commission in the form in which it becomes effective, as the same may at any time and from time to time thereafter be amended or supplemented. "Shares" means the Shares of the General Partner. "Special Partners" means the Corporate Special Partner and the Individual Special Partner. "Subsidiary Partnership" means Fourth Subsidiary, L.P., a California limited partnership, which is a subsidiary of the General Partner. ARTICLE IV PURPOSE The business and purpose of the Partnership is to invest in and own real property or interests therein (including leasehold estates) or appurtenances thereto as well as personal or mixed property connected therewith which is income-producing within a reasonable time after acquisition. The Partnership may enter into ventures, partnerships and other business arrangements with respect to real property as deemed prudent by the General Partner in order to achieve successful operations for the Partnership. Operations of the Partnership may be conducted wherever, in the opinion of the General Partner and not in violation of the general restrictions described in Paragraph H of Article X the factors involved appear to be favorable for the Partnership and the Partners. ARTICLE V NAMES AND ADDRESSES OF PARTNERS The General Partner of the Partnership shall be Carey Diversified LLC, a Delaware limited liability company having an office at 50 Rockefeller Plaza, New York, New York 10020. 8 The names and addresses of the Limited Partners of the Partnership shall be as set forth on the books and records of the Partnership and shall be kept at the principal place of business of the Partnership and a copy of which shall be kept at the Partnership's California office. ARTICLE VI PRINCIPAL PLACE OF BUSINESS; CALIFORNIA OFFICE The principal place of business of the Partnership shall be 50 Rockefeller Plaza, New York, New York 10020. The Partnership shall also maintain an office in California at Transamerica Pyramid, 600 Montgomery Street, San Francisco, California 94111. The General Partner may from time to time change the principal place of business of the Partnership or its California office and, in either such event, the General Partner shall notify the Partners in writing within ten days after the effective date of such change; provided, however, that no such change shall be effected unless the General Partner determines that such change is in the best interests of the Partnership after giving consideration to any material adverse state or local income, estate or inheritance tax consequences to the Partners, or any adverse effect on the limited liability of the Limited Partners, as a result of such change. The General Partner may establish additional places of business of the Partnership when and where required by the business of the Partnership. The Partnership shall at all times maintain in California an agent for service of process upon the Partnership. ARTICLE VII CAPITAL CONTRIBUTIONS The Partnership is authorized to issue and sell up to $140,000 of limited partner interests. No interest shall be paid on any contribution to the capital of the Partnership. Loans by a Partner to the Partnership shall not be considered contributions to the capital of the Partnership. Any Partner, including any additional or substituted Partner, who shall acquire a Partnership Interest or whose Partnership Interest is increased by means of a transfer to him of all or a part of the Partnership Interest of another Partner, shall succeed to the Capital Account, or portion thereof, in respect of the Partnership Interest received. 9 ARTICLE VIII PROFITS AND LOSSES A. Determination of Profits and Losses. The profits and losses of the Partnership shall be determined for each Fiscal Year of the Partnership in accordance with generally accepted accounting principles and procedures applied in a consistent manner and for federal income tax purposes, by additionally making such adjustments as are necessary to include other items of income, expense, deduction and allowance as are permitted and required under the Code and the regulations promulgated thereunder. Except as otherwise provided herein, whenever a proportionate part of the Partnership profit or loss is credited or charged to a Partner's Capital Account every item of income, gain, loss or deduction entering into the computation of such profit or loss shall be considered either credited or charged, as the case may be, to such Partner's Capital Account and every item of credit or tax preference related to such profit or loss and applicable to the period during which such profit or loss was realized shall be allocated to such Partner in the same proportion. Every recapture of deduction or credit shall be allocated among the Partners in the same proportion as the items of deduction or credit subject to recapture were allocated among the Partners. Any increase or decrease in the amount of any item of income, gain,. loss or deduction attributable to an adjustment to the basis of Partnership assets made pursuant to a valid election under Sections 734, 743 and 754 of the Code, and pursuant to corresponding provisions of applicable state and local income tax laws shall be charged or credited, as the case may be, and any increase or decrease in the amount of any item of credit or tax preference attributable to any such adjustment shall be allocated, to the Partners entitled thereto under such laws. Profits and losses allocated, to a particular class of Partnership Interests shall be allocated among the holders of record of such class of Partnership Interests at the end of each Fiscal Year (or such shorter period as may be provided herein) of the Partnership in proportion to their respective Partnership Interests; provided however, that any such profits and losses attributable to a limited partner interest assigned during such Fiscal Year of the Partnership shall be allocated among the holders of such limited partner interests during such Fiscal Year in proportion to the number of months (for purposes of such allocation ownership of limited partner interests for each month will be determined on the fifteenth day of each month) that each such holder was recognized as the owner of such limited partner interest during such Fiscal Year, without regard to the results of Partnership operations during the period in which each such holder was recognized as the owner thereof and without regard to 10 the date, amount or recipient of any distributions which may have been made with respect to such limited partner interest. B. Allocation of Profits and Losses. 1. Except as provided in subparagraph 4 of this paragraph B, the profits and losses of the Partnership (other than gains or losses from the sale, exchange or other disposition of Partnership assets) shall be allocated to the Partners as follows and in the following order to priority: a. An amount of net income equal to the excess, if any, of the aggregate negative balance of the Capital Accounts of the Partners over the Minimum Gain (determined as of the end of such year or fraction thereof), shall first be allocated among the Partners whose Capital Accounts are negative as a result of nonrecourse debt in proportion to the negative amounts attributable to such nonrecourse debt. b. Any remaining balance of net income shall be allocated 1% of the General Partner, 5% to the Corporate Special Partner, 1% to the Individual Special Partner and 93% to the Limited Partners. c. Net losses of the Partnership shall be allocated 1% to the General Partner, 5% to the Corporate Special Partner, 1% to the Individual Special Partner and 93% to the Limited Partners. 2. Except as provided in subparagraph 4 of this Paragraph B, net losses arising from sales, exchanges or other dispositions of Partnership assets shall be allocated 1% to the General Partner, 1% to the Individual Special Partner and 98% to the Limited Partners. For purposes of this subparagraph 2, Capital Accounts shall be determined after applying the allocations provided in subparagraphs 1 and 5 of this Paragraph B, and after applying subparagraphs 6 and 7 of this Paragraph B. 3. Net gains arising from sales, exchanges or other dispositions of Partnership assets shall be allocated to the Partners as follows and in the following order to priority: a. An amount of such gains equal to the excess, if any, of the aggregate negative balance of the Capital Account of the General Partner over the Minimum Gain; b. If each Partner's Capital Account is negative and the gains are less than the aggregate negative amounts in the Capital Accounts, in the ratio that the Capital Accounts bear to each other; 11 c. If each Partner's Capital Account is negative and the gains are greater than the aggregate negative amounts in the Capital Accounts (i) first in an amount to bring each Partner's Capital Account to zero, and (ii) then to the Partners in the percentage by which Cash From Sales and Cash From Financings is then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; d. If certain Partner's Capital Accounts are positive and other Partner's Capital Accounts are negative (i) first in an amount to bring the Capital Account of each Partner whose Capital Accounts which are negative to zero (or if gains are less than the aggregate negative amounts of the Capital Accounts which are negative, to such Partners in the ratio that such negative Capital Accounts bear to each other), and (ii) then to the Partners in the percentage by which Cash From Sales and Cash From Financings is then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; e. If each Partner's Capital Account is positive, in the percentages by which Cash From Sales and Cash From Financings is then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; For purposes of this subparagraph 3, Capital Accounts shall be determined after applying the allocations provided in subparagraphs 1 and 2 of this Paragraph B and after applying subparagraphs 6 and 7 of Paragraph B. 4. No loss or deduction or item thereof under subparagraph 1 or 2 of this Paragraph B shall be allocated to the General Partner if, or to the extent, such allocation would create or increase a deficit in the General Partner's Capital Account, unless: a. Such allocation of loss or deduction is attributable to nonrecourse debt of the Partnership; and b. Such allocation does not cause the deficit capital account of the General Partner to exceed the amount of Minimum Gain attributable to such nonrecourse debt, determined as of the last day of the taxable year to which such allocation is attributable. 5. To the extent that any amount paid to a Limited Partner or its Affiliates pursuant to the provisions of Paragraphs G(2), (4),(5),(6), or (7) of Article X hereof, or as Front-End Fees, is treated as a distributive share of Partnership income to the Limited Partner for Federal income tax purposes, the Limited Partner affected shall be allocated gross income of the 12 Partnership at a time and in an amount equal to the amount of such payment, and the Capital Account of the Limited Partner so affected shall be adjusted to reflect such allocation and payment. If the Partnership's gross income for a Fiscal Year is less than the amount of such payment, the Limited Partner so affected shall be allocated gross income in each succeeding Fiscal Year until the total amount so allocated equals the total amount of such payment. 6. For purposes of subparagraphs 1(a), 2 and 3 of this Paragraph B, distributions to the Partners pursuant to Paragraphs A and E of Article IX hereof shall be treated as having been made and charged to the Capital Accounts of the Partners prior to the allocations of income, gains and losses provided therein. 7. Solely for purposes of this Paragraph B, the Capital Accounts of each Partner shall be reduced by such Partner's share of any Partnership expenditure which would be treated as it were an expenditure described under Section 705(a)(2)(B) of the Code, and shall be reduced or increased by any other amount required by the then applicable regulations under Section 704 of the Code. 8. Notwithstanding anything to the contrary in this Article VIII, if any Partner receives an adjustment, allocation or distribution described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), such Partner shall be specially allocated a pro rata portion of each item of Partnership income, including gross income, and gain in an amount and manner sufficient to eliminate, as quickly as possible, any deficit balance in such Partner's Capital Account created by such adjustment, allocation or distribution in excess of the sum of (i) the amount such Partner is obligated to restore pursuant to any provision of this Agreement and (ii) the amount such Limited Partner is deemed to be obligated to restore pursuant to the penultimate sentence of Treasury Regulations Section 1.704-1(b)(2)(iv)(f) (as amended in 1986). This subparagraph 8 of Paragraph B is intended to constitute a "qualified income offset" within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(3). 9. Except as otherwise provided in Section 1.704-2(f) of the Treasury Regulations, if there is a net decrease in Partnership Minimum Gain for any Partnership fiscal year, each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary subsequent years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain to the extent required by Treasury Regulations Section 1.704-2(f). The items to be so allocated shall be determined in accordance with Section 1.704-2(f) and (i) of the Treasury Regulations. This subparagraph is intended to comply with the minimum gain chargeback requirement in said 13 section of the Treasury Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant hereto. 10. Except as otherwise provided in Section 1.704-2(i)(4) of the Treasury Regulations, if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any fiscal year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the Treasury Regulations, shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to that Partner's share of the net decrease in the Partner Minimum Gain attributable to such Partner Nonrecourse Debt to the extent and in the manner required by Section 1.704-2(i) of the Treasury Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i) of the Treasury Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and (j)(2) of the Treasury Regulations. This subparagraph is intended to comply with the minimum gain chargeback requirement with respect to Partner Nonrecourse Debt contained in said section of the Treasury Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph shall be made in proportion to the respective amounts to be allocated to each Partner pursuant hereto. 11. To the extent any Partner has an Adjusted Capital Account Deficit at the end of any Partnership Fiscal Year, each such Partner shall be specially allocated items of Partnership income (including gross income) and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Paragraph 8(B)(11) shall be made if and only to the extent that such Partners would have an Adjusted Capital Account Deficit after all other allocations provided for in this Section have been tentatively made as if this Paragraph 8(B)(11) were not in the Agreement. 12. Partner Nonrecourse Deductions for any fiscal year or other applicable period with respect to a Partner Nonrecourse Debt shall be specially allocated to the Partners that bear the economic risk of loss for such Partner Nonrecourse Debt (as determined under Sections 1.704-2(b)(4) and 1.704-2(i)(1) of the Treasury Regulations). C. Power of the Partner to Vary Allocations of Profits and Losses. It is the intent of the Partners that each Partner's distributive share of income, gains, losses, deductions and credits shall be determined and allocated in accordance with this Article VII to the fullest extent permitted by Section 704(b) of 14 the Code. If the Partnership is advised that the allocations provided in this Article VIII are unlikely to be respected for Federal income tax purposes, the General Partner has been granted power in Paragraph B(2) of Article XVI of this Agreement to amend the allocation provisions of this Agreement, on advice of accountants and legal counsel, to the minimum extent necessary to effect the plan of allocations and distributions provided in this Agreement. D. Allocations of Profits and Losses Among Limited Partners. Except as otherwise provided in this Article VIII, profits and losses shall be allocated among the Limited Partners in the same manner as distributions are allocated in Paragraph D of Article IX hereof. E. Consent of Partners to Allocation of Profits and Losses. The methods hereinabove set forth by which profits and losses of the Partnership are determined and allocated are hereby consented to by each Partner as a condition to becoming a Partner. ARTICLE IX DISTRIBUTIONS A. Distributable Cash From Operations. The General Partner shall distribute as soon after the close of each Fiscal Quarter as is reasonably feasible all of the Distributable Cash From Operations for such Fiscal Quarter in the following manner: 1% to the General Partner, 5% to the Corporate Special Partner, 1% to the Individual Special Partner and 93% to the Limited Partners. B. Cash From Sales. The General Partner shall distribute, as soon after the close of each Fiscal Quarter as is reasonably feasible, all Cash From Sales realized by the Partnership during such Fiscal Quarter in accordance with the provisions of Paragraph E of this Article IX. C. Cash From Financings. The General Partner shall distribute, as soon after the close of each Fiscal Quarter as is reasonably feasible, all of the Cash From Financings realized by the Partnership during such Fiscal Quarter in accordance with the provisions of Paragraph E of this Article IX. D. Allocation of Distributions Among Limited Partners. Distributions of cash to the Limited Partners shall be apportioned among the holders of record of limited partner interests in the ratio in which the number of limited partner interests held of record by each of them bears to the number of limited partner interests held of record by all the Limited 15 Partners as of the first day of the Fiscal Quarter with respect to which such distribution is made E. Distributions of Cash From Sales and Cash From Financings. The General Partner shall distribute Cash From Sales and Cash From Financings in the following manner: 1% to the General Partner, 1% to the Individual Special Partner and 98% to the Limited Partners, until such time as $335,185 has been distributed to the Individual Special Partner pursuant to this Paragraph E of Article IX. Thereafter, Cash From Sales and Cash From Financings shall be distributed 1% to the General Partner and 99% to the Limited Partners. F. Return of Capital Contributions. To the extent that, at the end of any Fiscal Quarter, the total cash distributions to the Limited Partners made pursuant to this Article IX exceed the profits of the Partnership for such Fiscal Quarter, such excess shall be charged to each Limited Partners' Capital Account and shall be regarded as a rightful return of capital contributions. G. Consent of Partners to Allocation of Distributions. The methods hereinabove set forth by which Cash From Operations, Cash From Sales and Cash From Financings are allocated and distributed are hereby consented to by each Partner as a condition to becoming a Partner. ARTICLE X MANAGEMENT AND OPERATION OF BUSINESS A. Management of Business. The Partnership shall be managed by the General Partner and the conduct of the Partnership's business shall be controlled and conducted by the General Partner in accordance with this Agreement. B. Authority of General Partner. In addition to and not in limitation of any rights and powers conferred by law or other provisions of this Agreement, the General Partner shall have and may exercise on behalf of the Partnership all powers and rights necessary, proper, convenient or advisable to effectuate and carry out the purposes, business and objectives of the Partnership. Such powers shall include, without limitation, the following powers: 1. To acquire, hold and dispose of any real property, (or any interests therein, including leasehold estates) and appurtenances thereto as well as personal or mixed property connected therewith, including the purchase, lease, development, improvement, maintenance, exchange, trade or sale of such property at such price, rental or amount, for cash, securities or other property and upon such terms, as 16 the General Partner deem to be in the best interests of the Partnership; 2. Subject to the provisions of Paragraph H(10) of this Article X to borrow money and, if security is required therefor, to mortgage or subject to any other security device any portion of the assets of the Partnership, to obtain replacements of any mortgage or other security device, and to prepay, in whole or in part, refinance, increase, modify, consolidate or extend any mortgage or other security device; 3. To invest the Partnership's funds in United States Government securities, certificates of deposit of United States commercial banks with a net worth of at least $20,000,000, savings accounts with United States commercial banks, savings banks, savings and loan associations or similar institutions where such accounts are fully insured by any federal or state government agency, Eurodollar deposits in branches of United States banks, which banks have a net worth of at least $50,000,000, bank repurchase agreements covering securities of the United States Government or governmental agencies, bankers' acceptances, public no-load money market funds or other similar short-term highly liquid investments; to invest any working capital or other reserves retained by the General Partner for the operation of the Partnership in like manner; and to deposit, withdraw, invest, pay, retain and distribute the Partnership's funds in any manner consistent with the provisions of this Agreement. 4. To bring and defend actions at law or in equity. 5. To employ persons in the operation and management of the Partnership's business, including but not limited to supervisory managing agents, building management agents. real property developers and real estate brokers; 6. To place record title to, or the right to use, Partnership assets in the name or names of a non-operating nominee or nominees, including an Affiliate of the General Partner, for any purpose convenient or beneficial to the Partnership; 7. To perform all acts and file all documents, including tax returns and registration statements, necessary to comply with federal, state and local laws, rules and regulations applicable to the Partnership or the conduct of the Partnership's business; 8. To enter into and carry out contracts and agreements and any or all documents and instruments and to do and perform all such other things as may be in furtherance of 17 Partnership purposes or necessary or appropriate to the conduct of Partnership activities; 9. To execute, acknowledge, deliver, seal, file, record and vote any and all instruments which may be deemed necessary or convenient to effect the foregoing; and 10. To designate Carey Diversified LLC, the General Partner, as the "Tax Matters Partner" in accordance with Section 6231(a)(7) of the Code and, as such, the General Partner shall have all powers necessary to so perform including, without limitation, the power to retain attorneys and accountants of its choice and the right to settle any audits without the consent of the Limited Partners, except as otherwise required by the Code. the designation provided for herein is expressly consented to by each Partner as an express condition to becoming a Partner; and C. Restrictions on Authority of General Partner. In addition to other acts expressly prohibited or restricted by this Agreement or by law, the General Partner shall have no authority to act on behalf of the Partnership with respect to, and are expressly prohibited from undertaking, the following: 1. Doing any act in contravention of this Agreement; 2. Except as provided in this Agreement and except in connection with the liquidation and winding up of the business of the Partnership upon its termination and dissolution, doing any act which would make it impossible to carry on the ordinary business of the Partnership; 3. Confessing a judgment against the Partnership in connection with any threatened or pending legal action, 4. Possessing Partnership property or assigning the rights of the Partnership in specific Partnership property for other than a Partnership purpose; 5. Admitting a person as a Limited Partner except as provided in this Agreement; 6. Except as provided in this Agreement and except in connection with the liquidation and winding up of business of the Partnership upon its termination and dissolution or a Mandatory Distribution Event, selling substantially all the assets of the Partnership at a single sale or in multiple sales in the same 12-month period without the prior written consent of Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, with 18 the same proportionate vote as provided in paragraph (d) of Article XI; 7. Pledging or encumbering substantially all the properties of the Partnership at one time or from time to time in a series of related transactions, unless the lien of such pledge or encumbrance arises in connection with the acquisition or improvement of properties or the initial financing of properties acquired free and clear of encumbrances or the refinancing of previous obligations and such lien is limited to the properties so acquired, improved, financed or refinanced; 8. Obtaining any loan or any mortgage loan on any residential property made or guaranteed by any Federal, state or local government or municipality or any agency of any federal, state or local government or municipality; 9. Performing any act (other than an act required by this Agreement or any act taken in good faith in reliance upon counsel's opinion) which would, at the time such act occurred, subject any Limited Partner to liability as a general partner in any jurisdiction; 10. Prepaying any interest on any Partnership indebtedness; provided that the payment of any amount commonly referred to as "points" shall not be deemed a prepayment of interest; or 11. Assessing any Partner for an additional capital contribution. D. Fiduciary Obligations of General Partner. The General Partner shall act at all times as a fiduciary with respect to the Partnership, the Limited Partners and the Partnership property and assets. E. Obligations of General Partner. The General Partner shall: 1. Devote such of their time to the business of the Partnership as they shall, in its discretion, exercised in good faith, determine to be necessary to conduct the business of the Partnership for the benefit of the Partnership and the Limited Partners; 2. File and publish all certificates, statements or other instruments required by law for formation, qualification and operation of the Partnership and for the conduct of its business in all appropriate jurisdictions; 19 3. Use its best efforts to cause the Partnership and the Partners to be protected by adequate public liability, property damage and other insurance; 4. Employ attorneys to represent the Partnership, which attorneys may also serve as counsel to the General Partner and any of its Affiliates; and 5. Use its best efforts to maintain the status of the Partnership as a "partnership" for federal income tax purposes. F. Limitation on Liability of General Partner Indemnification. 1. The General Partner shall have no liability, responsibility or accountability in damages or otherwise to any other Partner or the Partnership for, and the Partnership agrees to indemnify, pay, protect and hold harmless the General Partner (on the demand of and to the satisfaction of the General Partner) from and against, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, proceedings, costs, expenses and disbursements of any kind or nature whatsoever (including without limitation all costs and expenses of defense, appeal and settlement of any and all suits, actions or proceedings instituted against the General Partner or the Partnership and all costs of investigation in connection therewith) which may be imposed on, incurred by or asserted against the General Partner or the Partnership in any way relating to or arising out of, or alleged to relate to or arise out of, any action or inaction on the part of the Partnership or on the part of the General Partner as a General Partner of the Partnership; provided, that the General Partner shall be liable, responsible and accountable, and the Partnership shall not be liable to the General Partner, for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, proceedings, costs, expenses and disbursements resulting from the General Partner's own fraud, bad faith, negligence, misconduct or other breach of fiduciary duty to the Partnership or any Partner. If any action, suit or proceeding shall be pending or threatened against the Partnership or the General Partner relating to or arising, or alleged to relate to or arise, out of any such action or inaction the General Partner shall have the right to employ, at the expense of the Partnership, separate counsel of the General Partner's choice in such action, suit or proceeding. The satisfaction of the obligations of the Partnership under this Section 1 shall be from and limited to the assets of the Partnership and no Partner shall have any personal liability on account thereof. The General Partner shall have the right to bill the 20 Partnership for, or otherwise request the Partnership to pay, at any time and from time to time after the General Partner has become obligated to make payment therefor, any and all amounts for which the General Partner believes in good faith that the General Partner is entitled to indemnification for under this Section. 2. The Partnership shall pay any and all such bills and honor any and all such requests for payment within 60 days after such bill or request is received by the General Partner. In the event that a final determination is made that the Partnership is not so obligated in respect of any amount paid by it to the General Partner, the General Partner will refund such amount within 180 days of such determination. 3. The Partnership shall indemnify to the extent of the Partnership assets each Limited Partner against any claims of liability asserted against a Limited Partner solely because he is a Limited Partner in the Partnership. 4. Notwithstanding the foregoing, neither the General Partner nor any officer, director, employee, agent, subsidiary or assignee of the General Partner or of the Partnership shall be indemnified from any liability, loss or damage incurred by them in connection with (i) any claim or settlement involving allegations that the Securities Act of 1933 was violated by the General Partner or by any such other person or entity unless: (a) the General Partner or other persons or entities seeking indemnification are successful in defending such action; and (b) such indemnification is specifically approved by a court of law which shall be advised as to the current position of the Securities and Exchange Commission and the California Commissioner of Corporations regarding indemnification for violations of securities laws; or (ii) any liability imposed by law, including liability for fraud, bad faith or negligence. G. Specific Transactions Authorized. The General Partner is hereby authorized to enter into, on behalf of the Partnership, the following specific transactions: 1. The Partnership may purchase property from any Affiliate of the General Partner provided (i) the property was acquired by such Affiliate for the purpose of facilitating its purchase by the Partnership, facilitating the borrowing of money or the obtaining of financing for the Partnership or any other purpose related to the business of the Partnership, (ii) the property is purchased by the Partnership for a price no greater than the acquisition and out-of-pocket carrying cost of the property to such Affiliate, (iii) there is no adverse difference in the interest rates of the loans secured by the property at the time acquired by such Affiliate and at the time 21 purchased by the Partnership nor any other benefit arising out of such transaction to the General Partner and (iv) no compensation is paid by the Partnership or by any non-affiliated person to any Affiliate of the General Partner in connection with the purchase of the property by the Partnership. 2. The Partnership may contract (i) with Affiliates of the General Partner to serve as real estate brokers and mortgage placement brokers in connection with the investment of the Partnership assets and (ii) with Affiliates of the General Partner to serve as real estate brokers in connection with the sale of property by the Partnership. The amount of real estate commissions payable to Affiliates of the General Partner upon a sale of property by the Partnership where such Affiliates have provided a substantial amount of services in the sales effort may not exceed the lesser of (i) 3% of the sales contract price of the property or (ii) 50% of the reasonable, customary and competitive rate for similar services in light of the size, type and location of the property and the total real estate commissions payable to such Affiliates and to other persons may not exceed the lesser of (a) 6% of the contract price for the sale of the property or (b) the reasonable, customary and competitive rate for similar services in light of the size, type and location of the property. No Affiliate of the General Partner may receive payment of a real estate commission with respect to the sale of any property by the Partnership unless total consideration received by the Partnership upon such sale exceeds the amounts actually paid by the Partnership for the purchase, development, construction or improvement, of the property and any fees and commissions paid by the Partnership in connection therewith. For purposes of this Paragraph G(2) only, the term "Affiliate" shall not be deemed to exclude any person solely by reason of his or its providing underwriting or financial or investment advisory services to the Partnership, the Partners or any Affiliate of any of them from time to time. 3. Affiliates of the General Partner may receive insurance premiums and brokerage commissions with respect to insurance on property owned by the Partnership only when the cost of such insurance is paid by tenants who net lease such properties from the Partnership. No such Net Lease shall provide that the lessee is required to purchase insurance through an Affiliate of the General Partner. 4. At any time, the Partnership may borrow money on a short-term basis from an Affiliate of the General Partner in connection therewith pay interest to such Affiliate at a rate equal to the lesser of (i) one percent above the prime interest rate at the Bank of New York or (ii) the rate that would be 22 charged to the Partnership by unrelated lending institutions on comparable loans for the same purpose in the locality of the property. Such borrowings shall be non-recourse to the Partnership, unless the General Partner shall otherwise consent in writing. 5. All of the Partnership's expenses shall be billed directly to and paid by the Partnership. The Partnership shall reimburse the General Partner or its Affiliates for: (a) the actual cost to the General Partner or its Affiliates of goods and materials used for and by the Partnership and obtained from unaffiliated parties and (b) the costs incurred by the General Partner or its Affiliates in performing administrative services necessary to the prudent operation of the Partnership; provided, however, that the amounts charged to the Partnership for services performed pursuant to this clause (c) shall not exceed the lesser of (1) the actual cost of such services, or (2) the amount which the Partnership would be required to pay to independent parties for comparable services in the same geographic location. No reimbursement shall be made to the General Partner or its Affiliates for: (x) services for which the General Partner or its Affiliates are entitled to compensation by way of a separate fee, or (y) any of the salaries, fringe benefits, travel expenses, and other administrative items incurred by or allocated to any controlling person (as defined herein) of the General Partner or its Affiliates. The Partnership's annual report to the Limited Partners shall contain a breakdown of the costs reimbursed to the General Partner or its Affiliates. Within the scope of the annual audit of the General Partner's (or such Affiliates) financial statement, the independent certified public accountant shall verify the allocation of such costs to the Partnership. The method of review shall at minimum provide (1) a review of time records of individual employees, the costs of whose services were reimbursed; and (2) a review of the specific nature of the work performed by each such employee. The methods of review shall be in accordance with generally accepted auditing standards and shall accordingly include such tests of the accounting records and such other auditing procedures which the General Partner's (or such Affiliate's) independent certified public accountants consider appropriate in the circumstance. The additional costs of such review shall be itemized by such accountants on a partnership by partnership basis and may be reimbursed to the General Partner (or such Affiliate) in accordance with this Paragraph G(9) only to the extent that such reimbursement, when added to the cost for administrative services rendered, does not exceed the competitive rate for such services as determined in this Paragraph G(9). As used herein, the term "controlling person" shall mean any person, whatever his title, who performs executive or senior management functions for the General Partner or Affiliate similar 23 to those of executive or senior management officers, directors or partners, or those holding 5% or more equity interest in the General Partner or Affiliate or a person having the power to direct or cause the direction of the management level employees and policies of the General Partner or Affiliate, whether through the ownership of voting securities, by contract, or otherwise. For the purposes of this Paragraph G(5), not every person who carries a title such as vice president or senior vice president, corporate secretary or treasurer, shall be considered a controlling person, unless such person performs the functions or has the powers described above, and even in the absence of a specific title, an executive in a truly senior management position shall be considered a controlling person. H. General Restrictions. 1. The Partnership shall obtain a written evaluation report signed by an independent appraiser prior to the purchase of any real property by the Partnership and shall not purchase any such real property if the purchase price and all Acquisition Fees paid by the Partnership in connection with the acquisition exceed the appraised value set forth in such report. All such appraisals whether or not the real property which is the subject of such appraisal is purchased by the Partnership, shall be at the Partnership's expense or at the expense of the seller, shall be retained for five years and shall be available for inspection and duplication by the Limited Partners. 2. The Partnership may not sell any property in a transaction in which an Affiliate of the General Partner acts as a real estate broker unless the provisions of Paragraph G(2) of this Article X are complied with. 3. The Partnership shall not own any land where the buildings and improvements thereon are owned by an Affiliate of a General Partner. 4. The Partnership may not acquire property in exchange for interests in the Partnership. 5. The Partnership shall not give an Affiliate of a General Partner the exclusive right to sell property for the Partnership. 6. The Partnership shall not pay, directly or indirectly, any Acquisition Fee to an Affiliate of a General Partner in connection with the purchase of property acquired with proceeds obtained from Cash From Sales or Cash From Financings. 7. The aggregate borrowings of the Partnership shall not exceed 66-2/3,% of the purchase price of all properties 24 purchased by the Partnership on a combined basis. The foregoing restriction may be waived or lessened by the General Partner without the approval of the Limited Partners, but only with the prior written consent of the Commissioner of Corporations of the Sate of California or pursuant to a change in the published Rules of the Commissioner. In no event, however, shall the aggregate borrowings of the Partnership exceed the sum of 85% of the purchase price of all properties which have not been refinanced and 85% of the aggregate fair market value of all refinanced properties. 8. Except as set forth in Paragraph G(5) of this Article X, all expenses of the Partnership shall be billed directly to and paid by the Partnership. 9. The Partnership funds shall not be commingled with the funds of any other natural person. partnership, corporation, association or other legal entity. 10. The Partnership shall not finance the purchase of real property by use of a wrap around note and mortgage "all-inclusive" note and deed of trust) unless (a) neither the General Partner nor any Affiliate of the General Partner receives interest on the amount of the underlying encumbrance in excess of that payable to the lender on such underlying encumbrance, (b) the Partnership receives credit on its obligation under the all-inclusive note for payments made directly on the underlying encumbrance and (c) all payments on the underlying encumbrance shall be made by the Partnership or, in the alternative, payments by the Partnership on the wrap around note are made to a third party collecting agent which in turn disburses such payment, first to the holder of such underlying encumbrance, and thereafter to the holder of the wrap around note. 11. The Partnership shall not create or assume any indebtedness for borrowed money unless the documents pursuant to which such indebtedness is created or assumed provide, and the General Partner shall cause any and all such documents assumed or entered into by or on behalf of the Partnership to provide, that the parties thereto other than the Partnership (including any Affiliates of the General Partner) shall look only to the assets of the Partnership for satisfaction of the liabilities and obligations of the Partnership under such documents (including without limitation those arising from representations, warranties, covenants and agreements made in or in connection with such documents) and that such other parties shall have no recourse to the Partners or the separate assets of the Partners for the satisfaction of such liabilities and obligations. The Partnership shall not incur any indebtedness including indebtedness under a shared appreciation or similar mortgage wherein the lender will have or acquire, at any time as a result 25 of making the loan, any direct or indirect interest in the profit, capital or property of the Partnership other than as a creditor. 12. The Partnership shall not enter into any contracts with the General Partner or with any Affiliates of the General Partner to construct or develop Partnership properties or to render any services in connection with such construction or development. 13. The Partnership shall not acquire any property which is under construction unless completion of the improvements on the property is guaranteed at the contracted price by (a) an adequate completion bond; (b) a letter of credit issued by a bank organized and doing business under the laws of the United States or any State or of the District of Columbia which is subject to supervision by Federal, State or District of Columbia authority and which has a combined capital and surplus of not less than $5,000,000; or (c) a completion guarantee by a third person, provided that such person has a net worth of at least $10,000,000 and had in the most recent fiscal year or twelve-month period prior to the giving of such guarantee net income of at least $2,000,000. 14. Unimproved or non-income producing property shall not be acquired except in amounts and upon terms which can be financed by the net proceeds derived from the sale of limited partner interests. No more than 10% of the net proceeds derived from Distributable Cash from Operations. 15. No portion of the net proceeds derived from the sale of limited partner interests may be invested in junior mortgages or deeds of trust; provided, however, that the acquisition or granting of a junior mortgage or deed of trust in connection with the sale, purchase, financing or refinancing of real property of the Partnership shall not be deemed to be investing in junior mortgages or deeds of trust. 16. Any agreement entered into between the Partnership and the General Partner or its Affiliates must be terminable by the Partnership, without penalty, upon 60 days' notice. I. Compensation of General Partner. The General Partner shall not, in its capacity as General Partner, receive any salary, fees, profits or distributions from the Partnership except profits, distributions, fees and allocations to which they may be entitled under Articles VIII and IX. J. Other Business of Partners. Except as otherwise specifically provided herein, any of the Partners and any shareholder, officer, director, employee or other person holding 26 a legal or beneficial interest in an entity which is a Partner may engage in or possess an interest in other business ventures of every nature and description, independently or with others, including, but not limited to, the ownership, financing, leasing, operation, management, syndication, brokerage and development of real property and neither the Partnership nor the Partners shall have any right by virtue of this Agreement in and to such independent ventures or to the income or profits derived therefrom. ARTICLE XI STATUS OF LIMITED PARTNERS AND SPECIAL PARTNERS The Limited Partners and Special Partners shall not participate in the management or control of the Partnership's business nor shall they transact any business for the Partnership nor shall they have the power to sign for or bind the Partnership, said powers being vested solely and exclusively in the General Partner. The Limited Partners and Special Partners shall not be bound by, or be personally liable for, the expenses, liabilities or obligations of the Partnership, except to the extent of their Capital Accounts. The Partnership Interest owned by a Limited Partner or Special Partner shall be fully paid and nonassessable. In addition to those described elsewhere in the Partnership Agreement, the Limited Partners and Special Partners shall have the following rights, powers, privileges, duties and liabilities: (a) The Limited Partners and Special Partners shall have the right to have full and true information of all things affecting the Partnership and shall be entitled to such reports as are set forth in Article XII hereof. (b) The Limited Partners and Special Partners shall receive from the Partnership the share of the distributions provided for in this Agreement in the manner and at the times provided for in this Agreement. (c) A Limited Partner or a Special Partner shall have the right to demand the return of his Capital Account only on the dissolution and winding up of the Partnership in accordance with Article XVIII hereof. No Limited Partner shall have priority over any other Limited Partner either as to the return of capital or as to profits, losses or distributions. No Limited Partner shall have right to bring an action for partition against the Partnership. 27 (d) Limited Partners holding more than fifty percent (50%) of the outstanding Limited Partner Interests may (1) remove the General Partner and (2) in the event that a vacancy shall occur in the office of General Partner, subject to the provisions B(5) of Article XV, elect a successor General Partner upon retirement, removal, death, adjudication of incompetence to manage his person or estate, adjudication of bankruptcy under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in lieu thereof), dissolution or other cessation to exist as a legal entity of the General Partner. (e) Each Limited Partner and Special Partner shall have the right to a complete list of names and addresses and interests of all Limited Partners as set forth in the records of the Partnership, upon written request to the Partnership, provided such request is for a purpose reasonably related to such Partner's interest in the Partnership. A reasonable charge for copy work may be charged by the Partnership. ARTICLE XII BOOKS OF ACCOUNT AND REPORTS Proper books of account shall be kept by the General Partner wherein shall be entered all transactions, matters and things relating to the Partnership's business as are usually entered into books of account kept by persons engaged in a business of a like character. The books of account shall be kept at the principal place of business of the Partnership and each Partner (or any duly constituted designee of a Partner) shall at all times during reasonable business hours have free access to and the right to inspect and copy the same. There shall be established for each Partner on the books of the Partnership a Capital Account which shall show the amount of each capital contribution made by such Partner (or his, her or its predecessor in the case of an assignment of a Partnership Interest),. adjusted to reflect such Partner's proportion of profits and losses (determined according to Paragraph B of Article VIII) and of withdrawals and distributions and other items to the extent properly creditable to or chargeable against such Capital Account. Within 75 days after the end of each Fiscal Year, the General Partner shall deliver to each Limited Partner adequate information to enable each Limited Partner to complete and file his Federal tax return. 28 Copies of each such report shall be distributed to each Limited Partner within 60 days after the end of any such quarter. If deemed appropriate by the General Partner such notice may be prepared and distributed to Limited Partners more frequently than quarterly. The General Partner shall send such other reports and information, if any, to the Limited Partners as the General Partner may deem necessary or appropriate, including but not limited to reports containing the name and address of each person who has had an unconditional written offer to purchase Partnership property rejected by the Partnership (such report shall also contain the price and terms offered). Copies of each report distributed to the Limited Partners shall, to the extent required by applicable law, be filed concurrently with relevant state "Blue Sky" authorities ARTICLE XIII FISCAL YEAR The Fiscal Year of the Partnership shall begin on the first day of January and end on the thirty-first day of December in each year. ARTICLE XIV PARTNERSHIP FUNDS The funds of the Partnership shall be deposited in such account or accounts as shall be designated by the General Partner and all withdrawals against such accounts shall be made only by one of the General Partner or by its properly delegated agents. ARTICLE XV TRANSFER OF PARTNERSHIP INTEREST A. In General. A Limited Partner or Special Partner may not sell, assign, transfer or otherwise dispose of, or pledge, hypothecate or in any manner encumber, his interest in the Partnership or any part thereof except as permitted in this Article, and any act in violation of this Paragraph A shall not be binding upon or recognized by the Partnership regardless of whether the General Partner shall have knowledge thereof. B. General Partner. 1. Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, pursuant to 29 Paragraph (d) of Article XI and with the same proportionate vote as provided therein, may remove a General Partner from the Partnership. Written notice of the removal of the General Partner shall be served upon the General Partner either by certified or by registered mail, return receipt requested. or by personal service. Said notice shall set forth the day upon which the removal is to become effective. Upon receipt of notice, the General Partner shall cause an accounting to be prepared covering the transactions of the Partnership since the end of the previous Fiscal Year, and it shall not thereafter sell or dispose of or allow the sale or disposition of any Partnership asset unless such sale or disposition was the subject of a contract entered into by and binding upon the Partnership prior to the date upon which the notice was received by the General Partner. 2. Until the dissolution of the Partnership otherwise occurs, the General Partner shall not voluntarily take any steps to dissolve itself nor shall the General Partner voluntarily retire; provided, however, that nothing in this Partnership Agreement shall be deemed to prevent the merger or reorganization of Carey Diversified LLC into or with any other entity organized under the laws of the United States or any state thereof or the transfer of all the limited liability company interests of Carey Diversified LLC and the assumption of the rights and duties of the General Partner by, in the case of a merger, reorganization or consolidation, the surviving entity by operation of law. 3. Upon the removal, adjudication of bankruptcy or insolvency, dissolution or other cessation to exist as a legal entity of the General Partner, the General Partner's Partnership Interest and interest in Distributable Cash From Operations and its subordinated interest in Cash From Sales and Cash From Financings shall be purchased by the Partnership for a purchase price equal to the fair market value thereof determined pursuant to the provisions of Section 4 of this Paragraph B. The purchase price of such interest shall be paid by the Partnership to the General Partner by the promissory note of the Partnership, payable to the General Partner or its order, having a face amount equal to such purchase price, containing provisions as would be usual and customary in a commercial promissory note, bearing interest at a rate per annum equal to one percent above the prime interest rate at The Bank of New York, payable annually, with principal and all unpaid accrued interest subject to mandatory prepayment from all Cash From Sales and Cash From Financings, and the remaining unpaid principal balance and unpaid accrued interest on such promissory note due and payable five years from the date of the General Partner's retirement, expulsion, adjudication of bankruptcy or insolvency, dissolution or other cessation to exist as a legal entity. 30 4. The fair market value of the General Partner's interest purchased by the Partnership pursuant to Section 3 of this Paragraph B shall be determined by agreement between the General Partner and the Partnership (which agreement shall require the approval of the Limited Partners holding more than fifty percent (50%) of the outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI). If the General Partner and the Partnership cannot agree upon the fair market value of such Partnership Interest within 30 days after the occurrence of the event upon which such interest of the General Partner is to be purchased by the Partnership, the fair market value thereof shall be determined in the manner provided by the laws of the State of California for the determination of controversies by arbitration, the General Partner to choose one arbitrator, the Partnership to choose one arbitrator and the two arbitrators so chosen to choose a third arbitrator. The decision of a majority of said arbitrators as to the fair market value of such Partnership interest shall be final and binding and may be enforced by legal proceedings. The General Partner and the Partnership shall each compensate the arbitrator appointed by it and the compensation of the third arbitrator shall be borne equally by such parties. C. Limited Partners and Special Partners. 1. The General Partner may, pursuant to this Article XV, (a) admit as a substituted Limited Partner or Special Partner any successor in interest to a Limited Partner or Special Partner either deceased or under legal disability, and (b) admit as substituted Limited Partners or Special Partners assignees of Limited Partners or Special Partners. 2. A substituted Limited Partner or Special Partner is a person admitted to all the rights of a Limited Partner or Special Partner. An assignee is a person to whom a Limited Partner or Special Partner has assigned his interest in the Partnership but who has not become a substituted Limited Partner or Special Partner. An assignee shall have no right to require any information or account of the Partnership's transactions or to inspect the Partnership's books but shall only be entitled to receive the share of the profits, or the return of the capital contribution, to which his assignor would otherwise be entitled as set forth in Section 5 of this Paragraph C. 3. No assignee of the whole or any portion of a Limited Partner's or Special Partner's interest in the Partnership shall have the right to become a substituted Limited Partner or Special Partner in place of his assignor unless all of the following conditions are satisfied: 31 (a) The written consent of the General Partner to such substitution shall be obtained, the granting or denial of which shall be within the absolute discretion of the General Partner; (b) The duly executed written instrument of assignment setting forth the intention of the assignor that the assignee become a substituted Limited Partner or Special Partner in his place shall have been filed with the Partnership; (c) The interests in the Partnership being acquired by the assignee shall consist of at least five (5) percent of the limited partner or special partner interest and, if the assignor shall retain any partner interest, such retention shall consist of at least five (5) percent of the limited partner or special partner interest; (d) The assignor and assignee shall execute and acknowledge such other instruments as the General Partner may deem necessary or desirable to effect such assignment and admission, including the written acceptance and adoption by the assignee of the provisions of this Agreement and his execution, acknowledgment and delivery to the General Partner of a Power of Attorney, the form and content of which are more fully described in Article XIX hereof; and (e) The assignee shall pay a transfer fee not to exceed $50.00 per transaction to the Partnership. 4. Any person admitted to the Partnership as a Partner shall be subject to all of the provisions; of this Agreement as if originally a party to it. 5. Subject to the provisions of Section 11 of this Paragraph C. compliance with the suitability standards imposed by the Partnership, applicable "Blue Sky" laws and the applicable rules of any other governmental authority, a Limited Partner or Special Partner shall have the right to assign the whole or any portion (not less than five (5) percent of the limited partner or special partner interest and, if he shall retain any limited partner or special partner interest, subject to his retaining not less than five (5) percent of the limited partner or special partner interest) of his Partnership Interest by a written assignment the terms of which are not in contravention of any of the provisions of this Agreement, which assignment has been executed by the assignor and received by the Partnership and recorded on the books thereof. Any assignment in contravention of any of the provisions of this Section 5 shall be of no force and effect and shall not be binding upon or recognized by the Partnership. 32 (a) Except as provided in Subsection (c) below, Paragraph A of Article VIII hereof and Paragraph D or Article IX hereof, an assignee of a Partner's Partnership Interest shall be entitled to receive distributions of cash or other property from the Partnership attributable to the interest acquired by reason of such assignment from and after the effective date of the assignment of such interest to him. The "effective date" of an assignment of an interest in the Partnership as used in this Subsection shall be the last day of the month in which the written instrument of assignment, in form and substance satisfactory to the General Partner, is received by the General Partner. (b) The net profits and net losses attributable to an interest in the Partnership assigned during any year shall be divided among and allocated in accordance with the provisions of Paragraph A of Article VIII hereof. (c) Anything herein to the contrary notwithstanding. both the Partnership and the General Partner shall be entitled to treat the assignor of such interest as the absolute owner thereof in all respects, and shall incur no liability for distributions of cash or other property made in good faith to him, until such time as the written assignment has been received by, and recorded in books of, the Partnership. 6. The General Partner may elect to treat an assignee who has not become a substituted Limited Partner or Special Partner as a substituted Limited Partner or Special Partner in the place of his assignor should they deem, in its absolute discretion, that such treatment is in the best interests of the Partnership for any of its purposes or for any of the purposes of this Agreement. 7. No consent of any of the Limited Partners or Special Partners is required to effect the substitution of a Limited Partner or Special Partner, except that a Limited Partner or Special Partner who assigns his interest in the Partnership must evidence his intention that his assignee be admitted as a substituted Limited Partner or Special Partner in his place and must execute such instruments as the General Partner may in its absolute discretion determine to be necessary or desirable in connection therewith. 8. Upon the admission of a Limited Partner or Special Partner (whether as a result of his purchase of partner interests from the Partnership or his admission as a substituted Limited Partner or Special Partner), the General Partner shall make an appropriate amendment to the list of the Partner's names, 33 addresses, Contributions and Capital Accounts referred to in Article XII hereof. 9. Upon the death or legal incompetency of an individual Limited Partner or Special Partner. his personal representative shall have all of the rights of a Limited Partner or Special Partner for the purpose of settling or managing his estate, and such power as the decedent or incompetent possessed to constitute a successor as an assignee of its interest in the Partnership and to join with such assignee in making application to substitute such assignee as a Limited Partner or Special Partner. However, such personal representative shall not have the right to become a substituted Limited Partner or Special Partner in the place of his predecessor in interest unless the conditions of Section 2 of this Paragraph C (other than the requirement that the assignor execute and acknowledge instruments) are first satisfied. 10. Upon the adjudication of bankruptcy or insolvency, dissolution or other cessation to exist as a legal entity of a Limited Partner or Special Partner not an individual, the authorized representative of such entity shall have all of the rights of a Limited Partner or Special Partner for the purpose of effecting the orderly winding up and disposition of the business of such entity and such power as such entity possessed to constitute a successor as an assignee of its interest in the Partnership and to join with such assignee in making application to substitute such assignee as a Limited Partner or Special Partner. However, such authorized representative shall not have the right to become a substituted Limited Partner or Special Partner in the place of his predecessor in interest unless the conditions of Section 2 of this Paragraph C (other than the requirement that the assignor execute and acknowledge instruments) are first satisfied. 11. (a) No assignment or transfer of an interest in the Partnership may be made which would result in Limited Partners or Special Partners and assignees of Limited Partners or Special Partners owning, directly or indirectly, individually or in the aggregate, more than twenty percent (20%) of the equity interests of a General Partner or any Affiliate of a General Partner as defined in Section 1504(a)) of the Code. If any such assignment or transfer would otherwise be made by bequest, inheritance or operation of law, the transferee shall not become a Partner and the interest in the Partnership transferred shall be automatically redeemed by the Partnership immediately prior to such transfer in the same manner as provided in Subsection (b)(4) of this Section 11. (b) Anything to the contrary contained herein notwithstanding: 34 (1) Except in the case of the Merger, in any twelve (12) consecutive month period no assignment or transfer of a limited partner interest may be made if as a result thereof the aggregate total of limited partner interests assigned and/or transferred in such period would exceed forty percent (40%) of the outstanding limited partner interests. This limitation is hereinafter referred to as the "forty percent (40%) limitation". (2) A Limited Partner may assign or transfer his Partnership Interest to: (i) his spouse (unless legally separated), child or ancestor, or (ii) a corporation, partnership, trust or other entity, fifty-one percent (51%) of the equity interest of which is owned by such Limited Partner and/or any of the persons specified in clause (i) so related to such Limited Partner, provided, however, that such transfers are subject to the forty percent (40%) limitation. (3) Subsection (b)(1) of this Section 11 shall not apply to a transfer by gift, bequest or inheritance or a transfer to the Partnership and, for purposes of the forty percent (40%) limitation, any such transfer shall not be treated as such. (4) If, after the forty percent (40%) limitation is reached in any consecutive twelve (12) month period, a transfer of a Partnership Interest would otherwise take place by operation of law (but not including any transfer referred to in Subsection (b)(3) of this Section 11), then the transferee shall not become a Limited Partner and such Partnership Interest shall be automatically redeemed by the Partnership immediately prior to such transfer for a price equal to the fair market value of said interest on such date of transfer. The price shall be paid within ninety (90) days after the date of the transfer and redemption. If the Partnership and the transferor do not agree upon the fair market value of the Partnership Interest, the purchase price shall be determined by arbitration. The purchase price shall be paid in cash within ten (10) days after such determination. (c) No transfer or assignment of any limited partner interest shall be made if it would result in the Partnership's being treated as an association taxable as a corporation for tax purposes. The General Partner, in its sole discretion, may, on behalf of the Partnership, impose any restrictions or transfers or assignments of limited partner interests it may deem appropriated to give effect to the preceding sentence. The General Partner shall incur no liability to any Limited Partner, prospective investor or assignee for any action or inaction in 35 connection with the foregoing, provided that the General Partner acted in good faith and such course of conduct did not constitute negligence or misconduct of the General Partner. 12. The General Partner, in its absolute discretion, may cause the Partnership to make, refrain from making, or once having made, to revoke, the election referred to in Section 754 of the Code, and any similar election provided by state or local law, or any similar provision enacted in lieu thereof. 13. Until the dissolution of the Partnership, the General Partner shall not take any voluntary steps to dissolve itself nor shall the General Partner voluntarily withdraw or resign. ARTICLE XVI MEETINGS AND AMENDMENT OF LIMITED PARTNERSHIP CERTIFICATE AND AGREEMENT A. Amendment of Limited Partnership Certificate The General Partner shall amend and record the Certificate of Limited Partnership of the Partnership without additional consent of Limited Partners when, pursuant to the terms of this Partnership Agreement: 1. There is a change in the name of the Partnership; 2. The General Partner withdraws, is removed, is adjudicated bankrupt under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in lieu thereof), is adjudicated incompetent to manage his person or estate or dies, or a person is admitted as the General Partner; 3. There is a false or erroneous statement in the Certificate; 4. A time is fixed for dissolution of the Partnership or the return of contributions and such time has not been specified in the Certificate; 5. The Partners desire to make a change in any other statement in the Certificate in order that it shall accurately represent the agreement among them; 6. There is a change in the character of the business of the Partnership; 7. There is a change in the address of the Partnership's principal place of business or its California office; 36 8. There is a change in the time as stated in the Certificate for the dissolution of the Partnership or for the return of a contribution; and There is a change in the address of the California agent for service of process designated in the Certificate of Limited Partnership (unless such agent is a corporation) or a new agent for service of process is appointed. B. Amendments to the Agreement. 1. Amendments to this Partnership Agreement may be proposed by the General Partner or by Limited Partners holding ten percent (10%) or more of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. Following such proposal, the General Partner shall submit to the Partners a verbatim statement of any proposed amendment and an opinion of counsel, who may be counsel to the Partnership, as to the legality of such amendment and the effect of such amendment on the liability of Limited Partners for the debts of the Partnership. The General Partner shall include in any such submission the General Partner's recommendations as to the proposed amendment. The amendment shall become effective only upon the written consent or affirmative vote of holders holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. 2. Any provision to the contrary herein notwithstanding, the General Partner may, without the consent of the Limited Partners, make the following amendments to this Agreement: a. Any amendments to Article VIII and/or Article IX of this Agreement if the Partnership is advised by its accountants or legal counsel at any time that the allocations provided in those Articles are not likely to be respected for Federal income tax purposes, either because of the promulgation of Treasury Regulations under Section 704 of the Code or other developments in the law. The General Partner is empowered to amend such provisions to the minimum extent necessary in accordance with the advice of the accountants and counsel to effect the allocations provided in this Agreement . New allocations made by the General Partner in reliance upon the advice of the accountants or counsel described above shall be deemed to be made pursuant to the fiduciary obligation of the General Partner to the Partnership and the Limited Partners, and no such new allocation shall give rise to any claim or cause of action by 37 any Limited Partner, provided that the General Partner acted in good faith; and b. In the event that the State of California amends the California Revised Limited Partnership Act in any manner and, as a result of such amendment, counsel to the Partnership is unable to give the Partnership an opinion to the effect that the Partnership will be treated as a partnership for Federal income tax purposes and not as an association taxable as a corporation, then the General Partner may decide in its sole discretion to reconstitute the Partnership under the laws of another state. 3. Any provision to the contrary contained herein notwithstanding, the General Partner may, without the consent of the Limited Partners, amend this Agreement (a) to add to the representations, duties or obligations of a General Partner or to surrender any right or power granted to a General Partner herein, for the benefit of the Limited Partners, (b) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein or to make any other provision with respect to matters or questions arising under this Agreement which will not be inconsistent with the provisions of this Agreement, (c) to delete any provision from this Agreement or to add any provision to this Agreement required to be so deleted or added by the Staff of the Securities and Exchange Commission or by a State "Blue Sky" Commissioner or similar such official, which addition or deletion is deemed by such Commission or official to be for the benefit or protection of the Limited Partners, and (d) to change administrative or other provisions of this Agreement in a manner which, in the opinion of the General Partner, will permit the most profitable and/or efficient operation of the Partnership; provided, however, that no amendment shall be adopted pursuant to this Section 3 unless the adoption thereof (i) is for the benefit of, or not adverse to, the interests of the Limited Partners, (ii) is consistent with Article IV and Paragraph A of Article X hereof, (iii) does not affect the distribution of Distributable Cash From Operations, Cash From Sales and Cash From Financings or the allocation of profits and losses among the Limited Partners or between the Limited Partners and the General Partner and (iv) does not affect the limited liability of the Limited Partners or the status of the Partnership as a partnership for Federal income tax purposes. 4. Upon amendment of this Agreement, the Certificate of Limited Partnership shall also be amended if necessary to reflect such change. 38 5. Any amendment to the Partnership Agreement which modifies the compensation or distributions to which a General Partner is entitled or which affects the duties of a General Partner must be consented to by the General Partner before becoming effective. 6. In the event there is a change in the Federal income tax laws or regulations which result in the Partnership being taxed as an association taxable as a corporation, the General Partner may cause the Partnership to conduct its business so as to be treated as a real estate investment trust for Federal income tax purposes. C. Meetings of the Partnership. Meetings of the Partnership may be called by the General Partner and shall be called by them upon the written request of Limited Partners holding ten percent (10%) or more of the outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. Upon receipt of such a written request, stating the purpose of the proposed meeting, the General Partner shall provide each Partner, within 10 days of such request, written notice (either by personal service or certified mail or by express or other overnight delivery service) of a meeting and the purpose of such meeting. Such meeting shall be held not less than 10 days nor more than 60 days after the receipt of such request. Included with the notice shall be a detailed statement of the action proposed, including a verbatim statement of the wording of any resolution proposed for adoption by the Limited Partners and of any proposed amendment to the Partnership Agreement. The Partnership will provide for Proxies or written consents which specify a choice between approval or disapproval of each matter to be acted upon at the meeting. Holders of a majority of the limited partner interests entitled to vote, represented in person or by Proxy, shall constitute a quorum at a meeting of the Limited Partners. To the extent not consistent with this Paragraph C, all meetings shall be governed by the provisions of Section 15637 of the Act. The General Partner may establish a record date for any meeting, subject to the limitations of Section 15637(j) of the Act. ARTICLE XVII TERM The Partnership shall terminate on December 31, 2020, unless sooner dissolved pursuant to the provisions of Article XVIII hereof as otherwise provided by law. ARTICLE XVIII 39 DISSOLUTION A. Events Requiring Dissolution. The Partnership shall be dissolved upon the happening of any of the following events: 1. The retirement, removal, adjudication of bankruptcy under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in lieu thereof), of the General Partner, the dissolution or other cessation to exist as a legal entity of the General Partner, unless the Limited Partners agree in writing to continue the business of the Partnership and to admit one or more General Partners. 2. The Partnership is adjudicated bankrupt under Chapter 7 of the Federal Bankruptcy Code (or any similar law or provision enacted in lieu thereof). 3. The vote of Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests held by all Limited Partners, with the same proportionate vote as provided in paragraph (d) of Article XI. 4. The disposition of all interests in the real, personal and mixed property and other assets of the Partnership. 5. December 31, 2020. B. Distributions on Dissolution. Upon the dissolution of the Partnership the General Partner who has not wrongfully dissolved the Partnership shall wind up the affairs of the Partnership. If there is no such General Partner, the Limited Partners shall wind up the affairs of the Partnership. The Partners winding up the affairs of the Partnership shall take full account of the Partnership assets and liabilities and all assets shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom shall be applied and distributed in the following order: (1) to creditors (including Partners who are creditors to the extent permitted by law), in the order of priority as provided by law, (2) to the Partners in accordance with their respective Capital Accounts, determined after the application of Articles VIII and IX hereof and (3) to the Partners in accordance with the provisions of Paragraph E of Article IX hereof. Notwithstanding anything to the contrary, in the event the Partnership is "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), liquidating distributions shall be made pursuant to the previous sentence by the end of the taxable year in which the Partnership is liquidated, or, if later, within 90 days after the date of such liquidation. Distributions pursuant to the 40 preceding sentence may be made to a trust for the purposes of an orderly liquidation of the Partnership by the trust in accordance with the Act. C. Contributions by the General Partner. In the event that, upon the liquidation of the Partnership, a General Partner shall have a negative balance in the General Partner's Capital Account then the General Partner shall contribute to the capital of the Partnership an amount equal to such negative balance in the General Partner's Capital Account. ARTICLE XIX POWER OF ATTORNEY Concurrently with the written acceptance and adoption of the provisions of this Agreement, each Limited Partner and Special Partner shall execute and deliver to the General Partner a Power of Attorney in form acceptable to the General Partner in which the General Partner is constituted and appointed as the attorney-in-fact for such Limited Partner or Special Partner with power and authority to act in his name and on his behalf in the execution, acknowledgment and filing of documents, which will include but not be limited to a Certificate of Limited Partnership, as well as amendments thereto, under the laws of the State of California and under the laws of any other state in which the General Partner deems it advisable to file such a certificate; any other instrument which may be required to be filed by the Partnership under the laws of any state or by any governmental agency, or which the General Partner deems it advisable to file; and any documents which may be required to effect the continuation of the Partnership, the admission of an additional or substituted Limited Partner or the dissolution and termination of the Partnership, provided such continuation, admission or dissolution and termination are in accordance with the terms of this Agreement. The Power of Attorney so granted by each Limited Partner and Special Partner to the General Partner is a Special Power of Attorney coupled with an interest, is irrevocable and shall survive the death or legal incapacity of the Limited Partner or Special Partner; may be exercised by the General Partner for each Limited Partner or Special Partner by a facsimile signature of one of its officers or by listing all the Limited Partners and Special Partners executing any instrument with a single signature of one of its officers acting as attorney-in-fact for all of them; and shall survive the delivery of any assignment by a Limited Partner or Special Partner of the whole or any portion of his interest in the Partnership; except that where the assignee thereof has been approved by the General Partner for admission to 41 the Partnership as a substituted Limited Partner or Special Partner, the Power of Attorney shall survive the delivery of such assignment for the sole purpose of enabling the General Partner to execute, acknowledge and file any instrument necessary to effect such substitution. The Power of Attorney so granted by each Limited Partner to the General Partner shall not authorize the General Partner to act on behalf of Limited Partners in any situation in which this Agreement requires the consent of Limited Partners. ARTICLE XX LIMITATIONS ON LIABILITY; LITIGATION Except as provided in his Subscription Agreement, no Limited Partner or Special Partner shall be liable (i) as a General Partner unless, in addition to the exercise of his rights and powers as a Limited Partner or Special Partner, he takes part in the management or control of the Partnership's business or (ii) to the Partnership or to a General Partner unless a liability of the Partnership or of the General Partner, as the case may be, is founded upon the unauthorized activity of such Limited Partner or Special Partner in attempting to take part in the control of the Partnership's business or misstatements contained in such Partner's Subscription Agreement delivered in connection with his purchase of limited partner interests. The General Partner is hereby authorized to prosecute, defend, settle or compromise actions or claims at law or in equity at the Partnership's expense as may be necessary or proper to enforce or protect the Partnership's interests. The General Partner shall satisfy any judgment, decree or decision of any court, board or authority having jurisdiction or any settlement of any suit or claim prior to judgment or final decision thereon first, out of any insurance proceeds available therefor, next out of the Partnership's assets and income and finally out of the assets and income of the General Partner. 42 ARTICLE XXI MISCELLANEOUS All notices under this Agreement shall be in writing and shall, except as otherwise expressly provided herein, be given to the Partner entitled thereto by personal service or by certified or registered mail, return receipt requested, to the address set forth in this Agreement for such Partner or at such other address as he may specify in writing. Article titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. Whenever the singular number is used in this Agreement and when required by the context, the same shall include the plural, and the masculine gender shall include the feminine and neuter genders and the word "persons" shall include individuals, corporations, firms, partnerships, trusts or other forms of associations. This Agreement may be executed in several counterparts, and all so executed shall constitute one agreement, binding on all of the parties hereto, notwithstanding that all the parties are not signatory to the original or the same counterpart. Subject to the provisions of Article XV, the terms and provisions of this Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, successors and assigns of the respective Partners. Whenever the vote of the Limited Partners is referred to in this Agreement, the General Partner may vote on behalf of such Limited Partners who have by written proxy authorized the General Partner so to do. This Agreement and amendments hereof shall be governed by the laws of the State of California. 43 IN WITNESS WHEREOF, the parties hereto have hereunto set their respective hands as of the day and year first above written. GENERAL PARTNER: CAREY DIVERSIFIED LLC ________________________________________ CORPORATE SPECIAL PARTNER: CAREY MANAGEMENT LLC By:_____________________________________ INDIVIDUAL SPECIAL PARTNER ________________________________________ William Polk Carey LIMITED PARTNERS: CAREY CORPORATE PROPERTY, INC. By:_____________________________________ CAREY DIVERSIFIED LLC By:_____________________________________ 44 All Limited Partners now and hereafter admitted as limited partners of the Partnership pursuant to powers of attorney and authorizations now and hereafter executed in favor of and granted and delivered to the General Partner By: CAREY DIVERSIFIED LLC, General Partner By:_____________________________________ EX-99.17 57 AMEND & RESTATED OPINION OF LTD PARTNERSHIP CPA 5 1 Exhibit 99.17 AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF CORPORATE PROPERTY ASSOCIATES 5 (A California Limited Partnership) THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP of CORPORATE PROPERTY ASSOCIATES 5, a California limited partnership (the "Partnership"), which amends and restates the Amended Agreement of Limited Partnership dated as of June 1, 1983, as amended as of _________, 1997, is made and entered into as of the ____ day of _______, 1997 by and between CAREY DIVERSIFIED LLC, a Delaware limited liability company as general partner and as limited partner, CAREY MANAGEMENT LLC, as Corporate Special Partner, WILLIAM POLK CAREY, as Individual Special Partner, and CAREY CORPORATE PROPERTY, INC., as limited partner, those Persons set forth on Schedule A hereto, as limited partners, and all persons and entities admitted as Limited Partners as provided herein. ARTICLE I FORMATION OF PARTNERSHIP The parties hereby continue the Partnership under the provisions of the California Revised Limited Partnership Act (the "Act") and the rights and liabilities of the Partners shall be as provided in such law and as herein expressly provided. In the event that it shall be necessary for the Partnership to exist in or qualify to do business under the laws of any state or states other than or in addition to the State of California, the parties hereby agree that the Partnership shall take such action as may be necessary to exist or qualify to do business in any state in which such existence or qualification shall be required, provided that in any such event the Partnership shall at all times continue to be a limited partnership formed under and governed by the provisions of the Act. ARTICLE II NAME The business of the Partnership shall be conducted under the name "Corporate Property Associates 5" or under the name "Corporate Property Associates 5 -A California Limited Partnership" in any state or other jurisdiction which requires that the term "limited partnership" be a part of the Partnership's name or under such other name as the General Partner shall hereafter designate in writing to the other Partners. 2 ARTICLE III DEFINITIONS "Acquisition Expenses" means the expenses of the Partnership related to the selection and acquisition of properties by the Partnership, whether or not such properties are acquired, including but not limited to legal fees and expenses, travel and communications expenses, costs of appraisals, non-refundable option payments on property not acquired, accounting fees and expenses, costs of title reports and title insurance, transfer and recording taxes and miscellaneous expenses. Acquisition Expenses shall not include Acquisition Fees. "Acquisition Fees" means the total of all fees and commissions paid by any party in connection with the purchase or development of property by the Partnership, except a development fee paid to a person not an Affiliate of the Partnership in connection with the actual development of a project after the Partnership's acquisition of the land. Included in the computation of such fees or commissions shall be any real estate commission, selection fee, development fee, nonrecurring management fee, or any fee of a similar nature, however designated but not any loan fee ("points"). Acquisition Fees shall not include Acquisition Expenses. "Affiliate" means, with respect to any party hereto, (i) any person directly or indirectly controlling, controlled by or under common control with such party, (ii) any person owning or controlling 10% or more of the outstanding voting securities of such party. (iii) any officer, director or partner of such party or of any person specified in (i) or (ii) above and (iv) any company in which any officer, director or partner of any person specified in (iii) above is an officer, director or partner; provided, however, that for purposes of this definition the term "Affiliate" shall not be deemed to include any person providing legal, underwriting or financial or investment advisory services to the Partnership, the General Partner, or any Affiliate of any of them from time to time. "Agreement" means this Amended and Restated Agreement of Limited Partnership as hereafter amended from time to time. "Appraisal Date" means December 31, 2001. "Capital Account" means, in respect of any Partner, the account maintained for such Partner in accordance with Article XII. "Cash From Financings" means the net cash proceeds realized by the Partnership from the financing of Partnership property or the refinancing of any Partnership indebtedness. "Cash From Sales" means the net cash proceeds realized by the Partnership from the sale, exchange or other disposition 2 3 of any of its assets. Cash From Sales shall not include net cash proceeds realized from the financing of Partnership property or the refinancing of any Partnership indebtedness. "Code" means the Internal Revenue Code of 1986. "Consolidation and Offering Expenses" means all expenses incurred in connection with the formation and qualification of the Subsidiary Partnership, the Merger and in offering the Shares to the former limited partners of the Partnership in exchange for their Partnership Interests under applicable Federal and state law, and any other expenses actually incurred and directly related to the offering of the Shares, including such expenses as: (i) the preparing, printing, filing and delivering of the Registration Statement and the Prospectus (including any amendments thereof or supplements thereto), (ii) the preparing and printing of this Agreement, other solicitation material and related documents and the filing and/or recording of such certificates or other documents necessary to comply with the laws of the State of California for the formation of a limited partnership, the merger of a limited partnership into another limited partnership and for the continued good standing of a limited partnership, (iii) the qualification or registration of the limited liability company interests under state securities or "Blue Sky" laws, (iv) any escrow arrangements, including any compensation to an escrow agent, (v) the filing fees payable to the United States Securities and Exchange Commission and to the National Association of Securities Dealers, Inc. and any costs payable to the New York Stock Exchange for the listing of the Listed Shares, (vi) the fees of the Partnership's counsel, (vii) all advertising expenses incurred in connection therewith, including the cost of all sales literature and the costs related to investor and broker/dealer sales and information meetings and marketing incentive programs and (viii) selling commissions and wholesaling expenses incurred in connection with the sale of the Shares. "Contribution" means any money, property or services rendered, or a promissory note or other binding obligations to contribute money or property, or to render services as permitted by Section 15651 of the Act, which a Partner contributes to the Partnership as capital in that Partner's capacity as Partner pursuant to this Partnership Agreement or any other agreement among the Partners, including any agreement as to value. "Corporate Special Partner" means Carey Management LLC, a Delaware limited liability company. "CPA Partnership" means Corporate Property Associates, a California limited partnership, Corporate Property Associates 2, a California limited partnership, Corporate Property Associates 3, a California limited partnership, Corporate Property Associates 4, a California limited partnership, Corporate Property Associates 6, a California limited partnership, Corporate Property Associates 7, a California 3 4 limited partnership, Corporate Property Associates 8, L.P., a Delaware limited partnership, Corporate Property Associates 9, L.P., a Delaware limited partnership, the Partnership and any other real estate limited partnerships sponsored by W.P. Carey & Co., Inc. or its Affiliates with investment objectives substantially similar to the Partnership's. "Distributable Cash From Operations" means cash receipts from the ordinary day-to-day operations of the Partnership (including all interest on Partnership investments and mortgages held by the Partnership) without deduction for the management fee authorized by Paragraph G(3) of Article X payable to an Affiliate of the General Partner or for depreciation and amortization of intangibles such as organization, underwriting and debt placement costs but after deducting all other expenses, debt amortization and provisions for reserves established by the General Partner which it deems to be reasonably required for the proper operation of the business of the Partnership. "Distributable Cash from Operations" shall not include cash proceeds realized from the sale, exchange or other disposition of assets of the Partnership or from financing of Partnership property or the refinancing of any Partnership indebtedness. "Distribution" means any transfer of money or property by the Partnership to a Partner without consideration. "Fiscal Quarter" means the three-month period ending on the last day of the third. sixth. ninth and twelfth calendar months of each Fiscal Year of the Partnership. "Fiscal Year' means the Fiscal Year specified in Article XIII. "Front-End Fees" means all fees and expenses paid by any party for any services rendered in connection with the organizational or acquisition phase of the Partnership, including Consolidation and Offering Expenses, Acquisition Fees, Acquisition Expenses and any other similar fees, however designated. "General Partner" means any person or entity in his, her or its capacity as general partner of the Partnership and whose name and address are set forth in Article V, or any successor thereto appointed or elected hereunder. "Individual Special Partner" means William Polk Carey. "Investment in Properties" means the amount of gross proceeds of the Offering actually paid or allocated to the purchase, development, construction or improvement of properties acquired by the Partnership, including the purchase of properties, working capital reserves (except that working capital reserves in excess of 5% of the gross proceeds of the Offering shall not be included) and other cash payments such as interest, closing costs, financing fees, taxes and other similar items, but excluding Front-End Fees. 4 5 "Limited Partner" means any person or entity in his, her or its capacity as a limited partner of the Partnership and whose name and address are set forth on the books and records of the Partnership. "Mandatory Distribution Event" means (a) the sale or disposition of a Partnership property to a third party unaffiliated with the Partnership or the General Partner, not including the pledge, mortgage or encumbrance of a property, or of any interest therein, in connection with the financing, refinancing or other leveraging of such property or otherwise or any assignment of any leases or rents related to such property, or (b) the mandatory distribution to holders of Partnership Interests following the Appraisal Date. "Merger" means the merger of the Subsidiary Partnership into the Partnership. "Merger Agreement" means the Agreement of Merger pursuant to which the Subsidiary Partnership is merged with and into the Partnership. "Minimum Gain" shall mean and refer to, at any time, the excess, if any, of the outstanding principal balance of all nonrecourse debt of the Partnership that is secured by an interest in Partnership assets, over the adjusted basis of such assets to the Partnership for Federal income tax purposes. For purposes of the preceding sentence, the term "nonrecourse debt" shall mean a liability of the Partnership with respect to which no Partner has any personal liability. "Nonrecourse Deductions" has the meaning set forth in Sections 1.704-2(b)(1) and 1.704-2(c) of the Treasury Regulations. "Nonrecourse Liabilities" has the meaning set forth in Section 1.704-2(b)(3) of the Treasury Regulations. "Net Lease" means a lease in which the tenant undertakes to pay all or substantially all the cash expenses, excluding debt service, related to the leased property. "Offering" means the offering of the Shares made pursuant to the Prospectus. "Partner" means the General Partner, the Corporate Special Partner, the Individual Special Partner and any Limited Partner where no distinction is required by the context in which the term is used. "Partner Minimum Gain" means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were 5 6 treated as a nonrecourse Liability, determined in accordance with Treasury Regulations Section 1.704-2(i)(4). "Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulations Section 1.704-2(b)(4). "Partner Nonrecourse Deductions" has the meaning set forth in Treasury Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Debt for the Partnership taxable year shall be determined in accordance with the rules of Treasury Regulations Section 1.704-2(i)(2). "Partnership" means Corporate Property Associates 5, a California limited partnership. "Partnership Interest" means the interest of each Partner in the profits, losses, distributions, capital and assets of the Partnership. "Partnership Minimum Gain" has the meaning set forth in Treasury Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in Partnership Minimum Gain, for a Partnership taxable year shall be determined in accordance with the rules of the Treasury Regulations. "Prospectus" means the final prospectus of the General Partner pursuant to which the Partnership will offer up to 23,654,898 Shares as the same may at any time and from time to time be amended or supplemented after the effective date of the Registration Statement. "Proxy" means a written authorization signed by a Partner or the Partner's attorney-in-fact giving another person the power to vote with respect to the Partnership Interest of that Partner. "Signed," for the purpose of this paragraph, means the placing of the Partner's name on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the Partner or the Partner's attorney-in-fact. "Special Partners" means the Corporate Special Partner and the Individual Special Partner. "Registration Statement" means the General Partner's Registration Statement on Form S-4 filed with the Securities and Exchange Commission in the form in which it becomes effective, as the same may at any time and from time to time thereafter be amended or supplemented. "Shares" means Shares of the General Partner. 6 7 "Subsidiary Partnership" means Fifth Subsidiary, L.P., a California limited partnership, which is a subsidiary of the General Partner. ARTICLE IV PURPOSE The business and purpose of the Partnership is to invest in and own real property or interests therein (including leasehold estates) or appurtenances thereto as well as personal or mixed property connected therewith which is income-producing or capable of improvement to become income-producing within a reasonable time after acquisition. The Partnership may enter into ventures, partnerships and other business arrangements with respect to real property as deemed prudent by the General Partner in order to achieve successful operations for the Partnership. Operations of the Partnership may be conducted wherever, in the opinion of the General Partner and not in violation of the general restrictions described in Paragraph H of Article X the factors involved appear to be favorable for the Partnership and the Partners. ARTICLE V NAMES AND ADDRESSES OF PARTNERS The General Partner of the Partnership shall be Carey Diversified LLC, a Delaware limited liability company having an office at 50 Rockefeller Plaza, New York, New York 10020. The names and addresses of the Limited Partners of the Partnership shall be as set forth on the books and records of the Partnership and shall be kept at the principal place of business of the Partnership and a copy of which shall be kept at the Partnership's California office. ARTICLE VI PRINCIPAL PLACE OF BUSINESS; CALIFORNIA OFFICE The principal place of business of the Partnership shall be 50 Rockefeller Plaza, New York, New York 10020. The Partnership shall also maintain an office in California at Transamerica Pyramid, 600 Montgomery Street, San Francisco, California 94111. The General Partner may from time to time change the principal place of business of the Partnership or its California office and, in either such event, the General Partner shall notify the Partners in writing within ten days after the effective date of such change; provided, however, that no such change shall be effected unless the General Partner determines 7 8 that such change is in the best interests of the Partnership after giving consideration to any material adverse state or local income, estate or inheritance tax consequences to the Partners, or any adverse effect on the limited liability of the Limited Partners, as a result of such change. The General Partner may establish additional places of business of the Partnership when and where required by the business of the Partnership. The Partnership shall at all times maintain in California an agent for service of process upon the Partnership. ARTICLE VII CAPITAL CONTRIBUTIONS The Partnership is authorized to issue and sell up to $160,000 of limited partner interests. No interest shall be paid on any contribution to the capital of the Partnership. Loans by a Partner to the Partnership shall not be considered contributions to the capital of the Partnership. Any Partner, including any additional or substituted Partner, who shall acquire a Partnership Interest or whose Partnership Interest is increased by means of a transfer to him of all or a part of the Partnership Interest of another Partner, shall succeed to the Capital Account, or portion thereof, in respect of the Partnership Interest received. ARTICLE VIII PROFITS AND LOSSES A. Determination of Profits and Losses. The profits and losses of the Partnership shall be determined for each Fiscal Year of the Partnership in accordance with generally accepted accounting principles and procedures applied in a consistent manner and for federal income tax purposes, by additionally making such adjustments as are necessary to include other items of income, expense, deduction and allowance as are permitted and required under the Code and the regulations promulgated thereunder. Except as otherwise provided herein, whenever a proportionate part of the Partnership profit or loss is credited or charged to a Partner's Capital Account every item of income, gain, loss or deduction entering into the computation of such profit or loss shall be considered either credited or charged, as the case may be, to such Partner's Capital Account and every item of credit or tax preference related to such profit or loss and applicable to the period during which such profit or loss was realized shall be allocated to such Partner in the same proportion. Every recapture of deduction or credit shall be allocated among the Partners in the same proportion as the items 8 9 of deduction or credit subject to recapture was allocated among the Partners. Any increase or decrease in the amount of any item of income, gain, loss or deduction attributable to an adjustment to the basis of Partnership assets made pursuant to a valid election under sections 734, 743 and 754 of the Code, and pursuant to corresponding provisions of applicable state and local income tax laws shall be charged or credited, as the case may be, and any increase or decrease in the amount of any item of credit or tax preference attributable to any such adjustment shall be allocated, to the Partners entitled thereto under such laws. Profits and losses allocated, to a particular class of Partnership Interests shall be allocated among the holders of record of such class of Partnership Interests at the end of each Fiscal Year (or such shorter period as may be provided herein) of the Partnership in proportion to their respective Partnership Interests; provided however, that any such profits and losses attributable to a limited partner interest assigned during such Fiscal Year of the Partnership shall be allocated among the holders of such limited partner interests during such Fiscal Year in proportion to the number of months (for purposes of such allocation ownership of limited partner interests for each month will be determined on the fifteenth day of each month) that each such holder was recognized as the owner of such limited partner interest during such Fiscal Year, without regard to the results of Partnership operations during the period in which each such holder was recognized as the owner thereof and without regard to the date, amount or recipient of any distributions which may have been made with respect to such limited partner interest. B. Allocation of Profits and Losses. 1. Except as provided in subparagraph 4 of this paragraph B, the profits and losses of the Partnership (other than gains or losses from the sale, exchange or other disposition of Partnership assets) shall be allocated to the Partners as follows and in the following order to priority: a. An amount of net income equal to the excess, if any, of the aggregate negative balance of the Capital Accounts of the Partners over the Minimum Gain (determined as of the end of such year or fraction thereof), shall first be allocated among the Partners whose Capital Accounts are negative as a result of nonrecourse debt in proportion to the negative amounts attributable to such nonrecourse debt. b. Any remaining balance of net income shall be allocated 1% to the General Partner, 5% to the Corporate Special Partner, 1% to the Individual Special Partner and 93% to the Limited Partners. c. Net losses of the Partnership shall be allocated 1% to the General Partner, 5% to the Corporate Special Partner, 1% to the Individual Special Partner and 93% to the Limited Partners. 9 10 2. Except as provided in subparagraph 4 of this Paragraph B, net losses arising from sales, exchanges or other dispositions of Partnership assets shall be allocated 1% to the General Partner, 1% to the Individual Special Partner and 98% to the Limited Partners. For purposes of this subparagraph 2, Capital Accounts shall be determined after applying the allocations provided in subparagraphs 1 and 5 of this Paragraph B, and after applying subparagraphs 6 and 7 of this Paragraph B. 3. Net gains arising from sales, exchanges or other dispositions of Partnership assets shall be allocated to the Partners as follows and in the following order to priority: a. An amount of such gains equal to the excess, if any, of the aggregate negative balance of the Capital Account of the General Partner over the Minimum Gain; b. If each Partner's Capital Account is negative and the gains are less than the aggregate negative amounts in the Capital Accounts, in the ratio that the Capital Accounts bear to each other; c. If each Partner's Capital Account is negative and the gains are greater than the aggregate negative amounts in the Capital Accounts (i) first in an amount to bring each Partner's Capital Account to zero, and (ii) then to the Partners in the percentage by which Cash From Sales and Cash From Financings is then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; d. If certain Partner's Capital Accounts are positive and other Partner's Capital Accounts are negative (i) first in an amount to bring the Capital Account of each Partner whose Capital Accounts which are negative to zero (or if gains are less than the aggregate negative amounts of the Capital Accounts which are negative, to such Partners in the ratio that such negative Capital Accounts bear to each other), and (ii) then to the Partners in the percentage by which Cash From Sales and Cash From Financings is then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; e. If each Partner's Capital Account is positive, in the percentages by which Cash From Sales and Cash From Financings is then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; For purposes of this subparagraph 3, Capital Accounts shall be determined after applying the allocations provided in subparagraphs 1 and 2 of this Paragraph B and after applying subparagraphs 6 and 7 of Paragraph B. 4. No loss or deduction or item thereof under subparagraph 1 or 2 of this Paragraph B shall be allocated to the General Partner if, or to the extent, such allocation would 10 11 create or increase a deficit in the General Partner's Capital Account, unless: a. Such allocation of loss or deduction is attributable to nonrecourse debt of the Partnership; and b. Such allocation does not cause the deficit capital account of the General Partner to exceed the amount of Minimum Gain attributable to such nonrecourse debt, determined as of the last day of the taxable year to which such allocation is attributable. 5. To the extent that any amount paid to a Limited Partner or its Affiliates pursuant to the provisions of Paragraphs G(2), (4),(5),(6), or (7) of Article X hereof, or as Front-End Fees, is treated as a distributive share of Partnership income to the Limited Partner for Federal income tax purposes, the Limited Partner affected shall be allocated gross income of the Partnership at a time and in an amount equal to the amount of such payment, and the Capital Account of the Limited Partner so affected shall be adjusted to reflect such allocation and payment. If the Partnership's gross income for a Fiscal Year is less than the amount of such payment, the Limited Partner so affected shall be allocated gross income in each succeeding Fiscal Year until the total amount so allocated equals the total amount of such payment. 6. For purposes of subparagraphs 1(a), 2 and 3 of this Paragraph B, distributions to the Partners pursuant to Paragraphs A and E of Article IX hereof shall be treated as having been made and charged to the Capital Accounts of the Partners prior to the allocations of income, gains and losses provided therein. 7. Solely for purposes of this Paragraph B, the Capital Accounts of each Partner shall be reduced by such Partner's share of any Partnership expenditure which would be treated as it were an expenditure described under Section 705(a)(2)(B) of the Code, and shall be reduced or increased by any other amount required by the then applicable regulations under Section 704 of the Code. 8. Notwithstanding anything to the contrary in this Article VIII, if any Partner receives an adjustment, allocation or distribution described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), such Partner shall be specially allocated a pro rata portion of each item of Partnership income, including gross income, and gain in an amount and manner sufficient to eliminate, as quickly as possible, any deficit balance in such Partner's Capital Account created by such adjustment, allocation or distribution in excess of the sum of (i) the amount such Partner is obligated to restore pursuant to any provision of this Agreement and (ii) the amount such Limited Partner is deemed to be obligated to restore pursuant to the penultimate sentence of Treasury Regulations Section 1.704-1(b)(2)(iv)(f) (as amended in 1986). This subparagraph 8 of 11 12 Paragraph B is intended to constitute a "qualified income offset" within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(3). 9. Except as otherwise provided in Section 1.704-2(f) of the Treasury Regulations, if there is a net decrease in Partnership Minimum Gain for any Partnership fiscal year, each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary subsequent years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain to the extent required by Treasury Regulations Section 1.704-2(f). The items to be so allocated shall be determined in accordance with Section 1.704-2(f) and (i) of the Treasury Regulations. This subparagraph is intended to comply with the minimum gain chargeback requirement in said section of the Treasury Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant hereto. 10. Except as otherwise provided in Section 1.704-2(i)(4) of the Treasury Regulations, if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any fiscal year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the Treasury Regulations, shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to that Partner's share of the net decrease in the Partner Minimum Gain attributable to such Partner Nonrecourse Debt to the extent and in the manner required by Section 1.704-2(i) of the Treasury Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i) of the Treasury Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and (j)(2) of the Treasury Regulations. This subparagraph is intended to comply with the minimum gain chargeback requirement with respect to Partner Nonrecourse Debt contained in said section of the Treasury Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph shall be made in proportion to the respective amounts to be allocated to each Partner pursuant hereto. 11. To the extent any Partner has an Adjusted Capital Account Deficit at the end of any Partnership Fiscal Year, each such Partner shall be specially allocated items of Partnership income (including gross income) and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Paragraph 8(B)(11) shall be made if and only to the extent that such Partners would have an Adjusted Capital Account Deficit after all other allocations provided for in this Section have been tentatively made as if this Paragraph 8(B)(11) were not in the Agreement. 12 13 12. Partner Nonrecourse Deductions for any fiscal year or other applicable period with respect to a Partner Nonrecourse Debt shall be specially allocated to the Partners that bear the economic risk of loss for such Partner Nonrecourse Debt (as determined under Sections 1.704-2(b)(4) and 1.704-2(i)(1) of the Treasury Regulations). C. Power of the Partner to Vary Allocations of Profits and Losses. It is the intent of the Partners that each Partner's distributive share of income, gains, losses, deductions and credits shall be determined and allocated in accordance with this Article VII to the fullest extent permitted by Section 704(b) of the Code. If the Partnership is advised that the allocations provided in this Article VIII are unlikely to be respected for Federal income tax purposes, the General Partner has been granted power in Paragraph B(2) of Article XVI of this Agreement to amend the allocation provisions of this Agreement, on advice of accountants and legal counsel, to the minimum extent necessary to effect the plan of allocations and distributions provided in this Agreement. D. Allocations of Profits and Losses Among Limited Partners. Except as otherwise provided in this Article VIII, profits and losses shall be allocated among the Limited Partners in the same manner as distributions are allocated in Paragraph D of Article IX hereof. E. Consent of Partners to Allocation of Profits and Losses. The methods hereinabove set forth by which profits and losses of the Partnership are determined and allocated are hereby consented to by each Partner as a condition to becoming a Partner. ARTICLE IX DISTRIBUTIONS A. Distributable Cash From Operations. The General Partner shall distribute as soon after the close of each Fiscal Quarter as is reasonably feasible all of the Distributable Cash From Operations for such Fiscal Quarter in the following manner: 1% to the General Partner, 5% to the Corporate Special Partner, 1% to the Individual Special Partner and 93% to the Limited Partners. B. Cash From Sales. The General Partner shall distribute, as soon after the close of each Fiscal Quarter as is reasonably feasible, all Cash From Sales realized by the Partnership during such Fiscal Quarter in accordance with the provisions of Paragraph E of this Article IX. C. Cash From Financings. The General Partner shall distribute, as soon after the close of each Fiscal Quarter as is reasonably feasible, all of the Cash From Financings realized by 13 14 the Partnership during such Fiscal Quarter in accordance with the provisions of Paragraph E of this Article IX. D. Allocation of Distributions Among Limited Partners. Distributions of cash to the Limited Partners shall be apportioned among the holders of record of limited partner interests in the ratio in which the number of limited partner interests held of record by each of them bears to the number of limited partner interests held of record by all the Limited Partners as of the first day of the Fiscal Quarter with respect to which such distribution is made E. Distributions of Cash From Sales and Cash From Financings. The General Partner shall distribute Cash From Sales and Cash From Financings in the following manner: 1% to the General Partner, 1% to the Individual Special Partner and 98% to the Limited Partners, until such time as $430,844 has been distributed to the Individual Special Partner pursuant to this Paragraph E of Article IX. Thereafter, Cash From Sales and Cash From Financings shall be distributred 1% to the General Partner and 99% to the Limited Partners. F. Return of Capital Contributions. To the extent that, at the end of any Fiscal Quarter, the total cash distributions to the Limited Partners made pursuant to this Article IX exceed the profits of the Partnership for such Fiscal Quarter, such excess shall be charged to each Limited Partners' Capital Account and shall be regarded as a rightful return of capital contributions. G. Consent of Partners to Allocation of Distributions. The methods hereinabove set forth by which Cash From Operations, Cash From Sales and Cash From Financings are allocated and distributed are hereby consented to by each Partner as a condition to becoming a Partner. ARTICLE X MANAGEMENT AND OPERATION OF BUSINESS A. Management of Business. The Partnership shall be managed by the General Partner and the conduct of the Partnership's business shall be controlled and conducted by the General Partner in accordance with this Agreement. B. Authority of General Partner. In addition to and not in limitation of any rights and powers conferred by law or other provisions of this Agreement, the General Partner shall have and may exercise on behalf of the Partnership all powers and rights necessary, proper, convenient or advisable to effectuate and carry out the purposes, business and objectives of the Partnership. Such powers shall include, without limitation, the following powers: 14 15 1. To acquire, hold and dispose of any real property, (or any interests therein, including leasehold estates) and appurtenances thereto as well as personal or mixed property connected therewith, including the purchase, lease, development, improvement, maintenance, exchange, trade or sale of such property at such price, rental or amount, for cash, securities or other property and upon such terms, as the General Partner deem to be in the best interests of the Partnership; 2. Subject to the provisions of Paragraph H(10) of this Article X to borrow money and, if security is required therefor, to mortgage or subject to any other security device any portion of the assets of the Partnership, to obtain replacements of any mortgage or other security device, and to prepay, in whole or in part, refinance, increase, modify, consolidate or extend any mortgage or other security device; 3. To invest the Partnership's funds in United States Government securities, certificates of deposit or other time or demand deposits of United States commercial banks, savings banks, savings and loan associations or similar institutions which have a net worth of at least $100,000,000 or in which such certificates or deposits are fully insured by any Federal or state government agency, Eurodollar deposits in branches of United States banks, which banks have a net worth of at least $100,000,000, bank repurchase agreements covering securities of the United States Government or governmental agencies, bankers' acceptances, public no-load money market funds or other similar short-term highly liquid investments; to invest any working capital or other reserves retained by the General Partner for the operation of the Partnership in like manner; and to deposit, withdraw, invest, pay, retain and distribute the Partnership's funds in any manner consistent with the provisions of this Agreement. 4. To bring and defend actions at law or in equity. 5. To employ persons in the operation and management of the Partnership's business, including but not limited to supervisory managing agents, building management agents. real property developers and real estate brokers; 6. To place record title to, or the right to use, Partnership assets in the name or names of a non-operating nominee or nominees, including an Affiliate of the General Partner, for any purpose convenient or beneficial to the Partnership; 7. To perform all acts and file all documents, including tax returns and registration statements, necessary to comply with federal, state and local laws, rules and 15 16 regulations applicable to the Partnership or the conduct of the Partnership's business; 8. To enter into and carry out contracts and agreements and any or all documents and instruments and to do and perform all such other things as may be in furtherance of Partnership purposes or necessary or appropriate to the conduct of Partnership activities; 9. To execute, acknowledge, deliver, seal, file, record and vote any and all instruments which may be deemed necessary or convenient to effect the foregoing; and 10. To designate Carey Diversified LLC, the General Partner, as the "Tax Matters Partner" in accordance with Section 6231(a)(7) of the Code and, as such, the General Partner shall have all powers necessary to so perform including, without limitation, the power to retain attorneys and accountants of its choice and the right to settle any audits without the consent of the Limited Partners, except as otherwise required by the Code. the designation provided for herein is expressly consented to by each Partner as an express condition to becoming a Partner; and C. Restrictions on Authority of General Partner. In addition to other acts expressly prohibited or restricted by this Agreement or by law, the General Partner shall have no authority to act on behalf of the Partnership with respect to, and are expressly prohibited from undertaking, the following: 1. Doing any act in contravention of this Agreement; 2. Except as provided in this Agreement and except in connection with the liquidation and winding up of the business of the Partnership upon its termination and dissolution, doing any act which would make it impossible to carry on the ordinary business of the Partnership; 3. Confessing a judgment against the Partnership in connection with any threatened or pending legal action, 4. Possessing Partnership property or assigning the rights of the Partnership in specific Partnership property for other than a Partnership purpose; 5. Admitting a person as a Limited Partner except as provided in this Agreement; 6. Except as provided in this Agreement and except in connection with the liquidation and winding up of business of the Partnership upon its termination and dissolution or a Mandatory Distribution Event, selling substantially all the assets of the Partnership at a single sale or in multiple sales in the same 12-month period without the prior written consent of Limited Partners holding more than fifty percent (50%) of the then 16 17 outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI; 7. Pledging or encumbering substantially all the properties of the Partnership at one time or from time to time in a series of related transactions, unless the lien of such pledge or encumbrance arises in connection with the acquisition or improvement of properties or the initial financing of properties acquired free and clear of encumbrances or the refinancing of previous obligations and such lien is limited to the properties so acquired, improved, financed or refinanced; 8. Obtaining any loan or any mortgage loan on any residential property made or guaranteed by any Federal, state or local government or municipality or any agency of any federal, state or local government or municipality; 9. Performing any act (other than an act required by this Agreement or any act taken in good faith in reliance upon counsel's opinion) which would, at the time such act occurred, subject any Limited Partner to liability as a general partner in any jurisdiction; 10. Prepaying any interest on any Partnership indebtedness; provided that the payment of any amount commonly referred to as "points" shall not be deemed a prepayment of interest; or 11. Assessing any Partner for an additional capital contribution. D. Fiduciary Obligations of General Partner. The General Partner shall act at all times as a fiduciary with respect to the Partnership, the Limited Partners and the Partnership property and assets. E. Obligations of General Partner. The General Partner shall: 1. Devote such of their time to the business of the Partnership as they shall, in its discretion, exercised in good faith, determine to be necessary to conduct the business of the Partnership for the benefit of the Partnership and the Limited Partners; 2. File and publish all certificates, statements or other instruments required by law for formation, qualification and operation of the Partnership and for the conduct of its business in all appropriate jurisdictions; 3. Use its best efforts to cause the Partnership and the Partners to be protected by adequate public liability, property damage and other insurance; 17 18 4. Employ attorneys to represent the Partnership, which attorneys may also serve as counsel to the General Partner and any of its Affiliates; and 5. Use its best efforts to maintain the status of the Partnership as a "partnership" for federal income tax purposes. F. Limitation on Liability of General Partner Indemnification. 1. The General Partner shall have no liability, responsibility or accountability in damages or otherwise to any other Partner or the Partnership for, and the Partnership agrees to indemnify, pay, protect and hold harmless the General Partner (on the demand of and to the satisfaction of the General Partner) from and against, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, proceedings, costs, expenses and disbursements of any kind or nature whatsoever (including without limitation all costs and expenses of defense, appeal and settlement of any and all suits, actions or proceedings instituted against the General Partner or the Partnership and all costs of investigation in connection therewith) which may be imposed on, incurred by or asserted against the General Partner or the Partnership in any way relating to or arising out of, or alleged to relate to or arise out of, any action or inaction on the part of the Partnership or on the part of the General Partner as a General Partner of the Partnership; provided, that the General Partner shall be liable, responsible and accountable, and the Partnership shall not be liable to the General Partner, for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, proceedings, costs, expenses and disbursements resulting from the General Partner's own fraud, bad faith, negligence, misconduct or other breach of fiduciary duty to the Partnership or any Partner. If any action, suit or proceeding shall be pending or threatened against the Partnership or the General Partner relating to or arising, or alleged to relate to or arise, out of any such action or inaction the General Partner shall have the right to employ, at the expense of the Partnership, separate counsel of the General Partner's choice in such action, suit or proceeding. The satisfaction of the obligations of the Partnership under this Section 1 shall be from and limited to the assets of the Partnership and no Partner shall have any personal liability on account thereof. The General Partner shall have the right to bill the Partnership for, or otherwise request the Partnership to pay, at any time and from time to time after the General Partner has become obligated to make payment therefor, any and all amounts for which the General Partner believes in good faith that the General Partner is entitled to indemnification for under this Section. 2. The Partnership shall pay any and all such bills and honor any and all such requests for payment within 60 days after such bill or request is received by the General Partner. In the event that a final determination is made that the 18 19 Partnership is not so obligated in respect of any amount paid by it to the General Partner, the General Partner will refund such amount within 180 days of such determination. 3. The Partnership shall indemnify to the extent of the Partnership assets each Limited Partner against any claims of liability asserted against a Limited Partner solely because he is a Limited Partner in the Partnership. 4. Notwithstanding the foregoing, neither the General Partner nor any officer, director, employee, agent, subsidiary or assignee of the General Partner or of the Partnership shall be indemnified from any liability, loss or damage incurred by them in connection with (i) any claim or settlement involving allegations that the Securities Act of 1933 was violated by the General Partner or by any such other person or entity unless: (a) the General Partner or other persons or entities seeking indemnification are successful in defending such action; and (b) such indemnification is specifically approved by a court of law which shall be advised as to the current position of the Securities and Exchange Commission and the California Commissioner of Corporations regarding indemnification for violations of securities laws; or (ii) any liability imposed by law, including liability for fraud, bad faith or negligence. G. Specific Transactions Authorized. The General Partner is hereby authorized to enter into, on behalf of the Partnership, the following specific transactions: 1. The Partnership may purchase property from any Affiliate of the General Partner provided (i) the property was acquired by such Affiliate for the purpose of facilitating its purchase by the Partnership, facilitating the borrowing of money or the obtaining of financing for the Partnership or any other purpose related to the business of the Partnership, (ii) the property is purchased by the Partnership for a price no greater than the acquisition and out-of-pocket carrying cost of the property to such Affiliate, (iii) there is no adverse difference in the interest rates of the loans secured by the property at the time acquired by such Affiliate and at the time purchased by the Partnership nor any other benefit arising out of such transaction to the General Partner and (iv) no compensation is paid by the Partnership or by any non-affiliated person to any Affiliate of the General Partner in connection with the purchase of the property by the Partnership. 2. The Partnership may contract (i) with Affiliates of the General Partner to serve as real estate brokers and mortgage placement brokers in connection with the investment of the Partnership assets and (ii) with Affiliates of the General Partner to serve as real estate brokers in connection with the sale of property by the Partnership. The amount of real estate commissions payable to Affiliates of the General Partner upon a sale of property by the Partnership where such Affiliates have provided a substantial amount of services in the sales effort may 19 20 not exceed the lesser of (i) 3% of the sales contract price of the property or (ii) 50% of the reasonable, customary and competitive rate for similar services in light of the size, type and location of the property and the total real estate commissions payable to such Affiliates and to other persons may not exceed the lesser of (a) 6% of the contract price for the sale of the property or (b) the reasonable, customary and competitive rate for similar services in light of the size, type and location of the property. No Affiliate of the General Partner may receive payment of a real estate commission with respect to the sale of any property by the Partnership unless total consideration received by the Partnership upon such sale exceeds the amounts actually paid by the Partnership for the purchase, development, construction or improvement, of the property and any fees and commissions paid by the Partnership in connection therewith. 3. Affiliates of the General Partner may receive insurance premiums and brokerage commissions with respect to insurance on property owned by the Partnership only when the cost of such insurance is paid by tenants who net lease such properties from the Partnership. No such Net Lease shall provide that the lessee is required to purchase insurance through an Affiliate of the General Partner. 4. At any time, the Partnership may borrow money on a short-term basis from an Affiliate of the General Partner in connection therewith pay interest to such Affiliate at a rate equal to the lesser of (i) one percent above the prime interest rate at the Bank of New York or (ii) the rate that would be charged to the Partnership by unrelated lending institutions on comparable loans for the same purpose in the locality of the property. Such borrowings shall be non-recourse to the Partnership, unless the General Partner shall otherwise consent in writing. 5. All of the Partnership's expenses shall be billed directly to and paid by the Partnership. The Partnership shall reimburse the General Partner or its Affiliates for: (a) the actual cost to the General Partner or its Affiliates of goods and materials used for and by the Partnership and obtained from unaffiliated parties and (b) the costs incurred by the General Partner or its Affiliates in performing administrative services necessary to the prudent operation of the Partnership; provided, however, that the amounts charged to the Partnership for services performed pursuant to this clause (c) shall not exceed the lesser of (1) the actual cost of such services, or (2) the amount which the Partnership would be required to pay to independent parties for comparable services in the same geographic location. No reimbursement shall be made to the General Partner or its Affiliates for: (x) services for which the General Partner or its Affiliates are entitled to compensation by way of a separate fee, or (y) any of the salaries, fringe benefits, travel expenses, and other administrative items incurred by or allocated to any controlling person (as defined herein) of the General Partner or 20 21 its Affiliates; provided, however, that the Partnership may reimburse the General Partner or its Affiliates for any travel expenses incurred by any controlling person of the General Partner or its Affiliates where such travel expenses are for the evaluation by such controlling person of a property owned or being considered for acquisition by the Partnership or for visits to executives of tenants to discuss current financial results. The Partnership's annual report to the Limited Partners shall contain a breakdown of the costs reimbursed to the General Partner or its Affiliates. Within the scope of the annual audit of the General Partner's (or such Affiliates) financial statement, the independent certified public accountant shall verify the allocation of such costs to the Partnership. The method of review shall at minimum provide (1) a review of time records of individual employees, the costs of whose services were reimbursed; and (2) a review of the specific nature of the work performed by each such employee. The methods of review shall be in accordance with generally accepted auditing standards and shall accordingly include such tests of the accounting records and such other auditing procedures which the General Partner's (or such Affiliate's) independent certified public accountants consider appropriate in the circumstance. The additional costs of such review shall be itemized by such accountants on a partnership by partnership basis and may be reimbursed to the General Partner (or such Affiliate) in accordance with this Paragraph G(9) only to the extent that such reimbursement, when added to the cost for administrative services rendered, does not exceed the competitive rate for such services as determined in this Paragraph G(9). As used herein, the term "controlling person" shall mean any person, whatever his title, who performs executive or senior management functions for the General Partner or Affiliate similar to those of executive or senior management officers, directors or partners, or those holding 5% or more equity interest in the General Partner or Affiliate or a person having the power to direct or cause the direction of the management level employees and policies of the General Partner or Affiliate, whether through the ownership of voting securities, by contract, or otherwise. For the purposes of this Paragraph G(5), not every person who carries a title such as vice president or senior vice president, corporate secretary or treasurer, shall be considered a controlling person, unless such person performs the functions or has the powers described above, and even in the absence of a specific title, an executive in a truly senior management position shall be considered a controlling person. H. General Restrictions. 1. The Partnership shall obtain a written evaluation report signed by an independent appraiser prior to the purchase of any real property by the Partnership and shall not purchase any such real property if the purchase price and all Acquisition Fees paid by the Partnership in connection with the acquisition exceed the appraised value set forth in such report. All such 21 22 appraisals whether or not the real property which is the subject of such appraisal is purchased by the Partnership, shall be at the Partnership's expense or at the expense of the seller, shall be retained for five years and shall be available for inspection and duplication by the Limited Partners. 2. The Partnership may not sell any property in a transaction in which an Affiliate of the General Partner acts as a real estate broker unless the provisions of Paragraph G(2) of this Article X are complied with. 3. The Partnership shall not own any land where the buildings and improvements thereon are owned by an Affiliate of a General Partner. 4. The Partnership may not acquire property in exchange for interests in the Partnership. 5. The Partnership shall not give an Affiliate of a General Partner the exclusive right to sell property for the Partnership. 6. The Partnership shall not pay, directly or indirectly, any Acquisition Fee to an Affiliate of a General Partner in connection with the purchase of property acquired with proceeds obtained from Cash From Sales or Cash From Financings. 7. The aggregate borrowings of the Partnership shall not exceed 66-2/3,% of the purchase price of all properties purchased by the Partnership on a combined basis. The foregoing restriction may be waived or lessened by the General Partner without the approval of the Limited Partners, but only with the prior written consent of the Commissioner of Corporations of the Sate of California or pursuant to a change in the published Rules of the Commissioner. In no event, however, shall the aggregate borrowings of the Partnership exceed the sum of 85% of the purchase price of all properties which have not been refinanced and 85% of the aggregate fair market value of all refinanced properties. 8. Except as set forth in Paragraph G(5) of this Article X, all expenses of the Partnership shall be billed directly to and paid by the Partnership. 9. The Partnership funds shall not be commingled with the funds of any other natural person. partnership, corporation, association or other legal entity. 10. The Partnership shall not finance the purchase of real property by use of a wrap around note and mortgage "all-inclusive" note and deed of trust) unless (a) neither the General Partner nor any Affiliate of the General Partner receives interest on the amount of the underlying encumbrance in excess of that payable to the lender on such underlying encumbrance, (b) 22 23 the Partnership receives credit on its obligation under the all-inclusive note for payments made directly on the underlying encumbrance and (c) all payments on the underlying encumbrance shall be made by the Partnership or, in the alternative, payments by the Partnership on the wrap around note are made to a third party collecting agent which in turn disburses such payment, first to the holder of such underlying encumbrance, and thereafter to the holder of the wrap around note. 11. The Partnership shall not create or assume any indebtedness for borrowed money unless the documents pursuant to which such indebtedness is created or assumed provide, and the General Partner shall cause any and all such documents assumed or entered into by or on behalf of the Partnership to provide, that the parties thereto other than the Partnership (including any Affiliates of the General Partner) shall look only to the assets of the Partnership for satisfaction of the liabilities and obligations of the Partnership under such documents (including without limitation those arising from representations, warranties, covenants and agreements made in or in connection with such documents) and that such other parties shall have no recourse to the Partners or the separate assets of the Partners for the satisfaction of such liabilities and obligations. The Partnership shall not incur any indebtedness including indebtedness under a shared appreciation or similar mortgage wherein the lender will have or acquire, at any time as a result of making the loan, any direct or indirect interest in the profit, capital or property of the Partnership other than as a creditor. 12. The Partnership shall not enter into any contracts with the General Partner or with any Affiliates of the General Partner to construct or develop Partnership properties or to render any services in connection with such construction or development. 13. The Partnership shall not acquire any property which is under construction unless completion of the improvements on the property is guaranteed at the contracted price by (a) an adequate completion bond; (b) a letter of credit issued by a bank organized and doing business under the laws of the United States or any State or of the District of Columbia which is subject to supervision by Federal, State or District of Columbia authority and which has a combined capital and surplus of not less than $5,000,000; or (c) a completion guarantee by a third person, provided that such person has a net worth of at least $10,000,000 and had in the most recent fiscal year or twelve-month period prior to the giving of such guarantee net income of at least $2,000,000. 14. Unimproved or non-income producing property shall not be acquired except in amounts and upon terms which can be financed by the net proceeds derived from the sale of limited partner interests. No more than 10% of the net proceeds derived from Distributable Cash from Operations. 23 24 15. No portion of the net proceeds derived from the sale of limited partner interests may be invested in junior mortgages or deeds of trust; provided, however, that the acquisition or granting of a junior mortgage or deed of trust in connection with the sale, purchase, financing or refinancing of real property of the Partnership shall not be deemed to be investing in junior mortgages or deeds of trust. 16. Any agreement entered into between the Partnership and the General Partner or its Affiliates must be terminable by the Partnership, without penalty, upon 60 days' notice. I. Compensation of General Partner. The General Partner shall not, in its capacity as General Partner, receive any salary, fees, profits or distributions from the Partnership except profits, distributions, fees and allocations to which they may be entitled under Articles VIII and IX. J. Other Business of Partners. Except as otherwise specifically provided herein, any of the Partners and any shareholder, officer, director, employee or other person holding a legal or beneficial interest in an entity which is a Partner may engage in or possess an interest in other business ventures of every nature and description, independently or with others, including, but not limited to, the ownership, financing, leasing, operation, management, syndication, brokerage and development of real property and neither the Partnership nor the Partners shall have any right by virtue of this Agreement in and to such independent ventures or to the income or profits derived therefrom. ARTICLE XI STATUS OF LIMITED PARTNERS The Limited Partners and Special Partners shall not participate in the management or control of the Partnership's business nor shall they transact any business for the Partnership nor shall they have the power to sign for or bind the Partnership, said powers being vested solely and exclusively in the General Partner. The Limited Partners and Special Partners shall not be bound by, or be personally liable for, the expenses, liabilities or obligations of the Partnership, except to the extent of their Capital Accounts. The Partnership Interest owned by a Limited Partner or a Special Partner shall be fully paid and nonassessable. In addition to those described elsewhere in the Partnership Agreement, the Limited Partners and Special Partners shall have the following rights, powers, privileges, duties and liabilities: 24 25 (a) The Limited Partners and Special Partners shall have the right to have full and true information of all things affecting the Partnership and shall be entitled to such reports as are set forth in Article XII hereof. (b) The Limited Partners and Special Partners shall receive from the Partnership the share of the distributions provided for in this Agreement in the manner and at the times provided for in this Agreement. (c) A Limited Partner or a Special Partner shall have the right to demand the return of his Capital Account only on the dissolution and winding up of the Partnership in accordance with Article XVIII hereof. No Limited Partner shall have priority over any other Limited Partner either as to the return of capital or as to profits, losses or distributions. No Limited Partner or Special Partner shall have right to bring an action for partition against the Partnership. (d) Limited Partners holding more than fifty percent (50%) of the outstanding Limited Partner Interests may (1) remove the General Partner and (2) in the event that a vacancy shall occur in the office of General Partner, subject to the provisions B(5) of Article XV, elect a successor General Partner upon retirement, removal, death, adjudication of incompetence to manage his person or estate, adjudication of bankruptcy under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in lieu thereof), dissolution or other cessation to exist as a legal entity of the General Partner. (e) Each Limited Partner and Special Partner shall have the right to a complete list of names and addresses and interests of all Limited Partners as set forth in the records of the Partnership, upon written request to the Partnership, provided such request is for a purpose reasonably related to such Partner's interest in the Partnership. A reasonable charge for copy work may be charged by the Partnership. ARTICLE XII BOOKS OF ACCOUNT AND REPORTS Proper books of account shall be kept by the General Partner wherein shall be entered all transactions, matters and things relating to the Partnership's business as are usually entered into books of account kept by persons engaged in a business of a like character. The books of account shall be kept at the principal place of business of the Partnership and each Partner (or any duly constituted designee of a Partner) shall at all times during reasonable business hours have free access to and the right to inspect and copy the same. There shall be established for each Partner on the books of the Partnership a Capital Account which shall show the 25 26 amount of each capital contribution made by such Partner (or his, her or its predecessor in the case of an assignment of a Partnership Interest),. adjusted to reflect such Partner's proportion of profits and losses (determined according to Paragraph B of Article VIII) and of withdrawals and distributions and other items to the extent properly creditable to or chargeable against such Capital Account. Within 75 days after the end of each Fiscal Year, the General Partner shall deliver to each Limited Partner adequate information to enable each Limited Partner to complete and file his Federal tax return. Copies of each such report shall be distributed to each Limited Partner within 60 days after the end of any such quarter. If deemed appropriate by the General Partner such notice may be prepared and distributed to Limited Partners more frequently than quarterly. The General Partner shall send such other reports and information, if any, to the Limited Partners as the General Partner may deem necessary or appropriate, including but not limited to reports containing the name and address of each person who has had an unconditional written offer to purchase Partnership property rejected by the Partnership (such report shall also contain the price and terms offered). Copies of each report distributed to the Limited Partners shall, to the extent required by applicable law, be filed concurrently with relevant state "Blue Sky" authorities ARTICLE XIII FISCAL YEAR The Fiscal Year of the Partnership shall begin on the first day of January and end on the thirty-first day of December in each year. ARTICLE XIV PARTNERSHIP FUNDS The funds of the Partnership shall be deposited in such account or accounts as shall be designated by the General Partner and all withdrawals against such accounts shall be made only by one of the General Partner or by its properly delegated agents. 26 27 ARTICLE XV TRANSFER OF PARTNERSHIP INTEREST A. In General. A Limited Partner or Special Partner may not sell, assign, transfer or otherwise dispose of, or pledge, hypothecate or in any manner encumber, his interest in the Partnership or any part thereof except as permitted in this Article, and any act in violation of this Paragraph A shall not be binding upon or recognized by the Partnership regardless of whether the General Partner shall have knowledge thereof. B. General Partner. 1. The Limited Partners, at the direction or with the approval of holders of Listed Shares and Series 5 Partnership Shares holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, pursuant to Paragraph (d) of Article XI and with the same proportionate vote as provided therein, may remove a General Partner from the Partnership. Written notice of the removal of the General Partner shall be served upon the General Partner either by certified or by registered mail, return receipt requested. or by personal service. Said notice shall set forth the day upon which the removal is to become effective. Upon receipt of notice, the General Partner shall cause an accounting to be prepared covering the transactions of the Partnership since the end of the previous Fiscal Year, and it shall not thereafter sell or dispose of or allow the sale or disposition of any Partnership asset unless such sale or disposition was the subject of a contract entered into by and binding upon the Partnership prior to the date upon which the notice was received by the General Partner. 2. Until the dissolution of the Partnership otherwise occurs, the General Partner shall not voluntarily take any steps to dissolve itself nor shall the General Partner voluntarily retire; provided, however, that nothing in this Partnership Agreement shall be deemed to prevent the merger or reorganization of Carey Diversified LLC into or with any other entity organized under the laws of the United States or any state thereof or the transfer of all the limited liability company interests of Carey Diversified LLC and the assumption of the rights and duties of the General Partner by, in the case of a merger, reorganization or consolidation, the surviving entity by operation of law. 3. Upon the removal, adjudication of bankruptcy or insolvency, dissolution or other cessation to exist as a legal entity of the General Partner, the General Partner's Partnership Interest and interest in Distributable Cash From Operations and its subordinated interest in Cash From Sales and Cash From Financings shall be purchased by the Partnership for a purchase price equal to the fair market value thereof determined pursuant to the provisions of Section 4 of this Paragraph B. The purchase price of such interest shall be paid by the Partnership to the General Partner by the promissory note of the Partnership, 27 28 payable to the General Partner or its order, having a face amount equal to such purchase price, containing provisions as would be usual and customary in a commercial promissory note, bearing interest at a rate per annum equal to one percent above the prime interest rate at The Bank of New York, payable annually, with principal and all unpaid accrued interest subject to mandatory prepayment from all Cash From Sales and Cash From Financings, and the remaining unpaid principal balance and unpaid accrued interest on such promissory note due and payable five years from the date of the General Partner's retirement, expulsion, adjudication of bankruptcy or insolvency, dissolution or other cessation to exist as a legal entity. 4. The fair market value of the General Partner's interest purchased by the Partnership pursuant to Section 3 of this Paragraph B shall be determined by agreement between the General Partner and the Partnership (which agreement shall require the approval of the Limited Partners holding more than fifty percent (50%) of the outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI). If the General Partner and the Partnership cannot agree upon the fair market value of such Partnership Interest within 30 days after the occurrence of the event upon which such interest of the General Partner is to be purchased by the Partnership, the fair market value thereof shall be determined in the manner provided by the laws of the State of California for the determination of controversies by arbitration, the General Partner to choose one arbitrator, the Partnership to choose one arbitrator and the two arbitrators so chosen to choose a third arbitrator. The decision of a majority of said arbitrators as to the fair market value of such Partnership interest shall be final and binding and may be enforced by legal proceedings. The General Partner and the Partnership shall each compensate the arbitrator appointed by it and the compensation of the third arbitrator shall be borne equally by such parties. C. Limited Partners and Special Partners. 1. The General Partner may, pursuant to this Article XV, (a) admit as a substituted Limited Partner or Special Partner any successor in interest to a Limited Partner or Special Partner either deceased or under legal disability, and (b) admit as substituted Limited Partners or Special Partners assignees of Limited Partners or Special Partners. 2. A substituted Limited Partner or Special Partner is a person admitted to all the rights of a Limited Partner or Special Partner. An assignee is a person to whom a Limited Partner has assigned his interest in the Partnership but who has not become a substituted Limited Partner or Special Partner. An assignee shall have no right to require any information or account of the Partnership's transactions or to inspect the Partnership's books but shall only be entitled to receive the share of the profits, or the return of the capital contribution, 28 29 to which his assignor would otherwise be entitled as set forth in Section 5 of this Paragraph C. 3. No assignee of the whole or any portion of a Limited Partner's or Special Partner's interest in the Partnership shall have the right to become a substituted Limited Partner or Special Partner in place of his assignor unless all of the following conditions are satisfied: (a) The written consent of the General Partner to such substitution shall be obtained, the granting or denial of which shall be within the absolute discretion of the General Partner; (b) The duly executed written instrument of assignment setting forth the intention of the assignor that the assignee become a substituted Limited Partner or Special Partner in his place shall have been filed with the Partnership; (c) The interests in the Partnership being acquired by the assignee shall consist of at least five (5) percent of the limited partner or special partner interest and, if the assignor shall retain any Limited partner or special partner interest, such retention shall consist of at least five (5) percent of the limited partner or special partner interest; (d) The assignor and assignee shall execute and acknowledge such other instruments as the General Partner may deem necessary or desirable to effect such assignment and admission, including the written acceptance and adoption by the assignee of the provisions of this Agreement and his execution, acknowledgment and delivery to the General Partner of a Power of Attorney, the form and content of which are more fully described in Article XIX hereof; and (e) The assignee shall pay a transfer fee not to exceed $50.00 per transaction to the Partnership. 4. Any person admitted to the Partnership as a Partner shall be subject to all of the provisions; of this Agreement as if originally a party to it. 5. Subject to the provisions of Section 11 of this Paragraph C. compliance with the suitability standards imposed by the Partnership, applicable "Blue Sky" laws and the applicable rules of any other governmental authority, a Limited Partner or Special Partner shall have the right to assign the whole or any portion (not less than five (5) percent of the limited partner or special partner interest and, if he shall retain any limited partner or special partner interest, subject to his retaining not less than five (5) percent of the limited partner or special partner interest) of his Partnership Interest by a written assignment the terms of which are not in contravention of any of the provisions of this Agreement, which assignment has been executed by the assignor and received by the Partnership and 29 30 recorded on the books thereof. Any assignment in contravention of any of the provisions of this Section 5 shall be of no force and effect and shall not be binding upon or recognized by the Partnership. (a) Except as provided in Subsection (c) below, Paragraph A of Article VIII hereof and Paragraph D or Article IX hereof, an assignee of a Partner's Partnership Interest shall be entitled to receive distributions of cash or other property from the Partnership attributable to the interest acquired by reason of such assignment from and after the effective date of the assignment of such interest to him. The "effective date" of an assignment of an interest in the Partnership as used in this Subsection shall be the last day of the month in which the written instrument of assignment, in form and substance satisfactory to the General Partner, is received by the General Partner. (b) The net profits and net losses attributable to an interest in the Partnership assigned during any year shall be divided among and allocated in accordance with the provisions of Paragraph A of Article VIII hereof. (c) Anything herein to the contrary notwithstanding. both the Partnership and the General Partner shall be entitled to treat the assignor of such interest as the absolute owner thereof in all respects, and shall incur no liability for distributions of cash or other property made in good faith to him, until such time as the written assignment has been received by, and recorded in books of, the Partnership. 6. The General Partner may elect to treat an assignee who has not become a substituted Limited Partner or Special Partner as a substituted Limited Partner or Special Partner in the place of his assignor should they deem, in its absolute discretion, that such treatment is in the best interests of the Partnership for any of its purposes or for any of the purposes of this Agreement. 7. No consent of any of the Limited Partners or Special Partners is required to effect the substitution of a Limited Partner or Special Partner, except that a Limited Partner or Special Partner who assigns his interest in the Partnership must evidence his intention that his assignee be admitted as a substituted Limited Partner or Special Partner in his place and must execute such instruments as the General Partner may in its absolute discretion determine to be necessary or desirable in connection therewith. 8. Upon the admission of a Limited Partner or Special Partner (whether as a result of his purchase of partner interests from the Partnership or his admission as a substituted Limited Partner or Special Partner), the General Partner shall make an appropriate amendment to the list of the Partner's names, 30 31 addresses, Contributions and Capital Accounts referred to in Article XII hereof. 9. Upon the death or legal incompetency of an individual Limited Partner or Special Partner. his personal representative shall have all of the rights of a Limited Partner or Special Partner for the purpose of settling or managing his estate, and such power as the decedent or incompetent possessed to constitute a successor as an assignee of its interest in the Partnership and to join with such assignee in making application to substitute such assignee as a Limited Partner or Special Partner. However, such personal representative shall not have the right to become a substituted Limited Partner or Special Partner in the place of his predecessor in interest unless the conditions of Section 2 of this Paragraph C (other than the requirement that the assignor execute and acknowledge instruments) are first satisfied. 10. Upon the adjudication of bankruptcy or insolvency, dissolution or other cessation to exist as a legal entity of a Limited Partner or Special Partner not an individual, the authorized representative of such entity shall have all of the rights of a Limited Partner or a Special Partner for the purpose of effecting the orderly winding up and disposition of the business of such entity and such power as such entity possessed to constitute a successor as an assignee of its interest in the Partnership and to join with such assignee in making application to substitute such assignee as a Limited Partner or Special Partner. However, such authorized representative shall not have the right to become a substituted Limited Partner or Special Partner in the place of his predecessor in interest unless the conditions of Section 2 of this Paragraph C (other than the requirement that the assignor execute and acknowledge instruments) are first satisfied. 11. (a) No assignment or transfer of an interest in the Partnership may be made which would result in Limited Partners or Special Partners and assignees of Limited Partners or Special Partners owning, directly or indirectly, individually or in the aggregate, more than twenty percent (20%) of the equity interests of a General Partner or any Affiliate of a General Partner as defined in Section 1504(a)) of the Code. If any such assignment or transfer would otherwise be made by bequest, inheritance or operation of law, the transferee shall not become a Partner and the interest in the Partnership transferred shall be automatically redeemed by the Partnership immediately prior to such transfer in the same manner as provided in Subsection (b)(4) of this Section 11. (b) Anything to the contrary contained herein notwithstanding: (1) Except in the case of the Merger, in any twelve (12) consecutive month period no assignment or transfer of a limited partner interest may be made if as a result thereof the 31 32 aggregate total of limited partner interests assigned and/or transferred in such period would exceed forty percent (40%) of the outstanding limited partner interests. This limitation is hereinafter referred to as the "forty percent (40%) limitation". (2) A Limited Partner may assign or transfer his Partnership Interest to: (i) his spouse (unless legally separated), child or ancestor, or (ii) a corporation, partnership, trust or other entity, fifty-one percent (51%) of the equity interest of which is owned by such Limited Partner and/or any of the persons specified in clause (i) so related to such Limited Partner, provided, however, that such transfers are subject to the forty percent (40%) limitation. (3) Subsection (b)(1) of this Section 11 shall not apply to a transfer by gift, bequest or inheritance or a transfer to the Partnership and, for purposes of the forty percent (40%) limitation, any such transfer shall not be treated as such. (4) If, after the forty percent (40%) limitation is reached in any consecutive twelve (12) month period, a transfer of a Partnership Interest would otherwise take place by operation of law (but not including any transfer referred to in Subsection (b)(3) of this Section 11), then the transferee shall not become a Limited Partner and such Partnership Interest shall be automatically redeemed by the Partnership immediately prior to such transfer for a price equal to the fair market value of said interest on such date of transfer. The price shall be paid within ninety (90) days after the date of the transfer and redemption. If the Partnership and the transferor do not agree upon the fair market value of the Partnership Interest, the purchase price shall be determined by arbitration. The purchase price shall be paid in cash within ten (10) days after such determination. (c) No transfer or assignment of any partner interest shall be made if it would result in the Partnership's being treated as an association taxable as a corporation for tax purposes. The General Partner, in its sole discretion, may, on behalf of the Partnership, impose any restrictions or transfers or assignments of limited partner interests it may deem appropriated to give effect to the preceding sentence. The General Partner shall incur no liability to any Limited Partner, prospective investor or assignee for any action or inaction in connection with the foregoing, provided that the General Partner acted in good faith and such course of conduct did not constitute negligence or misconduct of the General Partner. 12. The General Partner, in its absolute discretion, may cause the Partnership to make, refrain from making, or once having made, to revoke, the election referred to in Section 754 of the Code, and any similar election provided by state or local law, or any similar provision enacted in lieu thereof. 32 33 13. Until the dissolution of the Partnership, the General Partner shall not take any voluntary steps to dissolve itself nor shall the General Partner voluntarily withdraw or resign. ARTICLE XVI MEETINGS AND AMENDMENT OF LIMITED PARTNERSHIP CERTIFICATE AND AGREEMENT A. Amendment of Limited Partnership Certificate The General Partner shall amend and record the Certificate of Limited Partnership of the Partnership without additional consent of Limited Partners when, pursuant to the terms of this Partnership Agreement: 1. There is a change in the name of the Partnership; 2. The General Partner withdraws, is removed, is adjudicated bankrupt under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in lieu thereof), is adjudicated incompetent to manage his person or estate or dies, or a person is admitted as the General Partner; 3. There is a false or erroneous statement in the Certificate; 4. A time is fixed for dissolution of the Partnership or the return of contributions and such time has not been specified in the Certificate; 5. The Partners desire to make a change in any other statement in the Certificate in order that it shall accurately represent the agreement among them; 6. There is a change in the character of the business of the Partnership; 7. There is a change in the address of the Partnership's principal place of business or its California office; 8. There is a change in the time as stated in the Certificate for the dissolution of the Partnership or for the return of a contribution; and There is a change in the address of the California agent for service of process designated in the Certificate of Limited Partnership (unless such agent is a corporation) or a new agent for service of process is appointed. B. Amendments to the Agreement. 33 34 1. Amendments to this Partnership Agreement may be proposed by the General Partner or by Limited Partners holding ten percent (10%) or more of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. Following such proposal, the General Partner shall submit to the Partners a verbatim statement of any proposed amendment and an opinion of counsel, who may be counsel to the Partnership, as to the legality of such amendment and the effect of such amendment on the liability of Limited Partners for the debts of the Partnership. The General Partner shall include in any such submission the General Partner's recommendations as to the proposed amendment. The amendment shall become effective only upon the written consent or affirmative vote of holders holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. 2. Any provision to the contrary herein notwithstanding, the General Partner may, without the consent of the Limited Partners, make the following amendments to this Agreement: a. Any amendments to Article VIII and/or Article IX of this Agreement if the Partnership is advised by its accountants or legal counsel at any time that the allocations provided in those Articles are not likely to be respected for Federal income tax purposes, either because of the promulgation of Treasury Regulations under Section 704 of the Code or other developments in the law. The General Partner is empowered to amend such provisions to the minimum extent necessary in accordance with the advice of the accountants and counsel to effect the allocations provided in this Agreement . New allocations made by the General Partner in reliance upon the advice of the accountants or counsel described above shall be deemed to be made pursuant to the fiduciary obligation of the General Partner to the Partnership and the Limited Partners, and no such new allocation shall give rise to any claim or cause of action by any Limited Partner, provided that the General Partner acted in good faith; and b. In the event that the State of California amends the California Revised Limited Partnership Act in any manner and, as a result of such amendment, counsel to the Partnership is unable to give the Partnership an opinion to the effect that the Partnership will be treated as a partnership for Federal income tax purposes and not as an association taxable as a corporation, then the General Partner may decide in its sole discretion to reconstitute the Partnership under the laws of another state. 3. Any provision to the contrary contained herein notwithstanding, the General Partner may, without the consent of the Limited Partners, amend this Agreement (a) to add to the representations, duties or obligations of a General Partner or to surrender any right or power granted to a General Partner herein, 34 35 for the benefit of the Limited Partners, (b) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein or to make any other provision with respect to matters or questions arising under this Agreement which will not be inconsistent with the provisions of this Agreement, (c) to delete any provision from this Agreement or to add any provision to this Agreement required to be so deleted or added by the Staff of the Securities and Exchange Commission or by a State "Blue Sky" Commissioner or similar such official, which addition or deletion is deemed by such Commission or official to be for the benefit or protection of the Limited Partners, and (d) to change administrative or other provisions of this Agreement in a manner which, in the opinion of the General Partner, will permit the most profitable and/or efficient operation of the Partnership; provided, however, that no amendment shall be adopted pursuant to this Section 3 unless the adoption thereof (i) is for the benefit of, or not adverse to, the interests of the Limited Partners, (ii) is consistent with Article IV and Paragraph A of Article X hereof, (iii) does not affect the distribution of Distributable Cash From Operations, Cash From Sales and Cash From Financings or the allocation of profits and losses among the Limited Partners or between the Limited Partners and the General Partner and (iv) does not affect the limited liability of the Limited Partners or the status of the Partnership as a partnership for Federal income tax purposes. 4. Upon amendment of this Agreement, the Certificate of Limited Partnership shall also be amended if necessary to reflect such change. 5. Any amendment to the Partnership Agreement which modifies the compensation or distributions to which a General Partner is entitled or which affects the duties of a General Partner must be consented to by the General Partner before becoming effective. 6. In the event there is a change in the Federal income tax laws or regulations which result in the Partnership being taxed as an association taxable as a corporation, the General Partner may cause the Partnership to conduct its business so as to be treated as a real estate investment trust for Federal income tax purposes. C. Meetings of the Partnership. Meetings of the Partnership may be called by the General Partner and shall be called by them upon the written request of Limited Partners holding more than ten percent (10%) or more of the outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. Upon receipt of such a written request, stating the purpose of the proposed meeting, the General Partner shall provide each Partner, within 10 days of such request, written notice (either by personal service or certified mail or by express or other overnight delivery service) of a meeting and the purpose of such meeting. Such meeting shall 35 36 be held not less than 10 days nor more than 60 days after the receipt of such request. Included with the notice shall be a detailed statement of the action proposed, including a verbatim statement of the wording of any resolution proposed for adoption by the Limited Partners and of any proposed amendment to the Partnership Agreement. The Partnership will provide for Proxies or written consents which specify a choice between approval or disapproval of each matter to be acted upon at the meeting. Holders of a majority of the Limited Partner Interests entitled to vote, shall constitute a quorum at a meeting of the Limited Partners. To the extent not consistent with this Paragraph C, all meetings shall be governed by the provisions of Section 15637 of the Act. The General Partner may establish a record date for any meeting, subject to the limitations of Section 15637(j) of the Act. ARTICLE XVII TERM The Partnership shall terminate on December 31, 2005, unless sooner dissolved pursuant to the provisions of Article XVIII hereof as otherwise provided by law. ARTICLE XVIII DISSOLUTION A. Events Requiring Dissolution. The Partnership shall be dissolved upon the happening of any of the following events: 1. The retirement, removal, adjudication of bankruptcy under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in lieu thereof), of the General Partner, the dissolution or other cessation to exist as a legal entity of the General Partner, unless the Limited Partners agree in writing to continue the business of the Partnership and to admit one or more General Partners. 2. The Partnership is adjudicated bankrupt under Chapter 7 of the Federal Bankruptcy Code (or any similar law or provision enacted in lieu thereof). 3. The vote of Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests held by all Limited Partners, with the same proportionate vote as provided in paragraph (d) of Article XI. 4. The disposition of all interests in the real, personal and mixed property and other assets of the Partnership. 36 37 5. December 31, 2005. B. Distributions on Dissolution. Upon the dissolution of the Partnership the General Partner who has not wrongfully dissolved the Partnership shall wind up the affairs of the Partnership. If there is no such General Partner, the Limited Partners shall wind up the affairs of the Partnership. The Partners winding up the affairs of the Partnership shall take full account of the Partnership assets and liabilities and all assets shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom shall be applied and distributed in the following order: (1) to creditors (including Partners who are creditors to the extent permitted by law), in the order of priority as provided by law, (2) to the Partners in accordance with their respective Capital Accounts, determined after the application of Articles VIII and IX hereof and (3) to the Partners in accordance with the provisions of Paragraph E of Article IX hereof. Notwithstanding anything to the contrary, in the event the Partnership is "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), liquidating distributions shall be made pursuant to the previous sentence by the end of the taxable year in which the Partnership is liquidated, or, if later, within 90 days after the date of such liquidation. Distributions pursuant to the preceding sentence may be made to a trust for the purposes of an orderly liquidation of the Partnership by the trust in accordance with the Act. C. Contributions by the General Partner. In the event that, upon the liquidation of the Partnership, a General Partner shall have a negative balance in the General Partner's Capital Account then the General Partner shall contribute to the capital of the Partnership an amount equal to such negative balance in the General Partner's Capital Account. ARTICLE XIX POWER OF ATTORNEY Concurrently with the written acceptance and adoption of the provisions of this Agreement, each Limited Partner and Special Partner shall execute and deliver to the General Partner a Power of Attorney in form acceptable to the General Partner in which the General Partner is constituted and appointed as the attorney-in-fact for such Limited Partner or Special Partner with power and authority to act in his name and on his behalf in the execution, acknowledgment and filing of documents, which will include but not be limited to a Certificate of Limited Partnership, as well as amendments thereto, under the laws of the State of California and under the laws of any other state in which the General Partner deems it 37 38 advisable to file such a certificate; any other instrument which may be required to be filed by the Partnership under the laws of any state or by any governmental agency, or which the General Partner deems it advisable to file; and any documents which may be required to effect the continuation of the Partnership, the admission of an additional or substituted Limited Partner or the dissolution and termination of the Partnership, provided such continuation, admission or dissolution and termination are in accordance with the terms of this Agreement. The Power of Attorney so granted by each Limited Partner and Special Partner to the General Partner is a Special Power of Attorney coupled with an interest, is irrevocable and shall survive the death or legal incapacity of the Limited Partner or Special Partner; may be exercised by the General Partner for each Limited Partner or Special Partner by a facsimile signature of one of its officers or by listing all the Limited Partners and Special Partners executing any instrument with a single signature of one of its officers acting as attorney-in-fact for all of them; and shall survive the delivery of any assignment by a Limited Partner or Special Partner of the whole or any portion of his interest in the Partnership; except that where the assignee thereof has been approved by the General Partner for admission to the Partnership as a substituted Limited Partner or Special Partner, the Power of Attorney shall survive the delivery of such assignment for the sole purpose of enabling the General Partner to execute, acknowledge and file any instrument necessary to effect such substitution. The Power of Attorney so granted by each Limited Partner to the General Partner shall not authorize the General Partner to act on behalf of Limited Partners in any situation in which this Agreement requires the consent of Limited Partners. ARTICLE XX LIMITATIONS ON LIABILITY; LITIGATION Except as provided in his Subscription Agreement, no Limited Partner shall be liable (i) as a General Partner unless, in addition to the exercise of his rights and powers as a Limited Partner, he takes part in the management or control of the Partnership's business or (ii) to the Partnership or to a General Partner unless a liability of the Partnership or of the General Partner, as the case may be, is founded upon the unauthorized activity of such Limited Partner in attempting to take part in the control of the Partnership's business or misstatements contained in such Limited Partner's Subscription Agreement delivered in connection with his purchase of limited partner interests. The General Partner is hereby authorized to prosecute, defend, settle or compromise actions or claims at law or in equity at the Partnership's expense as may be necessary or proper to enforce or protect the Partnership's interests. The General Partner shall satisfy any judgment, decree or decision of any court, board or authority having jurisdiction or any settlement 38 39 of any suit or claim prior to judgment or final decision thereon first, out of any insurance proceeds available therefor, next out of the Partnership's assets and income and finally out of the assets and income of the General Partner. ARTICLE XXI MISCELLANEOUS All notices under this Agreement shall be in writing and shall, except as otherwise expressly provided herein, be given to the Partner entitled thereto by personal service or by certified or registered mail, return receipt requested, to the address set forth in this Agreement for such Partner or at such other address as he may specify in writing. Article titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. Whenever the singular number is used in this Agreement and when required by the context, the same shall include the plural, and the masculine gender shall include the feminine and neuter genders and the word "persons" shall include individuals, corporations, firms, partnerships, trusts or other forms of associations. This Agreement may be executed in several counterparts, and all so executed shall constitute one agreement, binding on all of the parties hereto, notwithstanding that all the parties are not signatory to the original or the same counterpart. Subject to the provisions of Article XV, the terms and provisions of this Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, successors and assigns of the respective Partners. Whenever the vote of the Limited Partners is referred to in this Agreement, the General Partner may vote on behalf of such Limited Partners who have by written proxy authorized the General Partner so to do. This Agreement and amendments hereof shall be governed by the laws of the State of California. 39 40 IN WITNESS WHEREOF, the parties hereto have hereunto set their respective hands as of the day and year first above written. GENERAL PARTNER: CAREY DIVERSIFIED LLC By: -------------------------------- CORPORATE SPECIAL PARTNER: CAREY MANAGEMENT LLC By: -------------------------------- INDIVIDUAL SPECIAL PARTNER ----------------------------------- William Polk Carey LIMITED PARTNERS: CAREY CORPORATE PROPERTY, INC. By: -------------------------------- CAREY DIVERSIFIED LLC By: -------------------------------- All Limited Partners now and hereafter admitted as limited partners of the Partnership pursuant to powers of attorney and authorizations now and hereafter executed in favor of and granted and delivered to the General Partner By: CAREY DIVERSIFIED LLC, General Partner By: -------------------------------- 40 EX-99.18 58 AMEN & RESTATED AGREEMENT OF LTD PARTNERSHIP CPA 6 1 Exhibit 99.18 AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF CORPORATE PROPERTY ASSOCIATES 6 (A CALIFORNIA LIMITED PARTNERSHIP) THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP of CORPORATE PROPERTY ASSOCIATES 6, a California limited partnership (the "Partnership"), which amends and restates the Amended Agreement of Limited Partnership dated as of July 23, 1984, as amended as of November 26, 1984, April 14, 1988 and ___________,1997 is made and entered into as of the ______ day of __________, 1997 by and between CAREY DIVERSIFIED, LLC, a Delaware limited liability company, as general partner and as limited partner, and CAREY CORPORATE PROPERTY, INC., a Delaware corporation, as limited partner, CAREY MANAGEMENT LLC, as Corporate Special Partner, WILLIAM POLK CAREY, as Individual Special Partner, those Persons set forth on Schedule A hereto, as limited partners, and all persons and entities admitted as Limited Partners as provided herein. ARTICLE I FORMATION OF PARTNERSHIP The parties hereby continue the Partnership under the provisions of the California Revised Limited Partnership Act (the "Act") and the rights and liabilities of the Partners shall be as provided in such law and as herein expressly provided. In the event that it shall be necessary for the Partnership to exist in or qualify to do business under the laws of any state or states other than or in addition to the State of California, the parties hereby agree that the Partnership shall take such action as may be necessary to exist or qualify to do business in any state in which such existence or qualification shall be required, provided that in any such event the Partnership shall at all times continue to be a limited partnership formed under and governed by the provisions of the Act. ARTICLE II NAME The business of the Partnership shall be conducted under the name "Corporate Property Associates 6 - a California limited partnership" or under "Corporate Property Associates 6" in any state or other jurisdiction which does not permit the term "limited" to be a part of the Partnership's name or under such 2 other name as the General Partner shall hereafter designate in writing to the other Partners. ARTICLE III DEFINITIONS "Acquisition Expenses" means the expenses of the Partnership related to the selection and acquisition of properties by the Partnership, whether or not such properties are acquired, including but not limited to legal fees and expenses, travel and communications expenses, costs of appraisals, non-refundable option payments on property not acquired, accounting fees and expenses, costs of title reports and title insurance, transfer and recording taxes and miscellaneous expenses. Acquisition Expenses shall not include Acquisition Fees. "Acquisition Fees" means the total of all fees and commissions paid by any party in connection with the purchase or development of property by the Partnership, except a development fee paid to a person not an Affiliate of the Partnership in connection with the actual development of a project after the Partnership's acquisition of the land. Included in the computation of such fees or commissions shall be any real estate commission, selection fee, development fee (other than as described above), nonrecurring management fee, or any fee of a similar nature, however designated, but not any loan fee ("points"). Acquisition Fees shall not include Acquisition Expenses. "Act" means the California Revised Limited Partnership Act. "Affiliate" means, with respect to any Partner, (i) any person directly or indirectly controlling, controlled by or under common control with such Partner, (ii) any person owning or controlling 10% or more of the outstanding voting securities of such Partner, (iii) any officer, director or partner of such Partner or of any person specified in (i) or (ii) above and (iv) any company in which any officer, director or partner of any person specified in (iii) above is an officer, director or partner; provided, however, that for purposes of this definition the term "Affiliate" shall not be deemed to include any person providing legal, underwriting or financial or investment advisory services to the Partnership, the General Partner or any Affiliate of any of them from time to time. "Agreement" means this Amended and Restated Agreement of Limited Partnership as hereafter amended from time to time. "Appraisal Date" means December 31, 2001. 2 3 "Capital Account" means, in respect of any Partner, the account maintained for such Partner in accordance with Article XII. "Cash From Financings" means the net cash proceeds realized by the Partnership from the financing of Partnership property or the refinancing of any Partnership indebtedness. "Cash From Sales" means the net cash proceeds realized by the Partnership from the sale, exchange or other disposition of any of its assets. Cash From Sales shall not include net cash proceeds realized from the financing of Partnership property or the refinancing of any Partnership indebtedness. "Code" means the Internal Revenue Code of 1986. "Consolidation and Offering Expenses" means all expenses incurred in connection with the formation and qualification of the Subsidiary Partnership, the Merger and in offering the Shares to the former limited partners of the Partnership in exchange for their Partnership Interests under applicable Federal and state law, and any other expenses actually incurred and directly related to the offering of the Shares, including such expenses as: (i) the preparing, printing, filing and delivering of the Registration Statement and the Prospectus (including any amendments thereof or supplements thereto), (ii) the preparing and printing of this Agreement, other solicitation material and related documents and the filing and/or recording of such certificates or other documents necessary to comply with the laws of the State of California for the formation of a limited partnership, the merger of a limited partnership into another limited partnership and for the continued good standing of a limited partnership, (iii) the qualification or registration of the limited liability company interests under state securities or "Blue Sky" laws, (iv) any escrow arrangements, including any compensation to an escrow agent, (v) the filing fees payable to the United States Securities and Exchange Commission and to the National Association of Securities Dealers, Inc. and any costs payable to the New York Stock Exchange for the listing of the Listed Shares, (vi) the fees of the Partnership's counsel, (vii) all advertising expenses incurred in connection therewith, including the cost of all sales literature and the costs related to investor and broker/dealer sales and information meetings and marketing incentive programs and (viii) selling commissions and wholesaling expenses incurred in connection with the sale of the Shares. "Contribution" means any money, property or services rendered, or a promissory note or other binding obligations to contribute money or property, or to render services as permitted by Section 15651 of the Act, which a Partner contributes to the Partnership as capital in that Partner's capacity as Partner pursuant to this Partnership Agreement or any other agreement among the Partners, including any agreement as to value. 3 4 "Corporate Special Partner" means Carey Management LLC, a Delaware limited liability company. "CPA Partnership" means Corporate Property Associates, a California limited partnership, Corporate Property Associates 2, a California limited partnership, Corporate Property Associates 3, a California limited partnership, Corporate Property Associates 4, a California limited partnership, Corporate Property Associates 5, a California limited partnership, Corporate Property Associates 7, a California limited partnership, Corporate Property Associates 8, L.P., a Delaware limited partnership, Corporate Property Associates 9, L.P., a Delaware limited partnership, the Partnership and any other real estate limited partnerships sponsored by W.P. Carey & Co., Inc. or its Affiliates with investment objectives substantially similar to the Partnership's. "Distributable Cash From Operations" means cash receipts from the ordinary day-to-day operations of the Partnership (including all interest on Partnership investments and mortgages held by the Partnership) without deduction for the management fee authorized by Paragraph G(3) of Article X payable to an Affiliate of the General Partner or for depreciation and amortization of intangibles such as organization, underwriting and debt placement costs but after deducting all other expenses and debt amortization and provisions for reserves by the General Partner which it deems to be reasonably required for the proper operation of the business of the Partnership. "Distributable Cash From Operations" shall not include cash proceeds realized from the sale, exchange or other disposition of assets of the Partnership or from financing of Partnership property or the refinancing of any Partnership indebtedness. "Distribution" means any transfer of money or property by the Partnership to a Partner without consideration. "Fiscal Quarter" means the three-month period ending on the last day of the third, sixth, ninth and twelfth calendar months of each Fiscal Year of the Partnership. "Fiscal Year" means the Fiscal Year specified in Article XIII. "Front-End Fees" means all fees and expenses paid by any party for any services rendered in connection with the organizational or acquisition phase of the Partnership, including Consolidation and Offering Expenses, Acquisition Fees, Acquisition Expenses and any other similar fees, however designated. "General Partner" means any person or entity in his, her or its capacity as general partner of the Partnership and whose name and address are set forth in Article V, or any successor thereto appointed or elected hereunder. 4 5 "Individual Special Partner" means William Polk Carey. "Investment in Properties" means the amount of gross proceeds of the Offering paid or allocated to the purchase, development, construction or improvement of properties acquired by the Partnership, including the purchase of properties, investments in stock, interests, warrants or other rights as permitted by Paragraph G(7) of Article X hereof, working capital reserves (except that working capital reserves in excess of 5% of the gross proceeds of the Offering shall not be included) and other cash payments such as interest, financing fees, taxes and other similar items, but excluding Front-End Fees. "Limited Partner" means any person or entity in his, her or its capacity as a limited partner of the Partnership and whose name and address are set forth on the books and records of the Partnership. "Mandatory Distribution Event" means (a) the sale or disposition of a Partnership property to a third party unaffiliated with the Partnership or the General Partner, not including the pledge, mortgage or encumbrance of a property, or of any interest therein, in connection with the financing, refinancing or other leveraging of such property or otherwise or any assignment of any leases or rents related to such property, or (b) the mandatory distribution to holders of Partnership Interests following the Appraisal Date. "Merger" means the merger of the Subsidiary Partnership into the Partnership. "Merger Agreement" means the Agreement of Merger pursuant to which the Subsidiary Partnership is merged with and into the Partnership. "Minimum Gain" shall mean and refer to, at any time, the excess, if any, of the outstanding principal balance of all nonrecourse debt of the Partnership that is secured by an interest in Partnership assets, over the adjusted basis of such assets to the Partnership for Federal income tax purposes. For purposes of the preceding sentence, the term "nonrecourse debt" shall mean a liability of the Partnership with respect to which no Partner has any personal liability. "Nonrecourse Deductions" has the meaning set forth in Sections 1.704-2(b)(1) and 1.704-2(c) of the Treasury Regulations. "Nonrecourse Liabilities" has the meaning set forth in Section 1.704-2(b)(3) of the Treasury Regulations. "Net Lease" means a lease in which the tenant undertakes to pay all or substantially all the cash expenses, excluding debt service, related to the leased property. 5 6 "Offering" means the offering of the Shares made pursuant to the Prospectus. "Partner" means the General Partner, the Corporate Special Partner, the Individual Special Partner and any Limited Partner where no distinction is required by the context in which the term is used. "Partner Minimum Gain" means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a nonrecourse Liability, determined in accordance with Treasury Regulations Section 1.704-2(i)(4). "Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulations Section 1.704-2(b)(4). "Partner Nonrecourse Deductions" has the meaning set forth in Treasury Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Debt for the Partnership taxable year shall be determined in accordance with the rules of Treasury Regulations Section 1.704-2(i)(2). "Partnership" means Corporate Property Associates 6 - a California limited partnership. "Partnership Interest" means the interest of each Partner in the profits, losses, distributions, capital and assets of the Partnership. "Partnership Minimum Gain" has the meaning set forth in Treasury Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in Partnership Minimum Gain, for a Partnership taxable year shall be determined in accordance with the rules of the Treasury Regulations. "Prospectus" means the final prospectus of the General Partner pursuant to which the Partnership will offer up to 23,654,898 Shares as the same may at any time and from time to time be amended or supplemented after the effective date of the Registration Statement. "Proxy" means a written authorization signed by a Partner or the Partner's attorney-in-fact giving another person the power to vote with respect to the Partnership Interest of that Partner. "Signed," for the purpose of this paragraph, means the placing of the Partner's name on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the Partner or the Partner's attorney-in-fact. "Registration Statement" means the General Partner's Registration Statement on Form S-4 filed with the Securities and Exchange Commission in the form in which it becomes effective, as 6 7 the same may at any time and from time to time thereafter be amended or supplemented. "Shares" means the Shares of the General Partner. "Special Partners" means the Corporate Special Partner and the Individual Special Partner. "Subsidiary Partnership" means Sixth Subsidiary, L.P., a California limited partnership, which is a subsidiary of the General Partner. ARTICLE IV PURPOSE The business and purpose of the Partnership is to carry on any business that a California partnership without limited partners may carry on (except the banking, insurance or trust company business), and more particularly to invest in and own real property or interests therein (including leasehold estates) or appurtenances thereto as well as personal or mixed property connected therewith which is income producing or capable of becoming income producing within a reasonable time after acquisition. The Partnership may enter into ventures, partnerships and other business arrangements with respect to real property as deemed prudent by the General Partner in order to achieve successful operations for the Partnership. Operations of the Partnership may be conducted wherever, in the opinion of the General Partner and not in violation of the general restrictions described in Paragraph H of Article X, the factors involved appear to be favorable for the Partnership and the Partners. ARTICLE V NAMES AND ADDRESSES OF PARTNERS The General Partner of the Partnership shall be Carey Diversified LLC, a Delaware limited liability company having an office at 50 Rockefeller Plaza, New York, New York 10020. The names and addresses of the Limited Partners of the Partnership shall be as set forth on the books and records of the Partnership and shall be kept at the principal place of business of the Partnership and a copy of which shall be kept at the Partnership's California office. 7 8 ARTICLE VI PRINCIPAL PLACE OF BUSINESS; CALIFORNIA OFFICE The principal place of business of the Partnership shall be 50 Rockefeller Plaza, New York, New York 10020. The Partnership shall also maintain an office in California at Transamerica Pyramid, 600 Montgomery Street, San Francisco, California 94111. The General Partner may from time to time change the principal place of business of the Partnership or its California office and, in either such event, the General Partner shall notify the Partners in writing within ten days after the effective date of such change; provided, however, that no such change shall be effected unless the General Partner determines that such change is in the best interests of the Partnership after giving consideration to any material adverse state or local income, estate or inheritance tax consequences to the Partners, or any adverse effect on the limited liability of the Limited Partners, as a result of such change and provided further that the Partnership shall always maintain at least one office in California. The General Partner may establish additional places of business of the Partnership when and where required by the business of the Partnership. The Partnership at all times shall maintain in California an agent for service of process upon the Partnership. ARTICLE VII CAPITAL CONTRIBUTIONS The Partnership is authorized to issue and sell up to $90,000 of limited partner interests. No interest shall be paid on any contribution to the capital of the Partnership. Loans by a Partner to the Partnership shall not be considered contributions to the capital of the Partnership. Any Partner, including any additional or substituted Partner, who shall acquire a Partnership Interest or whose Partnership Interest is increased by means of a transfer to him of all or a part of the Partnership Interest of another Partner, shall succeed to the Capital Account, or portion thereof, in respect of the Partnership Interest received. 8 9 ARTICLE VIII PROFITS AND LOSSES A. Determination of Profits and Losses. The profits and losses of the Partnership shall be determined for each Fiscal Year of the Partnership in accordance with generally accepted accounting principles and procedures applied in a consistent manner and for federal income tax purposes, by additionally making such adjustments as are necessary to include other items of income, expense, deduction and allowance as are permitted or required under the Code and the regulations promulgated thereunder. Except as otherwise provided herein, whenever a proportionate part of the Partnership profit or loss is credited or charged to a Partner's Capital Account, every item of income, gain, loss or deduction entering into the computation of such profit or loss shall be considered either credited or charged, as the case may be, to such Partner's Capital Account and every item of credit or tax preference related to such profit or loss and applicable to the period during which such profit or loss was realized shall be allocated to such Partner in the same proportion. Every recapture of deduction or credit shall be allocated among the Partners in the same proportion as the items of deduction or credit subject to recapture were allocated among the Partners. Any increase or decrease in the amount of any item of income, gain, loss or deduction attributable to any adjustment to the basis of Partnership assets made pursuant to a valid election under Sections 734, 743 and 754 of the Code and pursuant to corresponding provisions of applicable state and local income tax laws shall be charged or credited, as the case may be, and any increase or decrease in the amount of any item of credit or tax preference attributable to any such adjustment shall be allocated, to the Partners entitled thereto under such laws. Profits and losses allocated to a particular class of Partnership Interests shall be allocated among the holders of record of such class of Partnership Interests at the end of each Fiscal Year (or such shorter period as may be provided herein) of the Partnership in proportion to their respective Partnership Interests; provided, however, that any such, profits and losses attributable to a limited partner interest assigned during such Fiscal Year of the Partnership shall be allocated among the holders of such limited partner interests during such Fiscal Year in proportion to the number of months (for purposes of such allocation ownership of limited partner interests for each month will be determined as of the fifteenth day of each month) that each such holder was recognized as the owner of such limited partner interest during such Fiscal Year, without regard to the results of Partnership operations during the period in which each such holder was recognized as the owner thereof and without regard to the date, amount or recipient of any distributions which may have been made with respect to such limited partner interest. B. Allocation of Profits and Losses. 9 10 1. Except as provided below, 1% of the profits and losses of the Partnership (other than gains or losses from the sale, exchange or other disposition of Partnership assets) shall be allocated to the General Partner, 5% of such profits and losses shall be allocated to the Corporate Special Partner, 1% of such profits and losses shall be allocated to the Individual Special Partner and 95% of such profits and losses shall be allocated to the Limited Partners. a. If certain Partners' Capital Accounts are negative and other Partners' Capital Accounts are positive or will be so as a result of an allocation of Partnership losses, losses shall not be allocated to any Partner in excess of the positive balance of his Capital Account until the balances of all Partners' Capital Accounts are first reduced to zero. Capital Accounts shall be determined prior to the application of the preceding sentence, after applying subparagraph (b) hereof, and after applying subparagraph 5 of this Paragraph B. b. If as of the end of any fiscal year (i) the excess, if any, of (x) the aggregate principal balance of Partnership non-recourse indebtedness secured by Partnership assets over (y) the adjusted basis for Federal income tax purposes of such assets is less than (ii) the aggregate negative amount attributable to such non-recourse indebtedness in proportion to the negative amounts attributable of the Capital Accounts of all Partners whose Capital Accounts are negative. Such Partners shall be allocated Partnership income to the extent recognized by the Partnership in an amount equal to such difference. Such Partnership income shall be allocated among the Partners whose Capital Accounts are negatives as a result of non-recourse indebtedness. Solely for purposes of this Paragraph b, the Capital Accounts of each Partner shall be reduced by such Partner's share of any Partnership expenditure which would be treated as if it were an expenditure described under Section 705 (a)(2)(B) of the Code, shall be reduced or increased, as appropriate, by other amount required by the then applicable regulations under Section 704 of the Code. 2. Subject to subparagraph 1(a) above, losses arising from a sale, exchange or other disposition of Partnership assets shall be allocated 1% to the General Partner, 5% to the Corporate Special Partner, 1% to the Individual Special Partner and 93% to the Limited Partners as follows: a. First, in proportion to and to the extent of the minimum amounts that must be allocated to equalize the Capital Accounts of each Limited Partner in proportion to percentage of partnership interest held of record by such Limited Partner; and 10 11 b. Then, the balance to each Limited Partner in proportion to the percentage of partnership interest held of record by such Limited Partner. For purposes of this subparagraph 2, Capital Accounts shall be determined after applying the allocations provided in subparagraphs 1 and 4 of this Paragraph B, and after applying subparagraph 5 of this Paragraph B. 3. Gains arising from a sale, exchange or other disposition of Partnership assets shall be allocated in the following order to priority: a. If each Partner's Capital Account is negative and the gains are less than the aggregate negative amounts in the Capital Accounts, in the ratio that the Capital Accounts bear to each other; b. If each Partner's Capital Account is negative and the gains are greater than the aggregate negative amounts in the Capital Accounts (i) first in an amount sufficient to bring each Partner's Capital Account to zero, and (ii) then to the Partners in the percentage by which Cash From Sales and Cash From Financings is then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; c. If certain Partner's Capital Accounts are positive and other Partner's Capital Accounts are negative (i) first in an amount to bring the Capital Account of each Partner whose Capital Accounts which are negative to zero (or if gains are less than the aggregate negative amounts of the Capital Accounts which are negative, to such Partners in the ratio that such negative Capital Accounts bear to each other), and (ii) then to the Partners in the percentage by which Cash From Sales and Cash From Financings is then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; d. If each Partner's Capital Account is positive, in the percentages by which Cash From Sales and Cash From Financings is then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; For purposes of this subparagraph 3, Capital Accounts shall be determined after applying the allocations provided in subparagraphs 1, 2 and 4 of this Paragraph B and after applying subparagraph 5 of Paragraph B. In no event shall the allocation of gains from the sale, exchange or disposition of Partnership assets be allocated in an amount less than 1% to the Limited Partners in the aggregate. 4. To the extent that any amount paid to a Limited Partner or its Affiliates pursuant to the provisions of Paragraphs G(2), (3), (4), (5), or (6) of Article X hereof, or as Front-End Fees, 11 12 is treated as a distributive share of Partnership income to the Limited Partner for Federal income tax purposes, the Limited Partner affected shall be allocated gross income of the Partnership at a time and in an amount equal to the amount of such payment, and the Capital Account of the Limited Partner so affected shall be adjusted to reflect such allocation and payment. If the Partnership's gross income for a Fiscal Year is less than the amount of such payment, the Limited Partner so affected shall be allocated gross income in each succeeding Fiscal Year until the total amount so allocated equals the total amount of such payment. 5. For purposes of subparagraphs 1(a), 2 and 3 of this Paragraph B, distributions to the Partners pursuant to Paragraphs A and E of Article IX hereof shall be treated as having been made and charged to the Capital Accounts of the Partners prior to the allocations of income, gains and losses provided therein. 6. Solely for purposes of this Paragraph B, the Capital Accounts of each Partner shall be reduced by such Partner's share of any Partnership expenditure which would be treated as it were an expenditure described under Section 705(a)(2)(B) of the Code, and shall be reduced or increased by any other amount required by the then applicable regulations under Section 704 of the Code. 7. Notwithstanding anything to the contrary in this Article VIII, if any Partner receives an adjustment, allocation or distribution described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), such Partner shall be specially allocated a pro rata portion of each item of Partnership income, including gross income, and gain in an amount and manner sufficient to eliminate, as quickly as possible, any deficit balance in such Partner's Capital Account created by such adjustment, allocation or distribution in excess of the sum of (i) the amount such Partner is obligated to restore pursuant to any provision of this Agreement and (ii) the amount such Limited Partner is deemed to be obligated to restore pursuant to the penultimate sentence of Treasury Regulations Section 1.704-1(b)(2)(iv)(f) (as amended in 1986). This subparagraph 8 of Paragraph B is intended to constitute a "qualified income offset" within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(3). 8. Except as otherwise provided in Section 1.704-2(f) of the Treasury Regulations, if there is a net decrease in Partnership Minimum Gain for any Partnership fiscal year, each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary subsequent years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain to the extent required by Treasury Regulations Section 1.704-2(f). The items to be so allocated shall be determined in accordance with Section 1.704-2(f) and (i) of the Treasury Regulations. This subparagraph is intended to comply with the minimum gain chargeback requirement in said 12 13 section of the Treasury Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant hereto. 9. Except as otherwise provided in Section 1.704-2(i)(4) of the Treasury Regulations, if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any fiscal year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the Treasury Regulations, shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to that Partner's share of the net decrease in the Partner Minimum Gain attributable to such Partner Nonrecourse Debt to the extent and in the manner required by Section 1.704-2(i) of the Treasury Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i) of the Treasury Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and (j)(2) of the Treasury Regulations. This subparagraph is intended to comply with the minimum gain chargeback requirement with respect to Partner Nonrecourse Debt contained in said section of the Treasury Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph shall be made in proportion to the respective amounts to be allocated to each Partner pursuant hereto. 10. To the extent any Partner has an Adjusted Capital Account Deficit at the end of any Partnership Fiscal Year, each such Partner shall be specially allocated items of Partnership income (including gross income) and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Paragraph 8(B)(11) shall be made if and only to the extent that such Partners would have an Adjusted Capital Account Deficit after all other allocations provided for in this Section have been tentatively made as if this Paragraph 8(B)(11) were not in the Agreement. 11. Partner Nonrecourse Deductions for any fiscal year or other applicable period with respect to a Partner Nonrecourse Debt shall be specially allocated to the Partners that bear the economic risk of loss for such Partner Nonrecourse Debt (as determined under Sections 1.704-2(b)(4) and 1.704-2(i)(1) of the Treasury Regulations). C. Power of the General Partner to Vary Allocations of Profits and Losses. It is the intent of the Partners that each Partner's distributive share of income, gains, losses, deductions and credits shall be determined and allocated in accordance with this Article VIII to the fullest extent permitted by Section 704(b) of the Code. If the Partnership is advised that the allocations 13 14 provided in this Article VIII are unlikely to be respected for Federal income tax purposes, the General Partner has been granted power in Paragraph B(2)(a) of Article XVI of this Agreement to amend the allocation provisions of this Agreement, on advice of accountants and legal counsel, to the minimum extent necessary to effect the plan of allocations and distributions provided in this Agreement. D. Allocations of Profits and Losses Among Limited Partners. Except as otherwise provided in this Article VIII, profits and losses shall be allocated among the Limited Partners in the same manner as distributions are allocated in Paragraph D of Article IX hereof. E. Consent of Partners to Allocation of Profits and Losses. The methods hereinabove set forth by which profits and losses of the Partnership are determined and allocated are hereby consented to by each Partner as a condition to becoming a Partner. ARTICLE IX DISTRIBUTIONS A. Distributable Cash From Operations. The General Partner shall distribute as soon after the close of each Fiscal Quarter as is reasonably feasible all of the Distributable Cash From Operations for such Fiscal Quarter in the following manner: 1% to the General Partner, 5% to the Corporate Special Partner, 1% to the Individual Special Partner and 93% to the Limited Partners. (i) Cash From Sales. The General Partner shall distribute, as soon after the close of each Fiscal Quarter as is reasonably feasible, all Cash From Sales realized by the Partnership during such Fiscal Quarter in accordance with the provisions of Paragraph E of this Article IX. B. Cash From Financings. The General Partner shall distribute, as soon after the close of each Fiscal Quarter as is reasonably feasible, all of the Cash From Financings realized by the Partnership during such Fiscal Quarter in accordance with the provisions of Paragraph E of this Article IX. C. Allocation of Distributions Among Limited Partners. Distributions of cash to the Limited Partners shall be apportioned among the holders of record of limited partner interests in the ratio in which the number of limited partner interests held of record by each of them bears to the number of limited partner interests held of record by all Limited Partners as of the first day of the Fiscal Quarter with respect to which such distribution is made. 14 15 D. Distributions of Cash From Sales and Cash From Financings. The General Partner shall distribute Cash From Sales and Cash From Financings in the following manner: 1% to the General Partner, 1% to the Individual Special Partner and 98% to the Limited Partners, and thereafter, 100% to the Limited Partners until such time as $461,454 is distributed to the Individual Special Partner pursuant to this Paragraph E of Article IX. Thereafter, Cash From Sales and Cash From Financings shall be distributed 1% to the General Partner and 99% to the Limited Partners. E. Return of Capital Contributions. To the extent that, at the end of any Fiscal Quarter, the total cash distributions to the Limited Partners made pursuant to this Article IX exceed the profits of the Partnership for such Fiscal Quarter, such excess shall be charged to each Limited Partner's Capital Account and shall be regarded as a rightful return of capital contributions. F. No Distributions Under Certain Circumstances. Notwithstanding any other provision of this Article IX, no distribution shall be made if, after giving effect to the distribution, all liabilities of the Partnership (other than liabilities to Partners on account of their interest in the Partnership and liabilities as to which recourse of creditors is limited to specified property of the Partnership) exceed the fair value of the Partnership's assets, provided that the fair value of any asset that is subject to a liability as to which the recourse of creditors is so limited shall be included in the Partnership's assets only to the extent that the fair value of the property exceeds such liability. No Partner shall have the right to receive property other than money upon any distribution. No Partner may be compelled to accept a distribution of any asset in kind in lieu of a proportionate distribution of money being made to other Partners. G. Consent of Partners to Allocation of Distributions. The methods hereinabove set forth by which Cash From Operations, Cash From Sales and Cash From Financings are allocated and distributed are hereby consented to by each Partner as a condition to becoming a Partner. ARTICLE X MANAGEMENT AND OPERATION OF BUSINESS A. Management of Business. The Partnership shall be managed by the General Partner and the conduct of the Partnership's business shall be controlled and conducted by the General Partner in accordance with this Agreement. B. Authority of General Partner. In addition to and not in limitation of any rights and powers conferred by law or other provisions of this Agreement, the General Partner shall have and may exercise on behalf of the Partnership all powers and rights 15 16 necessary, proper, convenient or advisable to effectuate and carry out the purposes, business and objectives of the Partnership. Such powers shall include, without limitation, the following powers: 1. To acquire, hold and dispose of any real property (or any interests therein, including leasehold estates) and appurtenances thereto as well as personal or mixed property connected therewith, including the purchase, lease, development, improvement, maintenance, exchange, trade or sale of such property at such price, rental or amount, for cash, securities or other property and upon such terms, as the General Partner deems to be in the best interests of the Partnership; 2. Subject to the provisions of Paragraph H (12) of this Article X, to borrow money and, if security is required therefor, to mortgage or subject to any other security device any portion of the assets of the Partnership, to obtain replacements of any mortgage or other security device, and to prepay, in whole or in part, refinance, increase, modify, consolidate or extend any mortgage or other security device, provided, however, that loans from Affiliates of the General Partner shall be made in accordance with the provisions of Paragraphs G(5) of this Article X; 3. To invest the Partnership's funds in United States Government securities, certificates of deposit other time or demand deposits of United States commercial banks, savings banks, savings and loan associations or similar institutions which have a net worth of at least $100,000,000 or in which such certificates or deposits are fully insured by any federal or state government agency, Eurodollar deposits in foreign branches of United States banks, which banks have a net worth of at least $100,000,000 bank repurchase agreements covering securities of the United States Government or governmental agencies, bankers' acceptances, public no-load money market funds or other similar short-term highly liquid investments; to invest any working capital or other reserves retained by the General Partner for the operation of the Partnership in like manner; and to deposit, withdraw, invest, pay, retain and distribute the Partnership's funds in any manner consistent with the provisions of this Agreement; 4. To bring and defend actions at law or in equity; 5. To employ persons in the operation and management of the Partnerships' business, including but not limited to supervisory managing agents, building management agents, real property developers and real estate brokers; 6. To place record title to, or the right to use, Partnership assets in the name or names of a non-operating nominee or nominees, including an Affiliate of the General 16 17 Partner, for any purpose convenient or beneficial to the Partnership. 7. To perform all acts and file all documents, including tax returns and registration statements, necessary to comply with federal, state and local laws, rules and regulations applicable to the Partnership or the conduct of the Partnership's business; 8. To enter into and carry out contracts and agreements and any or all documents and instruments and to do and perform all such other things as may be in furtherance of Partnership purposes or necessary or appropriate to the conduct of Partnership's activities; 9. To execute, acknowledge, deliver, seal, file, record and vote any and all instruments which may be deemed necessary or convenient to effect the foregoing; and 10. To cause the Partnership to make or revoke any of the elections required or permitted to be made by the Partnership under the Code; 11. To determine the appropriate accounting method or methods to be used by the Partnership (the Partnership intends initially to utilize the accrual method of accounting in maintaining its books and records and the cash receipts and disbursements method of accounting in reporting its profits and losses for Federal, state and local income tax purposes); and 12. To designate Carey Diversified LLC, the General Partner, as the "Tax Matters Partner" in accordance with Section 6231(a)(7) of the Code and, as such, the General Partner shall have all powers necessary to so perform including, without limitation, the power to retain attorneys and accountants of its choice and the right to settle any audits without the consent of the Limited Partners, except as otherwise required by the Code. The designation provided for herein is expressly consented to by each Partner as an express condition to becoming a Partner. C. Restrictions on Authority of General Partner. In addition to other acts expressly prohibited or restricted by this Agreement or by law, the General Partner shall have no authority to act on behalf of the Partnership with respect to, and are expressly prohibited from undertaking, the following: 1. Doing any act in contravention of this Agreement; 2. Except as provided in this Agreement and except in connection with the liquidation and winding up of the business of the Partnership upon its termination and dissolution, doing any act which would make it impossible to carry on the ordinary business of the Partnership; 17 18 3. Confessing a judgment against the Partnership in connection with any threatened or pending legal action; 4. Possessing Partnership property or assigning the rights of the Partnership in specific Partnership property for other than a Partnership purpose; 5. Admitting a person as a Limited Partner except as provided in this Agreement; 6. Except as provided in this Agreement and except in connection with the liquidation and winding up of business of the Partnership upon its termination and dissolution or a Mandatory Distribution Event, selling substantially all the assets of the Partnership at a single sale or in multiple sales in the same 12-month period without the prior written consent of Limited Partners, which approval shall be conditional on the receipt by the General Partner of the written approval of holders of Limited Partner Interests holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI; 7. Pledging or encumbering substantially all the properties of the Partnership at one time or from time to time in a series of related transactions, unless the lien of such pledge or encumbrance arises in connection with the acquisition or improvement of properties or the initial financing of properties acquired free and clear of encumbrances or the refinancing of previous obligations and such lien is limited to the properties so acquired, improved, financed or refinanced; 8. Obtaining any loan or any mortgage loan on any residential property made or guaranteed by any federal, state or local government or municipality or any agency of any Federal, state or local government or municipality; 9. Performing any act (other than an act required by this Agreement or any act taken in good faith in reliance upon counsel's opinion) which would, at the time such act occurred, subject any Limited Partner to liability as a general partner in any jurisdiction; 10. Prepaying any interest on any Partnership indebtedness; provided that the payment of any amount commonly referred to as "points" shall not be deemed a prepayment of interest; or 11. Assessing any Partner for an additional capital contribution. D. Fiduciary Obligations of General Partner. The General Partner shall act at all times as a fiduciary with respect to the Partnership, the Limited Partners and the Partnership property and assets. 18 19 E. Obligations of the General Partner. The General Partner shall: 1. Devote such of its time to the business of the Partnership as it shall, in its discretion, exercised in good faith, determine to be necessary to conduct the business of the Partnership for the benefit of the Partnership and the Limited Partners; 2. File and publish all certificates, statements or other instruments required by law for formation, qualification and operation of the Partnership and for the conduct of its business in all appropriate jurisdictions; 3. Use its best efforts to cause the Partnership and the Partners to be protected by adequate public liability, property damage and other insurance; 4. Employ attorneys to represent the Partnership, which attorneys may also serve as counsel to the General Partner and any of its Affiliates; and 5. Use its best efforts to maintain the status of the Partnership as a "partnership" for federal income tax purposes. F. Limitation on Liability of General Partner; Indemnification. 1. The General Partner shall have no liability, responsibility or accountability in damages or otherwise to any other Partner or the Partnership for, and the Partnership agrees to indemnify, pay, protect and hold harmless the General Partner (on the demand of and to the satisfaction of the General Partner) from and against, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, proceedings, costs, expenses and disbursements of any kind or nature whatsoever (including without limitation all costs and expenses of defense, appeal, and settlement of any and all suits, actions or proceedings instituted against the General Partner or the Partnership and all costs of investigation in connection therewith) which may be imposed on, incurred by or asserted against the General Partner or the Partnership in any way relating to or arising out of, or alleged to relate to or arise out of, any action or inaction on the part of the Partnership or on the part of the General Partner as a General Partner to the Partnership which the General Partner has determined, in good faith, was in the best interest of the Partnership; provided, that the General Partner shall be liable, responsible and accountable, and the Partnership shall not be liable to the General Partner, for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, proceedings, costs, expenses and disbursements resulting from the General Partner's own fraud, bad faith, negligence, misconduct or other breach of fiduciary duty to the Partnership 19 20 or any Partner. If any action, suit or proceeding shall be pending or threatened against the Partnership or the General Partner relating to or arising, or alleged to relate to or arise, out of any such action or inaction the General Partner shall have the right to employ, at the expense of the Partnership, separate counsel of the General Partner's choice in such action, suit or proceeding. The satisfaction of the obligations of the Partnership under this Section 1 shall be from and limited to the assets of the Partnership and no Partner shall have any personal liability on account thereof. The General Partner shall have the right to bill the Partnership for, or otherwise request the Partnership to pay, at any time and from time to time after the General Partner has become obligated to make payment therefor, any and all amounts for which the General Partner believes in good faith that the General Partner is entitled to indemnification for under this Section 1. The Partnership shall pay any and all such bills and honor any and all such requests for payment within 60 days after such bill or request is received by the General Partner. In the event that a final determination is made that the Partnership is not so obligated in respect of any amount paid by it to the General Partner, the General Partner will refund such amount within 180 days of such final determination. 2. The Partnership shall indemnify to the extent of the Partnership assets each Limited Partner against any claims of liability asserted against a Limited Partner solely because he is a Limited Partner in the Partnership. 3. Notwithstanding the foregoing, neither the General Partner nor any officer, director, employee, agent, subsidiary or assignee of the General Partner or of the Partnership shall be indemnified from any liability, loss or damage incurred by them in connection with (i) any claim or settlement involving allegations that the Securities Act of 1933 was violated by the General Partner or by any such other person or entity unless: (a) the General Partner or other persons or entities seeking indemnification are successful in defending such action; and (b) such indemnification is specifically approved by a court of law which shall be advised as to the current position of the Securities and Exchange Commission and the California Commissioner of Corporations regarding indemnification for violations of securities laws; or (ii) any liability imposed by law, including liability for fraud, bad faith or negligence. G. Specific Transactions Authorized. The General Partner is hereby authorized to enter into, on behalf of the Partnership, the following specific transactions: 1. The Partnership may purchase property from any Affiliate of the General Partner provided (i) the property was acquired by such Affiliate for the purpose of facilitating its purchase by the Partnership, facilitating the borrowing of money or the obtaining of financing for the Partnership or any other 20 21 purpose related to the business of the Partnership, (ii) the property is purchased by the Partnership for a price no greater than the acquisition and out-of-pocket carrying cost of the property to such Affiliate, (iii) there is no adverse difference in the interest rates of the loans secured by the property at the time acquired by such Affiliate and at the time purchased by the Partnership nor any other benefit arising out of such transaction to the General Partner and (iv) no compensation is paid by the Partnership or by any non-affiliated person to any Affiliate of the General Partner in connection with the purchase of the property by the Partnership. 2. The Partnership may contract (i) with Affiliates of the General Partner to serve as real estate brokers and mortgage placement brokers in connection with the investment of the Partnership assets and (ii) with Affiliates of the General Partner to serve as real estate brokers in connection with the sale of property by the Partnership. The amount of the real estate commissions payable to Affiliates of the General Partner upon a sale of property by the Partnership where such Affiliates have provided a substantial amount of services in the sales effort may not exceed the lesser of (i) 3% of the sales contract price of the property or (ii) 50% of the reasonable, customary and competitive rate for similar services in light of the size, type and location of the property and the total real estate commissions payable to such Affiliates and to other persons may not exceed the lesser of (a) 6% of the contract price for the sale of the property or (b) the reasonable, customary and competitive rate for similar services in light of the size, type and location of the property. No Affiliate of the General Partner may receive payment of a real estate commission with respect to the sale of any property by the Partnership unless the total consideration received by the Partnership upon such sale exceeds the amounts actually paid by the Partnership for the purchase, development, construction or improvement of the property and any fees and commissions paid by the Partnership in connection therewith. 3. The Partnership may enter into a contract with an Affiliate of the General Partner, in substantially the form of the Management Agreement between the Partnership and Carey Corporate Property Management, Inc., to perform services relating to the management of property of the Partnership as described in such Management Agreement. Such contract may provide that as compensation for such services such Affiliate of the General Partner may receive a management fee equal to (a) 1% of the gross revenues per annum from commercial and industrial properties net leased for terms of 10 or more years; or (b) for leases of other commercial and industrial properties (i) 6% of the gross revenues of such leases where such Affiliate performs leasing, re-leasing and leasing related services, or(ii) 3% of gross revenues of such leases where such services are not performed; provided, however, that in no event shall such management fee exceed an amount which is competitive for similar services in the same geographic area 21 22 and further provided that bookkeeping services and fees paid to non-Affiliates for management services shall be included in the management fee. 4. Affiliates of the General Partner may receive insurance premiums and brokerage commissions with respect to insurance on property owned by the Partnership only when the cost of such insurance is paid by tenants who net lease such properties from the Partnership. No such Net Lease shall provide that the lessee is required to purchase insurance through an Affiliate of the General Partner. 5. At any time, the Partnership may borrow funds on a short-term basis from an Affiliate of the General Partner or third parties to provide the debt portion of the purchase price of any real properties if the Partnership is unable to obtain a permanent loan or, in the judgment of the General Partner, it is not in the best interests of the Partnership to obtain a permanent loan at the interest rates then prevailing and (ii) the General Partner has reason to believe that the Partnership will be able to obtain a permanent loan on or prior to the end of the loan term. Any such short-term loans may be fully or partially amortized, may provide for the payment of interest only during the term of the loan or may provide for the payment of principal and interest only upon maturity. Any such short term loans may be secured by a pledge of or security interest in the net assets of the Partnership or, if the loan is obtained to pay or provide the debt or equity portion of the purchase price of a property, by a first or junior mortgage on the property to be acquired. Any short-term loans from Affiliates of the General Partner will (i) bear interest at a rate equal to the lesser of (A) one percent above the prime interest rate at the Bank of New York or (B) the rate that would be charged to the Partnership by unrelated lending institutions on comparable loans for the same purpose in the locality of the property and (ii) have a term not exceeding one year. Such borrowings shall be non-recourse to the Partnership, unless the General Partner shall otherwise consent in writing. 6. All of the Partnership's expenses shall be billed directly to and paid by the Partnership. The Partnership shall reimburse the General Partner or its Affiliates for: (a) the actual cost to the General Partner or its Affiliates of goods and materials used for and by the Partnership and obtained from unaffiliated parties, and (b) the costs incurred by the General Partner or its Affiliates in performing administrative services necessary to the prudent operation of the Partnership; provided, however, that the amounts charged to the Partnership for services performed pursuant to this clause (b) shall not exceed the lesser of (1) the actual cost of such services, or (2) the amount which the Partnership would be required to pay to independent parties for comparable services in the same geographic location. No reimbursement shall be made to the General Partner or its Affiliates for: (x) services for which the General Partner or its 22 23 Affiliates are entitled to compensation by way of a separate fee or (y) any of the salaries, fringe benefits, travel expenses and other administrative items incurred by or allocated to any controlling person(as defined herein) of the General Partner or its Affiliates; provided, however, that the Partnership may reimburse the General Partner or its Affiliates for the travel expenses of controlling persons if such travel expenses are incurred for the evaluation of properties being considered for acquisition or visits to executives of potential tenants of properties being considered for acquisition to discuss current financial results. The Partnership's annual report to the Limited Partners shall contain a breakdown of the costs reimbursed to the General Partner or its Affiliates. Within the scope of the annual audit of the General Partner's (or such Affiliate's) financial statement, the independent certified public accountant shall verify the allocation of such costs to the Partnership. The method of review shall at minimum provide (1) a review of time records of individual employees, the costs of whose services were reimbursed; and (2) a review of the specific nature of the work performed by each such employee. The methods of review shall be in accordance with generally accepted auditing standards and shall accordingly include such tests of the accounting records and such other auditing procedures which the General Partner's (or such Affiliate's) independent certified public accountants consider appropriate in the circumstances. The additional costs of such review shall be itemized by such accountants on a partnership by partnership basis and may be reimbursed to the General Partner (or such Affiliate) in accordance with this Paragraph G(6) only to the extent that such reimbursement, when added to the cost for administrative services rendered, does not exceed the competitive rate for such services as determined in this Paragraph G(6). As used herein, the term "controlling person" shall mean any person, whatever his title, who performs executive or senior management functions for the General Partner or Affiliate similar to those of executive or senior management officers, directors or partners, or those holding 5% or more equity interest in the General Partner or Affiliate or a person having the power to direct or cause the direction of the management level employees and policies of the General Partner or Affiliate, whether through the ownership of voting securities, by contract or otherwise. For the purposes of this Paragraph G(6), not every person who carries a title such as vice president or senior vice president, corporate secretary or treasurer shall be considered a controlling person, unless such person performs the functions or has the powers described above, and even in the absence of a specific title, an executive in a senior management position shall be considered a controlling person. 7. The Partnership may invest in unimproved or non-income producing real property and the stock of or other interests in, or warrants or other rights to purchase the stock of or other interests in, any tenant of the Partnership or the parent or 23 24 controlling person of any tenant. The Partnership will not exercise warrants or other rights to purchase the stock of or other interests in a tenant or the parent or controlling person of a tenant unless the Partnership will immediately liquidate the stock or interest purchased at a price in excess of the exercise price. Under such circumstances, payment of the exercise price shall not be deemed an investment subject to the above limitation respecting the amount of net proceeds derived from the sale of limited partner interests which the Partnership may invest in unimproved or non-income producing real property or stock, interests, warrants or other rights. The Partnership may borrow funds on a short term basis to pay the exercise price on warrants or other rights may pay such exercise price from funds held in the working capital reserve and will repay the loan or replenish the reserve upon the sale of the securities or interests purchased before it makes distributions to the Partners respecting the proceeds of sale or reinvests such proceeds in real property. H. General Restrictions. 1. The Partnership shall obtain a written evaluation report signed by an independent appraiser prior to the purchase of any real property by the Partnership and shall not purchase any such property if the purchase price and all Acquisition Fees paid by the Partnership in connection with the acquisition exceed the appraised value set forth in such report. All such appraisals, whether or not the real property which is the subject of such appraisal is purchased by the Partnership, shall be at the Partnership's expense or at the expense of the seller, shall be retained for five years and shall be available for inspection and duplication by the Limited Partners. 2. The Partnership may not sell any property in a transaction in which an Affiliate of the General Partner acts as a real estate broker unless the provisions of Paragraph G(2) of this Article X are complied with. 3. The Partnership shall not own any land where the buildings and improvements thereon are owned by an Affiliate of a General Partner. 4. No more than 20% of the net proceeds derived from the sale of limited partnership interests shall be applied to the purchase of land where the Partnership's purchase is exclusive of the buildings and improvements thereon or to be constructed thereon. 5. The Partnership may not acquire property in exchange for interests in the Partnership. 6. The Partnership shall not give an Affiliate of a General Partner the exclusive right to sell property for the Partnership. 24 25 7. The Partnership shall not pay, directly or indirectly, any Acquisition Fees to an Affiliate of the General Partner in connection with the purchase of property by the Partnership. In addition, the Partnership shall not pay, directly or indirectly, any Acquisition Fee to an Affiliate of the General Partner in connection with the purchase of property acquired with proceeds obtained from Cash From Sales and Cash From Financings. 8. The aggregate borrowings of the Partnership shall not exceed 66 2/3% of the purchase price of all properties purchased by the Partnership on a combined basis. The foregoing restriction may be waived or lessened by the General Partner without the approval of the Limited Partners, but only with the prior written consent of the Commissioner of Corporations of the Sate of California or pursuant to a change in the published Rules of the Commissioner. In no event, however, shall the aggregate borrowings of the Partnership exceed the sum of 85% of the purchase price of all properties which have not been refinanced and 85% of the aggregate fair market value of all refinanced properties. 9. Except as set forth in Paragraph G(7) of this Article X, all expenses of the Partnership shall be billed directly to and paid by the Partnership. 10. The Partnership funds shall not be commingled with the funds of any other natural person, partnership, corporation, association or other legal entity. 11. The Partnership shall not finance the purchase of real property by use of a wrap-around note and mortgage ("all -inclusive" note and deed of trust) unless (a) neither the General Partner nor any Affiliate of the General Partner receives interest on the amount of the underlying encumbrance in excess of that payable to the lender on such underlying encumbrance, (b) the Partnership receives credit on its obligation under the all-inclusive note for payments made directly on the underlying encumbrance and (c) all payments on the underlying encumbrance shall be made by the Partnership or, in the alternative, payments by the Partnership on the wrap-around note are made to a third party collecting agent which in turn disburses such payment, first to the holder of such underlying encumbrance, and thereafter to the holder of the wrap-around note. 12. The Partnership shall not create or assume any indebtedness for borrowed money unless the documents pursuant to which such indebtedness is created or assumed provide, and the General Partner shall cause any and all such documents assumed or entered into by or on behalf of the Partnership to provide, that the parties thereto other than the Partnership (including any Affiliates of the General Partner ) shall look only to the assets of the Partnership for satisfaction of the liabilities and obligations of the Partnership under such documents (including without limitation those arising from representations, 25 26 warranties, covenants and agreements made in or in connection with such documents) and that such other parties shall have no recourse to the Partners or the separate assets of the Partners for the satisfaction of such liabilities and obligations. The Partnership shall not incur any indebtedness including indebtedness under a shared appreciation or similar mortgage wherein the lender will have or acquire, at any time as a result of making the loan, any direct or indirect interest in the profit, capital or property of the Partnership other than as a creditor. 13. The Partnership shall not enter into any contracts with the General Partner or with any Affiliates of the General Partner to construct or develop Partnership properties or to render any services in connection with such construction or development. 14. The Partnership shall not acquire any property which under construction unless completion of the improvements on the property is guaranteed at the contracted price by an adequate completion bond or other satisfactory arrangement. 15. Unimproved or non-income producing property shall not be acquired except in amounts and upon terms which can be financed from Distributable Cash From Operations. 16. No Partnership assets may be invested in junior mortgages or deeds of trust; provided, however, that the acquisition of a junior mortgage or deed of trust in connection with the sale, financing or refinancing of real property shall not be deemed to be investing in junior mortgagees or deeds of trust. 17. Any agreement entered into between the Partnership and the General Partner or its Affiliates must be terminable by the Partnership, without penalty, upon 60 days' notice. I. Compensation of General Partner. The General Partner shall not, in its capacity as General Partner, receive any salary, fees, profits or distributions from the Partnership except profits, distributions, fees and allocations to which they may be entitled under Articles VIII or IX. J. Other Business of Partners. Except as otherwise specifically provided herein, any of the Partners and any shareholder, officer, director, employee or other person holding a legal or beneficial interest in an entity which is a Partner may engage in or possess an interest in other business ventures of every nature and description, independently or with others, including, but not limited to, the ownership, financing, leasing, operation, management, syndication, brokerage and development of real property and neither the Partnership nor the Partners shall have any right by virtue of this Agreement in and to such 26 27 independent ventures or to the income or profits derived therefrom. 27 28 ARTICLE XI STATUS OF LIMITED PARTNERS A. The Limited Partners and Special Partners shall not participate in the management or control of the Partnership's business nor shall they transact any business for the Partnership nor shall they have the power to sign for or bind the Partnership, said powers being vested solely and exclusively in the General Partner. The Limited Partners and Special Partners shall not be bound by, or be personally liable for, the expenses, liabilities or obligations of the Partnership, except to the extent of their Capital Accounts. The Partnership Interest owned by a Limited Partner or Special Partner shall be fully paid and nonassessable. In addition to those described elsewhere in the Partnership Agreement, the Limited Partners and Special Partners shall have the following rights, powers, privileges, duties and liabilities: (a) The Limited Partners and Special Partners shall have the right to have full and true information of all things affecting the Partnership and shall be entitled to such reports as are set forth in Article XII hereof. (b) The Limited Partners and Special Partners shall receive from the Partnership the share of distributions provided for in this Agreement in the manner and at the times provided for in this Agreement. (c) A Limited Partner or a Special Partner shall have the right to demand the return of his Capital Account only on the dissolution and winding up of the Partnership in accordance with Article XVIII hereof. No Limited Partner or Special Partner shall have priority over any other Limited Partner either as to the return of his capital or as to profits, losses or distributions. No Limited Partner shall have the right to bring an action for partition against the Partnership. (d) Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests may (1) remove a General Partner and (2) in the event that a vacancy shall occur in the office of General Partner, subject to the provisions of paragraph B(5) of Article XV, elect a successor General Partner upon the retirement, removal, death, adjudication of incompetence to manage his person or estate, adjudication of bankruptcy under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in lieu thereof), dissolution or other cessation to exist as a legal entity of a General Partner. (e) Upon written request to the Partnership for a purpose reasonably related to such Partner's interest as a 28 29 Limited Partner of the Partnership, each Limited Partner and Special Partner shall have the right to a complete list of names and addresses and interests of all Limited Partners as set forth in the records of the Partnership, copies of the Certificate of Limited Partnership and all amendments thereto, copies of this Agreement and all amendments thereto and powers of attorney pursuant to which this Agreement was executed. A reasonable charge for copy work may be charged by the Partnership. ARTICLE XII BOOKS OF ACCOUNT AND REPORTS Proper books of account shall be kept by the General Partner wherein shall be entered all transactions, matters and things relating to the Partnership's business as are usually entered into books of account kept by persons engaged in a business of a like character. The books of account for the current and past three fiscal years shall be kept at the principal place of business of the Partnership and at the Partnership's California office and each Partner (or any duly constituted designee of a Partner) shall at all times during reasonable business hours have free access to and the right to inspect and copy the same. There shall also be kept at the Partnership's California office: a current alphabetical list of the Partners' names, addresses, Contributions and Capital Accounts; copies of the Certificate of Limited Partnership and all amendments thereto; copies of the Partnership's Federal, state and local income tax or information returns and reports for the six most recent tax years; copies of this Partnership Agreement and all amendments thereto and powers of attorney pursuant to which this Agreement was executed and the Partnership's financial statements for the six most recent fiscal years. There shall be established for each Partner on the books of the Partnership a Capital Account which shall be maintained in accordance with Federal income tax accounting principles and which shall show the amount of each capital contribution made by such Partner (or his, her or its predecessor in the case of an assignment of a Partnership Interest), adjusted to reflect such Partner's proportion of profits and losses (determined according to Article VIII) and of withdrawals and distributions and other items to the extent properly creditable to or chargeable against such Capital Account. Within 75 days after the end of each Fiscal Year, the General Partner shall deliver to each Limited Partner adequate information to enable each Limited Partner to complete and file his Federal tax return. 29 30 Copies of each such report shall be distributed to each Limited Partner within 60 days after the end of each quarter. If deemed appropriate by the General Partner, such notice may be prepared and distributed to Limited Partners more frequently than quarterly. The General Partner shall send such other reports and information, if any, to the Limited Partners as the General Partner may deem necessary or appropriate, including but not limited to reports containing the name and address of each person who has had an unconditional written offer to purchase Partnership property rejected by the Partnership (such report shall also contain the price and terms offered). Copies of each such report distributed to the Limited Partners shall, to the extent required by applicable law, be filed concurrently with relevant state "Blue Sky" authorities. ARTICLE XIII FISCAL YEAR The Fiscal Year of the Partnership shall begin on the first day of January and end on the thirty-first day of December in each year. ARTICLE XIV PARTNERSHIP FUNDS The funds of the Partnership shall be deposited in such account or accounts as shall be designated by the General Partner and all withdrawals against such accounts shall be made only by one of the General Partner or by its properly delegated agents. ARTICLE XV TRANSFER OF PARTNERSHIP INTEREST A. In General. A Limited Partner or Special Partner may not sell, assign, transfer or otherwise dispose of, or pledge, hypothecate or in any manner encumber, his interest in the Partnership or any part thereof except as permitted in this Article, and any act in violation of this Paragraph A shall not be binding upon or recognized by the Partnership regardless of whether the General Partner shall have knowledge thereof. B. General Partner. 1. Upon the vote of Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, pursuant to Paragraph (d) of Article XI and with the same proportionate vote as provided therein, may 30 31 remove a General Partner from the Partnership. Written notice of the removal of the General Partner shall be served upon the General Partner either by certified or registered mail, return receipt requested, or by personal service. Said notice shall set forth the day upon which the removal is to become effective. Upon receipt of notice, the General Partner shall cause an accounting to be prepared covering the transactions of the Partnership since the end of the previous Fiscal Year and it shall not thereafter sell or dispose of or allow the sale or disposition of any Partnership asset unless such sale or disposition was the subject of a contract entered into by and binding upon the Partnership prior to the date upon which the notice was received by the General Partner. 2. Until the dissolution of the Partnership otherwise occurs, the General Partner shall not voluntarily take any step to dissolve itself nor shall the General Partner voluntarily retire, provided, however, that nothing in this Partnership Agreement shall be deemed to prevent the merger or reorganization of Carey Diversified LLC into or with any other entity organized under the laws of the United States or any state thereof or the transfer of all the limited liability company interests of Carey Diversified LLC and the assumption of rights and duties of the General Partner by, in the case of a merger, reorganization or consolidation, the surviving entity by operation of law. 3. Upon the removal, adjudication of bankruptcy under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in lieu thereof), dissolution or other cessation to exist as a legal entity of the General Partner, the General Partner's Partnership Interest and interest in Distributable Cash From Operations and its subordinated interest in Cash From Sales and Cash From Financings shall be purchased by the Partnership for a purchase price equal to the fair market value thereof determined pursuant to the provisions of Section 4 of this Paragraph B. The purchase price of such interest shall be paid by the Partnership to the General Partner by the promissory note of the Partnership, payable to the General Partner or its order, having a face amount equal to such purchase price, containing provisions as would be usual and customary in a commercial promissory note, bearing interest at a rate per annum equal to one percent above the prime interest rate at The Bank of New York, payable annually, with principal and all unpaid accrued interest subject to mandatory prepayment from all Cash From Sales and Cash From Financings, and the remaining unpaid principal balance and unpaid accrued interest on such promissory note due and payable five years from the date of the General Partner's retirement, expulsion, adjudication of bankruptcy or insolvency, dissolution or other cessation to exist as a legal entity. The Partnership shall also pay to the General Partner all amounts then accrued and owing to the General Partner. 31 32 4. The fair market value of the General Partner's interest purchased by the Partnership pursuant to Section 3 of this Paragraph B shall be determined by agreement between the General Partner and the Partnership (which agreement shall require the approval of the Limited Partners holding more than fifty percent (50%) of the outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI). If the General Partner and the Partnership cannot agree upon the fair market value of such Partnership Interest within 30 days after the occurrence of the event upon which such interest of the General Partner is to be purchased by the Partnership, the fair market value thereof shall be determined by arbitration in accordance with the then current rules of the American Arbitration Association. The results of such arbitration shall be final and binding and may be enforced by legal proceedings. The expense of arbitration shall be borne equally by the General Partner and the Partnership. The fair market value of the General Partner's interest shall be the amount the General Partner would receive upon dissolution and termination of the Partnership assuming that such dissolution or termination occurred on the date of the occurrence of the event upon which such interest of the General Partner is to be purchased by the Partnership and the assets sold for their then fair market value without any compulsion on the part of the Partnership to sell such assets. C. Limited Partners and Special Partners. 1. The General Partner may, pursuant to this Article XV, (a) admit as a substituted Limited Partner or Special Partner any successor in interest to a Limited Partner or Special Partner either deceased or under legal disability, and (b) admit as substituted Limited Partners or Special Partners assignees of Limited Partners or Special Partners. 2. A substituted Limited Partner or a Special Partner is a person admitted to all the rights of a Limited Partner or a Special Partner. An assignee is a person to whom a Limited Partner or Special Partner has assigned his interest in the Partnership but who has not become a substituted Limited Partner or Special Partner. An assignee shall have no right to require any information or account of the Partnership's transactions or to inspect the Partnership's books but shall only be entitled to receive the share of the profits, or the return of the capital contribution, to which his assignor would otherwise be entitled as set forth in Section 5 of this Paragraph C. 3. No assignee of the whole or any portion of a Limited Partner's or Special Partner's interest in the Partnership shall have the right to become a substituted Limited Partner or Special Partner in place of his assignor unless all of the following conditions are satisfied: 32 33 (a) The written consent of the General Partner to such substitution shall be obtained, the granting or denial of which shall be within the absolute discretion of the General Partner; (b) The duly executed written instrument of assignment setting forth the intention of the assignor that the assignee become a substituted Limited Partner or Special Partner in his place shall have been filed with the Partnership; (c) The interests in the Partnership being acquired by the assignee shall consist of at least five percent of the limited partner or special partner interest and, if the assignor shall retain any limited partner or special partner interest, such retention shall consist of at least five percent of the limited partner or special partner interest; (d) The assignor and assignee shall execute and acknowledge such other instruments as the General Partner may deem necessary or desirable to effect such assignment and admission, including the written acceptance and adoption by the assignee of the provisions of this Agreement and his execution, acknowledgment and delivery to the General Partner of a Power of Attorney, the form and content of which are more fully described in Article XIX hereof; and (e) The assignee shall pay a transfer fee not to exceed $50.00 per transaction to the Partnership. The written consent or a notice of denial of consent shall be given to the assignee not later that the last day of the calendar month following the month the General Partner actually receives the instrument of assignment. 4. Any person admitted to the Partnership as a Partner shall be subject to all of the provisions of this Agreement as if originally a party to it. 5. Subject to the provisions of Section 11 of this Paragraph C, compliance with the suitability standards imposed by the Partnership, applicable "Blue Sky" laws and the applicable rules of any other governmental authority, a Limited Partner or Special Partner shall have the right to assign the whole or any portion (but not less than five percent of the limited partner or special partner interest (two percent of the limited partner or special partner interest for an Individual Retirement Account or a Self Employed Retirement (Keogh) Plan)) and, if he shall retain any limited partner or special partner interest, subject to his retaining not less than five percent of the limited partner or special partner interest (two percent of the limited partner or special partner interest for an 33 34 Individual Retirement Account or a Self Employed Retirement (Keogh) Plan) of his Partnership Interest by a written assignment the terms of which are not in contravention of any of the provisions of this Agreement, which assignment has been executed by the assignor and received by the Partnership and recorded on the books thereof. Any assignment in contravention of any of the provisions of this Section 5 shall be of no force and effect and shall not be binding upon or recognized by the Partnership. (f) Except as provided in Subsection (c) below, Paragraph A of Article VII hereof and Paragraph D of Article IX hereof, an assignee of a Partnership Interest shall be entitled to receive distributions from the Partnership attributable to the interest acquired by reason of such assignment from and after the effective date of the assignment of such interest to him. The effective date of an assignment of an interest in the Partnership as used in this Subsection shall be the last day of the quarter in which the written instrument of assignment, in form and substance satisfactory to the General Partner, is received by the General Partner. (g) The net profits and net losses attributable to an interest in the Partnership assigned during any year shall be divided among and allocated in accordance with the provisions of Paragraph A of Article VIII hereof. (h) Anything herein to the contrary notwithstanding, both the Partnership and the General Partner shall be entitled to treat the assignor of such interest as the absolute owner thereof in all respects, and shall incur no liability for distributions made in good faith to him, until such time as the written assignment has been received by, and recorded in the books of, the Partnership. 3. The General Partner may elect to treat an assignee who has not become a substituted Limited Partner or Special Partner as a substituted Limited Partner or Special Partner in the place of his assignor should it deem, in its absolute discretion, that such treatment is in the best interests of the Partnership for any of its purposes or for any of the purposes of this Agreement. 34 35 4. No consent of any of the Limited Partners or Special Partners is required to effect the substitution of a Limited Partner or Special Partner, except that a Limited Partner or Special Partner who assigns his interest in the Partnership must evidence his intention that his assignee be admitted as a substituted Limited Partner or Special Partner in his place and must execute such instruments as the General Partner may in its absolute discretion determine to be necessary or desirable in connection therewith. 5. Upon the admission of a Limited Partner or Special Partner (whether as a result of his purchase of a partner interest from the Partnership or his admission as a substituted Limited Partner or Special Partner), the General Partner shall make an appropriate amendment to the list of the Partner's names, addresses, Contributions and Capital Accounts referred to in Article XII hereof. 6. Upon the death or adjudication of incompetence to manage his person or estate of an individual Limited Partner or Special Partner, his personal representative shall have all of the rights of a Limited Partner or Special Partner for the purpose of setting or managing his estate, and such power as the decedent or incompetent possessed to constitute a successor as an assignee of its interest in the Partnership and to join with such assignee in making application to substitute such assignee as a Limited Partner or Special Partner. However, such personal representative shall not have the right to become a substituted Limited Partner or Special Partner in the place of his predecessor in interest unless the conditions of Section 2 of this Paragraph C (other than the requirement that the assignor execute and acknowledge instruments) are first satisfied. 7. Upon the adjudication of bankruptcy under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in lieu thereof), dissolution or other cessation to exist as a legal entity of a Limited Partner or Special Partner not an individual, the authorized representative of such entity shall have all of the rights of a Limited Partner or Special Partner for the purpose of effecting the orderly winding up and disposition of the business of such entity and such power as such entity possessed to constitute a successor as an assignee of its interest in the Partnership and to join with such assignee in making the application to substitute such assignee as a Limited Partner or Special Partner. However, such authorized representative shall not have the right to become a substituted Limited Partner or Special Partner in the place of his predecessor in interest unless the conditions of Section 2 of this Paragraph C (other than the requirement that the assignor execute and acknowledge instruments) are first satisfied. 8. (a) No assignment or transfer of an interest in the Partnership may be made which would result in Limited Partners or Special Partners and assignees of Limited Partners or Special Partners owning, directly or indirectly, individually or in the aggregate, more than twenty percent (20%) of the equity interests of a General Partner or any Affiliate of a General Partner as defined in Section 1504(a) of the Code. If any such assignment or transfer would otherwise be made by bequest, inheritance or operation of law, the transferee shall not become a Partner and the interest in the Partnership transferred shall be automatically redeemed by the Partnership immediately prior 35 36 to such transfer in the same manner as provided in Subsection (b)(4) of this Section 11. (b) Anything to the contrary contained herein notwithstanding: (1) Except in the case of the Merger, in any twelve (12) consecutive month period no assignment or transfer of a limited partner interest may be made if as a result thereof the aggregate total of limited partner interests assigned and/or transferred in such period would exceed forty percent (40%) of the outstanding limited partner interests. This limitation is hereinafter referred to as the "forty percent (40%) limitation". (2) A Limited Partner may assign or transfer his Partnership Interest to: (i) his spouse (unless legally separated), child or ancestor, or (ii) a corporation, partnership, trust or other entity, fifty-one percent (51%) of the equity interest of which is owned by such Limited Partner and/or any of the persons specified in clause (i) so related to such Limited Partner, provided, however, that such transfers are subject to the forty percent (40%) limitation. (3) Subsection (b)(1) of this Section 11 shall not apply to a transfer by gift, bequest or inheritance, or a transfer to the Partnership and, for purposes of the forty percent (40%) limitation, any such transfer shall not be treated as such. (4) If, after the forty percent (40%) limitation is reached in any consecutive twelve (12) month period, a transfer of the Partnership Interest would otherwise take place by operation of law (but not including any transfer referred to in Subsection (b)(3) of this Section 11), then the transferee shall not become a Limited Partner and such Partnership Interest shall be automatically redeemed by the Partnership immediately prior to such transfer for a price equal to the fair market value of said interest on such date of transfer. The price shall be paid within ninety (90) days after the date of the transfer and redemption. If the Partnership and the transferor do not agree upon the fair market value of the Partnership Interest, the purchase price shall be determined by arbitration. The purchase price shall be paid in cash within ten (10) days after such determination. (c) No transfer or assignment of any limited partner interest shall be made if it would result in the Partnership's being treated as an association taxable as a corporation for tax purposes. The General Partner, in its sole discretion, may, on behalf of the Partnership, impose any restrictions or transfers or assignments of limited 36 37 partner interests it may deem appropriated to give effect to the preceding sentence. The General Partner shall incur no liability to any Limited Partner, prospective investor or assignee for any action or inaction in connection with the foregoing, provided that the General Partner acted in good faith and such course of conduct did not constitute negligence or misconduct of the General Partner. 3. The General Partner, in its absolute discretion, may cause the Partnership to make, refrain from making, or once having made, to revoke, the election referred to in Section 754 of the Code, and any similar election provided by state or local law, or any similar provision enacted in lieu thereof. 4. Until the dissolution of the Partnership, the General Partner shall not take any voluntary steps to dissolve itself nor shall the General Partner voluntarily withdraw or resign. 5. No Limited Partner or Special Partner shall be entitled to withdraw from the Partnership except on transfer of all his partner interest pursuant to this Article XV. 6. Each Limited Partner or Special Partner shall immediately notify the Partnership of any assignment of any Unit in the Partnership and shall provide the name, address and identification number of the assignee. ARTICLE XVI MEETINGS AND AMENDMENT OF LIMITED PARTNERSHIP CERTIFICATE AND AGREEMENT A. Amendment of Limited Partnership Certificate. The General Partner shall amend and record the Certificate of Limited Partnership of the Partnership without additional consent of Limited Partners, when, pursuant to the terms of this Partnership Agreement: 1. There is a change in the name of the Partnership; 2. The General Partner withdraws, is removed, is adjudicated bankrupt under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in lieu thereof), is adjudicated incompetent to manage his person or estate or dies, or a person is admitted as the General Partner; 3. There is a false or erroneous statement in the Certificate; 4. A time is fixed for dissolution of the Partnership or the return of contributions and such time has not been specified in the Certificate; 37 38 5. The Partners desire to make a change in any other statement in the Certificate in order that it shall accurately represent the agreement among them; 6. There is a change in the address of the Partnership's principal place of business or its California office; 7. There is a change in the time as stated in the Certificate for the dissolution of the Partnership or for the return of a contribution; and 8. There is a change in the address of the California agent for service of process designated in the Certificate of Limited Partnership (unless such agent is a corporation) or a new agent for service of process is appointed. If the General Partner is required to file a certificate of amendment and fails after demand to do so within 30 days of such demand or if it refuses to do so, any Limited Partner may, unless otherwise precluded by applicable law, prepare, execute and file an appropriate certificate of amendment. B. Amendments to the Agreement. 1. Amendments to this Partnership Agreement may be proposed by the General Partner or by Limited Partners holding ten percent (10%) or more of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. Following such proposal, the General Partner shall submit to the Limited Partners a verbatim statement of any proposed amendment and an opinion of counsel, who may be counsel to the Partnership, as to the legality of such amendment and the effect of such amendment on the liability of Limited Partners for the debts of the Partnership. The General Partner shall include in any such submission the General Partner's recommendations as to the proposed amendment. The amendment shall become effective only upon the written consent or affirmative vote of holders of Limited Partner Interests holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. 2. Any provision to the contrary herein notwithstanding, the General Partner may, without the consent of the Limited Partners, make the following amendments to this Agreement: a. Any amendments to Article VIII and/or Article IX of this Agreement if the Partnership is advised by its accountants or legal counsel at any time that the allocations provided in those Articles are not likely to be respected for Federal income tax purposes, either because of the promulgation of Treasury Regulations under Section 704 of the Code or other developments in the law. The General Partner is empowered to amend such provisions to 38 39 the minimum extent necessary in accordance with the advice of the accountants and counsel to effect the allocations provided in this Agreement. New allocations made by the General Partner in reliance upon the advice of the accountants or counsel described above shall be deemed to be made pursuant to the fiduciary obligation of the General Partner to the Partnership and the Limited Partners, and no such new allocation shall give rise to any claim or cause of action by any Limited Partner, provided that the General Partner acted in good-faith; and b. In the event that the State of California amends the California Revised Limited Partnership Act in any manner and, as a result of such amendment, counsel to the Partnership is unable to give the Partnership an opinion to the effect that the Partnership will be treated as a partnership for Federal income tax purposes and not as an association taxable as a corporation, then in the sole discretion of the General Partner, to reconstitute the Partnership under the laws of another state. 3. Any provision to the contrary contained herein notwithstanding, the General Partner may, without the consent of the Limited Partners, amend this Agreement (a) to add to the representations, duties or obligations of a General Partner or to surrender any right or power granted to a General Partner herein, for the benefit of the Limited Partners, (b) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein or to make any other provision with respect to matters or questions arising under this Agreement which will not be inconsistent with the provisions of this Agreement, (c) to delete any provision from this Agreement or to add any provision to this Agreement required to be so deleted or added by the Staff of the Securities and Exchange Commission or by a State "Blue Sky" Commissioner or similar such official, which addition or deletion is deemed by such Commission or official to be for the benefit or protection of the Limited Partners, and (d) to change administrative or other provisions of this Agreement in a manner which, in the opinion of the General Partner, will permit the most profitable and/or efficient operation of the Partnership; provided, however, that no amendment shall be adopted pursuant to this Section 3 unless the adoption thereof (i) is for the benefit of, or not adverse to, the interests of the Limited Partners, (ii) is consistent with Article IV and Paragraph A of Article X hereof, (iii) does not affect the distribution of Distributable Cash From Operations, Cash From Sales and Cash From Financings or the allocation of profits and losses among the Limited Partners or between the Limited Partners and the General Partner and (iv) does not affect the limited liability of the Limited Partners or the status of the Partnership as a partnership for Federal income tax purposes. 39 40 4. Upon amendment of this Agreement, the Certificate of Limited Partnership shall also be amended if necessary to reflect such change. 5. Any amendment to the Partnership Agreement which modifies the compensation or distributions to which a General Partner is entitled or which affects the duties of a General Partner must be consented to by the General Partner before becoming effective. C. Meetings of the Partnership. Meetings of the Partnership may be called by the General Partner and shall be called by them upon the written request of Limited Partners holding ten percent (10%) or more of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. Upon receipt of such a written request, stating the purpose of the proposed meeting, the General Partner shall provide each Partner, within 10 days of such request, written notice (either by personal service or certified mail or by express or other overnight delivery service) of a meeting and the purpose of such meeting. Such meeting shall be held not less than 10 days nor more than 60 days after the receipt of such request. Included with the notice shall be a detailed statement of the action proposed, including a verbatim statement of the wording of any resolution proposed for adoption by the Limited Partners and of any proposed amendment to the Partnership Agreement. The Partnership will provide for Proxies or written consents which specify a choice between approval or disapproval of each matter to be acted upon at the meeting. Holders of a majority of the Limited Partner Interests entitled to vote, represented in person or by Proxy, shall constitute a quorum at a meeting of the Limited Partners. To the extent not consistent with this Paragraph C, all meetings shall be governed by the provisions of Section 15637 of the Act. The General Partner may establish a record date for any meeting, subject to the limitations of Section 15637(j) of the Act. ARTICLE XVII TERM The Partnership shall terminate on December 31, 2004, unless sooner dissolved pursuant to the provisions of Article XVIII hereof as otherwise provided by law. 40 41 ARTICLE XVIII DISSOLUTION A. Events Requiring Dissolution. The Partnership shall be dissolved upon the happening of any of the following events: 1. The retirement, removal, adjudication of bankruptcy under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in lieu thereof), of the General Partner, the dissolution or other cessation to exist as a legal entity of the General Partner, unless the Limited Partners agree in writing to continue the business of the Partnership and to admit one or more General Partners. 2. The Partnership is adjudicated bankrupt under Chapter 7 of the Federal Bankruptcy Code (or any similar law or provision enacted in lieu thereof). 3. The vote of Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests held by all Limited Partners, with the same proportionate vote as provided in paragraph (d) of Article XI. 4. The disposition of all interests in the real property and other assets of the Partnership. 5. December 31, 2004. B. Distributions on Dissolution. Upon the dissolution of the Partnership the General Partner who has not wrongfully dissolved the Partnership shall wind up the affairs of the Partnership. If there is no such General Partner, the Limited Partners shall wind up the affairs of the Partnership. The Partners winding up the affairs of the Partnership shall take full account of the Partnership assets and liabilities and all assets shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom shall be applied and distributed in the following order: (1) to creditors (including Partners who are creditors to the extent permitted by law), in the order of priority as provided by law, (2) to the Partners in accordance with their respective Capital Accounts and (3) to the Partners in accordance with the provisions of Paragraph E of Article IX hereof. Notwithstanding anything to the contrary, in the event the Partnership is "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), liquidating distributions shall be made pursuant to the previous sentence by the end of the taxable year in which the Partnership is liquidated, or, if later, within 90 days after the date of such liquidation. Distributions pursuant to the preceding sentence may be made to a trust for the purposes of an orderly liquidation of the Partnership by the trust in accordance with the Act. 41 42 C. Contributions by the General Partner. In the event that, upon the liquidation of the Partnership, the General Partner shall have a negative balance in the General Partner's Capital Account then the General Partner shall contribute to the capital of the Partnership an amount equal to such negative balance in the General Partner's Capital Account. ARTICLE XIX POWER OF ATTORNEY Concurrently with the written acceptance and adoption of the provisions of this Agreement, each Limited Partner and Special Partner shall execute and deliver to the General Partner a Power of Attorney in a form acceptable to the General Partner in which the General Partner is constituted and appointed as the attorney-in-fact for such Limited Partner or Special Partner with power and authority to act in his name and on his behalf in the execution, acknowledgment and filing of documents, which will include but not be limited to a Certificate of Limited Partnership, as well as amendments thereto, under the laws of the State of California and under the laws of any other state in which the General Partner deems it advisable to file such a certificate; any other instrument which may be required to be filed by the Partnership under the laws of any state or by any governmental agency, or which the General Partner deems it advisable to file; and any documents which may be required to effect the continuation of the Partnership, the admission of an additional or substituted Limited Partner or Special Partner or the dissolution and termination of the Partnership, provided such continuation, admission or dissolution and termination are in accordance with the terms of this Agreement. The Power of Attorney so granted by each Limited Partner and Special Limited Partner to the General Partner is a Special Power of Attorney coupled with an interest, is irrevocable and shall survive the death or legal incapacity of the Limited Partner or Special Partner; may be exercised by the General Partner for each Limited Partner or Special Partner by a facsimile signature of one of its officers or by listing all the Limited Partners and Special Partners executing any instrument with a single signature of one of its officers acting as attorney-in-fact for all of them; and shall survive the delivery of any assignment by a Limited Partner or Special Partner of the whole or any portion of his interest in the Partnership; except that where the assignee thereof has been approved by the General Partner for admission to the Partnership as a substituted Limited Partner or Special Partner, the Power of Attorney shall survive the delivery of such assignment for the sole purpose of enabling the General Partner to execute, acknowledge and file any instrument necessary to effect such substitution. 42 43 The Power of Attorney so granted by each Limited Partner to the General Partner shall not authorize the General Partner to act on behalf of Limited Partners in any situation in which this Agreement requires the consent of Limited Partners. ARTICLE XX LIMITATIONS ON LIABILITY; LITIGATION Except as provided in his Subscription Agreement, no Limited Partner or Special Partner shall be liable (i) as a General Partner unless, in addition to the exercise of his rights and powers as a Limited Partner or Special Partner, he takes part in the management or control of the Partnership's business or is named as a General Partner in the Certificate of Limited Partnership or any amendment thereto or (ii) to the Partnership or to a General Partner unless a liability of the Partnership or of the General Partner, as the case may be, is founded upon the unauthorized activity of such Limited Partner or Special Partner in attempting to take part in the control of the Partnership's business or misstatements contained in such Partner's Subscription Agreement delivered in connection with his purchase of limited partner interests. The General Partner is hereby authorized to prosecute, defend, settle or compromise actions or claims at law or in equity at the Partnership's expense as may be necessary or proper to enforce or protect the Partnership's interests. The General Partner shall satisfy any judgment, decree or decision of any court, board or authority having jurisdiction or any settlement of any suit or claim prior to judgment or final decision thereon first, out of any insurance proceeds available therefor, next out of the Partnership's assets and income and finally out of the assets and income of the General Partner. ARTICLE XXI MISCELLANEOUS All notices under this Agreement shall be in writing and shall, except as otherwise expressly provided herein, be given to the Partner entitled thereto by personal service or by certified or registered mail or express mail or other overnight delivery service, return receipt requested, to the address set forth in this Agreement for such Partner or at such other address as he may specify in writing. Article titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference and 43 44 in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. Whenever the singular number is used in this Agreement and when required by the context, the same shall include the plural, and the masculine gender shall include the feminine and neuter genders and the word "persons" shall include individuals, corporations, firms, partnerships, trusts or other forms of associations. This Agreement may be executed in several counterparts, and all so executed shall constitute one agreement, binding on all of the parties hereto, notwithstanding that all the parties are not signatory to the original or the same counterpart. Subject to the provisions of Article XV, the terms and provisions of this Agreement shall be binding upon and inure to the benefit of heirs, executors, administrators, successors and assigns of the respective Partners. Whenever the vote of the Limited Partners is referred to in this Agreement, the General Partner may vote on behalf of such Limited Partners who have by written proxy authorized the General Partner so to do. This Agreement and all amendments hereof shall be governed by the laws of the State of California. 44 45 IN WITNESS WHEREOF, the parties hereto have hereunto set their respective hands as of the day and year first above written. GENERAL PARTNER: CAREY DIVERSIFIED LLC By:___________________________________ CORPORATE SPECIAL PARTNER: CAREY MANAGEMENT LLC By:____________________________________ INDIVIDUAL SPECIAL PARTNER: _______________________________________ William Polk Carey LIMITED PARTNERS: SIXTH CAREY CORPORATE PROPERTY, INC. By:___________________________________ CAREY DIVERSIFIED LLC By:___________________________________ 45 46 All Limited Partners now and hereafter admitted as limited partners of the Partnership pursuant to powers of attorney and authorizations now and hereafter executed in favor of and granted and delivered to the General Partner By: CAREY DIVERSIFIED LLC, General Partner By:___________________________________________ 46 EX-99.19 59 AMEN & RESTATED AGREEMENT OF LTD PARTNERSHIP CPA 7 1 EXHIBIT 99.19 AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF CORPORATE PROPERTY ASSOCIATES 7 A CALIFORNIA LIMITED PARTNERSHIP THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP, (the "Partnership") which amends and restates the Agreement of Limited Partnership dated as of April 10, 1986, as amended as of April 10, 1988 and ______, 1997, is made and entered into as of the ____ day of ______, 1996 by and between CAREY DIVERSIFIED PROPERTIES LLC, a Delaware limited liability company, as General Partner and as Limited Partner, CAREY MANAGEMENT LLC, as Corporate Special Partner, WILLIAM POLK CAREY, as Individual Special Partner, and SEVENTH CAREY CORPORATE PROPERTY, INC., a Delaware corporation, as Limited Partner, those persons set forth on Schedule A hereto, as Limited Partners, and all persons and entities admitted as Limited Partners as provided herein. ARTICLE I FORMATION OF PARTNERSHIP The parties hereby continue the Partnership under the provisions of the California Revised Limited Partnership Act (the "Act") and the rights and liabilities of the Partners shall be as provided in such law and as herein expressly provided. In the event that it shall be necessary for the Partnership to exist in or qualify to do business under the laws of any state or states other than or in addition to the State of California, the parties hereby agree that the Partnership shall take such action as may be necessary to exist or qualify to do business in any state in which such existence or qualification shall be required, provided that in any such event the Partnership shall at all times continue to be a limited partnership formed under and governed by the provisions of the Act. ARTICLE II NAME The business of the Partnership shall be conducted under the name "Corporate Property Associates 7 - a California limited partnership" or under "Corporate Property Associates 7" in any state or other jurisdiction which does not permit the term "limited" to be a part of the Partnership's name or under such other name as the General Partner shall hereafter designate in writing to the other Partners. 2 ARTICLE III DEFINITIONS "Acquisition Expenses" means the expenses of the Partnership related to the selection and acquisition of properties by the Partnership, whether or not such properties are acquired, including but not limited to legal fees and expenses, travel and communications expenses, costs of appraisals and fairness letters, non-refundable option payments on property not acquired, accounting fees and expenses, costs of title reports and title insurance, transfer and recording taxes and miscellaneous expenses. Acquisition Expenses shall not include Acquisition Fees. "Acquisition Fees" means the total of all fees and commissions paid by any party in connection with the purchase or development of property by the Partnership, except a development fee paid to a person not an Affiliate of the Partnership in connection with the actual development of a project after the Partnership's acquisition of the land. Included in the computation of such fees or commissions shall be any real estate commission, selection fee, development fee (other than as described above), nonrecurring management fee, or any fee of a similar nature, however designated, but not any loan fee ("points"). Acquisition Fees shall not include Acquisition Expenses. "Act" means the California Revised Limited Partnership Act. "Affiliate" means, with respect to any Partner, (i) any person directly or indirectly controlling, controlled by or under common control with such Partner, (ii) any person owning or controlling 10% or more of the outstanding voting securities of such Partner, (iii) any officer, director or partner of such Partner or of any person specified in (i) or (ii) above and (iv) any company in which any officer, director or partner of any person specified in (iii) above is an officer, director or partner; provided, however, that for purposes of this definition the term "Affiliate" shall not be deemed to include any person providing legal, underwriting or financial or investment advisory services to the Partnership, the General Partner or any Affiliate of any of them from time to time so long as those are the only services provided to the Partnership by any such person and except that Carey Financial Corporation shall be deemed as Affiliate hereunder if it otherwise meets the above definition. "Agreement" means this Amended and Restated Agreement of Limited Partnership as hereafter amended from time to time. "Appraisal Date" means December 31, 2001. "Appraised Value" means the value according to an appraisal made by an independent qualified appraiser. Such qualification -2- 3 may be demonstrated by membership in a nationally recognized appraisal society such as American Institute of Real Estate Appraisers ("M.A.I."), Society of Real Estate Appraisers ("S.R.E.A.")or their equivalent, but is not limited thereto. "Capital Account" means, in respect of any Partner, the account maintained for such Partner in accordance with Article XII. "Cash From Financings" means the net cash proceeds realized by the Partnership from the financing of Partnership property or the refinancing of any Partnership indebtedness. "Cash From Sales" means the net cash proceeds realized by the Partnership from the sale, exchange or other disposition of any of its assets. Cash From Sales shall not include net cash proceeds realized from the financing of Partnership property or the refinancing of any Partnership indebtedness. "Code" means the Internal Revenue Code of 1986. "Consolidation and Offering Expenses" means all expenses incurred in connection with the formation and qualification of the Subsidiary Partnership, the Merger and in offering the Shares to the former limited partners of the Partnership in exchange for their Partnership Interests under applicable Federal and state law, and any other expenses actually incurred and directly related to the offering of the Shares, including such expenses as: (i) the preparing, printing, filing and delivering of the Registration Statement and the Prospectus (including any amendments thereof or supplements thereto), (ii) the preparing and printing of this Agreement, other solicitation material and related documents and the filing and/or recording of such certificates or other documents necessary to comply with the laws of the State of California for the formation of a limited partnership, the merger of a limited partnership into another limited partnership and for the continued good standing of a limited partnership, (iii) the qualification or registration of the limited liability company interests under state securities or "Blue Sky" laws, (iv) any escrow arrangements, including any compensation to an escrow agent, (v) the filing fees payable to the United States Securities and Exchange Commission and to the National Association of Securities Dealers, Inc. and any costs payable to the New York Stock Exchange for the listing of the Listed Shares, (vi) the fees of the Partnership's counsel, (vii) all advertising expenses incurred in connection therewith, including the cost of all sales literature and the costs related to investor and broker/dealer sales and information meetings and marketing incentive programs and (viii) selling commissions and wholesaling expenses incurred in connection with the sale of the Shares. "Contribution" means any money, property or services rendered, or a promissory note or other binding obligation to -3- 4 contribute money or property, or to render services as permitted by Section 15651 of the Act, which a Partner contributes to the Partnership as capital in that Partner's capacity as Partner pursuant to this Partnership Agreement or any other agreement among the Partners, including any agreement as to value. "Corporate Special Partner" means Carey Management LLC, a Delaware limited liability company. "CPA Partnership" means Corporate Property Associates, a California limited partnership, Corporate Property Associates 2, a California limited partnership, Corporate Property Associates 3, a California limited partnership, Corporate Property Associates 4, a California limited partnership, Corporate Property Associates 5, a California limited partnership, Corporate Property Associates 6, a California limited partnership, Corporate Property Associates 8, L.P., a Delaware limited partnership, Corporate Property Associates 9, L.P., a Delaware Limited Partnership, the Partnership and any other real estate limited partnerships sponsored by W.P. Carey & Co., Inc. or its Affiliates with investment objectives substantially similar to the Partnership's. "Distributable Cash From Operations" means cash receipts from the ordinary day-to-day operations of the Partnership (including all interest on Partnership investments and mortgages held by the Partnership) without deduction for the management fee authorized by Paragraph G (7) of Article X payable to an Affiliate of the General Partner or for depreciation and amortization of intangibles such as organization, underwriting and debt placement costs but after deducting all other expenses and debt amortization and provisions for reserves established by the General Partner which it deems to be reasonably required for the proper operation of the business of the Partnership. "Distributable Cash From Operations" shall not include cash proceeds realized from the sale, exchange or other disposition of assets of the Partnership or from financing of Partnership property or the refinancing of any Partnership indebtedness. "Distribution" means any transfer of money or property by the Partnership to a Partner without consideration. "Fiscal Quarter" means the three-month period ending on the last day of the third, sixth, ninth and twelfth calendar months of each Fiscal Year of the Partnership. "Fiscal Year" means the Fiscal Year specified in Article XIII. "Front-End Fees" means all fees and expenses paid by any party for any services rendered in connection with the organizational or acquisition phase of the Partnership, including Consolidation and Offering Expenses, Acquisition Fees, -4- 5 Acquisition Expenses and any other similar fees, however designated. "General Partner" means any person or entity in his, her or its capacity as general partner of the Partnership and whose name and address are set forth in Article V, or any successor thereto appointed or elected hereunder. "Independent Advisor" means a long established, nationally recognized investment banking firm, accounting firm, mortgage banking firm, accounting firm, mortgage banking firm, bank, real estate financial consulting firm or advisory firm which has a staff of real estate professionals, whose compensation is determined and embodied in a written contract before an opinion is rendered and who, directly or indirectly, has no interest in, nor any material business or professional relationship with, the Partnership, the General Partner, a borrower, or any of their Affiliates. No more than 5% of the aggregate annual gross income of the Independent Advisor or its Affiliates may be attributable to compensation paid to the Independent Advisor by the Partnership pursuant to the advisory agreement. "Independent Directors" means a director of the General Partner who, in the opinion of the board of directors of the General Partner, is free from any relationship that would interfere with the exercise of independent judgment. A director of the General Partner who is an Affiliate of the General Partner or an officer or employee of the General Partner or its subsidiaries or Affiliates would not qualify as an Independent Director. "Individual Special Partner" means William Polk Carey. "Investment in Properties" means the amount of gross proceeds of the Offering paid or allocated to the purchase, development, construction or improvement of real property, appurtenances thereto and personal or mixed property connected therewith, acquired by the Partnership, including the purchase of properties, working capital reserves (except that working capital reserves in excess of 5% of the gross proceeds of the Offering shall not be included) and other cash payments such as interest, financing fees, taxes and other similar items, but excluding Front-End Fees. "Limited Partner" means any person or entity in his, her or its capacity as a limited partner of the Partnership and whose name and address are set forth on the books and records of the Partnership. "Mandatory Distribution Event" means (a) the sale or disposition of a Partnership property to a third party unaffiliated with the Partnership or the General Partner, not including the pledge, mortgage or encumbrance of a property, or of any interest therein, in connection with the financing, -5- 6 refinancing or other leveraging of such property or otherwise or any assignment of any leases or rents related to such property, or (b) the mandatory distribution to holders of Partnership Interests following the Appraisal Date. "Merger" means the merger of the Subsidiary Partnership into the Partnership. "Merger Agreement" means the Agreement of Merger pursuant to which the Subsidiary Partnership is merged with and into the Partnership. "Minimum Gain" shall mean and refer to, at any time, the excess, if any, of the outstanding principal balance of all nonrecourse debt of the Partnership that is secured by an interest in Partnership assets, over the adjusted basis of such assets to the Partnership for Federal income tax purposes. For purposes of the preceding sentence, the term "nonrecourse debt" shall mean a liability of the Partnership with respect to which no Partner has any personal liability. "Nonrecourse Deductions" has the meaning set forth in Sections 1.704-2(b)(1) and 1.704-2(c) of the Treasury Regulations. "Nonrecourse Liabilities" has the meaning set forth in Section 1.704-2(b)(3) of the Treasury Regulations. "Net Lease" means a lease in which the tenant undertakes to pay all or substantially all the cash expenses, excluding debt service, related to the leased property. "Offering" means the offering of the Shares made pursuant to the Prospectus. "Partner" means the General Partner, the Corporate Special Partner, the Individual Special Partner and any Limited Partner where no distinction is required by the context in which the term is used. "Partner Minimum Gain" means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a nonrecourse Liability, determined in accordance with Treasury Regulations Section 1.704-2(i)(4). "Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulations Section 1.704-2(b)(4). "Partner Nonrecourse Deductions" has the meaning set forth in Treasury Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Debt for the Partnership taxable year shall be determined in accordance with the rules of Treasury Regulations Section 1.704-2(i)(2). -6- 7 "Partnership" means Corporate Property Associates 7 - a California limited partnership. "Partnership Interest" means the interest of each Partner in the profits, losses, distributions, capital and assets of the Partnership. "Partnership Minimum Gain" has the meaning set forth in Treasury Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in Partnership Minimum Gain, for a Partnership taxable year shall be determined in accordance with the rules of the Treasury Regulations. "Prospectus" means the final prospectus of the General Partner pursuant to which the Partnership will offer up to 32,640,879 Shares as the same may at any time and from time to time be amended or supplemented after the effective date of the Registration Statement. "Proxy" means a written authorization signed by a Partner or the Partner's attorney-in-fact giving another person the power to vote with respect to the Partnership Interest of that Partner. "Signed," for the purpose of this paragraph, means the placing of the Partner's name on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the Partner or the Partner's attorney-in-fact. "Registration Statement" means the General Partner's Registration Statement on Form S-4 filed with the Securities and Exchange Commission in the form in which it becomes effective, as the same may at any time and from time to time thereafter be amended or supplemented. "Shares" means the Shares of the General Partner. "Special Partners" means the Corporate Special Partner and the Individual Special Partner. "Subsidiary Partnership" means Seventh Subsidiary, L.P., a California limited partnership, which is a subsidiary of the General Partner. ARTICLE IV PURPOSE The business and purpose of the Partnership is to carry on any business that a California partnership without limited partners may carry on (except the banking, insurance or trust company business), and more particularly to invest in and own real property or interests therein (including leasehold estates) -7- 8 or appurtenances thereto as well as personal or mixed property connected therewith which is income producing or capable of becoming income producing within a reasonable time after acquisition. The Partnership may enter into ventures, partnerships and other business arrangements with respect to real property and personal or mixed property connected therewith or interest therein as deemed prudent by the General Partner in order to achieve successful operations for the Partnership. Operations of the Partnership may be conducted wherever, in the opinion of the General Partner and not in violation of the general restrictions described in Paragraph H of Article X, the factors involved appear to be favorable for the Partnership and the Partners. ARTICLE V NAMES AND ADDRESSES OF PARTNERS The General Partner of the Partnership shall be Carey Diversified LLC, a Delaware limited liability company having an office at 50 Rockefeller Plaza, New York, New York 10020. The names and addresses of the Limited Partners of the Partnership shall be as set forth on the books and records of the Partnership and shall be kept at the principal place of business of the Partnership and a copy of which shall be kept at the Partnership's California office. -8- 9 ARTICLE VI PRINCIPAL PLACE OF BUSINESS; CALIFORNIA OFFICE The principal place of business of the Partnership shall be 50 Rockefeller Plaza, New York, New York 10020. The Partnership shall also maintain an office in California at Transamerica Pyramid, 600 Montgomery Street, San Francisco, California 94111. The General Partner may from time to time change the principal place of business of the Partnership or its California office and, in either such event, the General Partner shall notify the Partners in writing within ten days after the effective date of such change; provided, however, that no such change shall be effected unless the General Partner determines that such change is in the best interests of the Partnership after giving consideration to any material adverse state or local income, estate or inheritance tax consequences to the Partners, or any adverse effect on the limited liability of the Limited Partners, as a result of such change and provided further that the Partnership shall always maintain at least one office in California. The General Partner may establish additional places of business of the Partnership when and where required by the business of the Partnership. The Partnership at all times shall maintain in California an agent for service of process upon the Partnership. ARTICLE VII CAPITAL CONTRIBUTIONS The Partnership is authorized to issue and sell up to $100,000 of limited partner interests. No interest shall be paid on any contribution to the capital of the Partnership. Loans by a Partner to the Partnership shall not be considered contributions to the capital of the Partnership. Any Partner, including any additional or substituted Partner, who shall acquire a Partnership Interest or whose Partnership Interest is increased by means of a transfer to him of all or a part of the Partnership Interest of another Partner, shall succeed to the Capital Account, or portion thereof, in respect of the Partnership Interest received. -9- 10 ARTICLE VIII PROFITS AND LOSSES A. Determination of Profits and Losses. The Partnership presently intends to keep its books on the cash receipts and disbursements method of accounting and to report for federal, state and local income tax purposes using the same method by making such adjustments as are necessary to include other items of income, expense, deduction and allowance as are permitted or required under the Code and the regulations promulgated thereunder. The Partnership may report its activities to the Limited Partners in accordance with generally accepted accounting principles. Except as otherwise provided herein, whenever a proportionate part of the Partnership profit or loss is credited or charged to a Partner's Capital Account, every item of income, gain, loss or deduction entering into the computation of such profit or loss shall be considered either credited or charged, as the case may be, to such Partner's Capital Account and every item of credit or tax preference related to such profit or loss and applicable to the period during which such profit or loss was realized shall be allocated to such Partner in the same proportion. Every recapture of deduction or credit shall be allocated among the Partners in the same proportion as the items of deduction or credit subject to recapture were allocated among the Partners. Any increase or decrease in the amount of any item of income, gain, loss or deduction attributable to any adjustment to the basis of Partnership assets made pursuant to a valid election under Sections 734, 743 and 754 of the Code and pursuant to corresponding provisions of applicable state and local income tax laws shall be charged or credited, as the case may be, and any increase or decrease in the amount of any item of credit or tax preference attributable to any such adjustment shall be allocated to the Partners entitled thereto under such laws. Profits and losses allocated to a particular class of Partnership Interests shall be allocated among the holders of record of such class of Partnership Interests at the end of each Fiscal Year (or such shorter period as may be provided herein) of the Partnership in proportion to their respective Partnership Interests; provided, however, that any such profits and losses attributable to a limited partner interest assigned during a Fiscal Year of the Partnership shall be allocated among the holders of such limited partner interests during such Fiscal Year in proportion to the number of months (for purposes of such allocation ownership of limited partner interests for each month will be determined as of the fifteenth day of each month) that each such holder was recognized as the owner of such limited partner interest during such Fiscal Year, without regard to the results of Partnership operations during the period in which each such holder was recognized as the owner thereof and without regard to the date, amount or recipient of any distributions which may have been made with respect to such limited partner interest. -10- 11 B. Allocation of Profits and Losses. 1. Except as provided in subparagraph 4 of this paragraph B, the profits and losses of the Partnership (other than gains or losses from the sale, exchange or other disposition of Partnership assets) shall be allocated to the Partners as follows and in the following order to priority: a. An amount of net income equal to the excess, if any, of the aggregate negative balance of the Capital Accounts of the Partners over the Minimum Gain (determined as of the end of such year or fraction thereof), shall first be allocated among the Partners whose Capital Accounts are negative as a result of nonrecourse debt in proportion to the negative amounts attributable to such nonrecourse debt. b. Any remaining balance of net income shall be allocated 1% to the General Partner, 5% to the Corporate Special Partner, 1% to the Individual Special Partner and 93% to the Limited Partners. c. Net losses of the Partnership shall be allocated 1% to the General Partner, 5% to the Corporate Special Partner, 1% to the Individual Special Partner and 93% to the Limited Partners. 2. Except as provided in subparagraph 4 of this Paragraph B, net losses arising from sales, exchanges or other dispositions of Partnership assets shall be allocated 1% to the General Partner, 1% to the Individual Special Partner and 98% to the Limited Partners. For purposes of this subparagraph 2, Capital Accounts shall be determined after applying the allocations provided in subparagraphs 1 and 5 of this Paragraph B, and after applying subparagraphs 6 and 7 of this Paragraph B. 3. Net gains arising from sales, exchanges or other dispositions of Partnership assets shall be allocated to the Partners as follows and in the following order to priority: a. An amount of such gains equal to the excess, if any, of the aggregate negative balance of the Capital Accounts of the General Partner over the Minimum Gain; b. If each Partner's Capital Account is negative and the gains are less than the aggregate negative amounts in the Capital Accounts, in the ratio that the Capital Accounts bear to each other; c. If each Partner's Capital Account is negative and the gains are greater than the aggregate negative amounts in the Capital Accounts (i) first in an amount to bring each Partner's Capital Account to zero, and (ii) then to the Partners in the percentage by which Cash From Sales and Cash -11- 12 From Financings is then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; d. If certain Partner's Capital Accounts are positive and other Partner's Capital Accounts are negative (i) first in an amount to bring the Capital Account of each Partner whose Capital Accounts which are negative to zero (or if gains are less than the aggregate negative amounts of the Capital Accounts which are negative, to such Partners in the ratio that such negative Capital Accounts bear to each other), and (ii) then to the Partners in the percentage by which Cash From Sales and Cash From Financings is then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; e. If each Partner's Capital Account is positive, in the percentages by which Cash From Sales and Cash From Financings is then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; For purposes of this subparagraph 3, Capital Accounts shall be determined after applying the allocations provided in subparagraphs 1 and 2 of this Paragraph B and after applying subparagraphs 6 and 7 of Paragraph B. 4. No loss or deduction or item thereof under subparagraph 1 or 2 of this Paragraph B shall be allocated to the General Partner if, or to the extent, such allocation would create or increase a deficit in the General Partner's Capital Account, unless: a. Such allocation of loss or deduction is attributable to nonrecourse debt of the Partnership; and b. Such allocation does not cause the deficit capital account of the General Partner to exceed the amount of Minimum Gain attributable to such nonrecourse debt, determined as of the last day of the taxable year to which such allocation is attributable. 5. To the extent that any amount paid to a Limited Partner or its Affiliates pursuant to the provisions of Paragraphs G(2), (4), (5), (6), or (7) of Article X hereof, or as Front-End Fees, is treated as a distributive share of Partnership income to the Limited Partner for Federal income tax purposes, the Limited Partner affected shall be allocated gross income of the Partnership at a time and in an amount equal to the amount of such payment, and the Capital Account of the Limited Partner so affected shall be adjusted to reflect such allocation and payment. If the Partnership's gross income for a Fiscal Year is less than the amount of such payment, the Limited Partner so affected shall be allocated gross income in each succeeding Fiscal Year until the total amount so allocated equals the total amount of such payment. -12- 13 6. For purposes of subparagraphs 1(a), 2 and 3 of this Paragraph B, distributions to the Partners pursuant to Paragraphs A and E of Article IX hereof shall be treated as having been made and charged to the Capital Accounts of the Partners prior to the allocations of income, gains and losses provided therein. 7. Solely for purposes of this Paragraph B, the Capital Accounts of each Partner shall be reduced by such Partner's share of any Partnership expenditure which would be treated as it were an expenditure described under Section 705(a)(2)(B) of the Code, and shall be reduced or increased by any other amount required by the then applicable regulations under Section 704 of the Code. 8. Notwithstanding anything to the contrary in this Article VIII, if any Partner receives an adjustment, allocation or distribution described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), such Partner shall be specially allocated a pro rata portion of each item of Partnership income, including gross income, and gain in an amount and manner sufficient to eliminate, as quickly as possible, any deficit balance in such Partner's Capital Account created by such adjustment, allocation or distribution in excess of the sum of (i) the amount such Partner is obligated to restore pursuant to any provision of this Agreement and (ii) the amount such Limited Partner is deemed to be obligated to restore pursuant to the penultimate sentence of Treasury Regulations Section 1.704-1(b)(2)(iv)(f) (as amended in 1986). This subparagraph 8 of Paragraph B is intended to constitute a "qualified income offset" within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(3). 9. Except as otherwise provided in Section 1.704-2(f) of the Treasury Regulations, if there is a net decrease in Partnership Minimum Gain for any Partnership fiscal year, each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary subsequent years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain to the extent required by Treasury Regulations Section 1.704-2(f). The items to be so allocated shall be determined in accordance with Section 1.704-2(f) and (i) of the Treasury Regulations. This subparagraph is intended to comply with the minimum gain chargeback requirement in said section of the Treasury Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant hereto. 10. Except as otherwise provided in Section 1.704-2(i)(4) of the Treasury Regulations, if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any fiscal year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the Treasury Regulations, shall be specially allocated items of -13- 14 Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to that Partner's share of the net decrease in the Partner Minimum Gain attributable to such Partner Nonrecourse Debt to the extent and in the manner required by Section 1.704-2(i) of the Treasury Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i) of the Treasury Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and (j)(2) of the Treasury Regulations. This subparagraph is intended to comply with the minimum gain chargeback requirement with respect to Partner Nonrecourse Debt contained in said section of the Treasury Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph shall be made in proportion to the respective amounts to be allocated to each Partner pursuant hereto. 11. To the extent any Partner has an Adjusted Capital Account Deficit at the end of any Partnership Fiscal Year, each such Partner shall be specially allocated items of Partnership income (including gross income) and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Paragraph 8(B)(11) shall be made if and only to the extent that such Partners would have an Adjusted Capital Account Deficit after all other allocations provided for in this Section have been tentatively made as if this Paragraph 8(B)(11) were not in the Agreement. 12. Partner Nonrecourse Deductions for any fiscal year or other applicable period with respect to a Partner Nonrecourse Debt shall be specially allocated to the Partners that bear the economic risk of loss for such Partner Nonrecourse Debt (as determined under Sections 1.704-2(b)(4) and 1.704-2(i)(1) of the Treasury Regulations). C. Power of the General Partner to Vary Allocations of Profits and Losses. It is the intent of the Partners that each Partner's distributive share of income, gains, losses, deductions and credits shall be determined and allocated in accordance with this Article VIII to the fullest extent permitted by Section 704(b) of the Code. If the Partnership is advised that the allocations provided in this Article VIII are unlikely to be respected for Federal income tax purposes, the General Partner has been granted power in Paragraph B(2) of Article XVI of this Agreement to amend the allocation provisions of this Agreement, on advice of accountants and legal counsel, to the minimum extent necessary to effect the plan of allocations and distributions provided in this Agreement. D. Allocations of Profits and Losses Among Limited Partners. Except as otherwise provided in this Article VIII, profits and losses shall be allocated among the Limited Partners in the same manner as distributions are allocated in Paragraph D of Article IX hereof. -14- 15 E. Consent of Partners to Allocation of Profits and Losses. The methods hereinabove set forth by which profits and losses of the Partnership are determined and allocated are hereby consented to by each Partner as a condition to becoming a Partner. ARTICLE IX DISTRIBUTIONS A. Distributable Cash From Operations. The General Partner shall distribute as soon after the close of each Fiscal Quarter as is reasonably feasible all of the Distributable Cash From Operations for such Fiscal Quarter in the following manner: 1% to the General Partner, 5% to the Corporate Special Partner, 1% to the Individual Special Partner and 93% to the Limited Partners. Cash From Sales. The General Partner shall distribute, as soon after the close of each Fiscal Quarter as is reasonably feasible, all Cash From Sales realized by the Partnership during such Fiscal Quarter in accordance with the provisions of Paragraph E of this Article IX. Cash From Financings. The General Partner shall distribute, as soon after the close of each Fiscal Quarter as is reasonably feasible, all of the Cash From Financings realized by the Partnership during such Fiscal Quarter in accordance with the provisions of Paragraph E of this Article IX. B. Allocation of Distributions Among Limited Partners. Distributions of cash to the Limited Partners shall be apportioned among the holders of record of limited partner interests in the ratio in which the number of limited partner interests held of record by each of them bears to the number of limited partner interests held of record by all Limited Partners as of the first day of the Fiscal Quarter with respect to which such distribution is made. C. Distributions of Cash From Sales and Cash From Financings. General Partner shall distribute Cash From Sales and Cash From Financings in the following manner: 1% to the General Partner, 1% to the Individual Special Partner and 98% to the Limited Partners. D. No Distributions Under Certain Circumstances. Notwithstanding any other provision of this Article IX, no distribution shall be made if, after giving effect to the distribution, the liabilities of the Partnership, excluding the Partnership non-recourse liabilities, exceeds the sum of (i) the fair market value of the Partnership's assets not subject to Partnership non-recourse liabilities and (ii) the fair market value of the Partnership's assets subject to Partnership non-recourse liabilities (but only to the extent the fair market -15- 16 value of each such asset exceeds the amount of the corresponding Partnership non-recourse liability). No Partner shall have the right to receive property other than money upon any distribution. No Partner may be compelled to accept a distribution of any asset in kind in lieu of a proportionate distribution of money being made to other Partners. E. Consent of Partners to Allocation of Distributions. The methods hereinabove set forth by which Cash From Operations, Cash From Sales and Cash From Financings are allocated and distributed are hereby consented to by each Partner as a condition to becoming a Partner. ARTICLE X MANAGEMENT AND OPERATION OF BUSINESS A. Management of Business. The Partnership shall be managed by the General Partner and the conduct of the Partnership's business shall be controlled and conducted by the General Partner in accordance with this Agreement. The approval of only the General Partner is needed for decisions concerning the Partnership's investments. B. Authority of the General Partner. In addition to and not in limitation of any rights and powers conferred by law or other provisions of this Agreement, the General Partner shall have and may exercise on behalf of the Partnership all powers and rights necessary, proper, convenient or advisable to effectuate and carry out the purposes, business and objectives of the Partnership. Such powers shall include, without limitation, the following powers: 1. To acquire, hold and dispose of any real property (or any interests therein, including leasehold estates) and appurtenances thereto as well as personal or mixed property connected therewith, including the purchase, lease, development, improvement, maintenance, exchange, trade or sale of such property at such price, rental or amount, for cash, securities or other property and upon such terms, as the General Partner deems to be in the best interests of the Partnership; 2. Subject to the provisions of Paragraph H (10) of this Article X, to borrow money and, if required therefor, to mortgage or subject to any other security device any portion of the assets of the Partnership, to obtain replacements of any mortgage or other security device, and to prepay, in whole or in part, refinance, increase, modify, consolidate or extend any mortgage or other security device, provided, however, that loans from Affiliates of the General Partner shall be made in accordance with the provisions of Paragraphs G (2) and G (6) of this Article X; -16- 17 3. To invest the Partnership's funds in United States Government securities, certificates of deposit other time or demand deposits of banks, savings banks, savings and loan associations or similar institutions which have a net worth of at least $100,000,000 or in which such certificates or deposits are fully insured by any Federal or state government agency, United States dollar deposits in foreign branches of banks, which banks have a net worth of at least $100,000,000 bank repurchase agreements covering securities of the United States Government or governmental agencies, bankers' acceptances, public money market funds, adjustable rate preferred stock funds, including those managed by Affiliates of the General Partner, or other similar short-term highly liquid investments (except that the Partnership will invest its liquid reserves in an adjustable rate preferred fund managed by Affiliates of the General Partner only if (i) such investment is approved in advance by a majority of the General Partner's Independent Directors and (ii) the Partnership's investment in such fund represents no more than 10% of such fund's net asset value); to invest any working capital or other reserves retained by the General Partner for the operation of the Partnership in like manner; and to deposit, withdraw, invest, pay, retain and distribute the Partnership's funds in any manner consistent with the provisions of this Agreement; 4. To bring and defend actions at law or in equity; 5. To employ persons in the operation and management of the Partnerships' business, including but not limited to supervisory managing agents, building management agents, real property developers and real estate brokers; 6. To place record title to, or the right to use, Partnership assets in the name or names of a non-operating nominee or nominees, including an Affiliate of the General Partner, for any purpose convenient or beneficial to the Partnership. 7. To perform all acts and file all documents, including tax returns and registration statements, necessary to comply with federal, state and local laws, rules and regulations applicable to the Partnership or the conduct of the Partnership's business; 8. To enter into and carry out contracts and agreements and any or all documents and instruments and to do and perform all such other things as may be in furtherance of Partnership purposes or necessary or appropriate to the conduct of Partnership's activities; 9. To cause the Partnership to make or revoke any of the elections required or permitted to be made by the Partnership under the Code; 10. To determine the appropriate accounting method or methods to be used by the Partnership (the Partnership intends -17- 18 initially to utilize the cash receipts and disbursements method of accounting in reporting its profits and losses for Federal, state and local income tax purposes); 11. To designate Carey Diversified LLC, the General Partner, as the "Tax Matters Partner" in accordance with Section 6231(a)(7) of the Code and, as such, the General Partner shall have all powers necessary to so perform including, without limitation, the power to retain attorneys and accountants of its choice and the right to settle any audits without the consent of the Limited Partners, except as otherwise required by the Code. the designation provided for herein is expressly consented to by each Partner as an express condition to becoming a Partner; and 12. To execute, acknowledge, deliver, seal, file, record and vote any and all instruments which may be deemed necessary or convenient to effect the foregoing. C. Restrictions on Authority of General Partner. In addition to other acts expressly prohibited or restricted by this Agreement or by law, the General Partner shall have no authority to act on behalf of the Partnership with respect to, and are expressly prohibited from undertaking, the following: 1. Doing any act in contravention of this Agreement; 2. Except as provided in this Agreement and except in connection with the liquidation and winding up of business of the Partnership upon its termination and dissolution, doing any act which would make it impossible to carry on the ordinary business of the Partnership; 3. Confessing a judgment against the Partnership in connection with any threatened or pending legal action; 4. Possessing Partnership property or assigning the rights of the Partnership in specific Partnership property for other than a Partnership purpose; 5. Admitting a person as a Limited Partner except as provided in this Agreement; 6. Except as provided in this Agreement and except in connection with the liquidation and winding up of business of the Partnership upon its termination and dissolution or a Mandatory Distribution Event, selling substantially all the assets of the Partnership at a single sale or in multiple sales in the same 12-month period without the prior written consent of Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI; 7. Pledging or encumbering substantially all the properties of the Partnership at one time or from time to time in -18- 19 a series of related transactions, unless the lien of such pledge or encumbrance arises in connection with the acquisition or improvement of properties or the initial financing of properties acquired free and clear of encumbrances or the refinancing of previous obligations and such lien is limited to the properties so acquired, improved, financed or refinanced; 8. Obtaining any loan or any mortgage loan on any residential property made or guaranteed by any federal, state or local government or municipality or any agency of any federal, state or local government or municipality; 9. Performing any act (other than an act required by this Agreement or any act taken in good faith in reliance upon counsel's opinion) which would, at the time such act occurred, subject any Limited Partner to liability as a general partner in any jurisdiction; 10. Prepaying any interest on any Partnership indebtedness; provided that the payment of any amount commonly referred to as "points" shall not be deemed a prepayment of interest; or 11. Assessing any Partner for an additional capital contribution. D. Fiduciary Obligations of General Partner. The General Partner shall act at all times as a fiduciary with respect to the Partnership, the Limited Partners and the Partnership property and assets. E. Obligations of the General Partner. The General Partner shall: 1. Devote such of its time to the business of the Partnership as it shall, in its discretion, exercised in good faith, determine to be necessary to conduct the business of the Partnership for the benefit of the Partnership and the Limited Partners; 2. File and publish all certificates, statements or other instruments required by law for formation, qualification and operation of the Partnership and for the conduct of its business in all appropriate jurisdictions; 3. Use its best efforts to cause Partnership and the Partners to be protected by adequate public liability, directors and officers liability, property damage and other insurance; however, no Partnership funds may be used to purchase any liability insurance for which the indemnified person would be prohibited from being indemnified by the Partnership under Article X(F) of this Agreement; -19- 20 4. Employ attorneys to represent the Partnership, which attorneys may also serve as counsel to the General Partner and any of its Affiliates; and 5. Use its best efforts to maintain the status of the Partnership as a "partnership" for federal income tax purposes. F. Limitation on Liability of General Partner; Indemnification. 1. Neither the General Partner nor any of its Affiliates shall have the liability to the Partnership or to any Partner for any loss suffered by the Partnership which arises out of any action or inaction of the General Partner of its Affiliates if the General Partner or its Affiliates, in good faith determined that such cause of conflict was in the best interest of the Partnership and such course of conduct did not constitute negligence or misconduct of the General Partner or its Affiliates and provided, with respect to Affiliates, such Affiliates were acting within the scope of the authority of the General Partner. The General Partner and its Affiliates (other than broker-dealers) shall be indemnified by the Partnership against any losses, judgments, liabilities, expenses and amounts paid in settlement of any claim sustained by them in connection with the Partnership, provided that the same were not the result of negligence or misconduct on the part of the General Partner or its Affiliates and, with respect to the Affiliates, provided that such Affiliates were acting within the scope of the authority of the General Partner. 2. The General Partner and its Affiliates and any person acting as a broker dealer shall not be indemnified for any losses, liabilities and expenses arising from or out of an alleged violation of federal or state securities laws unless (a) there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee, (b) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee or (c) a court of competent jurisdiction approves a settlement of the claims against a particular indemnitee. In any claim for indemnification for federal or state securities law violations, the party seeking indemnification shall place before the court the position of the Securities and Exchange Commission and state securities commissioner with respect to the issue of indemnification for securities law violations. 3. The Partnership shall not incur the cost of that portion of any insurance, other than public liability insurance, which insures any party against any liability the indemnification of which is herein prohibited. 4. The Partnership shall not make any advances to the General Partner or its Affiliates for legal expenses and other -20- 21 costs incurred as a result of legal action unless the following three conditions are satisfied: (a) the legal action relates to the performance of duties or services by the General Partner or its Affiliates on behalf of the Partnership, (b) the legal action is initiated by a party other than the Partnership or a Limited Partner and (c) the General Partner or its Affiliates undertake to repay the advanced funds to the Partnership in cases in which they would not be entitled to such indemnification. 5. For purposes of this Section (F) of Article X, the term Affiliate shall mean any person performing services on behalf of the Partnership (i) who directly or indirectly controls, is controlled by, or is under common control with the General Partner, (ii) who owns or controls 10% or more of the outstanding voting securities of the General Partner, (iii) who is an officer, director or partner of the General Partner or (iv) which is a company for which the General Partner acts as an officer, director, partner or trustee. 6. The Partnership shall indemnify to the extent of the Partnership assets each Limited Partner against any claims of liability asserted against a Limited Partner solely because he is a Limited Partner in the Partnership. G. Specific Transactions Authorized. The General Partner is hereby authorized to enter into, on behalf of the Partnership, the following specific transactions: 1. The Partnership may purchase property from any Affiliate of the General Partner provided (i) the property was acquired by such Affiliate for the purpose of facilitating its purchase by the Partnership, facilitating the borrowing of money or the obtaining of financing for the Partnership or any other purpose related to the business of the Partnership, (ii) the property is purchased by the Partnership for a price no greater than the acquisition and out-of-pocket carrying cost of the property to such Affiliate, (iii) there is no adverse difference in the interest rates of the loans secured by the property at the time acquired by such Affiliates and at the time purchased by the Partnership nor any other benefit arising out of such transaction to the General Partner and (iv) no compensation is paid by the Partnership or by any non-affiliated person to any Affiliate of the General Partner in connection with the purchase of the property by the Partnership. 2. The Partnership may take a loan, the principal amount of which is scheduled to be paid over a period of not less that 48 months and not more than 50% of the principal amount of which is scheduled to be paid during the first 24 months, from an Affiliate of the General Partner provided that such Affiliate is a public program formed for the purpose of, among other things, making mortgage loans and further provided that (i) the terms of any such loan are fair and at least as favorable to the Partnership as could be obtained from a non-Affiliate in similar -21- 22 circumstances; (ii) the Partnership obtains a letter of opinion from a qualified Independent Advisor to such effect and (iii) the Partnership is represented, with respect to such mortgage loan, be legal counsel different from the legal counsel retained for such transaction by the Affiliated lender. 3. An officer or director of the General Partner may serve as a director of a tenant of the Partnership after a lease with the Partnership has been executed. Any tenant having such an officer or director serving as director shall nor be considered an Affiliate for purposes of this Partnership Agreement. 4. The Partnership may contract (i) with Affiliates of the General Partner to serve as real estate brokers and mortgage placement brokers in connection with the investment of the Partnership assets and (ii) with Affiliates of the General Partner to serve as real estate brokers in connection with the sale of property by the Partnership. The amount of the real estate commissions payable to Affiliates of the General Partner upon a sale of property by the Partnership where such Affiliates of the General Partner upon a sale of property by the Partnership where such Affiliates have provided a substantial amount of services in the sales effort may not exceed the lesser of (i) 3% of the contract price for the sale of the property or (ii) 50% of the reasonable, customary and competitive rate for similar services in light of the size, type and location of the property; provided, however that the total real estate commissions payable to such Affiliates and to other persons may not exceed the lesser of (a) 6% of the contract price for the sale of the property or (b) the reasonable, customary and competitive rate for similar services in light of the size, type and location of the property. No Affiliate of the General Partner may receive payment of a real estate commission with respect to the sale of a property by the Partnership unless the total consideration received by the Partnership upon such sale exceeds the amounts actually paid by the Partnership for the purchase, development, construction or improvement of the property and any fees and commissions paid by the Partnership in connection therewith. 5. Affiliates of the General Partner may receive insurance premiums and brokerage commissions with respect to insurance on property owned by the Partnership only when the cost of such insurance is paid by the tenants who net lease such properties from the Partnership. No such Net Lease shall provide that the lessee is required to purchase insurance through an Affiliate of the General Partner. 6. At any time, the Partnership may borrow funds on a short-term basis from Affiliates of the General Partner or third parties on a short term basis to provide the debt portion of the purchase price of any property if the Partnership is unable to obtain a permanent loan or, in the judgment of the General Partner, it is not in the best interests of the Partnership to obtain a permanent loan at the interest rates then prevailing and -22- 23 (ii) the General Partner has reason to believe that the Partnership will be able to obtain a permanent loan on or prior to the end of the loan term. Any such short-term loans may be fully or partially amortized, may provide for the payment of interest only during the term of the loan or may provide for the payment of principal and interest only upon maturity. Any such short term loans may be secured by a pledge of or security interest in the net assets of the Partnership, or if the loan is obtained to pay or provide the debt or equity portion of the purchase price of a property, by a first or junior mortgage on the property to be acquired. Any short-term loans from Affiliates of the General Partner will bear interest at a rate equal to the lesser of (A) 1% above the prime interest rate at the Bank of New York or (B) the rate that would be charged to the Partnership by unrelated lending institutions on comparable loans for the same purpose in the locality of the property. Such borrowings shall be nonrecourse to the Partnership, unless both General Partner shall otherwise consent in writing. No prepayment charge or penalty shall be required by a General Partner on a loan to the Partnership from the General Partner secured by either a first or a junior or all inclusive trust deed, mortgage or encumbrance on the property; except to the extent such prepayment charge or penalty is attributable to the underlying encumbrance. 7. All of the Partnership's expenses shall be billed directly to and paid by the Partnership. The Partnership shall reimburse the General Partner or its Affiliates for: (a) all Consolidation and Offering Expenses, (b) the actual cost to the General Partner or its Affiliates of goods and materials used for and by the Partnership and obtained from unaffiliated parties, and (c) the costs incurred by the General Partner or its Affiliates in performing administrative services necessary to the prudent operation of the Partnership; provided, however, that the amounts charged to the Partnership for services performed pursuant to this clause (c) shall not exceed the lesser of (1) the actual cost of such services, or (2) 90% of the amount which the Partnership would be required to pay to independent parties for comparable services in the same geographic location. Contracts entered into by the General Partner or its Affiliates for the provision of goods and materials to the Partnership may be modified only by a vote of the majority of Limited Partners. No reimbursement shall be made to the General Partner or its Affiliates for: (x) services for which the General Partner or its Affiliates are entitled to compensation by way of a separate fee, (y) any rent or depreciation, utilities, capital equipment and other administrative items, or (z) any of the salaries, fringe benefits, travel expenses and other administrative items incurred by or allocated to any controlling person (as defined herein) of the General Partner or its Affiliates; provided, however, that the Partnership may reimburse the General Partner or its Affiliates for the travel expenses of controlling persons if such travel expenses are incurred by such controlling persons in connection with the initial investment in properties of the -23- 24 proceeds of the Offering for the evaluation of properties being considered for acquisition or visits to executives of potential tenants of properties being considered for acquisition to discuss current financial results. The Partnership's annual report to the Limited Partners shall contain a breakdown of the costs reimbursed to the General Partner to its Affiliates. Within the scope of the annual audit of the General Partner's (or such Affiliate's) financial statement, the independent certified public accountant shall verify the allocation of such costs to the Partnership. The method of review shall at minimum provide (1) a review of time records of individual employees, the costs of whose services were reimbursed; and (2) a review of the specific nature of the work performed by each employee. The methods of review shall be in accordance with generally accepted auditing standards and shall accordingly include such tests of the accounting records and such other auditing procedures which the General Partner's (or such Affiliate's) independent certified public accountants consider appropriate in the circumstances. The additional costs of such review shall be itemized by such accountants on a partnership by partnership basis and may be reimbursed to the General Partner (or such Affiliate) in accordance with this Paragraph G(7) only to the extent that such reimbursement, when added to the cost for administrative services rendered, does not exceed the competitive rate for such services as determined in this Paragraph G(7). As used herein, the term "controlling person" shall mean any person, whatever his title, who performs executive or senior management functions for the General Partner or Affiliate similar to those of executive or senior management officers, directors or partners, or those holding 5% or more equity interest in the General Partner or Affiliate or a person having the power to direct or cause the direction of the management level employees and policies of the General Partner or Affiliate, whether through the ownership of voting securities, by contract or otherwise. For the purposes of this Paragraph G(7), not every person who carries a title such as vice president or senior vice president, corporate secretary or treasurer shall be considered a controlling person, unless such person performs the functions or has the powers described above, and even in the absence of a specific title, an executive in a senior management position shall be considered a controlling person. 8. The Partnership may invest in unimproved or non-income producing real property and the stock of or other interests in, or warrants or other rights to purchase the stock of or other interests in, any tenant of the Partnership or the parent or controlling person of any tenant. The Partnership may not borrow funds to make investments in such stock, interests, warrants or other rights. The Partnership will not exercise warrants or other rights to purchase the stock of or other interests in a tenant or the parent or controlling person of a tenant unless the Partnership will immediately liquidate the stock or interest purchased at a price in excess of the exercise price. Under such -24- 25 circumstances, payment of the exercise price shall not be deemed an investment subject to the above limitations respecting the amount of net proceeds derived from the sale of limited partner interests which the Partnership may invest in unimproved or non-income producing real property or stock, interests, warrants or other rights. The Partnership may borrow funds on a short term basis to pay the exercise price on warrants or other rights or may pay such price on warrants or other rights or may pay such exercise price from funds held in the working capital reserve and will repay the loan or replenish the reserve upon the sale of the securities or interests purchased before it makes distributions to the Partners respecting the proceeds of sale or reinvests such proceeds in properties. 9. The Partnership may incur indebtedness in connection with the purchase, improvement, repair, development and financing or refinancing of properties and the operation of the Partnership, including the funding of operating deficits and obtaining Cash From Sales and Cash From Financings for distribution to Partners. Such indebtedness may not exceed 80% of the total purchase price of the Partnership's properties and may be in the form of purchase money obligations to the sellers of properties or in the form of loans from banks, institutional investors and other lenders, which indebtedness may be secured by mortgages or other interests in the property owned by the Partnership (including "wrap-around" or "all-inclusive" mortgages to the extent provided in Paragraph (H) of this Article X) and may involve final or interim principal payments substantially greater that the regular payments. The Partnership may also from time to time borrow additional funds for the purchase of property, which indebtedness may be secured by the general of the assets of the Partnership. H. General Restrictions. 1. The Partnership shall obtain a written evaluation report specifying an Appraised Value signed by an independent appraiser prior to the purchase of any property by the Partnership and shall not purchase any such property if the purchase price and all Acquisition Fees paid by the Partnership in connection with the acquisition exceed the Appraised Value set forth in such report. All such appraisals, whether or not the property which is the subject of such appraisal is purchased by the Partnership, shall be at the Partnership's expense or at the expense of the seller, shall be retained for five years and shall be available for inspection and duplication by the Limited Partners upon reasonable notice to the Partnership. 2. The Partnership may not sell any property in a transaction in which an Affiliate of the General Partner acts as a real estate broker unless the provisions of Paragraph G(4) of this Article X are complied with. -25- 26 3. The Partnership shall not own any land where the buildings and improvements thereon are owned by an Affiliate of the General Partner unless (i) such Affiliate is a public program formed for the purpose of investing in real estate, (ii) the terms of such transaction are at least as favorable as the terms of any comparable transactions made on an arm's-length basis and known to the General Partner, and (iii) payments to the General Partner and its Affiliates for services rendered in a capacity other than that as General Partner may only be made upon a determination that (a) the compensation is not in excess of the compensation paid to them by third parties for any comparable services and (b) the compensation is not greater than the charges for comparable services available from others who are competent and not affiliated with any of the parties involved and the Partnership has obtained a letter of opinion of a qualified Independent Advisor to such effect prior to effecting such transaction. 4. The Partnership shall not give an Affiliate of a General Partner the exclusive right to sell property for the Partnership. 5. The aggregate borrowings of the Partnership shall not exceed 80% of the purchase price of all properties purchased by the Partnership on a combined basis. The foregoing restriction may be waived or lessened by the General Partner without the approval of the Limited Partners, but only with the prior written consent of the Commissioner of Corporations of the Sate of California or pursuant to a change in the published Rules of the Commissioner. In no event, however, shall the aggregate borrowings of the Partnership exceed the sum of 85% of the purchase price of all properties which have not been refinanced and 85% of the aggregate fair market value of all refinanced properties. 6. Except as set forth in Paragraph G(8) and Paragraph G(10) of this Article X, all expenses of the Partnership shall be billed directly to and paid by the Partnership. 7. Except as disclosed in the Prospectus, the General Partner shall not receive from the Partnership a rebate or give-up or participate in any reciprocal business arrangement which would enable them or any Affiliate of the General Partner to receive such rebate or give-up or to circumvent any restrictions contained herein upon dealings with Affiliates. 8. The Partnership funds shall not be commingled with the funds of any other natural person, partnership, corporation, association or other legal entity. 9. The Partnership shall not finance the purchase of property by use of a wrap-around note and mortgage ("all-inclusive" note and deed of trust) unless (a) neither the General Partner nor any Affiliate of the General Partner receives -26- 27 interest on the amount of the underlying encumbrance in excess of that payable to the lender on such underlying encumbrance, (b) the Partnership receives credit on its obligation under the all-inclusive note for payments made directly on the underlying encumbrance and (c) all payments on the underlying encumbrance shall be made by the Partnership or, in the alternative, payments by the Partnership on the wrap-around note are made to a third party collecting agent which in turn disburses such payment, first to the holder of such underlying encumbrance, and thereafter to the holder of the wrap-around note. 10. The Partnership shall not create or assume any indebtedness for borrowed money unless the documents pursuant to which such indebtedness is created or assumed provide, and the General Partner shall cause any and all such documents assumed or entered into by or on behalf of the Partnership to provide, that the parties thereto other than the Partnership (including any Affiliates of the General Partner ) shall look only to the assets of the Partnership for satisfaction of the liabilities and obligations of the Partnership under such documents (including without limitation those arising from representations, warranties, covenants and agreements made in or in connection with such documents) and that such other parties shall have no recourse to the Partners or the separate assets of the Partners for the satisfaction of such liabilities and obligations. The Partnership shall not incur any indebtedness wherein the lender will have or acquire, at any time as a result of making the loan, any direct or indirect interest in the profit, capital or property of the Partnership other than as a creditor. 11. The Partnership shall not enter into any contracts with the General Partner or with any Affiliates of the General Partner to construct or develop Partnership properties or to render any services in connection with such construction or development. 12. The Partnership shall not acquire any property which under construction unless completion of the improvements on the property is guaranteed at the contracted price by an adequate completion bond or other satisfactory arrangement. 13. Unimproved or non-income producing property shall not be acquired except in amounts and upon terms which can be financed from Distributable Cash From Operations. 14. No Partnership assets may be invested in junior mortgages or deeds of trust; provided, however, that the acquisition of a junior mortgage or deed of trust in connection with the sale, financing or refinancing of real property shall not be deemed to be investing in junior mortgagees or deeds of trust. 15. Any agreement entered into between the Partnership and the General Partner or its Affiliates, other than a mortgage with -27- 28 a public program sponsored by Carey Co. or an Affiliate of Carey Co., under which such General Partner or its Affiliates are compensated for the provision of goods or services to the Partnership, must be terminable by the Partnership, without penalty, upon 60 days' notice and any such agreement must be embodied in a written contract which precisely describes the services to be rendered and all compensation to be paid and which agreement shall be fully disclosed in the Prospectus and no such agreement shall be permitted unless the General Partner or such Affiliate has been previously engaged in the business of rendering such services or selling or leasing such goods independently of the Partnership and as an ordinary and ongoing business and unless the cost to the Partnership does not exceed the lesser of the cost of such goods of 90% of the comparable and competitive with the cost to the Partnership of any other person who is rendering comparable services or selling or leasing comparable goods which could reasonably be made available to the Partnership and the agreement is on competitive terms. If the General Partner or such Affiliate purchases goods or materials from an independent third party which are used by the Partnership, the General Partner or Affiliate may be reimbursed at its cost. "Cost", as that term is used in this paragraph, includes the price of goods and materials paid to independent third parties and direct costs incurred by the General Partner or Affiliate providing the service, including overhead directly attributable to the transaction but excluding general or administrative overhead (which term includes but is not limited to salaries, rent, travel expenses and other items generally falling under the category of overhead). Agreements with the General Partner and its Affiliates for other than administrative services and other than leases and mortgages may be modified only by a vote of the majority of Limited Partners. I. Compensation of General Partner. The General Partner shall not, in its capacity as General Partner, receive an annual salary, fees, profits or distributions from the Partnership except profits, distributions, fees and allocations to which they may be entitled under Articles VIII or IX. J. Other Business of Partners. Except as otherwise specifically provided herein, any of the Partners and any shareholder, officer, director, employee or other person holding a legal or beneficial interest in an entity which is a Partner may engage in or possess an interest in other business ventures of every nature and description, independently or with others, including, but not limited to, the ownership, financing, leasing, operation, management, syndication, brokerage and development of real, personal or mixed property and neither the Partnership nor the Partners shall have any right by virtue of this Agreement in and to such independent ventures or to the income or profits derived therefrom. -28- 29 ARTICLE XI STATUS OF LIMITED PARTNERS AND SPECIAL PARTNERS A. The Limited Partners and Special Partners shall not participate in the management or control of the Partnership's business nor shall they transact any business for the Partnership nor shall they have the power to sign for or bind the Partnership, said powers being vested solely and exclusively in the General Partner. The Limited Partners and Special Partners shall not be bound by, or be personally liable for, the expenses, liabilities or obligations of the Partnership, except to the extent of their Capital Accounts. The Partnership Interest owned by a Limited Partner or Special Partner shall be fully paid and nonassessable. In addition to those described elsewhere in the Partnership Agreement, the Limited Partners and Special Partners shall have the following rights, powers, privileges, duties and liabilities: (a) The Limited Partners and Special Partners shall have the right to have full and true information of all things affecting the Partnership and shall be entitled to such reports as are set forth in Article XII hereof. (b) The Limited Partners and Special Partners shall receive from the Partnership the share of distributions provided for in this Agreement in the manner and at the times provided for in this Agreement. (c) A Limited Partner or a Special Partner shall have the right to demand the return of his Capital Account only on the dissolution and winding up of the Partnership in accordance with Article XVIII hereof. No Limited Partner shall have priority over any other Limited Partner either as to the return of his capital or as to profits, losses or distributions. No Limited Partner or Special Partner shall have the right to bring an action for partition against the Partnership. (d) Limited Partners holding more than fifty percent (50%) of the outstanding Limited Partner Interests may (1) remove the General Partner and (2) in the event that a vacancy shall occur in the office of General Partner, elect a successor General Partner upon retirement, removal, death, adjudication of incompetence to manage his person or estate, adjudication of bankruptcy under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in lieu thereof), dissolution or other cessation to exist as a legal entity of the General Partner. (e) Upon written request to the Partnership for a purpose reasonably related to such Partner's interest as a Partner of the Partnership, each Limited Partner and Special Partner shall have the right to be mailed, at Partner's expense, a complete list of -29- 30 names and addresses and interests of all Limited Partners as set forth in the records of the Partnership, copies of the Certificate of Limited Partnership and all amendments thereto, copies of this Agreement and all amendments thereto and powers of attorney pursuant to which this Agreement was executed. A reasonable charge for copy work may be charged by the Partnership. ARTICLE XII BOOKS OF ACCOUNT AND REPORTS Proper books of account shall be kept by the General Partner wherein shall be entered all transactions, matters and things relating to the Partnership's business as are usually entered into books of account kept by persons engaged in a business of a like character. The books of account shall be kept at the principal place of business of the Partnership and the books of account for the current and past three Fiscal Years shall be kept at the Partnership's California office and each Partner (or any duly constituted designee of a Partner) shall at all times during reasonable business hours have free access to and the right to inspect and copy the same. There shall also be kept at the Partnership's California office: a current alphabetical list of the Partners' names, addresses, Contributions and Capital Accounts; copies of the Certificate of Limited Partnership and all amendments thereto; copies of the Partnership's Federal, state and local income tax or information returns and reports for the six most recent tax years; copies of this Partnership Agreement and all amendments thereto and powers of attorney pursuant to which this Agreement was executed and the Partnership's financial statements for the six most recent fiscal years. There shall be established for each Partner on the books of the Partnership a Capital Account which shall be maintained in accordance with Federal income tax accounting principles and which shall show the amount of each capital contribution made by such Partner (or his, her or its predecessor in the case of an assignment of a Partnership Interest), adjusted to reflect such Partner's proportion of profits and losses (determined according to Article VIII) and of withdrawals and distributions and other items to the extent properly creditable to or chargeable against such Capital Account. Within 75 days after the end of each Fiscal Year, the General Partner shall deliver to each Limited Partner adequate information to enable each Limited Partner to complete and file his Federal tax return. Copies of each report distributed to the Limited Partners shall, to the extent required by applicable law, be filed -30- 31 concurrently with relevant state "Blue Sky" authorizes. If the Partnership engages an Independent Advisor who is not the Independent Advisor engaged to render a current fairness opinion or the fairness opinion preceding it, the General Partner shall inform the Limited Partners (by no later that the next annual report) of the date when such new Independent Advisor was engaged, and whether there were any disagreements with the former Independent Advisor on any matters of valuation, assumptions, methodology, accounting principles and practice, or disclosure, which disagreements, if not resolved to the satisfaction of the former Independent Advisor, would have caused him to make reference, in connection with the fairness opinion, to the subject matter of the disagreement or decline to give an opinion. ARTICLE XIII FISCAL YEAR The Fiscal Year of the Partnership shall begin on the first day of January and end on the thirty-first day of December in each year. Should the General Partner decide to change the Fiscal Year of the Partnership, it will seek to obtain any required approvals from the Internal Revenue Service for such change. If such approval is obtained (or not then required), the General Partner will give prompt notice to the Limited Partners of the change in Fiscal Year. ARTICLE XIV PARTNERSHIP FUNDS The funds of the Partnership shall be deposited in such account or accounts as shall be designated by the General Partner and all withdrawals against such accounts shall be made only by the General Partner or by its properly delegated agents. ARTICLE XV TRANSFER OF PARTNERSHIP INTEREST A. In General. A Limited Partner or Special Partner may not sell, assign, transfer or otherwise dispose of, or pledge, hypothecate or in any manner encumber, his interest in the Partnership or any thereof except as permitted in this Article, and any act in violation of this Paragraph A shall not be binding upon or recognized by the Partnership regardless of whether the General Partner shall have knowledge thereof. -31- 32 B. General Partner. 1. Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, pursuant to Paragraph (d) of Article XI and with the same proportionate vote as provided therein, may remove a General Partner from the Partnership. Written notice of the removal of the General Partner shall be served upon the General Partner either by certified or registered mail, return receipt requested, or by personal service. Said notice shall set forth the day upon which the removal is to become effective. Upon receipt of notice, the General Partner shall cause an accounting to be prepared covering the transactions of the Partnership since the end of the previous Fiscal Year and it shall not thereafter sell or dispose of or allow the sale or disposition of any Partnership asset unless such sale or disposition was the subject of a contract entered into by and binding upon the Partnership prior to the date upon which the notice was received by the General Partner. 2. Until the dissolution of the Partnership otherwise occurs, the General Partner shall not voluntarily take any step to dissolve itself nor shall the General Partner voluntarily retire, provided, however, that nothing in this Partnership Agreement shall be deemed to prevent the merger or reorganization of Carey Diversified LLC into or with any other entity organized under the laws of the United States or any state thereof or the transfer of all the limited liability company interests of Carey Diversified LLC and the assumption of rights and duties of the General Partner by, in the case of a merger, reorganization or consolidation, the surviving entity by operation of law. 3. Upon the removal, adjudication of bankruptcy under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in lieu thereof), dissolution or other cessation to exist as a legal entity of the General Partner, the General Partner's Partnership Interest and interest in Distributable Cash From Operations and its subordinated interest in Cash From Sales and Cash From Financings shall be purchased by the Partnership for a purchase price equal to the fair market value thereof determined pursuant to the provisions of Section 4 of this Paragraph B. The purchase price of such interest shall be paid by the Partnership to the General Partner by the promissory note of the Partnership, payable to the General Partner or its order, having a face amount equal to such purchase price, containing provisions as would be usual and customary in a commercial promissory note, bearing interest at a rate per annum equal to 1% above the prime interest rate at The Bank of New York, payable annually, with principal and all unpaid accrued interest subject to mandatory prepayment from all Cash From Sales and Cash From Financings , and the remaining unpaid principal balance and unpaid accrued interest on such promissory note due and payable five years from the date of the General Partner's retirement, expulsion, adjudication of bankruptcy or insolvency, dissolution or other cessation to exist as a legal entity. The Partnership shall also pay to the General -32- 33 Partner all amounts then accrued and owing to the General Partner. 4. The fair market value of the General Partner's interest purchased by the Partnership pursuant to Section 3 of this Paragraph B shall be determined by agreement between the General Partner and the Partnership (which agreement shall require the approval of the Limited Partners holding more than fifty percent (50%)of the outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI). If the General Partner and the Partnership cannot agree upon the fair market value of such Partnership Interest within 30 days after the occurrence of the event upon which such interest of the General Partner is to be purchased by the Partnership, the fair market value thereof shall be determined by arbitration in accordance with the then current rules of the American Arbitration Association. The results of such arbitration shall be final and binding and may be enforced by legal proceedings. The expense of arbitration shall be borne equally by the General Partner and the Partnership. The fair market value of the General Partner's interest shall be the amount the General Partner would receive upon dissolution and termination of the Partnership assuming that such dissolution or termination occurred on the date of the occurrence of the event upon which such interest of the General Partner is to be purchased by the Partnership and the assets sold for their then fair market value without any compulsion on the part of the Partnership to sell such assets. C. Limited Partners and Special Partners. 1. The General Partner may, pursuant to this Article XV, (a) admit as a substituted Limited Partner or Special Partner any successor in interest to a Limited Partner or Special Partner either deceased or under legal disability, and (b) admit as substituted Limited Partners or Special Partners assignees of Limited Partners or Special Partners. 2. A substituted Limited Partner or Special Partner is a person admitted to all the rights of a Limited Partner or Special Partner. An assignee is a person to whom a Limited Partner or Special Partner has assigned his interest in the Partnership but who has not become a substituted Limited Partner or Special Partner. An assignee shall have no right to require any information or account of the Partnership's transactions or to inspect the Partnership's books but shall only be entitled to receive the share of the profits, or the return of the capital contribution, to which his assignor would otherwise be entitled as set forth in Section 5 of this Paragraph C. 3. No assignee of the whole or any portion of a Limited Partner's or Special Partner's interest in the Partnership shall have the right to become a substituted Limited Partner or -33- 34 Special Partner in place of his assignor unless all of the following conditions are satisfied: (a) The written consent of the General Partner to such substitution shall be obtained, the granting or denial of which shall be within the absolute discretion of the General Partner; (b) The duly executed written instrument of assignment setting forth the intention of the assignor that the assignee become a substituted Limited Partner or Special Partner in his place shall have been filed with the Partnership; (c) The interests in the Partnership being acquired by the assignee shall consist of at least five percent of the limited partner or special partner interest (two percent of the limited partner or special partner interest for an Individual Retirement Account or a Self Employed Retirement (Keogh) Plan) and, if the assignor shall retain any limited partner or special partner interest, such retention shall consist of at least five percent of the limited partner or special partner interest (two percent of the limited partner or special partner interest for an Individual Retirement Account or a Self Employed Retirement (Keogh) Plan); (d) The assignor and assignee shall execute and acknowledge such other instruments as the General Partner may deem necessary or desirable to effect such assignment and admission, including the written acceptance and adoption by the assignee of the provisions of this Agreement and his execution, acknowledgment and delivery to the General Partner of a Power of Attorney, the form and content of which are more fully described in Article XIX hereof; and The assignee shall pay a transfer fee not to exceed $50.00 per transaction to the Partnership. The written consent or a notice of denial of consent shall be given to the assignee not later that the last day of the calendar month following the month the General Partner actually receives the instrument of assignment. 4. Any person admitted to the Partnership as a Partner shall be subject to all of the provisions of this Agreement as if originally a party to it. 5. Subject to the provisions of Section 11 of this Paragraph C, compliance with the suitability standards imposed by the Partnership, applicable "Blue Sky" laws and the applicable rules of any other governmental authority, a Limited Partner or Special Partner shall have the right to assign the whole or any portion (but not less than five percent of the limited partner or special partner interest (two percent of the limited partner interest for an Individual Retirement Account or a Self Employed Retirement (Keogh) Plan)) and, if he shall -34- 35 retain any limited partner or special partner interest, subject to his retaining not less than five percent of the limited partner or special partner interest (two percent of the limited partner or special partner interest for an Individual Retirement Account or a Self Employed Retirement (Keogh) Plan) of his Partnership Interest by a written assignment the terms of which are not in contravention of any of the provisions of this Agreement, which assignment has been executed by the assignor and received by the Partnership and recorded on the books thereof. Any assignment in contravention of any of the provisions of this Section 5 shall be of no force and effect and shall not be binding upon or recognized by the Partnership. (a) Except as provided in Subsection (c) below, Paragraph A of Article VII hereof and Paragraph D of Article IX hereof, an assignee of a Partnership Interest shall be entitled to receive distributions from the Partnership attributable to the interest acquired by reason of such assignment from and after the effective date of the assignment of such interest to him. The effective date of an assignment of an interest in the Partnership as used in this Subsection shall be the last day of the quarter in which the written instrument of assignment, in form and substance satisfactory to the General Partner, is received by the General Partner. (b) The net profits and net losses attributable to an interest in the Partnership assigned during any year shall be divided among and allocated in accordance with the provisions of Paragraph A of Article VIII hereof. (c) Anything herein to the contrary notwithstanding, both the Partnership and the General Partner shall be entitled to treat the assignor of such interest as the absolute owner thereof in all respects, and shall incur no liability for distributions made in good faith to him, until such time as the written assignment has been received by, and recorded in the books of, the Partnership. 6. The General Partner may elect to treat an assignee who has not become a substituted Limited Partner or Special Partner as a substituted Limited Partner or Special Partner in the place of his assignor should the General Partner deem, in its absolute discretion, that such treatment is in the best interests of the Partnership for any of its purposes or for any of the purposes of this Agreement. 7. No consent of any of the Limited Partners or Special Partners is required to effect the substitution of a Limited Partner or Special Partner, except that a Limited Partner or Special Partner who assigns his interest in the Partnership must evidence his intention that his assignee be admitted as a substituted Limited Partner or Special Partner in his place and must execute such instruments as the General Partner may in its -35- 36 absolute discretion determine to be necessary or desirable in connection therewith. 8. Upon the admission of a Limited Partner or Special Partner (whether as a result of his purchase of limited partner interests from the Partnership or his admission as a substituted Limited Partner or Special Partner), the General Partner shall make an appropriate amendment to the list of the Partner's names, addresses, Contributions and Capital Accounts referred to in Article XII hereof. 9. Upon the death or adjudication of incompetence to manage his person or estate of an individual Limited Partner or Special Partner, his personal representative shall have all of the rights of a Limited Partner or Special Partner for the purpose of setting or managing his estate, and such power as the decedent or incompetent possessed to constitute a successor as an assignee of its interest in the Partnership and to join with such assignee in making application to substitute such assignee as a Limited Partner or Special Partner. However, such personal representative shall not have the right to become a substituted Limited Partner or Special Partner in the place of his predecessor in interest unless the conditions of Sections 3 of this Paragraph C (other than the requirement that the assignor execute and acknowledge instruments) are first satisfied. 10. Upon the adjudication of bankruptcy under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in lieu thereof), dissolution or other cessation to exist as a legal entity of a Limited Partner or Special Partner not an individual, the authorized representative of such entity shall have all of the rights of a Limited Partner or Special Partner for the purpose of effecting the orderly winding up and disposition of the business of such entity and such power as such entity possessed to constitute a successor as an assignee of its interest in the Partnership and to join with such assignee in making the application to substitute such assignee as a Limited Partner or Special Partner. However, such authorized representative shall not have the right to become a substituted Limited Partner or Special Partner in the place of his predecessor in interest unless the conditions of Sections 3 of this Paragraph C (other than the requirement that the assignor execute and acknowledge instruments) are first satisfied. 11. (a) No assignment or transfer of an interest in the Partnership may be made which would result in Limited Partners or Special Partners and assignees of Limited Partners or Special Partners owning, directly or indirectly, individually or in the aggregate, more than twenty percent (20%) of the equity interests of a General Partner or any Affiliate of a General Partner as defined in Section 1504(a) of the Code. If any such assignment or transfer would otherwise be made by bequest, inheritance or operation of law, the transferee shall not become -36- 37 a Partner and the interest in the Partnership transferred shall be automatically redeemed by the Partnership immediately prior to such transfer in the same manner as provided in Subsection (b)(4) of this Section 11. (b) Anything to the contrary contained herein notwithstanding: (1) Except in the case of the Merger, in any twelve (12) consecutive month period no assignment or transfer of a limited partner interest may be made as a result thereof the aggregate total of limited partner interests assigned and/or transferred in such period would exceed forty percent (40%) of the outstanding limited partner interests. This limitation is hereinafter referred to as the "forty percent (40%) limitation". (2) A Limited Partner may assign or transfer his Partnership Interest to: (i) his spouse (unless legally separated), child or ancestor, or (ii) a corporation, partnership, trust or other entity, fifty-one percent (51%) of the equity interest of which is owned by such Limited Partner and/or any of the persons specified in clause (i) so related to such Limited Partner, provided, however, that such transfers are subject to the forty percent (40%) limitation. (3) Subsection (b)(1) of this Section 11 shall not apply to a transfer by gift, bequest or inheritance, or a transfer to the Partnership and, for purposes of the forty percent (40%) limitation, any such transfer shall not be treated as such. If, after the forty percent (40%) limitation is reached in any consecutive twelve (12) month period, a transfer of the Partnership Interest would otherwise take place by operation of law (but not including any transfer referred to in Subsection (b)(3) of this Section 11), then the transferee shall not become a Limited Partner and such Partnership Interest shall be automatically redeemed by the Partnership immediately prior to such transfer for a price equal to the fair market value of said interest on such date of transfer. The price shall be paid within ninety (90) days after the date of the transfer and redemption. If the Partnership and the transferor do not agree upon the fair market value of the Partnership Interest, the purchase price shall be determined by arbitration. The purchase price shall be paid in cash within ten (10) days after such determination. (c) No transfer or assignment of any limited partner interest shall be made if it would result in the Partnership's being treated as an association taxable as a corporation for tax purposes. The General Partner, in its -37- 38 sole discretion, may, on behalf of the Partnership, impose any restrictions or transfers or assignments of limited partner interests it may deem appropriated to give effect to the preceding sentence. The General Partner shall incur no liability to any Limited Partner, prospective investor or assignee for any action or inaction in connection with the foregoing, provided that the General Partner acted in good faith and such course of conduct did not constitute negligence or misconduct of the General Partner. 12. The General Partner, in its absolute discretion, may cause the Partnership to make or refrain from making, or once having made, to revoke, the election referred to in Section 754 of the Code, and any similar election provided by state or local law, or any similar provision enacted in lieu thereof. 13. Until the dissolution of the Partnership, the General Partner shall not take any voluntary steps to dissolve itself nor shall the General Partner voluntarily withdraw or resign. 14. No Limited Partner or Special Partner shall be entitled to withdraw from the Partnership except on transfer of all his partner interest pursuant to this Article XV. 15. Each Limited Partner or Special Partner shall immediately notify the Partnership of any assignment of any Unit in the Partnership and shall provide the name, address and identification number of the assignee. ARTICLE XVI MEETINGS AND AMENDMENT OF LIMITED PARTNERSHIP CERTIFICATE AND AGREEMENT A. Amendment of Limited Partnership Certificate. The General Partner shall amend and record the Certificate of Limited Partnership of the Partnership without additional consent of Limited Partners, when, pursuant to the terms of this Partnership Agreement: 1. There is a change in the name of the Partnership; 2. The General Partner withdraws, is removed, is adjudicated bankrupt under Chapter 7 of the Federal Bankruptcy Code (or any similar law or provision enacted in lieu thereof), is adjudicated incompetent to manage his person or estate or dies, or a person is admitted as the General Partner; 3. There is a false or erroneous statement in the Certificate; -38- 39 4. A time is fixed for dissolution of the Partnership or the return of contributions and such time has not been specified in the Certificate; 5. The Partners desire to make a change in any other statement in the Certificate in order that it shall accurately represent the agreement among them; 6. There is a change in the address of the Partnership's principal place of business or its California office; 7. There is a change in the time as stated in the Certificate for the dissolution of the Partnership or for the return of a contribution; and 8. There is a change in the address of the California agent for service of process designated in the Certificate of Limited Partnership (unless such agent is a corporation) or a new agent for service of process is appointed. If the General Partner is required to file a certificate of amendment and fails after demand to do so within 30 days of such demand or if it refuses to do so, any Limited Partner may, unless otherwise precluded by applicable law, prepare, execute and file an appropriate certificate of amendment. B. Amendments to the Agreement. 1. Amendments to this Partnership Agreement may be proposed by the General Partner or by Limited Partners holding ten percent (10%) or more of the outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. Following such proposal, the General Partner shall submit to the Limited Partners a verbatim statement of any proposed amendment and the effect of such amendment on the liability of Limited Partners for the debts of the Partnership. The General Partner shall include in any such submission the General Partner's recommendations as to the proposed amendment. The amendment shall become effective only upon the written consent or affirmative vote of holders holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. 2. Any provision to the contrary herein notwithstanding, the General Partner may, without the consent of the Limited Partners, make the following amendments to this Agreement: a. Any amendments to Article VIII and/or Article IX of this Agreement if the Partnership is advised by its accountants or legal counsel at any time that the allocations provided in those Articles are not likely to be respected for Federal income tax purposes, either because of the promulgation of Treasury Regulations under Section -39- 40 704 of the Code or other developments in the law. The General Partner is empowered to amend such provisions to the minimum extent necessary in accordance with the advice of the accountants and counsel to effect the allocations provided in this Agreement . New allocations made by the General Partner in reliance upon the advice of the accountants or counsel described above shall be deemed to be made pursuant to the fiduciary obligation of the General Partner to the Partnership and the Limited Partners, and no such new allocation shall give rise to any claim or cause of action by any Limited Partner, provided that the General Partner acted in good faith; and b. In the event that the State of California amends the California Revised Limited Partnership Act in any manner and, as a result of such amendment, counsel to the Partnership is unable to give the Partnership an opinion to the effect that the Partnership will be treated as a partnership for Federal income tax purposes and not as an association taxable as a corporation, then the General Partner may decide in its sole discretion to reconstitute the Partnership under the laws of another state. 3. Any provision to the contrary contained herein notwithstanding, the General Partner may, without the consent of the Limited Partners, amend this Agreement (a) to add to the representations, duties or obligations of a General Partner or to surrender any right or power granted to a General Partner herein, for the benefit of the Limited Partners, (b) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein or to make any other provision with respect to matters or questions arising under this Agreement which will not be inconsistent with the provisions of this Agreement, (c) to delete any provision from this Agreement or to add any provision to this Agreement required to be so deleted or added by the Staff of the Securities and Exchange Commission or by a State "Blue Sky" Commissioner or similar such official, which addition or deletion is deemed by such Commission or official to be for the benefit or protection of the Limited Partners, and (d) to change administrative or other provisions of this Agreement in a manner which, in the opinion of the General Partner, will permit the most profitable and/or efficient operation of the Partnership; provided, however, that no amendment shall be adopted pursuant to this Section 3 unless the adoption thereof (i) is for the benefit of, or not adverse to, the interests of the Limited Partners, (ii) is consistent with Article IV and Paragraph A of Article X hereof, (iii) does not affect the distribution of Distributable Cash From Operations, Cash From Sales and Cash From Financings or the allocation of profits and losses among the Limited Partners or between the Limited Partners and the General Partner and (iv) does not effect the limited liability of the Limited Partners or the status of the Partnership as a partnership for Federal income tax purposes. -40- 41 4. Upon amendment of this Agreement, the Certificate of Limited Partnership shall also be amended to reflect such change. 5. Any amendment to the Partnership Agreement which modifies the compensation or distributions to which a General Partner is entitled or which affects the duties of a General Partner must be consented to by the General Partner before becoming effective. 6. In the event there is a change in the Federal income tax laws or regulations which result in the Partnership being taxed as an association taxable as a corporation, the General Partner may cause the Partnership to conduct its business so as to be treated as a real estate investment trust for Federal income tax purposes. C. Meetings of the Partnership. Meetings of the Partnership may be called by the General Partner and shall be called by them upon the written request of Limited Partners holding ten percent (10%) or more of the outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. Upon receipt of such a written request, stating the purpose of the proposed meeting, the General Partner shall provide each Partner, within 10 days of such request, written notice (either by personal service or certified mail or by express or other overnight delivery service) of a meeting and the purpose of such meeting. Such meeting shall be held not less than 10 days nor more than 60 days after the receipt of such request. Included with the notice shall be a detailed statement of the action proposed, including a verbatim statement of the wording of any resolution proposed for adoption by the Limited Partners and of any proposed amendment to the Partnership Agreement. The Partnership will provide for Proxies or written consents which specify a choice between approval or disapproval of each matter to be acted upon at the meeting. Holders of a majority of the Limited Partner Interests entitled to vote, represented in person or by Proxy, shall constitute a quorum at a meeting of the Limited Partners. To the extent not consistent with this Paragraph C, all meetings shall be governed by the provisions of Section 15637 of the Act. The General Partner may establish a record date for any meeting, subject to the limitations of Section 15637(j) of the Act. -41- 42 ARTICLE XVII TERM The Partnership shall terminate on December 31, 2010, unless sooner dissolved pursuant to the provisions of Article XVIII hereof as otherwise provided by law. ARTICLE XVIII DISSOLUTION A. Events Requiring Dissolution. The Partnership shall be dissolved upon the happening of any of the following events: 1. The retirement, removal, adjudication of bankruptcy under Chapter 7 of the Bankruptcy Code (or any similar law or provision enacted in lieu thereof), of the General Partner, the dissolution or other cessation to exist as a legal entity of the General Partner, unless the Limited Partners agree in writing to continue the business of the Partnership and to admit one or more General Partners. 2. The Partnership is adjudicated bankrupt under Chapter 7 of the Federal Bankruptcy Code (or any similar law or provision enacted in lieu thereof). 3. The vote of Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests held by all Limited Partners, with the same proportionate vote as provided in paragraph (d) of Article XI. 4. The disposition of all interests in the real, personal and mixed property and other assets of the Partnership. 5. December 31, 2010. B. Distributions on Dissolution. Upon the dissolution of the Partnership the General Partner who has not wrongfully dissolved the Partnership shall wind up the affairs of the Partnership. If there is no such General Partner, the Limited Partners shall wind up the affairs of the Partnership. The Partners winding up the affairs of the Partnership shall take full account of the Partnership assets and liabilities and all assets shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom shall be applied and distributed in the following order: (1) to creditors (including Partners who are creditors to the extent permitted by law), in the order of priority as provided by law, (2) to the Partners in accordance with their respective Capital -42- 43 Accounts, determined after the application of Articles VIII and IX hereof and (3) to the Partners in accordance with the provisions of Paragraph E of Article IX hereof. Notwithstanding anything to the contrary, in the event the Partnership is "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), liquidating distributions shall be made pursuant to the previous sentence by the end of the taxable year in which the Partnership is liquidated, or, if later, within 90 days after the date of such liquidation. Distributions pursuant to the preceding sentence may be made to a trust for the purposes of an orderly liquidation of the Partnership by the trust in accordance with the Act. C. Contributions by the General Partner. In the event that, upon the liquidation of the Partnership, the General Partner shall have a negative balance in the General Partner's Capital Account then the General Partner shall contribute to the capital of the Partnership an amount equal to such negative balance in the General Partner's Capital Account. ARTICLE XIX POWER OF ATTORNEY Concurrently with the written acceptance and adoption of the provisions of this Agreement, each Limited Partner and Special Partner shall execute and deliver to the General Partner a Power of Attorney in a form acceptable to the General Partner in which the General Partner is constituted and appointed as the attorney-in-fact for such Limited Partner or Special Partner with power and authority to act in his name and on his behalf in the execution, acknowledgment and filing of documents, which will include but not be limited to a Certificate of Limited Partnership, as well as amendments thereto, under the laws of the State of California and under the laws of any other state in which the General Partner deems it advisable to file such a certificate; any other instrument which may be required to be filed by the Partnership under the laws of any state or by any governmental agency, or which the General Partner deems it advisable to file; and any documents which may be required to effect the continuation of the Partnership, the admission of an additional or substituted Limited Partner or Special Partner or the dissolution and termination of the Partnership, provided such continuation, admission or dissolution and termination are in accordance with the terms of this Agreement. The Power of Attorney so granted by each Limited Partner and Special Partner to the General Partner is a Special Power of Attorney coupled with an interest, is irrevocable and shall survive the death or legal incapacity of the Limited Partner or Special Partner; may be exercised by the General Partner for each Limited Partner or Special Partner by a facsimile signature -43- 44 of one of its officers or by listing all the Limited Partners or Special Partners executing any instrument with a single signature of one of its officers acting as attorney-in-fact for all of them; and shall survive the delivery of any assignment by a Limited Partner or Special Partner of the whole or any portion of his interest in the Partnership; except that where the assignee thereof has been approved by the General Partner for admission to the Partnership as a substituted Limited Partner or Special Partner, the Power of Attorney shall survive the delivery of such assignment for the sole purpose of enabling the General Partner to execute, acknowledge and file any instrument necessary to effect such substitution. The Power of Attorney so granted by each Limited Partner to the General Partner shall not authorize the General Partner to act on behalf of Limited Partners in any situation in which this Agreement requires the consent of Limited Partners. ARTICLE XX LIMITATIONS ON LIABILITY; LITIGATION Except as provided in his Subscription Agreement, no Limited Partner or Special Partner shall be liable (i) as a General Partner unless, in addition to the exercise of his rights and powers as a Limited Partner or Special Partner, he takes part in the management or control of the Partnership's business or is named as a General Partner in the Certificate of Limited Partnership or any amendment thereto or (ii) to the Partnership or to a General Partner unless a liability of the Partnership or of the General Partner, as the case may be, is founded upon the unauthorized activity of such Limited Partner or Special Partner in attempting to take part in the control of the Partnership's business or misstatements contained in such Partner's Subscription Agreement delivered in connection with his purchase of limited partner interests. The General Partner is hereby authorized to prosecute, defend, settle or compromise actions or claims at law or in equity at the Partnership's expense as may be necessary or proper to enforce or protect the Partnership's interests. The General Partner shall satisfy any judgment, decree or decision of any court, board or authority having jurisdiction or any settlement of any suit or claim prior to judgment or final decision thereon first, out of any insurance proceeds available therefor, next out of the Partnership's assets and income and finally out of the assets and income of the General Partner. -44- 45 ARTICLE XXI MISCELLANEOUS All notices under this Agreement shall be in writing and shall, except as otherwise expressly provided herein, be given to the Partner entitled thereto by personal service or by certified or registered mail or express mail or other overnight delivery service, return receipt requested, to the address set forth in this Agreement for such Partner or at such other address as he may specify in writing. Article titles contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. Whenever the singular number is used in this Agreement and when required by the context, the same shall include the plural, and the masculine gender shall include the feminine and neuter genders and the word "persons" shall include individuals, corporations, firms, partnerships, trusts or other forms of associations. This Agreement may be executed in several counterparts, and all so executed shall constitute one agreement, binding on all of the parties hereto, notwithstanding that all the parties are not signatory to the original or the same counterpart. Subject to the provisions of Article XV, the terms and provisions of this Agreement shall be binding upon and inure to the benefit of heirs, executors, administrators, successors and assigns of the respective Partners. Whenever the vote of the Limited Partners is referred to in this Agreement, the General Partner may vote on behalf of such Limited Partners who have by written proxy authorized the General Partner so to do. This Agreement and all amendments hereof shall be governed by the laws of the State of California. -45- 46 IN WITNESS WHEREOF, the parties hereto have hereunto set their respective hands as of the day and year first above written. GENERAL PARTNER: CAREY DIVERSIFIED LLC By:___________________________________ CORPORATE SPECIAL PARTNER: CAREY MANAGEMENT LLC By:___________________________________ INDIVIDUAL SPECIAL PARTNER ______________________________________ William Polk Carey LIMITED PARTNERS: SEVENTH CAREY CORPORATE PROPERTY, INC. By:___________________________________ CAREY DIVERSIFIED LLC By:___________________________________ -46- 47 All Limited Partners now and hereafter admitted as limited partners of the Partnership pursuant to powers of attorney and authorizations now and hereafter executed in favor of and granted and delivered to the General Partner By: CAREY DIVERSIFIED LLC, General Partner By:_______________________________ -47- EX-99.20 60 AMEND & RESTATED AGREEMENT OF LTD PARTNERSHIP CPA8 1 Exhibit 99.20 AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF CORPORATE PROPERTY ASSOCIATES 8, L.P., A DELAWARE LIMITED PARTNERSHIP THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP of CORPORATE PROPERTY ASSOCIATES 8, L.P., A DELAWARE LIMITED PARTNERSHIP (the "Partnership"), which amends and restates the Amended Agreement of Limited Partnership dated as of February 12, 1988, as amended as of _________________, 1997, is made and entered into as of the ____ day of ___________, 1997 by and between CAREY DIVERSIFIED LLC, a Delaware limited liability company, as General Partner and as Limited Partner, CAREY MANAGEMENT LLC, as Corporate Special Partner, WILLIAM POLK CAREY, as Individual Special Partner, and EIGHTH CAREY CORPORATE PROPERTY, INC., a Delaware corporation, as Limited Partner, those persons set forth on Schedule A hereto, as Limited Partners, and all persons and entities admitted as Limited Partners as provided herein. ARTICLE I CONTINUATION OF PARTNERSHIP The parties hereby continue the Partnership under the provisions of the Delaware Revised Uniform Limited Partnership Act (6 Del.C. ss.ss.17-101, et seq.), as amended from time to time (the "Act") and the rights and liabilities of the Partners shall be as provided in the Act and as herein expressly provided. Pursuant to Section 17-211 of the Act, upon the consummation of the Merger, Carey Diversified Properties LLC shall become the general partner of the Partnership, and Eighth Carey Corporate Property, Inc. shall become the limited partner of the Partnership. In the event that it shall be necessary for the Partnership to exist in or qualify to do business under the laws of any state or states other than or in addition to the State of Delaware, the parties hereby agree that the Partnership shall take such action as may be necessary to exist or qualify to do business in any state in which such existence or qualification shall be required, provided that in any such event the Partnership shall at all times continue to be a limited partnership formed under and governed by the provisions of the Act. 2 ARTICLE II NAME The name of the Partnership shall be "Corporate Property Associates 8, L.P., a Delaware limited partnership." The business of the Partnership shall be conducted under the name "Corporate Property Associates 8, L.P., a Delaware limited partnership" or under "Corporate Property Associates 8, L.P." in any state or other jurisdiction which does not permit the term "limited" to be part of the Partnership's name or under such other name as the General Partner shall hereafter designate in writing to the other Partners. ARTICLE III DEFINITIONS "Acquisition Expenses" means the expenses of the Partnership related to the selection and acquisition of properties by the Partnership, whether or not such properties are acquired, including but not limited to legal fees and expenses, travel and communications expenses, costs of appraisals and fairness letters, non-refundable option payments on property not acquired, accounting fees and expenses, costs of title reports and title insurance, transfer and recording taxes and miscellaneous expenses. Acquisition Expenses shall not include Acquisition Fees. "Acquisition Fees" means the total of all fees and commissions paid by any party in connection with the purchase or development of property by the Partnership including compensation paid in the form of stock or other interests in, or warrants or other rights to purchase the stock of or other interests in the stock of tenants or their affiliates, provided, however, that the percentage calculated by dividing the number of warrants or other stock rights received by the General Partner or its Affiliates (excluding the Partnership) by the total warrants or other stock rights granted by the seller in any transaction cannot exceed that percentage calculated by dividing the portion of the Acquisition Fee paid in cash by the total cash purchase price of the real estate purchased by the Partnership in such transaction, and except a development fee paid to a Person not an Affiliate of the General Partner in connection with the actual development of a project after the Partnership's acquisition of the land. Included in the computation of such fees or commissions shall be any real estate commission, selection fee, development fee (other than as described above), nonrecurring management fee, or any fee 2 3 of a similar nature, however designated. Acquisition Fees shall not include Acquisition Expenses. "Act" means the Delaware Revised Uniform Limited Partnership Act (6 Del.C. ss.ss.17-101, et seq.) as amended from time to time. "Affiliate" means, with respect to any Person, (i) any Person directly or indirectly controlling, controlled by or under common control with such Person, (ii) any Person owning or controlling 10% or more of the outstanding voting securities of such Person, (iii) any officer, director or partner of such Person or of any Person specified in (i) or (ii) above and (iv) any company in which any officer, director or partner of any Person specified in (iii) above is an officer, director or partner. "Agreement" means this Amended and Restated Agreement of Limited Partnership as hereafter amended from time to time. "Appraisal Date" means December 31, 2002. "Appraised Value" means the value according to an appraisal made by an independent qualified appraiser. Such qualification may be demonstrated by membership in a nationally recognized appraisal society such as American Institute of Real Estate Appraisers ("M.A.I."), Society of Real Estate Appraisers ("S.R.E.A.") or their equivalent, but is not limited thereto. "Capital Account" means, in respect of any Partner, the account maintained for such Partner in accordance with Article XII. "Cash From Financings" means, the net cash proceeds realized by the Partnership from the financing of Partnership property or the refinancing of any Partnership indebtedness. "Cash From Sales" means the net cash proceeds realized by the Partnership from the sale, exchange or other disposition of any of its assets. Cash From Sales shall not include net cash proceeds realized from the financing of Partnership property or the refinancing of any Partnership indebtedness. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any similar law or provision enacted in lieu thereof, unless the context indicates otherwise. "Consolidation and Offering Expenses" means all expenses incurred in connection with the formation and qualification of the Subsidiary Partnership, the Merger and in offering the Shares to the former limited partners of the Partnership in exchange for 3 4 their Partnership Interests under applicable Federal and state law, and any other expenses actually incurred and directly related to the offering of the Shares, including such expenses as: (i) the preparing, printing, filing and delivering of the Registration Statement and the Prospectus (including any amendments thereof or supplements thereto), (ii) the preparing and printing of this Agreement, other solicitation material and related documents and the filing and/or recording of such certificates or other documents necessary to comply with the laws of the State of Delaware for the formation of a limited partnership, the merger of a limited partnership into another limited partnership and for the continued good standing of a limited partnership, (iii) the qualification or registration of the limited liability company interests under state securities or "Blue Sky" laws, (iv) any escrow arrangements, including any compensation to an escrow agent, (v) the filing fees payable to the United States Securities and Exchange Commission and to the National Association of Securities Dealers, Inc. and any costs payable to the NYSE for the listing of the Listed Shares, (vi) the fees of the Partnership's counsel, (vii) all advertising expenses incurred in connection therewith, including the cost of all sales literature and the costs related to investor and broker/dealer sales and information meetings and marketing incentive programs and (viii) selling commissions and wholesaling expenses incurred in connection with the sale of the Shares. "Contribution" means any money, property or services rendered, or a promissory note or other obligation to contribute money or property, or to render services as permitted by the Act, which a Partner contributes to the Partnership as capital in that Partner's capacity as Partner pursuant to this Agreement. "Corporate Special Partner" means Carey Management LLC, a Delaware limited liability company. "CPA Partnership" means Corporate Property Associates, a California limited partnership, Corporate Property Associates 2, a California limited partnership, Corporate Property Associates 3, a California limited partnership, Corporate Property Associates 4, a California limited partnership, Corporate Property Associates 5, a California limited partnership, Corporate Property Associates 6, a California limited partnership, Corporate Property Associates 7, a California limited partnership, Corporate Property Associates 9, L.P., a Delaware limited partnership, the Partnership and any other real estate limited partnerships sponsored by W.P. Carey & Co., Inc. or its Affiliates with investment objectives substantially similar to the Partnership's. 4 5 "Distributable Cash From Operations" means cash receipts from the ordinary day-to-day operations of the Partnership (including all interest on Partnership investments and mortgages held by the Partnership) without deduction for depreciation and amortization of intangibles such as organization, underwriting and debt placement costs but after deducting all other expenses and debt amortization and provisions for reserves established by the General Partner which it deems to be reasonably required for the proper operation of the business of the Partnership. Distributable Cash From Operations shall not include cash proceeds realized from the sale, exchange or other disposition of assets of the Partnership or from financing of Partnership property or the refinancing of any Partnership indebtedness. "Distribution" means any transfer of money or property by the Partnership to a Partner without consideration. "Fiscal Quarter" means the three-month period ending on the last day of the third, sixth, ninth and twelfth calendar months of each Fiscal Year of the Partnership. "Fiscal Year" means the Fiscal Year specified in Article XIII. "Front-End Fees" means all fees and expenses paid by any party for any services rendered in connection with the organizational or acquisition phase of the Partnership, including Consolidation and Offering Expenses, Acquisition Fees, Acquisition Expenses and any other similar fees, however designated. "General Partner" means any Person in his, her or its capacity as a general partner of the Partnership (except as otherwise expressly provided herein) and whose name and address are set forth in Article V, or any successor thereto appointed or elected hereunder. "Individual Special Partner" means William Polk Carey. "Independent Advisor" means a long established, nationally recognized investment banking firm, accounting firm, mortgage banking firm, bank, real estate financial consulting firm or advisory firm which has a staff of real estate professionals, whose compensation is determined and embodied in a written contract before an opinion is rendered and who, directly or indirectly, has no interest in, nor any material business or professional relationship with, the Partnership, the General Partner, a borrower, or any of their Affiliates. No more than 5% of the aggregate annual gross income of the Independent Advisor or its Affiliates may be attributable to compensation paid to the 5 6 Independent Advisor by the Partnership pursuant to the advisory agreement. The compensation of the Independent Advisor will be paid by the Sponsor and the Sponsor may not claim reimbursement from the Partnership for such expenses. "Independent Director" means a director of the General Partner who, in the opinion of the board of directors of the General Partner, is free from any relationship that would interfere with the exercise of independent judgment. A director of the General Partner who is an Affiliate of the General Partner or an officer or employee of the General Partner or its subsidiaries or Affiliates would not qualify as an Independent Director. "Investment in Properties" means the amount of gross proceeds of the Offering paid or allocated to the purchase, development, construction or improvement of real property and personal or mixed property connected therewith, acquired by the Partnership, including the purchase of properties, working capital reserves (except that working capital reserves in excess of 5% of the gross proceeds of the Offering shall not be included) and other cash payments such as interest and taxes, but excluding Front-End Fees. "Limited Partner" means any Person in his, her or its capacity as a limited partner of the Partnership and whose name and address are set forth on the books and records of the Partnership. "Mandatory Distribution Event" means (a) the sale or disposition of a Partnership property to a third party unaffiliated with the Partnership or the General Partner, not including the pledge, mortgage or encumbrance of a property, or of any interest therein, in connection with the financing, refinancing or other leveraging of such property or otherwise or any assignment of any leases or rents related to such property, or (b) the mandatory distribution to holders of Partnership Interests following the Appraisal Date. "Merger" means the merger of the Subsidiary Partnership into the Partnership. "Merger Agreement" means the Agreement of Merger pursuant to which the Subsidiary Partnership is merged with and into the Partnership. "Minimum Gain" shall mean and refer to, at any time, the excess, if any, of the outstanding principal balance of all nonrecourse debt of the Partnership that is secured by an interest in Partnership assets, over the adjusted basis of such 6 7 assets to the Partnership for Federal income tax purposes. For purposes of the preceding sentence, the term "nonrecourse debt" shall mean a liability of the Partnership with respect to which no Partner has any personal liability. "Net Lease" means a lease in which the tenant undertakes to pay all or substantially all the cash expenses, excluding debt service, related to the leased property. "Nonrecourse Deductions" has the meaning set forth in Sections 1.704-2(b)(1) and 1.704-2(c) of the Treasury Regulations. "Nonrecourse Liabilities" has the meaning set forth in Section 1.704-2(b)(3) of the Treasury Regulations. "Offering" means the offering of the Shares made pursuant to the Prospectus. "Partner" means the General Partner, the Corporate Special Partner, the Individual Special Partner and any Limited Partner where no distinction is required by the context in which the term is used. "Partner Minimum Gain" means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a nonrecourse Liability, determined in accordance with Treasury Regulations Section 1.704-2(i)(4). "Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulations Section 1.704-2(b)(4). "Partner Nonrecourse Deductions" has the meaning set forth in Treasury Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Debt for the Partnership taxable year shall be determined in accordance with the rules of Treasury Regulations Section 1.704-2(i)(2). "Partnership" means Corporate Property Associates 8, L.P., a Delaware limited partnership. "Partnership Interest" or "Interest" means the interest of each Partner in the profits, losses, distributions, capital and assets of the Partnership. "Partnership Minimum Gain" has the meaning set forth in Treasury Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in Partnership Minimum Gain, for a Partnership taxable year shall 7 8 be determined in accordance with the rules of the Treasury Regulations. "Person" means any natural person, partnership, corporation, limited liability company, association or other legal entity. "Prospectus" means the final prospectus of the General Partner pursuant to which the General Partner will offer up to 23,654,898 Shares, as the same may at any time and from time to time be amended or supplemented after the effective date of the Registration Statement. "Proxy" means a written authorization signed by a Partner or the Partner's duly authorized attorney-in-fact giving another Person the power to vote with respect to the Partnership Interest of that Partner. "Signed," for the purpose of this paragraph, means the placing of the Partner's name on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the Partner or the Partner's duly authorized attorney-in-fact. "Purchase Price of Property" means the price paid upon the purchase or sale of a particular property, including the amount of Acquisition Fees and all liens and mortgages on the property, but excluding points and prepaid interest. "Registration Statement" means the General Partner's Registration Statement on Form S-4 filed with the Securities and Exchange Commission in the form in which it becomes effective, as the same may at any time and from time to time thereafter be amended or supplemented. "Shares" means the Shares of the General Partner. "Special Partners" means the Corporate Special Partner and the Individual Special Partner. "Sponsor" means any Person directly or indirectly instrumental in organizing wholly or in part, a limited or general partnership or any Person who will manage or participate in the management of a limited or general partnership, and any Affiliate of any such Person, but does not include a Person whose only relation with the Partnership is as that of an independent property manager and whose only compensation is as such. Sponsor does not include wholly independent third parties such as attorneys, accountants and underwriters whose only compensation is for professional services rendered in connection with the offering of syndicated interests. 8 9 "Subsidiary Partnership" means Eighth Subsidiary, L.P., a Delaware limited partnership, which is a subsidiary of the General Partner. ARTICLE IV PURPOSE The business and purpose of the Partnership is to carry on any business that a Delaware partnership without limited partners may carry on (except the business of granting policies of insurance, assuming insurance risks or banking), and more particularly to invest in and own real property or interests therein (including leasehold estates) as well as personal or mixed property connected therewith which is income producing or capable of becoming income producing within a reasonable time after acquisition. The Partnership may enter into ventures, partnerships and other business arrangements with respect to real property and personal or mixed property connected therewith or interests therein as deemed prudent by the General Partner in order to achieve successful operations for the Partnership. Operations of the Partnership may be conducted wherever, in the opinion of the General Partner and not in violation of the general restrictions described in Paragraph H of Article X, the factors involved appear to be favorable for the Partnership and the Partners. ARTICLE V NAMES AND ADDRESSES OF PARTNERS The General Partner shall be Carey Diversified LLC, a limited liability company having an office at 50 Rockefeller Plaza, New York, New York 10020. The names and addresses of the Limited Partners shall be as set forth on the books and records of the Partnership which shall be kept at the principal place of business of the Partnership. ARTICLE VI PRINCIPAL PLACE OF BUSINESS; REGISTERED OFFICE AND AGENT The principal place of business of the Partnership shall be 50 Rockefeller Plaza, New York, New York 10020. The Partnership shall also maintain a registered office in the State of Delaware at 229 South State Street, Dover, Delaware 19901. The General Partner may from time to time change the principal place of 9 10 business of the Partnership or its registered office and, in either such event, the General Partner shall notify the Partners in writing within ten days after the effective date of such change; provided, however, that no such change shall be effected unless the General Partner determines that such change is in the best interests of the Partnership after giving consideration to any material adverse state or local income, estate or inheritance tax consequences to the Partners, or any adverse effect on the limited liability of the Limited Partners, as a result of such change and provided further that the Partnership shall always maintain a registered office in the State of Delaware. The General Partner may establish additional places of business of the Partnership when and where required by the business of the Partnership. The Partnership at all times shall maintain in the State of Delaware a registered agent for service of process upon the Partnership. ARTICLE VII CAPITAL CONTRIBUTIONS The Partnership is authorized to issue and sell up to 100,000 limited partner interests. No interest shall be paid on any contribution to the capital of the Partnership. Loans by a Partner to the Partnership shall not be considered contributions to the capital of the Partnership. Any Partner, including any additional or substituted Partner, who shall acquire a Partnership Interest or whose Partnership Interest is increased by means of a transfer to him of all or a part of the Partnership Interest of another Partner, shall succeed to the Capital Account, or portion thereof, in respect of the Partnership Interest received. ARTICLE VIII PROFITS AND LOSSES A. Determination of Profits and Losses. The Partnership presently intends to keep its books on the accrual method of accounting and to report for federal, state and local income tax purposes using the same method by making such adjustments as are necessary to include other items of income, expense, deduction and allowance as are permitted or required under the Code and the regulations promulgated thereunder. The Partnership may report its activities to the Limited Partners in accordance with 10 11 generally accepted accounting principles. Except as otherwise provided herein, whenever a proportionate part of the Partnership profit or loss is credited or charged to a Partner's Capital Account, every item of income, gain, loss or deduction entering into the computation of such profit or loss shall be considered either credited or charged, as the case may be, to such Partner's Capital Account and every item of credit or tax preference related to such profit or loss and applicable to the period during which such profit or loss was realized shall be allocated to such Partner in the same proportion. Every recapture of deduction or credit shall be allocated among the Partners in the same proportion as the items of deduction or credit subject to recapture were allocated among the Partners. Any increase or decrease in the amount of any item of income, gain, loss or deduction attributable to an adjustment to the basis of Partnership assets made pursuant to a valid election under Sections 734, 743 and 754 of the Code and pursuant to corresponding provisions of applicable state and local income tax laws shall be charged or credited, as the case may be, and any increase or decrease in the amount of any item of credit or tax preference attributable to any such adjustment shall be allocated to the Partners entitled thereto under such laws. Profits and losses allocated to a particular class of Partnership Interests shall be allocated among the holders of record of such class of Partnership Interests at the end of each Fiscal Year (or such shorter period as may be provided herein) of the Partnership in proportion to their respective Partnership Interests; provided, however, that any such profits and losses attributable to a limited partner interest assigned during a Fiscal Year of the Partnership shall be allocated among the Persons who were the holders of such limited partner interests during such Fiscal Year in proportion to the number of months (for purposes of such allocation, ownership of limited partner interests for each month will be determined as of the fifteenth day of each month) that each such holder was recognized as the owner of such limited partner interest during such Fiscal Year, without regard to the results of Partnership operations during the period in which each such holder was recognized as the owner thereof and without regard to the date, amount or recipient of any distributions which may have been made with respect to such limited partner interest. B. Allocation of Profits and Losses. 1. Except as provided in subparagraph 4 of this paragraph B, the profits and losses of the Partnership (other than gains or losses from the sale, exchange or other disposition of Partnership assets) shall be allocated to the Partners as follows and in the following order of priority: 11 12 a. An amount of net income equal to the excess, if any, of the aggregate negative balance of the Capital Accounts of the Partners over the Minimum Gain (determined as of the end of such year or fraction thereof), shall first be allocated among the Partners whose Capital Accounts are negative as a result of nonrecourse debt in proportion to the negative amounts attributable to such nonrecourse debt. b. Any remaining balance of net income shall be allocated 1% to the General Partner, 9% to the Corporate Special Partner, 1% to the Individual Special Partner and 89% to the Limited Partners. c. Net losses of the Partnership shall be allocated 1% to the General Partner, 9% to the Corporate Special Partner, 1% to the Individual Special Partner and 89% to the Limited Partners. 2. Except as provided in subparagraph 4 of this Paragraph B, net losses arising from sales, exchanges or other dispositions of Partnership assets shall be allocated 1% to the General Partner, 1% to the Individual Special Partner and 98% to the Limited Partners. For purposes of this subparagraph 2, Capital Accounts shall be determined after applying the allocations provided in subparagraphs 1 and 5 of this Paragraph B, and after applying subparagraphs 6 and 7 of this Paragraph B. 3. Net gains arising from sales, exchanges or other dispositions of Partnership assets shall be allocated to the Partners as follows and in the following order of priority: a. An amount of such gains equal to the excess, if any, of the aggregate negative balance of the Capital Accounts of the General Partner over the Minimum Gain; b. If each Partner's Capital Account is negative and the gains are less than the aggregate negative amounts in the Capital Accounts, in the ratio that the Capital Accounts bear to each other; c. If each Partner's Capital Account is negative and the gains are greater than the aggregate negative amounts in the Capital Accounts (i) first in an amount sufficient to bring each Partner's Capital Account to zero, and (ii) then to the Partners in the percentage by which Cash From Sales and Cash From Financings are then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; d. If certain Partners' Capital Accounts are positive and other Partners' Capital Accounts are negative (i) first in an amount sufficient to bring the Capital Account of each Partner whose Capital Account is negative to zero (or if the gains are 12 13 less than the aggregate negative amounts of the Capital Accounts which are negative, to such Partners in the ratio that such negative Capital Accounts bear to each other), and (ii) then to the Partners in the percentage by which Cash From Sales and Cash From Financings is then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; or e. If each Partner's Capital Account is positive, in the percentages by which Cash From Sales and Cash From Financings are then being distributed pursuant to the provisions of Paragraph E of Article IX hereof. For purposes of this subparagraph 3, Capital Accounts shall be determined after applying the allocations provided first in subparagraph 5 and then in subparagraphs 1 and 2 of this Paragraph B and after applying subparagraphs 6 and 7 of Paragraph B. 4. No loss or deduction or item thereof under subparagraph 1 or 2 of this Paragraph B shall be allocated to the General Partner if, or to the extent, such allocation would create or increase a deficit in the General Partner's Capital Account, unless: a. Such allocation of loss or deduction is attributable to nonrecourse debt of the Partnership; and b. Such allocation does not cause the deficit Capital Account of the General Partner to exceed the amount of Minimum Gain attributable to such nonrecourse debt, determined as of the last day of the taxable year to which such allocation is attributable. 5. To the extent that any amount paid to a Limited Partner or its Affiliates pursuant to the provisions of Paragraphs G(2),(4),(5),(6) or (7) of Article X hereof, or as Front-End Fees, is treated as a distributive share of Partnership income to the Limited Partner for Federal income tax purposes, the Limited Partner affected shall be allocated gross income of the Partnership at a time and in an amount equal to the amount of such payment, and the Capital Account of the Limited Partner so affected shall be adjusted to reflect such allocation and payment. If the Partnership's gross income for a Fiscal Year is less than the amount of such payment, the Limited Partner affected shall be allocated gross income in each succeeding Fiscal Year until the total amount so allocated equals the total amount of such payment. 6. For purposes of subparagraphs 1(a), 2 and 3 of this Paragraph B, distributions to the Partners pursuant to Paragraphs A and E of Article IX hereof shall be treated as having been made 13 14 and charged to the Capital Accounts of the Partners prior to the allocations of income, gains and losses provided therein. 7. Solely for purposes of this Paragraph B, the Capital Accounts of each Partner shall be reduced by such Partner's share of any Partnership expenditure which would be treated as if it were an expenditure described under Section 705(a)(2)(B) of the Code, and shall be reduced or increased by any other amount required by the then applicable regulations under Section 704 of the Code. 8. Notwithstanding anything to the contrary in this Article VIII, if any Partner receives an adjustment, allocation or distribution described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), such Partner shall be specially allocated a pro rata portion of each item of Partnership income, including gross income, and gain in an amount and manner sufficient to eliminate, as quickly as possible, any deficit balance in such Partner's Capital Account created by such adjustment, allocation or distribution in excess of the sum of (i) the amount such Partner is obligated to restore pursuant to any provision of this Agreement and (ii) the amount such Limited Partner is deemed to be obligated to restore pursuant to the penultimate sentence of Treasury Regulations Section 1.704-1(b)(2)(iv)(f) (as amended in 1986). This subparagraph 8 of Paragraph B is intended to constitute a "qualified income offset" within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(3). 9. Except as otherwise provided in Section 1.704-2(f) of the Treasury Regulations, if there is a net decrease in Partnership Minimum Gain for any Partnership fiscal year, each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary subsequent years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain to the extent required by Treasury Regulations Section 1.704-2(f). The items to be so allocated shall be determined in accordance with Section 1.704-2(f) and (i) of the Treasury Regulations. This subparagraph is intended to comply with the minimum gain chargeback requirement in said section of the Treasury Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant hereto. 10. Except as otherwise provided in Section 1.704-2(i)(4) of the Treasury Regulations, if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any fiscal year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse 14 15 Debt, determined in accordance with Section 1.704-2(i)(5) of the Treasury Regulations, shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to that Partner's share of the net decrease in the Partner Minimum Gain attributable to such Partner Nonrecourse Debt to the extent and in the manner required by Section 1.704-2(i) of the Treasury Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i) of the Treasury Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and (j)(2) of the Treasury Regulations. This subparagraph is intended to comply with the minimum gain chargeback requirement with respect to Partner Nonrecourse Debt contained in said section of the Treasury Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph shall be made in proportion to the respective amounts to be allocated to each Partner pursuant hereto. 11. To the extent any Partner has an Adjusted Capital Account Deficit at the end of any Partnership Fiscal Year, each such Partner shall be specially allocated items of Partnership income (including gross income) and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Paragraph 8(B)(11) shall be made if and only to the extent that such Partners would have an Adjusted Capital Account Deficit after all other allocations provided for in this Section have been tentatively made as if this Paragraph 8(B)(11) were not in the Agreement. 12. Partner Nonrecourse Deductions for any fiscal year or other applicable period with respect to a Partner Nonrecourse Debt shall be specially allocated to the Partners that bear the economic risk of loss for such Partner Nonrecourse Debt (as determined under Sections 1.704-2(b)(4) and 1.704-2(i)(1) of the Treasury Regulations). C. Power of the General Partner to Vary Allocations of Profits and Losses. It is the intent of the Partners that each Partner's distributive share of income, gains, losses, deductions and credits shall be determined and allocated in accordance with this Article VIII to the fullest extent permitted by Section 704(b) of the Code. If the Partnership is advised that the allocations provided in this Article VIII are unlikely to be respected for Federal income tax purposes, the General Partner has been granted the power in Paragraph B(2)(a) of Article XVI of this Agreement to amend the allocation provisions of this Agreement, on advice of accountants and legal counsel, to the minimum extent necessary to effect the plan of allocations and distributions provided in this Agreement. 15 16 D. Allocations of Profits and Losses Among Limited Partners. Except as otherwise provided in this Article VIII, all profits and losses shall be allocated among the Limited Partners in the same manner as distributions are allocated in Paragraph D of Article IX hereof. E. Approval of Partners to Allocation of Profits and Losses. The methods hereinabove set forth by which profits and losses of the Partnership are determined and allocated are hereby approved by each Partner as a condition to becoming a Partner. ARTICLE IX DISTRIBUTIONS A. Distributable Cash From Operations. The General Partner shall distribute as soon after the close of each Fiscal Quarter as is reasonably feasible all of the Distributable Cash From Operations for such Fiscal Quarter in the following manner: 1% to the General Partner, 9% to the Corporate Special Partner, 1% to the Individual Special Partner and 89% to the Limited Partners. B. Cash From Sales. The General Partner shall distribute, as soon after the close of each Fiscal Quarter as is reasonably feasible, all Cash From Sales realized by the Partnership during such Fiscal Quarter in accordance with the provisions of Paragraph E of this Article IX. C. Cash From Financings. The General Partner shall distribute, as soon after the close of each Fiscal Quarter as is reasonably feasible, all of the Cash From Financings realized by the Partnership during such Fiscal Quarter in accordance with the provisions of Paragraph E of this Article IX. D. Allocation of Distributions Among Limited Partners. Distributions of Distributable Cash From Operations to the Limited Partners shall be apportioned among the holders of record of limited partner interests (as determined in accordance with Paragraph A of Article VIII) in the ratio in which the number of limited partner interests held of record by each of them bears to the number of limited partner interests held of record by all the Limited Partners as of the last month of the Fiscal Quarter with respect to which such distribution is made. Distributions of Cash From Sales and Cash From Financings shall be made to holders of record (as determined in accordance with Paragraph A of Article VIII) for the month in which the transaction giving rise to the distribution was completed. 16 17 E. Distributions of Cash From Sales and Cash From Financings. The General Partner shall distribute Cash From Sales and Cash From Financings in the following manner: 1% to the General Partner, 1% to the Individual Special Partner and 98% to the Limited Partners, until such time as $682,646 has been distributed to the Individual Special Partner pursuant to this Paragraph E of Article IX. Thereafter, Cash From Sales and Cash From Financings shall be distributed 1% to the General Partner and 99% to the Limited Partners. F. No Distributions Under Certain Circumstances. Not withstanding any other provision of this Article IX, no distribution shall be made to the extent that at the time of the distribution, after giving effect to the distribution, all liabilities of the Partnership, other than liabilities to Partners on account of their partnership interests and liabilities for which the recourse of creditors is limited to specified property of the Partnership, exceed the fair value of the assets of the Partnership, except that the fair value of property that is subject to a liability for which the recourse of creditors is limited shall be included in the assets of the Partnership only to the extent that the fair value of that property exceeds that liability. No Partner shall have the right to receive property other than money upon any distribution. No Partner may be compelled to accept a distribution of any asset in kind in lieu of a proportionate distribution of money being made to other Partners. Except for distributions to a trust as set forth in the last sentence of paragraph B of Article XVIII, all distributions shall be made only in the form of cash. G. Approval of Partners to Allocation of Distributions. The methods hereinabove set forth by which Cash From Operations, Cash From Sales and Cash From Financings are allocated and distributed are hereby approved by each Partner as a condition to becoming a Partner. ARTICLE X MANAGEMENT AND OPERATION OF BUSINESS A. Management of Business. The Partnership shall be managed by the General Partner and the conduct of the Partnership's business shall be controlled and conducted by the General Partner in accordance with this Agreement. The approval of only the General Partner is needed for decisions concerning the Partnership's investments. B. Authority of the General Partner. In addition to and not in limitation of any rights and powers conferred by law or 17 18 other provisions of this Agreement, the General Partner shall have and may exercise on behalf of the Partnership all powers and rights necessary, proper, convenient or advisable to effectuate and carry out the purposes, business and objectives of the Partnership. Such powers shall include, without limitation, the following powers: 1. To acquire, hold and dispose of any real property (or any interests therein, including leasehold estates) as well as personal or mixed property connected therewith, including the purchase, lease, development, improvement, maintenance, exchange, trade or sale of such property at such price, rental or amount, for cash, securities or other property and upon such terms, as the General Partner deems to be in the best interests of the Partnership; 2. Subject to the provisions of paragraph H(10) of this Article X, to borrow money and, if required therefor, to mortgage or subject to any other security device any portion of the assets of the Partnership, to obtain replacements of any mortgage or other security device, and to prepay, in whole or in part, refinance, increase, modify, consolidate or extend any mortgage or other security device, provided, however, that loans from Affiliates of the General Partner shall be made in accordance with the provisions of Paragraphs G(2) and G(6) of this Article X; 3. To invest the Partnership's funds in United States Government securities, certificates of deposit or other time or demand deposits of banks, savings banks, savings and loan associations or similar institutions which have a net worth of at least $100,000,000 or in which such certificates or deposits are fully insured by any Federal or state government agency, United States dollar deposits in foreign branches of banks, which banks have a net worth of at least $100,000,000, bank repurchase agreements covering securities of the United States Government or governmental agencies, bankers' acceptances, public money market funds, or other similar short-term highly liquid investments; to invest any working capital or other reserves retained by the General Partner for the operation of the Partnership in like manner; and to deposit, withdraw, invest, pay, retain and distribute the Partnership's funds in any manner consistent with the provisions of this Agreement; 4. To bring and defend actions at law or in equity; 5. To employ persons in the operation and management of the Partnership's business, including but not limited to supervisory managing agents, building management agents, real property developers and real estate brokers; 18 19 6. To place record title to, or the right to use, Partnership assets in the name or names of a non-operating nominee or nominees, including an Affiliate of the General Partner, for any purpose convenient or beneficial to the Partnership; 7. To perform all acts and file all documents, including tax returns and registration statements, necessary to comply with Federal, state and local laws, rules and regulations applicable to the Partnership or the conduct of the Partnership's business; 8. To enter into and carry out contracts and agreements and any or all documents and instruments and to do and perform all such other things as may be in furtherance of Partnership purposes or necessary or appropriate to the conduct of Partnership activities; 9. To cause the Partnership to make or revoke any of the elections required or permitted to be made by the Partnership under the Code; 10. To determine the appropriate accounting method or methods to be used by the Partnership (the Partnership intends initially to utilize the accrual method of accounting in reporting its profits and losses for Federal, state and local income tax purposes); 11. To designate Carey Diversified LLC, the General Partner, as the "Tax Matters Partner" in accordance with Section 6231(a)(7) of the Code and, as such, the General Partner shall have all powers necessary to so perform including, without limitation, the power to retain attorneys and accountants of its choice and the right to settle any audits without the approval of the Limited Partners, except as otherwise required by the Code. The designation provided for herein is hereby expressly approved by each Partner as an express condition to becoming a Partner; and 12. To execute, acknowledge, deliver, seal, file, record and vote any and all instruments which may be deemed necessary or convenient to effect the foregoing. C. Restrictions on Authority of General Partner. In addition to other acts expressly prohibited or restricted by this Agreement or by law, the General Partner shall have no authority to act on behalf of the Partnership with respect to, and is expressly prohibited from undertaking, the following: 1. Doing any act in contravention of this Agreement; 19 20 2. Except as provided in this Agreement and except in connection with the liquidation and winding up of the business of the Partnership upon its dissolution, doing any act which would make it impossible to carry on the ordinary business of the Partnership; 3. Confessing a judgment against the Partnership in connection with any threatened or pending legal action; 4. Possessing Partnership property or assigning the rights of the Partnership in specific Partnership property for other than a Partnership purpose; 5. Admitting a Person as a Limited Partner except as provided in this Agreement; 6. Except as provided in this Agreement and except in connection with the liquidation and winding up of the business of the Partnership upon its dissolution or a Mandatory Distribution Event, selling substantially all the assets of the Partnership at a single sale or in multiple sales in the same 12-month period without the prior written approval of Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, with the same relative vote as provided in paragraph (d) of Article XI; 7. Pledging or encumbering substantially all the properties of the Partnership at one time or from time to time in a series of related transactions, unless the lien of such pledge or encumbrance arises in connection with the acquisition or improvement of properties or the initial financing of properties acquired free and clear of encumbrances or the refinancing of previous obligations and such lien is limited to the properties so acquired, improved, financed or refinanced; 8. Obtaining any loan or any mortgage loan on any residential property made or guaranteed by any Federal, state or local government or municipality or any agency of any Federal, state or local government or municipality; 9. Performing any act (other than an act required by this Agreement) which would, at the time such act occurred, subject any Limited Partner to liability as a general partner in any jurisdiction; 10. Prepaying any interest on any Partnership indebtedness; provided that the payment of any amount commonly referred to as "points" shall not be deemed a prepayment of interest; or 20 21 11. Assessing any Partner for an additional capital contribution. D. Fiduciary Obligations of General Partner. The General Partner shall have fiduciary responsibility for the safekeeping and use of all funds and assets of the Partnership, whether or not such funds or assets are in their possession or control. The General Partner will not employ, or permit another to employ, such funds or assets in any manner except for the exclusive benefit of the Partnership. E. Obligations of the General Partner. The General Partner shall: 1. Devote such of its time to the business of the Partnership as it shall, in its discretion, exercised in good faith, determine to be necessary to conduct the business of the Partnership for the benefit of the Partnership and the Limited Partners; 2. File and publish all certificates, statements or other instruments required by law for formation, qualification and operation of the Partnership and for the conduct of its business in all appropriate jurisdictions; 3. Use its best efforts to cause the Partnership and the Partners to be protected by adequate public liability, directors and officers liability, property damage and other insurance; however, no Partnership funds may be used to purchase any liability insurance for which the indemnified person would be prohibited from being indemnified by the Partnership under Article X(F) of this Agreement; 4. Employ attorneys to represent the Partnership, which a(tau)torneys may also serve as counsel to the General Partner and any of its Affiliates; and 5. Use its best efforts to maintain the status of the Partnership as a "partnership" for Federal income tax purposes. F. Limitation on Liability of General Partner; Indemnification. 1. Neither the General Partner nor any of its Affiliates shall have liability to the Partnership or to any Partner for any loss suffered by the Partnership which arises out of any action or inaction of the General Partner or its Affiliates if the General Partner or its Affiliates in good faith determined that such course of conduct was in the best interest of the Partnership and such course of conduct did not constitute 21 22 negligence or misconduct of the General Partner or its Affiliates and provided, with respect to Affiliates, such Affiliates were acting within the scope of the authority of the General Partner. To the fullest extent permitted by law, the General Partner and its Affiliates (other than broker-dealers) shall be indemnified by the Partnership for any losses, judgments, liabilities, expenses and amounts paid in settlement of any claim sustained by them in connection with the Partnership, provided that the same were not the result of negligence or misconduct on the part of the General Partner or its Affiliates, that the General Partner or its Affiliates, as the case may be, in good faith determined that their course of conduct was in the best interest of the Partnership and that, with respect to Affiliates, such Affiliates were acting within the scope of the authority of the General Partner. 2. The General Partner and its Affiliates and any Person acting as a broker dealer shall not be indemnified for any losses, liabilities or expenses arising from or out of an alleged violation of federal or state securities laws unless (a) there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee and the court approves indemnification of the litigation costs, (b) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee and the court approves indemnification of the litigation costs or (c) a court of competent jurisdiction approves a settlement of the claims against a particular indemnitee and finds that indemnification of the settlement and related costs should be made. In any claim for indemnification for Federal or state securities law violations, the party seeking indemnification shall place before the court the position of the Securities and Exchange Commission, the Arizona Corporations Commission, the Massachusetts Securities Division, the Missouri Securities Division, the Pennsylvania Securities Division and other state securities commissioners with respect to the issue of indemnification for securities law violations. 3. The Partnership shall not incur the cost of that portion of any insurance which insures any party against any liability the indemnification of which is herein prohibited. 4. The Partnership shall not make any advances to the General Partner or its Affiliates for legal expenses and other costs incurred as a result of a legal action unless the following three conditions are satisfied: (a) the legal action relates to the performance of duties or services by the General Partner or its Affiliates on behalf of the Partnership, (b) the legal action is initiated by a party other than the Partnership or a Limited 22 23 Partner and (c) the General Partner or its Affiliates undertake to repay the advanced funds to the Partnership in cases in which they would not be entitled to such indemnification. 5. For purposes of this Section (F) of Article X, the term Affiliate shall mean any Person performing services on behalf of the Partnership (i) who directly or indirectly controls, is controlled by, or is under common control with the General Partner, (ii) who owns or controls 10% or more of the outstanding voting securities of the General Partner, (iii) who is an officer, director or partner of the General Partner or (iv) which is a company for which the General Partner acts as an officer, director, partner or trustee. 6. Any payments made by the Partnership to the General Partner or its Affiliates as a result of any indemnification or hold harmless agreement shall be paid out of the assets of the Partnership (and any insurance proceeds) and not from the separate assets of the Limited Partners. G. Specific Transactions Authorized. The General Partner is hereby authorized to enter into, on behalf of the Partnership, the following specific transactions: 1. The Partnership may purchase property from any Affiliate of the General Partner provided (i) the property was acquired by such Affiliate for the purpose of facilitating its purchase by the Partnership, facilitating the borrowing of money or the obtaining of financing for the Partnership or any other purpose related to the business of the Partnership, (ii) the property is purchased by the Partnership for a price no greater than the Appraised Value, (iii) there is no adverse difference in the interest rates of the loans secured by the property at the time acquired by such Affiliate and at the time purchased by the Partnership nor any other benefit arising out of such transaction to the General Partner and (iv) no compensation is paid by the Partnership or by any non-affiliated person to any Affiliate of the General Partner in connection with the purchase of the property by the Partnership. 2. The Partnership may take a loan, the principal amount of which is scheduled to be paid over a period of not less than 48 months and not more than 50% of the principal amount of which is scheduled to be paid during the first 24 months, from an Affiliate of the General Partner provided that such Affiliate is a program formed for the purpose of, among other things, making mortgage loans and further provided that (i) the terms of any such loan are fair and at least as favorable to the Partnership as could be obtained from a non-Affiliate in similar circumstances, (ii) the Partnership obtains a letter of opinion 23 24 from a qualified Independent Advisor to such effect and (iii) the Partnership is represented, with respect to such mortgage loan, by legal counsel different from the legal counsel retained for such transaction by the Affiliated lender. 3. An officer or director of the General Partner may serve as a director of a tenant of the Partnership after a lease with the Partnership has been executed, provided that the purpose of such service as a director is for monitoring tenant activity on behalf of the Partnership and provided that the Partnership shall not incur, directly or indirectly, any costs relating to such service. Any tenant having such an officer or director serving as a director shall not be deemed an Affiliate of the Partnership for purposes of this Agreement so long as such tenant would not otherwise be an Affiliate for purposes of this Agreement except by reason of such service. An officer or director serving as a director of the tenant may not vote as a member of the board of directors of the tenant on matters relating to the Partnership or any Affiliate of the Partnership. 4. The Partnership may contract (i) with Affiliates of the General Partner to serve as real estate brokers and mortgage placement brokers in connection with the investment of the Partnership assets and (ii) with Affiliates of the General Partner to serve as real estate brokers in connection with the sale of property by the Partnership. The amount of real estate commissions payable to Affiliates of the General Partner upon a sale of property by the Partnership where such Affiliates have provided a substantial amount of services in the sales effort may not exceed the lesser of (i) 3% of the contract price for the sale of the property or (ii) 50% of the reasonable, customary and competitive rate for similar services in light of the size, type and location of the property; provided, however that the total real estate commissions payable to such Affiliates and to other Persons may not exceed the lesser of (a) 6% of the contract price for the sale of the property or (b) the reasonable, customary and competitive rate for similar services in light of the size, type and location of the property. No Affiliate of the General Partner may receive payment of a real estate commission with respect to the sale of any property by the Partnership unless the total consideration received by the Partnership upon such sale exceeds the amounts actually paid by the Partnership for the purchase, development, construction or improvement of the Property and any fees and commissions paid by the Partnership in connection therewith. 5. Affiliates of the General Partner may receive insurance premiums and brokerage commissions with respect to insurance on property owned by the Partnership only when the cost of such insurance is paid by tenants who net lease such properties from 24 25 the Partnership. No such net lease shall provide that the lessee is required to purchase insurance through an Affiliate of the General Partner. 6. At any time, the Partnership may borrow funds from Affiliates of the General Partner or third parties on a short term basis to provide the debt portion of the purchase price of any property if (i) the Partnership is unable to obtain a permanent loan or, in the judgment of the General Partner, it is not in the best interests of the Partnership to obtain a permanent loan at the interest rates then prevailing and (ii) the General Partner has reason to believe that the Partnership will be able to obtain a permanent loan on or prior to the end of the loan term. Any such short-term loans may be fully or partially amortized, may provide for the payment of interest only during the term of the loan or may provide for the payment of principal and interest only upon maturity. Any such short-term loans may be secured by a pledge of or security interest in the net assets of the Partnership or, if the loan is obtained to pay or provide the debt or equity portion of the purchase price of a property, by a first or junior mortgage on the property to be acquired. Any short-term loans from Affiliates of the General Partner will bear interest at a rate equal to the lesser of (A) 1% above the prime interest rate at The Bank of New York or (B) the rate that would be charged to the Partnership by unrelated lending institutions on comparable loans for the same purpose in the locality of the property but in no event greater than the maximum amount permitted by law. Such borrowings shall be nonrecourse to the Partnership, unless the General Partner shall otherwise consent in writing. No prepayment charge or penalty shall be required by a General Partner on a loan to the Partnership from the General Partner secured by either a first or a junior or all inclusive trust deed, mortgage or encumbrance on the property; except to the extent such prepayment charge or penalty is attributable to the underlying encumbrance. 7. All of the Partnership's expenses shall be billed directly to and paid by the Partnership. The Partnership shall reimburse the General Partner or its Affiliates for: (a) the actual cost to the General Partner or their Affiliates of goods and materials used for and by the Partnership and obtained from unaffiliated parties, and (b) the costs incurred by the General Partner or its Affiliates in performing administrative services necessary to the prudent operation of the Partnership; provided, however, that the amounts charged to the Partnership for services performed pursuant to this clause (b) shall not exceed the lesser of (1) the actual cost of such services, or (2) 90% of the amount which the Partnership would be required to pay to independent parties for comparable services in the same geographic location. No reimbursement shall be made to the General Partner or its 25 26 Affiliates for: (x) services for which the General Partner or its Affiliates are entitled to compensation by way of a separate fee or (y) any of the salaries, fringe benefits, travel expenses and other administrative items incurred by or allocated to any controlling person (as defined herein) of the General Partner or its Affiliates; provided, however, that the Partnership may reimburse the General Partner or its Affiliates for the travel expenses of controlling persons if such travel expenses are incurred by such controlling persons in connection with the evaluation of properties being considered for acquisition or visits to executives of potential tenants of properties being considered for acquisition to discuss current financial results. The Partnership's annual report to the Partners shall contain a breakdown of the costs reimbursed to the General Partner or its Affiliates. Within the scope of the annual audit of the General Partner's (or such Affiliate's) financial statement, the independent certified public accountant shall verify the allocation of such costs to the Partnership. The method of review shall at minimum provide (1) a review of time records of individual employees, the costs of whose services were reimbursed; and (2) a review of the specific nature of the work performed by each such employee. The methods of review shall be in accordance with generally accepted auditing standards and shall accordingly include such tests of the accounting records and such other auditing procedures which the General Partner's (or such Affiliate's) independent certified public accountants consider appropriate in the circumstances. The additional costs of such review shall be itemized by such accountants on a partnership by partnership basis and may be reimbursed to the General Partner (or such Affiliate) in accordance with this Paragraph only to the extent that such reimbursement, when added to the cost for administrative services rendered, does not exceed the competitive rate for such services as determined in this Paragraph G(7). As used herein, the term "controlling person" shall mean any Person, whatever his title, who performs executive or senior management functions for the General Partner or such Affiliate similar to those of executive or senior management officers, directors or partners, or those holding 5% or more equity interest in the General Partner or such Affiliate or a Person having the power to direct or cause the direction of the management and/or policies of the General Partner or such Affiliate, whether through the ownership of voting securities, by contract or otherwise. For the purposes of this Paragraph G(7), not every Person who carries a title such as vice president, corporate secretary or treasurer shall be considered a controlling person, unless such Person performs the functions or has the powers described above, and even in the absence of a 26 27 specific title, an executive in a senior management position shall be considered a controlling person. 8. The Partnership may invest in unimproved or non-income producing real property and the stock of or other interests in, or warrants or other rights to purchase the stock of or other interests in, any tenant of the Partnership or the parent or controlling person of any tenant. The Partnership may not borrow funds to make investments in such stock, interests, warrants or other rights. The Partnership will not exercise warrants or other rights to purchase the stock of or other interests in a tenant or the parent or controlling person of a tenant unless the Partnership will immediately liquidate the stock or interest purchased at a price in excess of the exercise price. Under such circumstances, payment of the exercise price shall not be deemed an investment subject to the above limitations respecting the amount of net proceeds derived from the sale of limited partner interests which the Partnership may invest in unimproved or non-income producing real property or stock, interests, warrants or other rights. The Partnership may borrow funds on a short-term basis to pay the exercise price on warrants or other rights or may pay such exercise price from funds held in the working capital reserve and will repay the loan or replenish the reserve upon the sale of the securities or interests purchased before it makes distributions to the Partners respecting the proceeds of sale or reinvests such proceeds in properties. 9. The Partnership may incur indebtedness in connection with the purchase, improvement, repair, development and financing or refinancing of properties and the operation of the Partnership, including the funding of operating deficits and obtaining Cash From Sales and Cash From Financings for distribution to Partners. Such indebtedness may not exceed 80% of the total purchase price of the Partnership's properties and may be in the form of purchase money obligations to the sellers of properties or in the form of loans from banks, institutional investors and other lenders, which indebtedness may be secured by mortgages or other interests in the property owned by the Partnership (including "wrap-around" or "all-inclusive" mortgages to the extent provided in Paragraph H(9) of this Article X) and may involve final or interim principal payments substantially greater than the regular monthly payments. The Partnership may also from time to time borrow additional funds for the purchase of property, which indebtedness may be secured by the general assets of the Partnership. H. General Restrictions. 1. The Partnership shall obtain a written evaluation report specifying an Appraised Value signed by an independent 27 28 appraiser prior to the purchase of any property by the Partnership and shall not purchase any such property if the purchase price and all Acquisition Fees paid by the Partnership in connection with the acquisition exceed the Appraised Value set forth in such report. All such appraisals, whether or not the property which is the subject of such appraisal is purchased by the Partnership, shall be at the Partnership's expense or at the expense of the seller, shall be retained for five years and shall be available for inspection and duplication by the Limited Partners upon reasonable notice to the Partnership for a purpose reasonably related to their interest as limited partners in the Partnership. 2. The Partnership may not sell any property in a transaction in which an Affiliate of the General Partner acts as a real estate broker unless the provisions of Paragraph G(4) of this Article X are complied with. 3. The Partnership shall not own any land where the buildings and improvements thereon are owned by an Affiliate of a General Partner unless (i) such Affiliate is a public program formed for the purpose of investing in real estate, (ii) the terms of such transaction are at least as favorable as the terms of any comparable transactions made on an arm's length basis and known to the General Partner, and (iii) payments to the General Partner and its Affiliates for services rendered in a capacity other than that as General Partner may only be made upon a determination that (a) the compensation is not in excess of the compensation paid to them by third parties for any comparable services and (b) the compensation is not greater than the charges for comparable services available from others who are competent and not affiliated with any of the parties involved and the Partnership has obtained a letter of opinion of a qualified Independent Advisor to such effect prior to effecting such transaction. 4. The Partnership shall not give an Affiliate of a General Partner the exclusive right to sell property for the Partnership. 5. The aggregate borrowings of the Partnership shall not exceed 80% of the purchase price of all properties purchased by the Partnership on a combined basis. The foregoing restriction may be waived or lessened by the General Partner without the approval of the Limited Partners, but only with the prior written consent of the Commissioner of Corporations of the Sate of California or pursuant to a change in the published Rules of the Commissioner. In no event, however, shall the aggregate borrowings of the Partnership exceed the sum of 85% of the purchase price of all properties which have not been refinanced 28 29 and 85% of the aggregate fair market value of all refinanced properties. 6. Except as set forth in paragraph G(7) of this Article X, all expenses of the Partnership shall be billed directly to and paid by the Partnership. 7. Except as disclosed in the Prospectus, the General Partner shall not receive from the Partnership a rebate or give up or participate in any reciprocal business arrangement which would enable them or any Affiliate of the General Partner to receive such rebate or give-up or to circumvent any restrictions contained herein upon dealings with Affiliates. 8. The Partnership funds shall not be commingled with the funds of any other Person. 9. The Partnership shall not finance the purchase of property by use of a wraparound note and mortgage ("all-inclusive" note and deed of trust) unless (a) the General Partner and any Affiliate of the General Partner receives interest on the amount of the underlying encumbrance in excess of that payable to the lender on such underlying encumbrance, (b) the Partnership receives credit on its obligation under the all-inclusive note for payments made directly on the underlying encumbrance and (c) all payments on the underlying encumbrance shall be made by the Partnership or, in the alternative, payments by the Partnership on the wrap-around note are made to a third party collecting agent which in turn disburses such payment, first to the holder of such underlying encumbrance, and thereafter to the holder of the wrap-around note. 10. The Partnership shall not create or assume any indebtedness for borrowed money unless the documents pursuant to which such indebtedness is created or assumed provide, and the General Partner shall cause any and all such documents assumed or entered into by or on behalf of the Partnership to provide, that the parties thereto other than the Partnership (including any Affiliates of the General Partner) shall look only to the assets of the Partnership for satisfaction of the liabilities and obligations of the Partnership under such documents (including without limitation those arising from representations, warranties, covenants and agreements made in or in connection with such documents) and that such other parties shall have no recourse to the Partners or the separate assets of the Partners for the satisfaction of such liabilities and obligations. The Partnership shall not incur any indebtedness wherein the lender will have or acquire, at any time as a result of making the loan, any direct or indirect interest in the profit, capital or property of the Partnership other than as a creditor. 29 30 11. The Partnership shall not enter into any contracts with the General Partner or with any Affiliates of the General Partner to construct or develop Partnership properties or to render any services in connection with such construction or development. 12. The Partnership shall not acquire any property which is under construction unless completion of the improvements on the property is guaranteed at the contracted price by an adequate completion bond or other satisfactory arrangement. 13. Unimproved or non-income producing property shall not be acquired except in amounts and upon terms which can be financed by Distributable Cash From Operations. 14. No Partnership assets may be invested in junior mortgages or deeds of trust; provided, however, that the acquisition of a junior mortgage or deed of trust in connection with the sale, financing or refinancing of real property shall not be deemed to be investing in junior mortgages or deeds of trust. 15. Any agreement entered into between the Partnership and the General Partner or its Affiliates, other than a mortgage with a program sponsored by W.P. Carey & Co., Inc. or an Affiliate of W.P. Carey & Co., Inc. under which such General Partner or its Affiliates are compensated for the provision of goods or services to the Partnership, must be terminable by the Partnership, without penalty, upon 60 days' notice and any such agreement must be embodied in a written contract which precisely describes the services to be rendered and all compensation to be paid and which agreement shall be fully disclosed in the Prospectus and no such agreement shall be permitted unless the General Partner or such Affiliate has been previously engaged in the business of rendering such services or selling or leasing such goods independently of the Partnership and as an ordinary and ongoing business and unless the cost to the Partnership does not exceed the lesser of the cost of such goods or 90% of the cost to the Partnership of any other Person who is rendering comparable services or selling or leasing comparable goods which could reasonably be made available to the Partnership and the agreement is on competitive terms. If the General Partner or such Affiliate purchases goods or materials from an independent third party which are used by the Partnership, the General Partner or Affiliate may be reimbursed at its cost. "Cost", as that term is used in this paragraph, includes the price of goods and materials paid to independent third parties and direct costs incurred by the General Partner or Affiliate providing the service, including overhead directly attributable to the transaction but excluding general or administrative overhead (which term includes but is 30 31 not limited to salaries, rent, travel expenses and other items generally falling under the category of overhead). Agreements with the General Partner and its Affiliates for other than administrative services and other than leases and mortgages may be modified only by a vote of the majority of Limited Partners. I. Compensation of General Partner. The General Partner shall not, in its capacity as General Partner, receive any salary, fees, profits or distributions from the Partnership except profits, distributions, fees and allocations to which they may be entitled under Articles VIII, IX and X. J. Other Business of Partners. Except as otherwise specifically provided herein, any of the Partners and any shareholder, officer, director, employee or other Person holding a legal or beneficial interest in an entity which is a Partner may engage in or possess an interest in other business ventures of every nature and description, independently or with others, including, but not limited to, the ownership, financing, leasing, operation, management, syndication, brokerage and development of real, personal or mixed property and neither the Partnership nor the Partners shall have any right by virtue of this Agreement in and to such independent ventures or to the income or profits derived therefrom. ARTICLE XI STATUS OF LIMITED PARTNERS AND SPECIAL PARTNERS The Limited Partners and Special Partners shall not participate in the management or control of the Partnership's business nor shall they transact any business for the Partnership nor shall they have the power to sign for or bind the Partnership, said powers being vested solely and exclusively in the General Partner. Except as described herein and in the Act, Limited Partners and Special Partners have no liability in excess of their obligation to make contributions to the Partnership and their share of the Partnership's assets and undistributed profits. The Partnership Interest owned by a Limited Partner or Special Partner shall be fully paid and nonassessable except as described herein and in the Act. In addition to those described elsewhere in this Agreement, the Limited Partners and Special Partners shall have the following rights, powers, privileges, duties and liabilities: (a) The Limited Partners and Special Partners shall have the right to have full and true information of all things affecting the Partnership and shall be entitled to such reports 31 32 as are set forth in Article XII hereof for a purpose reasonably related to such Partner's interest as a partner in the Partnership. (b) The Limited Partners and Special Partners shall receive from the Partnership the share of the distributions provided for in this Agreement in the manner and at the times provided for in this Agreement. (c) A Limited Partner or a Special Partner shall have the right to demand the return of his Capital Account only on the dissolution and winding up of the Partnership in accordance with Article XVIII hereof. No Limited Partner shall have priority over any other Limited Partner either as to the return of capital or as to profits, losses or distributions. No Limited Partner or Special Partner shall have the right to bring an action for partition against the Partnership. (d) Limited Partners holding more than fifty percent (50%) of the outstanding Limited Partner Interests may (1) remove the General Partner and (2) in the event that a vacancy shall occur in the office of General Partner, continue the business of the Partnership and elect a successor General Partner upon the withdrawal, removal, death, adjudication of incompetence to manage his person or his property, adjudication of bankruptcy under Chapter 7 of the Federal Bankruptcy Code (or any similar law or provision enacted in lieu thereof), assignment by the General Partner of all of the General Partner's Interest or other cessation to exist as a General Partner under the Act. (e) Upon written request to the Partnership for a purpose reasonably related to such Partner's interest as a partner in the Partnership, each Limited Partner and Special Partner shall have the right to be mailed, at such Partner's expense, a complete list of names and addresses and interests of all Limited Partners as set forth in the books and records of the Partnership, copies of the Certificate of Limited Partnership and all amendments thereto and copies of this Agreement and all amendments thereto and powers of attorney pursuant to which this Agreement was executed. A reasonable charge for copy work may be charged by the Partnership. ARTICLE XII BOOKS OF ACCOUNT AND REPORTS Proper books of account shall be kept by the General Partner wherein shall be entered all transactions, matters and things relating to the Partnership's business as are usually entered 32 33 into books of account kept by Persons engaged in a business of a like character. The books of account shall be kept at the principal place of business of the Partnership and each Partner (or any duly constituted designee of a Partner) shall at all times during reasonable business hours have free access to and the right to inspect and copy the same for a purpose reasonably related to such Partner's interest as a partner in the Partnership. The Partnership shall also maintain the following: a current alphabetical list of the Partners' names, addresses, Contributions and Capital Accounts; copies of the Certificate of Limited Partnership and all amendments thereto; copies of the Partnership's Federal, state and local income tax or information returns and reports for the six most recent tax years; copies of this Agreement and all amendments thereto and powers of attorney pursuant to which this Agreement was executed and the Partnership's financial statements for the six most recent fiscal years. There shall be established for each Partner on the books and records of the Partnership a Capital Account which shall be maintained in accordance with Federal income tax accounting principles and which shall show the amount of each capital contribution made by such Partner (or his, her or its predecessor in the case of an assignment of a Partnership Interest), adjusted to reflect such Partner's proportion of profits and losses (determined according to Article VIII) and of withdrawals and distributions and other items to the extent properly creditable to or chargeable against such Capital Account. Within 75 days after the end of each Fiscal Year, the General Partner shall deliver to each Limited Partner adequate information to enable each Limited Partner to complete and file his Federal tax return. Copies of each report distributed to the Limited Partners shall, to the extent required by applicable law, be filed concurrently with relevant state "Blue Sky" authorities. If the Partnership engages an Independent Advisor who is not the Independent Advisor engaged to render a current fairness opinion or the fairness opinion preceding it, the General Partner shall inform the Limited Partners (by no later than the next annual report) of the date when such new Independent Advisor was engaged, and whether there were any disagreements with the former Independent Advisor on any matters of valuation, assumptions, methodology, accounting principles and practice, or disclosure, which disagreements, if not resolved to the satisfaction of the former Independent Advisor, would have caused him to make reference, in connection with the fairness opinion, to the subject matter of the disagreement or decline to give an opinion. 33 34 ARTICLE XIII FISCAL YEAR The Fiscal Year of the Partnership shall begin on the first day of January and end on the thirty-first day of December in each year. Should the General Partner decide to change the Fiscal Year of the Partnership, it will seek to obtain any required approvals from the Internal Revenue Service for such change. If such approval is obtained (or not then required), the General Partner will give prompt notice to the Limited Partners of the change in Fiscal Year. ARTICLE XIV PARTNERSHIP FUNDS The funds of the Partnership shall be deposited in such account or accounts as shall be designated by the General Partner and all withdrawals against such accounts shall be made only by the General Partner or by its properly delegated agents. ARTICLE XV TRANSFER OF PARTNERSHIP INTEREST A. In General. A Limited Partner or Special Partner may not sell, assign, transfer or otherwise dispose of, or pledge, hypothecate or in any manner encumber, his interest in the Partnership or any part thereof except as permitted in this Article, and any act in violation of this Paragraph A shall not be binding upon or recognized by the Partnership regardless of whether the General Partner shall have knowledge thereof. B. General Partner. 1. Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, pursuant to Paragraph (d) of Article XI and with the same proportionate vote as provided therein, may remove a General Partner from the Partnership. Written notice of the removal of such General Partner shall be served upon the General Partner either by certified or by registered mail, return receipt requested, or by personal service. Said notice shall set forth the day upon which the removal is to become effective. Upon receipt of notice, the General Partner shall cause an accounting to be prepared covering the transactions of the Partnership since the end of the previous Fiscal Year and, it shall not thereafter sell or dispose of or 34 35 allow the sale or disposition of any Partnership asset unless such sale or disposition was the subject of a contract entered into by and binding upon the Partnership prior to the date upon which the notice was received by the General Partner. 2. Until the dissolution of the Partnership otherwise occurs, the General Partner shall not voluntarily take any steps to dissolve itself nor shall the General Partner voluntarily withdraw; provided, however, that nothing in this Agreement shall be deemed to prevent the merger or reorganization of Carey Diversified LLC into or with any other entity organized under the laws of the United States or any state thereof or the transfer of all the limited liability company interests of Carey Diversified LLC and the assumption of the rights and duties of the General Partner by, in the case of a merger, reorganization or consolidation, the surviving entity by operation of law provided that the surviving entity shall be admitted to the Partnership immediately prior to such event and such successor shall continue the business of the Partnership as the General Partner without dissolution. 3. Upon the removal, adjudication of bankruptcy under Chapter 7 of the Federal Bankruptcy Code (or any similar law or provision enacted in lieu thereof), assignment by the General Partner of its General Partner's Interest (other than by operation of law as a result of a merger or reorganization permitted by Paragraph B(2) of this Article XV) or other cessation to exist as the General Partner under the Act, the General Partner's Partnership Interest and interest in Distributable Cash From Operations and its interest in Cash From Sales and Cash From Financings shall be purchased by the Partnership for a purchase price equal to the fair market value thereof determined pursuant to the provisions of Section 4 of this Paragraph B. The purchase price of such interest shall be paid by the Partnership to the General Partner by the promissory note of the Partnership, payable to the General Partner or its order, having a face amount equal to such purchase price, containing provisions as would be usual and customary in a commercial promissory note, bearing interest at a rate per annum equal to the lesser of 1% above the prime interest rate at The Bank of New York or the maximum rate permitted by law, payable annually in equal installments of principal and interest over a period of no less than five years from the date of the General Partner's removal, adjudication of bankruptcy under Chapter 7 of the Federal Bankruptcy Code (or any similar law or provision enacted in lieu thereof), assignment by the General Partner of its General Partner's Partnership Interest (other than by operation of law as a result of a merger or reorganization permitted by Paragraph (2) of this Article XV) or other cessation to exist as a General Partner under the Act. The Partnership 35 36 shall also pay to the General Partner all amounts then accrued and owing to the General Partner. 4. The fair market value of the General Partner's Partnership Interest purchased by the Partnership pursuant to Section 3 of this Paragraph B shall be determined by agreement between the General Partner and the Partnership (which agreement shall require the approval of the Limited Partners holding more than fifty percent (50%) of the outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI). If the General Partner and the Partnership cannot agree upon the fair market value of such Partnership Interest within 30 days after the occurrence of the event upon which such interest of the General Partner is to be purchased by the Partnership, the fair market value thereof shall be determined by arbitration in accordance with the then current rules of the American Arbitration Association. The results of such arbitration shall be final and binding and may be enforced by legal proceedings. The expense of arbitration shall be borne equally by the General Partner and the Partnership. The fair market value of the General Partner's Partnership Interest shall be the amount the General Partner would receive upon dissolution and termination of the Partnership assuming that such dissolution or termination occurred on the date of the occurrence of the event upon which such Partnership Interest of the General Partner is to be purchased by the Partnership and the assets were sold for their then fair market value without any compulsion on the part of the Partnership to sell such assets. C. Limited Partners and Special Partners. 1. The General Partner may, pursuant to this Article XV, (a) admit as a substituted Limited Partner or Special Partner any successor in interest to a Limited Partner or Special Partner either deceased or under legal disability, and (b) admit as substituted Limited Partners or Special Partners assignees of Limited Partners or Special Partners. 2. A substituted Limited Partner or Special Partner is a Person admitted to all the rights of a Limited Partner or Special Partner. An assignee is a Person to whom a Limited Partner or Special Partner has assigned his interest in the Partnership but who has not become a substituted Limited Partner or Special Partner. An assignee shall have no right to require any information or account of the Partnership's transactions or to inspect the Partnership's books and records but shall only be entitled to receive the share of the profits, or the return of the capital contribution, to which his assignor would otherwise be entitled as set forth in Section 5 of this Paragraph C. 36 37 3. No assignee of the whole or any portion of a Limited Partner's or Special Partner's interest in the Partnership shall have the right to become a substituted Limited Partner or Special Partner in place of his assignor unless all of the following conditions are satisfied: (a) The written consent of the General Partner to such substitution shall be obtained, the granting or denial of which shall be within the absolute discretion of the General Partner; (b) The duly executed written instrument of assignment setting forth the intention of the assignor that the assignee become a substituted Limited Partner or Special Partner in his place shall have been filed with the Partnership; (c) The interests in the Partnership being acquired by the assignee shall consist of at least five percent of the limited partner or special partner interest (two percent of the limited partner or special partner interest for an Individual Retirement Account) and, if the assignor shall retain any limited partner interest, such retention shall consist of at least five percent of the limited partner or special partner interests (two percent of the limited partner or special partner interests for an Individual Retirement Account); (d) The assignor and assignee shall execute and acknowledge such other instruments as the General Partner may deem necessary or desirable to effect such assignment and admission, including the written acceptance and adoption by the assignee of the provisions of this Agreement and his execution, acknowledgment and delivery to the General Partner of a Power of Attorney, the form and content of which are more fully described in Article XIX hereof; and (e) The assignee shall pay a transfer fee not to exceed $50.00 per transaction to the Partnership. The written consent of the General Partner to such substitution or a notice of denial of consent shall be given to the assignee not later than the last day of the calendar month following the month the General Partner actually receives the instrument of assignment. 4. Any Person admitted to the Partnership as a Partner shall be subject to all of the provisions of this Agreement as if originally a party to it. 5. Subject to the provisions of Section 11 of this Paragraph C, compliance with the suitability standards imposed by the Partnership, applicable "Blue Sky" laws and the applicable rules of any other governmental authority, a Limited Partner or 37 38 Special Partner shall have the right to assign the whole or any portion of its limited partner or special partner interest (but not less than five percent of the limited partner or special partner interests (two percent of the limited partner or special partner interests for an Individual Retirement Account)) and, if he shall retain any limited partner or special partner interest, subject to his retaining not less than five percent of the limited partner or special partner interests (two percent of the limited partner or special partner interests for an Individual Retirement Account) of his Partnership Interest by a written assignment the terms of which are not in contravention of any of the provisions of this Agreement, which assignment has been executed by the assignor and received by the Partnership and recorded on the books and records thereof. Any assignment in contravention of any of the provisions of this Section 5 shall be of no force and effect and shall not be binding upon or recognized by the Partnership. (a) Except as provided in Subsection (e) below, Paragraph A of Article VIII hereof and Paragraph D of Article IX hereof, an assignee of a Partnership Interest shall be entitled to receive distributions from the Partnership of Distributable Cash From Operations for any quarter attributable to the interest acquired by reason of such assignment beginning in the Fiscal Quarter in which the assignee is recognized as the owner of such Partnership Interest. For purposes of such distribution, ownership of a Partnership Interest for each Fiscal Quarter will be determined as of the fifteenth day of the last month of each Fiscal Quarter. (b) Except as provided in Subsection (e) below, Paragraph A of Article VIII hereof and Article IX hereof, an assignee of a Partnership Interest shall be entitled to receive distributions from the Partnership of Cash From Sales and Cash From Financings beginning in the month in which the assignee is recognized as the owner of such Partnership Interest. For purposes of such distributions, ownership of a Partnership Interest for each month will be determined as of the fifteenth day of each month. (c) The net profits and net losses attributable to an interest in the Partnership assigned during any year shall be divided among and allocated in accordance with the provisions of Paragraph A of Article VIII hereof. (d) The effective date of an assignment of an interest in the Partnership as used in this Section shall be the day on which the written instrument of assignment, in form and substance satisfactory to the General Partner, is accepted by the General Partner. 38 39 (e) Notwithstanding the other provisions of this Article XV and subject to the limitations of Article X(F), both the Partnership and the General Partner shall be entitled to treat the assignor of such interest as the absolute owner thereof in all respects, and shall incur no liability for distributions made in good faith to him, until such time as the written assignment has been received by, and recorded in the books and records of, the Partnership. 6. The General Partner may elect to treat an assignee who has not become a substituted Limited Partner or Special Partner as a substituted Limited Partner or Special Partner in the place of his assignor should the General Partner deem, in its absolute discretion, that such treatment is in the best interests of the Partnership for any of its purposes or for any of the purposes of this Agreement. 7. No approval of any of the Limited Partners or Special Partners is required to effect the substitution of a Limited Partner or Special Partner, except that a Limited Partner or Special Partner who assigns his interest in the Partnership must evidence his intention that his assignee be admitted as a substituted Limited Partner or Special Partner in his place and must execute such instruments as the General Partner may in its absolute discretion determine to be necessary or desirable in connection therewith. 8. Upon the admission of a Limited Partner or Special Partner (whether as a result of his purchase of partner interest from the Partnership or his admission as a substituted Limited Partner or Special Partner), the General Partner shall make an appropriate entry on the books and records of the Partnership. 9. Upon the death or adjudication of incompetence to manage his person or his property of an individual Limited Partner or Special Partner, his personal representative shall have all of the rights of a Limited Partner or Special Partner for the purpose of settling or managing his estate, and such power as the decedent or incompetent possessed to constitute a successor as an assignee of its interest in the Partnership and to join with such assignee in making application to substitute such assignee as a Limited Partner or Special Partner. However, such personal representative shall not have the right to become a substituted Limited Partner or Special Partner in the place of his predecessor in interest unless the conditions of Section 3 of this Paragraph C (other than the requirement that the assignor execute and acknowledge instruments) are first satisfied. 10. Upon the adjudication of bankruptcy under Chapter 7 of the Federal Bankruptcy Code (or any similar law or provision 39 40 enacted in lieu thereof) or other cessation to exist as a legal entity of a Limited Partner or Special Partner not an individual, the authorized representative of such entity shall have all of the rights of a Limited Partner or Special Partner for the purpose of effecting the orderly winding up and disposition of the business of such entity and such power as such entity possessed to constitute a successor as an assignee of its interest in the Partnership and to join with such assignee in making application to substitute such assignee as a Limited Partner or Special Partner. However, such authorized representative shall not have the right to become a substituted Limited Partner or Special Partner in the place of his predecessor in interest unless the conditions of Section 3 of this Paragraph C (other than the requirement that the assignor execute and acknowledge instruments) are first satisfied. 11. (a) No assignment or transfer of an interest in the Partnership may be made which would result in Limited Partners or Special Partners and assignees of Limited Partners or Special Partners owning, directly or indirectly, individually or in the aggregate, more than twenty percent (20%) of the equity interests of a General Partner or any Affiliate of a General Partner as defined in Section 1504(a) of the Code. If any such assignment or transfer would otherwise be made by bequest, inheritance or operation of law, the transferee shall not become a Partner and the interest in the Partnership transferred shall be automatically redeemed by the Partnership in the same manner as provided in Subsection (b)(4) of this Section 11. (b) Anything to the contrary contained herein notwithstanding: (1) Except in the case of the Merger, in any twelve (12) consecutive month period no assignment or transfer of a limited partner interest may be made if as a result thereof the aggregate total of limited partner interests assigned and/or transferred in such period would exceed forty percent (40%) of the outstanding limited partner interests. This limitation is hereinafter referred to as the "forty percent (40%) limitation." (2) A Limited Partner may assign or transfer his Partnership Interest to: (i) his spouse (unless legally separated), child or ancestor, or (ii) a corporation, partnership, trust or other entity, fifty-one percent (51%) of the equity interest of which is owned by such Limited Partner and/or any of the Persons specified in clause (i) so related to such Limited Partner, provided, however, that such transfers are subject to the forty percent (40%) limitation. 40 41 (3) Subsection (b)(1) of this Section 11 shall not apply to a transfer by gift, bequest or inheritance, or a transfer to the Partnership and, for purposes of the forty percent (40%) limitation, any such transfer shall not be treated as such. (4) If, after the forty percent (40%) limitation is reached in any consecutive twelve (12) month period, a transfer of a Partnership Interest would otherwise take place by operation of law (but not including any transfer referred to in Subsection (b)(3) of this Section 11), then the transferee shall not become a Limited Partner and such Partnership Interest shall be automatically redeemed by the Partnership for a price equal to the fair market value of said interest on such date of transfer. The price shall be paid within ninety (90) days after the date of the transfer and redemption. If the Partnership and the transferor do not agree upon the fair market value of the Partnership Interest, the purchase price shall be determined by arbitration. The purchase price shall be paid in cash within ten (10) days after such determination. (c) No transfer or assignment of any partner interest shall be made if it would result in the Partnership's being treated as an association taxable as a corporation for tax purposes. The General Partner, in its sole discretion, may, on behalf of the Partnership, impose any restrictions or transfers or assignments of limited partner interests it may deem appropriated to give effect to the preceding sentence. The General Partner shall incur no liability to any Limited Partner, prospective investor or assignee for any action or inaction in connection with the foregoing, provided that the General Partner acted in good faith and such course of conduct did not constitute negligence or misconduct of the General Partner. 12. The General Partner will cause the Partnership to make the election referred to in Section 754 of the Code, and any similar election provided by state or local law, or any similar provision enacted in lieu thereof. 13. No Limited Partner or Special Partner shall be entitled to withdraw from the Partnership except on transfer of all his partner interest pursuant to this Article XV. 14. Each Limited Partner or Special Partner shall immediately notify the Partnership of any assignment of any partner interest in the Partnership and shall provide the name, address and identification number of the assignee. D. Opinions Regarding Taxation. In the event that the tax status of the Partnership changes and, notwithstanding any other provision of this Agreement, the requirement, as a condition to 41 42 any action proposed to be taken under this Agreement, that the Partnership be furnished an opinion of counsel for the Partnership to the effect that the proposed transaction would not result in the Partnership being treated as an association taxable as a corporation for federal income tax purposes, shall not be applicable if the Partnership is at such time treated in all material respects as an association taxable as a corporation for federal income tax purposes. ARTICLE XVI MEETINGS AND AMENDMENT OF LIMITED PARTNERSHIP CERTIFICATE AND AGREEMENT A. Amendment of Limited Partnership Certificate. The General Partner shall amend the Certificate of Limited Partnership of the Partnership, and shall file the same, without additional approval of Limited Partners when, pursuant to the terms of this Agreement: 1. There is a change in the name of the Partnership; 2. The General Partner withdraws, is removed, is adjudicated bankrupt under Chapter 7 of the Federal Bankruptcy Code (or any similar law or provision enacted in lieu thereof), assigns its General Partner's Interest, is adjudicated incompetent to manage his person or his property or dies or otherwise ceases to exist as a General Partner under the Act or a Person is admitted as a General Partner; 3. There is a false or erroneous statement in the Certificate; 4. The Partners desire to make a change in any other statement in the Certificate in order that it shall be accurate; or 5. There is a change in the address of the Partnership's principal place of business or registered office, or a change in the name or address of the Partnership's registered agent. If the General Partner is required to file a certificate of amendment and fails after demand to do so within 30 days of such demand or if it refuses to do so, any other Person who is adversely affected by such failure or refusal, may petition the Court of Chancery in the State of Delaware to direct the execution of the certificate. 42 43 B. Amendments to the Agreement. 1. Amendments to this Agreement may be proposed by the General Partner or by Limited Partners holding ten percent (10%) or more of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. Following such proposal, the General Partner shall submit to the Limited Partners a verbatim statement of any proposed amendment and an opinion of counsel, who may be counsel to the Partnership, as to the legality of such amendment and the effect of such amendment on the liability of Limited Partners for the debts of the Partnership. The General Partner shall include in any such submission the General Partner's recommendations as to the proposed amendment. The amendment shall become effective only upon the written approval or affirmative vote of Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. 2. Any provision to the contrary herein notwithstanding, the General Partner may, without the approval of the Limited Partners, make the following amendments to this Agreement: a. Any amendments to Article VIII and/or Article IX of this Agreement if the Partnership is advised by its accountants or legal counsel at any time that the allocations provided in those Articles are not likely to be respected for Federal income tax purposes, either because of the promulgation of Treasury Regulations under Section 704 of the Code or other developments in the law. The General Partner is empowered to amend such provisions to the minimum extent necessary in accordance with the advice of the accountants and counsel to effect the allocations provided in this Agreement. New allocations made by the General Partner in reliance upon the advice of the accountants or counsel described above shall be deemed to be made pursuant to the fiduciary obligation (as described herein) of the General Partner to the Partnership and the Limited Partners, and no such new allocation shall give rise to any claim or cause of action by any Limited Partner, provided that the General Partner acted in good faith; and b. In the event that the State of Delaware amends the Delaware Revised Uniform Limited Partnership Act in any manner and, as a result of such amendment, counsel to the Partnership is unable to give the Partnership an opinion to the effect that the Partnership will be treated as a partnership for Federal income tax purposes and not as association taxable a corporation, then the General Partner may decide in its sole discretion to reconstitute the Partnership under the laws of another state. 43 44 3. Any provision to the contrary contained herein notwithstanding, the General Partner may, without the approval of the Limited Partners, amend this Agreement (a) to add to the representations, duties or obligations of a General Partner or to surrender any right or power granted to a General Partner herein, for the benefit of the Limited Partners, (b) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein or to make any other provision with respect to matters or questions arising under this Agreement which will not be inconsistent with the provisions of this Agreement, (c) to delete any provision from this Agreement or to add any provision to this Agreement required to be so deleted or added by the Staff of the Securities and Exchange Commission or by a State "Blue Sky" Commissioner or similar such official, which addition or deletion is deemed by such Commission or official to be for the benefit or protection of the Limited Partners, and (d) to change administrative or other provisions of this Agreement in a manner which, in the opinion of the General Partner, will permit the most profitable and/or efficient operation of the Partnership; provided, however, that no amendment shall be adopted pursuant to this Section 3 unless the adoption thereof (i) is for the benefit of, or not adverse to, the interests of the Limited Partners, (ii) is consistent with Article IV and Paragraph A of Article X hereof, (iii) does not affect the distribution of Distributable Cash From Operations, Cash From Sales or Cash From Financings or the allocation of profits and losses among the Limited Partners or between the Limited Partners and the General Partner and (iv) does not affect the limited liability of the Limited Partners or the status of the Partnership as a partnership for Federal income tax purposes. 4. Upon amendment of this Agreement, the Certificate of Limited Partnership shall also be amended if necessary to reflect such change. 5. Any amendment to this Agreement which modifies the compensation or distributions to which a General Partner is entitled or which affects the duties of a General Partner must be consented to by such General Partner before becoming effective. 6. In the event there is a change in the Federal income tax laws or regulations which results in the Partnership being taxed as an association taxable as a corporation, the General Partner may take all steps necessary to cause the Partnership to conduct its business so as to be treated as a real estate investment trust for Federal income tax purposes, provided, however, that Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article 44 45 XI, approve such action either prior to or within six months after such action is taken. C. Meetings of the Partnership. Meetings of the Partnership may be called by the General Partner and shall be called by it upon the written request of Limited Partners holding ten percent (10%) or more of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. Upon receipt of such a written request, stating the purpose of the proposed meeting, the General Partner shall provide each Partner, within 10 days of such request, written notice (either by personal service or certified mail or by express or other overnight delivery service) of a meeting and the purpose of such meeting. Such meeting shall be held not less than 15 days nor more than 60 days after the receipt of such request at a time and place convenient to the Limited Partners as specified in the written notice of the meeting. Included with the notice shall be a detailed statement of the action proposed, including a verbatim statement of the wording of any resolution proposed for adoption by the Limited Partners and of any proposed amendment to this Agreement. The Partnership will provide for Proxies or written approvals which specify a choice between approval and disapproval of each matter to be acted upon at the meeting. Holders of a majority of the Limited Partner Interests entitled to vote represented in person or by Proxy, shall constitute a quorum at a meeting of the Limited Partners. The General Partner may establish a record date for any meeting. ARTICLE XVII TERM The term for the Partnership shall terminate on December 31, 2050, unless the Partnership is sooner dissolved pursuant to the provisions of Article XVIII hereof or as otherwise provided by law. ARTICLE XVIII DISSOLUTION A. Events Requiring Dissolution. The Partnership shall be dissolved upon the happening of any of the following events: 1. The withdrawal, removal, adjudication of bankruptcy under Chapter 7 of the Federal Bankruptcy Code (or any similar law or provision enacted in lieu thereof) of the General Partner, 45 46 the assignment by the General Partner of its General Partner's Interest (other than by operation of law as a result of a merger or reorganization permitted by Paragraph B(2) of Article XV) or other cessation to exist as a General Partner under the Act unless within 90 days of such event all remaining Partners agree in writing to continue the business of the Partnership and to admit one or more General Partner effective as of the date of such event. 2. The Partnership is adjudicated bankrupt under Chapter 7 of the Federal Bankruptcy Code (or any similar law or provision enacted in lieu thereof). 3. The vote of Limited Partners, holding more than fifty percent (50%) of the then outstanding Limited Partner Interests held by all Limited Partners with the same proportionate vote as provided in paragraph (d) of Article XI. 4. The disposition of all interests in the real, personal and mixed property and other assets of the Partnership. 5. The entry of a decree of judicial dissolution under Section 17-802 of the Act. 6. December 31, 2050. B. Distributions on Dissolution. Upon the dissolution of the Partnership the General Partner who has not wrongfully dissolved the Partnership shall wind up the affairs of the Partnership. If there is no such General Partner, a majority of Limited Partners shall elect a party to wind up the affairs of the Partnership. The party winding up the affairs of the Partnership shall take full account of the Partnership assets and liabilities and all assets shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom shall be applied and distributed in the following order: (1) to creditors (including Partners who are creditors to the extent permitted by law), in satisfaction of liabilities of the Partnership (whether by payment or by the making of reasonable provision for the payment thereof), in the order of priority as provided by law, (2) to the Partners in accordance with their respective Capital Accounts, determined after the application of Articles VIII and IX hereof and (3) to the Partners in accordance with the provisions of Paragraph E of Article IX hereof. Notwithstanding anything to the contrary, in the event the Partnership is "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), liquidating distributions shall be made pursuant to the previous sentence by the end of the taxable year in which the Partnership is liquidated, or, if later, within 90 days after the date of such 46 47 liquidation. Distributions pursuant to the preceding sentence may be made to a trust for the purposes of an orderly liquidation of the Partnership by the trust in accordance with the Act. C. Contributions by the General Partner. In the event that, upon the liquidation of the Partnership, a General Partner shall have a negative balance in such General Partner's Capital Account then such General Partner shall contribute to the capital of the Partnership an amount equal to such negative balance in such General Partner's Capital Account. ARTICLE XIX POWER OF ATTORNEY Each Limited Partner and Special Partner hereby constitutes and appoints the General Partner as the attorney-in-fact for such Limited Partner or Special Partner with power and authority to act in his name and on his behalf in the execution, acknowledgment and filing of documents, which will include but not be limited to a Certificate of Limited Partnership, as well as amendments thereto, under the laws of the State of Delaware and under the laws of any other state in which the General Partner deems it advisable to file such a certificate; this Agreement and any amendments hereto, any other instrument which may be required to be filed by the Partnership under the laws of any state or by any governmental agency, or which the General Partner deems it advisable to file; and any documents which may be required to effect the continuation of the Partnership, the admission of an additional or substituted Limited Partner, Special Partner or General Partner or the dissolution and termination of the Partnership, provided such continuation, admission or dissolution and termination are in accordance with the terms of this Agreement. The Power of Attorney so granted by each Limited Partner and Special Partner to the General Partner is a Special Power of Attorney coupled with an interest, is irrevocable and shall survive and not be affected by the subsequent death, incapacity or disability of the Limited Partner or Special Partner; may be exercised by the General Partner for each Limited Partner or Special Partner by a facsimile signature of one of its officers or with a single signature of one of its officers acting as attorney-in-fact for all of them; shall be retained by the General Partner; and shall survive the delivery of any assignment by a Limited Partner or Special Partner of the whole or any portion of his interest in the Partnership; except that where the assignee thereof has been approved by the General Partner for 47 48 admission to the Partnership as a substituted Limited Partner or Special Partner, the Power of Attorney shall survive the delivery of such assignment for the sole purpose of enabling the General Partner to execute, acknowledge and file any instrument necessary to effect such substitution. The Power of Attorney so granted by each Limited Partner to the General Partner shall not authorize the General Partner to act on behalf of Limited Partners in any situation in which this Agreement requires the approval of Limited Partners unless such approval is obtained. ARTICLE XX LITIGATION The General Partner is hereby authorized to prosecute, defend, settle or compromise actions or claims at law or in equity at the Partnership's expense as may be necessary or proper to enforce or protect the Partnership's interests. The General Partner shall satisfy any judgment, decree or decision of any court, board or authority having jurisdiction or any settlement of any suit or claim prior to judgment or final decision thereon first, out of any insurance proceeds available therefor, next out of the Partnership's assets and income and finally out of the assets and income of the General Partner. ARTICLE XXI MISCELLANEOUS All notices under this Agreement shall be in writing and shall, except as otherwise expressly provided herein, be given to the Partner entitled thereto by personal service or by certified or registered mail or express mail or other overnight delivery service, return receipt requested, to the address set forth in the books and records of the Partnership for such Partner or at such other address as he may specify in writing. Article titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. Whenever the singular number is used in this Agreement and when required by the context, the same shall include the plural, and the masculine gender shall include the feminine and neuter genders and the word persons shall include individuals, 48 49 corporations, firms, partnerships, trusts or other forms of associations. This Agreement may be executed in several counterparts, and all so executed shall constitute one agreement, binding on all of the parties hereto, notwithstanding that all the parties are not signatory to the original or the same counterpart. Subject to the provisions of Article XV, the terms and provisions of this Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, successors and assigns of the respective Partners. Whenever the vote of the Limited Partners is referred to in this Agreement, the General Partner may vote on behalf of such Limited Partners who have by written proxy authorized the General Partner so to do. This Agreement and all amendments hereof shall be governed by the laws of the State of Delaware. 49 50 IN WITNESS WHEREOF, the parties hereto have hereunto set their respective hands as of the day and year first above written. GENERAL PARTNER: CAREY DIVERSIFIED LLC By:_______________________________________ CORPORATE SPECIAL PARTNER: CAREY MANAGEMENT LLC By:_______________________________________ INDIVIDUAL SPECIAL PARTNER _________________________________________ William Polk Carey LIMITED PARTNERS: EIGHTH CAREY CORPORATE PROPERTY, INC. By:_______________________________________ CAREY DIVERSIFIED LLC By:_______________________________________ All Limited Partners now and hereafter admitted as limited partners of the Partnership pursuant to powers of attorney and authorizations now and hereafter executed in favor of and granted and delivered to the General Partner By: CAREY DIVERSIFIED LLC, 50 51 General Partner By:_______________________________________ 51 EX-99.21 61 AMEND & RESTATED AGREEMENT OF LTD PARTNERSHIP CPA9 1 EXHIBIT 99.21 AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF CORPORATE PROPERTY ASSOCIATES 9, L.P., A DELAWARE LIMITED PARTNERSHIP THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP of CORPORATE PROPERTY ASSOCIATES 9, L.P., A DELAWARE LIMITED PARTNERSHIP (the "Partnership"), which amends and restates the Agreement of Limited Partnership dated as of March 17, 1989 as amended as of ________, 1997, is made and entered into as of the ___ day of __________, 1997 by and between CAREY DIVERSIFIED LLC, a Delaware limited liability company, as General Partner and as Limited Partner, CAREY MANAGEMENT LLC, as Corporate Special Partner, WILLIAM POLK CAREY, as Individual Special Partner, and NINTH CAREY CORPORATE PROPERTY, INC., a Delaware corporation, as Limited Partner, those Persons set forth on Schedule A hereto, as Limited Partners, and all persons and entities admitted as Limited Partners as provided herein. ARTICLE I CONTINUATION OF PARTNERSHIP The parties hereby continue the Partnership under the provisions of the Delaware Revised Uniform Limited Partnership Act (6 Del.C. Sections 17-101, et seq.), as amended from time to time (the "Act") and the rights and liabilities of the Partners shall be as provided in the Act and as herein expressly provided. Pursuant to Section 17-211 of the Act, upon the consummation of the Merger, Carey Diversified LLC shall become the general partner of the Partnership, and Ninth Carey Corporate Property, Inc. shall become the limited partner of the Partnership. In the event that it shall be necessary for the Partnership to exist in or qualify to do business under the laws of any state or states other than or in addition to the State of Delaware, the parties hereby agree that the Partnership shall take such action as may be necessary to exist or qualify to do business in any state in which such existence or qualification shall be required, provided that in any such event the Partnership shall at all times continue to be a limited partnership formed under and governed by the provisions of the Act. ARTICLE II NAME The name of the Partnership shall be "Corporate Property Associates 9, L.P., a Delaware limited partnership." The business of the Partnership shall be conducted under the name "Corporate Property Associates 9, L.P., a Delaware limited partnership" or under "Corporate Property Associates 9, L.P." in any state or other jurisdiction which does not permit the term 2 "limited" to be part of the Partnership's name or under such other name as the General Partner shall hereafter designate in writing to the other Partners. ARTICLE III DEFINITIONS "Acquisition Expenses" means the expenses of the Partnership related to the selection and acquisition of properties by the Partnership, whether or not such properties are acquired, including but not limited to legal fees and expenses, travel and communications expenses, costs of appraisals and fairness letters, non-refundable option payments on property not acquired, accounting fees and expenses, costs of title reports and title insurance, transfer and recording taxes and miscellaneous expenses. Acquisition Expenses shall not include Acquisition Fees. "Acquisition Fees" means the total of all fees and commissions paid by any party in connection with the purchase or development of property by the Partnership including compensation paid in the form of stock or other interests in, or warrants or other rights to purchase the stock of or other interests in the stock of tenants or their affiliates, provided, however, that the percentage calculated by dividing the number of warrants or other stock rights received by the General Partner or its Affiliates (excluding the Partnership) by the total warrants or other stock rights granted by the seller in any transaction cannot exceed that percentage calculated by dividing the portion of the Acquisition Fee paid in cash by the total cash purchase price of the real estate purchased by the Partnership in such transaction, and except a development fee paid to a Person not an Affiliate of the General Partner in connection with the actual development of a project after the Partnership's acquisition of the land. Included in the computation of such fees or commissions shall be any real estate commission, selection fee, development fee (other than as described above), nonrecurring management fee, or any fee of a similar nature, however designated. Acquisition Fees shall not include Acquisition Expenses. "Act" means the Delaware Revised Uniform Limited Partnership Act (6 Del.C. Sections 17-101, et seq.) as amended from time to time. "Affiliate" means, with respect to any Person, (i) any Person directly or indirectly controlling, controlled by or under common control with such Person, (ii) any Person owning or controlling 10% or more of the outstanding voting securities of such Person, (iii) any officer, director or partner of such Person or of any Person specified in (i) or (ii) above and (iv) any company in which any officer, director or partner of any Person specified in (iii) above is an officer, director or partner. -2- 3 "Agreement" means this Amended and Restated Agreement of Limited Partnership as hereafter amended from time to time. "Appraisal Date" means December 31, 2002. "Appraised Value" means the value according to an appraisal made by an independent qualified appraiser. Such qualification may be demonstrated by membership in a nationally recognized appraisal society such as American Institute of Real Estate Appraisers ("M.A.I."), Society of Real Estate Appraisers ("S.R.E.A.") or their equivalent, but is not limited thereto. "Capital Account" means, in respect of any Partner, the account maintained for such Partner in accordance with Article XII. "Cash From Financings" means, the net cash proceeds realized by the Partnership from the financing of Partnership property or the refinancing of any Partnership indebtedness. "Cash From Sales" means the net cash proceeds realized by the Partnership from the sale, exchange or other disposition of any of its assets. Cash From Sales shall not include net cash proceeds realized from the financing of Partnership property or the refinancing of any Partnership indebtedness. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any similar law or provision enacted in lieu thereof, unless the context indicates otherwise. "Consolidation and Offering Expenses" means all expenses incurred in connection with the formation and qualification of the Subsidiary Partnership, the Merger and in offering the Shares to the former limited partners of the Partnership in exchange for their Partnership Interests under applicable Federal and state law, and any other expenses actually incurred and directly related to the offering of the Shares, including such expenses as: (i) the preparing, printing, filing and delivering of the Registration Statement and the Prospectus (including any amendments thereof or supplements thereto), (ii) the preparing and printing of this Agreement, other solicitation material and related documents and the filing and/or recording of such certificates or other documents necessary to comply with the laws of the State of Delaware for the formation of a limited partnership, the merger of a limited partnership into another limited partnership and for the continued good standing of a limited partnership, (iii) the qualification or registration of the limited liability company interests under state securities or "Blue Sky" laws, (iv) any escrow arrangements, including any compensation to an escrow agent, (v) the filing fees payable to the United States Securities and Exchange Commission and to the National Association of Securities Dealers, Inc. and any costs payable to the NYSE for the listing of the Listed Shares, (vi) the fees of the Partnership's counsel, (vii) all advertising expenses incurred in connection therewith, including the cost of all sales literature and the costs related to investor and -3- 4 broker/dealer sales and information meetings and marketing incentive programs and (viii) selling commissions and wholesaling expenses incurred in connection with the sale of the Shares. "Contribution" means any money, property or services rendered, or a promissory note or other obligation to contribute money or property, or to render services as permitted by the Act, which a Partner contributes to the Partnership as capital in that Partner's capacity as Partner pursuant to this Agreement. "Corporate Special Partner" means Carey Management LLC, a Delaware limited liability company. "CPA Partnership" means Corporate Property Associates, a California limited partnership, Corporate Property Associates 2, a California limited partnership, Corporate Property Associates 3, a California limited partnership, Corporate Property Associates 4, a California limited partnership, Corporate Property Associates 5, a California limited partnership, Corporate Property Associates 6, a California limited partnership, Corporate Property Associates 7, a California limited partnership, Corporate Property Associates 8, L.P., a Delaware limited partnership, the Partnership and any other real estate limited partnerships sponsored by W.P. Carey & Co., Inc. or its Affiliates with investment objectives substantially similar to the Partnership's. "Distributable Cash From Operations" means cash receipts from the ordinary day-to-day operations of the Partnership (including all interest on Partnership investments and mortgages held by the Partnership) without deduction for depreciation and amortization of intangibles such as organization, underwriting and debt placement costs but after deducting all other expenses, debt amortization and provisions for reserves established by the General Partner which it deems to be reasonably required for the proper operation of the business of the Partnership. Distributable Cash From Operations shall not include cash proceeds realized from the sale, exchange or other disposition of assets of the Partnership or from financing of Partnership property or the refinancing of any Partnership indebtedness. "Distribution" means any transfer of money or property by the Partnership to a Partner without consideration. "Fiscal Quarter" means the three-month period ending on the last day of the third, sixth, ninth and twelfth calendar months of each Fiscal Year of the Partnership. "Fiscal Year" means the Fiscal Year specified in Article XIII. "Front-End Fees" means all fees and expenses paid by any party for any services rendered in connection with the organizational or acquisition phase of the Partnership, including Consolidation and Offering Expenses, Acquisition Fees, -4- 5 Acquisition Expenses and any other similar fees, however designated. "General Partner" means any Person in his, her or its capacity as a general partner of the Partnership (except as otherwise expressly provided herein) and whose name and address are set forth in Article V, or any successor thereto appointed or elected hereunder. "Independent Advisor" means a long established, nationally recognized investment banking firm, accounting firm, mortgage banking firm, bank, real estate financial consulting firm or advisory firm which has a staff of real estate professionals, whose compensation is determined and embodied in a written contract before an opinion is rendered and who, directly or indirectly, has no interest in, nor any material business or professional relationship with, the Partnership, the General Partner, a borrower, or any of their Affiliates. No more than 6% of the aggregate annual gross income of the Independent Advisor or its Affiliates may be attributable to compensation paid to the Independent Advisor by the Partnership pursuant to the advisory agreement. The compensation of the Independent Advisor will be paid by the Sponsor and the Sponsor may not claim reimbursement from the Partnership for such expenses. "Independent Director" means a director of the General Partner who, in the opinion of the board of directors of the General Partner, is free from any relationship that would interfere with the exercise of independent judgment. A director of the General Partner who is an Affiliate of the General Partner or an officer or employee of the General Partner or its subsidiaries or Affiliates would not qualify as an Independent Director. "Individual Special Partner" means William Polk Carey. "Investment in Properties" means the amount of gross proceeds of the Offering paid or allocated to the purchase, development, construction or improvement of real property and personal or mixed property connected therewith, acquired by the Partnership, including the purchase of properties, working capital reserves (except that working capital reserves in excess of 5% of the gross proceeds of the Offering shall not be included) and other cash payments such as interest and taxes, but excluding Front-End Fees. "Limited Partner" means any Person in his, her or its capacity as a limited partner of the Partnership and whose name and address are set forth on the books and records of the Partnership. "Mandatory Distribution Event" means the sale or disposition of a Partnership property to a third party unaffiliated with the Partnership or the General Partner, not including the pledge, mortgage or encumbrance of a property, or of any interest therein, in connection with the financing, -5- 6 refinancing or other leveraging of such property or otherwise or any assignment of any leases or rents related to such property or (b) the mandatory distribution to holders of Partnership Interests following the Appraisal Date. "Merger" means the merger of the Subsidiary Partnership into the Partnership. "Merger Agreement" means the Agreement of Merger pursuant to which the Subsidiary Partnership is merged with and into the Partnership. "Minimum Gain" shall mean and refer to, at any time, the excess, if any, of the outstanding principal balance of all nonrecourse debt of the Partnership that is secured by an interest in Partnership assets, over the adjusted basis of such assets to the Partnership for Federal income tax purposes. For purposes of the preceding sentence, the term "nonrecourse debt" shall mean a liability of the Partnership with respect to which no Partner has any personal liability. "Net Lease" means a lease in which the tenant undertakes to pay all or substantially all the cash expenses, excluding debt service, related to the leased property. "Nonrecourse Deductions" has the meaning set forth in Sections 1.704-2(b)(1) and 1.704-2(c) of the Treasury Regulations. "Nonrecourse Liabilities" has the meaning set forth in Section 1.704-2(b)(3) of the Treasury Regulations. "Offering" means the offering of the Shares made pursuant to the Prospectus. "Partner" means the General Partner, the Corporate Special Partner, the Individual Special Partner and any Limited Partner where no distinction is required by the context in which the term is used. "Partner Minimum Gain" means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a nonrecourse Liability, determined in accordance with Treasury Regulations Section 1.704-2(i)(4). "Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulations Section 1.704-2(b)(4). "Partner Nonrecourse Deductions" has the meaning set forth in Treasury Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Debt for the Partnership taxable year shall be determined in accordance with the rules of Treasury Regulations Section 1.704-2(i)(2). -6- 7 "Partnership" means Corporate Property Associates 9, L.P., a Delaware limited partnership. "Partnership Interest" or "Interest" means the interest of each Partner in the profits, losses, distributions, capital and assets of the Partnership. "Partnership Minimum Gain" has the meaning set forth in Treasury Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in Partnership Minimum Gain, for a Partnership taxable year shall be determined in accordance with the rules of the Treasury Regulations. "Person" means any natural person, partnership, corporation, limited liability company, association or other legal entity. "Prospectus" means the final prospectus of the General Partner pursuant to which the General Partner will offer up to 23,654,898 Shares, as the same may at any time and from time to time be amended or supplemented after the effective date of the Registration Statement. "Proxy" means a written authorization signed by a Partner or the Partner's duly authorized attorney-in-fact giving another Person the power to vote with respect to the Partnership Interest of that Partner. "Signed," for the purpose of this paragraph, means the placing of the Partner's name on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the Partner or the Partner's duly authorized attorney-in-fact. "Purchase Price of Property" means the price paid upon the purchase or sale of a particular property, including the amount of Acquisition Fees and all liens and mortgages on the property, but excluding points and prepaid interest. "Registration Statement" means the General Partner's Registration Statement on Form S-4 filed with the Securities and Exchange Commission in the form in which it becomes effective, as the same may at any time and from time to time thereafter be amended or supplemented. "Shares" means the Shares of the General Partner. "Special Partners" means the Corporate Special Partner and the Individual Special Partner. "Sponsor" means any Person directly or indirectly instrumental in organizing wholly or in part, a limited or general partnership or any Person who will manage or participate in the management of a limited or general partnership, and any Affiliate of any such Person, but does not include a Person whose only relation with the Partnership is as that of an independent property manager and whose only compensation is as such. Sponsor -7- 8 does not include wholly independent third parties such as attorneys, accountants and underwriters whose only compensation is for professional services rendered in connection with the offering of syndicated interests. "Subsidiary Partnership" means Ninth Subsidiary, L.P., a Delaware limited partnership, which is a subsidiary of the General Partner. ARTICLE IV PURPOSE The business and purpose of the Partnership is to carry on any business that a Delaware partnership without limited partners may carry on (except the business of granting policies of insurance, assuming insurance risks or banking), and more particularly to invest in and own real property or interests therein (including leasehold estates) as well as personal or mixed property connected therewith which is income producing or capable of becoming income producing within a reasonable time after acquisition. The Partnership may enter into ventures, partnerships and other business arrangements with respect to real property and personal or mixed property connected therewith or interests therein as deemed prudent by the General Partner in order to achieve successful operations for the Partnership. Operations of the Partnership may be conducted wherever, in the opinion of the General Partner and not in violation of the general restrictions described in Paragraph H of Article X, the factors involved appear to be favorable for the Partnership and the Partners. ARTICLE V NAMES AND ADDRESSES OF PARTNERS The General Partner shall be Carey Diversified LLC, a limited liability company having an office at 50 Rockefeller Plaza, New York, New York 10020. The names and addresses of the Limited Partners shall be as set forth on the books and records of the Partnership which shall be kept at the principal place of business of the Partnership. ARTICLE VI PRINCIPAL PLACE OF BUSINESS; REGISTERED OFFICE AND AGENT The principal place of business of the Partnership shall be 50 Rockefeller Plaza, New York, New York 10020. The Partnership shall also maintain a registered office in the State of Delaware at 229 South State Street, Dover, Delaware 19901. The General Partner may from time to time change the principal place of business of the Partnership or its registered office and, in -8- 9 either such event, the General Partner shall notify the Partners in writing within ten days after the effective date of such change; provided, however, that no such change shall be effected unless the General Partner determines that such change is in the best interests of the Partnership after giving consideration to any material adverse state or local income, estate or inheritance tax consequences to the Partners, or any adverse effect on the limited liability of the Limited Partners, as a result of such change and provided further that the Partnership shall always maintain a registered office in the State of Delaware. The General Partner may establish additional places of business of the Partnership when and where required by the business of the Partnership. The Partnership at all times shall maintain in the State of Delaware a registered agent for service of process upon the Partnership. ARTICLE VII CAPITAL CONTRIBUTIONS The Partnership is authorized to issue and sell up to 100,000 limited partner interests. No interest shall be paid on any contribution to the capital of the Partnership. Loans by a Partner to the Partnership shall not be considered contributions to the capital of the Partnership. Any Partner, including any additional or substituted Partner, who shall acquire a Partnership Interest or whose Partnership Interest is increased by means of a transfer to him of all or a part of the Partnership Interest of another Partner, shall succeed to the Capital Account, or portion thereof, in respect of the Partnership Interest received. ARTICLE VIII PROFITS AND LOSSES A. Determination of Profits and Losses. The Partnership presently intends to keep its books on the accrual method of accounting and to report for federal, state and local income tax purposes using the same method by making such adjustments as are necessary to include other items of income, expense, deduction and allowance as are permitted or required under the Code and the regulations promulgated thereunder. The Partnership may report its activities to the Limited Partners in accordance with generally accepted accounting principles. Except as otherwise provided herein, whenever a proportionate part of the Partnership profit or loss is credited or charged to a Partner's Capital Account, every item of income, gain, loss or deduction entering into the computation of such profit or loss shall be considered either credited or charged, as the case may -9- 10 be, to such Partner's Capital Account and every item of credit or tax preference related to such profit or loss and applicable to the period during which such profit or loss was realized shall be allocated to such Partner in the same proportion. Every recapture of deduction or credit shall be allocated among the Partners in the same proportion as the items of deduction or credit subject to recapture were allocated among the Partners. Any increase or decrease in the amount of any item of income, gain, loss or deduction attributable to an adjustment to the basis of Partnership assets made pursuant to a valid election under Sections 734, 743 and 754 of the Code and pursuant to corresponding provisions of applicable state and local income tax laws shall be charged or credited, as the case may be, and any increase or decrease in the amount of any item of credit or tax preference attributable to any such adjustment shall be allocated to the Partners entitled thereto under such laws. Profits and losses allocated to a particular class of Partnership Interests shall be allocated among the holders of record of such class of Partnership Interests at the end of each Fiscal Year (or such shorter period as may be provided herein) of the Partnership in proportion to their respective Partnership Interests; provided, however, that any such profits and losses attributable to a limited partner interest assigned during a Fiscal Year of the Partnership shall be allocated among the Persons who were the holders of such limited partner interests during such Fiscal Year in proportion to the number of months (for purposes of such allocation, ownership of limited partner interests for each month will be determined as of the fifteenth day of each month) that each such holder was recognized as the owner of such limited partner interest during such Fiscal Year, without regard to the results of Partnership operations during the period in which each such holder was recognized as the owner thereof and without regard to the date, amount or recipient of any distributions which may have been made with respect to such limited partner interest. B. Allocation of Profits and Losses. 1. Except as provided in subparagraph 4 of this paragraph B, the profits and losses of the Partnership (other than gains or losses from the sale, exchange or other disposition of Partnership assets) shall be allocated to the Partners as follows and in the following order of priority: a. An amount of net income equal to the excess, if any, of the aggregate negative balance of the Capital Accounts of the Partners over the Minimum Gain (determined as of the end of such year or fraction thereof), shall first be allocated among the Partners whose Capital Accounts are negative as a result of nonrecourse debt in proportion to the negative amounts attributable to such nonrecourse debt. b. Any remaining balance of net income shall be allocated 1% to the General Partner, 9% to the Corporate Special Partner, 1% to the Individual Special Partner and 89% to the Limited Partners. -10- 11 c. Net losses of the Partnership shall be allocated 1% to the General Partner, 9% to the Corporate Special Partner, 1% to the Individual Special Partner and 89% to the Limited Partners. 2. Except as provided in subparagraph 4 of this Paragraph B, net losses arising from sales, exchanges or other dispositions of Partnership assets shall be allocated 1% to the General Partner, 1% to the Individual Special Partner and 98% to the Limited Partners. For purposes of this subparagraph 2, Capital Accounts shall be determined after applying the allocations provided in subparagraphs 1 and 5 of this Paragraph B, and after applying subparagraphs 6 and 7 of this Paragraph B. 3. Net gains arising from sales, exchanges or other dispositions of Partnership assets shall be allocated to the Partners as follows and in the following order of priority: a. An amount of such gains equal to the excess, if any, of the aggregate negative balance of the Capital Accounts of the General Partner over the Minimum Gain; b. If each Partner's Capital Account is negative and the gains are less than the aggregate negative amounts in the Capital Accounts, in the ratio that the Capital Accounts bear to each other; c. If each Partner's Capital Account is negative and the gains are greater than the aggregate negative amounts in the Capital Accounts (i) first in an amount sufficient to bring each Partner's Capital Account to zero, and (ii) then to the Partners in the percentage by which Cash From Sales and Cash From Financings are then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; d. If certain Partners' Capital Accounts are positive and other Partners' Capital Accounts are negative (i) first in an amount sufficient to bring the Capital Account of each Partner whose Capital Account is negative to zero (or if the gains are less than the aggregate negative amounts of the Capital Accounts which are negative, to such Partners in the ratio that such negative Capital Accounts bear to each other), and (ii) then to the Partners in the percentage by which Cash From Sales and Cash From Financings is then being distributed pursuant to the provisions of Paragraph E of Article IX hereof; or e. If each Partner's Capital Account is positive, in the percentages by which Cash From Sales and Cash From Financings are then being distributed pursuant to the provisions of Paragraph E of Article IX hereof. For purposes of this subparagraph 3, Capital Accounts shall be determined after applying the allocations provided first in subparagraph 5 and then in subparagraphs 1 and 2 of this Paragraph B and after applying subparagraphs 6 and 7 of Paragraph B. -11- 12 4. No loss or deduction or item thereof under subparagraph 1 or 2 of this Paragraph B shall be allocated to the General Partner if, or to the extent, such allocation would create or increase a deficit in the General Partner's Capital Account, unless: a. Such allocation of loss or deduction is attributable to nonrecourse debt of the Partnership; and b. Such allocation does not cause the deficit Capital Account of the General Partner to exceed the amount of Minimum Gain attributable to such nonrecourse debt, determined as of the last day of the taxable year to which such allocation is attributable. 5. To the extent that any amount paid to a Limited Partner or its Affiliates pursuant to the provisions of Paragraphs G(2),(4),(5),(6) or (7) of Article X hereof, or as Front-End Fees, is treated as a distributive share of Partnership income to the Limited Partner for Federal income tax purposes, the Limited Partner affected shall be allocated gross income of the Partnership at a time and in an amount equal to the amount of such payment, and the Capital Account of the Limited Partner so affected shall be adjusted to reflect such allocation and payment. If the Partnership's gross income for a Fiscal Year is less than the amount of such payment, the Limited Partner affected shall be allocated gross income in each succeeding Fiscal Year until the total amount so allocated equals the total amount of such payment. 6. For purposes of subparagraphs 1(a), 2 and 3 of this Paragraph B, distributions to the Partners pursuant to Paragraphs A and E of Article IX hereof shall be treated as having been made and charged to the Capital Accounts of the Partners prior to the allocations of income, gains and losses provided therein. 7. Solely for purposes of this Paragraph B, the Capital Accounts of each Partner shall be reduced by such Partner's share of any Partnership expenditure which would be treated as if it were an expenditure described under Section 705(a)(2)(B) of the Code, and shall be reduced or increased by any other amount required by the then applicable regulations under Section 704 of the Code. 8. Notwithstanding anything to the contrary in this Article VIII, if any Partner receives an adjustment, allocation or distribution described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), such Partner shall be specially allocated a pro rata portion of each item of Partnership income, including gross income, and gain in an amount and manner sufficient to eliminate, as quickly as possible, any deficit balance in such Partner's Capital Account created by such adjustment, allocation or distribution in excess of the sum of (i) the amount such Partner is obligated to restore pursuant to any provision of this Agreement and (ii) the amount such Limited -12- 13 Partner is deemed to be obligated to restore pursuant to the penultimate sentence of Treasury Regulations Section 1.704-1(b)(2)(iv)(f) (as amended in 1986). This subparagraph 8 of Paragraph B is intended to constitute a "qualified income offset" within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(3). 9. Except as otherwise provided in Section 1.704-2(f) of the Treasury Regulations, if there is a net decrease in Partnership Minimum Gain for any Partnership fiscal year, each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary subsequent years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain to the extent required by Treasury Regulations Section 1.704-2(f). The items to be so allocated shall be determined in accordance with Section 1.704-2(f) and (i) of the Treasury Regulations. This subparagraph is intended to comply with the minimum gain chargeback requirement in said section of the Treasury Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant hereto. 10. Except as otherwise provided in Section 1.704-2(i)(4) of the Treasury Regulations, if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any fiscal year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the Treasury Regulations, shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to that Partner's share of the net decrease in the Partner Minimum Gain attributable to such Partner Nonrecourse Debt to the extent and in the manner required by Section 1.704-2(i) of the Treasury Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i) of the Treasury Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and (j)(2) of the Treasury Regulations. This subparagraph is intended to comply with the minimum gain chargeback requirement with respect to Partner Nonrecourse Debt contained in said section of the Treasury Regulations and shall be interpreted consistently therewith. Allocations pursuant to this subparagraph shall be made in proportion to the respective amounts to be allocated to each Partner pursuant hereto. 11. To the extent any Partner has an Adjusted Capital Account Deficit at the end of any Partnership Fiscal Year, each such Partner shall be specially allocated items of Partnership income (including gross income) and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Paragraph 8(B)(11) shall be made if and only to the extent that such Partners would have an Adjusted Capital Account Deficit after all other allocations provided for in this Section have been tentatively made as if this Paragraph 8(B)(11) were not in the Agreement. -13- 14 12. Partner Nonrecourse Deductions for any fiscal year or other applicable period with respect to a Partner Nonrecourse Debt shall be specially allocated to the Partners that bear the economic risk of loss for such Partner Nonrecourse Debt (as determined under Sections 1.704-2(b)(4) and 1.704-2(i)(1) of the Treasury Regulations). C. Power of the General Partner to Vary Allocations of Profits and Losses. It is the intent of the Partners that each Partner's distributive share of income, gains, losses, deductions and credits shall be determined and allocated in accordance with this Article VIII to the fullest extent permitted by Section 704(b) of the Code. If the Partnership is advised that the allocations provided in this Article VIII are unlikely to be respected for Federal income tax purposes, the General Partner has been granted the power in Paragraph B(2)(a) of Article XVI of this Agreement to amend the allocation provisions of this Agreement, on advice of accountants and legal counsel, to the minimum extent necessary to effect the plan of allocations and distributions provided in this Agreement. D. Allocations of Profits and Losses Among Limited Partners. Except as otherwise provided in this Article VIII, all profits and losses shall be allocated among the Limited Partners in the same manner as distributions are allocated in Paragraph D of Article IX hereof. E. Approval of Partners to Allocation of Profits and Losses. The methods hereinabove set forth by which profits and losses of the Partnership are determined and allocated are hereby approved by each Partner as a condition to becoming a Partner. ARTICLE IX DISTRIBUTIONS A. Distributable Cash From Operations. The General Partner shall distribute as soon after the close of each Fiscal Quarter as is reasonably feasible all of the Distributable Cash From Operations for such Fiscal Quarter in the following manner: 1% to the General Partner, 9% to the Corporate Special Partner, 1% to the Individual Special Partner and 89% to the Limited Partners. B. Cash From Sales. The General Partner shall distribute, as soon after the close of each Fiscal Quarter as is reasonably feasible, all Cash From Sales realized by the Partnership during such Fiscal Quarter in accordance with the provisions of Paragraph E of this Article IX. C. Cash From Financings. The General Partner shall distribute, as soon after the close of each Fiscal Quarter as is reasonably feasible, all of the Cash From Financings realized by -14- 15 the Partnership during such Fiscal Quarter in accordance with the provisions of Paragraph E of this Article IX. D. Allocation of Distributions Among Limited Partners. Distributions of Distributable Cash From Operations to the Limited Partners shall be apportioned among the holders of record of limited partner interests (as determined in accordance with Paragraph A of Article VIII) in the ratio in which the number of limited partner interests held of record by each of them bears to the number of limited partner interests held of record by all the Limited Partners as of the last month of the Fiscal Quarter with respect to which such distribution is made. Distributions of Cash From Sales and Cash From Financings shall be made to holders of record (as determined in accordance with Paragraph A of Article VIII) for the month in which the transaction giving rise to the distribution was completed. E. Distributions of Cash From Sales and Cash From Financings. The General Partner shall distribute Cash From Sales and Cash From Financings in the following manner: 1% to the General Partner, 1% to the Individual Special Partner and 98% to the Limited Partners. F. No Distributions Under Certain Circumstances. Not withstanding any other provision of this Article IX, no distribution shall be made to the extent that at the time of the distribution, after giving effect to the distribution, all liabilities of the Partnership, other than liabilities to Partners on account of their partnership interests and liabilities for which the recourse of creditors is limited to specified property of the Partnership, exceed the fair value of the assets of the Partnership, except that the fair value of property that is subject to a liability for which the recourse of creditors is limited shall be included in the assets of the Partnership only to the extent that the fair value of that property exceeds that liability. No Partner shall have the right to receive property other than money upon any distribution. No Partner may be compelled to accept a distribution of any asset in kind in lieu of a proportionate distribution of money being made to other Partners. Except for distributions to a trust as set forth in the last sentence of paragraph B of Article XVIII, all distributions shall be made only in the form of cash. G. Approval of Partners to Allocation of Distributions. The methods hereinabove set forth by which Cash From Operations, Cash From Sales and Cash From Financings are allocated and distributed are hereby approved by each Partner as a condition to becoming a Partner. ARTICLE X MANAGEMENT AND OPERATION OF BUSINESS A. Management of Business. The Partnership shall be managed by the General Partner and the conduct of the -15- 16 Partnership's business shall be controlled and conducted by the General Partner in accordance with this Agreement. The approval of only the General Partner is needed for decisions concerning the Partnership's investments. B. Authority of the General Partner. In addition to and not in limitation of any rights and powers conferred by law or other provisions of this Agreement, the General Partner shall have and may exercise on behalf of the Partnership all powers and rights necessary, proper, convenient or advisable to effectuate and carry out the purposes, business and objectives of the Partnership. Such powers shall include, without limitation, the following powers: 1. To acquire, hold and dispose of any real property (or any interests therein, including leasehold estates) as well as personal or mixed property connected therewith, including the purchase, lease, development, improvement, maintenance, exchange, trade or sale of such property at such price, rental or amount, for cash, securities or other property and upon such terms, as the General Partner deems to be in the best interests of the Partnership; 2. Subject to the provisions of paragraph H(10) of this Article X, to borrow money and, if required therefor, to mortgage or subject to any other security device any portion of the assets of the Partnership, to obtain replacements of any mortgage or other security device, and to prepay, in whole or in part, refinance, increase, modify, consolidate or extend any mortgage or other security device, provided, however, that loans from Affiliates of the General Partner shall be made in accordance with the provisions of Paragraphs G(2) and G(6) of this Article X; 3. To invest the Partnership's funds in United States Government securities, certificates of deposit or other time or demand deposits of banks, savings banks, savings and loan associations or similar institutions which have a net worth of at least $100,000,000 or in which such certificates or deposits are fully insured by any Federal or state government agency, United States dollar deposits in foreign branches of banks, which banks have a net worth of at least $100,000,000, bank repurchase agreements covering securities of the United States Government or governmental agencies, bankers' acceptances, public money market funds, or other similar short-term highly liquid investments; to invest any working capital or other reserves retained by the General Partner for the operation of the Partnership in like manner; and to deposit, withdraw, invest, pay, retain and distribute the Partnership's funds in any manner consistent with the provisions of this Agreement; 4. To bring and defend actions at law or in equity; 5. To employ persons in the operation and management of the Partnership's business, including but not limited to -16- 17 supervisory managing agents, building management agents, real property developers and real estate brokers; 6. To place record title to, or the right to use, Partnership assets in the name or names of a non-operating nominee or nominees, including an Affiliate of the General Partner, for any purpose convenient or beneficial to the Partnership; 7. To perform all acts and file all documents, including tax returns and registration statements, necessary to comply with Federal, state and local laws, rules and regulations applicable to the Partnership or the conduct of the Partnership's business; 8. To enter into and carry out contracts and agreements and any or all documents and instruments and to do and perform all such other things as may be in furtherance of Partnership purposes or necessary or appropriate to the conduct of Partnership activities; 9. To cause the Partnership to make or revoke any of the elections required or permitted to be made by the Partnership under the Code; 10. To determine the appropriate accounting method or methods to be used by the Partnership (the Partnership intends initially to utilize the accrual method of accounting in reporting its profits and losses for Federal, state and local income tax purposes); 11. To designate Carey Diversified LLC, the General Partner, as the "Tax Matters Partner" in accordance with Section 6231(a)(7) of the Code and, as such, the General Partner shall have all powers necessary to so perform including, without limitation, the power to retain attorneys and accountants of its choice and the right to settle any audits without the approval of the Limited Partners, except as otherwise required by the Code. The designation provided for herein is hereby expressly approved by each Partner as an express condition to becoming a Partner; and 12. To execute, acknowledge, deliver, seal, file, record and vote any and all instruments which may be deemed necessary or convenient to effect the foregoing. C. Restrictions on Authority of General Partner. In addition to other acts expressly prohibited or restricted by this Agreement or by law, the General Partner shall have no authority to act on behalf of the Partnership with respect to, and is expressly prohibited from undertaking, the following: 1. Doing any act in contravention of this Agreement; 2. Except as provided in this Agreement and except in connection with the liquidation and winding up of the business of -17- 18 the Partnership upon its dissolution, doing any act which would make it impossible to carry on the ordinary business of the Partnership; 3. Confessing a judgment against the Partnership in connection with any threatened or pending legal action; 4. Possessing Partnership property or assigning the rights of the Partnership in specific Partnership property for other than a Partnership purpose; 5. Admitting a Person as a Limited Partner except as provided in this Agreement; 6. Except as provided in this Agreement and except in connection with the liquidation and winding up of the business of the Partnership upon its dissolution or a Mandatory Distribution Event, selling substantially all the assets of the Partnership at a single sale or in multiple sales in the same 12-month period without the prior written approval of Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, with the same relative vote as provided in paragraph (d) of Article XI; 7. Pledging or encumbering substantially all the properties of the Partnership at one time or from time to time in a series of related transactions, unless the lien of such pledge or encumbrance arises in connection with the acquisition or improvement of properties or the initial financing of properties acquired free and clear of encumbrances or the refinancing of previous obligations and such lien is limited to the properties so acquired, improved, financed or refinanced; 8. Obtaining any loan or any mortgage loan on any residential property made or guaranteed by any Federal, state or local government or municipality or any agency of any Federal, state or local government or municipality; 9. Performing any act (other than an act required by this Agreement) which would, at the time such act occurred, subject any Limited Partner to liability as a general partner in any jurisdiction; 10. Prepaying any interest on any Partnership indebtedness; provided that the payment of any amount commonly referred to as "points" shall not be deemed a prepayment of interest; or 11. Assessing any Partner for an additional capital contribution. D. Fiduciary Obligations of General Partner. The General Partner shall have fiduciary responsibility for the safekeeping and use of all funds and assets of the Partnership, whether or not such funds or assets are in their possession or control. The General Partner will not employ, or permit another -18- 19 to employ, such funds or assets in any manner except for the exclusive benefit of the Partnership. E. Obligations of the General Partner. The General Partner shall: 1. Devote such of its time to the business of the Partnership as it shall, in its discretion, exercised in good faith, determine to be necessary to conduct the business of the Partnership for the benefit of the Partnership and the Limited Partners; 2. File and publish all certificates, statements or other instruments required by law for formation, qualification and operation of the Partnership and for the conduct of its business in all appropriate jurisdictions; 3. Use its best efforts to cause the Partnership and the Partners to be protected by adequate public liability, directors and officers liability, property damage and other insurance; however, no Partnership funds may be used to purchase any liability insurance for which the indemnified person would be prohibited from being indemnified by the Partnership under Article X(F) of this Agreement; 4. Employ attorneys to represent the Partnership, which attorneys may also serve as counsel to the General Partner and any of its Affiliates; and 5. Use its best efforts to maintain the status of the Partnership as a "partnership" for Federal income tax purposes. F. Limitation on Liability of General Partner; Indemnification. 1. Neither the General Partner nor any of its Affiliates shall have liability to the Partnership or to any Partner for any loss suffered by the Partnership which arises out of any action or inaction of the General Partner or its Affiliates if the General Partner or its Affiliates in good faith determined that such course of conduct was in the best interest of the Partnership and such course of conduct did not constitute negligence or misconduct of the General Partner or its Affiliates and provided, with respect to Affiliates, such Affiliates were acting within the scope of the authority of the General Partner. To the fullest extent permitted by law, the General Partner and its Affiliates (other than broker-dealers) shall be indemnified by the Partnership for any losses, judgments, liabilities, expenses and amounts paid in settlement of any claim sustained by them in connection with the Partnership, provided that the same were not the result of negligence or misconduct on the part of the General Partner or its Affiliates, that the General Partner or its Affiliates, as the case may be, in good faith determined that their course of conduct was in the best interest of the Partnership and that, with respect to Affiliates, such Affiliates -19- 20 were acting within the scope of the authority of the General Partner. 2. The General Partner and its Affiliates and any Person acting as a broker dealer shall not be indemnified for any losses, liabilities or expenses arising from or out of an alleged violation of federal or state securities laws unless (a) there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee and the court approves indemnification of the litigation costs, (b) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee and the court approves indemnification of the litigation costs or (c) a court of competent jurisdiction approves a settlement of the claims against a particular indemnitee and finds that indemnification of the settlement and related costs should be made. In any claim for indemnification for Federal or state securities law violations, the party seeking indemnification shall place before the court the position of the Securities and Exchange Commission, the Arizona Corporations Commission, the Massachusetts Securities Division, the Missouri Securities Division, the Pennsylvania Securities Division and other state securities commissioners with respect to the issue of indemnification for securities law violations. 3. The Partnership shall not incur the cost of that portion of any insurance which insures any party against any liability the indemnification of which is herein prohibited. 4. The Partnership shall not make any advances to the General Partner or its Affiliates for legal expenses and other costs incurred as a result of a legal action unless the following three conditions are satisfied: (a) the legal action relates to the performance of duties or services by the General Partner or its Affiliates on behalf of the Partnership, (b) the legal action is initiated by a party other than the Partnership or a Limited Partner and (c) the General Partner or its Affiliates undertake to repay the advanced funds to the Partnership in cases in which they would not be entitled to such indemnification. 5. For purposes of this Section (F) of Article X, the term Affiliate shall mean any Person performing services on behalf of the Partnership (i) who directly or indirectly controls, is controlled by, or is under common control with the General Partner, (ii) who owns or controls 10% or more of the outstanding voting securities of the General Partner, (iii) who is an officer, director or partner of the General Partner or (iv) which is a company for which the General Partner acts as an officer, director, partner or trustee. 6. Any payments made by the Partnership to the General Partner or its Affiliates as a result of any indemnification or hold harmless agreement shall be paid out of the assets of the Partnership (and any insurance proceeds) and not from the separate assets of the Limited Partners. -20- 21 G. Specific Transactions Authorized. The General Partner is hereby authorized to enter into, on behalf of the Partnership, the following specific transactions: 1. The Partnership may purchase property from any Affiliate of the General Partner provided (i) the property was acquired by such Affiliate for the purpose of facilitating its purchase by the Partnership, facilitating the borrowing of money or the obtaining of financing for the Partnership or any other purpose related to the business of the Partnership, (ii) the property is purchased by the Partnership for a price no greater than the Appraised Value, (iii) there is no adverse difference in the interest rates of the loans secured by the property at the time acquired by such Affiliate and at the time purchased by the Partnership nor any other benefit arising out of such transaction to the General Partner and (iv) no compensation is paid by the Partnership or by any non-affiliated person to any Affiliate of the General Partner in connection with the purchase of the property by the Partnership. 2. The Partnership may take a loan, the principal amount of which is scheduled to be paid over a period of not less than 48 months and not more than 50% of the principal amount of which is scheduled to be paid during the first 24 months, from an Affiliate of the General Partner provided that such Affiliate is a program formed for the purpose of, among other things, making mortgage loans and further provided that (i) the terms of any such loan are fair and at least as favorable to the Partnership as could be obtained from a non-Affiliate in similar circumstances, (ii) the Partnership obtains a letter of opinion from a qualified Independent Advisor to such effect and (iii) the Partnership is represented, with respect to such mortgage loan, by legal counsel different from the legal counsel retained for such transaction by the Affiliated lender. 3. An officer or director of the General Partner may serve as a director of a tenant of the Partnership after a lease with the Partnership has been executed, provided that the purpose of such service as a director is for monitoring tenant activity on behalf of the Partnership and provided that the Partnership shall not incur, directly or indirectly, any costs relating to such service. Any tenant having such an officer or director serving as a director shall not be deemed an Affiliate of the Partnership for purposes of this Agreement so long as such tenant would not otherwise be an Affiliate for purposes of this Agreement except by reason of such service. An officer or director serving as a director of the tenant may not vote as a member of the board of directors of the tenant on matters relating to the Partnership or any Affiliate of the Partnership. 4. The Partnership may contract (i) with Affiliates of the General Partner to serve as real estate brokers and mortgage placement brokers in connection with the investment of the Partnership assets and (ii) with Affiliates of the General Partner to serve as real estate brokers in connection with the -21- 22 sale of property by the Partnership. The amount of real estate commissions payable to Affiliates of the General Partner upon a sale of property by the Partnership where such Affiliates have provided a substantial amount of services in the sales effort may not exceed the lesser of (i) 3% of the contract price for the sale of the property or (ii) 50% of the reasonable, customary and competitive rate for similar services in light of the size, type and location of the property; provided, however that the total real estate commissions payable to such Affiliates and to other Persons may not exceed the lesser of (a) 6% of the contract price for the sale of the property or (b) the reasonable, customary and competitive rate for similar services in light of the size, type and location of the property. No Affiliate of the General Partner may receive payment of a real estate commission with respect to the sale of any property by the Partnership unless the total consideration received by the Partnership upon such sale exceeds the amounts actually paid by the Partnership for the purchase, development, construction or improvement of the Property and any fees and commissions paid by the Partnership in connection therewith. 5. Affiliates of the General Partner may receive insurance premiums and brokerage commissions with respect to insurance on property owned by the Partnership only when the cost of such insurance is paid by tenants who net lease such properties from the Partnership. No such net lease shall provide that the lessee is required to purchase insurance through an Affiliate of the General Partner. 6. At any time, the Partnership may borrow funds from Affiliates of the General Partner or third parties on a short term basis to provide the debt portion of the purchase price of any property if (i) the Partnership is unable to obtain a permanent loan or, in the judgment of the General Partner, it is not in the best interests of the Partnership to obtain a permanent loan at the interest rates then prevailing and (ii) the General Partner has reason to believe that the Partnership will be able to obtain a permanent loan on or prior to the end of the loan term. Any such short-term loans may be fully or partially amortized, may provide for the payment of interest only during the term of the loan or may provide for the payment of principal and interest only upon maturity. Any such short-term loans may be secured by a pledge of or security interest in the net assets of the Partnership or, if the loan is obtained to pay or provide the debt or equity portion of the purchase price of a property, by a first or junior mortgage on the property to be acquired. Any short-term loans from Affiliates of the General Partner will bear interest at a rate equal to the lesser of (A) 1% above the prime interest rate at The Bank of New York or (B) the rate that would be charged to the Partnership by unrelated lending institutions on comparable loans for the same purpose in the locality of the property but in no event greater than the maximum amount permitted by law. Such borrowings shall be nonrecourse to the Partnership, unless the General Partner shall otherwise consent in writing. No prepayment charge or penalty shall be required by a General Partner on a loan to the Partnership from the General -22- 23 Partner secured by either a first or a junior or all inclusive trust deed, mortgage or encumbrance on the property; except to the extent such prepayment charge or penalty is attributable to the underlying encumbrance. 7. All of the Partnership's expenses shall be billed directly to and paid by the Partnership. The Partnership shall reimburse the General Partner or its Affiliates for: (a) the actual cost to the General Partner or their Affiliates of goods and materials used for and by the Partnership and obtained from unaffiliated parties and (b) the costs incurred by the General Partner or its Affiliates in performing administrative services necessary to the prudent operation of the Partnership; provided, however, that the amounts charged to the Partnership for services performed pursuant to this clause (b) shall not exceed the lesser of (1) the actual cost of such services, or (2) 90% of the amount which the Partnership would be required to pay to independent parties for comparable services in the same geographic location. No reimbursement shall be made to the General Partner or its Affiliates for: (x) services for which the General Partner or its Affiliates are entitled to compensation by way of a separate fee or (y) any of the salaries, fringe benefits, travel expenses and other administrative items incurred by or allocated to any controlling person (as defined herein) of the General Partner or its Affiliates; provided, however, that the Partnership may reimburse the General Partner or its Affiliates for the travel expenses of controlling persons if such travel expenses are incurred by such controlling persons in connection with the evaluation of properties being considered for acquisition or visits to executives of potential tenants of properties being considered for acquisition to discuss current financial results. The Partnership's annual report to the Partners shall contain a breakdown of the costs reimbursed to the General Partner or its Affiliates. Within the scope of the annual audit of the General Partner's (or such Affiliate's) financial statement, the independent certified public accountant shall verify the allocation of such costs to the Partnership. The method of review shall at minimum provide (1) a review of time records of individual employees, the costs of whose services were reimbursed; and (2) a review of the specific nature of the work performed by each such employee. The methods of review shall be in accordance with generally accepted auditing standards and shall accordingly include such tests of the accounting records and such other auditing procedures which the General Partner's (or such Affiliate's) independent certified public accountants consider appropriate in the circumstances. The additional costs of such review shall be itemized by such accountants on a partnership by partnership basis and may be reimbursed to the General Partner (or such Affiliate) in accordance with this Paragraph only to the extent that such reimbursement, when added to the cost for administrative services rendered, does not exceed the competitive rate for such services as determined in this Paragraph G(7). As used herein, the term "controlling person" shall mean any Person, whatever his title, who performs executive or -23- 24 senior management functions for the General Partner or such Affiliate similar to those of executive or senior management officers, directors or partners, or those holding 5% or more equity interest in the General Partner or such Affiliate or a Person having the power to direct or cause the direction of the management and/or policies of the General Partner or such Affiliate, whether through the ownership of voting securities, by contract or otherwise. For the purposes of this Paragraph G(7), not every Person who carries a title such as vice president, corporate secretary or treasurer shall be considered a controlling person, unless such Person performs the functions or has the powers described above, and even in the absence of a specific title, an executive in a senior management position shall be considered a controlling person. 8. The Partnership may invest in unimproved or non-income producing real property and the stock of or other interests in, or warrants or other rights to purchase the stock of or other interests in, any tenant of the Partnership or the parent or controlling person of any tenant. The Partnership may not borrow funds to make investments in such stock, interests, warrants or other rights. The Partnership will not exercise warrants or other rights to purchase the stock of or other interests in a tenant or the parent or controlling person of a tenant unless the Partnership will immediately liquidate the stock or interest purchased at a price in excess of the exercise price. Under such circumstances, payment of the exercise price shall not be deemed an investment subject to the above limitations respecting the amount of net proceeds derived from the sale of limited partner interests which the Partnership may invest in unimproved or non-income producing real property or stock, interests, warrants or other rights. The Partnership may borrow funds on a short-term basis to pay the exercise price on warrants or other rights or may pay such exercise price from funds held in the working capital reserve and will repay the loan or replenish the reserve upon the sale of the securities or interests purchased before it makes distributions to the Partners respecting the proceeds of sale or reinvests such proceeds in properties. 9. The Partnership may incur indebtedness in connection with the purchase, improvement, repair, development and financing or refinancing of properties and the operation of the Partnership, including the funding of operating deficits and obtaining Cash From Sales and Cash From Financings for distribution to Partners. Such indebtedness may not exceed 80% of the total purchase price of the Partnership's properties and may be in the form of purchase money obligations to the sellers of properties or in the form of loans from banks, institutional investors and other lenders, which indebtedness may be secured by mortgages or other interests in the property owned by the Partnership (including "wrap-around" or "all-inclusive" mortgages to the extent provided in Paragraph H(9) of this Article X) and may involve final or interim principal payments substantially greater than the regular monthly payments. The Partnership may also from time to time borrow additional funds for the purchase -24- 25 of property, which indebtedness may be secured by the general assets of the Partnership. H. General Restrictions. 1. The Partnership shall obtain a written evaluation report specifying an Appraised Value signed by an independent appraiser prior to the purchase of any property by the Partnership and shall not purchase any such property if the purchase price and all Acquisition Fees paid by the Partnership in connection with the acquisition exceed the Appraised Value set forth in such report. All such appraisals, whether or not the property which is the subject of such appraisal is purchased by the Partnership, shall be at the Partnership's expense or at the expense of the seller, shall be retained for five years and shall be available for inspection and duplication by the Limited Partners upon reasonable notice to the Partnership for a purpose reasonably related to their interest as limited partners in the Partnership. 2. The Partnership may not sell any property in a transaction in which an Affiliate of the General Partner acts as a real estate broker unless the provisions of Paragraph G(4) of this Article X are complied with. 3. The Partnership shall not own any land where the buildings and improvements thereon are owned by an Affiliate of a General Partner unless (i) such Affiliate is a public program formed for the purpose of investing in real estate, (ii) the terms of such transaction are at least as favorable as the terms of any comparable transactions made on an arm's length basis and known to the General Partner, and (iii) payments to the General Partner and its Affiliates for services rendered in a capacity other than that as General Partner may only be made upon a determination that (a) the compensation is not in excess of the compensation paid to them by third parties for any comparable services and (b) the compensation is not greater than the charges for comparable services available from others who are competent and not affiliated with any of the parties involved and the Partnership has obtained a letter of opinion of a qualified Independent Advisor to such effect prior to effecting such transaction. 4. The Partnership shall not give an Affiliate of a General Partner the exclusive right to sell property for the Partnership. 5. The aggregate borrowings of the Partnership shall not exceed 80% of the purchase price of all properties purchased by the Partnership on a combined basis. The foregoing restriction may be waived or lessened by the General Partner without the approval of the Limited Partners, but only with the prior written consent of the Commissioner of Corporations of the State of California or pursuant to a change in the published Rules of the Commissioner. In no event, however, shall the aggregate borrowings of the Partnership exceed the sum of 85% of the -25- 26 purchase price of all properties which have not been refinanced and 85% of the aggregate fair market value of all refinanced properties. 6. Except as set forth in paragraph G(7) of this Article X, all expenses of the Partnership shall be billed directly to and paid by the Partnership. 7. Except as disclosed in the Prospectus, the General Partner shall not receive from the Partnership a rebate or give up or participate in any reciprocal business arrangement which would enable them or any Affiliate of the General Partner to receive such rebate or give-up or to circumvent any restrictions contained herein upon dealings with Affiliates. 8. The Partnership funds shall not be commingled with the funds of any other Person. 9. The Partnership shall not finance the purchase of property by use of a wraparound note and mortgage ("all-inclusive" note and deed of trust) unless (a) the General Partner and any Affiliate of the General Partner receives interest on the amount of the underlying encumbrance in excess of that payable to the lender on such underlying encumbrance, (b) the Partnership receives credit on its obligation under the all-inclusive note for payments made directly on the underlying encumbrance and (c) all payments on the underlying encumbrance shall be made by the Partnership or, in the alternative, payments by the Partnership on the wrap-around note are made to a third party collecting agent which in turn disburses such payment, first to the holder of such underlying encumbrance, and thereafter to the holder of the wrap-around note. 10. The Partnership shall not create or assume any indebtedness for borrowed money unless the documents pursuant to which such indebtedness is created or assumed provide, and the General Partner shall cause any and all such documents assumed or entered into by or on behalf of the Partnership to provide, that the parties thereto other than the Partnership (including any Affiliates of the General Partner) shall look only to the assets of the Partnership for satisfaction of the liabilities and obligations of the Partnership under such documents (including without limitation those arising from representations, warranties, covenants and agreements made in or in connection with such documents) and that such other parties shall have no recourse to the Partners or the separate assets of the Partners for the satisfaction of such liabilities and obligations. The Partnership shall not incur any indebtedness wherein the lender will have or acquire, at any time as a result of making the loan, any direct or indirect interest in the profit, capital or property of the Partnership other than as a creditor. 11. The Partnership shall not enter into any contracts with the General Partner or with any Affiliates of the General Partner to construct or develop Partnership properties or to -26- 27 render any services in connection with such construction or development. 12. The Partnership shall not acquire any property which is under construction unless completion of the improvements on the property is guaranteed at the contracted price by an adequate completion bond or other satisfactory arrangement. 13. Unimproved or non-income producing property shall not be acquired except in amounts and upon terms which can be financed by Distributable Cash From Operations. 14. No Partnership assets may be invested in junior mortgages or deeds of trust; provided, however, that the acquisition of a junior mortgage or deed of trust in connection with the sale, financing or refinancing of real property shall not be deemed to be investing in junior mortgages or deeds of trust. 15. Any agreement entered into between the Partnership and the General Partner or its Affiliates, other than a mortgage with a program sponsored by W.P. Carey & Co., Inc. or an Affiliate of W.P. Carey & Co., Inc. under which such General Partner or its Affiliates are compensated for the provision of goods or services to the Partnership, must be terminable by the Partnership, without penalty, upon 60 days' notice and any such agreement must be embodied in a written contract which precisely describes the services to be rendered and all compensation to be paid and which agreement shall be fully disclosed in the Prospectus and no such agreement shall be permitted unless the General Partner or such Affiliate has been previously engaged in the business of rendering such services or selling or leasing such goods independently of the Partnership and as an ordinary and ongoing business and unless the cost to the Partnership does not exceed the lesser of the cost of such goods or 90% of the cost to the Partnership of any other Person who is rendering comparable services or selling or leasing comparable goods which could reasonably be made available to the Partnership and the agreement is on competitive terms. If the General Partner or such Affiliate purchases goods or materials from an independent third party which are used by the Partnership, the General Partner or Affiliate may be reimbursed at its cost. "Cost", as that term is used in this paragraph, includes the price of goods and materials paid to independent third parties and direct costs incurred by the General Partner or Affiliate providing the service, including overhead directly attributable to the transaction but excluding general or administrative overhead (which term includes but is not limited to salaries, rent, travel expenses and other items generally falling under the category of overhead). Agreements with the General Partner and its Affiliates for other than administrative services and other than leases and mortgages may be modified only by a vote of the majority of Limited Partners. 16. Neither the General Partner nor its Affiliates may acquire stock or other interests in, or warrants or other rights -27- 28 to purchase the stock of or other interests in, any tenant of the Partnership or the parent or controlling person of any tenant unless such securities are (i) received as payment of an Acquisition Fee for services provided in connection with the acquisition of the property occupied by such tenant (subject to the limitation included in the definition of "Acquisition Fees") or (ii) available to the general public. I. Compensation of General Partner. The General Partner shall not, in its capacity as General Partner, receive any salary, fees, profits or distributions from the Partnership except profits, distributions, fees and allocations to which they may be entitled under Articles VIII, IX and X. J. Other Business of Partners. Except as otherwise specifically provided herein, any of the Partners and any shareholder, officer, director, employee or other Person holding a legal or beneficial interest in an entity which is a Partner may engage in or possess an interest in other business ventures of every nature and description, independently or with others, including, but not limited to, the ownership, financing, leasing, operation, management, syndication, brokerage and development of real, personal or mixed property and neither the Partnership nor the Partners shall have any right by virtue of this Agreement in and to such independent ventures or to the income or profits derived therefrom. ARTICLE XI STATUS OF LIMITED PARTNERS AND SPECIAL PARTNERS The Limited Partners and Special Partners shall not participate in the management or control of the Partnership's business nor shall they transact any business for the Partnership nor shall they have the power to sign for or bind the Partnership, said powers being vested solely and exclusively in the General Partner. Except as described herein and in the Act, Limited Partners and Special Partners have no liability in excess of their obligation to make contributions to the Partnership and their share of the Partnership's assets and undistributed profits. The Partnership Interest owned by a Limited Partner or Special Partner shall be fully paid and nonassessable except as described herein and in the Act. In addition to those described elsewhere in this Agreement, the Limited Partners and Special Partners shall have the following rights, powers, privileges, duties and liabilities: (a) The Limited Partners and Special Partners shall have the right to have full and true information of all things affecting the Partnership and shall be entitled to such reports as are set forth in Article XII hereof for a purpose reasonably related to such Partner's interest as a partner in the Partnership. -28- 29 (b) The Limited Partners and Special Partners shall receive from the Partnership the share of the distributions provided for in this Agreement in the manner and at the times provided for in this Agreement. (c) A Limited Partner or a Special Partner shall have the right to demand the return of his Capital Account only on the dissolution and winding up of the Partnership in accordance with Article XVIII hereof. No Limited Partner shall have priority over any other Limited Partner either as to the return of capital or as to profits, losses or distributions. No Limited Partner or Special Partner shall have the right to bring an action for partition against the Partnership. (d) Limited Partners holding more than 50% of the outstanding Limited Partner Interests may (1) remove the General Partner and (2) in the event that a vacancy shall occur in the office of General Partner, continue the business of the Partnership and elect a successor General Partner upon the withdrawal, removal, death, adjudication of incompetence to manage his person or his property, adjudication of bankruptcy under Chapter 7 of the Federal Bankruptcy Code (or any similar law or provision enacted in lieu thereof), assignment by the General Partner of all of the General Partner's Interest or other cessation to exist as a General Partner under the Act. (e) Upon written request to the Partnership for a purpose reasonably related to such Partner's interest as a partner in the Partnership, each Limited Partner and Special Partner shall have the right to be mailed, at such Partner's expense, a complete list of names and addresses and interests of all Limited Partners as set forth in the books and records of the Partnership, copies of the Certificate of Limited Partnership and all amendments thereto and copies of this Agreement and all amendments thereto and powers of attorney pursuant to which this Agreement was executed. A reasonable charge for copy work may be charged by the Partnership. ARTICLE XII BOOKS OF ACCOUNT AND REPORTS Proper books of account shall be kept by the General Partner wherein shall be entered all transactions, matters and things relating to the Partnership's business as are usually entered into books of account kept by Persons engaged in a business of a like character. The books of account shall be kept at the principal place of business of the Partnership and each Partner (or any duly constituted designee of a Partner) shall at all times during reasonable business hours have free access to and the right to inspect and copy the same for a purpose reasonably related to such Partner's interest as a partner in the Partnership. The Partnership shall also maintain the following: a current alphabetical list of the Partners' names, addresses, Contributions and Capital Accounts; copies of the Certificate of -29- 30 Limited Partnership and all amendments thereto; copies of the Partnership's Federal, state and local income tax or information returns and reports for the six most recent tax years; copies of this Agreement and all amendments thereto and powers of attorney pursuant to which this Agreement was executed and the Partnership's financial statements for the six most recent fiscal years. There shall be established for each Partner on the books and records of the Partnership a Capital Account which shall be maintained in accordance with Federal income tax accounting principles and which shall show the amount of each capital contribution made by such Partner (or his, her or its predecessor in the case of an assignment of a Partnership Interest), adjusted to reflect such Partner's proportion of profits and losses (determined according to Article VIII) and of withdrawals and distributions and other items to the extent properly creditable to or chargeable against such Capital Account. Within 75 days after the end of each Fiscal Year, the General Partner shall deliver to each Limited Partner adequate information to enable each Limited Partner to complete and file his Federal tax return. Copies of each report distributed to the Limited Partners shall, to the extent required by applicable law, be filed concurrently with relevant state "Blue Sky" authorities. If the Partnership engages an Independent Advisor who is not the Independent Advisor engaged to render a current fairness opinion or the fairness opinion preceding it, the General Partner shall inform the Limited Partners (by no later than the next annual report) of the date when such new Independent Advisor was engaged, and whether there were any disagreements with the former Independent Advisor on any matters of valuation, assumptions, methodology, accounting principles and practice, or disclosure, which disagreements, if not resolved to the satisfaction of the former Independent Advisor, would have caused him to make reference, in connection with the fairness opinion, to the subject matter of the disagreement or decline to give an opinion. ARTICLE XIII FISCAL YEAR The Fiscal Year of the Partnership shall begin on the first day of January and end on the thirty-first day of December in each year. Should the General Partner decide to change the Fiscal Year of the Partnership, it will seek to obtain any required approvals from the Internal Revenue Service for such change. If such approval is obtained (or not then required), the General Partner will give prompt notice to the Limited Partners of the change in Fiscal Year. -30- 31 ARTICLE XIV PARTNERSHIP FUNDS The funds of the Partnership shall be deposited in such account or accounts as shall be designated by the General Partner and all withdrawals against such accounts shall be made only by the General Partner or by its properly delegated agents. ARTICLE XV TRANSFER OF PARTNERSHIP INTEREST A. In General. A Limited Partner or Special Partner may not sell, assign, transfer or otherwise dispose of, or pledge, hypothecate or in any manner encumber, his interest in the Partnership or any part thereof except as permitted in this Article, and any act in violation of this Paragraph A shall not be binding upon or recognized by the Partnership regardless of whether the General Partner shall have knowledge thereof. B. General Partner. 1. Upon the vote of Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests pursuant to Paragraph (d) of Article XI and with the same proportionate vote as provided therein, may remove a General Partner from the Partnership. Written notice of the removal of such General Partner shall be served upon the General Partner either by certified or by registered mail, return receipt requested, or by personal service. Said notice shall set forth the day upon which the removal is to become effective. Upon receipt of notice, the General Partner shall cause an accounting to be prepared covering the transactions of the Partnership since the end of the previous Fiscal Year and, it shall not thereafter sell or dispose of or allow the sale or disposition of any Partnership asset unless such sale or disposition was the subject of a contract entered into by and binding upon the Partnership prior to the date upon which the notice was received by the General Partner. 2. Until the dissolution of the Partnership otherwise occurs, the General Partner shall not voluntarily take any steps to dissolve itself nor shall the General Partner voluntarily withdraw; provided, however, that nothing in this Agreement shall be deemed to prevent the merger or reorganization of Carey Diversified LLC into or with any other entity organized under the laws of the United States or any state thereof or the transfer of all the limited liability company interests of Carey Diversified LLC and the assumption of the rights and duties of the General Partner by, in the case of a merger, reorganization or consolidation, the surviving entity by operation of law provided that the surviving entity shall be admitted to the Partnership immediately prior to such event and such successor shall continue -31- 32 the business of the Partnership as the General Partner without dissolution. 3. Upon the removal, adjudication of bankruptcy under Chapter 7 of the Federal Bankruptcy Code (or any similar law or provision enacted in lieu thereof), assignment by the General Partner of its General Partner's Interest (other than by operation of law as a result of a merger or reorganization permitted by Paragraph B(2) of this Article XV) or other cessation to exist as the General Partner under the Act, the General Partner's Partnership Interest and interest in Distributable Cash From Operations and its interest in Cash From Sales and Cash From Financings shall be purchased by the Partnership for a purchase price equal to the fair market value thereof determined pursuant to the provisions of Section 4 of this Paragraph B. The purchase price of such interest shall be paid by the Partnership to the General Partner by the promissory note of the Partnership, payable to the General Partner or its order, having a face amount equal to such purchase price, containing provisions as would be usual and customary in a commercial promissory note, bearing interest at a rate per annum equal to the lesser of 1% above the prime interest rate at The Bank of New York or the maximum rate permitted by law, payable annually in equal installments of principal and interest over a period of no less than five years from the date of the General Partner's removal, adjudication of bankruptcy under Chapter 7 of the Federal Bankruptcy Code (or any similar law or provision enacted in lieu thereof), assignment by the General Partner of its General Partner's Partnership Interest (other than by operation of law as a result of a merger or reorganization permitted by Paragraph (2) of this Article XV) or other cessation to exist as a General Partner under the Act. The Partnership shall also pay to the General Partner all amounts then accrued and owing to the General Partner. 4. The fair market value of the General Partner's Partnership Interest purchased by the Partnership pursuant to Section 3 of this Paragraph B shall be determined by agreement between the General Partner and the Partnership (which agreement shall require the approval of the Limited Partners holding more than fifty percent (50%) of the outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. If the General Partner and the Partnership cannot agree upon the fair market value of such Partnership Interest within 30 days after the occurrence of the event upon which such interest of the General Partner is to be purchased by the Partnership, the fair market value thereof shall be determined by arbitration in accordance with the then current rules of the American Arbitration Association. The results of such arbitration shall be final and binding and may be enforced by legal proceedings. The expense of arbitration shall be borne equally by the General Partner and the Partnership. The fair market value of the General Partner's Partnership Interest shall be the amount the General Partner would receive upon dissolution and termination of the Partnership assuming that such dissolution or termination occurred on the date of the occurrence of the -32- 33 event upon which such Partnership Interest of the General Partner is to be purchased by the Partnership and the assets were sold for their then fair market value without any compulsion on the part of the Partnership to sell such assets. C. Limited Partners and Special Partners. 1. The General Partner may, pursuant to this Article XV, (a) admit as a substituted Limited Partner or Special Partner any successor in interest to a Limited Partner or Special Partner either deceased or under legal disability, and (b) admit as substituted Limited Partners or Special Partners assignees of Limited Partners or Special Partners. 2. A substituted Limited Partner or Special Partner is a Person admitted to all the rights of a Limited Partner or Special Partner. An assignee is a Person to whom a Limited Partner or Special Partner has assigned his interest in the Partnership but who has not become a substituted Limited Partner or Special Partner. An assignee shall have no right to require any information or account of the Partnership's transactions or to inspect the Partnership's books and records but shall only be entitled to receive the share of the profits, or the return of the capital contribution, to which his assignor would otherwise be entitled as set forth in Section 5 of this Paragraph C. 3. No assignee of the whole or any portion of a Limited Partner's or Special Partner's interest in the Partnership shall have the right to become a substituted Limited Partner or Special Partner in place of his assignor unless all of the following conditions are satisfied: (a) The duly executed written instrument of assignment setting forth the intention of the assignor that the assignee become a substituted Limited Partner or Special Partner in his place shall have been filed with the Partnership; (b) The interests in the Partnership being acquired by the assignee shall consist of at least five percent of the limited partner or special partner interest (two percent of the limited partner or special partner interest for an Individual Retirement Account) and, if the assignor shall retain any limited partner interest, such retention shall consist of at least five percent of the limited partner or special partner interests (two percent of the limited partner or special partner interests for an Individual Retirement Account); (c) The assignor and assignee shall execute and acknowledge such other instruments as the General Partner may deem necessary or desirable to effect such assignment and admission, including the written acceptance and adoption by the assignee of the provisions of this Agreement and his execution, acknowledgment and delivery to the General Partner of a Power of Attorney, the form and content of which are more fully described in Article XIX hereof; and -33- 34 (d) The assignee shall pay a transfer fee not to exceed $50.00 per transaction to the Partnership. The written consent of the General Partner to such substitution or a notice of denial of consent shall be given to the assignee not later than the last day of the calendar month following the month the General Partner actually receives the instrument of assignment. 4. Any Person admitted to the Partnership as a Partner shall be subject to all of the provisions of this Agreement as if originally a party to it. 5. Subject to the provisions of Section 11 of this Paragraph C, compliance with the suitability standards imposed by the Partnership, applicable "Blue Sky" laws and the applicable rules of any other governmental authority, a Limited Partner or Special Partner shall have the right to assign the whole or any portion of its limited partner or special partner interest (but not less than five percent of the limited partner or special partner interests (two percent of the limited partner interests for an Individual Retirement Account)) and, if he shall retain any limited partner or special partner interest, subject to his retaining not less than five percent of the limited partner or special partner interests (two percent of the limited partner or special partner interests for an Individual Retirement Account) of his Partnership Interest by a written assignment the terms of which are not in contravention of any of the provisions of this Agreement, which assignment has been executed by the assignor and received by the Partnership and recorded on the books and records thereof. Any assignment in contravention of any of the provisions of this Section 5 shall be of no force and effect and shall not be binding upon or recognized by the Partnership. (a) Except as provided in Subsection (e) below, Paragraph A of Article VIII hereof and Paragraph D of Article IX hereof, an assignee of a Partnership Interest shall be entitled to receive distributions from the Partnership of Distributable Cash From Operations for any quarter attributable to the interest acquired by reason of such assignment beginning in the Fiscal Quarter in which the assignee is recognized as the owner of such Partnership Interest. For purposes of such distribution, ownership of a Partnership Interest for each Fiscal Quarter will be determined as of the fifteenth day of the last month of each Fiscal Quarter. (b) Except as provided in Subsection (e) below, Paragraph A of Article VIII hereof and Article IX hereof, an assignee of a Partnership Interest shall be entitled to receive distributions from the Partnership of Cash From Sales and Cash From Financings beginning in the month in which the assignee is recognized as the owner of such Partnership Interest. For purposes of such distributions, ownership of a Partnership Interest for each month will be determined as of the fifteenth day of each month. (c) The net profits and net losses attributable to an interest in the Partnership assigned during any year shall be -34- 35 divided among and allocated in accordance with the provisions of Paragraph A of Article VIII hereof. (d) The effective date of an assignment of an interest in the Partnership as used in this Section shall be the day on which the written instrument of assignment, in form and substance satisfactory to the General Partner, is accepted by the General Partner. (e) Notwithstanding the other provisions of this Article XV and subject to the limitations of Article X(F), both the Partnership and the General Partner shall be entitled to treat the assignor of such interest as the absolute owner thereof in all respects, and shall incur no liability for distributions made in good faith to him, until such time as the written assignment has been received by, and recorded in the books and records of, the Partnership. 6. The General Partner may elect to treat an assignee who has not become a substituted Limited Partner or Special Partner as a substituted Limited Partner or Special Partner in the place of his assignor should the General Partner deem, in its absolute discretion, that such treatment is in the best interests of the Partnership for any of its purposes or for any of the purposes of this Agreement. 7. No approval of any of the Limited Partners or Special Partners is required to effect the substitution of a Limited Partner or Special Partner, except that a Limited Partner or Special Partner who assigns his interest in the Partnership must evidence his intention that his assignee be admitted as a substituted Limited Partner or Special Partner in his place and must execute such instruments as the General Partner may in its absolute discretion determine to be necessary or desirable in connection therewith. 8. Upon the admission of a Limited Partner or Special Partner (whether as a result of his purchase of limited partner interest from the Partnership or his admission as a substituted Limited Partner or Special Partner), the General Partner shall make an appropriate entry on the books and records of the Partnership. 9. Upon the death or adjudication of incompetence to manage his person or his property of an individual Limited Partner or Special Partner, his personal representative shall have all of the rights of a Limited Partner or Special Partner for the purpose of settling or managing his estate, and such power as the decedent or incompetent possessed to constitute a successor as an assignee of its interest in the Partnership and to join with such assignee in making application to substitute such assignee as a Limited Partner or Special Partner. However, such personal representative shall not have the right to become a substituted Limited Partner or Special Partner in the place of his predecessor in interest unless the conditions of Section 3 of -35- 36 this Paragraph C (other than the requirement that the assignor execute and acknowledge instruments) are first satisfied. 10. Upon the adjudication of bankruptcy under Chapter 7 of the Federal Bankruptcy Code (or any similar law or provision enacted in lieu thereof) or other cessation to exist as a legal entity of a Limited Partner or Special Partner not an individual, the authorized representative of such entity shall have all of the rights of a Limited Partner or Special Partner for the purpose of effecting the orderly winding up and disposition of the business of such entity and such power as such entity possessed to constitute a successor as an assignee of its interest in the Partnership and to join with such assignee in making application to substitute such assignee as a Limited Partner or Special Partner. However, such authorized representative shall not have the right to become a substituted Limited Partner or Special Partner in the place of his predecessor in interest unless the conditions of Section 3 of this Paragraph C (other than the requirement that the assignor execute and acknowledge instruments) are first satisfied. 11. (a) No assignment or transfer of an interest in the Partnership may be made which would result in Limited Partners or Special Partners and assignees of Limited Partners or Special Partners owning, directly or indirectly, individually or in the aggregate, more than twenty percent (20%) of the equity interests of a General Partner or any Affiliate of a General Partner as defined in Section 1504(a) of the Code. If any such assignment or transfer would otherwise be made by bequest, inheritance or operation of law, the transferee shall not become a Partner and the interest in the Partnership transferred shall be automatically redeemed by the Partnership in the same manner as provided in Subsection (b)(4) of this Section 11. (b) Anything to the contrary contained herein notwithstanding: (1) Except in the case of the Merger, in any twelve (12) consecutive month period no assignment or transfer of a limited partner interest may be made if as a result thereof the aggregate total of limited partner interests assigned and/or transferred in such period would exceed forty percent (40%) of the outstanding limited partner interests. This limitation is hereinafter referred to as the "forty percent (40%) limitation." (2) A Limited Partner may assign or transfer his Partnership Interest to: (i) his spouse (unless legally separated), child or ancestor, or (ii) a corporation, partnership, trust or other entity, fifty-one percent (51%) of the equity interest of which is owned by such Limited Partner and/or any of the Persons specified in clause (i) so related to such Limited Partner, provided, however, that such transfers are subject to the forty percent (40%) limitation. (3) Subsection (b)(1) of this Section 11 shall not apply to a transfer by gift, bequest or inheritance, or a -36- 37 transfer to the Partnership and, for purposes of the forty percent (40%) limitation, any such transfer shall not be treated as such. (4) If, after the forty percent (40%) limitation is reached in any consecutive twelve (12) month period, a transfer of a Partnership Interest would otherwise take place by operation of law (but not including any transfer referred to in Subsection (b)(3) of this Section 11), then the transferee shall not become a Limited Partner and such Partnership Interest shall be automatically redeemed by the Partnership for a price equal to the fair market value of said interest on such date of transfer. The price shall be paid within ninety (90) days after the date of the transfer and redemption. If the Partnership and the transferor do not agree upon the fair market value of the Partnership Interest, the purchase price shall be determined by arbitration. The purchase price shall be paid in cash within ten (10) days after such determination. (c) No transfer or assignment of any limited partner interest shall be made if it would result in the Partnership's being treated as an association taxable as a corporation for tax purposes. The General Partner, in its sole discretion, may, on behalf of the Partnership, impose any restrictions on transfers or assignments of limited partner interests it may deem appropriate to give effect to the preceding sentence. The General Partner shall incur no liability to any Limited Partner, prospective investor or assignee for any action or inaction in connection with the foregoing, provided that the General Partner acted in good faith and such course of conduct did not constitute negligence or misconduct of the General Partner. 12. The General Partner will cause the Partnership to make the election referred to in Section 754 of the Code, and any similar election provided by state or local law, or any similar provision enacted in lieu thereof. 13. No Limited Partner or Special Partner shall be entitled to withdraw from the Partnership except on transfer of all his partner interest pursuant to this Article XV. 14. Each Limited Partner or Special Partner shall immediately notify the Partnership of any assignment of any partner interest in the Partnership and shall provide the name, address and identification number of the assignee. D. Opinions Regarding Taxation. In the event that the tax status of the Partnership changes and, notwithstanding any other provision of this Agreement, the requirement, as a condition to any action proposed to be taken under this Agreement, that the Partnership be furnished an opinion of counsel for the Partnership to the effect that the proposed transaction would not result in the Partnership being treated as an association taxable as a corporation for federal income tax purposes, shall not be applicable if the Partnership is at such -37- 38 time treated in all material respects as an association taxable as a corporation for federal income tax purposes. ARTICLE XVI MEETINGS AND AMENDMENT OF LIMITED PARTNERSHIP CERTIFICATE AND AGREEMENT A. Amendment of Limited Partnership Certificate. The General Partner shall amend the Certificate of Limited Partnership of the Partnership, and shall file the same, without additional approval of Limited Partners when, pursuant to the terms of this Agreement: 1. There is a change in the name of the Partnership; 2. The General Partner withdraws, is removed, is adjudicated bankrupt under Chapter 7 of the Federal Bankruptcy Code (or any similar law or provision enacted in lieu thereof), assigns its General Partner's Interest, is adjudicated incompetent to manage his person or his property or dies or otherwise ceases to exist as a General Partner under the Act or a Person is admitted as a General Partner; 3. There is a false or erroneous statement in the Certificate; 4. The Partners desire to make a change in any other statement in the Certificate in order that it shall be accurate; or 5. There is a change in the address of the Partnership's principal place of business or registered office, or a change in the name or address of the Partnership's registered agent. If the General Partner is required to file a certificate of amendment and fails after demand to do so within 30 days of such demand or if it refuses to do so, any other Person who is adversely affected by such failure or refusal, may petition the Court of Chancery in the State of Delaware to direct the execution of the certificate. B. Amendments to the Agreement. 1. Amendments to this Agreement may be proposed by the General Partner or by Limited Partners Shares holding ten percent (10%) or more of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. Following such proposal, the General Partner shall submit to the Limited Partners a verbatim statement of any proposed amendment and an opinion of counsel, who may be counsel to the Partnership, as to the legality of such amendment and the effect of such amendment on the liability of Limited -38- 39 Partners for the debts of the Partnership. The General Partner shall include in any such submission the General Partner's recommendations as to the proposed amendment. The amendment shall become effective only upon the written approval or affirmative vote of Limited Partners holding more than fifty percent (50%) of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. 2. Any provision to the contrary herein notwithstanding, the General Partner may, without the approval of the Limited Partners, make the following amendments to this Agreement: a. Any amendments to Article VIII and/or Article IX of this Agreement if the Partnership is advised by its accountants or legal counsel at any time that the allocations provided in those Articles are not likely to be respected for Federal income tax purposes, either because of the promulgation of Treasury Regulations under Section 704 of the Code or other developments in the law. The General Partner is empowered to amend such provisions to the minimum extent necessary in accordance with the advice of the accountants and counsel to effect the allocations provided in this Agreement. New allocations made by the General Partner in reliance upon the advice of the accountants or counsel described above shall be deemed to be made pursuant to the fiduciary obligation (as described herein) of the General Partner to the Partnership and the Limited Partners, and no such new allocation shall give rise to any claim or cause of action by any Limited Partner, provided that the General Partner acted in good faith; and b. In the event that the State of Delaware amends the Delaware Revised Uniform Limited Partnership Act in any manner and, as a result of such amendment, counsel to the Partnership is unable to give the Partnership an opinion to the effect that the Partnership will be treated as a partnership for Federal income tax purposes and not as association taxable a corporation, then the General Partner may decide in its sole discretion to reconstitute the Partnership under the laws of another state. 3. Any provision to the contrary contained herein notwithstanding, the General Partner may, without the approval of the Limited Partners, amend this Agreement (a) to add to the representations, duties or obligations of a General Partner or to surrender any right or power granted to a General Partner herein, for the benefit of the Limited Partners, (b) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein or to make any other provision with respect to matters or questions arising under this Agreement which will not be inconsistent with the provisions of this Agreement, (c) to delete any provision from this Agreement or to add any provision to this Agreement required to be so deleted or added by the Staff of the Securities and Exchange Commission or by a State "Blue Sky" Commissioner or similar such official, which addition or deletion is deemed by such Commission or official to be for the benefit or protection -39- 40 of the Limited Partners, and (d) to change administrative or other provisions of this Agreement in a manner which, in the opinion of the General Partner, will permit the most profitable and/or efficient operation of the Partnership; provided, however, that no amendment shall be adopted pursuant to this Section 3 unless the adoption thereof (i) is for the benefit of, or not adverse to, the interests of the Limited Partners, (ii) is consistent with Article IV and Paragraph A of Article X hereof, (iii) does not affect the distribution of Distributable Cash From Operations, Cash From Sales or Cash From Financings or the allocation of profits and losses among the Limited Partners or between the Limited Partners and the General Partner and (iv) does not affect the limited liability of the Limited Partners or the status of the Partnership as a partnership for Federal income tax purposes. 4. Upon amendment of this Agreement, the Certificate of Limited Partnership shall also be amended if necessary to reflect such change. 5. Any amendment to this Agreement which modifies the compensation or distributions to which a General Partner is entitled or which affects the duties of a General Partner must be consented to by such General Partner before becoming effective. 6. In the event there is a change in the Federal income tax laws or regulations which results in the Partnership being taxed as an association taxable as a corporation, the General Partner may take all steps necessary to cause the Partnership to conduct its business so as to be treated as a real estate investment trust for Federal income tax purposes, provided, however, that Limited Partners, holding more than fifty percent (50%) of the then outstanding Limited Partner interests, with the same proportionate vote as provided in paragraph (d) of Article XI, approve such action either prior to or within six months after such action is taken. C. Meetings of the Partnership. Meetings of the Partnership may be called by the General Partner and shall be called by it upon the written request of Limited Partners holding ten percent (10%) or more of the then outstanding Limited Partner Interests, with the same proportionate vote as provided in paragraph (d) of Article XI. Upon receipt of such a written request, stating the purpose of the proposed meeting, the General Partner shall provide each Partner, within 10 days of such request, written notice (either by personal service or certified mail or by express or other overnight delivery service) of a meeting and the purpose of such meeting. Such meeting shall be held not less than 15 days nor more than 60 days after the receipt of such request at a time and place convenient to the Limited Partners as specified in the written notice of the meeting. Included with the notice shall be a detailed statement of the action proposed, including a verbatim statement of the wording of any resolution proposed for adoption by the Limited Partners and of any proposed amendment to this Agreement. The Partnership will provide for Proxies or written approvals which -40- 41 specify a choice between approval and disapproval of each matter to be acted upon at the meeting. Holders of a majority of the limited partner interests entitled to vote, represented in person or by Proxy, shall constitute a quorum at a meeting of the Limited Partners. The General Partner may establish a record date for any meeting. ARTICLE XVII TERM The term for the Partnership shall terminate on December 31, 2050, unless the Partnership is sooner dissolved pursuant to the provisions of Article XVIII hereof or as otherwise provided by law. ARTICLE XVIII DISSOLUTION A. Events Requiring Dissolution. The Partnership shall be dissolved upon the happening of any of the following events: 1. The withdrawal, removal, adjudication of bankruptcy under Chapter 7 of the Federal Bankruptcy Code (or any similar law or provision enacted in lieu thereof) of the General Partner, the assignment by the General Partner of its General Partner's Interest (other than by operation of law as a result of a merger or reorganization permitted by Paragraph B(2) of Article XV) or other cessation to exist as a General Partner under the Act unless within 90 days of such event all remaining Partners agree in writing to continue the business of the Partnership and to admit one or more General Partner effective as of the date of such event. 2. The Partnership is adjudicated bankrupt under Chapter 7 of the Federal Bankruptcy Code (or any similar law or provision enacted in lieu thereof). 3. The vote of Limited Partners, holding more than fifty percent (50%) of the then outstanding limited partner interests held by all Limited Partners, with the same proportionate vote as provided in paragraph (d) of Article XI. 4. The disposition of all interests in the real, personal and mixed property and other assets of the Partnership. 5. The entry of a decree of judicial dissolution under Section 17-802 of the Act. 6. December 31, 2050. -41- 42 B. Distributions on Dissolution. Upon the dissolution of the Partnership the General Partner who has not wrongfully dissolved the Partnership shall wind up the affairs of the Partnership. If there is no such General Partner, a majority of Limited Partners shall elect a party to wind up the affairs of the Partnership. The party winding up the affairs of the Partnership shall take full account of the Partnership assets and liabilities and all assets shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom shall be applied and distributed in the following order: (1) to creditors (including Partners who are creditors to the extent permitted by law), in satisfaction of liabilities of the Partnership (whether by payment or by the making of reasonable provision for the payment thereof), in the order of priority as provided by law, (2) to the Partners in accordance with their respective Capital Accounts, determined after the application of Articles VIII and IX hereof and (3) to the Partners in accordance with the provisions of Paragraph E of Article IX hereof. Notwithstanding anything to the contrary, in the event the Partnership is "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), liquidating distributions shall be made pursuant to the previous sentence by the end of the taxable year in which the Partnership is liquidated, or, if later, within 90 days after the date of such liquidation. Distributions pursuant to the preceding sentence may be made to a trust for the purposes of an orderly liquidation of the Partnership by the trust in accordance with the Act. C. Contributions by the General Partner. In the event that, upon the liquidation of the Partnership, a General Partner shall have a negative balance in such General Partner's Capital Account then such General Partner shall contribute to the capital of the Partnership an amount equal to such negative balance in such General Partner's Capital Account. ARTICLE XIX POWER OF ATTORNEY Each Limited Partner and Special Partner hereby constitutes and appoints the General Partner as the attorney-in-fact for such Limited Partner or Special Partner with power and authority to act in his name and on his behalf in the execution, acknowledgment and filing of documents, which will include but not be limited to a Certificate of Limited Partnership, as well as amendments thereto, under the laws of the State of Delaware and under the laws of any other state in which the General Partner deems it advisable to file such a certificate; this Agreement and any amendments hereto, any other instrument which may be required to be filed by the Partnership under the laws of any state or by any governmental agency, or which the General Partner deems it advisable to file; and any documents which may be required to effect the continuation of the Partnership, the admission of an additional or substituted Limited Partner, Special Partner or General Partner or the dissolution and -42- 43 termination of the Partnership, provided such continuation, admission or dissolution and termination are in accordance with the terms of this Agreement. The Power of Attorney so granted by each Limited Partner and Special Partner to the General Partner is a Special Power of Attorney coupled with an interest, is irrevocable and shall survive and not be affected by the subsequent death, incapacity or disability of the Limited Partner or Special Partner; may be exercised by the General Partner for each Limited Partner or Special Partner by a facsimile signature of one of its officers or with a single signature of one of its officers acting as attorney-in-fact for all of them; shall be retained by the General Partner; and shall survive the delivery of any assignment by a Limited Partner or Special Partner of the whole or any portion of his interest in the Partnership; except that where the assignee thereof has been approved by the General Partner for admission to the Partnership as a substituted Limited Partner or Special Partner, the Power of Attorney shall survive the delivery of such assignment for the sole purpose of enabling the General Partner to execute, acknowledge and file any instrument necessary to effect such substitution. The Power of Attorney so granted by each Limited Partner to the General Partner shall not authorize the General Partner to act on behalf of Limited Partners in any situation in which this Agreement requires the approval of Limited Partners unless such approval is obtained. ARTICLE XX LITIGATION The General Partner is hereby authorized to prosecute, defend, settle or compromise actions or claims at law or in equity at the Partnership's expense as may be necessary or proper to enforce or protect the Partnership's interests. The General Partner shall satisfy any judgment, decree or decision of any court, board or authority having jurisdiction or any settlement of any suit or claim prior to judgment or final decision thereon first, out of any insurance proceeds available therefor, next out of the Partnership's assets and income and finally out of the assets and income of the General Partner. ARTICLE XXI MISCELLANEOUS All notices under this Agreement shall be in writing and shall, except as otherwise expressly provided herein, be given to the Partner entitled thereto by personal service or by certified or registered mail or express mail or other overnight delivery service, return receipt requested, to the address set -43- 44 forth in the books and records of the Partnership for such Partner or at such other address as he may specify in writing. Article titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. Whenever the singular number is used in this Agreement and when required by the context, the same shall include the plural, and the masculine gender shall include the feminine and neuter genders and the word persons shall include individuals, corporations, firms, partnerships, trusts or other forms of associations. This Agreement may be executed in several counterparts, and all so executed shall constitute one agreement, binding on all of the parties hereto, notwithstanding that all the parties are not signatory to the original or the same counterpart. Subject to the provisions of Article XV, the terms and provisions of this Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, successors and assigns of the respective Partners. Whenever the vote of the Limited Partners is referred to in this Agreement, the General Partner may vote on behalf of such Limited Partners who have by written proxy authorized the General Partner so to do. This Agreement and all amendments hereof shall be governed by the laws of the State of Delaware. -44- 45 IN WITNESS WHEREOF, the parties hereto have hereunto set their respective hands as of the day and year first above written. GENERAL PARTNER: CAREY DIVERSIFIED LLC By:_________________________________________ CORPORATE SPECIAL PARTNER: CAREY MANAGEMENT LLC By:_________________________________________ INDIVIDUAL SPECIAL PARTNER: ____________________________________________ William Polk Carey LIMITED PARTNERS: CAREY DIVERSIFIED LLC By: ________________________________________ NINTH CAREY CORPORATE PROPERTY, INC. By: ________________________________________ -45- 46 All Limited Partners now and hereafter admitted as limited partners of the Partnership pursuant to powers of attorney and authorizations now and hereafter executed in favor of and granted and delivered to the General Partner By: CAREY DIVERSIFIED LLC, General Partner By:______________________________________ -46- EX-99.22 62 LISTED SHARE PURCHASE WARRANT 1 Exhibit 99.22 NEITHER THIS WARRANT NOR THE LISTED SHARES UNDERLYING THIS WARRANT OF CAREY DIVERSIFIED LLC ("COMPANY") HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), NOR UNDER ANY STATE SECURITIES LAW AND MAY NOT BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED (i) UNTIL (A) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND APPLICABLE STATE SECURITIES LAW OR (B) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE COMPANY OR COUNSEL TO THE HOLDER OF SUCH WARRANT (PROVIDED SUCH OTHER COUNSEL IS REASONABLY SATISFACTORY TO THE COMPANY) THAT SUCH WARRANT MAY BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES LAW. Right to Purchase up to _______ Listed Shares of Carey Diversified LLC CAREY DIVERSIFIED LLC LISTED SHARE PURCHASE WARRANT Carey Diversified LLC, a Delaware limited liability company (the "Company"), hereby certifies that, for value received, W.P. Carey & Co., Inc. ("W.P. Carey") is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time before 5:00 p.m., New York time, on _________ up to ______ limited liability interests in the Company representing an interest in all of the income, loss and capital of the Company (each, a "Listed Share") at the exercise price of $______ per Listed Share. Such price per share as further adjusted from time to time as herein provided is referred to herein as the "Purchase Price". The number and character of such Listed Shares and the Purchase Price are subject to further adjustment as provided herein. This Warrant is the Listed Share Purchase Warrant (the "Warrant") evidencing the right to purchase Listed Shares, issued pursuant to a certain Investment Banking Services Agreement (the "Agreement"), dated as of ______, among the Company and W.P. Carey, copies of which agreement are on file at the principal office of the Company, and the holder of this Warrant shall be entitled to all of the benefits of the Agreement, as provided therein. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Cashless Exercise Ratio" shall mean a fraction, the numerator of which is the difference between the Current Market Price per Listed Share on the date of the exercise of this Warrant and the Exercise Price and the denominator of which is the Current Market Price per Listed Share on the date of the exercise of this Warrant. 2 (b) The term "Company" shall include any corporation which shall succeed or assume the obligations of the Company hereunder. (c) The term "Convertible Securities" shall mean evidence of indebtedness, limited liability company interests or other securities which are convertible into or exchangeable, with or without payment of additional consideration in cash or property, for additional Listed Shares, either immediately or upon the occurrence of a specified date or a specified event. (d) The term "Current Market Price" as of any date herein specified as to any security shall mean the average of the daily closing prices for the thirty (30) consecutive trading days commencing forty-five (45) trading days before the day in question. The closing price for each day shall be (i) the closing price of any such security in the over-the-counter market as shown by the National Association of Securities Dealers, Inc. Automated Quotation System, or any similar system of automated dissemination of quotations of securities prices then in common use, if so quoted, as reported by any member firm of the New York Stock Exchange selected by the Company, or (ii) if not quoted as described in clause (i), the mean between the high bid and low asked quotations for any such security as reported by the National Quotation Bureau Incorporated or any similar successor organization, as reported by any member firm of the New York Stock Exchange selected by the Company, or (iii) if any such security is listed or admitted for trading on any national securities exchange, the last sale price of any such security, regular way, or the mean of the closing bid and asked prices thereof if no such sale occurred, in each case as officially reported on the principal securities exchange on which any such security is listed. If any such security is quoted on a national securities or central market system in lieu of a market or quotation system described above, the closing price shall be determined in the manner set forth in clause (ii) of the preceding sentence if bid and asked quotations are reported but actual transactions are not, and in the manner set forth in clause (iii) of the preceding sentence if actual transactions are reported. (e) The term "Listed Share" includes (i) a limited liability interests in the Company representing an interest in all of the income, loss and capital of the Company; (ii) any other interest of any class or classes (however designated) of the Company, authorized on or after such date, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividend and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference and the holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency), and (iii) any other securities into which or for which any of the securities described in (i) or (ii) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (f) The term "Other Securities" refers to any shares (other than Listed Shares) and other securities of the Company or any other person (corporate or otherwise) which the holders of the Warrants at any time shall be entitled to receive, or shall have received, on the exercise of the Warrants, in lieu of or in addition to Listed Shares, or which at any time shall be issuable -2- 3 or shall have been issued in exchange for or in replacement of Listed Shares or other Securities pursuant to Section 3 or otherwise. (g) The term "Outstanding" shall mean, when used with reference to Listed Shares, at any date as of which the number of shares thereof is to be determined, all issued Listed Shares, except Listed Shares then owned or held by or for the account of the Company thereof, and shall include all Listed Shares issuable in respect of outstanding scrip or any certificates representing fractional interests in Listed Shares. All capitalized terms used herein without specific definition shall have the meanings assigned to such terms in the Agreement. 1. Exercise of Warrant. 1.1 Manner of Exercise; Issuance of Common Stock. To exercise this Warrant, the holder hereof shall (i) deliver to the Company (a) a Notice of Exercise duly executed by the holder hereof specifying the number of Listed Shares to be purchased, (b) an amount equal to the aggregate Exercise Price for all Listed Shares as to which this Warrant is then being exercised and (c) this Warrant or (ii) in connection with the exercise of this Warrant without the payment of the Exercise Price, deliver to the Company (a) a Notice of Exercise duly executed by the holder hereof specifying the number of Listed Shares for which this Warrant is being exercised and the number of Listed Shares deliverable upon such exercise, which shall equal the product of (x) the number of Listed Shares for which this Warrant is being exercised and (y) the Cashless Exercise Ratio and (b) this Warrant. At the option of the holder hereof, if this Warrant is being exercised in the manner described in clause (i) of the immediately preceding sentence, payment of the Exercise Price shall be made by (a) wire transfer of funds to an account in a bank located in the United States designated by the Company for such purpose, (b) certified or official bank check payable to the order of the Company and drawn on a member of the New York Clearing House or (c) by any combination of such methods. Upon receipt of the required deliveries, the Company shall, as promptly as practicable, and in any event within five (5) days thereafter, cause to be issued and delivered to the holder hereof (or its nominee), a certificate or certificates representing Listed Shares equal in the aggregate to the number of Listed Shares specified in the Notice of Exercise (but not exceeding the maximum number of Listed Shares issuable upon exercise of this Warrant). Such certificates shall be registered in the name of the holder hereof (or its nominee) or in the name of such transferee, as the case may be. If this Warrant is exercised in part, the Company shall, at the time of delivery of such certificate or certificates, unless the Exercise Period has expired, issue and deliver to the holder hereof a new warrant evidencing the right of the holder hereof or such transferee to purchase the aggregate number of shares of Common Stock for which this Warrant shall not have been exercised, and this Warrant shall be canceled. -3- 4 1.2 Company Acknowledgment. The Company will, at the time of the exercise of the Warrant, upon the request of the holder hereof acknowledge in writing its continuing obligation to afford to such holder any rights to which such holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant. If the holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such holder any such rights. 1.3 Company Covenant. The Company covenants that all shares that may be issued upon the exercise of the Warrant will, upon issuance, be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof. The Company further covenants that during the period within which the Warrant may be exercised, the Company will at all times have authorized and reserved a sufficient number of Listed Shares to permit the exercise of the Warrant. 2. Delivery of Share Certificate, etc. on Exercise. As soon as practicable after the exercise of this Warrant in full or in part and in any event within 10 days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes, but not income taxes of the holder) will cause to be issued in the name of and delivered to the holder hereof, or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and nonassessable Listed Shares (or Other Securities) to which such holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash value in the amount of such fraction multiplied by the then Fair Market Value of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such holder is entitled upon such exercise pursuant to Section 1 or otherwise. 3. Adjustments. The number of Listed Shares for which this Warrant is exercisable, or the price at which such shares may be purchased upon exercise of this Warrant, shall be subject to adjustment from time to time as set forth in this Section 3. The Company shall give each holder notice of any event described below which requires an adjustment pursuant to this Section 3 at the time of such event. 3.1 Listed Share Dividends, Subdivisions and Combinations. If at any time the Company shall: (a) take a record of the holders of its Listed Shares for the purpose of entitling them to receive a dividend payable in, or other distribution of, additional Listed Shares, (b) subdivide its outstanding Listed Shares into a larger number of Listed Shares, or -4- 5 (c) combine its outstanding Listed Shares into a smaller number of Listed Shares, then, (i) the number of Listed Shares for which this Warrant is exercisable immediately after the occurrence of any such event shall be adjusted to equal the number of Listed Shares which a record holder of the same number of Listed Shares for which this Warrant is exercisable immediately prior to the occurrence of such event would own or be entitled to receive after the happening of such event, and (ii) the Purchase Price shall be adjusted to equal (A) the Purchase Price multiplied by the number of Listed Shares for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of Listed Shares for which this Warrant is exercisable immediately after such adjustment. 3.2 Certain Other Distributions. If at any time the Company shall take a record of the holders of its Listed Shares for the purpose of entitling them to receive any dividend or other distribution of: (a) any Other Securities or property of any nature whatsoever (other than cash, Convertible Securities or additional Listed Shares), or (b) any warrants or other rights to subscribe for or purchase any Other Securities or property of any nature whatsoever (other than cash, Convertible Securities or additional Listed Shares), the holder shall be entitled to receive such dividends or distributions as if the holder has exercised the Warrant. A reclassification of the Listed Shares into Listed Shares and shares of any other class of securities shall be deemed a distribution by the Company to the holders of its Listed Shares of such shares of such other class of shares within the meaning of this Section 3.2 and, if the outstanding Listed Shares shall be changed into a larger or smaller number of Listed Shares as a part of such reclassification, such change shall be deemed a subdivision or combination, as the case may be, of the outstanding Listed Shares within the meaning of Section 3.2. 3.3 Issuance of Warrants or Other Rights. If at any time the Company shall take a record of the holders of its Listed Shares for the purpose of entitling them to receive a distribution of, or shall in any manner (whether directly or by assumption in a merger in which Company is the surviving entity) issue or sell, any warrants or other rights to subscribe for or purchase any additional Listed Shares or any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Listed Shares are issuable upon the exercise of such Warrants or other right or upon conversion or exchange of such Convertible Securities shall be less than the Purchase Price in effect immediately prior to the time of such issue or sale, then the number of Listed Shares for which this Warrant is exercisable and the Purchase Price shall be adjusted as follows: (i) the Purchase Price as to the number of Listed Shares for which this Warrant is exercisable prior to such adjustment shall be reduced to a price determined by dividing (A) an amount equal to the sum of -5- 6 (x) the number of Listed Shares outstanding immediately prior to such conversion multiplied by the then existing Purchase Price, plus (y) the consideration, if any, received by the Company upon such issue or sale, by (B) the total number of Listed Shares Outstanding immediately after such conversion; and (ii) the number of Listed Shares for which this Warrant is exercisable shall be adjusted to equal the product obtained by multiplying the Purchase Price in effect immediately prior to such conversion by the number of Listed Shares for which this Warrant is exercisable immediately prior to such conversion and dividing the product thereof by the Purchase Price resulting from the adjustment made pursuant to clause (i) above on the basis that the maximum number of additional Listed Shares issuable pursuant to all such warrants or other rights or necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding and the Company shall have received all of the consideration payable therefor, if any, as of the date of the actual issuance of the number of Listed Shares for which this Warrant is exercisable and such warrants or other rights. No further adjustments of the Purchase Price shall be made upon the actual issue of such Listed Shares or of such Convertible Securities upon exercise of such warrants or other rights or upon the actual issue of such Listed Shares upon such conversion or exchange of such Convertible Securities. 3.4 Issuance of Convertible Securities. If at any time the Company shall take a record of the holders of its Listed Shares for the purpose of entitling them to receive a distribution of, or shall in any manner (whether directly or by assumption in a merger in which the Company is the surviving entity) issue or sell, any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Listed Shares are issuable upon such conversion or exchange shall be less than the Purchase Price in effect immediately prior to the time of such issue or sale, then the number of Listed Shares for which this Warrant is exercisable and the Purchase Price shall be adjusted as provided in Section 3.3 on the basis that the maximum number of additional Listed Shares necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding and the Company shall have received all of the consideration payable therefor, if any, as of the date of actual issuance of such Convertible Securities. No adjustment of the number of Listed Shares for which this Warrant is exercisable and the Purchase Price shall be made under this Section 3.4 upon the issuance of any Convertible Securities which are issued pursuant to the exercise of any warrants or other subscription or purchase rights therefor, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights pursuant to Section 3.3. No further adjustments of the number of Listed Shares for which this Warrant is exercisable and the Purchase Price shall be made upon the actual issue of such Listed Shares upon conversion or exchange of such Convertible Securities and, if any issue or sale of such Convertible Securities is made upon exercise of any warrant or other right to subscribe for or to purchase any such Convertible Securities for which adjustments of the number of Listed Shares for which this Warrant is exercisable and the Purchase Price have been or are to be made pursuant to other provisions of this Section 3, no further adjustments of the number of Shares for which this Warrant is exercisable and the Purchase Price shall be made by reason of such issue or sale. -6- 7 3.5 Superseding Adjustment. If, at any time after any adjustment of the number of Listed Shares for which this Warrant is exercisable and the Purchase Price shall have been made pursuant to Section 3.3 or Section 3.4 as the result of any issuance of warrants, rights or Convertible Securities, (a) such warrants or rights, or the right of conversion or exchange in such other Convertible Securities, shall expire, and all or a portion of such warrants or rights, or the right of conversion or exchange with respect to all or a portion of such other Convertible Securities, as the case may be, shall not have been exercised, or (b) the consideration per Listed Share for which Listed Shares are issuable pursuant to such warrants or rights, or the terms of such other Convertible Securities, shall be increased solely by virtue of provisions therein contained for an automatic increase in such consideration per share upon the occurrence of a specified date or event, then for each outstanding Warrant, such previous adjustment shall be rescinded and annulled and the additional Listed Shares which were deemed to have been issued by virtue of the computation made in connection with the adjustment so rescinded and annulled shall no longer be deemed to have been issued by virtue of such computation. Thereupon, a recomputation shall be made of the effect of such rights or options or other Convertible Securities on the basis of (c) treating the number of additional Listed Shares or other property, if any, theretofore actually issued or issuable pursuant to the previous exercise of any such warrants or rights or any such right of conversion of exchange, as having been issued on the date or dates of any such exercise and for the consideration actually received and receivable therefor, and (d) treating any such warrants or rights or any such other Convertible Securities which then remain outstanding as having been granted or issued immediately after the time of such increase of the consideration per share for which Listed Shares or other property are issuable under such warrants or rights or other Convertible Securities; whereupon a new adjustment of the number of Listed Shares for which this Warrant is exercisable and the Purchase Price shall be made, which new adjustment shall supersede the previous adjustment so rescinded and annulled. 3.6 Other Provisions Applicable to Adjustments Under this Section. The following provisions shall be applicable to the making of adjustments of the number of Listed Shares for which this Warrant is exercisable and the Purchase Price provided for in this Section 3: (a) Computation of Consideration. To the extent that any additional Listed Shares or any Convertible Securities or any warrants or other rights to -7- 8 subscribe for or purchase any additional Listed Shares or any Convertible Securities shall be issued for cash consideration, the consideration received by the Company therefor shall be the amount of the cash received by the Company therefor, or, if such additional Listed Shares or Convertible Securities are offered by Company for subscription, the subscription price, or, if such additional Listed Shares or Convertible Securities are sold to underwriters or dealers for public offering without a subscription offering, the public offering price (in any such case subtracting any amounts paid or receivable for accrued interest or accrued dividends and without taking into account any compensation, discounts or expenses paid or incurred by Company for and in the underwriting of, or otherwise in connection with, the issuance thereof). To the extent that such issuance shall be for a consideration other than cash, then, except as herein otherwise expressly provided, the amount of such consideration shall be deemed to be the fair value of such consideration at the time of such issuance as determined in good faith by the Board of Directors of the Company. In case any additional Listed Shares or any Convertible Securities or any warrants or other rights to subscribe for or purchase such additional Listed Shares or Convertible Securities shall be issued in connection with any merger in which Company issues any securities, the amount of consideration therefor shall be deemed to be the fair value, as determined in good faith by the Board of Directors of the Company, of such portion of the assets and business of the nonsurviving entity as such Board in good faith shall determine to be attributable to such additional Listed Shares, Convertible Securities, warrants or other rights, as the case may be. The consideration for any additional Listed Shares issuable pursuant to any warrants or other rights to subscribe for or purchase the same shall be the consideration received by the Company for issuing such warrants or other rights plus the additional consideration payable to the Company upon exercise of such warrants or other rights. The consideration for any additional Listed Shares issuable pursuant to the terms of any Convertible Securities shall be the consideration received by the Company for issuing warrants or other rights to subscribe for or purchase such Convertible Securities, plus the consideration paid or payable to the Company in respect of the subscription for or purchase of such Convertible Securities, plus the additional consideration, if any, payable to Company upon the exercise of the right of conversion or exchange in such Convertible Securities. In case of the issuance at any time of any additional Listed Shares or Convertible Securities in payment or satisfaction of any dividends upon any class of stock other than Listed Shares, the Company shall be deemed to have received for such additional Listed Shares or Convertible Securities a consideration equal to the amount of such dividend so paid or satisfied. (b) When Adjustments to be Made. The adjustments required by this Section 3 shall be made whenever and as often as any specified event requiring an adjustment shall occur, except that any adjustment of the number of Listed Shares for which this Warrant is exercisable that would otherwise be required may be postponed (except in the case of a subdivision or combination of Listed Shares, as provided for in Section 3.1) up to, but not beyond the date of exercise if such adjustment either by itself or with other adjustments not previously made adds or subtracts less than $.0001 to the -8- 9 Exercise Price immediately prior to the making of such adjustment. Any adjustment representing a change of less than such minimum amount (except as aforesaid) which is postponed shall be carried forward and made as soon as such adjustment, together with other adjustments required by this Section 3 and not previously made, would result in a minimum adjustment or on the date of exercise. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. (c) Fractional Interests. In computing adjustments under this Section 3, fractional interests in Listed Shares shall be taken into account to the nearest 1000th of a share. (d) When Adjustment Not Required. If the Company shall take a record of the holders of its Listed Shares for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. 3.7 Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets. (a) In case the Company shall reorganize its capital, consolidate or merge with or into another entity (where the Company is not the surviving entity or where there is a change in or distribution with respect to the Listed Shares), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another entity and, pursuant to the terms of such reorganization, merger, consolidation or disposition of assets, Listed Shares or other securities of the successor or acquiring entity, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock or other securities of the successor or acquiring entity ("Other Property"), are to be received by or distributed to the holders of the Listed Shares, then each holder shall have the right thereafter, to receive, upon exercise of this Warrant, the amount of equity of the successor or acquiring entity or of the Company, if it is the surviving entity, and Other Property receivable upon or as a result of such reorganization, merger, consolidation or disposition of assets by any holder of the number of Listed Shares for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, merger, consolidation or disposition of assets, the successor or acquiring entity (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined by resolution of the Board of Directors of the Company) in -9- 10 order to provide for adjustments of Listed Shares for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 3. For purposes of this Section 3.7, "common stock of the successor or acquiring corporation" shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of Securities of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 3.8 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets. (b) In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall at its expense, deliver or cause to be delivered the Listed Shares and other securities and property (including cash, where applicable) receivable by the holders of the Warrants after the effective date of such dissolution pursuant to this Section 3 to a bank or trust company, as trustee for the holder or holders of the Warrants. 4. Record Date as Date of Issue or Sale. (a) In the event that at any time the Company shall take a record of the holders of its Listed Shares for the purpose of entitling them (i) to receive a dividend or other distribution payable in Listed Shares or Convertible Securities, or (ii) to subscribe for or purchase Listed Shares or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the Listed Shares deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (b) The number of Listed Shares outstanding at any given time shall not include Listed Shares owned or held by or for the account of the Company, and the disposition of any such Listed Shares shall be considered an issue or sale of Listed Shares for the purposes of Section 3. 5. No Dilution or Impairment. The Company will not by an action, including, without limitation, by amending its Certificate of Formation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Warrants, but will at all times in good faith assist in the carrying out of all such terms and in the taking of such action as may be necessary or appropriate in order to protect the rights of the holders of the Warrants against dilution or other impairment, but only as provided herein. -10- 11 Without limiting the generality of the foregoing, the Company (a) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Listed Shares on the exercise of this Warrant and (b) will use its best effects to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable Company to perform its obligations under this Warrant. Upon the request of the holder, the Company will at any time during the period this Warrant is outstanding acknowledge in writing, in form satisfactory to the holder, the continuing validity of this Warrant and the obligations of the Company hereunder. 6. Certificate as to Adjustments. In each case of any adjustment or readjustment in the Listed Shares issuable on the exercise of the Warrants, the Company at its expense will compute such adjustment or readjustment in accordance with the terms of the Warrants and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. If requested by the Holder hereof, the Company will provide an accountant's certificate verifying the accuracy of the adjustments. The Company will forthwith mail a copy of each such certificate of each holder of a Warrant, and will, on the written request at any time of any holder of a Warrant, furnish to such holder a like certificate setting forth the Purchase Price at the time in effect and showing how it was calculated. 7. Notices of Record Date, etc. In the event of: (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the equity of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, then and in each such event the Company will mail or cause to be mailed to each holder of a Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Listed Shares shall -11- 12 be entitled to exchange their Listed Shares for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up, and (iii) the amount and character of any shares or other securities, or rights or options with respect thereto, proposed to be issued or granted, the date of such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made. Such notice shall be mailed at least 10 days prior to the date specified in such notice on which any such action is to be taken. Notwithstanding the foregoing, failure to give such notice or any defect in such notice shall not effect the validity or legality of any such transaction. 8. Reservation of Listed Shares, etc. Issuable on Exercise of Warrants. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrants, all Listed Shares from time to time issuable on the exercise of the Warrants. 9. Exchange of Warrants. On surrender for exchange of any Warrant, properly endorsed, to the Company, the Company at its expense will issue and deliver to or on the order of the holder thereof a new Warrant and Warrants of like tenor, calling in the aggregate on the face or faces thereof from the number of Listed Shares called for on the face or faces of the Warrant or Warrants so surrendered. 10. Replacement of Warrants. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction of any Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 11. Negotiability, etc. This Warrant is issued upon the following terms, to all of which each holder or owner hereof by the taking hereof consents and agrees: (a) title to this Warrant may be transferred by endorsement (by the holder hereof executing the form of assignment at the end hereof) and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery; and (b) subject to (a) above, any person in possession of this Warrant properly endorsed is authorized to represent himself as absolute owner hereof and is empowered to transfer absolute title thereto by endorsement and delivery hereof to a bona fide purchaser hereof for value; each prior taker or owner waives and renounces all of his equities or rights in this Warrant in favor of each such bona fide purchase, and each such bona fide purchaser shall acquire absolute title hereto and to all rights represented hereby. -12- 13 12. Registration Rights. (a) If the Company at any time after the Warrant first becomes exercisable and prior to the expiration date of the Warrant proposes to register any of its securities, either for its own account or the account of security holders, other than a registration on Forms S-8 or S-4, or any registration on a form which does not permit secondary sales, the Company shall, each such time, give written notice of such intention to each holder of Warrant(s) or Listed Shares ("Holder"), and, upon written request of any Holder received by the Company within twenty (20) days after the Company has given such notice, include in such registration (and all related qualifications under state securities laws) all Listed Shares (whether issued or issuable) specified in such written request. If the registration involves any underwriting, the Company shall so advise the Holders in the notice, and the right of each Holder to have its Listed Shares included in the registration shall be conditioned upon such Holder's Shares being included in the underwriting arrangements with underwriters (selected by the Company) on the same terms as other persons selling common stock or other Company securities to the underwriters. Notwithstanding the foregoing, if the underwriters determine that marketing factors require a limitation of the number of shares to be underwritten, the number of Shares to be registered for the account of all Holders may be limited in proportion to limitations imposed on other holders of common stock or other Company securities seeking to have their securities included in the registration pursuant to registration rights similar to those conferred upon Holders by this paragraph (c); provided, however, that priority may be given to securities to be sold for the account of the Company. The allocation shall be made in proportion, as nearly as practicable, to the respective number of shares requested to be included in such registration by each person selling common stock or other company securities to the underwriters, including Holders. Any Holder disapproving of the terms of the underwriting may withdraw therefrom by written notice to the Company, and such Holder's Shares shall be withdrawn from registration. (b) All expenses of registration and qualification incurred in connection with a registration under paragraph (c) of this Section 12(b) shall be borne by the Company, except that each Holder whose Listed Shares are being registered shall bear the fees and expenses of its own counsel, if any, and the underwriting commission or discount applicable to its Shares being sold. The Company will keep the Holders participating in a registration advised of the status of the registration and will furnish such number of preliminary and final prospectuses as such Holders may reasonably request; and such Holders will furnish to the Company such information regarding such Holders as may be required in connection with the registration. (c) The following provisions shall apply to any registration effected pursuant to paragraph (a) of this Section 12. (i) The Company shall indemnify and hold harmless such Holder and each underwriter of the Shares so registered or qualified (including any broker or dealer through whom such securities may be sold) and each person, if any, who controls any such Holder or any such underwriter within the meaning of the Securities Act from and against any and all losses, claims, damages, expenses or liabilities, joint and several, to which they or any of them may -13- 14 become subject under the Securities Act or under any other statute or at common law or otherwise, and, except as hereinafter provided, will reimburse each Holder and each of the underwriters and each such controlling person, if any, for any legal or other expenses reasonably incurred by any of them in connection with investigating or defending any actions, whether or not resulting in any liability, insofar as such losses, claims, damages, expenses, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement, any preliminary prospectus or the final prospectus (or the registration statement or prospectus as from time to time amended or supplemented by the Company) or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein not misleading, unless each untrue statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company in connection therewith by such Holder or underwriter expressly for use therein. Promptly after receipt by any Holder or any underwriter or any person controlling such Holder or such underwriter of notice of the commencement of any action in respect of which indemnity may be sought against the Company, such Holder or such underwriter, as the case may be, will notify the Company in writing of the commencement thereof, and, subject to the provisions hereinafter stated, the Company shall assume the defense of such action (including the employment of counsel, who shall be counsel satisfactory to such Holder or such underwriter or such person, as the case may be, and the payment of legal expenses) insofar as such action shall relate to any alleged liability in respect of which indemnity may be sought against the Company. Any Holder or any underwriter or any such controlling person shall have the right to employ separate counsel in any such action and to participate in the defense thereof but the fees and expenses of such counsel shall not be at the expense of the Company unless the employment of such counsel has been specifically authorized by the Company, which authorization shall be given whenever the party seeking indemnity has been advised by its counsel that one or more legal defenses may be available to it that are not available to the Company or that for other reasons separate representation may be necessary, to avoid a conflict. The Company shall not be liable to indemnify any person for any settlement of any such action effected without the consent of the Company. (ii) Any Holder will indemnify and hold harmless the Company, each of its directors and each of its officers who have signed the registration statement and each person, if any, who controls the Company within the meaning of the Securities Act from and against any and all losses, claims, damages, expenses of liabilities, joint and several, to which they are or any of them may become subject under the Securities Act or under any other statute or at common law or otherwise, and, except as hereinafter provided, will reimburse the Company and each such director, officer or controlling person for any legal and other expenses reasonably incurred by any of them in connection with investigating or defending any actions, whether or not resulting in any liability, insofar as such losses, claims, damages, expenses, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement, in any preliminary prospectus or in the final prospectus (or the registration statement or prospectus as from time to time amended or supplemented) or arise out of or are based upon the omission or alleged omission to state therein a material fact required to -14- 15 be stated therein or necessary in order to make the statements therein not misleading, but only insofar as any such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company in connection therewith by such Holder expressly for use therein. Promptly after receipt of notice of the commencement of any action in respect of which indemnity may be sought against any Holder, the company will notify such Holder in writing of the commencement thereof, and such Holder shall, subject to the provisions hereinafter stated, assume the defense of such action (including the employment of counsel, who shall be counsel satisfactory to the Company, and the payment of legal expenses) insofar as such action shall relate to an alleged liability in respect of which indemnity may be sought against such Holder. The Company and each such director, officer or controlling person shall have the right to employ separate counsel in any such action and to participate in the defense thereof but the fees and expenses of such counsel shall not be at the expense of such Holder unless the employment of such counsel has been specifically authorized by such Holder, which authorization shall be given whenever separate representation may be necessary to avoid a conflict. No Holder shall be liable to indemnify any person or any settlement of any such action effected without the consent of such Holder. (iii) The indemnity provisions of this paragraph (c) shall be in addition to any liability the indemnitor may otherwise have. Section 13. Miscellaneous. 13.1 Nonwaiver. No course of dealing or any delay or failure to exercise any right, power or remedy hereunder on the part of the holder hereof shall operate as a waiver of or otherwise prejudice such holder's rights, powers or remedies. 13.2 Holder Not a Stockholder. Prior to the exercise of this Warrant as hereinbefore provided, the holder hereof shall not be entitled to any of the rights of a holder of Listed Shares including, without limitation, the right as a stockholder to (a) vote on or consent to any proposed action of the Company or (b) receive (i) dividends or any other distributions made to holders of Listed Shares, (ii) notice of or attend any meetings of holders of Listed Shares of the Company or (iii) notice of any other proceedings of the Company. 13.3 Notices. Any notice, demand or delivery to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if sent by first class mail, postage prepaid, addressed to (a) the holder of this Warrant at its last known address appearing on the books of the Company maintained for such purpose or (b) the Company at its principal office at 50 Rockefeller Plaza, New York, New York 10020. The holder of this Warrant and the Company may each designate a different address by notice to the other pursuant to this Section 13.3. 13.4 Like Tenor. All Warrants shall at all times be identical, except as to the number of shares for which each Warrant may be exercised. -15- 16 13.5 Remedies. The Company stipulates that the remedies at law of the holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate and that, to the fullest extent permitted by law, such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 13.6 Successors and Assigns. This Warrant and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors and assigns of the Company, the holder hereof, to the extent provided herein, and shall be enforceable by any such holder. 13.7 Modification and Severability. If, in any action before any court or agency legally empowered to enforce any provision contained herein, any provision hereof is found to be unenforceable, then such provision shall be deemed modified to the extent necessary to make it enforceable by such court or agency. If any such provision is not durable as set forth in the preceding sentence, the unenforceability of such provision shall not affect the other provisions of this Agreement, but this Agreement shall be construed as if such unenforceable provision had never been contained herein. 13.8 Integration. This Warrant replaces all prior agreements, supersedes all prior negotiations and constitutes the entire agreement of the parties with respect to the transactions contemplated herein. 13.9 Amendment. This Warrant may not be modified or amended except by written agreement of the Company and the holder hereof. 13.10 Headings. The headings of the Sections of this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. 13.11 Governing Law. This Warrant shall be governed by the laws of the State of New York. 14. Expiration. The right to exercise this Warrant shall expire at 5:00 p.m., New York time,_______. IN WITNESS WHEREOF, the Company has executed this Warrant under seal as of the date first written above. CAREY DIVERSIFIED LLC BY: ----------------------------------- Name: Title: -16- 17 -17- 18 FORM OF SUBSCRIPTION [To be signed only on exercise of Warrant] TO: CAREY DIVERSIFIED LLC The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise this Warrant for, and to purchase thereunder, _________ Listed Shares of CAREY DIVERSIFIED LLC and herewith makes payment of $_____________ therefor, and requests that the certificates for such shares be issued in the name of, and delivered to ________________, whose address is __________________. Dated: ---------------------------- (Signature must conform to name of holder as specified on the face of the Warrant) --------------------------- (Address) FORM OF ASSIGNMENT (To be signed only on transfer of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto ________________ the right represented by the within Warrant to purchase ________________ Listed Shares of CAREY DIVERSIFIED LLC to which the within Warrant relates, and appoints ______________ Attorney to transfer such right on the books of CAREY DIVERSIFIED LLC with full power of substitution in the premises. Dated: ----------------------------------- (Signature must conform to name of holder as specified ion the face of the Warrant) -------------------------------------- (Address) -18- -----END PRIVACY-ENHANCED MESSAGE-----