-----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, ByVJUSsnk84CVbedIF6fYfxHt/BAwlHfn20roQFy4dXkF3jaf/Wa8YWWLN6krYHE HYW2BnFHHIFdqpqGv/egjA== /in/edgar/work/0000898430-00-003432/0000898430-00-003432.txt : 20001115 0000898430-00-003432.hdr.sgml : 20001115 ACCESSION NUMBER: 0000898430-00-003432 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KILROY REALTY CORP CENTRAL INDEX KEY: 0001025996 STANDARD INDUSTRIAL CLASSIFICATION: [6798 ] IRS NUMBER: 954598246 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12675 FILM NUMBER: 764576 BUSINESS ADDRESS: STREET 1: 2250 E IMPERIAL HWY STREET 2: C/O KILROY INDUSTRIES CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3105635500 MAIL ADDRESS: STREET 1: C/O KILROY INDUSTRIES STREET 2: 2250 E IMPERIAL HIGHWAY #1200 CITY: EL SEGUNDO STATE: CA ZIP: 90245 10-Q 1 0001.txt FORM 10-Q FOR PERIOD ENDED 09/30/2000 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-12675 KILROY REALTY CORPORATION (Exact name of registrant as specified in its charter) Maryland 95-4598246 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number)
2250 East Imperial Highway, Suite 1200, El Segundo, California 90245 (Address of principal executive offices) (310) 563-5500 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] As of November 10, 2000, 26,455,400 shares of common stock, par value $.01 per share, were outstanding. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- KILROY REALTY CORPORATION QUARTERLY REPORT FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 TABLE OF CONTENTS
Page ---- PART I--FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS (unaudited) Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999.............................................. 3 Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2000 and 1999....................... 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999.................................... 5 Notes to Consolidated Financial Statements..................... 6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................... 14 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 30 PART II--OTHER INFORMATION Item 1. LEGAL PROCEEDINGS.............................................. 34 Item 2. CHANGES IN SECURITIES.......................................... 34 Item 3. DEFAULTS UPON SENIOR SECURITIES................................ 34 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 34 Item 5. OTHER INFORMATION.............................................. 34 Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 34 SIGNATURES..................................................... 35
2 PART I--FINANCIAL INFORMATION ITEM 1. Financial Statements KILROY REALTY CORPORATION CONSOLIDATED BALANCE SHEETS (unaudited, in thousands, except share data)
September 30, December 31, 2000 1999 ------------- ------------ ASSETS ------ INVESTMENT IN REAL ESTATE (Note 2): Land and improvements................................ $ 263,923 $ 274,463 Buildings and improvements........................... 1,034,081 946,130 Undeveloped land and construction in progress, net... 151,453 189,645 ---------- ---------- Total investment in real estate.................... 1,449,457 1,410,238 Accumulated depreciation and amortization............ (194,563) (174,427) ---------- ---------- Investment in real estate, net..................... 1,254,894 1,235,811 CASH AND CASH EQUIVALENTS............................. 12,801 26,116 RESTRICTED CASH....................................... 35,506 6,636 TENANT RECEIVABLES, NET............................... 25,181 22,078 NOTE RECEIVABLE FROM RELATED PARTY (Note 3)........... 45,278 DEFERRED FINANCING AND LEASING COSTS, NET............. 34,657 27,840 PREPAID EXPENSES AND OTHER ASSETS..................... 5,735 2,020 ---------- ---------- TOTAL ASSETS....................................... $1,414,052 $1,320,501 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ LIABILITIES: Secured debt (Note 4)................................ $ 387,556 $ 325,516 Unsecured line of credit (Note 4).................... 186,000 228,000 Unsecured term facility (Note 4)..................... 100,000 Accounts payable and accrued expenses................ 39,177 26,260 Accrued distributions (Note 9)....................... 13,591 13,456 Rents received in advance and tenant security deposits............................................ 16,773 20,287 ---------- ---------- Total liabilities.................................. 743,097 613,519 ---------- ---------- COMMITMENTS AND CONTINGENCIES MINORITY INTERESTS (Note 5): 8.075% Series A Cumulative Redeemable Preferred unitholders......................................... 73,716 73,716 9.375% Series C Cumulative Redeemable Preferred unitholders......................................... 34,464 34,464 9.250% Series D Cumulative Redeemable Preferred unitholders......................................... 44,321 44,022 Common unitholders of the Operating Partnership...... 62,900 71,920 Minority interests in Development LLCs............... 11,606 9,931 ---------- ---------- Total minority interests........................... 227,007 234,053 ---------- ---------- STOCKHOLDERS' EQUITY (Note 6): Preferred stock, $.01 par value, 26,200,000 shares authorized, none issued and outstanding............. 8.075% Series A Cumulative Redeemable Preferred stock, $.01 par value, 1,700,000 shares authorized, none issued and outstanding......................... Series B Junior Participating Preferred stock, $.01 par value, 400,000 shares authorized, none issued and outstanding......................................... 9.375% Series C Cumulative Redeemable Preferred stock, $.01 par value, 700,000 shares authorized, none issued and outstanding......................... 9.250% Series D Cumulative Redeemable Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued and outstanding......................... Common stock, $.01 par value, 150,000,000 shares authorized, 26,455,400 and 27,808,410 shares issued and outstanding, respectively....................... 265 278 Additional paid-in capital........................... 459,785 491,204 Distributions in excess of earnings.................. (16,102) (18,553) ---------- ---------- Total stockholders' equity......................... 443,948 472,929 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $1,414,052 $1,320,501 ========== ==========
See accompanying notes to consolidated financial statements. 3 KILROY REALTY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands, except share and per share data)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- REVENUES (Note 7): Rental income................ $ 40,555 $ 34,959 $ 117,627 $ 101,941 Tenant reimbursements........ 4,748 4,214 14,036 12,530 Interest income.............. 1,706 239 3,008 860 Other income................. 212 790 1,673 1,722 ---------- ---------- ---------- ---------- Total revenues............. 47,221 40,202 136,344 117,053 ---------- ---------- ---------- ---------- EXPENSES: Property expenses............ 6,217 5,054 17,749 15,517 Real estate taxes............ 3,523 3,108 9,959 8,969 General and administrative expenses.................... 2,890 2,266 8,077 6,781 Ground leases................ 423 331 1,211 1,002 Interest expense............. 10,024 6,501 27,800 18,420 Depreciation and amortization................ 9,941 7,900 28,909 22,577 ---------- ---------- ---------- ---------- Total expenses............. 33,018 25,160 93,705 73,266 ---------- ---------- ---------- ---------- INCOME FROM OPERATIONS BEFORE NET GAINS ON DISPOSITIONS OF OPERATING PROPERTIES, EQUITY IN INCOME (LOSS) OF UNCONSOLIDATED SUBSIDIARY AND MINORITY INTERESTS............ 14,203 15,042 42,639 43,787 NET GAINS ON DISPOSITIONS OF OPERATING PROPERTIES.......... 7,288 75 11,256 75 EQUITY IN INCOME (LOSS) OF UNCONSOLIDATED SUBSIDIARY..... 28 (8) 11 (22) ---------- ---------- ---------- ---------- INCOME BEFORE MINORITY INTERESTS..................... 21,519 15,109 53,906 43,840 ---------- ---------- ---------- ---------- MINORITY INTERESTS: Distributions on Cumulative Redeemable Preferred units.. (3,375) (2,334) (10,125) (7,003) Minority interest in earnings of Operating Partnership.... (2,227) (1,830) (5,442) (5,186) Minority interest in earnings of Development LLCs......... (238) (34) (279) (34) ---------- ---------- ---------- ---------- Total minority interests... (5,840) (4,198) (15,846) (12,223) ---------- ---------- ---------- ---------- NET INCOME..................... $ 15,679 $ 10,911 $ 38,060 $ 31,617 ========== ========== ========== ========== Net income per common share-- basic (Note 8)................ $ 0.59 $ 0.39 $ 1.43 $ 1.14 ========== ========== ========== ========== Net income per common share-- diluted (Note 8).............. $ 0.59 $ 0.39 $ 1.42 $ 1.14 ========== ========== ========== ========== Weighted average shares outstanding--basic (Note 8)... 26,455,400 27,658,014 26,646,871 27,640,016 ========== ========== ========== ========== Weighted average shares outstanding--diluted (Note 8)............................ 26,696,985 27,676,512 26,757,751 27,674,515 ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. 4 KILROY REALTY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands)
Nine Months Ended September 30, ------------------ 2000 1999 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 38,060 $ 31,617 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................. 28,909 22,577 Provision for uncollectable tenant receivables and deferred rent............................................ 3,508 1,744 Minority interest in earnings of Operating Partnership and Development LLCs..................................... 5,721 5,220 Amortization of restricted stock grants................... 744 381 Net gains on dispositions of operating properties and undeveloped land......................................... (11,256) (614) Other..................................................... (284) (213) Changes in assets and liabilities: Tenant receivables....................................... (8,482) (3,120) Deferred leasing costs................................... (1,739) (2,127) Prepaid expenses and other assets........................ (4,430) 505 Accounts payable and accrued expenses.................... 11,920 466 Rents received in advance and tenant security deposits... (3,514) 1,762 Accrued distributions to Cumulative Redeemable Preferred unitholders............................................. 299 52 -------- -------- Net cash provided by operating activities............... 59,456 58,250 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for operating properties..................... (8,509) (37,428) Expenditures for undeveloped land and construction in progress................................................. (128,401) (115,601) Cash paid to acquire note receivable...................... (45,278) Net proceeds received from dispositions of operating properties............................................... 110,642 11,000 Net proceeds received from dispositions of undeveloped land..................................................... 5,051 Decrease in escrow deposits............................... 295 Net investment in and advances (to) unconsolidated subsidiary............................................... 470 (935) -------- -------- Net cash used in investing activities................... (71,076) (137,618) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repurchases of common stock............................... (41,270) Net (repayments) borrowings on unsecured line of credit... (42,000) 18,000 Proceeds from issuance of secured and unsecured debt...... 163,961 125,000 Principal payments on secured debt........................ (10,421) (21,716) Financing costs........................................... (3,932) (918) Increase in restricted cash............................... (28,870) (555) Net contributions from minority interests in Development LLCs..................................................... 1,396 Distributions paid to common stockholders and common unitholders.............................................. (40,559) (40,029) -------- -------- Net cash (used) provided by financing activities........ (1,695) 79,782 -------- -------- Net (decrease) increase in cash and cash equivalents....... (13,315) 414 Cash and cash equivalents, beginning of period............. 26,116 6,443 -------- -------- Cash and cash equivalents, end of period................... $ 12,801 $ 6,857 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest, net of capitalized interest....... $ 26,441 $ 17,287 ======== ======== Distributions paid to Cumulative Redeemable Preferred unitholders.............................................. $ 9,827 $ 6,930 ======== ======== NON-CASH TRANSACTIONS: Accrual of distributions payable (Note 9)................. $ 13,591 $ 13,567 ======== ======== Issuance of secured note payable in connection with undeveloped land acquisition (Note 2).................... $ 8,500 ======== Issuance of common units of the Operating Partnership to acquire operating properties and undeveloped land........ $ 9,915 ======== Minority interest recorded in connection with Development LLCs undeveloped land acquisitions....................... $ 9,733 ======== Note receivable from related parties repaid in connection with operating property acquisition...................... $ 2,267 ======== Note receivable from related parties satisfied in connection with Development LLC undeveloped land acquisitions............................................. $ 6,531 ========
See accompanying notes to consolidated financial statements. 5 KILROY REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Nine Months Ended September 30, 2000 and 1999 (Unaudited) 1. Organization and Basis of Presentation Organization Kilroy Realty Corporation (the "Company") develops, owns, and operates office and industrial real estate, primarily in Southern California. The Company operates as a self-administered real estate investment trust ("REIT"). As of September 30, 2000, the Company's stabilized portfolio of operating properties consisted of 80 office buildings (the "Office Properties") and 78 industrial buildings (the "Industrial Properties"), which encompassed an aggregate of approximately 6.3 million and 5.8 million rentable square feet, respectively, and was approximately 96.9% occupied. The Company's stabilized portfolio of operating properties consists of all of the Company's Office and Industrial Properties excluding properties recently developed by the Company that have not yet reached 95.0% occupancy ("lease-up" properties) and projects currently under construction or in pre-development. As of September 30, 2000, the Company had recently completed construction on two office properties encompassing an aggregate of approximately 294,700 rentable square feet which were in the lease-up phase. Lease-up properties are included in land and improvements and building and improvements on the consolidated balance sheets upon building shell completion. In addition, as of September 30, 2000, the Company had eight office properties under construction which when completed are expected to encompass an aggregate of approximately 606,000 rentable square feet. The Company owns its interests in all of its properties through Kilroy Realty, L.P. (the "Operating Partnership") and Kilroy Realty Finance Partnership, L.P. and conducts substantially all of its operations through the Operating Partnership. The Company owned an 87.6% general partnership interest in the Operating Partnership as of September 30, 2000. The Operating Partnership owns a 50% interest in two limited liability companies (the "Development LLCs") which were formed to develop two multi-phased office projects in San Diego, California. The Development LLCs are consolidated for financial reporting purposes since the Company holds significant control over the entities through a 50% managing partner ownership interest, combined with the ability to control all significant development and operating decisions. Basis of Presentation The accompanying interim financial statements have been prepared by the Company's management in accordance with generally accepted accounting principles ("GAAP") and in conjunction with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim financial statements do not include all of the information and footnotes required by GAAP in the United States of America for complete financial statements. In the opinion of management, the interim financial statements presented herein reflect all adjustments of a normal and recurring nature which are considered necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim period are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. These financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Certain prior year amounts have been reclassified to conform to the current period's presentation. New Accounting Pronouncement In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 provides guidance on applying GAAP to revenue recognition issues in 6 KILROY REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) financial statements. The Company is required to adopt SAB 101 in the fourth quarter of 2000. Management does not expect the adoption of SAB 101 to have a material effect on the Company's results of operations or financial position. 2. Acquisitions, Dispositions and Completed Development Projects Acquisitions In March 2000, the Company acquired 17 acres of undeveloped land in San Diego, California from an unaffiliated third party for $11.3 million, consisting of a cash payment of $2.8 million and the issuance of an $8.5 million mortgage note payable due to the seller. The $8.5 million mortgage note is payable upon the earlier of the successful completion of infrastructure improvements to the undeveloped land that the seller is obligated to perform, or December 31, 2003, the note's stated maturity. The note bears interest at 10.00% per annum until December 31, 2000. If the infrastructure improvements are not completed by December 31, 2000, the note will not accrue any additional interest and the principal balance of the note will be reduced at the rate of $1,000 per day. The Company expects that the infrastructure improvements will be completed in the third quarter of 2001. The cash portion of the purchase price was funded primarily with existing working capital. Dispositions During the nine months ended September 30, 2000, the Company sold, through six separate transactions, nine office and nine industrial buildings encompassing an aggregate of approximately 956,500 rentable square feet, to unaffiliated third parties for an aggregate sales price of $113.6 million as follows:
Month of Rentable Square Sales Price Property Type Location Disposition # of Buildings Feet ($ in millions) ------------- ---------------- ----------- -------------- --------------- --------------- Industrial ............. Lake Forest, CA January 2 45,300 $ 3.3 Industrial ............. Garden Grove, CA April 1 110,200 6.3 Industrial ............. Carlsbad, CA June 1 82,900 12.6 Office ................. Aliso Viejo, CA June 5 134,700 18.0 Industrial.............. San Jose, CA July 5 431,400 62.4 Office.................. Fullerton, CA August 4 152,000 11.0 --- ------- ------ Total ............................................. 18 956,500 $113.6 === ======= ======
Completed Development Projects During the nine months ended September 30, 2000, the Company completed the development of and stabilized seven office buildings encompassing an aggregate of approximately 630,500 rentable square feet as shown on the table below.
Completion & Rentable Square Stabilized Property Type Location Stabilization Date # of Buildings Feet Occupancy(1) ------------- ------------- ------------------ -------------- --------------- ----------- Office ................. Del Mar, CA Q1 2000 1 72,300 100% Office ................. Del Mar, CA Q2 2000 1 129,700 100% Office ................. Del Mar, CA Q2 2000 1 112,100 100% Office ................. San Diego, CA Q3 2000 2 103,000 100% Office ................. San Diego, CA Q3 2000 1 62,400 100% Office ................. West LA, CA Q3 2000 1 151,000 100%(/1/) --- ------- Total ................................................. 7 630,500 === =======
- -------- (1) All of these properties were included in the Company's stabilized portfolio at September 30, 2000, with the exception of the office project in West LA since occupancy commenced on October 2, 2000. As a result, this property will be included in the Company's stabilized portfolio starting in October 2000. 7 KILROY REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) At September 30, 2000, the Company had recently completed construction on two office properties encompassing an aggregate of approximately 294,700 rentable square feet, which were in the lease-up phase as follows:
Rentable Square Occupancy at Property Type Location Completion Date # of Buildings Feet September 30, 2000 ------------- -------------- --------------- -------------- --------------- ------------------ Office.................. Long Beach, CA Q2 2000 1 192,400 87% Office.................. Calabasas, CA Q2 2000 1 102,300 81% --- ------- Total ............................................... 2 294,700 85% === =======
3. Notes Receivable from Related Party In May 2000, the Company initiated actions that put it in a position to potentially acquire the fee interest in a three building office complex located in El Segundo, California from Kilroy Airport Imperial Co. ("KAICO"), a partnership owned by John B. Kilroy, Sr., the Company's Chairman of the Board of Directors, John B. Kilroy, Jr. the Company's President and Chief Executive Officer, and certain other Kilroy family members. The complex, which encompasses approximately 366,000 aggregate rentable square feet, is comprised of two office buildings and a parking structure. One of the office buildings is occupied by Hughes Space & Communications Company ("Hughes") and the other office building is vacant. The lease with Hughes contained a 60-day right of first offer that gave Hughes, under certain circumstances, the right to offer to purchase the complex. Hughes has waived this 60-day right of first offer. On May 1, 2000, the Company purchased a non-recourse note receivable with an outstanding principal balance of $60.8 million and accrued interest of $10.2 million from an institutional lender for $45.3 million. The note is secured by the first trust deed on the complex, has an annual interest rate of 9.63% and matures February 1, 2005. At the time of the acquisition, KAICO was in payment default under the terms of the note. The Company recorded its investment in the impaired note at the $45.3 million purchase price and recorded no additional impairment allowance since the Company believes that the purchase price of the note is less than the fair market value of the complex securing it. The acquisition of the note was funded with borrowings under the Company's revolving credit facility. As a result of the acquisition of the note, the Company receives all of the net operating income from the complex under a related agreement. In addition, the Company also receives payment of an additional $98,000 per month from KAICO through October 2000. The Company records these amounts on a cash basis as interest income on the consolidated statement of operations. For the period from May 1 to September 30, 2000, the Company recorded approximately $1.9 million of interest income related to this note receivable. On October 13, 2000, the Company and KAICO agreed to modify the terms of the existing note receivable to write down the principal value and accrued interest owed on the note to $45.3 million. A wholly-owned subsidiary of the Company concurrently acquired a 25% tenancy in common interest in the complex from KAICO subject to 25% or $11.3 million of the $45.3 million note in exchange for 1,133 common units of the Operating Partnership valued at approximately $30,000 based upon the closing share price of the Company's common stock as reported on the New York Stock Exchange. The Company and KAICO also entered into agreements whereby the Company agreed to pay KAICO approximately $3.3 million for the reimbursement of expenditures incurred by KAICO on the complex since 1997 and for the modification of an existing option that the Company holds to purchase the complex. Of the $3.3 million, $2.3 million was paid to KAICO in May 2000 and $0.4 million was paid to KAICO in October 2000. 8 KILROY REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company, in its capacity as manager of the property, was named as a codefendant in litigation that was pending between KAICO and Hughes with respect to the lease on the complex. In October 2000, the litigation was settled without adverse effect upon the Company's financial condition, results of operations and cash flows. 4. Unsecured Line of Credit and Debt As of September 30, 2000, the Company had borrowings of $186 million outstanding under its revolving unsecured line of credit (the "Credit Facility") and availability of approximately $80.0 million. Availability under the Credit Facility is based upon the value of the Company's pool of unencumbered assets and is reduced by amounts outstanding under the Credit Facility and the Company's $100.0 million unsecured term facility, as discussed in the following paragraph. The Credit Facility bears interest at an annual rate between LIBOR plus 1.13% and LIBOR plus 1.75% (8.14% at September 30, 2000), depending upon the Company's leverage ratio at the time of borrowing. The Company expects to use the Credit Facility to finance development expenditures, to fund potential undeveloped land acquisitions and for general corporate purposes. In September 2000, the Company borrowed $100.0 million under an unsecured debt facility from a bank group led by The Chase Manhattan Bank and Morgan Guaranty Trust Company of New York. The $100.0 million facility, which matures in September 2002 with two one-year extension options, requires monthly interest-only payments based upon an annual interest rate between LIBOR plus 1.13% and LIBOR plus 1.75% (8.13% at September 30, 2000), depending upon the Company's leverage ratio at the time of borrowing. Availability under the Company's Credit Facility, as discussed above, takes into consideration amounts outstanding under both the Credit Facility and this $100.0 million facility, since a common pool of unencumbered assets is used to determine availability for both financings. In February 2000, the Company entered into an interest rate swap agreement with a total notional amount of $150.0 million to effectively limit interest expense on the Company's variable rate debt during periods of increasing interest rates. The agreement, which expires in February 2002, requires the Company to pay fixed rate interest payments based on an annual interest rate of 6.95% and receive variable rate interest payments based on one-month LIBOR. Also, in February 2000, the Company entered into an interest rate cap agreement with a total notional amount of $150.0 million to effectively limit interest expense on the Company's variable rate debt during periods of increasing interest rates. The agreement begins in July 2000, has a LIBOR based cap rate of 6.50% and expires in January 2002. The Company's exposure is limited to the $1.9 million cost of the agreement which is amortized over the life of the agreement and included as a component of interest expense in the consolidated statements of operations. In April 2000, one of the Development LLCs obtained a non-recourse construction loan with a total commitment of $57.0 million. The construction loan, which had an outstanding balance of approximately $42.0 million and an annual interest rate of LIBOR plus 2.70% (9.26% at September 30, 2000) at September 30, 2000, matures in April 2002, with the option to extend for up to two six-month periods. The proceeds from the construction loan are being used to finance the development of part of a multi-phased office project that the Company is developing in San Diego, California, with The Allen Group, a group of affiliated real estate development and investment companies based in San Diego, California. In October 2000, the construction loan was modified to increase the total commitment to $61.0 million and to decrease the interest rate on $37.2 million of the loan to LIBOR plus 2.00%. The project is expected to encompass an aggregate of approximately 550,000 rentable square feet of office space upon completion of all phases. The construction loan is secured by the land for the entire project, the three phases of the project that the Company had completed as of September 30, 2000, and improvements on one of the two remaining buildings to be constructed. 9 KILROY REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In May 2000, one of the Development LLCs entered into an interest rate cap agreement with a LIBOR based cap rate of 8.50% to effectively limit interest expense on the aforementioned variable rate construction loan during periods of increasing interest rates. The agreement has an initial notional amount of $21.1 million that increases to $57.0 million during the period from May 2000 through August 2001, and then remains at $57.0 million until expiration in April 2002. The notional amount of the interest rate cap agreement was approximately $38.9 million at September 30, 2000. The Development LLC's exposure is limited to the $0.1 million cost of the agreement. In June 2000, one of the Development LLCs borrowed $22.0 million under a mortgage loan that requires monthly principal and interest payments based on a floating annual interest rate of LIBOR plus 1.75% (8.37% at September 30, 2000), amortizes over 25 years, and matures in June 2004. The mortgage loan is secured by two office buildings that the Company has developed with The Allen Group and completed in the fourth quarter of 1999. The Development LLC used the proceeds from the mortgage loan to repay an intercompany loan to the Operating Partnership. The Operating Partnership concurrently used the proceeds to repay borrowings under the Company's Credit Facility. In July 2000, in connection with the disposition of the industrial property in Carlsbad, California (see Note 2), the Company made a $6.8 million partial paydown on the principal balance of an existing $90.0 million variable-rate mortgage note payable which has an annual interest rate of LIBOR plus 1.75% and matures in October 2003. In October 2000, the Company obtained a construction loan with a total commitment of $18.5 million. The construction loan bears interest at an annual rate of LIBOR plus 1.75% and matures in October 2002, with the option to extend for up to one twelve-month period. The proceeds from the construction loan are being used to finance the development of an office project in San Diego, California that is expected to encompass an aggregate of approximately 102,900 rentable square feet upon completion. The construction loan is secured by the improvements to be constructed. In October 2000, the Company obtained a construction loan with a total commitment of $13.3 million. The construction loan bears interest at an annual rate of LIBOR plus 1.75% and matures in March 2002, with the option to extend for up to two six-month periods. The proceeds from the construction loan are being used to finance the development of two office buildings in San Diego, California that are expected to encompass an aggregate of approximately 119,000 rentable square feet upon completion. The construction loan is secured by a first deed of trust on the project. Total interest capitalized for the three months ended September 30, 2000 and 1999 was $4.3 million and $3.2 million, respectively. Total interest capitalized for the nine months ended September 30, 2000 and 1999 was $13.5 million and $8.1 million, respectively. 5. Minority Interests Minority interests represent the preferred limited partnership interests in the Operating Partnership, the common limited partnership interests in the Operating Partnership not owned by the Company, and interests held by The Allen Group in the Development LLCs. The Company owned an 87.6% general partnership interest in the Operating Partnership as of September 30, 2000. During the nine months ended September 30, 2000, 481,290 common units of the Operating Partnership were exchanged into shares of the Company's common stock on a one-for-one basis. Of these 481,290 common units, 364,200 common units were owned by Kilroy Industries, an entity owned by John B. Kilroy, Sr., the Chairman of the Company's Board of Directors, and John B. Kilroy, Jr., the Company's President and Chief Executive Officer. In addition, of the 481,290 common units, 1,739 common units were owned by a Vice 10 KILROY REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) President of the Company. Neither the Company nor the Operating Partnership received any proceeds from the issuance of the common stock to the identified common unitholders. 6. Stockholders' Equity During the first quarter of 2000, the Company repurchased 1,999,300 shares of its common stock in open market transactions for an aggregate repurchase price of $41.2 million, or an average repurchase price of $20.58 per share. Repurchases during the first quarter of 2000 were funded primarily through working capital and borrowings on the Company's Credit Facility. The Company did not repurchase any shares of common stock in the second or third quarters of 2000. In April 2000, the Company filed a registration statement on Form S-3 with the SEC which registered the potential issuance and resale of up to a total of 380,333 shares of the Company's common stock in exchange for 380,333 common limited partnership units of the Operating Partnership previously issued in connection with certain 1999 and 1998 property acquisitions. The common limited partnership units may be exchanged at the Company's option into shares of the Company's common stock on a one-for-one basis. Neither the Company nor the Operating Partnership will receive any proceeds from the issuance of the common stock resulting from any such exchange. The SEC declared the registration statement effective on May 8, 2000. On June 23, 2000, the Company's Compensation Committee, comprised of two independent directors, granted 175,000 shares of restricted stock to certain key employees, the grantees. All of the shares of restricted stock granted, which were sold at a purchase price of $0.01 per share, contain cliff-vesting provisions such that the shares vest 100% on March 1, 2003. Compensation expense for the restricted shares is calculated based upon the Company's closing share price of $24.94 on the June 23, 2000 grant date, and is amortized on a straight-line basis over the vesting period and included in general and administrative expenses in the consolidated statements of operations. The restricted shares have the same dividend and voting rights as common stock. The restricted shares are included in the Company's calculation of weighted average outstanding shares at September 30, 2000. 11 KILROY REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. Segment Disclosure The Company evaluates the performance of its segments based upon net operating income. Net operating income is defined as operating revenues (rental income, tenant reimbursements and other income) less property and related expenses (property expenses, real estate taxes and ground leases) and does not include interest income and expense, depreciation and amortization and corporate general and administrative expenses. All operating revenues are comprised of amounts received from third-party tenants.
Three Months Ended September Nine Months Ended 30, September 30, ---------------- ------------------ 2000 1999 2000 1999 ------- ------- -------- -------- (in thousands) Revenues and Expenses: Office Properties: Operating revenues..................... $33,604 $27,270 $ 94,562 $ 80,039 Property and related expenses.......... 8,183 6,798 23,150 19,995 ------- ------- -------- -------- Net operating income, as defined....... 25,421 20,472 71,412 60,044 ------- ------- -------- -------- Industrial Properties: Operating revenues..................... 11,911 12,693 38,774 36,154 Property and related expenses.......... 1,980 1,695 5,769 5,493 ------- ------- -------- -------- Net operating income, as defined....... 9,931 10,998 33,005 30,661 ------- ------- -------- -------- Total Reportable Segments: Operating revenues..................... 45,515 39,963 133,336 116,193 Property and related expenses.......... 10,163 8,493 28,919 25,488 ------- ------- -------- -------- Net operating income, as defined....... 35,352 31,470 104,417 90,705 ------- ------- -------- -------- Reconciliation to Consolidated Net Income: Total net operating income, as defined, for reportable segments............... 35,352 31,470 104,417 90,705 Other unallocated revenues: Interest income...................... 1,706 239 3,008 860 Other unallocated expenses: General and administrative expenses.. 2,890 2,266 8,077 6,781 Interest expense..................... 10,024 6,501 27,800 18,420 Depreciation and amortization........ 9,941 7,900 28,909 22,577 ------- ------- -------- -------- Net income from operations before net gains on dispositions of operating properties, equity in income (loss) of unconsolidated subsidiary and minority interests............................. 14,203 15,042 42,639 43,787 Net gains on dispositions of operating properties............................ 7,288 75 11,256 75 Equity in income (loss) of unconsolidated subsidiary............. 28 (8) 11 (22) Minority interests..................... (5,840) (4,198) (15,846) (12,223) ------- ------- -------- -------- Net income............................. $15,679 $10,911 $ 38,060 $ 31,617 ======= ======= ======== ========
12 KILROY REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the sum of the weighted-average number of common shares outstanding for the period plus the number of common shares issuable assuming the exercise of all dilutive securities. The Company does not consider common units of the Operating Partnership to be dilutive since the exchange of common units into common stock is on a one-for-one basis and would not have any effect on diluted earnings per share. The following table reconciles the numerator and denominator of the basic and diluted per-share computations for net income.
Three Months Ended September 30, 2000 Three Months Ended September 30, 1999 ------------------------------------------- ------------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ------------ --------------- ---------- ------------ --------------- ---------- (in thousands, except share and per share amounts) Basic................... $ 15,679 26,455,400 $ 0.59 $ 10,911 27,658,014 $ 0.39 Effect of dilutive securities: Stock options granted.............. 241,585 18,498 ------------ --------------- ---------- ------------ --------------- ---------- Diluted................. $ 15,679 26,696,985 $ 0.59 $ 10,911 27,676,512 $ 0.39 ============ =============== ========== ============ =============== ========== Nine Months Ended September 30, 2000 Nine Months Ended September 30, 1999 ------------------------------------------- ------------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ------------ --------------- ---------- ------------ --------------- ---------- (in thousands, except share and per share amounts) Basic................... $ 38,060 26,646,871 $ 1.43 $ 31,617 27,640,016 $ 1.14 Effect of dilutive securities: Stock options granted.............. 110,880 (.01) 34,499 ------------ --------------- ---------- ------------ --------------- ---------- Diluted................. $ 38,060 26,757,751 $ 1.42 $ 31,617 27,674,515 $ 1.14 ============ =============== ========== ============ =============== ==========
At September 30, 2000, Company employees and directors held options to purchase 63,000 shares of the Company's common stock that were antidilutive to the diluted earnings per share computation. These options could become dilutive in future periods if the average market price of the Company's common stock exceeds the exercise price of the outstanding options. 9. Subsequent Events On October 17, 2000, aggregate distributions of $13.6 million were paid to common stockholders and common unitholders of record on September 30, 2000. On October 13, 2000, the Company agreed to modify the terms of the note receivable with KAICO and acquired a 25% tenancy in common interest in the KAICO complex (see Note 3). On October 6, 2000, a consolidated entity of the Company obtained an $18.5 million construction loan (See Note 4). On October 17, 2000, the Company obtained a $13.3 million construction loan (see Note 4). 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion relates to the consolidated financial statements of the Company and should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. Statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" that are not historical facts may be forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected. Some of the enclosed information presented is forward-looking in nature, including information concerning development timing and investment amounts. Although the information is based on the Company's current expectations, actual results could vary from expectations stated here. Numerous factors will affect the Company's actual results, some of which are beyond its control. These include the timing and strength of regional economic growth, the strength of commercial and industrial real estate markets, competitive market conditions, future interest rate levels and capital market conditions. You are cautioned not to place undue reliance on this information, which speaks only as of the date of this report. The Company assumes no obligation to update publicly any forward-looking information, whether as a result of new information, future events or otherwise. For a discussion of important risks related to the Company's business, and an investment in its securities, including risks that could cause actual results and events to differ materially from results and events referred to in the forward-looking information, see the discussion under the caption "business risks" in the Company's annual report on Form 10-K for the year ended December 31, 1999. In light of these risks, uncertainties and assumptions, the forward-looking events contained herein might not occur. Overview and Background Kilroy Realty Corporation (the "Company") develops, owns, and operates office and industrial real estate, primarily in Southern California. The Company operates as a self-administered real estate investment trust ("REIT"). The Company owns its interests in all of its properties through Kilroy Realty, L.P. (the "Operating Partnership") and Kilroy Realty Finance Partnership, L.P. and conducts substantially all of its operations through the Operating Partnership. The Company owned an 87.6% general partnership interest in the Operating Partnership as of September 30, 2000. Results of Operations The Company continues to capitalize on its substantial development pipeline which at September 30, 2000 consisted of an aggregate of approximately 1.1 million rentable square feet of in-process and committed office development projects and an aggregate of approximately 1.5 million rentable square feet of future office development projects that the Company expects to add to its stabilized portfolio. During the nine months ended September 30, 2000, the Company completed and stabilized seven office buildings encompassing an aggregate of approximately 630,500 rentable square feet. During the fourth quarter of 1999, the Company completed and stabilized one office building encompassing an aggregate of approximately 52,400 rentable square feet and stabilized two industrial buildings encompassing an aggregate of approximately 178,800 rentable square feet. The Company's stabilized portfolio of operating properties consists of all of the Company's office and industrial properties excluding properties recently developed by the Company that have not yet reached 95.0% occupancy ("lease-up" properties) and projects currently under construction or in pre-development. At September 30, 2000, the Company had two office buildings encompassing an aggregate of approximately 294,700 rentable square feet in the lease-up phase and eight office projects under construction which when completed are expected to encompass an aggregate of approximately 606,100 rentable square feet. During the nine months ended September 30, 2000, the Company sold nine industrial and nine office buildings encompassing an aggregate of approximately 669,800 and 286,700 rentable square feet, respectively, for an aggregate sales price of $113.6 million. During the fourth quarter of 1999, the Company disposed of five office and one industrial building encompassing an aggregate of approximately 113,700 and 56,700 rentable 14 square feet, respectively, for an aggregate sales price of $11.6 million. The Company did not acquire any operating properties during the nine months ended September 30, 2000, or during the fourth quarter of 1999. As a result of the properties acquired and the projects developed by the Company subsequent to September 30, 1999, net of the effect of properties disposed of subsequent to September 30, 1999, rentable square footage in the Company's portfolio of stabilized properties decreased by an aggregate of approximately 524,000 rentable square feet, or 4.1% to 12.1 million rentable square feet at September 30, 2000 compared to 12.6 million rentable square feet at September 30, 1999. As of September 30, 2000, the Company's stabilized portfolio was comprised of 80 office properties (the "Office Properties") encompassing an aggregate of approximately 6.3 million rentable square feet and 78 industrial properties (the "Industrial Properties") encompassing an aggregate of approximately 5.8 million rentable square feet. The stabilized portfolio occupancy rate at September 30, 2000 was 96.9%, with the Office and Industrial Properties 95.3% and 98.7% occupied, respectively. Three Months Ended September 30, 2000 Compared to Three Months Ended September 30, 1999
Three Months Ended September 30, --------------- Dollar Percentage 2000 1999 Change Change ------- ------- ------ ---------- (unaudited, dollars in thousands) Revenues: Rental income............................. $40,555 $34,959 $5,596 16.0 % Tenant reimbursements..................... 4,748 4,214 534 12.7 Interest income........................... 1,706 239 1,467 613.8 Other income.............................. 212 790 (578) (73.2) ------- ------- ------ Total revenues.......................... 47,221 40,202 7,019 17.5 ------- ------- ------ Expenses: Property expenses......................... 6,217 5,054 1,163 23.0 Real estate taxes......................... 3,523 3,108 415 13.4 General and administrative expenses....... 2,890 2,266 624 27.5 Ground leases............................. 423 331 92 27.8 Interest expense.......................... 10,024 6,501 3,523 54.2 Depreciation and amortization............. 9,941 7,900 2,041 25.8 ------- ------- ------ Total expenses.......................... 33,018 25,160 7,858 31.2 ------- ------- ------ Income from operations before net gains on dispositions of operating properties, equity in income (loss) of unconsolidated subsidiary and minority interests.......... $14,203 $15,042 $ (839) (5.6)% ======= ======= ======
15 Rental Operations Management evaluates the operations of its portfolio based on operating property type. The following tables compare the net operating income, defined as operating revenues (rental income, tenant reimbursements and other income) less property and related expenses (property expenses, real estate taxes and ground leases) before depreciation, for the Office and Industrial Properties for the three months ended September 30, 2000 and 1999. Office Properties
Total Office Portfolio Core Office Portfolio(1) ---------------------------------- ---------------------------------- Dollar Percentage Dollar Percentage 2000 1999 Change Change 2000 1999 Change Change ------- ------- ------ ---------- ------- ------- ------ ---------- Operating revenues: Rental income......... $29,997 $23,829 $6,168 25.9 % $21,836 $21,022 $ 814 3.9 % Tenant reimbursement.. 3,423 2,729 694 25.4 3,032 2,552 480 18.8 Other income.......... 183 712 (529) (74.3) 116 694 (578) (83.3) ------- ------- ------ ------- ------- ----- Total............... 33,603 27,270 6,333 23.2 24,984 24,268 716 3.0 ------- ------- ------ ------- ------- ----- Property and related expenses: Property expenses..... 5,241 4,502 739 16.4 4,324 4,232 92 2.2 Real estate taxes..... 2,519 1,965 554 28.2 1,731 1,757 (26) (1.5) Ground leases......... 423 331 92 27.8 333 327 6 1.8 ------- ------- ------ ------- ------- ----- Total............... 8,183 6,798 1,385 20.4 6,388 6,316 72 1.1 ------- ------- ------ ------- ------- ----- Net operating income, as defined................ $25,420 $20,472 $4,948 24.2 % $18,596 $17,952 $ 644 3.6 % ======= ======= ====== ======= ======= =====
- -------- (1) Stabilized office properties owned at January 1, 1999 and still owned at September 30, 2000. Total revenues from Office Properties increased $6.3 million, or 23.2% to $33.6 million for the three months ended September 30, 2000 compared to $27.3 million for the three months ended September 30, 1999. Rental income from Office Properties increased $6.2 million, or 25.9% to $30.0 million for the three months ended September 30, 2000 compared to $23.8 million for the three months ended September 30, 1999. Rental income generated by the Core Office Portfolio increased $0.8 million, or 3.9% for the three months ended September 30, 2000 as compared to the three months ended September 30, 1999. This increase was primarily attributable to an increase in occupancy with additional growth provided by increases in rental rates on renewed and released space in this portfolio. Average occupancy in the Core Office Portfolio increased 2.6% to 94.4% for the three months ended September 30, 2000 compared to 91.8% for the three months ended September 30, 1999. Of the remaining increase of $5.4 million in rental income from office properties, an increase of $6.2 million was generated by the office properties developed by the Company in 2000 and 1999 (the "Office Development Properties"), offset by a decrease of $0.8 million in rental income attributed to the 14 office buildings sold during 2000 and 1999, net of the three office buildings acquired in 1999 (the "Net Office Acquisitions and Dispositions"). Tenant reimbursements from Office Properties increased $0.7 million, or 25.4% to $3.4 million for the three months ended September 30, 2000 compared to $2.7 million for the three months ended September 30, 1999. An increase of $0.5 million, or 18.8% in tenant reimbursements was generated by the Core Office Portfolio and was primarily due to the collection of amounts identified in common area maintenance reconciliations as well as an increase in average occupancy in this portfolio. An increase of $0.1 million in tenant reimbursements was generated by the Office Development Properties and the remaining increase of $0.1 million was generated by the Net Office Acquisitions and Dispositions. Other income from Office Properties decreased $0.5 million or 74.3% to $0.2 million for the three months ended September 30, 2000 compared to $0.7 million for the three months ended September 30, 1999. Other income for the three months ended September 30, 1999 included a $0.5 million lease termination fee. The remaining amounts in other income from Office Properties for both periods consisted primarily of lease termination fees, management fees and tenant late charges. 16 Total expenses from Office Properties increased $1.4 million, or 20.4% to $8.2 million for the three months ended September 30, 2000 compared to $6.8 million for the three months ended September 30, 1999. Property expenses increased $0.7 million, or 16.4% to $5.2 million for the three months ended September 30, 2000 compared to $4.5 million for the three months ended September 30, 1999. An increase of $0.1 million in property expenses was attributable to the Core Office Portfolio as a result of increased variable expenses due to occupancy gains. Of the remaining increase of $0.6 million, an increase of $0.8 million attributable to the Office Development Properties was offset by a decrease of $0.2 million from the Net Office Acquisitions and Dispositions. Real estate taxes increased $0.6 million, or 28.2% to $2.5 million for the three months ended September 30, 2000 as compared to $1.9 million for the three months ended September 30, 1999. This increase was attributable to the Office Development Properties. Real estate taxes for the Core Office Portfolio remained consistent for the three months ended September 30, 2000 compared to the comparable period in 1999. Ground lease expense from Office Properties increased $0.1 million, or 27.8% for the three months ended September 30, 2000 compared to the three months ended September 30, 1999. This increase was attributable to ground leases at two of the Office Development Properties. Net operating income, as defined, from Office Properties increased $5.0 million, or 24.2% to $25.4 million for the three months ended September 30, 2000 compared to $20.4 million for the three months ended September 30, 1999. Of this increase, $0.6 million was generated by the Core Office Portfolio and represented a 3.6% increase in net operating income for the Core Office Portfolio. The remaining increase of $4.4 million was generated by an increase of $4.9 million from the Office Development Properties, offset by a $0.5 million decrease generated by the Net Office Acquisitions and Dispositions. Industrial Properties
Total Industrial Portfolio Core Industrial Portfolio(1) ----------------------------------- -------------------------------- Dollar Percentage Dollar Percentage 2000 1999 Change Change 2000 1999 Change Change ------- ------- ------- ---------- ------- ------ ------ ---------- Operating revenues: Rental income......... $10,558 $11,130 $ (572) (5.1)% $ 9,046 $8,297 $749 9.0 % Tenant reimbursements....... 1,325 1,485 (160) (10.8) 1,177 953 224 23.5 Other income.......... 29 78 (49) (62.3) 30 41 (11) (26.8) ------- ------- ------- ------- ------ ---- Total............... 11,912 12,693 (781) (6.2) 10,253 9,291 962 10.4 ------- ------- ------- ------- ------ ---- Property and related expenses: Property expenses..... 976 552 424 76.8 527 401 126 31.4 Real estate taxes..... 1,004 1,143 (139) (12.2) 860 881 (21) (2.4) ------- ------- ------- ------- ------ ---- Total............... 1,980 1,695 285 16.8 1,387 1,282 105 8.2 ------- ------- ------- ------- ------ ---- Net operating income, as defined................ $ 9,932 $10,998 $(1,066) (9.7)% $ 8,866 $8,009 $857 10.7 % ======= ======= ======= ======= ====== ====
- -------- (1) Stabilized industrial properties owned at January 1, 1999 and still owned at September 30, 2000. Total revenues from Industrial Properties decreased $0.8 million, or 6.2% to $11.9 million for the three months ended September 30, 2000 compared to $12.7 million for the three months ended September 30, 1999. Rental income from Industrial Properties decreased $0.6 million, or 5.1% to $10.5 million for the three months ended September 30, 2000 compared to $11.1 million for the three months ended September 30, 1999. An increase of $0.7 million was generated by the Core Industrial Portfolio and represented a 9.0% increase in rental income for the Core Industrial Portfolio. This increase in rental income from the Core Industrial Portfolio is primarily attributable to an increase in occupancy with additional growth provided by increases in rental rates on renewed and re-leased space in this portfolio. An increase of $0.4 million in rental income was generated by the industrial properties developed by the Company in 2000 and 1999 (the "Industrial Development Properties"), offset by a decrease of $1.7 million in rental income attributed to the 14 industrial buildings sold during 1999 and 2000 (the "Industrial Dispositions"). 17 Tenant reimbursements from Industrial Properties decreased $0.2 million, or 10.8% to $1.3 million for the three months ended September 30, 2000 compared to $1.5 million for three months ended September 30, 1999. An increase of $0.2 million was primarily attributable to an increase in property expenses reimbursable by tenants in the Core Industrial Portfolio. In addition, an increase of $0.1 million generated by the Industrial Development Properties was offset by a $0.3 million decrease generated by the Industrial Dispositions. Other income from Industrial Properties remained consistent for the three months ended September 30, 2000 compared to the comparable period in 1999. Total expenses from Industrial Properties increased $0.3 million, or 16.8% to $2.0 million for the three months ended September 30, 2000 compared to $1.7 million for the three months ended September 30, 1999. Property expenses from Industrial Properties increased by $0.4 million, or 76.8% to $1.0 million for the three months ended September 30, 2000 compared to $0.6 million for the three months ended September 30, 1999. An increase of $0.1 million in property expenses generated by the Core Industrial Portfolio was due to increased occupancy. Of the remaining increase of $0.3 million, $0.2 million was from the Industrial Development Portfolio and $0.1 million was from Industrial Dispositions. Real estate taxes decreased by $0.1 million for the three months ended September 30, 2000 compared to the three months ended September 30, 1999. Real estate taxes for the Core Industrial Portfolio remained consistent for the three months ended September 30, 2000 compared to the same period in 1999. An increase of $0.1 million from the Industrial Development Portfolio was offset by a decrease of $0.2 million from the Industrial Dispositions. Net operating income, as defined, from Industrial Properties decreased $1.1 million, or 9.7% to $9.9 million for the three months ended September 30, 2000 compared to $11.0 million for the three months ended September 30, 1999. An increase of $0.8 million was generated by the Core Industrial Portfolio and represented a 10.7% increase in net operating income for the Core Industrial Portfolio. This was offset by a decrease of $1.9 million in net operating income from the Industrial Dispositions. Non-Property Related Income and Expenses Interest income increased $1.5 million, or 613.8% to $1.7 million for the three months ended September 30, 2000 compared to $0.2 million for the three months ended September 30, 1999. The increase was due primarily to the receipt of interest income on a note receivable acquired in May 2000. General and administrative expenses increased $0.6 million, or 27.5% to $2.9 million for the three months ended September 30, 2000 compared to $2.3 million for the three months ended September 30, 1999. This increase was primarily due to higher salaries and benefits. Interest expense increased $3.5 million, or 54.2% to $10.0 million for the three months ended September 30, 2000 compared to $6.5 million for the three months ended September 30, 1999, primarily due to a net increase in aggregate indebtedness and higher interest rates. The Company's weighted average annual interest rate increased approximately 1.02 % to 8.17% at September 30, 2000 as compared to 7.15% at September 30, 1999. Depreciation and amortization increased $2.0 million, or 25.8% to $9.9 million for the three months ended September 30, 2000 compared to $7.9 million for the three months ended September 30, 1999. The increase was due primarily to depreciation on properties developed by the Company subsequent to September 30, 1999. 18 Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30, 1999
Nine Months Ended September 30, ----------------- Dollar Percentage 2000 1999 Change Change -------- -------- ------- ---------- (unaudited, dollars in thousands) Revenues: Rental income.......................... $117,627 $101,941 $15,686 15.4 % Tenant reimbursements.................. 14,036 12,530 1,506 12.0 Interest income........................ 3,008 860 2,148 249.8 Other income........................... 1,673 1,722 (49) (2.8) -------- -------- ------- Total revenues....................... 136,344 117,053 19,291 16.5 -------- -------- ------- Expenses: Property expenses...................... 17,749 15,517 2,232 14.4 Real estate taxes...................... 9,959 8,969 990 11.0 General and administrative expenses.... 8,077 6,781 1,296 19.1 Ground leases.......................... 1,211 1,002 209 20.9 Interest expense....................... 27,800 18,420 9,380 50.9 Depreciation and amortization.......... 28,909 22,577 6,332 28.0 -------- -------- ------- Total expenses....................... 93,705 73,266 20,439 27.9 -------- -------- ------- Income from operations before net gains on dispositions of operating properties, equity in income (loss) of unconsolidated subsidiary and minority interests............................... $ 42,639 $ 43,787 $(1,148) (2.6)% ======== ======== =======
Rental Operations Management evaluates the operations of its portfolio based on operating property type. The following tables compare the net operating income, defined as operating revenues (rental income, tenant reimbursements, other income) less property and related expenses (property expenses, real estate taxes and ground leases) before depreciation, for the Office and Industrial Properties for the nine months ended September 30, 2000 and 1999. Office Properties
Total Office Portfolio Core Office Portfolio(1) ----------------------------------- ---------------------------------- Dollar Percentage Dollar Percentage 2000 1999 Change Change 2000 1999 Change Change ------- ------- ------- ---------- ------- ------- ------ ---------- Operating revenues: Rental income......... $84,034 $69,931 $14,103 20.2% $67,257 $64,776 $2,481 3.8% Tenant reimbursements....... 9,872 8,513 1,359 16.0 8,861 8,202 659 8.0 Other income.......... 656 1,595 (939) (58.9) 343 1,034 (691) (66.8) ------- ------- ------- ------- ------- ------ Total............... 94,562 80,039 14,523 18.1 76,461 74,012 2,449 3.3 ------- ------- ------- ------- ------- ------ Property and related expenses: Property expenses..... 15,128 13,538 1,590 11.7 13,390 12,946 444 3.4 Real estate taxes..... 6,811 5,455 1,356 24.9 5,261 5,082 179 3.5 Ground leases......... 1,211 1,002 209 20.9 1,045 972 73 7.5 ------- ------- ------- ------- ------- ------ Total............... 23,150 19,995 3,155 15.8 19,696 19,000 696 3.7 ------- ------- ------- ------- ------- ------ Net operating income, as defined................ $71,412 $60,044 $11,368 18.9% $56,765 $55,012 $1,753 3.2% ======= ======= ======= ======= ======= ======
- -------- (1) Stabilized office properties owned at January 1, 1999 and still owned at September 30, 2000. Total revenues from Office Properties increased $14.5 million, or 18.1% to $94.5 million for the nine months ended September 30, 2000 compared to $80.0 million for the nine months ended September 30, 1999. Rental income from Office Properties increased $14.1 million, or 20.2% to $84.0 million for the nine months 19 ended September 30, 2000 compared to $69.9 million for the nine months ended September 30, 1999. Rental income generated by the Core Office Portfolio increased $2.5 million, or 3.8% for the nine months ended September 30, 2000 as compared to the nine months ended September 30, 1999. This increase was primarily attributable to an increase in occupancy. Average occupancy in the Core Office Portfolio increased 2.5% to 95.5% for the nine months ended September 30, 2000 compared to 93.0% for the nine months ended September 30, 1999. In addition, there was an increase in rental income generated by an increase in rental rates. The remaining increase of $11.6 million in rental income from office properties was generated by an increase of $12.1 million from the office properties developed by the Company in 2000 and 1999 (the "Office Development Properties"), offset by a decrease of $0.5 million from the 14 office properties sold during 1999 and 2000, net of the office properties acquired in 1999 (the "Net Office Acquisitions and Dispositions"). Tenant reimbursements from Office Properties increased $1.4 million, or 16.0% to $9.9 million for the nine months ended September 30, 2000 compared to $8.5 million for the nine months ended September 30, 1999. An increase of $0.7 million in tenant reimbursements was generated by the Core Office Portfolio which was primarily due to the collection of amounts identified in common area maintenance reconciliations as well as an increase in average occupancy in this portfolio. An increase of $0.4 million was generated by the Office Development Properties and the remaining increase of $0.3 million was generated by the Net Office Acquisitions and Dispositions. Other income from Office Properties decreased $0.9 million or 58.9% to $0.7 million for the nine months ended September 30, 2000 compared to $1.6 million for the nine months ended September 30, 1999. Other income for the nine months ended September 30, 1999 included $0.5 million in gain on the sale of 13 acres of undeveloped land in Calabasas and San Diego, California and a $0.5 million lease termination fee from one tenant at a Core Office Portfolio property. The remaining amounts in other income from Office Properties for both periods consisted primarily of lease termination fees, management fees and tenant late charges. Total expenses from Office Properties increased $3.1 million, or 15.8% to $23.1 million for the nine months ended September 30, 2000 compared to $20.0 million for the nine months ended September 30, 1999. Property expenses increased $1.6 million, or 11.7% to $15.1 million for the nine months ended September 30, 2000 compared to $13.5 million for the nine months ended September 30, 1999. An increase of $0.4 million in property expenses was attributable to the Core Office Portfolio which was due to occupancy gains and increased salaries and benefits. Of the remaining increase of $1.2 million in property expenses, an increase of $1.4 million was attributable to the Office Development Properties which was offset by a $0.2 million decrease attributable to the Net Office Acquisitions and Dispositions. Real estate taxes increased $1.4 million, or 24.9% to $6.8 million for the nine months ended September 30, 2000 as compared to $5.4 million for the nine months ended September 30, 1999. Of this increase, $0.2 million was attributable to real estate taxes on the Core Office Portfolio. The remaining increase of $1.2 million was attributable to the Office Development Properties. Ground lease expense from Office Properties increased $0.2 million, or 20.9% for the nine months ended September 30, 2000 compared to the nine months ended September 30, 1999. Of this increase, $0.1 million was attributable to the Core Office Portfolio properties, and the remaining $0.1 million increase was attributable to ground leases at two of the Office Development Properties. Net operating income, as defined, from Office Properties increased $11.4 million, or 18.9% to $71.4 million for the nine months ended September 30, 2000 compared to $60.0 million for the nine months ended September 30, 1999. Of this increase, $1.8 million was generated by the Core Office Portfolio and represented a 3.2% increase in net operating income for the Core Office Portfolio. The remaining increase of $9.6 million was generated by the Office Development Properties. 20 Industrial Properties
Total Industrial Portfolio Core Industrial Portfolio(1) ---------------------------------- ---------------------------------- Dollar Percentage Dollar Percentage 2000 1999 Change Change 2000 1999 Change Change ------- ------- ------ ---------- ------- ------- ------ ---------- Operating revenues: Rental income ........ $33,593 $32,010 $1,583 4.9% $29,376 $26,722 $2,654 9.9% Tenant reimbursements ..................... 4,164 4,017 147 3.7 3,567 3,236 331 10.2 Other income ......... 1,017 127 890 700.8 1,018 73 945 1294.5 ------- ------- ------ ------- ------- ------ Total............... 38,774 36,154 2,620 7.2 33,961 30,031 3,930 13.1 ------- ------- ------ ------- ------- ------ Property and related expenses: Property expenses .... 2,621 1,979 642 32.4 1,894 1,604 290 18.1 Real estate taxes .... 3,148 3,514 (366) (10.4) 2,713 3,046 (333) (10.9) ------- ------- ------ ------- ------- ------ Total .............. 5,769 5,493 276 5.0 4,607 4,650 (43) (0.9) ------- ------- ------ ------- ------- ------ Net operating income, as defined................ $33,005 $30,661 $2,344 7.6% $29,354 $25,381 $3,973 15.7% ======= ======= ====== ======= ======= ======
- -------- (1) Stabilized industrial properties owned at January 1, 1999 and still owned at September 30, 2000. Total revenues from Industrial Properties increased $2.6 million, or 7.2% to $38.8 million for the nine months ended September 30, 2000 compared to $36.2 million for the nine months ended September 30, 1999. Rental income from Industrial Properties increased $1.6 million, or 4.9% to $33.6 million for the nine months ended September 30, 2000 compared to $32.0 million for the nine months ended September 30, 1999. An increase of $2.7 million was generated by the Core Industrial Portfolio and represented a 9.9% increase in rental income for the Core Industrial Portfolio. This increase in rental income for the Core Industrial Portfolio is attributable to an increase in occupancy with additional growth provided by increases in rental rates on renewed and re- leased space in this portfolio. An increase of $1.7 million in rental income generated by the industrial properties developed by the Company in 2000 and 1999 (the "Industrial Development Properties"), was offset by a decrease of $2.8 million in rental income attributed to the 14 industrial buildings sold during 1999 and 2000 (the "Industrial Dispositions"). Tenant reimbursements from Industrial Properties increased $0.2 million, or 3.7% to $4.2 million for the nine months ended September 30, 2000 compared to $4.0 million for nine months ended September 30, 1999. Of this increase, $0.3 million was generated by the Core Industrial Portfolio. An increase of $0.3 million attributable to the Industrial Development Properties was offset by a $0.4 million decrease attributable to the Industrial Dispositions. Other income from Industrial Properties increased by $0.9 million for the nine months ended September 30, 2000 compared to the nine months ended September 30, 1999. Other income for the nine months ended September 30, 2000 included a $0.9 million lease termination fee from a building in El Segundo, California. Net of a $0.4 million write-off of the related deferred rent receivable balance, the Company recognized a net lease termination fee of $0.5 million on this transaction. The building was subsequently re-leased to a single tenant under a 15-year lease at a higher rental rate. Total expenses from Industrial Properties increased $0.3 million, or 5.0% to $5.8 million for the nine months ended September 30, 2000 compared to $5.5 million for the nine months ended September 30, 1999. Property expenses from Industrial Properties increased by $0.6 million, or 32.4% to $2.6 million for the nine months ended September 30, 2000 compared to $2.0 million for the nine months ended September 30, 1999. Increases of $0.3 million in the Core Industrial Portfolio and $0.4 million in the Industrial Development Properties were offset by a decrease of $0.1 million in property expense at the Industrial Dispositions. The increase in property expenses for the Core Industrial Portfolio is primarily due to the occupancy gains in that portfolio. As the 21 majority of the leases signed allow for recovery of expenses from the tenants, this increase in expenses is offset by an increase in tenant reimbursement income. Real estate taxes decreased by $0.4 million, or 10.4% to $3.1 million for the nine months ended September 30, 2000 compared to $3.5 million for the nine months ended September 30, 1999. A decrease of $0.3 million was attributable to the Core Industrial Portfolio which was due primarily to the effect of prior year real estate taxes which were successfully appealed by the Company in 2000. An increase of $0.3 million in real estate taxes for the Industrial Development Properties was offset by a decrease of $0.4 million for the Industrial Dispositions. Net operating income, as defined, from Industrial Properties increased $2.3 million, or 7.6% to $33.0 million for the nine months ended September 30, 2000 compared to $30.7 million for the nine months ended September 30, 1999. An increase of $4.0 million was generated by the Core Industrial Portfolio and represented a 15.7% increase in net operating income for the Core Industrial Portfolio. In addition, an increase of $1.3 million generated by the Industrial Development Properties was offset by a decrease of $2.8 million from the Industrial Dispositions. Non-Property Related Income and Expenses Interest income increased $2.1 million, or 249.8% to $3.0 million for the nine months ended September 30, 2000 compared to $0.9 million for the nine months ended September 30, 1999. The increase was due primarily to the receipt of interest income on a note receivable acquired in May 2000. General and administrative expenses increased $1.3 million, or 19.1% to $8.1 million for the nine months ended September 30, 2000 compared to $6.8 million for the nine months ended September 30, 2000. This increase was due primarily to higher salaries and benefits. Interest expense increased $9.4 million, or 50.9% to $27.8 million for the nine months ended September 30, 2000 compared to $18.4 million for the nine months ended September 30, 1999, primarily due to a net increase in aggregate indebtedness and higher interest rates. The Company's weighted average interest rate increased approximately 1.02% to 8.17% at September 30, 2000 as compared to 7.15% at September 30, 1999. Depreciation and amortization increased $6.3 million, or 28.0% to $28.9 million for the nine months ended September 30, 2000 compared to $22.6 million for the nine months ended September 30, 1999. The increase was primarily due to depreciation on properties developed by the Company subsequent to September 30, 1999. Liquidity and Capital Resources The Company has a $400 million unsecured revolving credit facility (the "Credit Facility") which bears interest at an annual rate between LIBOR plus 1.13% and LIBOR plus 1.75% (8.14% at September 30, 2000), depending upon the Company's leverage ratio at the time of borrowing, and matures in November 2002. As of September 30, 2000, the Company had borrowings of $186 million outstanding under the Credit Facility and availability of approximately $80.0 million. Availability under the Credit Facility is based upon the value of the Company's unencumbered assets and is reduced by the amounts outstanding under the Credit Facility and the Company's $100.0 million unsecured term facility discussed in the following paragraph. The Company uses the Credit Facility to finance development expenditures, to fund potential undeveloped land acquisitions and for general corporate purposes. In September 2000, the Company borrowed $100.0 million under an unsecured debt facility from a bank group led by The Chase Manhattan Bank and Morgan Guaranty Trust Company of New York. The $100.0 million facility, which matures in September 2002 with two one-year extension options, requires monthly interest-only payments based upon an annual interest rate between LIBOR plus 1.13% and LIBOR plus 1.75% (8.13% at September 30, 2000), and prices based upon the same pricing tiers and leverage ratio at the time of borrowing. Availability under the Company's Credit Facility, as discussed above, takes into consideration amounts outstanding under both the Credit Facility and this $100.0 million facility, since the same pool of unencumbered assets is used to determine availability for both financings. 22 In April 2000, one of the Development LLCs obtained a non-recourse construction loan with a total commitment of $57.0 million. The construction loan, which had an outstanding balance of approximately $42.0 million and an annual rate of LIBOR plus 2.70% (9.26% at September 30, 2000) at September 30, 2000, matures in April 2002, with the option to extend for up to two six-month periods. The proceeds from the construction loan are being used to finance the development of part of a multi-phased office project that the Company is developing in San Diego, California, with The Allen Group, a group of affiliated real estate development and investment companies based in San Diego, California. In October 2000, the construction loan agreement was modified to increase the total commitment to $61.0 million, and to decrease the interest rate on $37.2 million of the loan to LIBOR plus 2.00%. The project is expected to encompass approximately 550,000 rentable square feet of office space upon completion of all phases. The construction loan is secured by the land for the entire project, the three phases of the project that the Company had completed as of September 30, 2000, and all improvements on one of the two remaining buildings to be constructed. In June 2000, one of the Development LLCs borrowed $22.0 million under a mortgage loan that requires monthly principal and interest payments based on a floating annual interest rate of LIBOR plus 1.75% (8.37% at September 30, 2000), amortizes over 25 years, and matures in June 2004. The mortgage loan is secured by two buildings that the Company developed with The Allen Group and completed in the fourth quarter of 1999. The Development LLC used the proceeds from the mortgage loan to repay an intercompany loan to the Operating Partnership. The Operating Partnership concurrently used the proceeds to repay borrowings under the Company's Credit Facility. In October 2000, the Company obtained a construction loan with a total commitment of $18.5 million. The construction loan bears interest at an annual rate of LIBOR plus 1.75% and matures in October 2002, with the option to extend for up to one twelve-month period. The proceeds from the construction loan are being used to finance the development of an office project in San Diego, California that is expected to encompass an aggregate of approximately 102,900 rentable square feet upon completion. The construction loan is secured by the improvements to be constructed. In October 2000, the Company obtained a construction loan with a total commitment of $13.3 million. The construction loan bears interest at an annual rate of LIBOR plus 1.75% and matures in March 2002, with the option to extend for up to two six-month periods. The proceeds from the construction loan are being used to finance the development of two office buildings in San Diego, California that are expected to encompass an aggregate of approximately 119,000 rentable square feet upon completion. The construction loan is secured by a first deed of trust on the project. 23 The following table sets forth the composition of the Company's secured debt at September 30, 2000 and December 31, 1999:
September 30, December 31, 2000 1999 ------------- ------------ (in thousands) Mortgage note payable, due April 2009, fixed interest at 7.20%, monthly principal and interest payments........................................... $ 92,847 $ 93,953 Mortgage note payable, due October 2003, interest at LIBOR plus 1.75%, (8.30% and 7.94% at September 30, 2000 and December 31, 1999, respectively), monthly interest-only payments............................. 83,213 90,000 Mortgage note payable, due February 2022, fixed interest at 8.35%, monthly principal and interest payments(a)........................................ 79,835 80,812 Construction loan payable, due April 2002, interest at LIBOR plus 2.70%, (9.26% at September 30, 2000).............................................. 41,961 Mortgage note payable, due May 2017, fixed interest at 7.15%, monthly principal and interest payments.. 28,778 29,440 Mortgage note payable, due June 2004, interest at LIBOR plus 1.75%, (8.37% at September 30, 2000), monthly principal and interest payments............ 21,956 Mortgage note payable, due December 2005, fixed interest at 8.45%, monthly principal and interest payments........................................... 12,639 12,973 Mortgage note payable, due November 2014, fixed interest at 8.43%, monthly principal and interest payments........................................... 10,678 10,966 Mortgage note payable, due December 2003, fixed interest at 10.00%, monthly interest accrued through December 31, 2000, no interest accrues thereafter......................................... 8,500 Mortgage note payable, due October 2013, fixed interest at 8.21%, monthly principal and interest payments........................................... 7,149 7,372 -------- -------- $387,556 $325,516 ======== ========
- -------- (a) Beginning February 2005, the mortgage note is subject to increases in the effective annual interest rate to the greater of 13.35% or the sum of the interest rate for U.S. Treasury Securities maturing 15 years from the reset date plus 2.00%. The following table sets forth certain information with respect to the maturities and scheduled principal repayments of the Company's secured debt and unsecured term facility at September 30, 2000, assuming the exercise of available debt extension options:
Year Ending Dollars ----------- -------------- (in thousands) Remaining 2000.............................................. $ 1,308 2001........................................................ 5,525 2002........................................................ 47,932 2003........................................................ 98,167 2004........................................................ 127,511 Thereafter.................................................. 207,113 -------- Total..................................................... $487,556 ========
24 The following table sets forth certain information with respect to the Company's aggregate debt composition at September 30, 2000 and December 31, 1999:
Weighted Average Interest Percentage of Total Debt Rate -------------------------- -------------------------- September 30, December 31, September 30, December 31, 2000 1999 2000 1999 ------------- ------------ ------------- ------------ Secured vs. unsecured: Secured............... 57.5% 58.8% 8.1% 7.8% Unsecured............. 42.5% 41.2% 8.3% 7.6% Fixed rate vs. variable rate: Fixed rate(1)(4)...... 58.0% 42.5% 8.1% 7.8% Variable rate(2)(3)... 42.0% 57.5% 8.3% 7.7%
- -------- (1) At September 30, 2000, the Company had an interest rate swap agreement to fix LIBOR on $150 million of its floating rate debt at 6.95% that expires in February 2002. (2) At September 30, 2000, the Company had an interest rate cap agreement to cap LIBOR on $150 million of its floating rate debt at 6.50% that expires in January 2002. (3) At September 30, 2000, one of the Development LLCs had an interest-rate cap agreement to cap LIBOR on its floating rate construction debt at 8.50%. The notional amount of the cap increases over the life of the agreement as the balance of the related construction loan increases. At September 30, 2000, the notional amount of the interest rate cap was approximately $38.9 million. (4) The percentage of fixed rate debt to total debt at September 30, 2000 does not take into consideration the portion of floating rate debt capped by the Company's interest-rate cap agreements. Including the effects of the interest-rate cap agreements, the Company had fixed or capped approximately 86.0% of its total outstanding debt at September 30, 2000. In December 1999, the Company announced the implementation of its share repurchase program, pursuant to which the Company is authorized to repurchase up to an aggregate of 3.0 million shares of its outstanding common stock, representing up to approximately 11% of the Company's currently outstanding shares at the time the program was announced. During the first quarter of 2000, the Company repurchased 1,999,300 shares of its common stock in open market transactions for an aggregate repurchase price of $41.2 million or an average repurchase price of $20.58 per share. The Company did not repurchase any shares during the second or third quarters of 2000. Repurchases to date total 2,264,300 shares for an aggregate repurchase price of $46.5 million or an average repurchase price of $20.54 per share. Repurchases during the first quarter of 2000 were funded primarily through working capital and borrowings on the Company's unsecured revolving credit facility. Depending on market conditions, the Company will evaluate the opportunity to repurchase additional shares in the future. In February 1998, the SEC declared effective the Company's "shelf" registration statement on Form S-3 with respect to $400 million of the Company's equity securities. As of November 10, 2000, an aggregate of $313 million of equity securities were available for issuance under the registration statement. Capital Expenditures As of September 30, 2000, the Company had an aggregate of approximately 1.1 million rentable square feet of office space that was either under construction or committed for construction at a total budgeted cost of approximately $211 million. The Company has spent an aggregate of approximately $114 million on these projects as of September 30, 2000. The Company intends to finance the presently budgeted $97.0 million of remaining development costs, $9.9 million of which relates to the Company's Peregrine Systems Corporate Center project which is being financed with proceeds from the $61.0 million Development LLC construction loan, with additional construction loan financing, proceeds from the Company's dispositions program of non-strategic assets, borrowings under the Credit Facility and from working capital. In connection with an agreement signed with The Allen Group in October 1997, the Company has agreed to purchase one office property encompassing approximately 128,000 rentable square feet, subject to the property meeting certain occupancy thresholds and other tenancy requirements. The purchase price for this property will 25 be determined at the time of acquisition based on the net operating income at the time of acquisition. The Company expects that in the event that this acquisition does occur, it would be financed with borrowings under the Credit Facility and the issuance of common limited partnership units of the Operating Partnership. On May 1, 2000, the Company initiated actions that has put it in a position to potentially acquire the fee interest in a three building office complex located in El Segundo, California (see Note 3 to the consolidated financial statements included at Item 1 for further discussion of this transaction). The Company presently owns a 25% tenancy in common interest in the complex. If the Company acquires the remaining tenancy in common interest, the Company currently estimates that it could invest up to an additional $15.0 million to $20.0 million related to this complex over the next twelve months. The Company believes that it will have sufficient capital resources to satisfy its obligations and planned capital expenditures for the next twelve months. The Company expects to meet its long-term liquidity requirements including possible future development and undeveloped land acquisitions, through retained cash flow, long-term secured and unsecured borrowings, proceeds from the Company's dispositions program, or the issuance of common or preferred units of the Operating Partnership. Building and Lease Information The following tables set forth certain information regarding the Company's Office and Industrial Properties at September 30, 2000: Occupancy by Segment Type
Square Feet Number of ------------------------------- Region Buildings Total Leased Available Occupancy ------ --------- ---------- ---------- --------- --------- Office Properties: Los Angeles.............. 27 2,506,098 2,404,492 101,606 95.9% Orange County............ 13 625,893 505,245 120,648 80.7 San Diego................ 34 2,452,429 2,397,962 54,467 97.8 Other.................... 6 709,575 688,133 21,442 97.0 --- ---------- ---------- ------- 80 6,293,995 5,995,832 298,163 95.3 --- ---------- ---------- ------- Industrial Properties: Los Angeles.............. 7 554,225 551,055 3,170 99.4 Orange County............ 62 4,393,470 4,320,579 72,891 98.3 San Diego................ 1 39,669 39,669 100.0 Other.................... 8 820,124 820,124 100.0 --- ---------- ---------- ------- 78 5,807,488 5,731,427 76,061 98.7 --- ---------- ---------- ------- Total Portfolio.......... 158 12,101,483 11,727,259 374,224 96.9% === ========== ========== =======
26 Lease Expirations by Segment Type
Percentage Total of Total Square Leased Annual Base Footage Square Feet Rent Under Number of of Represented Expiring Expiring Expiring by Expiring Leases Year of Lease Expiration Leases(1) Leases Leases(2) (in 000's)(3) ------------------------ --------- --------- ----------- ------------- Office Properties: Remaining 2000............... 16 61,057 1.1% $ 1,407 2001......................... 71 900,381 15.5 15,361 2002......................... 57 403,440 7.0 7,231 2003......................... 46 258,500 4.5 5,048 2004......................... 49 788,505 13.6 17,999 2005......................... 47 923,201 15.9 15,363 --- --------- ---- ------- 286 3,335,084 57.6 62,409 --- --------- ---- ------- Industrial Properties: Remaining 2000............... 18 376,817 6.6 3,141 2001......................... 73 800,345 14.1 5,670 2002......................... 48 331,473 5.6 3,031 2003......................... 34 713,293 12.6 4,958 2004......................... 14 529,130 9.3 3,769 2005......................... 14 681,255 12.0 5,115 --- --------- ---- ------- 201 3,432,313 60.2 25,684 --- --------- ---- ------- Total Portfolio ............. 487 6,767,397 55.9% $88,093 === ========= =======
- ------- (1) Represents the total number of tenants. Some tenants have multiple leases. Excludes leases for amenity, retail, parking and month-to-month tenants. (2) Based on total leased square footage for the respective portfolios as of September 30, 2000. (3) Determined based upon aggregate base rent to be received over the term, divided by the term in months, multiplied by 12, including all leases executed on or before October 1, 2000. Leasing Activity by Segment Type
Number of Change Weighted Leases Square Feet in Average ----------- --------------- Retention GAAP Lease Term New Renewal New Renewal Rate Rents (in months) --- ------- ------- ------- --------- ------ ----------- For the Three Months Ended September 30, 2000: Office Properties....... 22 14 174,542 75,723 54.2% 21.3% 51 Industrial Properties... 12 8 81,671 27,105 58.8% 13.9% 59 --- --- ------- ------- ---- ---- --- Total Portfolio......... 34 22 256,213 102,828 55.5% 20.5% 53 === === ======= ======= ==== ==== === Number of Change Weighted Leases Square Feet in Average ----------- --------------- Retention GAAP Lease Term New Renewal New(1) Renewal Rate Rents (in months) --- ------- ------- ------- --------- ------ ----------- For the Nine Months Ended September 30, 2000: Office Properties ...... 43 36 260,165 193,487 55.0% 22.4% 42 Industrial Properties... 32 27 402,957 380,358 61.4% 24.2% 62 --- --- ------- ------- ---- ---- --- Total Portfolio......... 75 63 663,122 573,845 58.8% 23.0% 54 === === ======= ======= ==== ==== ===
- ------- (1) The lease-up of 663,122 square feet to new tenants for the nine months ended September 30, 2000 includes re-leasing of 400,390 square feet and first generation leasing of 262,732 square feet. 27 Historical Cash Flows The principal sources of funding for development, acquisitions, and capital expenditures are the Credit Facility, cash flow from operating activities, secured and unsecured debt financing and proceeds from the Company's dispositions program. The Company's net cash provided by operating activities increased $1.2 million, or 2.1% to $59.5 million for the nine months ended September 30, 2000 compared to $58.3 million for the nine months ended September 30, 1999. This increase was primarily attributable to an increase in net income resulting from the Office and Industrial Development Properties and an increase in net operating income, as defined, generated by the Core Office Portfolio and the Core Industrial Portfolio. Net cash used in investing activities decreased $66.5 million, or 48.3% to $71.1 million for the nine months ended September 30, 2000 compared to $137.6 million for the nine months ended September 30, 1999. Cash used in investing activities for the nine months ended September 30, 2000 consisted primarily of the purchase of 17 acres of undeveloped land for $11.3 million less $8.5 million for a mortgage note payable issued in connection with the acquisition, expenditures for construction in progress of $126 million, $8.5 million in additional tenant improvements and capital expenditures, and $45.3 million paid to acquire a note receivable, net of the effect of net proceeds received from the sale of nine office and nine industrial buildings of approximately $111 million. Cash used in investing activities for the nine months ended September 30, 1999 consisted primarily of the purchase of two office properties for $30.6 million less $3.6 million of contributed value in exchange for which the Company issued common units of the Operating Partnership and the repayment of an existing $2.3 million note receivable, the purchase of the minority interest in one office complex for $1.2 million, the purchase of 67 acres of undeveloped land for $27.1 million less $6.3 million of contributed value in exchange for which the Company issued common units of the Operating Partnership, expenditures for construction in progress of $94.8 million, and $11.4 million in additional tenant improvements and capital expenditures, net of the effect of net proceeds received from the sale of two industrial properties of approximately $11.0 million and the sale of 13 acres of undeveloped land of approximately $5.1 million. Net cash provided by financing activities decreased $81.5 million, or 102.1% to $1.7 million net cash used by financing activities for the nine months ended September 30, 2000 as compared to $79.8 million net cash provided by financing activities for the nine months ended September 30, 1999. Cash used in financing activities for the nine months ended September 30, 2000 consisted primarily of $42.0 million in repayments to the Credit Facility, $41.0 million in distributions paid to common stockholders and common unitholders, $41.3 million paid for securities purchased in the Company's stock repurchase program and a $28.9 million increase in restricted cash partially offset by $154 million in net proceeds from the issuance of secured and unsecured debt. Cash provided by financing activities for the nine months ended September 30, 1999 consisted primarily of $103 million in net proceeds from the issuance of secured debt and $18.0 million in borrowings under the Credit Facility partially offset by $40.0 million in distributions paid to common stockholders and common unitholders. Funds from Operations Industry analysts generally consider Funds From Operations, as defined by NAREIT, an alternative measure of performance for an equity REIT. Funds From Operations is defined by NAREIT to mean net income (loss) before minority interests of common unitholders (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of property, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships and joint ventures. The Company considers Funds From Operations an appropriate measure of performance of an equity REIT because it is predicated on cash flow analyses. The Company believes that in order to facilitate a clear understanding of the historical operating results of the Company, Funds From Operations should be examined in conjunction with net income as presented in the financial statements included elsewhere in this report. The Company computes Funds From Operations in accordance with standards established by the Board of Governors of NAREIT in its March 1995 White Paper as clarified by the November 1999 NAREIT National Policy Bulletin which became effective on January 1, 2000 which may differ from the methodologies used by other equity REITs and, accordingly, may not be comparable 28 to Funds From Operations published by such other REITs. Funds From Operations should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of the properties' financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of the properties' liquidity, nor is it indicative of funds available to fund the properties' cash needs, including the Company's ability to pay dividends or make distributions. The following table presents the Company's Funds From Operations for the three and nine months ended September 30, 2000 and 1999.
Three Months Ended Nine Months Ended September 30, September 30, -------------------- ------------------ 2000 1999 2000 1999 --------- --------- -------- -------- (in thousands) (in thousands) Net income........................... $ 15,679 $ 10,911 $ 38,060 $ 31,617 Adjustments: Minority interest in earnings of Operating Partnership........... 2,227 1,830 5,442 5,186 Depreciation and amortization.... 9,941 7,900 28,909 22,577 Net gains on dispositions of operating properties............ (7,288) (75) (11,256) (75) Non cash amortization of restricted stock grants......... 508 127 744 381 --------- --------- -------- -------- Funds From Operations................ $ 21,067 $ 20,693 $ 61,899 $ 59,686 ========= ========= ======== ========
Inflation The majority of the Company's tenant leases require tenants to pay most operating expenses, including real estate taxes and insurance, and increases in common area maintenance expenses, which reduce the Company's exposure to increases in costs and operating expenses resulting from inflation. 29 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Changes in Primary Risk Exposures Information about the Company's changes in primary risk exposures from December 31, 1999 to September 30, 2000, is incorporated herein by reference from "Item 2: Management Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Tabular Presentation of Market Risk The tabular presentations below provide information about the Company's interest rate sensitive financial and derivative instruments as of September 30, 2000 and 1999. All of the Company's interest rate sensitive financial and derivative instruments are designated as held for purposes other than trading. Presentation at September 30, 2000 For the Credit Facility, the table presents the assumption that the outstanding principal balance at September 30, 2000 will be paid upon the Credit Facility's maturity in November 2002. The table also presents the expected maximum contractual weighted average interest rate index for outstanding Credit Facility borrowings from 2000 through 2002. For variable rate secured debt and unsecured term debt, the table presents the assumption that all available debt extension options will either be exercised or extended and that the outstanding principal balance at September 30, 2000 will be paid upon the extended debt maturities. The table also presents the contractual weighted average interest rate index for outstanding variable rate mortgage debt borrowings from 2000 through 2004. For fixed rate secured debt, the table presents the assumption that the outstanding principal balance at September 30, 2000 will be paid according to scheduled principal payments and that the Company will not prepay any of the outstanding principal balance. The table also presents the related contractual weighted-average interest rate at September 30, 2000 for outstanding fixed rate mortgage debt borrowings from 2000 through 2004 and thereafter. For the Series A and Series C Cumulative Redeemable Preferred units (the "Series A and Series C Preferred units") the table reflects the assumption that the Company is not contractually obligated to repay the outstanding balance of the Series A and Series C Preferred units since the Series A and Series C Preferred units will either remain outstanding or be converted into shares of the Company's 8.075% Series A and 9.375% Series C Cumulative Redeemable Preferred stock, respectively, in 2008 when the Series A and Series C Preferred units become exchangeable at the option of the majority of the holders. For the Series D Cumulative Redeemable Preferred units (the "Series D Preferred units"), the table reflects the assumption that the Company is not contractually obligated to repay the outstanding balance of the Series D Preferred units since the Series D Preferred units will either remain outstanding or be converted into shares of the 9.250% Series D Cumulative Redeemable Preferred stock in 2009 when the Series D Preferred units become exchangeable at the option of the majority of the holders. The table also presents the related weighted-average interest rate at September 30, 2000 for outstanding Series A, C and D Preferred units from 2000 through the exchange date. The same interest rates will apply when the Series A, C and D Preferred units are exchanged into the respective Cumulative Redeemable Preferred stock. For the interest rate cap, the table presents the notional amount, cap rate and the related interest rate index upon which the cap rate is based, by contractual maturity date. For the interest rate swap, the table presents the notional amount, maximum contractual fixed pay rate, and related interest rate index upon which the floating receive rate is based, by contractual maturity date. Notional amounts are used solely to calculate the contractual cash flow to be received under the contract and do not reflect outstanding principal balances September 30, 2000. 30 Interest Rate Risk Analysis--Tabular Presentation Financial Assets and Liabilities Outstanding Principal by Expected Maturity Date September 30, 2000 (dollars in millions)
Maturity Date ------------------------------------------------- Fair Value at There- September 30, 2000 2001 2002 2003 2004 after Total 2000 -------------------------- ----- ------ ------ ------ ------------- Liabilities: Unsecured line of credit: Variable rate............ $186.0 $186.0 $186.0 Average interest rate LIBOR LIBOR LIBOR index................... +1.50% +1.50% +1.50% Secured debt and unsecured term debt: Variable rate............ $ 0.1 $ 0.3 $ 42.2 $83.6 $120.9 $247.1 $247.1 Average interest rate LIBOR LIBOR LIBOR LIBOR LIBOR index................... +2.02% +2.02% +2.02% +2.02% +2.02% Fixed rate............... $ 1.2 $ 5.2 $ 5.7 $14.6 $ 6.6 $207.1 $240.4 $236.6 Average interest rate.... 7.83% 7.83% 7.83% 7.83% 7.83% 7.83% Series A, C and D Preferred units: Fixed rate............... $142.1 Average interest rate.... 8.71% 8.71% 8.71% 8.71% 8.71% 8.71%
Interest Rate Risk Analysis--Tabular Presentation Financial Derivative Instruments Notional Amounts by Contractual Maturity September 30, 2000 (dollars in millions)
Maturity Date -------------------------------------- Fair Value at There- September 30, 2000 2001 2002 2003 2004 after Total 2000 ----- ----- ------ ---- ---- ------ ------ ------------- Interest Rate Derivatives Used to Hedge Variable Rate Debt: Interest rate cap agreement: Notional amount....... $150.0 $150.0 $ 0.5 Cap rate ............. 6.50% 6.50% 6.50% Forward rate index.... LIBOR LIBOR LIBOR Interest rate swap agreement: Notional amount....... $150.0 $150.0 $(0.8) Fixed pay interest rate................. 8.45% 8.45% 8.45% Floating receive LIBOR LIBOR LIBOR interest rate index.. +1.50% +1.50% +1.50%
31 Presentation at September 30, 1999 For the unsecured line of credit, the table presents that the outstanding principal balance at September 30, 1999 was paid in November 1999 when the Company obtained its new $400 million Credit Facility. The table also presents the maximum interest rate index for outstanding Credit Facility borrowings in 1999. For fixed rate secured debt, the table presents the assumption that the outstanding principal balance at September 30, 1999 will be paid according to scheduled principal payments and that the Company will not prepay any of the outstanding principal balance. The table also presents the related weighted- average interest rate at September 30, 1999 for outstanding fixed rate mortgage debt borrowings from 1999 through 2003 and thereafter. The Company had no outstanding variable rate mortgage debt at September 30, 1999. For the Series A and Series C Preferred units the table presents the same assumptions as discussed for the presentation at September 30, 2000. For interest rate caps, the table presents notional amounts, average cap rates and the related interest rate index upon which cap rates are based, by contractual maturity date. Notional amounts are used solely to calculate the contractual cash flow to be received under the contract and do not reflect outstanding principal balances at September 30, 1999. Interest Rate Sensitivity Analysis Financial Assets and Liabilities Outstanding Principal by Expected Maturity Date September 30, 1999 (dollars in millions)
Maturity Date Fair Value at ------------------------------------------- September 30, 1999 2000 2001 2002 2003 Thereafter Total 1999 ----- ------ ---- ---- ---- ---------- ------ ------------- Liabilities: Line of credit: Variable rate................ $290.0 $290.0 $290.0 LIBOR LIBOR Average interest rate index.. +1.50% +1.50% Secured debt: Fixed rate................... $ 1.0 $ 4.8 $5.1 $5.6 $6.1 $214.1 $236.7 $232.4 Average interest rate........ 7.75% 7.75% 7.75% 7.75% 7.75% 7.75% Series A and C Preferred units: Fixed rate................... $ 98.3 Average interest rate........ 8.49% 8.49% 8.49% 8.49% 8.49% 8.49%
32 Interest Rate Sensitivity Analysis Financial Derivative Instruments Notional Amounts by Contractual Maturity September 30, 1999 (dollars in millions)
Maturity Date Fair Value at ---------------------------------------- September 30, 1999 2000 2001 2002 2003 Thereafter Total 1999 ----- ------ ---- ---- ---- ---------- ------ ------------- Interest Rate Derivatives Used to Hedge the Line of Credit: Interest rate cap agreement: Notional amount....... $150.0 $150.0 $0.1 Cap rate.............. 6.50% 6.50% Forward rate index.... LIBOR LIBOR
33 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS During the three months ended September 30, 2000, no legal proceedings were initiated against or on behalf of the Company, which if determined adversely to the Company, would have a material adverse effect upon the financial condition, results of operations and cash flows of the Company. ITEM 2. CHANGES IN SECURITIES--None ITEM 3. DEFAULTS UPON SENIOR SECURITIES--None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--None ITEM 5. OTHER INFORMATION--None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
Exhibit Number Description ------- ----------- *10.1 Credit Agreement and Form of Promissory Notes Aggregating $100.0 million. *27.1 Financial Data Schedule.
- -------- * Filed herewith. (b) Reports on Form 8-K The Company filed the Current Report on Form 8-K (No. 1-12673), dated November 1, 2000, in connection with its third quarter 2000 earnings release. 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 10, 2000. Kilroy Realty Corporation /s/ John B. Kilroy, Jr. By: _________________________________ John B. Kilroy, Jr. President and Chief Executive Officer (Principal Executive Officer) /s/ Richard E. Moran Jr. By: _________________________________ Richard E. Moran Jr. Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Ann Marie Whitney By: _________________________________ Ann Marie Whitney Senior Vice President and Controller (Principal Accounting Officer) 35 EX-10.1 2 0002.txt CREDIT AGREEMENT AND FORM OF PROMISSORY NOTES EXHIBIT 10.1 ____________________________________________________________________ ____________________________________________________________________ CREDIT AGREEMENT, dated as of September 7, 2000, among KILROY REALTY, L.P., as Borrower, THE CHASE MANHATTAN BANK, as Bank and as Syndication Agent, MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Bank and as Administrative Agent for the Banks, COMMERZBANK AKTIENGESELLSCHAFT, NEW YORK AND GRAND CAYMAN BRANCHES, as Documentation Agent, CHASE SECURITIES INC., as Lead Arranger and Joint Bookmanager, J.P. MORGAN SECURITIES INC., as Lead Arranger and Joint Bookmanager, and THE BANKS LISTED HEREIN ____________________________________________________________________ ____________________________________________________________________ TABLE OF CONTENTS ----------------- ARTICLE I DEFINITIONS Section 1.1 Definitions........................................ 1 Section 1.2 Accounting Terms and Determinations................ 24 Section 1.3 Types of Borrowings................................ 24 ARTICLE II THE LOANS Section 2.1 Commitments and Loans.............................. 25 Section 2.2 Notice of Borrowing................................ 25 Section 2.3 Intentionally Deleted.............................. 25 Section 2.4 Notice to Banks; Funding of Loans.................. 25 Section 2.5 Notes.............................................. 26 Section 2.6 Maturity of Loans.................................. 26 Section 2.7 Interest Rates..................................... 27 Section 2.8 Fees............................................... 28 Section 2.9 Mandatory Termination.............................. 29 Section 2.10 Mandatory Prepayment............................... 30 Section 2.11 Optional Prepayments............................... 31 Section 2.12 General Provisions as to Payments.................. 32 Section 2.13 Funding Losses..................................... 33 Section 2.14 Computation of Interest and Fees................... 33 Section 2.15 Method of Electing Interest Rates.................. 34 ARTICLE III CONDITIONS Section 3.1 Closing............................................ 35 ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.1 Existence and Power................................ 39 Section 4.2 Power and Authority................................ 39 Section 4.3 No Violation....................................... 39 Section 4.4 Financial Information.............................. 40 Section 4.5 Litigation......................................... 40
i Section 4.6 Compliance with ERISA.............................. 41 Section 4.7 Environmental Compliance........................... 41 Section 4.8 Taxes.............................................. 43 Section 4.9 Full Disclosure.................................... 43 Section 4.10 Solvency........................................... 43 Section 4.11 Use of Proceeds; Margin Regulations................ 44 Section 4.12 Governmental Approvals............................. 44 Section 4.13 Investment Company Act; Public Utility Holding Company Act....................................... 44 Section 4.14 Closing Date Transactions.......................... 44 Section 4.15 Representations and Warranties in Loan Documents... 44 Section 4.16 Patents, Trademarks, etc........................... 44 Section 4.17 No Default......................................... 45 Section 4.18 Licenses, etc...................................... 45 Section 4.19 Compliance With Law................................ 45 Section 4.20 No Burdensome Restrictions......................... 45 Section 4.21 Brokers' Fees...................................... 45 Section 4.22 Labor Matters...................................... 46 Section 4.23 Organizational Documents........................... 46 Section 4.24 Principal Offices.................................. 46 Section 4.25 REIT Status........................................ 46 Section 4.26 Ownership of Property.............................. 46 Section 4.27 Insurance.......................................... 46 ARTICLE V AFFIRMATIVE AND NEGATIVE COVENANTS Section 5.1 Information........................................ 47 Section 5.2 Payment of Obligations............................. 47 Section 5.3 Maintenance of Property; Insurance................. 50 Section 5.4 Conduct of Business................................ 51 Section 5.5 Compliance with Laws............................... 51 Section 5.6 Inspection of Property, Books and Records.......... 51 Section 5.7 Existence.......................................... 51 Section 5.8 Financial Covenants................................ 52 Section 5.9 Restriction on Fundamental Changes; Operation and Control........................................... 53 Section 5.10 Changes in Business................................ 54 Section 5.11 Sale of Unencumbered Asset Pool Properties......... 54 Section 5.12 Fiscal Year; Fiscal Quarter........................ 54 Section 5.13 Margin Stock....................................... 54 Section 5.14 Development Activities............................. 54 Section 5.15 Interest Rate Protection........................... 55
ii Section 5.16 Joint Ventures..................................... 55 Section 5.17 Investments in Unimproved Real Property............ 55 Section 5.18 Use of Proceeds.................................... 55 Section 5.19 General Partner Status............................. 55 Section 5.20 Certain Requirements for the Unencumbered Asset Pool.............................................. 55 ARTICLE VI DEFAULTS Section 6.1 Events of Default.................................. 56 Section 6.2 Rights and Remedies................................ 59 Section 6.3 Notice of Default.................................. 60 ARTICLE VII THE ADMINISTRATIVE AGENT Section 7.1 Appointment and Authorization...................... 60 Section 7.2 Administrative Agent and Affiliates................ 61 Section 7.3 Action by Administrative Agent..................... 61 Section 7.4 Consultation with Experts.......................... 61 Section 7.5 Liability of Administrative Agent.................. 61 Section 7.6 Indemnification.................................... 62 Section 7.7 Credit Decision.................................... 62 Section 7.8 Successor Administrative Agent..................... 62 Section 7.9 Administrative Agent's Fee......................... 63 Section 7.10 Copies of Notices.................................. 63 ARTICLE VIII CHANGE IN CIRCUMSTANCES Section 8.1 Basis for Determining Interest Rate Inadequate or Unfair............................................ 63 Section 8.2 Illegality......................................... 64 Section 8.3 Increased Cost and Reduced Return.................. 65 Section 8.4 Taxes.............................................. 66 Section 8.5 Base Rate Loans Substituted for Affected Euro- Dollar Loans...................................... 68 ARTICLE IX MISCELLANEOUS Section 9.1 Notices............................................ 69 Section 9.2 No Waivers......................................... 69
iii Section 9.3 Expenses; Indemnification.......................... 70 Section 9.4 Sharing of Set-Offs................................ 71 Section 9.5 Amendments and Waivers............................. 72 Section 9.6 Successors and Assigns............................. 72 Section 9.7 Governing Law; Submission to Jurisdiction.......... 74 Section 9.8 Marshaling; Recapture.............................. 75 Section 9.9 Counterparts; Integration; Effectiveness........... 75 Section 9.10 WAIVER OF JURY TRIAL............................... 76 Section 9.11 Survival........................................... 76 Section 9.12 Domicile of Loans.................................. 76 Section 9.13 Limitation of Liability............................ 76
iv Exhibit A - Form of Note Exhibit B - Unencumbered Asset Pool Properties (Fee Interests) Exhibit C - Unencumbered Asset Pool Properties (Leasehold Interests) Exhibit D - Form of Assignment and Assumption Agreement Schedule 4.22- Labor Matters v CREDIT AGREEMENT CREDIT AGREEMENT, dated as of September 7, 2000, among KILROY REALTY, L.P., a Delaware limited partnership (the "Borrower"), THE CHASE MANHATTAN BANK, -------- as Bank and as Syndication Agent, MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Bank and as Administrative Agent for the Banks (the "Administrative Agent"), -------------------- COMMERZBANK AKTIENGESELLSCHAFT, NEW YORK AND GRAND CAYMAN BRANCHES, as Documentation Agent, CHASE SECURITIES INC., as Lead Arranger and Joint Bookmanager, J.P. MORGAN SECURITIES INC., as Lead Arranger and Joint Bookmanager, and the BANKS listed on the signature pages hereof (collectively, the "Banks"). ----- The parties hereto agree as follows: ARTICLE I DEFINITIONS Section I.1 Definitions. The following terms, as used herein, have ----------- the following meanings: "Adjusted London Interbank Offered Rate" has the meaning set forth in -------------------------------------- Section 2.7(b). "Adjustment Date" shall mean the date that the Borrower receives an --------------- Investment Grade Rating for its unsecured senior long term indebtedness from at least two (2) Rating Agencies, at least one (1) of which shall be either S&P or Moody's. "Administrative Agent" means Morgan Guaranty Trust Company of New York -------------------- in its capacity as Administrative Agent for the Banks hereunder, and its successors in such capacity. "Administrative Questionnaire" means, with respect to each Bank, an ---------------------------- administrative questionnaire in the form prepared by the Administrative Agent and submitted to the Administrative Agent (with a copy to the Borrower) duly completed by such Bank. "Agreement" means this Credit Agreement as the same may from time to --------- time hereafter be modified, supplemented or amended. "Annual EBITDA" means, measured as of the last day of each calendar ------------- quarter, an amount derived from (i) total revenues relating to all Real Property Assets of the Borrower, the General Partner and their Consolidated Subsidiaries or to the Borrower's or the General Partner's interest in Minority Holdings for the previous four consecutive calendar quarters including the quarter then ended, on an accrual basis with adjustments for the straight-lining of rents, plus (ii) interest and other income of the Borrower, the General Partner and - ---- their Consolidated Subsidiaries, including, without limitation, real estate service revenues, for such period, less (iii) total operating expenses and other ---- expenses relating to such Real Property Assets and to the Borrower's and the General Partner's interest in Minority Holdings for such period (other than interest, taxes, depreciation, amortization, and other non-cash items), less ---- (iv) total corporate operating expenses (including general overhead expenses) and other expenses of the Borrower, the General Partner, their Consolidated Subsidiaries and the Borrower's and the General Partner's interest in Minority Holdings (other than interest, taxes, depreciation, amortization and other non- cash items), for such period. "Applicable Interest Rate" means the lesser of (x) the rate at which ------------------------ the interest rate applicable to any floating rate Debt could be fixed, at the time of calculation, by the Borrower entering into an unsecured interest rate swap agreement (or, if such rate is incapable of being fixed by entering into an unsecured interest rate swap agreement at the time of calculation, a reasonably determined fixed rate equivalent), and (y) the rate at which the interest rate applicable to such floating rate Debt is actually capped, at the time of calculation, if the Borrower has entered into an interest rate cap agreement with respect thereto or if the documentation for such Debt contains a cap. "Applicable Lending Office" means, with respect to any Bank, (i) in ------------------------- the case of its Base Rate Loans, its Domestic Lending Office, and (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office. "Applicable Margin" means, prior to the Adjustment Date, with respect ----------------- to each Euro-Dollar Loan, the respective percentages per annum determined, 2 at any time, based on the range into which the Total Debt Ratio then falls, in accordance with the table set forth below:
Total Debt Ratio Applicable Margin for Euro-Dollar Loans (% per annum) - ---------------------------------------------------------------------------------- less than 25% 1.125% - ---------------------------------------------------------------------------------- equal to or greater than 25% but less 1.25% than 35% - ---------------------------------------------------------------------------------- equal to or greater than 35% but less 1.375% than 45% - ---------------------------------------------------------------------------------- equal to or greater than 45% but less 1.50% than 50% - ---------------------------------------------------------------------------------- equal to or greater than 50% but less 1.75% than 55% - ----------------------------------------------------------------------------------
From and after the Adjustment Date, the Applicable Margin with respect to each Euro-Dollar Loan shall mean the respective percentages per annum determined, at any time, based on the range into which the Borrower's Credit Rating (if any) then falls, in accordance with the table set forth below. Any change in the Borrower's Credit Rating shall be effective immediately as of the date on which any of the Rating Agencies announces a change in the Borrower's Credit Rating or the date on which the Borrower (or as applicable, the General Partner) has no credit rating, whichever is applicable. In the event that the Borrower (or as applicable, the General Partner) receives two (2) credit ratings that are not equivalent, the Applicable Margin shall be determined by the lower of such two (2) credit ratings. In the event that Borrower (or as applicable, the General Partner) receives more than two (2) credit ratings and such credit ratings are not equivalent, the Applicable Margin shall be determined by the lower of the two (2) highest ratings, provided that each of said two (2) highest ratings shall be Investment Grade Ratings and at least one of which shall be an Investment Grade Rating from S&P or Moody's. 3
- ---------------------------------------------------------------------------------- Borrower's Credit Rating (S&P/Moody's Applicable Margin for Euro-Dollar Loans Ratings) (% per annum) - ---------------------------------------------------------------------------------- BBB+/Baa1 1.00% - ---------------------------------------------------------------------------------- BBB/Baa2 (or better) 1.10% - ---------------------------------------------------------------------------------- BBB-/Baa3 1.20% - ---------------------------------------------------------------------------------- Less than Investment Grade Rating 1.675% - ----------------------------------------------------------------------------------
"Assignee" has the meaning set forth in Section 9.6(c). -------- "Bank" means each bank listed on the signature pages hereof, each ---- Assignee which becomes a Bank pursuant to Section 9.6(c), and their respective successors. "Bank Due Diligence Package" has the meaning provided in Section 3.2. -------------------------- "Bankruptcy Code" means Title 11 of the United States Code, entitled --------------- "Bankruptcy", as amended from time to time, and any successor statute or statutes. "Base Rate" means, for any day, a rate per annum equal to the higher --------- of (i) the Prime Rate for such day and (ii) the sum of the Federal Funds Rate plus .50%. "Base Rate Borrowing" means a Borrowing comprised of Base Rate Loans. ------------------- "Base Rate Loan" means a Loan to be made by a Bank as a Base Rate Loan -------------- in accordance with the applicable Notice of Borrowing or pursuant to Article VIII. "Benefit Arrangement" means at any time an employee benefit plan ------------------- within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. 4 "Borrower" means Kilroy Realty, L.P., a Delaware limited partnership, -------- and its successors. "Borrower's Credit Rating" means the rating assigned by the Rating ------------------------ Agencies to the Borrower's or the General Partner's senior unsecured long term indebtedness. "Borrowing" has the meaning set forth in Section 1.3. --------- "Capital Expenditures" means, for any period, the sum of all -------------------- expenditures (whether paid in cash or accrued as a liability) by the Borrower which are capitalized on the consolidated balance sheet of the Borrower in conformity with GAAP, but less (i) all expenditures made with respect to the acquisition by the Borrower and its Consolidated Subsidiaries of any interest in real property within nine months after the date such interest in real property is acquired and (ii) capital expenditures made from the proceeds of insurance or condemnation awards (or payments in lieu thereof) or indemnity payments received during such period by Borrower or any of its Consolidated Subsidiaries from third parties. "Cash or Cash Equivalents" means (i) cash, (ii) direct obligations of ------------------------ the United States Government, including, without limitation, treasury bills, notes and bonds, (iii) interest bearing or discounted obligations of Federal agencies and Government sponsored entities or pools of such instruments offered by banks rated AA or better by S&P or Aa2 by Moody's and dealers, including, without limitation, Federal Home Loan Mortgage Corporation participation sale certificates, Government National Mortgage Association modified pass-through certificates, Federal National Mortgage Association bonds and notes, Federal Farm Credit System securities, (iv) time deposits, domestic and Eurodollar certificates of deposit, bankers acceptances, commercial paper rated at least A- 1 by S&P and P-1 by Moody's, and/or guaranteed by an Aa rating by Moody's, an AA rating by S&P, or better rated credit, floating rate notes, other money market instruments and letters of credit each issued by banks which have a long-term debt rating of at least AA by S&P or Aa2 by Moody's, (v) obligations of domestic corporations, including, without limitation, commercial paper, bonds, debentures, and loan participations, each of which is rated at least AA by S&P, and/or Aa2 by Moody's, and/or unconditionally guaranteed by an AA rating by S&P, an Aa2 rating by Moody's, or better rated credit, (vi) obligations issued by states and local governments or their agencies, rated at least MIG-1 by Moody's and/or SP-1 by S&P and/or guaranteed by an irrevocable letter of credit of a bank with a long-term debt rating of at least AA by S&P or Aa2 by Moody's, 5 (vii) repurchase agreements with major banks and primary government securities dealers fully secured by U.S. Government or agency collateral equal to or exceeding the principal amount on a daily basis and held in safekeeping, (viii) real estate loan pool participations, guaranteed by an entity with an AA rating given by S&P or an Aa2 rating given by Moody's, or better rated credit, and (ix) shares of any mutual fund that has its assets primarily invested in the types of investments referred to in clauses (i) through (v). "Closing Date" means the date on which the Administrative Agent shall ------------ have received the documents specified in or pursuant to Section 3.1. "Commitment" means, with respect to each Bank, the amount committed by ---------- such Bank pursuant to this Agreement with respect to any Loans, as such amount may be reduced from time to time pursuant to Sections 2.10 and 2.11. "Completion of Construction" means the issuance of a temporary or -------------------------- permanent certificate of occupancy for the improvements under construction, permitting the use and occupancy thereof for their regular intended uses. "Consolidated Subsidiary" means at any date any Subsidiary or other ----------------------- entity which is consolidated with the Borrower in accordance with GAAP. "Consolidated Tangible Net Worth" means at any date the consolidated ------------------------------- stockholders' equity of the Borrower (determined on a book basis), less its consolidated Intangible Assets, all determined as of such date. For purposes of this definition "Intangible Assets" means with respect to any such intangible ----------------- assets, the amount (to the extent reflected in determining such consolidated stockholders' equity) of (i) all write-ups subsequent to December 31, 1998 in the book value of any asset owned by the Borrower or a Consolidated Subsidiary and (ii) goodwill, patents, trademarks, service marks, trade names, anticipated future benefit of tax loss carry forwards, copyrights, organization or developmental expenses and other intangible assets. "Contingent Obligation" as to any Person means, without duplication, --------------------- (i) any contingent obligation of such Person required to be shown on such Person's balance sheet in accordance with GAAP, and (ii) any obligation required to be disclosed in the footnotes to such Person's financial statements, guaranteeing partially or in whole any non-recourse Debt, lease, dividend or other obligation, exclusive of contractual indemnities (including, without limitation, any indemnity or 6 price-adjustment provision relating to the purchase or sale of securities or other assets) and guarantees of non-monetary obligations (other than guarantees of completion) which have not yet been called on or quantified, of such Person or of any other Person. The amount of any Contingent Obligation described in clause (ii) shall be deemed to be (a) with respect to a guaranty of interest or interest and principal, or operating income guaranty, the sum of all payments required to be made thereunder (which in the case of an operating income guaranty shall be deemed to be equal to the debt service for the note secured thereby), calculated at the Applicable Interest Rate, through (i) in the case of an interest or interest and principal guaranty, the stated date of maturity of the obligation (and commencing on the date interest could first be payable thereunder), or (ii) in the case of an operating income guaranty, the date through which such guaranty will remain in effect, and (b) with respect to all guarantees not covered by the preceding clause (a), an amount equal to the stated or determinable amount of the primary obligation in respect of which such guaranty is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as recorded on the balance sheet and on the footnotes to the most recent financial statements of the Borrower required to be delivered pursuant to Section 4.4 hereof. Notwithstanding anything contained herein to the contrary, guarantees of completion shall not be deemed to be Contingent Obligations unless and until a claim for payment or performance has been made thereunder, at which time any such guaranty of completion shall be deemed to be a Contingent Obligation in an amount equal to any such claim. Subject to the preceding sentence, (i) in the case of a joint and several guaranty given by such Person and another Person (but only to the extent such guaranty is recourse, directly or indirectly to the Borrower), the amount of the guaranty shall be deemed to be 100% thereof unless and only to the extent that such other Person has delivered Cash or Cash Equivalents to secure all or any part of such Person's guaranteed obligations, (ii) in the case of joint and several guarantees given by a Person in whom the Borrower owns an interest (which guarantees are non-recourse to the Borrower), to the extent the guarantees, in the aggregate, exceed 15% of total real estate investments, the amount in excess of 15% shall be deemed to be a Contingent Obligation of the Borrower, and (iii) in the case of a guaranty (whether or not joint and several) of an obligation otherwise constituting Debt of such Person, the amount of such guaranty shall be deemed to be only that amount in excess of the amount of the obligation constituting Debt of such Person. Notwithstanding anything contained herein to the contrary, "Contingent Obligations" shall not be deemed to include guarantees of Unused Commitments or of construction loans to the extent the same have not been drawn. 7 "Debt" of any Person (including Minority Holdings) means, without ---- duplication, (A) as shown on such Person's consolidated balance sheet (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or any asset and, (ii) all indebtedness of such Person evidenced by a note, bond, debenture or similar instrument (whether or not disbursed in full in the case of a construction loan), (B) the face amount of all letters of credit issued for the account of such Person and, without duplication, all unreimbursed amounts drawn thereunder, (C) all Contingent Obligations of such Person, (D) all payment obligations of such Person under any interest rate protection agreement (including, without limitation, any interest rate swaps, caps, floors, collars and similar agreements) or other hedging agreements and currency swaps and foreign exchange contracts or similar agreements which were not entered into specifically in connection with Debt set forth in clauses (A), (B) or (C) hereof. For purposes of this Agreement, Debt (other than Contingent Obligations) of the Borrower shall be deemed to include only the Borrower's pro rata share (such share being based upon the Borrower's percentage ownership interest as shown on the Borrower's annual audited financial statements) of the Debt of any Person in which the Borrower, directly or indirectly, owns an interest, provided that such Debt is nonrecourse, both directly and indirectly, to the Borrower. "Default" means any condition or event which constitutes an Event of ------- Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Domestic Business Day" means any day except a Saturday, Sunday or --------------------- other day on which commercial banks in New York City and Los Angeles are authorized by law to close. "Domestic Lending Office" means, as to each Bank, its office located ----------------------- within the United States at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office within the United States as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Administrative Agent; provided that no Bank shall be permitted to change its Domestic Lending Office if as a result of such change either (i) pursuant to the provisions of Section 8.1 or Section 8.2, Borrower would be unable to maintain any Loans as Euro-Dollar Loans; or (ii) Borrower would be required to make any payment to such Bank pursuant to the provisions of Section 8.3 or Section 8.4. 8 "Due Diligence Package" has the meaning provided in Section 3.2. --------------------- "Duff & Phelps" means Duff & Phelps Credit Rating Co. or any successor ------------- thereto. "Environmental Affiliate" means any partnership, or joint venture, ----------------------- trust or corporation in which an equity interest is owned by the Borrower, either directly or indirectly. "Environmental Approvals" means any permit, license, approval, ruling, ----------------------- variance, exemption or other authorization required under applicable Environmental Laws. "Environmental Claim" means, with respect to any Person, any notice, ------------------- claim, demand or similar communication (written or oral) by any other Person alleging potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damage, property damage, personal injuries, fines or penalties arising out of, based on or resulting from (i) the presence, or release into the environment, of any Material of Environmental Concern at any location, whether or not owned by such Person or (ii) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law, in each case as to which could reasonably be expected to have a Material Adverse Effect. "Environmental Laws" means any and all federal, state, local and ------------------ foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to the environment, the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Material of Environmental Concern or hazardous wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Material of Environmental Concern or hazardous wastes or the clean-up or other remediation thereof. "Environmental Report" has the meaning set forth in Section 4.7. -------------------- "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended, or any successor statute. 9 "ERISA Group" means the Borrower, any Subsidiary and all members of a ----------- controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "Euro-Dollar Borrowing" has the meaning set forth in Section 1.3. --------------------- "Euro-Dollar Business Day" means any Domestic Business Day on which ------------------------ commercial banks are open for international business (including dealings in dollar deposits) in London. "Euro-Dollar Lending Office" means, as to each Bank, its office, -------------------------- branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro- Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Administrative Agent; provided that no Bank shall be permitted to change its Euro-Dollar Lending Office if as a result of such change either (i) pursuant to the provisions of Section 8.1 or Section 8.2, Borrower would be unable to maintain any Loans as Euro-Dollar Loans; or (ii) Borrower would be required make any payment to such Bank pursuant to the provisions of Sections 8.3 or Section 8.4. "Euro-Dollar Loan" means a Loan to be made by a Bank as a Loan bearing ---------------- interest at the Adjusted London Interbank Offered Rate in accordance with the applicable Notice of Borrowing or Notice of Interest Rate Election. "Euro-Dollar Reserve Percentage" has the meaning set forth in Section ------------------------------ 2.7(b). "Event of Default" has the meaning set forth in Section 6.1. ---------------- "Federal Funds Rate" means, for any day, the rate per annum (rounded ------------------ upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day; provided that (i) if such day is not a Domestic -------- Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the 10 next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Morgan on such day on such transactions as determined by the Administrative Agent. "Federal Reserve Board" means the Board of Governors of the Federal --------------------- Reserve System as constituted from time to time. "Financeable Ground Lease" means either (x) a ground lease reasonably ------------------------ satisfactory to the Required Banks, or (y) a ground lease which provides (i) for a remaining term of not less than 25 years (including options and renewals) from the date that such Real Property Asset shall become an Unencumbered Asset Pool Property, (ii) that the ground lease will not be terminated until any leasehold mortgagee shall have received notice of a default and has had a reasonable opportunity to cure the same or complete foreclosure, and has failed to do so, (iii) for a new lease on substantially the same terms to any leasehold mortgagee recognized under such ground lease as tenant if the ground lease is terminated for any reason, (iv) for non-merger of the fee and leasehold estates, and (v) transferability of the tenant's interest under the ground lease, subject only to the landlord's reasonable approval. Notwithstanding the foregoing, it is hereby agreed that the ground lease with respect to the Real Property Asset commonly known as "Kilroy Airport Center, Long Beach, California ", shall be deemed to be a "Financeable Ground Lease." "FFO" means "funds from operations," defined to mean net income (or --- loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructurings and sales of properties, plus depreciation and amortization, after adjustments for Minority Holdings. Adjustments for Minority Holdings will be calculated to reflect FFO on the same basis as above. "Fitch" means Fitch Investors Services, L.P. or any successor thereto. ----- "FMV Cap Rate" means 9%. ------------ "GAAP" means generally accepted accounting principles recognized as ---- such in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and Board or in such other statements by such other entity as may be approved by a significant segment of the 11 accounting profession, which are applicable to the circumstances as of the date of determination. "General Partner" means Kilroy Realty Corporation, a Maryland --------------- corporation. "Governmental Authority" means any Federal, state or local government ---------------------- or any other political subdivision thereof or agency exercising executive, legislative, judicial, regulatory or administrative functions having jurisdiction over the Borrower or any Unencumbered Asset Pool Property. "Group of Loans" means, at any time, a group of Loans consisting of -------------- (i) all Loans which are Base Rate Loans at such time, or (ii) all Loans which are Euro-Dollar Loans having the same Interest Period at such time; provided -------- that, if a Loan of any particular Bank is converted to or made as a Base Rate Loan pursuant to Section 8.2 or 8.4, such Loan shall be included in the same Group or Groups of Loans from time to time as it would have been in if it had not been so converted or made. "Guaranty" means the Guaranty of Payment, dated as of even date -------- herewith, made by the General Partner. "Indemnitee" has the meaning set forth in Section 9.3(b). ---------- "Interest Period" means: (i) with respect to each Euro-Dollar --------------- Borrowing, the period commencing on the date of such Borrowing or of any Notice of Interest Rate Election with respect to such Borrowing and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable Notice of Borrowing or Notice of Interest Rate Election; provided that: -------- (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest 12 Period) shall end on the last Euro-Dollar Business Day of a calendar month; and (ii) with respect to each Base Rate Borrowing, the period commencing on the date of such Borrowing or Notice of Interest Rate Election and ending 30 days thereafter; provided that any Interest Period which would otherwise end on -------- a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day. "Interest Rate Hedges" shall mean interest rate exchange, collar, cap, -------------------- swap, adjustable strike cap, adjustable strike corridor or similar agreements having terms, conditions and tenors reasonably acceptable to the Administrative Agent entered into by the Borrower, the General Partner and/or their Subsidiaries in order to provide protection to, or minimize the impact upon, the Borrower, the General Partner and/or their Subsidiaries of increasing floating rates of interest applicable to Debt under clause (A) of the definition of Debt. "Internal Revenue Code" means the Internal Revenue Code of 1986, as --------------------- amended, or any successor statute. "Investment Grade Rating" means a rating for a Person's senior long- ----------------------- term unsecured debt, or if no such rating has been issued, a "shadow" rating, of BBB- or better from S&P, and a rating or "shadow" rating of Baa3 or better from Moody's or a rating or "shadow" rating equivalent to the foregoing from either Duff & Phelps or Fitch. Any such "shadow" rating shall be evidenced by a letter from the applicable Rating Agency or by such other evidence as may be reasonably acceptable to the Administrative Agent (as to any such other evidence, the Administrative Agent shall present the same to, and discuss the same with, the Banks). "Lien" means, with respect to any asset, any mortgage, lien, pledge, ---- charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset. For the purposes of this Agreement, each of the Borrower and any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan" means a Base Rate Loan or a Euro-Dollar Loan, and "Loans" means ---- ----- Base Rate Loans, Euro-Dollar Loans or any combination of the foregoing, 13 provided that, if any such Loan or Loans (or portions thereof) are combined or - -------- subdivided pursuant to a Notice of Interest Rate Election, the term "Loan" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "Loan Amount" has the meaning set forth in Section 2.1(a). ----------- "Loan Documents" means this Agreement, the Notes, the Guaranty, and -------------- any related documents. "London Interbank Offered Rate" has the meaning set forth in Section ----------------------------- 2.7(b). "Margin Stock" shall have the meaning provided such term in Regulation ------------ U and Regulation G of the Federal Reserve Board. "Material Adverse Effect" means a material adverse effect upon (i) the ----------------------- business, operations, properties or assets of the Borrower or (ii) the ability of the Borrower to perform its obligations hereunder in all material respects, including to pay interest and principal. "Material Lease" means, with respect to any Real Property Asset, any -------------- lease, underletting, concession agreement or license affecting such Real Property Asset, which represents more than 15% of the gross leasable area of such Real Property Asset. "Material of Environmental Concern" means and includes pollutants, --------------------------------- contaminants, hazardous wastes, and toxic, radioactive, caustic or otherwise hazardous substances, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics. "Material Plan" means at any time a Plan having aggregate Unfunded ------------- Liabilities in excess of $5,000,000. "Maturity Date" has the meaning set forth in Section 2.9. ------------- 14 "Minority Holdings" means partnerships, limited liability companies ----------------- and corporations held or owned by the Borrower which are not consolidated with the Borrower on its financial statements. "Moody's" means Moody's Investors Service, Inc. or any successor ------- thereto. "Morgan" means Morgan Guaranty Trust Company of New York, in its ------ individual capacity. "Multiemployer Plan" means at any time an employee pension benefit ------------------ plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "Net Offering Proceeds" means all cash received by the Borrower or the --------------------- General Partner as a result of the sale of common shares of beneficial interest, preferred shares of beneficial interest (including perpetual preferred), partnership interests, limited liability company interests, or other ownership or equity interests in the Borrower or the General Partner (or evidence of indebtedness of the Borrower or the General Partner convertible into any of the foregoing) less customary costs and discounts of issuance paid by the Borrower ---- or the General Partner, as the case may be. "Net Operating Cash Flow" means, with respect to any Real Property ----------------------- Asset, the Property Income, calculated on an annualized basis, for the period during which such Real Property Asset shall have been owned by the Borrower, the General Partner or any of their Subsidiaries, less Property Expenses, calculated on an estimated, pro forma (i.e., the results for the period during which such Real Property Asset shall have been owned shall be annualized, with appropriate adjustments for items of income and expense which are not earned or incurred in equal monthly amounts) basis. "New Acquisitions" shall mean any Real Property Asset acquired after ---------------- the date hereof. 15 "Non-Recourse Debt" means Debt of the Borrower or the General Partner ----------------- on a consolidated basis for which the right of recovery of the obligee thereof is limited to recourse against the Real Property Assets securing such Debt (subject to such limited exceptions to the non-recourse nature of such Debt such as fraud, misappropriation, misapplication and environmental indemnities, as are usual and customary in like transactions at the time of the incurrence of such Debt). "Notes" means, collectively, the promissory notes of the Borrower, ----- each substantially in the form of Exhibit A hereto, evidencing the obligation of --------- the Borrower to repay the Loans, and "Note" means any one of such promissory ---- notes issued hereunder. "Notice of Borrowing" has the meaning set forth in Section 2.2. ------------------- "Notice of Interest Rate Election" has the meaning set forth in -------------------------------- Section 2.15(a). "Obligations" means all obligations, liabilities and indebtedness of ----------- every nature of the Borrower from time to time owing to any Bank under or in connection with this Agreement or any other Loan Document, including, without limitation, the outstanding principal amount of the Loans at such time. "Outstanding Balance" means the aggregate outstanding and unpaid ------------------- principal balance of all Loans. "Parent" means, with respect to any Bank, any Person controlling such ------ Bank. "Participant" has the meaning set forth in Section 9.6(b). ----------- "PBGC" means the Pension Benefit Guaranty Corporation or any entity ---- succeeding to any or all of its functions under ERISA. "Permitted Liens" means (a) Liens in favor of the Borrower or the --------------- General Partner on all or any part of the assets of Subsidiaries of the Borrower or the General Partner, as applicable, provided that (i) the Debt to which such Lien relates is held by the Borrower, (ii) such Debt is not otherwise pledged or encumbered, and (iii) no more than 5% of the Unencumbered Asset Pool Properties Value may be subject to any such Liens; (b) Liens to secure the performance of statutory obligations, surety or 16 appeal bonds, performance bonds, completion bonds, government contracts or other obligations of a like nature, including Liens in connection with workers' compensation, unemployment insurance and other types of statutory obligations or to secure the performance of tenders, bids, leases, contracts (other than for the repayment of Debt) and other similar obligations incurred in the ordinary course of business; (c) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded; provided, that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (d) Liens on property of the Borrower, the General Partner or any Subsidiary thereof in favor of the Federal or any state government to secure certain payments pursuant to any contract, statute or regulation; (e) easements (including, without limitation, reciprocal easement agreements and utility agreements), rights of way, covenants, consents, reservations, encroachments, variations and zoning and other restrictions, charges or encumbrances (whether or not recorded), which do not interfere materially with the ordinary conduct of the business of the Borrower, the General Partner or any Subsidiary thereof and which do not materially detract from the value of the property to which they attach or materially impair the use thereof by the Borrower, the General Partner or any Subsidiary thereof; (f) statutory Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other Liens imposed by law and arising in the ordinary course of business, for sums due and payable which are not then past due (or which, if past due, are being contested in good faith and with respect to which adequate reserves are being maintained to the extent required by GAAP); (g) Liens not otherwise permitted by this definition and incurred in the ordinary course of business of any or all of the Borrower, the General Partner or any Subsidiary thereof with respect to obligations which do not exceed $500,000 in principal amount in the aggregate at any one time outstanding; and (h) the interests of lessees and lessors under leases of real or personal property made in the ordinary course of business which would not have a Material Adverse Effect. "Person" means an individual, a corporation, a partnership, a limited ------ liability company, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan (other than ---- a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the 17 preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "Prime Rate" means the rate of interest publicly announced by Morgan ---------- in New York City from time to time as its Prime Rate. "Pro-Forma Debt Service" means, for any calendar quarter, the greater ---------------------- of (x) the interest actually payable on the Loans and all other Unsecured Debt, and (y) the amount of debt service payments determined by applying a 30-year mortgage style amortization schedule to the Loans and such other Unsecured Debt outstanding as of the last day of such calendar quarter, using an interest rate equal to the Treasury Rate plus 1.75%. "Property Expenses" means, when used with respect to any Real Property ----------------- Asset, the costs of operating and maintaining such Real Property Asset which are the responsibility of the owner thereof and that are not paid directly by the tenant thereof, including, without limitation, taxes, insurance, repairs and maintenance, but provided that if such tenant is more than 60 days in arrears in the payment of base or fixed rent, then such costs will also constitute "Property Expenses", but excluding depreciation, amortization and interest costs. "Property Income" means, when used with respect to any Real Property --------------- Asset, cash rents and other cash revenues received in the ordinary course therefrom, including, without limitation, revenues from any parking leases and lease termination fees amortized over the remaining term of the lease for which such termination fee was received (other than pre-paid rents and revenues and security deposits except to the extent applied in satisfaction of tenants' obligations for rent). "Qualified Development Properties" means any Real Property Assets -------------------------------- which are 100% owned in fee (or leasehold pursuant to a Financeable Ground Lease) by the Borrower, the General Partner or any of their Consolidated Subsidiaries and which are not subject to any Lien (other than Permitted Liens), and which are under construction and which, in accordance with GAAP, have not yet been placed into service, provided, however, that if 66.67% or more of the net rentable area of any Qualified Development Property has not been leased to tenants other than tenants that are affiliates of the Borrower on or before the earlier to occur of (x) the date which is six (6) months after the Completion of Construction thereof, and (y) the eighteen 18 month anniversary of the commencement of construction thereof, then the same will cease to be a Qualified Development Property. "Qualified Leased Development Properties" means any Real Property --------------------------------------- Assets which are 100% owned in fee (or leasehold pursuant to a Financeable Ground Lease) by the Borrower, the General Partner or any of their Consolidated Subsidiaries and which are not subject to any Lien (other than Permitted Liens), and which are under construction and, in accordance with GAAP, have not yet been placed into service, and of which, as of any date of determination, 66.67% or more of the net rentable area of such Real Property Asset has been leased to tenants other than tenants that are affiliates of the Borrower. "Rating Agencies" means, collectively, S&P, Moody's, Duff & Phelps and --------------- Fitch. "Real Property Assets" means as of any time, the real property assets -------------------- owned directly or indirectly by the Borrower at such time. "Recourse Debt" shall mean Debt of the Borrower, the General Partner ------------- or any Consolidated Subsidiary that is not Non-Recourse Debt. "Reference Bank" means the principal London offices of Morgan. -------------- "Regulation U" means Regulation U of the Board of Governors of the ------------ Federal Reserve System, as in effect from time to time. "Release" means any release, spill, emission, leaking, pumping, ------- pouring, dumping, emptying, deposit, discharge, leaching or migration. "Required Banks" means, at any time, Banks having at least two-thirds -------------- of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, holding Notes evidencing at least two-thirds of the aggregate unpaid principal amount of the Loans. "Requirements" means all present and future laws, statutes, codes, ------------ ordinances, orders, judgments, decrees, injunctions, rules, regulations and requirements of every Governmental Authority having jurisdiction over any Unencumbered Asset Pool Property and all restrictive covenants applicable to any Unencumbered Asset Pool Property. 19 "Secured Debt" means all Debt secured by a Lien on real property. ------------ "Separate Parcel" means a Real Estate Asset that is a single, legally --------------- subdivided, separately zoned parcel that can be legally transferred or conveyed separate and distinct from any other Real Estate Asset without benefit of any other Real Estate Asset. "Solvent" means, with respect to any Person, that the fair saleable ------- value of such Person's assets exceeds the Debts of such Person. "Subsidiary" means any corporation or other entity of which securities ---------- or other ownership interests representing either (i) ordinary voting power to elect a majority of the board of directors or other persons performing similar functions or (ii) a majority of the economic interest therein, are at the time directly or indirectly owned by the Borrower. "Term" has the meaning set forth in Section 2.9. ---- "Total Asset Value" means, the sum of (w) with respect to those Real ----------------- Property Assets owned for at least the two previous consecutive quarters, the quotient of (i) Annual EBITDA with respect thereto for the previous four (4) consecutive quarters (or, if owned for only two or three quarters, the Annual EBITDA for such period, annualized), including the quarter then ended, but less reserves for Capital Expenditures of (A) $0.30 per square foot per annum for each Real Property Asset that is an office property, and (B) $0.15 per square foot per annum for each Real Property Asset that is an industrial property, divided by (ii) the FMV Cap Rate, (x) with respect to those Real Property Assets owned for less than the two previous consecutive quarters, the lesser of (i) the quotient of Net Operating Cash Flow applicable to each such Real Property Asset, calculated on an annualized basis, based upon (A) the actual amount of Net Operating Cash Flow for the period of the Borrower's, the General Partner's or their Subsidiary's ownership of such Real Property Asset, less replacement reserves of (1) $0.30 per square foot per annum for each such Unencumbered Asset Pool Property which is an office building and (2) $0.15 per square foot per annum for each such Unencumbered Asset Pool Property which is an industrial building, divided by (B) the FMV Cap Rate, and (ii) the purchase price actually paid by the Borrower, the General Partner or any of their Subsidiaries (as applicable) for such Real Property, (y) with respect to Qualified Development Properties, 40% of the book value thereof, and (z) Cash or Cash Equivalents of the Borrower, the General Partner and their Subsidiaries as of the date of determination. 20 "Total Debt Ratio" means the ratio, as of the date of determination, ---------------- of (i) the sum of (x) the Total Liabilities of the Borrower, the General Partner and their Consolidated Subsidiaries and (y) the Borrower's and the General Partner's pro rata share of the Total Liabilities of any Minority Holdings of the Borrower or the General Partner to (ii) Total Asset Value. "Total Debt Service" means, as of the last day of each calendar ------------------ quarter, an amount equal to the sum of (i) interest (whether accrued, paid or capitalized) payable by Borrower on its Debt for the previous four consecutive quarters including the quarter then ended, plus (ii) scheduled payments of principal on such Debt, whether or not paid by the Borrower (excluding balloon payments) for the previous four consecutive quarters including the quarter then ended. "Total Liabilities" means the sum of the balance sheet amount of all ----------------- Debt of the Borrower, the General Partner and their Consolidated Subsidiaries and all accounts payable and all other liabilities of such Person, all as determined in accordance with GAAP. "Treasury Rate" means, as of any date, a rate equal to the annual ------------- yield to maturity on the U.S. Treasury Constant Maturity Series with a ten-year maturity, as such yield is reported in Federal Reserve Statistical Release H.15 - -- Selected Interest Rates, published most recently prior to the date the applicable Treasury Rate is being determined. Such yield shall be determined by straight line linear interpolation between the yields reported in Release H.15, if necessary. In the event Release H.15 is no longer published, the Administrative Agent shall select, in its reasonable discretion, an alternate basis for the determination of Treasury yield for U.S. Treasury Constant Maturity Series with ten-year maturities. "Unencumbered Asset Pool Net Operating Cash Flow" means, as of any ----------------------------------------------- date of determination with respect to the Unencumbered Asset Pool Properties, Property Income with respect to the Unencumbered Asset Pool Properties for the previous four (4) consecutive quarters (except as provided below), including the quarter then ended, but less (x) Property Expenses with respect to the Unencumbered Asset Pool Properties for the previous four (4) consecutive quarters (except as provided below), including the quarter then ended, and (y) the greater of (i) Capital Expenditures which are not related to new construction for the previous four (4) consecutive quarters, including the quarter then ended, and (ii) reserves for Capital Expenditures of $0.70 per square foot per annum for each Unencumbered Asset Pool Property that is an office property, and $0.40 per square foot per annum for each 21 Unencumbered Asset Pool Property that is an industrial property. Notwithstanding the foregoing, with respect to any Unencumbered Asset Pool Property owned by the Borrower, the General Partner or any of their Consolidated Subsidiaries for a period of less four (4) fiscal quarters, but more than one (1) fiscal quarter, Unencumbered Asset Pool Net Operating Cash Flow shall be determined in a manner consistent with the foregoing calculation utilizing annualized Property Income, Property Expenses and Capital Expenditures (or, if greater, reserves for Capital Expenditures) for the relevant period of the Borrower's, the General Partner's or any of their Consolidated Subsidiaries' ownership of such Unencumbered Asset Pool Property, provided such period shall be at least one fiscal quarter. "Unencumbered Asset Pool Properties" means, as of any date, the Real ---------------------------------- Property Assets listed in Exhibit B attached hereto and made a part hereof, each --------- of which is 100% owned in fee (or leasehold pursuant to a Financeable Ground Lease in the case of assets listed on Exhibit C as leaseholds) by the Borrower, --------- the General Partner or any of their Consolidated Subsidiaries and each of which is not subject to any Lien (other than Permitted Liens), subject to adjustment as set forth herein, together with all Real Property Assets which have become part of the Unencumbered Asset Pool Properties as of such date in accordance with Section 3.2. "Unencumbered Asset Pool Properties Value" means the sum of: ---------------------------------------- (i) with respect to the Unencumbered Asset Pool Properties owned by the Borrower, the General Partner or any of their Consolidated Subsidiaries for a period of at least six (6) calendar months, the quotient of (x) the Unencumbered Asset Pool Net Operating Cash Flow less replacement reserves of $0.30 per square foot per annum for each such Unencumbered Asset Pool Property which is an office building and $0.15 per square foot per annum for each such Unencumbered Asset Pool Property which is an industrial building, divided by (y) the FMV Cap Rate, and (ii) with respect to Unencumbered Asset Pool Properties owned by the Borrower, the General Partner or any of their Consolidated Subsidiaries for a period of less than six (6) calendar months, the lesser of (A) the quotient of (x) the Unencumbered Asset Pool Net Operating Cash Flow on an annualized basis based upon the Unencumbered Asset Pool Net Operating Cash Flow for the period of such Person's ownership of the Unencumbered Asset Pool Property in question less replacement reserves of $0.30 per square foot per annum for each such Unencumbered Asset Pool Property which is an office building and $0.15 per square foot per annum for each such Unencumbered Asset Pool Property which is an industrial 22 building, divided by (y) the FMV Cap Rate and (B) the purchase price actually paid by the Borrower, the General Partner or any of their Consolidated Subsidiaries (as applicable) for such Unencumbered Asset Pool Property (provided, however, that if any such Unencumbered Asset Pool Property shall have been purchased as part of a portfolio of properties and no purchase price shall have been specifically allocated thereto, then the purchase price therefore shall be deemed to be equal to that percentage of the total purchase price for such portfolio as is equal to the percentage of the total Net Operating Cash Flow with respect to such portfolio that the Net Operating Cash Flow attributable to the applicable Unencumbered Asset Pool Property bears, and (iii) with respect to Qualified Leased Development Properties, forty percent (40%) of the book value thereof, provided that availability under the Commitments attributable to such Qualified Leased Development Properties shall not in any event exceed 10% of Unencumbered Asset Pool Properties Value. "Unfunded Liabilities" means, with respect to any Plan at any time, -------------------- the amount (if any) by which (i) the value of all benefit liabilities under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "United States" means the United States of America, including the ------------- States and the District of Columbia, but excluding its territories and possessions. "Unsecured Debt" means Debt not secured by a Lien on real property. -------------- "Unsecured Debt Ratio" means, as of any date of determination, the -------------------- ratio of the Unencumbered Asset Pool Properties Value as of the date of determination to the aggregate amount of Unsecured Debt of the Borrower, the General Partner and their Consolidated Subsidiaries outstanding as of such date of determination. "Unused Commitments" means an amount equal to all unadvanced funds ------------------ (other than unadvanced funds in connection with any construction loan) which 23 any third party is obligated to advance to the Borrower or otherwise, pursuant to any Loan Document, written instrument or otherwise. Section I.2 Accounting Terms and Determinations. Unless otherwise ----------------------------------- specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the most recent audited consolidated financial statements of the Borrower delivered to the Administrative Agent and the Banks; provided that, if the Borrower notifies the Administrative Agent and -------- the Banks that the Borrower wishes to amend any covenant in Article V to eliminate the effect of any change in GAAP on the operation of such covenant (or if the Administrative Agent notifies the Borrower that the Required Banks wish to amend Article V for such purpose), then the Borrower's compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Required Banks. Section I.3 Types of Borrowings. The term "Borrowing" denotes the ------------------- --------- aggregation of Loans of one or more Banks to be made to the Borrower pursuant to Article II on the same date, all of which Loans are of the same type (subject to Article VIII) and, except in the case of Base Rate Loans, have the same Interest Period. Borrowings are classified for purposes of this Agreement either by reference to the pricing of Loans comprising such Borrowing (e.g., a "Euro- ---- ---- Dollar Borrowing" is a Borrowing comprised of Euro-Dollar Loans) or by reference - ---------------- to the provisions of Article II under which participation therein is determined (i.e., a "Committed Borrowing" is a Borrowing under Section 2.1 in which all ---- ------------------- Banks participate in proportion to their Commitments). ARTICLE II THE LOANS Section II.1 Commitments and Loans. Each Bank severally agrees, on --------------------- the terms and conditions set forth in this Agreement, to make Loans to the Borrower. The aggregate amount of Loans to be made hereunder is One Hundred Million Dollars ($100,000,000) (the "Loan Amount"). The Loans shall be made by ----------- the Banks 24 and disbursed to the Borrower on the Closing Date, subject to the provisions of this Agreement. The Loans will be evidenced by the Notes (as provided in Section 2.5). Section II.2 Notice of Borrowing. (a) The Borrower shall give the ------------------- Administrative Agent notice (a "Notice of Borrowing") not later than 2:00 p.m. ------------------- (New York City time) (x) one Domestic Business Day before the Closing Date with respect to a Base Rate Borrowing or (y) the third Euro-Dollar Business Day before the Closing Date with respect to a Euro-Dollar Borrowing, specifying: (1) the date of such Borrowing, which shall be the Closing Date, (2) whether the Loans comprising such Borrowing are to bear interest initially at the Base Rate and/or one or more Euro-Dollar Rates, and (3) in the case of a Euro-Dollar Borrowing, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. Section II.3 Intentionally Deleted. --------------------- Section II.4 Notice to Banks; Funding of Loans. --------------------------------- (a) Upon receipt of the Notice of Borrowing, the Administrative Agent shall notify each Bank on the same day as it receives the Notice of Borrowing of the contents thereof and of such Bank's share of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than 2:00 P.M. (New York City time) on the date of the Committed Borrowing, each Bank shall make available its share of such Committed Borrowing, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address referred to in Section 9.1. Unless the Administrative Agent determines that any applicable condition specified in Article III has not been satisfied, the Administrative Agent will make the entire Loan Amount available to the Borrower at the Administrative Agent's aforesaid address on or before 3:00 P.M. (New York City time) on the Closing Date. Section II.5 Notes. ----- 25 (a) The Loans of each Bank shall be evidenced by the Notes, each of which shall be payable to the order of such Bank for the account of its Applicable Lending Office in an amount equal to each such Bank's Commitment. (b) Each Bank may, by notice to the Borrower and the Administrative Agent, request that its Loans of a particular type be evidenced by a separate Note in an amount equal to the aggregate unpaid principal amount of such Loans. Each such Note shall be in substantially the form of Exhibit A hereto, with --------- appropriate modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to the "Note" of such Bank ---- shall be deemed to refer to and include any or all of such Notes, as the context may require. (c) Upon receipt of each Bank's Note, the Administrative Agent shall forward such Note to such Bank. Each Bank shall record the date, amount, type and maturity of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and may, if such Bank so elects in connection with any transfer or enforcement of its Note, endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided -------- that the failure of any Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Notes. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. (d) There shall be no more than ten (10) Euro-Dollar Borrowings outstanding at any one time pursuant to this Agreement. Section II.6 Maturity of Loans. The Loans shall mature, and the ----------------- principal amount thereof shall be due and payable, on the Maturity Date. Section II.7 Interest Rates. -------------- (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the sum of twenty-five (25) basis points plus the Base Rate for such day. Such interest shall be payable for each Interest Period on the last day thereof. 26 (b) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during the Interest Period applicable thereto, at a rate per annum equal to the sum of the Applicable Margin plus the Adjusted London Interbank Offered Rate for such day. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. "Adjusted London Interbank Offered Rate" applicable to any Interest -------------------------------------- Period means a rate per annum equal to the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (i) the applicable London Interbank Offered Rate by (ii) 1.00 minus the Euro-Dollar Reserve Percentage. "Euro-Dollar Reserve Percentage" means for any day that percentage ------------------------------ (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). The Adjusted London Interbank Offered Rate shall be adjusted automatically on and as of the effective date of any change in the Euro-Dollar Reserve Percentage. "London Interbank Offered Rate" applicable to any Interest Period ----------------------------- means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to the Reference Bank in the London interbank market at approximately 11:00 a.m. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. (c) In the event that, and for so long as, any Event of Default shall have occurred and be continuing, the outstanding principal amount of the Loans, and, to the extent permitted by law, overdue interest in respect of all Loans, shall bear interest at the annual rate of the sum of the Base Rate and four percent (4%). 27 (d) The Administrative Agent shall determine each interest rate applicable to the Loans hereunder. The Administrative Agent shall give prompt notice to the Borrower and the Banks of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (e) The Reference Bank agrees to use its best efforts to furnish quotations to the Administrative Agent as contemplated by this Section. If the Reference Bank does not furnish a timely quotation, the provisions of Section 8.1 shall apply. Section II.8 Fees. ---- (a) Facility Fee. From and after the Adjustment Date, the Borrower ------------ shall pay to the Administrative Agent for the account of the Banks ratably in proportion to their respective Commitments, a facility fee on the Loan Amount in any given quarter at the respective percentages per annum based upon the Borrower's Credit Rating in accordance with the following table: Borrower's Credit Rating Applicable Facility Fee (% per annum) - ----------------------------------------------------------------------------- BBB+/Baa1 0.20% - ----------------------------------------------------------------------------- BBB/Baa2 0.20% - ----------------------------------------------------------------------------- BBB-/Baa3 0.25% - ----------------------------------------------------------------------------- Below Investment Grade Rating or no 0.325% rating - ----------------------------------------------------------------------------- The facility fee shall be payable quarterly, in arrears, on each January 1, April 1, July 1, and October 1 during the Term and any extensions thereof. Any change in the Borrower's Credit Rating causing it to move into a different range on the table shall effect an immediate change in the applicable percentage per annum. In the event that the Borrower's (or the General Partner's) Credit Rating is such that the Rating Agencies' ratings are split between a higher and a lower rating, the applicable percentage per annum shall be based upon the lower of such two (2) Credit Ratings. In the event that the Borrower (or, as applicable, the General Partner) receives more than two (2) credit ratings and such credit ratings are not equivalent, the applicable 28 fee shall be determined by the lower of the two (2) highest ratings, provided that each of said two (2) highest ratings shall be Investment Grade Ratings and at least one of which shall be an Investment Grade Rating from S&P or Moody's. (b) Up-Front Fee. On the Closing Date, the Borrower shall pay to the ------------ Administrative Agent for the account of the Banks ratably in proportion to their respective Commitments, a fee equal to forty basis points (0.40%) of the Loan Amount. (c) Administrative Agent's Fee. On the Closing Date, the Borrower -------------------------- shall pay a fee to the Administrative Agent in accordance with that certain letter agreement, dated July 27, 2000, by and between Administrative Agent and the Borrower. (d) Fees Non-Refundable. All fees set forth in this Section 2.8 shall ------------------- be deemed to have been earned on the date payment is due in accordance with the provisions hereof and shall be non-refundable. The obligation of the Borrower to pay such fees in accordance with the provisions hereof shall be binding upon the Borrower and shall inure to the benefit of the Administrative Agent and the Banks regardless of whether any Loans are actually made. Section II.9 Mandatory Termination. The term (the "Term") of the --------------------- ---- Loans and of the Commitments shall terminate and expire on September 7, 2002 (as the same may be extended in accordance with the provisions of this Section 2.9, the "Maturity Date"); provided, however, the Borrower shall have two (2) options ------------- -------- ------- (each, an "Extension Option") for a period of one (1) year each to extend the ---------------- Term of the Loans and of the Commitments. Each Extension Option is exercisable upon delivery by the Borrower of written notice thereof to the Administrative Agent (each, an "Extension Notice") on or before the date which is thirty (30) ---------------- days prior to then applicable Maturity Date (which Extension Notice the Administrative Agent shall promptly deliver to the Banks) to extend the Term of the Loans, the Commitments and the Maturity Date for an additional one year period (each, an "Extension Period"), such that the Term shall expire on ---------------- September 7, 2003 or September 7, 2004, as the case may be. The Borrower's right to exercise either Extension Option shall be subject to the following terms and conditions: (i) no Event of Default shall have occurred and be continuing both on the date the Borrower delivers the applicable Extension Notice to the Administrative Agent and on the date the applicable Extension Period shall commence (each, an "Extension Date"), (ii) the Borrower shall pay a -------------- fee equal to twenty-five basis points (0.25%) of the Loan Amount upon the exercise 29 of the first Extension Option and a fee equal to twenty-five basis points (0.25%) of the Loan Amount upon the exercise of the second Extension Option, as applicable, and (iii) in the sole judgment of the Administrative Agent, no Material Adverse Effect shall have occurred. If any Loans are outstanding on the Maturity Date, the same shall be due and payable (together with accrued interest thereon) on the Maturity Date, and the Borrower shall repay the same in full. Section II.10 Mandatory Prepayment. -------------------- (a) In the event that an Unencumbered Asset Pool Property (or any Separate Parcel that originally formed a part of an Unencumbered Asset Pool Property) is sold, transferred or released from the restrictions of Section 5.11 hereof, the Borrower shall, simultaneously with such sale, transfer or release, prepay the Loans in an amount equal to 100% of the net proceeds of such sale or transfer, in the event of a sale or transfer, or such lesser amount as shall be required for the Borrower to remain in compliance with this Agreement, in the event of such a sale, transfer or release. Notwithstanding the foregoing, a simultaneous like-kind exchange under Section 1031 of the Internal Revenue Code will not be subject to the provisions of this Section 2.10(a), provided that the exchanged property has qualified as a New Acquisition and any cash "boot" associated therewith shall be applied to prepayment of the Loans or such lesser amount of such cash "boot" as shall be required for the Borrower to remain in compliance with this Agreement. Sale of an Unencumbered Asset Pool Property (or any Separate Parcel that originally formed a part of a Unencumbered Asset Pool Property) in violation of this Section 2.10 shall constitute an Event of Default. (b) Simultaneously with the closing of any sale of common shares of beneficial interest, preferred shares of beneficial interest, partnership interests, limited liability company interests, or other ownership or equity interests in the Borrower or the General Partner, the Borrower shall, simultaneously with such sale, prepay the Loans in an amount equal to 100% of the Net Offering Proceeds. Notwithstanding the foregoing, however, in the event that (i) the Net Offering Proceeds in connection with any individual offering shall be less than $20,000,000, and the Borrower anticipates reinvesting the same in Real Property Assets within fifteen (15) days after receipt thereof or (ii) any Loans expire within thirty (30) days of the date thereof, the Borrower may retain such funds, provided, however, that if the Borrower shall not in fact so reinvest such funds in Real Property Assets within such fifteen (15) day period or repay such Loans within such thirty (30) day period, as the case may be, the Borrower shall immediately apply the same in repayment of the Loans. 30 (c) In the event that the Unsecured Debt Ratio is not maintained as of the last day of a calendar quarter, either (i) the Borrower will add a Real Property Asset to the Unencumbered Asset Pool Properties in accordance with this Agreement which, on a pro forma basis (i.e. the Unsecured Debt Ratio shall be --------- --- recalculated to include such Real Property Asset as though the same had been an Unencumbered Asset Pool Property for the entire applicable period) would result in compliance with the Unsecured Debt Ratio, or (ii) the Borrower shall prepay to the Administrative Agent, for the account of the Banks, an amount necessary to cause the Unsecured Debt Ratio to be in compliance within ninety (90) days of the date on which the Unsecured Debt Ratio failed to be maintained. Failure by the Borrower to comply with the Unsecured Debt Ratio within ninety (90) days of the date of such non-compliance shall be an Event of Default. (d) Any amounts so prepaid pursuant to this Section 2.10 may not be reborrowed. Section II.11 Optional Prepayments. -------------------- (a) The Borrower may, upon at least one Domestic Business Day's notice to the Administrative Agent, prepay to the Administrative Agent, for the account of the Banks, any Base Rate Borrowing in whole at any time, or from time to time in part in amounts aggregating One Million Dollars ($1,000,000), or an integral multiple of One Million Dollars ($1,000,000) in excess thereof or, if less, the outstanding principal balance, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Banks included in such Borrowing. (b) Except as provided in Section 8.2, the Borrower may not prepay all or any portion of the principal amount of any Euro-Dollar Loan prior to the maturity thereof unless the Borrower shall also pay any applicable expenses pursuant to Section 2.13. Any such prepayment shall be upon at least three (3) Euro-Dollar Business Days' notice to the Administrative Agent. Any notice of prepayment delivered pursuant to this Section 2.11(b) shall set forth the amount of such prepayment which is applicable to any Loan made for working capital purposes. Each such optional prepayment shall be in the amounts set forth in Section 2.11(a) above and shall be applied to prepay ratably the Loans of the Banks included. 31 (c) Upon receipt of a notice of prepayment pursuant to this Section, the Administrative Agent shall promptly, and in any event within one (1) Domestic Business Day, notify each Bank of the contents thereof and of such Bank's ratable share (if any) of such prepayment and such notice shall not thereafter be revocable by the Borrower. (d) Any amounts so prepaid pursuant to this Section 2.11 may not be reborrowed. Section II.12 General Provisions as to Payments. --------------------------------- (a) The Borrower shall make each payment of principal of, and interest on, the Loans and of fees hereunder, not later than 3:00 p.m. (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address referred to in Section 9.1. The Administrative Agent will distribute to each Bank its ratable share of each such payment received by the Administrative Agent for the account of the Banks on the same day as received by the Administrative Agent if received by the Administrative Agent by 3:00 p.m. (New York City time), or, if received by the Administrative Agent after 3:00 p.m. (New York City time), on the immediately following Domestic Business Day. If the Administrative Agent shall fail to distribute to a Bank its ratable share of a payment on the same day it is received or the immediately following Domestic Business Day, as applicable in accordance with the immediately preceding sentence, the Administrative Agent shall pay to such Bank the interest accrued on such payment at the Federal Funds Rate, commencing on the day the Administrative Agent should have made the payment to such Bank and ending on the day prior to the date payment is actually made. Whenever any payment of principal of, or interest on, the Base Rate Loans or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks 32 hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Administrative Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Administrative Agent, at the Federal Funds Rate. Section II.13 Funding Losses. If the Borrower makes any payment of -------------- principal with respect to any Euro-Dollar Loan (pursuant to Article II, VI or VIII or otherwise, and specifically including any payments made pursuant to Sections 2.10 or 2.11) on any day other than the last day of the Interest Period applicable thereto, or if the Borrower fails to borrow any Euro-Dollar Loans, after notice has been given to any Bank in accordance with Section 2.4(a), the Borrower shall reimburse each Bank within fifteen (15) days after demand for any resulting loss or expense incurred by it (or by an existing Participant in the related Loan; provided that no Participant shall be entitled to receive more than the Bank with respect to which such Participant is a Participant would be entitled to receive under this Section 2.13), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment or failure to borrow, provided that such Bank shall have delivered to the Borrower -------- a certificate as to the amount of such loss or expense and the calculation thereof, which certificate shall be conclusive in the absence of manifest error. Section II.14 Computation of Interest and Fees. Interest based on -------------------------------- the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). Section II.15 Method of Electing Interest Rates. --------------------------------- (a) The Loans shall bear interest initially at the type of rate specified by the Borrower in the Notice of Borrowing. Thereafter, the Borrower may from time to time elect to change or continue the type of interest rate borne by each Group of Loans (subject in each case to the provisions of Article VIII), as follows: 33 (i) if such Loans are Base Rate Loans, the Borrower may elect to convert such Loans to Euro-Dollar Loans as of any Euro-Dollar Business Day; (ii) if such Loans are Euro-Dollar Loans, the Borrower may elect to convert such Loans to Base Rate Loans or elect to continue such Loans as Euro-Dollar Loans for an additional Interest Period, in each case effective on the last day of the then current Interest Period applicable to such Loans. Each such election shall be made by delivering a notice (a "Notice of Interest ------------------ Rate Election") to the Administrative Agent at least three (3) Euro-Dollar - ------------- Business Days before the conversion or continuation selected in such notice is to be effective (unless the relevant Loans are to be continued as Base Rate Loans, in which case such notice shall be delivered to the Administrative Agent no later than 2:00 p.m. (New York City time) at least one (1) Domestic Business Day before such continuation is to be effective). A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans; provided that (i) such portion -------- is allocated ratably among the Loans comprising such Group, (ii) the portion to which such notice applies, and the remaining portion to which it does not apply, are each $1,000,000 or any larger multiple of $1,000,000, (iii) there shall be no more than ten (10) Borrowings comprised of Euro-Dollar Loans outstanding at any time under this Agreement, (iv) no Loan may be continued as, or converted into, a Euro-Dollar Loan when any Event of Default has occurred and is continuing, and (v) no Interest Period shall extend beyond the Maturity Date. (b Each Notice of Interest Rate Election shall specify: (i) the Group of Loans (or portion thereof) to which such notice applies; (ii) the date on which the conversion or continuation selected in such notice is to be effective, which shall comply with the applicable clause of subsection (a) above; (iii) if the Loans comprising such Group are to be converted, the new type of Loans and, if such new Loans are Euro-Dollar Loans, the duration of the initial Interest Period applicable thereto; and 34 (iv) if such Loans are to be continued as Euro-Dollar Loans for an additional Interest Period, the duration of such additional Interest Period. Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of Interest Period. (c Upon receipt of a Notice of Interest Rate Election from the Borrower pursuant to subsection (a) above, the Administrative Agent shall notify each Bank on the same day as it receives such Notice of Interest Rate Election of the contents thereof and such notice shall not thereafter be revocable by the Borrower. If the Borrower fails to deliver a timely Notice of Interest Rate Election to the Administrative Agent for any Group of Euro-Dollar Loans, such Loans shall be converted into Base Rate Loans on the last day of the then current Interest Period applicable thereto. ARTICLE III CONDITIONS Section III.1 Closing. The closing hereunder shall occur on the date ------- (the "Closing Date") when each of the following conditions is satisfied (or ------------ waived by the Administrative Agent, such waiver to be evidenced by the continuation or funding after the date hereof of Loans and notice of such waiver to be given to the Banks by the Administrative Agent), each document to be dated the Closing Date unless otherwise indicated: (a the Borrower shall have executed and delivered to the Administrative Agent a Note for the account of each Bank dated on or before the Closing Date complying with the provisions of Section 2.5; (b the Borrower shall have executed and delivered to the Administrative Agent a duly executed original of this Agreement; (c the General Partner shall have executed and delivered to the Administrative Agent a duly executed original of the Guaranty; (d the Administrative Agent shall have received an opinion of Latham & Watkins, counsel for the Borrower, acceptable to the Administrative Agent, the Banks and their counsel; 35 (e the Administrative Agent shall have received all documents the Administrative Agent may reasonably request relating to the existence of the Borrower, the General Partner, the authority for and the validity of this Agreement and the other Loan Documents, and any other matters relevant hereto, all in form and substance reasonably satisfactory to the Administrative Agent. Such documentation shall include, without limitation, the articles of incorporation and by-laws or the partnership agreement and limited partnership certificate, as applicable, of the Borrower and the General Partner, as amended, modified or supplemented to the Closing Date, each certified to be true, correct and complete by a senior officer of the Borrower or the General Partner, as the case may be, as of the Closing Date, together with a good standing certificate from the Secretary of State (or the equivalent thereof) of the State of Delaware with respect to the Borrower and the State of Maryland with respect to the General Partner, and a good standing certificate from the Secretary of State (or the equivalent thereof) of each other State in which the Borrower and the General Partner is required to be qualified to transact business, each to be dated not more than forty-five (45) days prior to the Closing Date; (f the Administrative Agent shall have received all certificates, agreements and other documents and papers referred to in this Section 3.1 and Section 3.2, unless otherwise specified, in sufficient counterparts, satisfactory in form and substance to the Administrative Agent in its sole discretion; (g the Borrower and the General Partner shall have taken all actions required to authorize the execution and delivery of this Agreement and the other Loan Documents and the performance thereof by the Borrower and the General Partner; (h the Administrative Agent and the Banks shall have received an unaudited consolidated balance sheet and income statement of the Borrower for the fiscal quarter ended June 30, 2000; (i the Administrative Agent shall be satisfied that neither the Borrower nor the General Partner is subject to any present or contingent environmental liability which could reasonably be expected to have a Material Adverse Effect; (j the Administrative Agent shall have received wire transfer instructions in connection with the Loans; 36 (k the Administrative Agent shall have received, for its and any other Bank's account, all fees due and payable pursuant to Section 2.8 hereof on or before the Closing Date, and the reasonable fees and expenses accrued through the Closing Date of Skadden, Arps, Slate, Meagher & Flom LLP; (l the Administrative Agent shall have received copies of all consents, licenses and approvals, if any, required in connection with the execution, delivery and performance by the Borrower, and the validity and enforceability against the Borrower, of the Loan Documents, or in connection with any of the transactions contemplated thereby to occur on or prior to the Closing Date, and such consents, licenses and approvals shall be in full force and effect; (m the representations and warranties of the Borrower contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date both before and after giving effect to the making of the Loans; (n receipt by the Administrative Agent and the Banks of a certificate of the chief financial officer or the chief accounting officer of the Borrower certifying that the Borrower is in compliance with all covenants of the Borrower contained in this Agreement, including, without limitation, the requirements of Section 5.8, as of the Closing Date; and (o the General Partner shall intend to continue to qualify as a real estate investment trust under the Internal Revenue Code. The Administrative Agent shall promptly notify the Borrower and the Banks of the Closing Date, and such notice shall be conclusive and binding on all parties hereto. Section III.2 New Acquisitions and Additional Real Property Assets. ---------------------------------------------------- (a Any New Acquisition or Real Property Asset desired by the Borrower to be included as a Unencumbered Asset Pool Property after the date hereof and prior to the date on which Borrower has received an Investment Grade Rating from either S&P or Moody's, will require the approval of the Required Banks. The Borrower shall submit to the Lead Agent the materials set forth below (the "Due Diligence Package") relating to each New Acquisition or Real --------------------- Property Asset that the Borrower desires to be added to the Unencumbered Asset Pool Properties. The Due Diligence Package shall include (i) a description of the Real Property Asset, (ii) two years of historical cash flow operating statements, if available, (iii) five years of cash 37 flow projections (including capital expenditures), (iv) the credit history of each existing tenant which occupies more than 15% of such Real Property Asset, (v) a map and site plan, (vi) copies of all lease agreements and abstracts thereof with each existing tenant which occupies more than 15% of such Real Property Asset, (vii) a satisfactory environmental report indicating that (A) the Real Property Asset complies with all Environmental Laws in all material respects, (B) is free of all Material of Environmental Concern in all material respects and (C) is not subject to any Environmental Claim, (viii) an engineer's inspection report satisfactory to the Lead Agent (provided, however, the Lead Agent shall not deem an engineer's inspection report satisfactory unless the Required Banks shall find such engineer's inspection report satisfactory), (ix) a title report and an existing survey of the property dated not more than twelve (12) months prior to such submission, (x) tenant delinquency reports, if available, (xi) a rent roll certified to be true, correct and complete by an authorized officer of Borrower, (xii) a final investment memorandum prepared by the Borrower in connection with the Real Property Asset, and (xiii) a statement with respect to the purchase price of such Real Property Asset or, if such Real Property Asset was purchased as part of a portfolio and there was no allocation of purchase price, of the purchase price of the portfolio of Real Property Assets of which it formed a part. The Borrower shall permit the Lead Agent at all reasonable times and upon reasonable prior notice to make an inspection of such New Acquisition or Real Property Asset. (b The Borrower shall distribute a copy of the items listed in clauses (i), (ii), (iii), (v) and (xii) of Section 3.2(a) by overnight mail to each of the Banks for their review and approval (the "Bank Due Diligence ------------------ Package"). In the event that a Bank desires additional materials which are included in the Due Diligence Package delivered to the Lead Agent, such Bank(s) shall notify the Borrower within two (2) Business Days of receipt of the Bank Due Diligence Package and the Borrower shall deliver such requested materials to the requesting Bank within one (1) Business Day of request therefor. To the extent approval is required pursuant to Section 3.2(a) hereof, failure to respond to the Lead Agent in writing by any Bank within ten (10) Domestic Business Days after receipt of the Bank Due Diligence Package shall be deemed to be an approval by such Bank of such New Acquisition or Real Property Asset for inclusion as an Unencumbered Asset Pool Property. ARTICLE IV REPRESENTATIONS AND WARRANTIES 38 In order to induce the Administrative Agent and each of the other Banks which may become a party to this Agreement to make the Loans, the Borrower makes the following representations and warranties as of the date hereof. Such representations and warranties shall survive the effectiveness of this Agreement, the execution and delivery of the other Loan Documents and the making of the Loans. Section IV.1 Existence and Power. The Borrower is duly organized, ------------------- validly existing and in good standing as a limited partnership under the laws of the State of Delaware and has all powers and all material governmental licenses, authorizations, consents and approvals required to own its property and assets and carry on its business as now conducted or as it presently proposes to conduct and has been duly qualified and is in good standing in every jurisdiction in which the failure to be so qualified and/or in good standing is likely to have a Material Adverse Effect. Section IV.2 Power and Authority. The Borrower has the ------------------- organizational power and authority to execute, deliver and carry out the terms and provisions of each of the Loan Documents to which it is a party and has taken all necessary action to authorize the execution and delivery on behalf of the Borrower and the performance by the Borrower of such Loan Documents. The Borrower has duly executed and delivered each Loan Document to which it is a party, and each such Loan Document constitutes the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms, except as enforceability may be limited by applicable insolvency, bankruptcy or other laws affecting creditors rights generally, or general principles of equity, whether such enforceability is considered in a proceeding in equity or at law. Section IV.3 No Violation. Neither the execution, delivery or ------------ performance by or on behalf of the Borrower of the Loan Documents, nor compliance by the Borrower with the terms and provisions thereof nor the consummation of the transactions contemplated by the Loan Documents, (i) will contravene any applicable provision of any law, statute, rule, regulation, order, writ, injunction or decree of any court or governmental instrumentality applicable to Borrower or (ii) will conflict with or result in any breach of, any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of the Borrower pursuant to the terms of any material indenture, mortgage, deed of trust, or other agreement or other instrument to which the Borrower (or of any partnership of which the Borrower is a partner) is a party or by which it or any of its property or assets is bound or to which it is subject or (iii) will cause a default by the Borrower under any 39 organizational document of any Subsidiary, or cause a default under the General Partner's articles of incorporation or by-laws. Section IV.4 Financial Information. --------------------- (a The unaudited consolidated balance sheets of the Borrower and the General Partner as of June 30, 2000, when delivered to the Administrative Agent and to the Banks shall fairly present, in conformity with GAAP, the consolidated financial position of the Borrower and the General Partner as of such date and their consolidated results of operations for such fiscal year. (b Since June 30, 2000, (i) there has been no material adverse change in the business, financial position or results of operations of the Borrower or the General Partner and (ii) except as previously disclosed to the Administrative Agent and to the Banks, neither the Borrower nor the General Partner has incurred any material indebtedness or guaranty. Section IV.5 Litigation. ---------- (a There is no action, suit or proceeding pending against, or to the knowledge of the Borrower, threatened against or affecting, (i) the Borrower, the General Partner or any of their Subsidiaries, (ii) the Loan Documents or any of the transactions contemplated by the Loan Documents or (iii) any of their assets, in any case before any court or arbitrator or any governmental body, agency or official which could reasonably be expected to have a Material Adverse Effect or which in any manner draws into question the validity of this Agreement or the other Loan Documents. (b There are no final nonappealable judgments or decrees in an aggregate amount of One Million Dollars ($1,000,000) or more entered by a court or courts of competent jurisdiction against the Borrower or the General Partner (other than any judgment as to which, and only to the extent, a reputable insurance company has acknowledged coverage of such claim in writing). Section IV.6 Compliance with ERISA. --------------------- (a Except as previously disclosed to the Administrative Agent in writing, each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to 40 each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. (b Except for each "employee benefit plan" (as such term is defined in Section 3(3) of ERISA) that is maintained, or contributed to, by one or more members of the ERISA Group, no member of the ERISA Group is a "party in interest" (as such term is defined in Section 3(14) of ERISA or a "disqualified person" (as such term is defined in Section 4975(e)(2) of the Code) with respect to any funded employee benefit plan and none of the assets of any such plans have been invested in a manner that would cause the transactions contemplated by the Loan Documents to constitute a nonexempt prohibited transaction (as such term is defined in Section 4975 of the Code or Section 406 of ERISA). Section IV.7 Environmental Compliance. To the best of Borrower's ------------------------ knowledge, except as set forth in the Phase I environmental report(s) delivered to and accepted by the Administrative Agent with respect to each of the Unencumbered Asset Pool Properties (as supplemented or amended, the "Environmental Reports"), (y) there are in effect all Environmental Approvals - ---------------------- which are required to be obtained under all Environmental Laws with respect to the Property, except for such Environmental Approvals the absence of which would not have a Material Adverse Effect, and (z) the Borrower is in compliance in all material respects with the terms and conditions of all such Environmental Approvals, and is also in compliance in all material respects with all other Environmental Laws or any plan, order, decree, judgment, injunction, notice or demand letter issued, entered or approved thereunder, except to the extent failure to comply would not have a Material Adverse Effect. Except as set forth in the Environmental Reports or otherwise disclosed to the Administrative Agent as of the Closing Date, to Borrower's actual knowledge: 41 (i0 There are no Environmental Claims or investigations pending or threatened by any Governmental Authority with respect to any alleged failure by the Borrower to have any Environmental Approval required in connection with the conduct of the business of the Borrower on any of the Unencumbered Asset Pool Properties, or with respect to any generation, treatment, storage, recycling, transportation, Release or disposal of any Material of Environmental Concern generated by the Borrower or any lessee on any of the Unencumbered Asset Pool Properties; (ii0 No Material of Environmental Concern has been Released at any Unencumbered Asset Pool Property to an extent that it may reasonably be expected to have a Material Adverse Effect; (iii0 No PCB (in amounts or concentrations which exceed those set by applicable Environmental Laws) is present at any of the Unencumbered Asset Pool Properties; (iv0 No friable asbestos is present at any of the Unencumbered Asset Pool Properties; (v0 There are no underground storage tanks for Material of Environmental Concern, active or abandoned, at any of the Unencumbered Asset Pool Properties; (vi0 No Environmental Claims have been filed with a Governmental Authority with respect to any of the Unencumbered Asset Pool Properties, and none of the Unencumbered Asset Pool Properties is listed or proposed for listing on the National Priority List promulgated pursuant to CERCLA, on CERCLIS or on any similar state list of sites requiring investigation or clean-up; (vii0 There are no Liens arising under or pursuant to any Environmental Laws on any of the Unencumbered Asset Pool Properties, and no government actions have been taken or are in process which could subject any of the Unencumbered Asset Pool Properties to such Liens; and (viii0 There have been no environmental investigations, studies, audits, tests, reviews or other analyses conducted by, or which are in the possession of, the Borrower in relation to any of the Unencumbered Asset 42 Pool Properties which have not been made available to the Administrative Agent. Section IV.8 Taxes. The initial tax year of the Borrower for federal ----- income tax purposes was 1996. The federal income tax returns of the Borrower and its Consolidated Subsidiaries for the fiscal year ended December 31, 1998 have been filed. The Borrower and its Subsidiaries have filed all United States Federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Borrower or any Subsidiary except those being contested in good faith. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Borrower, adequate. Section IV.9 Full Disclosure. All information heretofore furnished --------------- by the Borrower to the Administrative Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is true and accurate in all material respects on the date as of which such information is stated or certified. The Borrower has disclosed to the Banks in writing any and all facts known to the Borrower which materially and adversely affect or are likely to materially and adversely affect (to the extent the Borrower can now reasonably foresee), the business, operations or financial condition of the Borrower considered as one enterprise or the ability of the Borrower to perform its obligations under this Agreement or the other Loan Documents. Section IV.10 Solvency. On the Closing Date and after giving effect -------- to the transactions contemplated by the Loan Documents occurring on the Closing Date, the Borrower is Solvent. Section IV.11 Use of Proceeds; Margin Regulations. All proceeds of ----------------------------------- the Loans will be used by the Borrower only in accordance with the provisions hereof. No part of the proceeds of any Loan will be used by the Borrower to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock. Neither the making of any Loan nor the use of the proceeds thereof will violate or be inconsistent with the provisions of Regulations T, U or X of the Federal Reserve Board. Section IV.12 Governmental Approvals. No order, consent, approval, ---------------------- license, authorization, or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority, or any subdivision 43 thereof, is required to authorize, or is required in connection with the execution, delivery and performance of any Loan Document or the consummation of any of the transactions contemplated thereby other than those that have already been duly made or obtained and remain in full force and effect. Section IV.13 Investment Company Act; Public Utility Holding Company ------------------------------------------------------ Act. The Borrower is not (x) an "investment company" or a company "controlled" - --- ------------------ ---------- by an "investment company", within the meaning of the Investment Company Act of ------------------ 1940, as amended, (y) a "holding company" or a "subsidiary company" of a --------------- ------------------ "holding company" or an "affiliate" of either a "holding company" or a - ---------------- --------- --------------- "subsidiary company" within the meaning of the Public Utility Holding Company - ------------------- Act of 1935, as amended, or (z) subject to any other federal or state law or regulation which purports to restrict or regulate its ability to borrow money. Section IV.14 Closing Date Transactions. On the Closing Date and ------------------------- immediately prior to or concurrently with the making of the Loans, the transactions (other than the making of the Loans) intended to be consummated on the Closing Date will have been consummated in accordance with all applicable laws. On or prior to the Closing Date, all consents and approvals of, and filings and registrations with, and all other actions by, any Person required in order to make or consummate such transactions have been obtained, given, filed or taken and are in full force and effect. Section IV.15 Representations and Warranties in Loan Documents. All ------------------------------------------------ representations and warranties made by the Borrower in the Loan Documents are true and correct in all material respects. Section IV.16 Patents, Trademarks, etc. The Borrower has obtained ------------------------- and holds in full force and effect all patents, trademarks, service marks, trade names, copyrights and other such rights, free from burdensome restrictions, which are necessary for the operation of its business as presently conducted, the impairment of which is likely to have a Material Adverse Effect. To the Borrower's knowledge, no material product, process, method, substance, part or other material presently sold by or employed by the Borrower in connection with such business infringes any patent, trademark, service mark, trade name, copyright, license or other such right owned by any other Person. There is not pending or, to the Borrower's knowledge, threatened any claim or litigation against or affecting the Borrower contesting its right to sell or use any such product, process, method, substance, part or other material. 44 Section IV.17 No Default. No Default or Event of Default exists ---------- under or with respect to any Loan Document. The Borrower is not in default in any material respect beyond any applicable grace period under or with respect to any other material agreement, instrument or undertaking to which it is a party or by which it or any of its property is bound in any respect, the existence of which default is likely (to the extent that the Borrower can now reasonably foresee) to result in a Material Adverse Effect. Section IV.18 Licenses, etc. The Borrower has obtained and holds in -------------- full force and effect, all franchises, licenses, permits, certificates, authorizations, qualifications, accreditations, easements, rights of way and other consents and approvals which are necessary for the operation of its businesses as presently conducted, the absence of which is likely (to the extent that the Borrower can now reasonably foresee) to have a Material Adverse Effect. Section IV.19 Compliance With Law. The Borrower is in compliance ------------------- with all laws, rules, regulations, orders, judgments, writs and decrees, including, without limitation, all building and zoning ordinances and codes, the failure to comply with which is likely (to the extent that the Borrower can now reasonably foresee) to have a Material Adverse Effect. Section IV.20 No Burdensome Restrictions. The Borrower is not a -------------------------- party to any agreement or instrument or subject to any other obligation or any charter or corporate or partnership restriction, as the case may be, which, individually or in the aggregate, is likely (to the extent that the Borrower can now reasonably foresee) to have a Material Adverse Effect. Section IV.21 Brokers' Fees. The Borrower has not dealt with any ------------- broker or finder with respect to the transactions contemplated by the Loan Documents (except with respect to the acquisition or disposition of Real Property Assets) or otherwise in connection with this Agreement, and the Borrower has not done any acts, had any negotiations or conversation, or made any agreements or promises which will in any way create or give rise to any obligation or liability for the payment by the Borrower of any brokerage fee, charge, commission or other compensation to any party with respect to the transactions contemplated by the Loan Documents (except with respect to the acquisition or disposition of Real Property Assets), other than the fees payable hereunder. 45 Section IV.22 Labor Matters. Except as set forth on Schedule 4.22 ------------- ------------- attached hereto and made a part hereof, there are no collective bargaining agreements or Multiemployer Plans covering the employees of the Borrower and the Borrower has not suffered any strikes, walkouts, work stoppages or other material labor difficulty within the last five (5) years. Section IV.23 Organizational Documents. The documents delivered ------------------------ pursuant to Section 3.1(e) constitute, as of the Closing Date, all of the organizational documents (together with all amendments and modifications thereof) of the Borrower. The Borrower represents that it has delivered to the Administrative Agent true, correct and complete copies of each of the documents set forth in this Section 4.23. Section IV.24 Principal Offices. The principal office, chief ----------------- executive office and principal place of business of the Borrower is 2250 East Imperial Highway, Suite 1200, El Segundo, California 90245. Section IV.25 REIT Status. For the fiscal year ended December 31, ----------- 2000, the General Partner will qualify, and the General Partner intends to continue to qualify as a real estate investment trust under the Internal Revenue Code. Section IV.26 Ownership of Property. The Borrower owns fee simple --------------------- title to or a ground leasehold interest in each of the Unencumbered Asset Pool Properties. Section IV.27 Insurance. The Borrower currently maintains insurance --------- at 100% replacement cost insurance coverage in respect of each of the Real Property Assets, as well as comprehensive general liability insurance (including "builders' risk") against claims for personal, and bodily injury and/or death, to one or more persons, or property damage, as well as workers' compensation insurance, in each case with respect to the Real Property Assets with insurers having an A.M. Best policyholders' rating of not less than A-VIII in amounts that prudent owner of assets such as the Real Property Assets would maintain. ARTICLE V AFFIRMATIVE AND NEGATIVE COVENANTS The Borrower covenants and agrees that, so long as any Obligations remain unpaid: 46 Section V.1 Information. The Borrower will deliver to the ----------- Administrative Agent and to each of the Banks: (a as soon as available and in any event within 105 days after the end of each fiscal year of the Borrower, an audited consolidated balance sheet of the Borrower as of the end of such fiscal year and the related consolidated statements of cash flow and operations for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, audited by Delloite & Touche or other independent public accountants of similar standing; (b as soon as available and in any event within sixty (60) days after the end of each quarter of each fiscal year (other than the last quarter in any fiscal year) of the Borrower, a statement of the Borrower, prepared in accordance with GAAP, setting forth the operating income and operating expenses of the Borrower, in sufficient detail so as to calculate Unencumbered Asset Pool Net Operating Cash Flow of the Borrower for the immediately preceding quarter; (c simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of the chief financial officer or the chief accounting officer of the Borrower (i) setting forth in reasonable detail the calculations required to establish whether the Borrower was in compliance with the requirements of Section 5.8 on the date of such financial statements;(ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; and (iii) certifying (x) that such financial statements fairly present the financial condition and the results of operations of the Borrower as of the dates and for the periods indicated, in accordance with GAAP, subject, in the case of interim financial statements, to normal year-end adjustments, and (y) that such officer has reviewed the terms of the Loan Documents and has made, or caused to be made under his or her supervision, a review in reasonable detail of the business and condition of the Borrower during the period beginning on the date through which the last such review was made pursuant to this Section 5.1(c) and ending on a date not more than ten (10) Domestic Business Days prior to the date of such delivery and that on the basis of such review of the Loan Documents and the business and condition of the Borrower, to the best knowledge of such officer, no Default or Event of Default under any other provision of Section 6.1 occurred or, if any such Default or Event of Default has occurred, specifying the nature and extent thereof and, if continuing, the action the Borrower proposes to take in respect thereof; 47 (d simultaneously with the delivery of each set of financial statements referred to in clause (a) above, a statement of a firm of independent public accountants confirming the calculations set forth in the officer's certificate delivered simultaneously therewith pursuant to clause (c) above; (e (i) within five (5) days after the president, chief financial officer, treasurer, controller or other executive officer of the Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer or the president of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (ii) promptly and in any event within ten (10) days after the Borrower obtains knowledge thereof, notice of (x) any litigation or governmental proceeding pending or threatened against the Borrower which is likely to individually or in the aggregate, result in a Material Adverse Effect, and (y) any other event, act or condition which is likely to result in a Material Adverse Effect; (f if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth details as to such occurrence 48 and action, if any, which the Borrower or applicable member of the ERISA Group is required or proposes to take; (g promptly and in any event within five (5) Domestic Business Days after the Borrower obtains actual knowledge of any of the following events, a certificate of the Borrower executed by an officer of the Borrower specifying the nature of such condition and the Borrower's, and if the Borrower has actual knowledge thereof, the Environmental Affiliate's proposed initial response thereto: (i) the receipt by the Borrower, or, if the Borrower has actual knowledge thereof, any of the Environmental Affiliates, of any communication (written or oral), whether from a governmental authority, citizens group, employee or otherwise, that alleges that the Borrower, or, if the Borrower has actual knowledge thereof, any of the Environmental Affiliates, is not in compliance with applicable Environmental Laws, and such noncompliance is likely to have a Material Adverse Effect, (ii) the Borrower shall obtain actual knowledge that there exists any Environmental Claim which is likely to have a Material Adverse Effect pending or threatened against the Borrower or any Environmental Affiliate or (iii) the Borrower obtains actual knowledge of any release, emission, discharge or disposal of any Material of Environmental Concern that is likely to form the basis of any Environmental Claim against the Borrower or any Environmental Affiliate; (h promptly and in any event within five (5) Domestic Business Days after receipt of any material notices or correspondence from any company or agent for any company providing insurance coverage to the Borrower relating to any material loss or loss of the Borrower with respect to any of the Unencumbered Asset Pool Properties, copies of such notices and correspondence; and (i promptly upon the mailing thereof to the shareholders or partners of the Borrower, copies of all financial statements, reports and proxy statement so mailed; (j promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Borrower shall have filed with the Securities and Exchange Commission; (k simultaneously with delivery of the information required by Sections 5.1(a) and (b), a statement of Unencumbered Asset Pool Net Operating Cash 49 Flow with respect to each Unencumbered Asset Pool Property and a list of all such Unencumbered Asset Pool Properties; and (l from time to time such additional information regarding the financial position or business of the Borrower as the Administrative Agent, at the request of any Bank, may reasonably request. Section V.2 Payment of Obligations. The Borrower will pay and ---------------------- discharge, at or before maturity, all its material obligations and liabilities including, without limitation, any obligation pursuant to any agreement by which it or any of its properties is bound and any tax liabilities, in any case, where failure to do so will likely result in a Material Adverse Effect except (i) such tax liabilities may be contested in good faith by appropriate proceedings, and will maintain in accordance with GAAP, appropriate reserves for the accrual of any of the same; or (ii) such obligation or liability as may be contested in good faith by appropriate proceedings. Section V.3 Maintenance of Property; Insurance. ---------------------------------- (a) The Borrower will keep each of the Unencumbered Asset Pool Properties in good repair, working order and condition, subject to ordinary wear and tear. (b) The Borrower shall (a) maintain insurance as specified in Section 4.27 hereof with insurers meeting the qualifications described therein, which insurance shall in any event not provide for materially less coverage than the insurance in effect on the Closing Date, and (b) furnish to each Bank from time to time, upon written request, copies of the policies under which such insurance is issued, certificates of insurance and such other information relating to such insurance as such Bank may reasonably request. The Borrower will deliver to the Banks (i) upon request of any Bank through the Administrative Agent from time to time, full information as to the insurance carried, (ii) within five (5) days of receipt of notice from any insurer, a copy of any notice of cancellation or material change in coverage from that existing on the date of this Agreement and (iii) forthwith, notice of any cancellation or nonrenewal of coverage by the Borrower. Section V.4 Conduct of Business. The Borrower's primary business ------------------- will continue to be acquiring, owning, operating, managing, developing (to the extent permitted in this Agreement), and leasing office and industrial properties. 50 Section V.5 Compliance with Laws. The Borrower will comply in all -------------------- material respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, Environmental Laws, all zoning and building codes and ERISA and the rules and regulations thereunder) except where the necessity of compliance therewith is contested in good faith by appropriate proceedings. Section V.6 Inspection of Property, Books and Records. The Borrower ----------------------------------------- will keep proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities; and will permit representatives of any Bank at such Bank's expense to visit and inspect any of its properties to examine and make abstracts from any of its books and records and to discuss its affairs, finances and accounts with its officers and employees, all at such reasonable times, upon reasonable notice, and as often as may reasonably be desired. Section V.7 Existence. --------- (a) The Borrower shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence or its partnership existence, as applicable. (b) The Borrower shall do or cause to be done all things necessary to preserve and keep in full force and effect its patents, trademarks, servicemarks, tradenames, copyrights, franchises, licenses, permits, certificates, authorizations, qualifications, accreditations, easements, rights of way and other rights, consents and approvals the nonexistence of which is likely to have a Material Adverse Effect. Section V.8 Financial Covenants. ------------------- (a) Total Liabilities to Total Asset Value. As of the last day of -------------------------------------- each calendar quarter, the Total Debt Ratio will not be greater than 55%. (b) EBITDA Debt Service Coverage. As of the last day of each calendar ---------------------------- quarter, the ratio of (i) Annual EBITDA to (ii) Total Debt Service, will not be less than 2.0:1.0. (c) Fixed Charge Coverage. As of the last day of each calendar --------------------- quarter, the ratio of (x) Annual EBITDA, less reserves for Capital Expenditures of 51 $0.70 per square foot per annum for each Real Property Asset that is an office property and $0.40 per square foot per annum for each Real Property Asset that is an industrial property to (y) the sum of (i) Total Debt Service, and (ii) dividends or other payments payable by the General Partner with respect to any preferred stock issued by the General Partner and distributions or other payments payable by the Borrower with respect to any preferred partnership units of the Borrower, will not be less than 1.5:1.0. (d) Limitation on Secured Debt. Secured Debt of the Borrower, the -------------------------- General Partner and their Consolidated Subsidiaries shall at no time exceed thirty-five percent (35%) of Total Asset Value. (e) Unsecured Debt Ratio. As of each of (x) the last day of each -------------------- calendar quarter, and (y) any Borrowing, the Unsecured Debt Ratio shall exceed 1.8:1.0. (f) Unencumbered Asset Pool Debt Service Coverage. As of the last day --------------------------------------------- of each calendar quarter and as of the date of any sale or secured financing of any Unencumbered Asset Pool Property, the ratio of (i) Unencumbered Asset Pool Net Operating Cash Flow to (ii) Pro-Forma Debt Service will not be less than 1.8:1.0. (g) Dividends. The Borrower will not, as determined on an aggregate --------- annual basis, pay any partnership distributions in excess of the greater of (i) 95% of its consolidated FFO for such year, and (ii) an amount which results in distributions to the General Partner in an amount sufficient to permit the General Partner to pay dividends to its shareholders which it reasonably believes are necessary for it to (A) maintain its qualification as a real estate investment trust for federal and state income tax purposes, and (B) avoid the payment of federal or state income or excise tax. During the continuance of an Event of Default under Section 6.1(a), the Borrower shall make only those partnership distributions necessary to make distributions to the General Partner to pay dividends to its shareholders which it reasonably believes are necessary to maintain its status as a real estate investment trust for federal and state income tax purposes. (h) Minimum Consolidated Tangible Net Worth. The Consolidated --------------------------------------- Tangible Net Worth will at no time be less than the sum of (i) $575,000,000 plus (ii) 90% of all Net Offering Proceeds. 52 (i) Debt. Prior to the date on which the Borrower receives an ---- Investment Grade Rating from either S&P or Moody's, neither the Borrower nor the General Partner shall, at any time, create, incur, assume, guaranty, suffer to exist or otherwise become or remain directly or indirectly liable with respect to any Debt other than Non-Recourse Debt. Notwithstanding the provisions of the sentence immediately foregoing, the Borrower shall have the right to incur Recourse Debt (A) up to an aggregate maximum of $5,000,000 which is either (i) unsecured or (ii) incurred with respect to assets which are not Unencumbered Asset Pool Properties and is subject to a purchase money security interest or security interest under a conditional sale agreement, and (B) up to an aggregate maximum of $50,000,000, which is secured and which is incurred in connection with the financing of construction costs. Section V.9 Restriction on Fundamental Changes; Operation and ------------------------------------------------- Control. (a) The Borrower shall not enter into any merger or consolidation, - ------- unless the Borrower is the surviving entity, or liquidate, wind-up or dissolve (or suffer any liquidation or dissolution), discontinue its business or convey, lease, sell, transfer or otherwise dispose of, in one transaction or series of transactions, any substantial part of its business or property, whether now or hereafter acquired, hold an interest in any subsidiary which is not controlled by the Borrower or the General Partner or enter into other business lines, without the prior written consent of the Administrative Agent, which consent shall not be given unless the Required Banks so consent. (b) The Borrower shall not amend its articles of incorporation, by- laws or agreement of limited partnership, as applicable, in any material respect which is reasonably likely to have an adverse effect on the Banks, without the Administrative Agent's consent, which shall not be unreasonably withheld or delayed. Section V.10 Changes in Business. The Borrower shall not enter into ------------------- any business which is substantially different from that conducted by the Borrower on the Closing Date after giving effect to the transactions contemplated by the Loan Documents. Section V.11 Sale of Unencumbered Asset Pool Properties. Prior to ------------------------------------------ the sale or transfer of any Unencumbered Asset Pool Property, the Borrower shall (i) deliver prior written notice to the Administrative Agent, (ii) deliver to the Administrative Agent a certificate from its chief financial officer or chief accounting officer certifying that at the time of such sale or other disposal (based on pro-forma calculations for the previous period assuming that such Unencumbered Asset Pool Property 53 was not a Unencumbered Asset Pool Property for the relevant period) all of the covenants contained in Sections 5.8, 5.14, 5.16, 5.17 and 5.20 are and after giving effect to the transaction shall continue to be true and accurate in all respects, and (iii) pay to the Administrative Agent an amount equal to that required pursuant to Section 2.10(a). In the event that a Separate Parcel that originally formed a part of a Unencumbered Asset Pool Property is to be sold or transferred, the value of the remaining portion of the Unencumbered Asset Pool Property will be determined by Administrative Agent at the time of sale or transfer in its sole discretion. Section V.12 Fiscal Year; Fiscal Quarter. The Borrower shall not --------------------------- change its fiscal year or any of its fiscal quarters without the Administrative Agent's consent, which shall not be unreasonably withheld or delayed. Section V.13 Margin Stock. None of the proceeds of the Loan will be ------------ used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any Margin Stock. Section V.14 Development Activities. The Borrower shall not engage ---------------------- in any development activities except for development in connection with the expansion and/or repositioning or restoration following a casualty or condemnation of existing improvements on Real Property Assets. Notwithstanding the foregoing, the Borrower may engage in all other development activities where there is construction completion risk provided that in no event shall the value (determined in accordance with the book value thereof, in accordance with GAAP) of the Real Property Assets under such other type of development exceed twenty percent (20%) of the Borrower's Total Asset Value. Section V.15 Interest Rate Protection. On or before the date that is ------------------------ the six (6) month anniversary of the date hereof, the Borrower and the General Partner shall maintain Interest Rate Hedges on a notional amount of the Debt under clause (A) of the definition of Debt of the Borrower, and the General Partner and their Subsidiaries which, when added to the aggregate principal amount of the Debt under clause (A) of the definition of Debt of the Borrower, and the General Partner and their Subsidiaries which bears interest at a fixed rate, equals or exceeds 50% of the aggregate principal amount of all Debt under clause (A) of the definition of Debt of the Borrower, and the General Partner and their Subsidiaries. 54 Section V.16 Joint Ventures. The value of the Borrower's and the -------------- General Partner's interest in any joint venture, whether consolidated or unconsolidated, shall at no time exceed 15% of Total Asset Value. Section V.17 Investments in Unimproved Real Property. The aggregate --------------------------------------- amount of the investments of the Borrower, the General Partner and their Consolidated Subsidiaries in unimproved real property will at no time exceed 7.5% of Total Asset Value. Section V.18 Use of Proceeds. The Borrower shall use the proceeds of --------------- the Loans solely to finance the acquisition of additional Unencumbered Asset Pool Properties or other Real Property Assets which are industrial or office properties and for its general business purposes. Section V.19 General Partner Status. The General Partner shall at ---------------------- all times (i) maintain its status as a self-directed and self-administered real estate investment trust under the Internal Revenue Code, and (ii) remain a publicly traded company listed on the New York Stock Exchange. Section V.20 Certain Requirements for the Unencumbered Asset Pool. ---------------------------------------------------- (a) At all times, (i) the Real Property Assets in the Unencumbered Asset Pool shall be on average during any consecutive twelve-month period (tested quarterly) at least 85% leased to tenants and (ii) any Real Property Asset that is a part of the Unencumbered Asset Pool less than 85% leased to tenants for more than twelve months shall not account for more than ten percent (10%) of the Unencumbered Asset Pool Properties Value. (b) Any Subsidiary which owns any of the Real Property Assets in the Unencumbered Asset Pool shall not at any time incur any Debt, nor shall the Borrower pledge its interest in such Subsidiary nor shall the Borrower or such Subsidiary enter into any negative pledge with respect thereto. ARTICLE VI DEFAULTS Section VI.1 Events of Default. Each of the following shall ----------------- constitute an event of default under this Agreement (an "Event of Default"): ---------------- 55 (a) the Borrower shall fail to pay when due any principal of any Loan, or the Borrower shall fail to pay when due any interest on any Loan; provided, -------- however, that the Borrower shall be entitled to a three (3) Domestic Business - ------- Day grace period with respect thereto but only as to two (2) payments of interest during the Term, or the Borrower shall fail to pay within three (3) Domestic Business Days after the same is due any fees or other amounts payable hereunder; (b) the Borrower shall fail to observe or perform any covenant contained in Sections 5.8 to 5.20, inclusive, subject to any applicable grace periods set forth therein; (c) the Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a) or (b) above) for 30 days after written notice thereof has been given to the Borrower by the Administrative Agent; (d) any representation, warranty, certification or statement made by the Borrower in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); (e) the Borrower or the General Partner shall default in the payment when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) of any amount owing in respect of any Recourse Debt or Debt guaranteed by the Borrower or the General Partner (other than the Obligations) in an aggregate principal amount of more than $1,000,000 and such default shall continue beyond the giving of any required notice and the expiration of any applicable grace period (as the same may be extended by the applicable lender) and such default shall not be waived by the applicable lender (which waiver shall serve to reinstate the applicable loan), or the Borrower or the General Partner shall default in the performance or observance of any obligation or condition with respect to any such Debt or any other event shall occur or condition exist beyond the giving of any required notice and the expiration of any applicable grace period (as the same may be extended by the applicable lender), if in any such case as a result of such default, event or condition, the lender thereof shall accelerate the maturity of any such Debt or to permit (without any further requirement of notice or lapse of time) the holder or holders thereof, or any trustee or agent for such holders, to accelerate the maturity of any such Debt and such default shall not be waived by the applicable lender (which waiver shall serve to reinstate the applicable loan), or any such Debt shall become or 56 be declared to be due and payable prior to its stated maturity other than as a result of a regularly scheduled payment; (f) the Borrower or the General Partner shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (g) an involuntary case or other proceeding shall be commenced against the Borrower or the General Partner seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or the General Partner under the federal bankruptcy laws as now or hereafter in effect; (h) the Borrower shall default in its obligations under any Loan Document other than this Agreement beyond any applicable notice and grace periods; (i) the General Partner shall default in its obligations under the Guaranty beyond any applicable notice and grace periods; (j) any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $1,000,000 which it shall have become liable to pay under Title IV of ERISA, or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing, or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Material Plan, or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated, or there shall occur a complete or partial withdrawal from, 57 or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation in excess of $1,000,000; (k) one or more final nonappealable judgments or decrees in an aggregate amount of $10,000,000 as of such date shall be entered by a court or courts of competent jurisdiction against the Borrower or the General Partner (other than any judgment as to which, and only to the extent, a reputable insurance company has acknowledged coverage of such claim in writing) and (i) any such judgments or decrees shall not be stayed, discharged, paid, bonded or vacated within thirty (30) days (or bonded, vacated or satisfied within thirty (30) after any stay is lifted) or (ii) enforcement proceedings shall be commenced by any creditor on any such judgments or decrees; (l) (i) any Environmental Claim shall have been asserted against the Borrower or any Environmental Affiliate, (ii) any release, emission, discharge or disposal of any Material of Environmental Concern shall have occurred, and such event is reasonably likely to form the basis of an Environmental Claim against the Borrower or any Environmental Affiliate, or (iii) the Borrower or the Environmental Affiliates shall have failed to obtain any Environmental Approval necessary for the ownership, or operation of its business, property or assets or any such Environmental Approval shall be revoked, terminated, or otherwise cease to be in full force and effect, in the case of clauses (i), (ii) or (iii) above, if the existence of such condition has had or is reasonably likely to have a Material Adverse Effect; (m) during any consecutive two (2) year period commencing on or after the date hereof, individuals who at the beginning of such period constituted the Board of Directors of the General Partner of the Borrower (together with any new directors whose election by the Board of Directors or whose nomination for election by the General Partner's stockholders was approved by a vote of at least a majority of the members of the Board of Directors then in the office who either were members of the Board of Directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the members of the Board of Directors then in office; (n) the General Partner shall cease at any time to qualify as a real estate investment trust under the Internal Revenue Code; and 58 (o) at any time, for any reason, the Borrower or the General Partner seeks to repudiate its obligations under any Loan Document. Section VI.2 Rights and Remedies. (a) Upon the occurrence of any ------------------- Event of Default described in Sections 6.1(f) or (g), the unpaid principal amount of, and any and all accrued interest on, the Loans and any and all accrued fees and other Obligations hereunder shall automatically become immediately due and payable, with all additional interest from time to time accrued thereon and without presentation, demand, or protest or other requirements of any kind (including, without limitation, valuation and appraisement, diligence, presentment, notice of intent to demand or accelerate and notice of acceleration), all of which are hereby expressly waived by the Borrower; and upon the occurrence and during the continuance of any other Event of Default, the Administrative Agent may exercise any of its rights and remedies hereunder and by written notice to the Borrower, declare the unpaid principal amount of and any and all accrued and unpaid interest on the Loans and any and all accrued fees and other Obligations hereunder to be, and the same shall thereupon be, immediately due and payable with all additional interest from time to time accrued thereon and without presentation, demand, or protest or other requirements of any kind other than as provided in the Loan Documents (including, without limitation, valuation and appraisement, diligence, presentment, and notice of intent to demand or accelerate), all of which are hereby expressly waived by the Borrower. (b) Notwithstanding the foregoing, upon the occurrence and during the continuance of any Event of Default other than any Event of Default described in Sections 6.1(f) or (g), the Administrative Agent shall not exercise any of its rights and remedies hereunder nor declare the unpaid principal amount of and any and all accrued and unpaid interest on the Loans and any and all accrued fees and other Obligations hereunder to be immediately due and payable, until such time as the Administrative Agent shall have delivered a notice to the Banks specifying the Event of Default which has occurred and whether Administrative Agent recommends the acceleration of the Obligations due hereunder or the exercise of other remedies hereunder. The Banks shall notify the Administrative Agent if they approve or disapprove of the acceleration of the Obligations due hereunder or the exercise of such other remedy recommended by Administrative Agent within five (5) Domestic Business Days after receipt of such notice. If any Bank shall not respond within such five (5) Domestic Business Day period, then such Bank shall be deemed to have accepted Administrative Agent's recommendation for acceleration of the Obligations due hereunder or the exercise of such other remedy. If the Required Banks shall approve the acceleration of the Obligations due hereunder or the exercise of such 59 other remedy, then Administrative Agent shall declare the unpaid principal amount of and any and all accrued and unpaid interest on the Loans and any and all accrued fees and other Obligations hereunder to be immediately due and payable or exercise such other remedy approved by the Required Banks. If the Required Banks shall neither approve nor disapprove the acceleration of the Obligations due hereunder or such other remedy recommended by Administrative Agent, then Administrative Agent may accelerate the Obligations due hereunder or exercise any of its rights and remedies hereunder in its sole discretion. If the Required Banks shall disapprove the acceleration of the Obligations due hereunder or the exercise of such other remedy recommended by Administrative Agent, but approve of another remedy, then to the extent permitted hereunder, Administrative Agent shall exercise such remedy. In the event the Administrative Agent exercises any remedy provided in any of the Loan Documents, the Administrative Agent shall act as a collateral agent for the Banks. Section VI.3 Notice of Default. If the Administrative Agent shall ----------------- not already have given any notice to the Borrower under Section 6.1, the Administrative Agent shall give notice to the Borrower under Section 6.1 promptly upon being requested to do so by the Required Banks and shall thereupon notify all the Banks thereof. ARTICLE VII THE ADMINISTRATIVE AGENT Section VII.1 Appointment and Authorization. Each Bank irrevocably ----------------------------- appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Loan Documents as are delegated to the Administrative Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. Section VII.2 Administrative Agent and Affiliates. Morgan shall have ----------------------------------- the same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Administrative Agent, and Morgan and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any subsidiary or affiliate of the Borrower as if it were not the Administrative Agent hereunder, and the term "Bank" and "Banks" shall include Morgan in its individual capacity. 60 Section VII.3 Action by Administrative Agent. The obligations of the ------------------------------ Administrative Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Administrative Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article VI. Section VII.4 Consultation with Experts. The Administrative Agent ------------------------- may consult with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. Section VII.5 Liability of Administrative Agent. Neither the --------------------------------- Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or, where required by the terms of this Agreement, all of the Banks, or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of the Borrower; (iii) the satisfaction of any condition specified in Article III, except receipt of items required to be delivered to the Administrative Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, the other Loan Documents or any other instrument or writing furnished in connection herewith. The Administrative Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex or similar writing) believed by it in good faith to be genuine or to be signed by the proper party or parties. Section VII.6 Indemnification. Each Bank shall, ratably in --------------- accordance with its Commitment, indemnify the Administrative Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct) that such indemnitees may suffer or incur as a result of, or in connection with, the Administrative Agent's capacity as Administrative Agent in connection with this Agreement, the other Loan 61 Documents or any action taken or omitted by such indemnitees in accordance with this Agreement. Section VII.7 Credit Decision. Each Bank acknowledges that it has, --------------- independently and without reliance upon the Administrative Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. Section VII.8 Successor Administrative Agent. The Administrative ------------------------------ Agent may resign at any time by giving notice thereof to the Banks and the Borrower. In addition, if the Administrative Agent at any time shall have been finally determined to have committed gross negligence or willful misconduct in connection with its performance of its duties as Administrative Agent hereunder, then, upon notice from the Required Banks, the Administrative Agent shall resign. Upon any such resignation, the Required Banks shall have the right to appoint a successor Administrative Agent with the consent of the Borrower provided that no Event of Default shall have occurred and be continuing. If no successor Administrative Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent gives notice of resignation, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $50,000,000. Upon the acceptance of its appointment as the Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder first accruing or arising after the effective date of such retirement. After any retiring Administrative Agent's resignation hereunder as Administrative Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Administrative Agent. If, at any time during the Term, the Administrative Agent shall no longer have any Commitment under this Agreement, the Administrative Agent shall give notice of its offer to resign to the Banks and the Borrower. Upon any such offer 62 of resignation, the Required Banks shall have the right to appoint a successor Administrative Agent or to retain the Administrative Agent with the consent of the Borrower, provided that no Event of Default shall be outstanding. Section VII.9 Administrative Agent's Fee. The Borrower shall pay to -------------------------- the Administrative Agent for its own account fees in the amounts and at the times previously agreed upon between the Borrower and the Administrative Agent. Section VII.10 Copies of Notices. Administrative Agent shall deliver ----------------- to each Bank a copy of any notice sent to the Borrower by Administrative Agent in connection with the performance of its duties as Administrative Agent hereunder; and Administrative Agent shall deliver to each Bank a copy of any notice sent to the Administrative Agent by the Borrower in connection with any Default or Event of Default hereunder. ARTICLE VIII CHANGE IN CIRCUMSTANCES Section VIII.1 Basis for Determining Interest Rate Inadequate or ------------------------------------------------- Unfair. If on or prior to the first day of any Interest Period for any Euro- - ------ Dollar Borrowing: (a) the Administrative Agent is advised by the Reference Bank that deposits in dollars (in the applicable amounts) are not being offered to the Reference Bank in the relevant market for such Interest Period, or (b) Banks having 50% or more of the aggregate amount of the affected Loans advise the Administrative Agent that the Adjusted London Interbank Offered Rate as determined by the Administrative Agent will not adequately and fairly reflect the cost to such Banks of funding their Euro-Dollar Loans for such Interest Period, the Administrative Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Administrative Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, the obligations of the Banks to make Euro-Dollar Loans, or to continue or convert outstanding Loans as or into Euro-Dollar Loans, as the case may be, shall be suspended, and each outstanding Euro-Dollar Loan shall be converted into a Base Rate Loan on the last day of the then current Interest Period applicable thereto. Unless the Borrower notifies the Administrative Agent at least two (2) Domestic Business Days 63 before the date of any Euro-Dollar Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, if such Borrowing is a Committed Borrowing, such Borrowing shall instead be made as a Base Rate Borrowing. Section VIII.2 Illegality. If, after the date of this Agreement, the ---------- adoption of any applicable law, rule or regulation, or any change in any existing applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro- Dollar Loans, such Bank shall so notify the Administrative Agent, the Administrative Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Administrative Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make or convert Euro-Dollar Loans shall be suspended. Before giving any notice to the Administrative Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such Bank shall determine that it may not lawfully continue to maintain and fund any of its outstanding Euro-Dollar Loans to maturity and shall so specify in such notice, the Borrower shall immediately prepay in full the then outstanding principal amount of each such Euro-Dollar Loan together with accrued interest thereon. Concurrently with prepaying each such Euro-Dollar Loan, the Borrower shall borrow a Base Rate Loan in an equal principal amount from such Bank (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Banks), and such Bank shall make such a Base Rate Loan. Section VIII.3 Increased Cost and Reduced Return. --------------------------------- (a) If, after the date hereof, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank 64 or comparable agency shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System (but excluding with respect to any Euro- Dollar Loan any such requirement reflected in an applicable Euro-Dollar Reserve Percentage)), special deposit, insurance assessment or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the London interbank market any other condition affecting its Euro-Dollar Loans, its Note, or its obligation to make Euro-Dollar Loans, and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Euro-Dollar Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank to be material, then, within fifteen (15) days after demand by such Bank (with a copy to the Administrative Agent), which demand shall be accompanied by a certificate showing, in reasonable detail, the calculation of such amount or amounts, the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within fifteen (15) days after demand by such Bank (with a copy to the Administrative Agent), which demand shall be accompanied by a certificate showing, in reasonable detail, the calculation of such amount or amounts, the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction. (c) Each Bank will promptly notify the Borrower and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will 65 designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. Section VIII.4 Taxes. ----- (a) Any and all payments by the Borrower to or for the account of any Bank or the Administrative Agent hereunder or under any other Loan Document shall be made free and clear of and without deduction for any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Bank and --------- the Administrative Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Bank or the Administrative Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Bank, taxes imposed on its income, and franchise or similar taxes imposed on it, by the jurisdiction of such Bank's Applicable Lending Office or any political subdivision thereof (and, if different from the jurisdiction of such Bank's Applicable Lending Office, the jurisdiction of the domicile of its Loans either established by the Bank pursuant to Section 9.12 or determined by the applicable taxing authorities)(all such non-excluded taxes, duties, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the ----- Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note to any Bank or the Administrative Agent, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.4) such Bank or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Borrower shall furnish to the Administrative Agent, at its address referred to in Section 9.1, the original or a certified copy of a receipt evidencing payment thereof. (b) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes and any other excise or property taxes, or charges or similar levies which arise from any payment made hereunder or under any Note or 66 from the execution or delivery of, or otherwise with respect to, this Agreement or any Note (hereinafter referred to as "Other Taxes"). ----------- (c) The Borrower agrees to indemnify each Bank and the Administrative Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 8.4) paid by such Bank or the Administrative Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. Any payment required under this indemnification shall be made within fifteen (15) days from the date such Bank or the Administrative Agent (as the case may be) makes demand therefor. (d) Each Bank organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Bank listed on the signature pages hereof and on or prior to the date on which it becomes a Bank in the case of each other Bank, and from time to time thereafter if requested in writing by the Borrower (but only so long as such Bank remains lawfully able to do so), shall provide the Borrower with Internal Revenue Service form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which reduces the rate of withholding tax on payments of interest or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States. If the form provided by a Bank at the time such Bank first became a party to this Agreement or at any time thereafter (other than solely by reason of a change in United States law or a change in the terms of any treaty to which the United States is a party after the date hereof) indicates a United States interest withholding tax rate in excess of zero (or would have indicated such a withholding tax rate if such form had been submitted and completed accurately and completely and either was not submitted or was not completed accurately and completely), or if a Bank otherwise is subject to United States interest withholding tax at a rate in excess of zero at any time for any reason (other than solely by reason of a change in United States law or regulation or a change in any treaty to which the United States is a party after the date hereof), withholding tax at such rate shall be considered excluded from "Taxes" as defined in Section 8.4(a). In addition, any amount that otherwise would be considered "Taxes" or "Other Taxes" for purposes of this Section 8.4 shall be excluded therefrom if the Bank either has transferred the domicile of its Loans pursuant to Section 9.12 or changed the Applicable Lending 67 Office with respect to such Loans and such amount would not have been incurred had such transfer or change not been made. (e) For any period with respect to which a Bank has failed to provide the Borrower with the appropriate form pursuant to Section 8.4(d) (unless such failure is due to a change in treaty, law or regulation occurring subsequent to the date on which a form originally was required to be provided), such Bank shall not be entitled to indemnification under Section 8.4(a) with respect to Taxes imposed by the United States; provided, however, that should a Bank, which -------- ------- is otherwise exempt from or subject to a reduced rate of withholding tax, become subject to Taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes. (f) If the Borrower is required to pay additional amounts to or for the account of any Bank pursuant to this Section 8.4, then such Bank will change the jurisdiction of its Applicable Lending Office so as to eliminate or reduce any such additional payment which may thereafter accrue if such change, in the judgment of such Bank, is not otherwise disadvantageous to such Bank. Section VIII.5 Base Rate Loans Substituted for Affected Euro-Dollar ---------------------------------------------------- Loans. If (i) the obligation of any Bank to make, or convert outstanding Loans - ----- to, Euro-Dollar Loans has been suspended pursuant to Sections 8.1 or 8.2 or (ii) any Bank has demanded compensation under Section 8.3 or 8.4 with respect to its Euro-Dollar Loans and the Borrower shall, by at least five (5) Euro-Dollar Business Days' prior notice to such Bank through the Administrative Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist: (a) all Loans which would otherwise be made by such Bank as Euro- Dollar Loans shall be made instead as Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Banks), and (b) after each of its Euro-Dollar Loans has been repaid, all payments of principal which would otherwise be applied to repay such Euro-Dollar Loans shall be applied to repay its Base Rate Loans instead. 68 ARTICLE IX MISCELLANEOUS Section IX.1 Notices. All notices, requests and other communications ------- to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower or the Administrative Agent, at its address or telecopy number set forth on the signature pages hereof, together with copies thereof, in the case of the Borrower, to Latham & Watkins, 633 West Fifth Street, Suite 4000, Los Angeles, CA 90071, Attention: Glen B. Collyer, Esq., Telephone: (213) 485-1234, Telecopy: (213) 891-8763, and in the case of the Administrative Agent, to Skadden, Arps, Slate, Meagher & Flom LLP, 4 Times Square, New York, New York 10036-6522, Attention: Martha Feltenstein, Esq., Telephone: (212)735-2272, Telecopy: (212)735-2000, (y) in the case of any Bank, at its address or telecopy number set forth on the signature pages hereof or in its Administrative Questionnaire or (z) in the case of any party, such other address or telecopy number as such party may hereafter specify for the purpose by notice to the Administrative Agent, the Banks and the Borrower. Each such notice, request or other communication shall be effective (i) if given by telecopy, when such telecopy is transmitted to the telecopy number specified in this Section, (ii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when delivered at the address specified in this Section; provided that notices to the Administrative Agent under Article II -------- or Article VIII shall not be effective until received. Section IX.2 No Waivers. No failure or delay by the Administrative ---------- Agent or any Bank in exercising any right, power or privilege hereunder or under any Note 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 IX.3 Expenses; Indemnification. ------------------------- (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses of the Administrative Agent (including, without limitation, reasonable fees and disbursements of special counsel Skadden, Arps, Slate, Meagher & Flom LLP, local counsel for the Administrative Agent, and travel, site visits, third party reports 69 (including Appraisals), mortgage recording taxes, environmental and engineering expenses), in connection with the preparation and administration of this Agreement, the Loan Documents and the documents and instruments referred to therein, the syndication of the Loans, any waiver or consent hereunder or any amendment or modification hereof or any Default or alleged Default hereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the Administrative Agent and each Bank, including, without limitation, reasonable fees and disbursements of counsel for the Administrative Agent, in connection with the enforcement of the Loan Documents and the instruments referred to therein and such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. (b) The Borrower agrees to indemnify the Administrative Agent and each Bank, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each, an "Indemnitee") and hold each ---------- Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel and settlements and settlement costs, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) that may at any time (including, without limitation, at any time following the payment of the Obligations) be imposed on, asserted against or incurred by any Indemnitee as a result of, or arising out of, or in any way related to or by reason of, (i) any of the transactions contemplated by the Loan Documents or the execution, delivery or performance of any Loan Document (including, without limitation, the Borrower's actual or proposed use of proceeds of the Loans, whether or not in compliance with the provisions hereof), (ii) any violation by the Borrower or the Environmental Affiliates of any applicable Environmental Law, (iii) any Environmental Claim arising out of the management, use, control, ownership or operation of property or assets by the Borrower or any of the Environmental Affiliates, including, without limitation, all on-site and off-site activities involving Material of Environmental Concern, (iv) the breach of any environmental representation or warranty set forth herein, (v) the grant to the Administrative Agent and the Banks of any Lien in any property or assets of the Borrower or any stock or other equity interest in the Borrower, and (vi) the exercise by the Administrative Agent and the Banks of their rights and remedies (including, without limitation, foreclosure) under any agreements creating any such Lien (but excluding in each case, as to any Indemnitee, any such losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements incurred solely by reason of (i) the gross negligence or willful miscon- 70 duct of such Indemnitee as finally determined by a court of competent jurisdiction or (ii) any investigative, administrative or judicial proceeding imposed or asserted against any Indemnitee by any bank regulatory agency or by any equity holder of such Indemnitee). The Borrower's obligations under this Section shall survive the termination of this Agreement and the payment of the Obligations. (c) The Borrower shall pay, and hold the Administrative Agent and each of the Banks harmless from and against, any and all present and future U.S. stamp, recording, transfer and other similar foreclosure related taxes with respect to the foregoing matters and hold the Administrative Agent and each Bank harmless from and against any and all liabilities with respect to or resulting from any delay or omission (other than to the extent attributable to such Bank) to pay such taxes. Section IX.4 Sharing of Set-Offs. In addition to any rights now or ------------------- hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence and during the continuance of any Event of Default, each Bank is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to the Borrower or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (general or special, time or demand, provisional or final), other than deposits held for the benefit of third parties, and any other indebtedness at any time held or owing by such Bank (including, without limitation, by branches and agencies of such Bank wherever located) to or for the credit or the account of the Borrower against and on account of the Obligations of the Borrower then due and payable to such Bank under this Agreement or under any of the other Loan Documents, including, without limitation, all interests in Obligations purchased by such Bank. Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to any Note held by it, which is greater than the proportion received by any other Bank, in respect of the aggregate amount of principal and interest due with respect to any Note held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Notes held by the other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Notes held by the Banks shall be shared by the Banks pro rata; provided that nothing in this Section shall impair -------- the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its indebtedness under the Notes. The Borrower agrees, to the fullest extent that it may effectively do so under 71 applicable law, that any holder of a participation in a Note, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Borrower in the amount of such participation. Section IX.5 Amendments and Waivers. Any provision of this Agreement ---------------------- (including any of the financial covenants given by the Borrower pursuant to Section 5.8), the Notes, or other Loan Documents may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Banks (and, if the rights or duties of the Administrative Agent are affected thereby, by the Administrative Agent); provided that no such amendment or waiver shall, unless signed by all the Banks, - -------- (i) increase or decrease the Commitment of any Bank (except for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or rate of interest on any Loan or any fees specified herein, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or any fees hereunder or for any reduction or termination of any Commitment, (iv) release the Guaranty or otherwise release any other collateral, (v) subordinate the Loans to any other Debt, (vi) amend or modify the provisions of this Section 9.5, or (vii) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement. Section IX.6 Successors and Assigns. ---------------------- (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights under this Agreement or the other Loan Documents without the prior written consent of all Banks. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "Participant") participating interests in its Commitment or ----------- any or all of its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower and the Administrative Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obliga- 72 tions under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation -------- agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii), (iii) or (iv) of Section 9.5 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article VIII with respect to its participating interest. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Bank may at any time assign to one or more banks or other institutions (each an "Assignee") all, or a proportionate part of all, of its -------- rights and obligations under this Agreement, the Notes and the other Loan Documents, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit D --------- attached hereto executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Administrative Agent, which consent shall not be unreasonably withheld, and, provided no Event of Default shall have occurred and be continuing, the Borrower, which consent shall not be unreasonably withheld or delayed. Upon execution and delivery of such instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Administrative Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note or Notes are issued to the Assignee. In connection with any such assignment (except for an assignment by a Bank to its Affiliate), the transferor Bank shall pay to the Administrative Agent an administrative fee for processing such assignment in the amount of $2,500. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall deliver to the Borrower and the Administrative Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 8.4. 73 (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 8.3 or 8.4 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.2, 8.3 or 8.4 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. Section IX.7 Governing Law; Submission to Jurisdiction. ----------------------------------------- (a) THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO THE PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW). (b) Any legal action or proceeding with respect to this Agreement or any other Loan Document and any action for enforcement of any judgment in respect thereof may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York, and, by execution and delivery of this Agreement, the Borrower hereby accepts for itself and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts and appellate courts from any thereof. The Borrower irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the hand delivery, or mailing of copies thereof by registered or certified mail, postage prepaid, to the Borrower at its address set forth below. The Borrower hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement or any other Loan Document brought in the courts referred to above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. Nothing herein shall affect the right of the Administrative Agent, any Bank or any holder of a Note to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Borrower in any other jurisdiction. Section IX.8 Marshaling; Recapture. Neither the Administrative Agent --------------------- nor any Bank shall be under any obligation to marshal any assets in favor of the Borrower or any other party or against or in payment of any or all of the Obligations. To the extent any Bank receives any payment by or on behalf of the Borrower, which payment or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to the Borrower or its estate, trustee, receiver, custodian or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such payment or repayment, the Obligation or part thereof which has been paid, reduced or satisfied by the amount so repaid shall be reinstated by the amount so repaid and shall be included within the liabilities of the Borrower to such Bank as of the date such initial payment, reduction or satisfaction occurred. Section IX.9 Counterparts; Integration; 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 constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. This Agreement shall become effective upon receipt by the Administrative Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Administrative Agent in form satisfactory to it of telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party). Section IX.10 WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE -------------------- ADMINISTRATIVE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. Section IX.11 Survival. All indemnities set forth herein shall survive -------- the execution and delivery of this Agreement and the other Loan Documents and the making and repayment of the Loans hereunder. 75 Section IX.12 Domicile of Loans. Subject to the provisions of Article ----------------- VIII, each Bank may transfer and carry its Loans at, to or for the account of any domestic or foreign branch office, subsidiary or affiliate of such Bank. Section IX.13 Limitation of Liability. No claim may be made by the ----------------------- Borrower or any other Person against the Administrative Agent or any Bank or the affiliates, directors, officers, employees, attorneys or agent of any of them for any consequential or punitive damages in respect of any claim for breach of contract or any other theory of liability arising out of or related to the transactions contemplated by this Agreement or by the other Loan Documents, or any act, omission or event occurring in connection therewith; and the Borrower hereby waives, releases and agrees not to sue upon any claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor. 76 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. BORROWER: KILROY REALTY, L.P., - -------- a Delaware limited partnership By: Kilroy Realty Corporation, a Maryland corporation, its general partner By: /s/ Jeffrey C. Hawken -------------------------------- Name: Jeffrey C. Hawken Title: Executive Vice President, Chief Operating Officer By: /s/ Tyler H. Rose -------------------------------- Name: Tyler H. Rose Title: Senior Vice President and Treasurer ADMINISTRATIVE AGENT MORGAN GUARANTY TRUST COMPANY - -------------------- AND BANK: OF NEW YORK - -------- By: /s/ Carl J. Mehldau, Jr. --------------------------------- Name: Carl J. Mehldau, Jr. Title: Associate 60 Wall Street New York, New York 10260-0060 Attention: Telephone number: Telecopy number: Domestic and Euro-Currency Lending Office: Nassau, Bahamas Office c/o J.P. Morgan Services Inc. 500 Stanton Christiana Road Newark, Delaware 19173-2107 Attention: Bill Lamb Telecopy number: (302) 634-4222 Commitment: $16,700,000 SYNDICATION AGENT - ----------------- THE CHASE MANHATTAN BANK AND BANK: - -------- By: /s/ John F. Mix ___________________________ Name: John F. Mix Title: Vice President Commitment: $16,700,000 DOCUMENTATION AGENT AND BANK: COMMERZBANK AKTIENGESELLSCHAFT, NEW YORK AND GRAND CAYMAN BRANCHES By: /s/ Christine H. Finkel ------------------------------------ Name: Christine H. Finkel Title: Vice President By: /s/ R. William Knickerbocker ------------------------------------ Name: R. William Knickerbocker Title: Assistant Vice President 2 Word Financial Center New York, New York 10281-1050 Attention: David Schwarz/Christine Finkel Telephone number: (212) 266-7632/(212) 266-7375 Telecopy number: (212) 266-7565 Domestic Lending Office: Commerzbank AG, New York Branch 2 World Financial Center New York, New York 10281-1050 Attention: David Schwarz/Christine Finkel Telephone number: (212) 266-7632/(212) 266-7375 Telecopy number: (212) 266-7565 Euro-Currency Lending Office: Commerzbank AG, Grand Cayman Branch C/o Commerzbank AG, New York Branch 2 World Financial Center New York, New York 10281-1050 Attention: David Schwarz/Christine Finkel Telephone number: (212) 266-7632/(212) 266-7375 Telecopy number: (212) 266-7565 Commitment: $16,600,000 BANK: PNC BANK, NATIONAL ASSOCIATION - ---- By: /s/ Paul Jamiolkowski ------------------------------------ Name: Paul Jamiolkowski Title: Vice President Commitment: $10,000,000 BANK: KEYBANK NATIONAL ASSOCIATION - ---- By: /s/ Kevin P. Murray ------------------------------------ Name: Kevin P. Murray Title: AVP Commitment: $10,000,000 BANK: THE BANK OF NOVA SCOTIA, ACTING THROUGH ITS - ---- SAN FRANCISCO AGENCY By: /s/ K. M. Pigott ------------------------------------ Name: K. M. Pigott Title: Director Commitment: $10,000,000 BANK: CITIZENS BANK OF RHODE ISLAND - ---- By: /s/ Lawrence S. Hershoff ---------------------------------------- Name: Lawrence S. Hershoff Title: Vice President Commitment: $10,000,000 BANK: KBC BANK N.V. - ---- By: /s/ Robert Snauffer ---------------------------------------- Name: Robert Snauffer Title: First Vice President By: /s/ Patrick A. Janssens ---------------------------------------- Name: Patrick A. Janssens Title: Vice President Commitment: $10,000,000 EXHIBIT A --------- NOTE $___________ New York, New York September __, 2000 For value received, KILROY REALTY, L.P., a Delaware limited partnership (the "Borrower") promises to pay to the order of ______________ (the "Bank"), -------- ---- for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the Maturity Date. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Administrative Agent under the Credit Agreement (as defined below). All Loans made by the Bank, the respective types and maturities thereof and all repayments of the principal thereof shall be recorded by the Bank and, if the Bank so elects in connection with any transfer or enforcement hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding may be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Bank to make any such recordation or -------- endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This Note is one of the Notes referred to in the Credit Agreement, dated as of September 7, 2000, among the Borrower, the Banks party thereto, The Chase Manhattan Bank, as Bank and as Syndication Agent, Morgan Guaranty Trust Company of New York, as Bank and as Administrative Agent for the Banks, Commerzbank Aktiengesellschaft, New York and Grand Cayman Branches, as Documentation Agent, Chase Securities Inc., as Lead Arranger and Joint Bookmanager, and J.P. Morgan Securities Inc., as Lead Arranger and Joint Bookmanager (as the same may be amended from time to time, the "Credit Agreement"). ---------------- A-1 Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. KILROY REALTY, L.P., a Delaware limited partnership By: Kilroy Realty Corporation, a Maryland corporation By: ______________________________ Name: Title: By: ______________________________ Name: Title: A-2 Note (cont'd) LOANS AND PAYMENTS OF PRINCIPAL ________________________________________________________________________________ Amount of Amount of Type of Principal Maturity Notation Date Loan Loan Repaid Date Made By ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ A-3 EXHIBIT B --------- Unencumbered Asset Pool Properties (Fee Interests) PROPERTY LOCATION 26541 Agoura Rd. Calabasas, CA 5325 Hunter Anaheim, CA 5151 - 5155 Camino Ruiz Camarillo, CA 23600 - 610 Telo Avenue Torrance, CA Brea Industrial Properties Brea, CA Garden Grove Industrial Properties Garden Grove, CA Kilroy Tech Center Irvine Irvine, CA 2501 Pullman Santa Ana, CA 9401 & 9451 Toledo Way Irvine, CA 12400 Industry Garden Grove, CA 1675 MacArthur Costa Mesa, CA 1633 26th Street Santa Monica, CA 2055 Main Street Irvine, CA 6828 Nancy Ridge San Diego, CA 199 & 201 N. Sunrise Ave. Roseville, CA 14831 Franklin Tustin, CA 4361 Latham Riverside, CA 4351 Latham Riverside, CA 601 Valencia Brea, CA 3130 Mira Loma Anaheim, CA 3125 E. Coronado Anaheim, CA 1840 Aerojet Way Las Vegas, NV 1900 Aerojet Way Las Vegas, NV 41093 County Center Dr. Temecula, CA 1951 Carnegie Santa Ana, CA 3130 Wilshire Santa Monica, CA 525 N. Brand Glendale, CA Walnut Business Center Diamond Bar, CA Anaheim Corp Center Anaheim, CA Alton Business Center Irvine, CA Fullerton Business Center Fullerton, CA 12100 Olympic Boulevard Los Angeles, CA 8101 Kaiser Anaheim, CA 795 Trademark Drive Reno, NV 1240 & 1250 N. Lakeview Ave. Anaheim, CA 4880 Santa Rosa Rd. Camarillo, CA 1250 N. Tustin Avenue Anaheim, CA 2911 Dow Avenue Tustin, CA Foothill Ranch Foothill Ranch, CA B-1 12312 Olympic Boulevard Los Angeles, CA 5115 E. La Palma Ave. Anaheim, CA 5115 N. 27th Avenue Phoenix, AZ Kilroy Tech Ctr, Anaheim - Ph I Anaheim, CA Kilroy Tech Ctr, Anaheim - Ph II Anaheim, CA Brea - Lambert Industrial Complex Brea, CA Brobeck San Diego, CA B-2 EXHIBIT C --------- Unencumbered Asset Pool Properties (Leasehold Interests) Kilroy Airport Center (Long Beach); Long Beach, CA C-1 EXHIBIT D --------- FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT ASSIGNMENT AND ASSUMPTION AGREEMENT ----------------------------------- THIS ASSIGNMENT AND ASSUMPTION AGREEMENT ("this Assignment"), dated as ---------- of __________, ____, is made by and among [ASSIGNOR] (the "Assignor"), -------- [ASSIGNEE] (the "Assignee"), KILROY REALTY, L.P. (the "Borrower"), and MORGAN -------- -------- GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent (the "Agent"). ----- W I T N E S S E T H ------------------- WHEREAS, this Assignment relates to the Credit Agreement, dated as of _________________, 2000 (the "Loan Agreement"), among the Borrower, the Banks -------------- party thereto, The Chase Manhattan Bank, as Bank and as Syndication Agent, the Agent, as Bank and as Administrative Agent for the Banks, Commerzbank Aktiengesellschaft, New York and Grand Cayman Branches, as Documentation Agent, Chase Securities Inc., as Lead Arranger and Joint Bookmanager, and J.P. Morgan Securities Inc., as Lead Arranger and Joint Bookmanager; WHEREAS, as provided under the Loan Agreement, the Assignor has a Commitment to make Loans to the Borrower in an aggregate principal amount at any time outstanding not to exceed $__________; WHEREAS, Loans made to the Borrower by the Assignor under the Loan Agreement in the aggregate principal amount of $____________ are outstanding at the date hereof; and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Loan Agreement in respect of a portion of its Commitment thereunder in an amount equal to $__________ (the "Assigned Amount"), --------------- together with a corresponding portion of its outstanding Loans, and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: D-1 SECTION 1. Definitions. All capitalized terms not otherwise defined ----------- herein shall have the respective meanings set forth in the Loan Agreement. SECTION 2. Assignment. The Assignor hereby assigns and sells to the ---------- Assignee all of the rights of the Assignor under the Loan Agreement to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Loan Agreement to the extent of the Assigned Amount, including the purchase from the Assignor of the corresponding portion of the principal amount of the Loans made by the Assignor outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee, the Borrower and the Agent and the payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Bank under the Loan Agreement with a Commitment in an amount equal to the Assigned Amount, and (ii) the Commitment of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor released from its obligations under the Loan Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. SECTION 3. Payments. As consideration for the assignment and sale -------- contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the date hereof in Federal funds the amount heretofore agreed between them./1/ It is understood that Commitment Fees accrued to the date hereof are for the account of the Assignor and such fees accruing from and including the date hereof are for the account of the Assignee. Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Loan Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. SECTION 4. Consent of the Borrower and the Agent. This Agreement is ------------------------------------- conditioned upon the written consent of the Borrower and the consent of the Agent pursuant ______________________________ /1/ The amount should combine principal together with accrued interest and breakage compensation, if any, to be paid by the Assignee, net of any portion of any upfront fee to be paid by the Assignor to the Assignee. It may be preferable in an appropriate case to specify these amounts generically or by formula rather than as a fixed sum. D-2 to Section 9.6(c) of the Loan Agreement. The execution of this Agreement by the Borrower and the Agent is evidence of the required consents. Pursuant to Section 9.6(c) the Borrower agrees to execute and deliver a Note payable to the order of the Assignee to evidence the assignment and assumption provided for herein. SECTION 5. Non-Reliance on Assignor. The Assignor represents and ------------------------ warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder, that it has not created any adverse claim upon such interest and that such interest is free and clear of any adverse claim, and that it is authorized to enter into this Agreement. The Assignor makes no other representation or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition, or statements of the Borrower, or the validity and enforceability of the obligations of the Borrower in respect of the Loan Agreement or any Note. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Borrower. The Assignee represents and warrants that it is authorized to enter into this Agreement. SECTION 6. Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the external laws of the State of New York SECTION 7. Counterparts. 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. D-3 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. [ASSIGNOR] By: _______________________ Name: Title: [ASSIGNEE] By: ________________________ Name: Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: ________________________ Name: Title: D-4 CONSENTED TO: KILROY REALTY, L.P., a Delaware limited partnership By: Kilroy Realty Corporation, a Maryland corporation, its general partner By: ____________________________ Name: Tyler H. Rose Title: Senior Vice President and Treasurer By: _____________________________ Name: Title: D-5 SCHEDULE 4.22 ------------- LABOR MATTERS Agreement between Building Owners and Managers Association of Greater Los Angeles, Inc., and International Union of Operating Engineers, Local No. 501, AFL-CIO (November 1, 1996-October 31, 2001) EX-27.1 3 0003.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS 9-MOS DEC-31-2000 DEC-31-1999 JAN-01-2000 JAN-01-1999 SEP-30-2000 SEP-30-1999 61,108 6,857 0 0 27,656 18,354 (2,475) (1,483) 0 0 0 0 1,449,457 1,354,043 194,563 165,000 1,414,052 1,244,920 0 0 673,556 526,667 0 0 0 0 265 279 443,683 478,259 1,414,052 1,244,920 0 0 137,757 118,797 0 0 65,905 54,846 0 0 1,413 1,744 27,800 18,420 42,639 43,787 0 0 42,639 43,787 11,256 75 0 0 0 0 38,060 31,617 1.43 1.14 1.42 1.14 NET INCOME INCLUDES EQUITY ON INCOME OF UNCONSOLIDATED SUBSIDIARY OF $11 AND MINORITY INTERESTS OF ($15,846)
-----END PRIVACY-ENHANCED MESSAGE-----