-----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, UrXH7lJEojkysBN9W/UgQ73MvOxBORvXKViRgRLpl7sAgEK4LUftNaF2fzmCkiZK A2WR/GSeZE2VztSk4bzCPA== 0000898430-96-005107.txt : 19961106 0000898430-96-005107.hdr.sgml : 19961106 ACCESSION NUMBER: 0000898430-96-005107 CONFORMED SUBMISSION TYPE: S-11 PUBLIC DOCUMENT COUNT: 19 FILED AS OF DATE: 19961105 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KILROY REALTY CORP CENTRAL INDEX KEY: 0001025996 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954598246 FILING VALUES: FORM TYPE: S-11 SEC ACT: 1933 Act SEC FILE NUMBER: 333-15553 FILM NUMBER: 96654630 BUSINESS ADDRESS: STREET 1: 2250 IMPERIAL HIGHWAY #1200 STREET 2: C/O KILROY INDUSTRIES CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 2137721193 MAIL ADDRESS: STREET 1: C/O KILROY INDUSTRIES STREET 2: 2250 E IMPERIAL HIGHWAY #1200 CITY: EL SEGUNDO STATE: CA ZIP: 90245 S-11 1 FORM S-11 REGISTRATION STATEMENT DATED 11/5/96 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 5, 1996 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM S-11 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- KILROY REALTY CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENTS) 2250 EAST IMPERIAL HIGHWAY EL SEGUNDO, CALIFORNIA 90245 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) ---------------- JOHN B. KILROY, JR. PRESIDENT AND CHIEF EXECUTIVE OFFICER KILROY REALTY CORPORATION 2250 EAST IMPERIAL HIGHWAY EL SEGUNDO, CALIFORNIA 90245 (NAME AND ADDRESS OF AGENT FOR SERVICE) ---------------- COPIES TO: EDWARD SONNENSCHEIN, JR., ESQ. LYNN TOBY FISHER, ESQ. LATHAM & WATKINS KAYE, SCHOLER, FIERMAN, HAYS & 633 WEST FIFTH STREET HANDLER, LLP LOS ANGELES, CALIFORNIA 90071 425 PARK AVENUE (213) 485-1234 NEW YORK, NEW YORK 10022 (212) 836-8000 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] ---------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED MAXIMUM AGGREGATE OFFERING AMOUNT OF TITLE OF SECURITIES BEING REGISTERED PRICE (1) REGISTRATION FEE - ------------------------------------------------------------------------------- Common Stock, par value $.01 per share.... $212,980,000 $64,539 - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) of the Securities Act of 1933. ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- CROSS REFERENCE SHEET
FORM S-11 ITEM NO. AND HEADING LOCATION OR HEADING IN PROSPECTUS ------------------------------ --------------------------------- 1. Forepart of Registration Statement and Outside Front Cover Page of Prospec- tus.................................... Outside Front Cover Page 2. Inside Front and Outside Back Cover Inside Front Cover Page; Outside Back Cover Pages of Prospectus................... Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges.... Prospectus Summary; Risk Factors; Distribu- tion Policy; Business and Properties; Certain Relationships and Related Transactions 4. Determination of Offering Price........ Underwriting 5. Dilution............................... Dilution 6. Selling Security Holders............... Not applicable 7. Plan of Distribution................... Underwriting 8. Use of Proceeds........................ Use of Proceeds 9. Selected Financial Data................ Selected Financial Data 10. Management's Discussion and Analysis of Financial Condition and Results of Operations............................ Management's Discussion and Analysis of Fi- nancial Condition and Results of Opera- tions 11. General Information as to Registrant... Prospectus Summary; Business and Proper- ties; Management; Principal Stockholders; Cer- tain Provisions of Maryland Law and of the Company's Articles of Incorporation and Bylaws 12. Policy with Respect to Certain Activi- ties................................... Policies With Respect to Certain Activities 13. Investment Policies of Registrant...... Policies With Respect to Certain Activities 14. Description of Real Estate............. Management's Discussion and Analysis of Fi- nancial Condition and Results of Opera- tions; Business and Properties 15. Operating Data......................... Business and Properties 16.Tax Treatment of Registrant and Its Security-Holders...................... Federal Income Tax Consequences 17.Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters................... Risk Factors; Principal Stockholders; Dis- tribution Policy; Shares Available for Fu- ture Sale 18. Description of Registrant's Securi- Description of Capital Stock; Certain Pro- ties................................... visions of Maryland Law and of the Company's Articles of Incorporation and Bylaws 19. Legal Proceedings...................... Business and Properties--Legal Proceedings 20.Security Ownership of Certain Beneficial Owners and Management................. Principal Stockholders 21. Directors and Executive Officers....... Management 22. Executive Compensation................. Management 23. Certain Relationships and Related Risk Factors; Business and Properties; Man- Transactions........................... agement; Certain Relationships and Related Transactions; Principal Stockholders
FORM S-11 ITEM NO. AND HEADING LOCATION OR HEADING IN PROSPECTUS ------------------------------ --------------------------------- 24.Selection, Management and Custody of Registrant's Investments.............. Risk Factors; Business and Properties; Pol- icies With Respect to Certain Activities 25. Policies with Respect to Certain Trans- Risk Factors; Business and Properties; Pol- actions................................ icies With Respect to Certain Activities; Management; Certain Relationships and Related Transac- tions; Principal Stockholders 26. Limitations of Liability............... Management; Certain Provisions of Maryland Law and of the Company's Articles of In- corporation and Bylaws 27. Financial Statements and Information... Index to Financial Statements 28. Interests of Named Experts and Coun- sel.................................... Not Applicable 29.Disclosure of Commission Position on Indemnification for Securities Act Liabilities........................... Not Applicable
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION--DATED , 1996 PROSPECTUS - -------------------------------------------------------------------------------- 9,260,000 Shares [LOGO] KILROY REALTY CORPORATION Common Stock - -------------------------------------------------------------------------------- Kilroy Realty Corporation (the "Company") has been formed to succeed to the business of Kilroy Industries and its affiliates consisting principally of a portfolio of Class A suburban office and industrial buildings in prime locations, primarily in Southern California, and the affiliated real estate ownership, acquisition, development, leasing and management businesses which were established in Southern California in 1947. Upon the consummation of this offering (the "Offering") and a series of related transactions (the "Formation Transactions"), the Company will own ten suburban office buildings (the "Office Properties"), all of which are located in Southern California, encompassing an aggregate of approximately 1.5 million rentable square feet and nine industrial properties (the "Industrial Properties") encompassing an aggregate of approximately 900,000 rentable square feet. As of June 30, 1996, the Office Properties were approximately 94.1% leased to 88 tenants and the Industrial Properties were approximately 98.4% leased to nine tenants. The Company will also have exclusive rights to develop an aggregate of approximately 24 acres of land in strategic Southern California submarkets presently entitled for over 900,000 net rentable square feet. See "Business and Properties--Development, Leasing and Management Activities." The Office Properties, the Industrial Properties, and all of the other real estate assets and contract rights are hereinafter collectively referred to as the "Properties." The Company will operate as a self-administered and self-managed real estate investment trust (a "REIT"). The Company intends to make regular quarterly distributions to its stockholders beginning with a distribution for the period ending , 1997. All of the shares of common stock of the Company, par value $.01 per share (the "Common Stock"), offered hereby are being sold by the Company and will represent approximately 84.8% of all shares of Common Stock (or interests exchangeable therefor) outstanding after consummation of the Offering. Upon consummation of the Offering, the Company's officers and directors (and certain of their affiliates) will own in the aggregate 15.2% of the Common Stock or interests exchangeable therefor. See "Principal Stockholders." To assist the Company in maintaining its qualification as a REIT for federal income tax purposes, ownership by any person generally is limited to 8.0% of the then outstanding Common Stock, which can be waived by the Board of Directors. Prior to the Offering, there has been no public market for the Common Stock of the Company. It is currently anticipated that the initial public offering price will be between $19.00 and $21.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The shares of Common Stock offered hereby have been approved for listing on the New York Stock Exchange (the "NYSE") under the symbol "KRC," subject to official notice of issuance. See "Risk Factors" on pages 18 to 32 for a discussion of certain material factors which should be considered in connection with an investment in the Common Stock offered hereby, including: . Dependence on demand for office, industrial and retail space in the Southern California market, thereby increasing the risk that the Company will be materially adversely affected by general economic conditions in a single market. . Dependence on certain significant tenants, particularly Hughes Electronic Corporation's Space & Communications Company. . A portion of the Company's anticipated cash flow may be generated from development activities which are partially dependent on the availability of development opportunities, and which are subject to the risks inherent with development. . The distribution requirements of REITs may limit the Company's ability to finance future developments, acquisitions and expansions without additional debt or equity financing. . The valuation of the Properties was not based on third-party appraisals, and the consideration to be paid by the Company for the Properties may exceed their aggregate fair market value. . Real estate investment considerations, including the effect of economic and other conditions on real estate values and the ability of the Company's properties to generate sufficient cash flow to meet operating expenses, including debt service. . Risks associated with debt financing, including the potential inability to refinance indebtedness upon maturity, and the fact that the Company's organizational documents do not limit the amount of indebtedness that the Company may incur. . Conflicts of interest with, and material benefits to, affiliates of the Company in connection with the Formation Transactions (as defined), consummation of the Offering and the operation of the Company's ongoing businesses, including conflicts associated with the tax consequences of sales and refinancings of the Properties. . Taxation of the Company as a corporation if it fails to qualify as a REIT for federal income tax purposes, the taxation of the Operating Partnership (as defined) as a corporation if it fails to qualify as a partnership for federal income tax purposes and the resulting decreases in cash available for distribution. . Risk that the Company's Board of Directors may in the future alter its investment policies without the consent of stockholders. . Limitations on stockholders' ability to effect a change of control of the Company, including the restriction of ownership of shares of Common Stock by any person (with certain exceptions) to 8.0% of the outstanding shares. - -------------------------------------------------------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Underwriting Price to Discounts and Proceeds to Public Commissions(1) Company(2) - ------------------------------------------------------------------------------- Per Share............. $ $ $ - ------------------------------------------------------------------------------- Total(3).............. $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting." (2) Before deducting expenses of the Offering payable by the Company estimated at $ . (3) The Company has granted the several Underwriters a 30-day over-allotment option to purchase up to 1,389,000 additional shares of Common Stock on the same terms and conditions as set forth above. If all such additional shares are purchased by the Underwriters, the total Price to Public will be $ , the total Underwriting Discounts and Commissions will be $ and the total Proceeds to Company will be $ . See "Underwriting." - -------------------------------------------------------------------------------- The shares of Common Stock are offered by the several Underwriters subject to delivery by the Company and acceptance by the Underwriters, to prior sale and to withdrawal, cancellation or modification of the offer without notice. Delivery of the shares to the Underwriters is expected to be made at the office of Prudential Securities Incorporated, One New York Plaza, New York, New York, on or about , 1996. PRUDENTIAL SECURITIES INCORPORATED DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION J.P. MORGAN & CO. , 1996 SMITH BARNEY INC. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE- COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. FORWARD LOOKING STATEMENTS THIS PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD LOOKING STATEMENTS AS A RESULT OF CERTAIN UNCERTAINTIES SET FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. THE FORWARD LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS UNDER THE CAPTIONS "PROSPECTUS SUMMARY," "THE COMPANY," "DISTRIBUTION POLICY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND "BUSINESS AND PROPERTIES," SUCH AS THOSE CONCERNING, AMONG OTHER THINGS, FUTURE RESULTS OF OPERATIONS, CASH AVAILABLE FOR DISTRIBUTION, LEASE RENEWALS, INCREASES IN BASE RENT, FEE DEVELOPMENT ACTIVITIES, SOURCES OF GROWTH, ECONOMIC CONDITIONS AND TRENDS, PROPERTY ACQUISITIONS AND PLANNED DEVELOPMENT AND EXPANSION OF OWNED OR LEASED PROPERTY ARE PROJECTIONS AND ARE NECESSARILY SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES. ACTUAL OUTCOMES ARE DEPENDENT UPON THE COMPANY'S SUCCESSFUL PERFORMANCE OF INTERNAL PLANS, ECONOMIC CONDITIONS IN THE SUBMARKETS IN WHICH THE COMPANY'S PROPERTIES ARE LOCATED SUCH AS OVERSUPPLY OF OFFICE, INDUSTRIAL OR RETAIL SPACE OR A REDUCTION IN THE DEMAND FOR SUCH SPACE, SUCCESSFUL COMPLETION OF PLANNED DEVELOPMENT, THE AVAILABILITY OF DEVELOPMENT OPPORTUNITIES, THE AVAILABILITY OF ACQUISITION AND DEVELOPMENT FINANCING, COMPLIANCE WITH APPLICABLE LAWS AND REGULATIONS AND THE SUCCESSFUL MANAGEMENT OF OTHER ECONOMIC, LEGAL, FINANCIAL AND GOVERNMENTAL RISKS AND UNCERTAINTIES. TABLE OF CONTENTS
PAGE ---- PROSPECTUS SUMMARY........................................................ 1 The Company............................................................... 1 Risk Factors.............................................................. 3 Growth Strategies......................................................... 5 The Office and Industrial Properties...................................... 9 The Company's Southern California Submarkets.............................. 11 The Financing............................................................. 11 Formation and Structure of the Company.................................... 12 Distribution Policy....................................................... 14 Tax Status of the Company................................................. 15 The Offering.............................................................. 15 Summary Financial Data.................................................... 16 RISK FACTORS.............................................................. 18 Dependence on Southern California Market.................................. 18 Dependence on Significant Tenants......................................... 18 Cash Flow from Development Activities..................................... 18 Distributions to Stockholders............................................. 18 No Appraisals; Consideration to be Paid for Properties and Other Assets May Exceed their Fair Market Value....................................... 19 Real Estate Investment Considerations..................................... 20 Real Estate Financing Risks............................................... 22 Conflicts of Interest..................................................... 22 Adverse Consequences of Failure to Qualify as a REIT...................... 24 Adverse Consequences of Failure of the Operating Partnership to Qualify as a Partnership for Federal Income Tax Purposes............................ 24 Changes in Investment and Financing Policies Without Stockholder Vote..... 25 Limits on Ownership and Change in Control................................. 26 Risks of Development Business and Related Activities Being Conducted by the Services Company; Control of the Services Company.................... 28 Dependence on Key Personnel............................................... 28 Distribution Payout Percentage............................................ 28 Historical Operating Losses of the Office and Industrial Properties....... 28 No Limitation on Debt..................................................... 29 Government Regulations.................................................... 29 Immediate and Substantial Dilution........................................ 31 No Prior Public Market.................................................... 31 Effect of Market Interest Rates on Price of Common Stock.................. 31 Shares Available for Future Sale.......................................... 31 THE COMPANY............................................................... 33
PAGE ---- General.................................................................. 33 Growth Strategies........................................................ 35 USE OF PROCEEDS.......................................................... 39 DISTRIBUTION POLICY...................................................... 41 CAPITALIZATION........................................................... 46 DILUTION................................................................. 47 SELECTED FINANCIAL DATA.................................................. 48 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................................... 50 Results of Operations.................................................... 50 Liquidity and Capital Resources.......................................... 52 Historical Cash Flows.................................................... 53 Funds from Operations.................................................... 53 Inflation................................................................ 53 BUSINESS AND PROPERTIES.................................................. 54 General.................................................................. 54 Occupancy and Rental Information......................................... 58 Lease Expirations........................................................ 59 Tenant Information....................................................... 60 Office Properties........................................................ 61 Industrial Properties.................................................... 67 Development, Leasing and Management Activities........................... 68 Acquisition Properties................................................... 70 The Company's Southern California Submarkets............................. 71 Excluded Properties...................................................... 84 Insurance................................................................ 86 Uninsured Losses from Seismic Activity................................... 86 Government Regulations................................................... 87 Management and Employees................................................. 88 Legal Proceedings........................................................ 88 POLICIES WITH RESPECT TO CERTAIN ACTIVITIES.............................. 89 Investment Policies...................................................... 89 Dispositions............................................................. 90 Financing................................................................ 90 Working Capital Reserves................................................. 91 Conflict of Interest Policies............................................ 91 Other Policies........................................................... 92 THE FINANCING............................................................ 94 The Mortgage Loan........................................................ 94 The Credit Facility...................................................... 94 MANAGEMENT............................................................... 95 Directors and Executive Officers......................................... 95 Committees of the Board of Directors..................................... 96 Compensation of Directors................................................ 96 Executive Compensation................................................... 97
i TABLE OF CONTENTS--(CONTINUED)
PAGE ---- Employment Agreements.................................................... 97 Stock Incentive Plan..................................................... 97 Section 401(k) Plan...................................................... 98 Indemnification.......................................................... 99 FORMATION AND STRUCTURE OF THE COMPANY................................... 100 Formation Transactions................................................... 100 Reasons for the Reorganization of the Company............................ 101 Comparison of Common Stock and Units..................................... 103 Advantages and Disadvantages of the Formation Transactions to Unaffiliated Stockholders............................................... 103 Benefits of the Formation Transactions to the Continuing Investors....... 104 Allocation of Consideration in the Formation Transactions................ 104 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 105 Partnership Agreement.................................................... 105 Assignment of Lease; Various Services Provided by the Services Company to the Kilroy Group........................................................ 105 Benefits of the Formation Transactions to Certain Executive Officers..... 105 PRINCIPAL STOCKHOLDERS................................................... 106 DESCRIPTION OF CAPITAL STOCK............................................. 107 General.................................................................. 107 Common Stock............................................................. 107 Transfer Agent and Registrar............................................. 108 Preferred Stock.......................................................... 108 Restrictions on Ownership and Transfer................................... 108 CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS................................................ 110 Board of Directors....................................................... 110 Removal of Directors..................................................... 111 Business Combinations.................................................... 111 Control Share Acquisitions............................................... 112 Amendment to the Articles of Incorporation and Bylaws.................... 113 Meetings of Stockholders................................................. 113 Advance Notice of Director Nominations and New Business.................. 113 Dissolution of the Company............................................... 113 Limitation of Directors' and Officers' Liability......................... 113
PAGE ---- Indemnification Agreements............................................... 114 PARTNERSHIP AGREEMENT OF THE OPERATING PARTNERSHIP....................... 115 Management............................................................... 115 Indemnification.......................................................... 115 Transferability of Interests............................................. 115 Issuance of Additional Units............................................. 116 Capital Contribution..................................................... 116 Awards Under Stock Incentive Plan........................................ 117 Redemption/Exchange Rights............................................... 117 Registration Rights...................................................... 117 Tax Matters.............................................................. 117 Operations............................................................... 118 Duties and Conflicts..................................................... 118 Certain Limited Partner Approval Rights.................................. 118 Term..................................................................... 118 SHARES AVAILABLE FOR FUTURE SALE......................................... 119 General.................................................................. 119 Redemption/Exchange Rights/Registration Rights........................... 120 Reinvestment and Share Purchase Plan..................................... 120 FEDERAL INCOME TAX CONSEQUENCES.......................................... 121 Taxation of the Company.................................................. 121 Failure to Qualify....................................................... 126 Taxation of Taxable U.S. Stockholders Generally.......................... 127 Backup Withholding....................................................... 127 Taxation of Tax-Exempt Stockholders...................................... 128 Taxation of Non-U.S. Stockholders........................................ 128 Tax Aspects of the Operating Partnership................................. 131 Services Company......................................................... 133 Other Tax Consequences................................................... 134 ERISA CONSIDERATIONS..................................................... 135 Employee Benefit Plans, Tax-Qualified Retirement Plans and IRAs ......... 135 Status of the Company, the Operating Partnership and the Partnerships Under ERISA............................................................. 135 UNDERWRITING............................................................. 137 LEGAL MATTERS............................................................ 138 EXPERTS.................................................................. 138 ADDITIONAL INFORMATION................................................... 139 GLOSSARY................................................................. 140 INDEX TO FINANCIAL STATEMENTS............................................ F-1
ii PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial data, including the financial statements and notes thereto, set forth elsewhere in this Prospectus. Unless otherwise indicated, all calculations and information contained in this Prospectus assume (i) an initial public offering price of $20 per share of Common Stock (representing the midpoint of the range set forth on the cover page of this Prospectus), (ii) that the Underwriters' over-allotment option will not be exercised and (iii) the consummation of the Formation Transactions described under the heading "Formation and Structure of the Company," including consummation of the financings described under the heading "The Financing" and the acquisition of certain properties described under the heading "Business and Properties-- Acquisition Properties" and give pro forma effect thereto as if such transactions had each occurred on January 1, 1995. In addition, unless otherwise indicated, all calculations and information contained in this Prospectus, other than the historical and pro forma financial statements and the respective notes thereto, give pro forma effect to the recent extension of the tenant lease with Hughes Electronic Corporation's Space & Communications Company with respect to space leased in the Office Property located at 2250 E. Imperial Highway, and a portion of the space leased in the Office Property located at 2240 E. Imperial Highway as if such lease renewal had occurred on January 1, 1995. Unless the context otherwise requires, (i) the "Company" shall include Kilroy Realty Corporation ("Kilroy Realty") and its subsidiaries, including Kilroy Realty, L.P. (the "Operating Partnership") and Kilroy Services, Inc. (the "Services Company"), and with respect to the period prior to the Offering, the Kilroy Group (as defined below), and its predecessors, (ii) the "Kilroy Group" shall mean, collectively, Kilroy Industries, a California corporation ("KI"), and certain of its affiliated corporations, partnerships and trusts that prior to the Offering owned the Properties (collectively, the "Partnerships") and (iii) the "Continuing Investors" shall mean the persons and entities which beneficially own interests in the Partnerships or in the Properties and will receive limited partnership interests ("Units") in the Operating Partnership in connection with the Formation Transactions. Additional capitalized terms shall have the meanings set forth in the Glossary. THE COMPANY The Company is a fully integrated REIT that has been formed to succeed to the business of the Kilroy Group, consisting principally of a portfolio of Class A suburban office and industrial buildings in prime locations, primarily in Southern California, and the Kilroy Group's real estate ownership, acquisition, development, leasing and management businesses which were established in Southern California in 1947. Upon the consummation of the Offering and the Formation Transactions, the Company (through the Operating Partnership) will own ten Office Properties encompassing an aggregate of approximately 1.5 million rentable square feet and nine Industrial Properties encompassing an aggregate of approximately 900,000 rentable square feet. All of the Office Properties and eight of the Industrial Properties are located in prime Southern California suburban submarkets (including a complex of three Office Properties located in El Segundo, adjacent to the Los Angeles International Airport, presently the nation's second largest air-cargo port, and a complex of five Office Properties located adjacent to the Long Beach Municipal Airport) and one Industrial Property is located in Phoenix, Arizona. As of June 30, 1996, the Office Properties were approximately 94.1% leased to 88 tenants and the Industrial Properties were approximately 98.4% leased to nine tenants. The average age of the Office Properties and the Industrial Properties is approximately ten years and twenty-seven years, respectively. The Company developed and leased all but one of the Office Properties and seven of the nine Industrial Properties, and, upon consummation of the Offering and acquisition of the Acquisition Properties, will manage all of the Properties. The Company was founded in 1947 by John B. Kilroy, Sr., a nationally prominent member of the real estate community, and is led by John B. Kilroy, Jr., the Company's Chief Executive Officer and President. The Company's executive officers have served as members of the Company's executive management team for an average of approximately 15 years. The Company presently has 46 employees, 36 of whom are located at the Company's headquarters at Kilroy Airport Center at El Segundo, California. Upon consummation of the 1 Offering, the Company's officers and directors (and certain of their affiliates) will own in the aggregate 15.2% of the Company's Common Stock (or interests exchangeable therefor). The Company's strategy has been to own, develop, acquire, lease and manage Class A properties in select locations in key suburban submarkets, primarily in Southern California, that the Company believes have strategic advantages compared to neighboring submarkets. Existing locations offer tenants: (i) lower business taxes and operating expenses than in adjoining submarkets; (ii) access to highly skilled labor markets; (iii) strategic access to major transportation facilities such as freeways, airports and the expanded Southern California light-rail system; (iv) proximity to the Los Angeles-Long Beach port complex which presently ranks as the largest commercial port in the United States; and (v) for tenants with their names on certain Properties, visibility to freeway and airplane travelers. As a result, the Properties attract major corporate tenants and historically have achieved among the highest occupancy, tenant retention and rental rates, both within their respective submarkets and as compared to their respective neighboring submarkets. See "Business and Properties--Office Properties" and "--Industrial Properties." The Company's major tenants include, among others, Hughes Electronic Corporation's Space & Communications Company and related companies ("Hughes Space & Communications"), a tenant since 1984, which is engaged in high- technology commercial activities including satellite development and related applications such as DirecTV, as well as Mattel, Inc., Northwest Airlines, Inc., Olympus America, Inc. and Furon Co., Inc. As of December 31, 1995, the Company's ten largest tenants (based upon December 31, 1995 base rents) had leased space from the Company for an average of 5.4 years. The Company's strong relationships with its tenants is further evidenced by its average tenant retention rate (based upon rentable square feet) for the three-year period ended December 31, 1995, which was 72.2%. The Company's extensive experience and long-term presence in Southern California have enabled it to form key alliances and working relationships with large corporate tenants, municipalities and landowners that have led to a variety of development projects and provide a continuing source of development and acquisition opportunities with institutional sellers. As a result of its experience and relationships, the Company currently has exclusive rights to develop approximately 24 acres of developable land (net of the acreage required for streets) at Kilroy Airport Center Long Beach, and has an exclusive agreement to negotiate to acquire an additional six acres of developable land (net of acreage reserved for open areas) at the Thousand Oaks Civic Arts Plaza Entertainment and Retail Center (together, the "Development Properties"). These properties are presently entitled for over 1.0 million rentable square feet of office, industrial and retail space, creating acquisition and development opportunities without, in most cases, significant carrying costs. See "Business and Properties--Development, Leasing and Management Activities." The Company believes, based on independent economic surveys, that the Southern California office and industrial real estate market is recovering after experiencing a downturn over the last several years. Vacancy rates in the Class A office space market in the greater Southern California area, including the counties of Los Angeles, Orange, Riverside, San Bernardino and Ventura (the "Southern California Area"), have decreased from a high in 1991 and 1992 of nearly 20.0% to a level at the end of 1995 of under 18.0%. Vacancy rates in the industrial space market in the Southern California Area also are decreasing from a high of nearly 14.0% in 1992 to 9.2% at the end of 1995. In addition, the Company has on average achieved increases in rental rates since 1994 in the Office Properties it has managed. See "--The Company's Southern California Submarkets" and "Business and Properties--The Company's Southern California Submarkets." Management believes that the on-going economic recovery in its submarkets will continue the trend of increasing occupancy rates and will cause rents for all of the Properties to increase. See "--Growth Strategies." The Company believes that the foundation for its growth in future years will be the strengthening Southern California economy, the quality and strategic location of its Properties, the economic benefits of its submarkets to tenants, its capital structure, its access to public capital markets, the lack of new construction of office 2 properties in its submarkets, its access to developable properties, the knowledge and experience of its senior management team and its long-term relationships with large Southern California corporate tenants, municipalities, landowners and institutional sellers. In addition, the Company believes that it will be one of a limited number of REITs focusing on office and industrial properties and that it will be the only REIT with a 50-year operating history concentrating primarily on suburban Southern California office and industrial properties. In the 12 months following the consummation of the Offering, the Company expects sources of potential growth in cash available for distribution per share from the amount set forth under the caption "Distribution Policy" through: (i) the further leasing of its available space, currently approximately 101,000 rentable square feet; (ii) the renewal of leases for approximately 35,000 rentable square feet which expire during such period; (iii) the acquisition of strategic properties with Units and/or with available cash and borrowings under its $100.0 million revolving credit facility (the "Credit Facility") and (iv) additional fees from development services and related leasing and management services provided to third parties. In the second 12-month period following consummation of the Offering, the Company expects sources of potential growth in cash flow per share from: (i) contractual increases in base rent payments from tenants; (ii) continued leasing of available space; (iii) the contemplated completion of certain planned development activities; (iv) increased fee income, including development fees and related leasing and management services provided to third parties; and (v) the acquisition of strategic properties. In addition, the Company presently plans to expand one or more of its Industrial Properties during the next two years, subject to substantial pre-leasing. There can be no assurance, however, that the Company will achieve any growth in cash available for distribution per share, that available space will be leased, that leases scheduled to expire will be renewed or that the Company will successfully acquire additional properties or complete any of its planned development activities. See "Risk Factors--Real Estate Investment Considerations--Risks of Real Estate Acquisition and Development." The Company will continue its practice of performing substantially all leasing, management and tenant improvements on an "in-house" basis and will be self-administered and self-managed. The Company expects to qualify as a REIT for federal income tax purposes beginning with its taxable year ending December 31, 1996. See "Federal Income Tax Consequences--Taxation of the Company." RISK FACTORS This Prospectus contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). Actual results could differ materially from those projected in the forward looking statements as a result of certain uncertainties set forth below and elsewhere in this Prospectus. An investment in the shares of Common Stock involves various material risks. Prospective investors should carefully consider the following risk factors, in addition to the other information set forth in this Prospectus, in connection with an investment in the shares of Common Stock offered hereby. Such risks include, among others: . geographic concentration of all but one of its Properties in Southern California, creating a dependence on demand for office, industrial and retail space in such market and increasing the risk that the Company will be materially adversely affected by general economic conditions in a single market; . the Company's results of operations are dependent on certain key tenants, particularly Hughes Space & Communications, which accounted for approximately 29.6% of the Company's total base rental revenues for the year ending December 31, 1995 (giving pro forma effect to a recent extension of a lease with Hughes Space & Communications with respect to two of the Office Properties located at Kilroy Airport Center at El Segundo). The base periods of the Hughes Space & Communications' leases expire beginning in January 1999; . a portion of the Company's anticipated cash flow may be generated from development activities, which are partially dependent on the availability of development opportunities, and which are subject to the 3 risks inherent in development as well as general economic conditions, and such activities will be subject to limitations imposed by the REIT tests; . the distribution requirements for REITs under federal income tax laws may limit the Company's ability to finance future acquisitions, developments and expansions without additional debt or equity financing and may limit cash available for distribution; . the valuation of the Properties was not based on third-party appraisals and there have not been arm's-length negotiations with respect to such values. The consideration to be paid by the Company for the Properties may exceed their aggregate fair market value; . real estate investment considerations such as the effect of economic and other conditions on real estate values, the general lack of liquidity of investments in real estate, the ability of tenants to pay rents, the possibility that leases may not be renewed or will be renewed on terms less favorable to the Company, the possibility of uninsured losses, including losses associated with earthquakes, the ability of the Properties to generate sufficient cash flow to meet operating expenses, including debt service, and competition in seeking properties for acquisition and in seeking tenants; . risks associated with debt financing, including the potential inability to refinance mortgage indebtedness upon maturity and the potential increase in the level of indebtedness incurred by the Company since its organizational documents do not limit the amount of indebtedness which the Company may incur; . conflicts of interest, particularly with the Continuing Investors (including John B. Kilroy, Sr. and John B. Kilroy, Jr.) in connection with the (i) Formation Transactions, (ii) operation of the Company's ongoing businesses, including conflicts associated with the tax consequences to Continuing Investors of sales or refinancings of any of the Properties, which may influence the Company's decision to sell or refinance the Properties or prepay debt secured by certain Properties, (iii) Company's election to exercise its option to purchase any of the properties owned or controlled by one or more of the Continuing Investors which the Company has the option to acquire (the "Excluded Properties") and (iv) enforcement of agreements with affiliates of the Company, any of which could result in decisions affecting the Company that do not fully reflect interests of all of the Company's stockholders; . taxation of the Company as a corporation if it fails to qualify as a REIT for federal income tax purposes, taxation of the Operating Partnership as a corporation if it fails to qualify as a partnership for federal income tax purposes (and the resulting failure of the Company to qualify as a REIT), the Company's liability for certain federal, state and local income taxes in any of such events and the resulting decrease in cash available for distribution; . substantial influence over the affairs of the Company by certain Continuing Investors who are directors and executive officers of the Company, including the ability of the Board of Directors to change the investment policies of the Company (including the Company's ratio of debt to total market capitalization) without the consent of stockholders; . potential antitakeover effects of provisions generally limiting the actual or constructive ownership by any one person or entity of Common Stock to 8.0% of the outstanding shares, a classified board of directors and other charter and statutory provisions and provisions in the Operating Partnership partnership agreement that may have the effect of inhibiting a change of control of the Company or making it more difficult to effect a change in management or limiting the opportunity for stockholders to receive a premium over the market price for the Common Stock; . the inability of the Company to control the operations of the Services Company, which could result in decisions that do not reflect the Company's interest because the Company does not control the election of directors or the selection of officers of the Services Company and the Services Company is controlled by a board of directors, the majority of whose members are not employed by the Company; 4 . the Company's cash available for distribution may be less than the Company expects and may decrease in future periods from expected levels, materially adversely affecting the Company's ability to make the expected annual distributions of $1.60 per share during the 12-month period following consummation of the Offering (which represents approximately 90.4% of the estimated cash available for distribution for such period) or to sustain such distribution rate in the future; . immediate and substantial dilution in the net tangible book value per share of the shares of Common Stock purchased by new investors in the Offering; . no prior public market for the shares of Common Stock, including the risk that an active trading market might not develop, or if developed might not be maintained, and the impact upon the price at which shares of the Common Stock may be resold; . potential adverse effects on the value of the shares of Common Stock of fluctuations in interest rates or equity markets; . dependence on key personnel; . the possible issuance of additional shares, including upon exchange of the Units, which may adversely affect the market price of the shares of Common Stock or result in dilution on a per share basis of cash available for distribution; . the Company's historical operating losses for financial reporting purposes; and . the potential liability of the Company for environmental matters and the costs of compliance with certain governmental regulations. GROWTH STRATEGIES The Company's objectives are to maximize growth in cash flow per share and to enhance the value of its portfolio through effective management, operating, acquisition and development strategies. The Company believes that opportunities exist to increase cash flow per share: (i) by acquiring office and industrial properties with attractive returns in strategic suburban submarkets where such properties complement its existing portfolio; (ii) from contractual increases in base rent; (iii) as a result of increasing rental and occupancy rates and decreasing concessions and tenant installation costs as vacancy rates in the Company's submarkets generally continue to decline; (iv) by developing properties for the benefit of the Company where such development will result in a favorable risk adjusted return on investment or, alternatively, on a fee basis for others; and (v) by expanding Properties within the Company's existing industrial portfolio. The Company believes that a number of factors will enable it to achieve its business objectives, including: (i) the opportunity to lease available space at attractive rental rates because of increasing demand and, with respect to the Office Properties, the present lack of new construction in the Southern California submarkets in which the Properties are located; (ii) the presence of distressed sellers and inadvertent owners (through foreclosure or otherwise) of office and industrial properties in the Company's markets, as well as the Company's ability to acquire properties with Units (thereby deferring the seller's taxable gain), all of which create enhanced acquisition opportunities; (iii) the quality and location of the Company's Properties; (iv) the Company's access to development opportunities as a result of its significant relationships with large Southern California corporate tenants, municipalities and landowners and its nearly 50-year presence in the Southern California market; and (v) the limited availability to competitors of capital for financing development, acquisitions or capital improvements. Management believes that the Company is well positioned to exploit existing opportunities because of its extensive experience in its submarkets, its seasoned management team and its proven ability to develop, lease and efficiently manage office and industrial properties. In addition, the Company believes that public ownership and its capital structure will provide new opportunities for growth. There can be no assurance, 5 however, that the Company will be able to lease available space, complete any property acquisitions, successfully develop any land acquired or improve the operating results of any developed properties that are acquired. See "Business and Properties--Development, Leasing and Management Activities." Operating Strategies. The Company will focus on enhancing growth in cash flow per share by: (i) maximizing cash flow from existing Properties through active leasing, contractual base rent increases and effective property management; (ii) managing operating expenses through the use of in-house management, leasing, marketing, financing, accounting, legal, construction management and data processing functions; (iii) maintaining and developing long-term relationships with a diverse tenant group; (iv) attracting and retaining motivated employees by providing financial and other incentives to meet the Company's operating and financial goals; and (v) continuing to emphasize capital improvements to enhance the Properties' competitive advantages in their markets. The Company believes that the strength of its leasing is demonstrated by the Company's leasing activity since 1993. In the period from January 1, 1993 to June 30, 1996, the Company leased or renewed leases for an aggregate of approximately 845,000 rentable square feet of office space and approximately 318,000 rentable square feet of industrial space. As of December 31, 1995, the Office Properties were approximately 89.3% leased as compared to approximately 82.0% for the Southern California Area, approximately 89.2% for the El Segundo submarket and approximately 85.4% in the Long Beach submarket. In addition, at December 31, 1995, the Industrial Properties were approximately 98.4% leased as compared to approximately 82.3% and approximately 87.1% for industrial properties located in Los Angeles and Orange Counties, respectively. As of June 30, 1996, (i) the Office Properties contained approximately 1.5 million rentable square feet and were approximately 94.1% leased, and (ii) the Industrial Properties contained an aggregate of approximately 900,000 rentable square feet and were approximately 98.4% leased. In addition, the number of individual lease transactions since 1992, including the results for the six- month period ended June 30, 1996, averaged over 26 per year. See "Business and Properties--General," "--Properties," "--Occupancy and Rental Information" and "--The Company's Southern California Submarkets." Approximately 800,000 aggregate rentable square feet in the Properties was leased by the Company from January 1, 1992 through December 31, 1994, a period which management characterizes as recessionary. Based on the leases the Company signed in 1996, and the findings in an independent study of the Southern California real estate market commissioned by the Company, management believes that the recent trend toward increasing rental rates in Class A office and industrial buildings in the Company's submarkets presents significant opportunities for growth. In addition, approximately 72.7% of the Company's net rentable square feet is subject to leases expiring in 2000 or beyond, when management expects asking rents for the respective Properties to be higher than the rents paid pursuant to such leases. In addition, approximately 34.2% of the Company's total base rent (representing approximately 26.0% of the Company's total rentable square feet) is attributable to leases with Consumer Price Index increases. No assurance can be given, however, that new leases will reflect rental rates greater than or equal to current rental rates or that current or future economic conditions will support higher rental rates. See "Risk Factors--Real Estate Investment Considerations." Acquisition Strategies. The Company will seek to increase its cash flow per share by acquiring additional quality office and industrial properties, including properties that may: (i) provide attractive initial yields with significant potential for growth in cash flow from property operations; (ii) are strategically located, of high quality and competitive in their respective submarkets; (iii) are located in the Company's existing submarkets and/or in other strategic submarkets where the demand for office and industrial space exceeds available supply; or (iv) have been under-managed or are otherwise capable of improved performance through intensive management and leasing that will result in increased occupancy and rental revenues. The Company believes that the Southern California market is an established and mature real estate market in which property owners generally have a low tax basis (and, accordingly, the potential for large taxable gains) in their properties. Management believes that the Company's extensive experience, capital structure and ability to acquire properties 6 for Units, and thereby defer a seller's taxable gain, if any, will enhance the ability of the Company to consummate transactions quickly and to structure more competitive acquisitions than other real estate companies in the market which lack its access to capital or the ability to issue Units. See "Business and Properties--Development, Leasing and Management Activities." The Company has entered into an agreement to acquire the two office properties that comprise Phase I of Kilroy Airport Center Long Beach. Kilroy Airport Center Long Beach Phase I was developed by the Company in 1987 and has been leased and managed by the Company since its inception. In addition, the Company has entered into an agreement to purchase an office property located in Thousand Oaks, California. The acquisition of these properties (the "Acquisition Properties") by the Company is expected to occur concurrently with the consummation of the Offering and, accordingly, the Acquisition Properties are included in the discussion of the Office Properties included throughout this Prospectus. The Company also has entered into agreements to acquire three industrial properties, each of which remains subject to satisfactory documentation and completion of the Company's due diligence procedures. Accordingly, there can be no assurance that any of such properties will be acquired. There can be no assurance, however, that the Company will be able to complete any property acquisitions, successfully develop any land acquired or improve the operating results of any developed properties that are acquired. See "Business and Properties--Acquisition Properties." Development Strategies. The Company's interests in the Development Properties provide it with significant growth opportunities. These projects allow the Company to control development on the land, while significant costs of carry prior to the completion of development are in most cases funded by others. The Company is the master ground lessee of, and has sole development rights in, Kilroy Airport Center Long Beach, a planned four-phase, approximately 53- acre property entitled for office, research and development, light industrial and other commercial projects at which the Company owns all five existing Office Properties and manages all ongoing leasing and development activities. The Company developed Phases I and II in 1987 and 1989/1990, respectively, encompassing an aggregate of approximately 620,000 rentable square feet of office space. Phases III and IV presently are planned to be developed on the projects' approximately 24 undeveloped acres and are entitled for an aggregate of approximately 900,000 rentable square feet. The Company is currently in discussions with several prospective tenants for office space presently planned to be included in Kilroy Long Beach Phase III. See "Business and Properties--Development, Leasing and Management Activities--Kilroy Long Beach." The Company has entered into an exclusive agreement to negotiate a Development and Disposition Agreement in connection with the Thousand Oaks Civic Arts Plaza Retail and Entertainment Center project, an approximately 11- acre project (representing approximately six developable acres net of acreage reserved for open areas) presently contemplated to include an approximately 90,000 square foot multiplex theater and virtual reality entertainment center and retail space. The project is located in the City of Thousand Oaks, immediately adjacent to the City's recently completed $65 million Civic Arts Plaza Complex. See "Business and Properties--Development, Leasing and Management Activities--Thousand Oaks." The Company also has entered into a Development Management Agreement in connection with the development, on a fee basis, of the Riverside Judicial Center. See "Business and Properties--Development, Management and Leasing Activities--Riverside Judicial Center." In addition, the Company has been engaged on a fee basis as a consultant in connection with the development of an approximately 200-acre site presently owned by Northrop Grumman Corporation. See "Business and Properties--Development, Management and Leasing Activities-- Northrop Grumman." In addition, certain of the Industrial Properties can support additional development, and the Company presently is planning to develop in the next two years, subject to substantial pre-leasing, approximately 105,000 rentable square feet of such additional space. The Company may engage in the development of other office and/or industrial properties primarily in Southern California submarkets when market conditions support a favorable risk-adjusted return on such 7 development. The Company's activities with third-party owners in Southern California are expected to give the Company further access to development opportunities. There can be no assurance, however, that the Company will be able to successfully develop any of the Development Properties or any other properties. See "Business and Properties--Development, Leasing and Management Activities." Financing Policies. The Company intends to limit the ratio of debt to total market capitalization (total debt of the Company as a percentage of the market value of issued and outstanding shares of Common Stock, including interests exchangeable therefor, plus total debt) to approximately 50%, although the Company's organizational documents do not limit the amount of indebtedness that the Company may incur. Upon completion of the transactions outlined under the caption "Formation and Structure of the Company," total debt will constitute approximately 25.6% of the total market capitalization of the Company (assuming an initial public offering price of $20.00 per share of Common Stock). The Company anticipates that upon consummation of the Offering all of its permanent indebtedness will bear interest at fixed rates. The Company intends to utilize one or more sources of capital for future acquisitions, including development and capital improvements, which may include undistributed cash flow, borrowings under the Credit Facility, issuance of debt or equity securities and other bank and/or institutional borrowings. There can be no assurance, however, that the Company will be able to obtain capital for any such acquisitions, developments or improvements on terms favorable to the Company. See "--Growth Strategies," "The Company--Growth Strategies" and "Business and Properties--Development, Leasing and Management Activities" and "--Debt Structure." 8 THE OFFICE AND INDUSTRIAL PROPERTIES The following table sets forth certain information relating to each of the Properties as of December 31, 1995, unless indicated otherwise. This table gives pro forma effect to a recent extension of one of the leases with Hughes Space & Communications with respect to two of the Office Properties located at Kilroy Airport Center at El Segundo as if such lease renewal had occurred on January 1, 1995. After completion of the Formation Transactions, the Company (through the Operating Partnership) will own a 100% interest in all of the Office and Industrial Properties other than the five Office Properties located at Kilroy Airport Center Long Beach, which are held subject to ground leases expiring in 2035.
AVERAGE PERCENTAGE PERCENTAGE BASE NET LEASED 1995 OF 1995 RENT RENTABLE AS OF BASE 1995 TOTAL PER EFFECTIVE SQUARE 12/31/95 RENT EFFECTIVE BASE SQ. FT. RENT PER PROPERTY LOCATION YEAR BUILT FEET (%)(1) ($000)(2) RENT($000)(3) RENT (%) ($)(4) SQ. FT. ($)(5) ----------------- ---------- --------- ---------- --------- ------------- ---------- ------- -------------- Office Properties: Kilroy Airport Center at El Segundo 2250 E. Imperial Highway(8)....... 1983 291,187 80.9 4,316 4,042 13.5 18.32 17.16 2260 E. Imperial Highway)(9)...... 1983 291,187 100.0 7,160 6,545 22.4 24.59 22.48 2240 E. Imperial Highway(10) El Segundo, California............ 1983 118,933 100.0 1,130 1,121 3.5 9.50 9.43 Kilroy Airport Center Long Beach 3900 Kilroy Airport Way(11)....... 1987 126,840 94.0 2,282 2,092 7.1 19.14 17.54 3880 Kilroy Airport Way(11)....... 1987 98,243 100.0 1,296 1,022 4.0 13.19 10.40 3760 Kilroy Airport Way........... 1989 165,278 92.1 3,372 2,807 10.6 22.16 18.45 3780 Kilroy Airport Way........... 1989 219,745 63.6 3,465 3,005 10.8 24.79 21.50 3750 Kilroy Airport Way Long Beach, California............ 1989 10,457 100.0 75 28 0.2 7.21 2.66 2829 Townsgate Road Thousand Oaks, California(11)..... 1990 81,158 100.0 1,888 1,760 5.9 23.26 21.69 185 S. Douglas Street(12) El Segundo, California............ 1978 60,000 100.0 1,313 898 4.1 21.89 14.96 --------- ----- ------ ------ ----- ----- ----- Subtotal/Weighted Average 1,463,028 89.3 26,297 23,320 82.1 20.12 17.84 --------- ----- ------ ------ ----- ----- ----- Industrial Properties: 2031 E. Mariposa Avenue El Segundo, California............ 1954 192,053 100.0 1,556 1,296 4.9 8.10 6.75 3332 E. La Palma Avenue Anaheim, California(15)........... 1966 153,320 100.0 881 790 2.8 5.74 5.16 2260 E. El Segundo Boulevard El Segundo, California(13)........ 1979 113,820 100.0 553 510 1.7 4.86 4.48 2265 E. El Segundo Boulevard El Segundo, California............ 1978 76,570 100.0 554 493 1.7 7.23 6.44 1000 E. Ball Road Anaheim, California(14)........... 1956 100,000 100.0 639 519 2.0 6.39 5.19 1230 S. Lewis Street Anaheim, California............... 1982 57,730 100.0 303 284 0.9 5.25 4.92 12681/12691 Pala Drive Garden Grove, California ......... 1970 84,700 82.6 476 454 1.5 6.81 6.48 2270 E. El Segundo Boulevard El Segundo, California(15)........ 1975 7,500 100.0 129 129 0.4 17.17 17.17 5115 N. 27th Avenue Phoenix, Arizona(16).............. 1962 130,877 100.0 640 612 2.0 4.89 4.68 --------- ----- ------ ------ ----- ----- ----- Subtotal/Weighted Average 916,570 98.4 5,731 5,087 17.9 6.36 5.64 --------- ----- ------ ------ ----- ----- ----- Office & Industrial--All Properties 2,379,598 92.8 32,028 28,407 100.0 14.50 12.86 ========= ===== ====== ====== ===== ===== ===== TENANTS LEASING PERCENTAGE 10% OR MORE OF LEASED NET RENTABLE AS OF SQUARE FEET PER 6/30/96 PROPERTY PROPERTY LOCATION (%)(6) AS OF 6/30/96(7) ----------------- ----------- ---------------- Office Properties: Kilroy Airport Center at El Segundo 2250 E. Imperial Highway(8)....... 85.2 Hughes Space & Communications (33.0%) 2260 E. Imperial Highway)(9)...... 100.0 Hughes Space & Communications (100.0%) 2240 E. Imperial Highway(10) El Segundo, California............ 100.0 Hughes Space & Communications (94.6%) Kilroy Airport Center Long Beach 3900 Kilroy Airport Way(11)....... 94.0 McDonnell Douglas Corporation (50.9%), Olympus America, Inc. (18.6%) 3880 Kilroy Airport Way(11)....... 100.0 Devry, Inc. (100.0%) 3760 Kilroy Airport Way........... 91.2 R.L. Polk & Co. (9.8%) 3780 Kilroy Airport Way........... 90.5 SCAN Health Plan (20.4%), Zelda Fay Walls (12.7%) 3750 Kilroy Airport Way Long Beach, California............ 100.0 Oasis Cafe (37.1%), Keywanfar & Baroukhim (16.1%), SR Impressions (15.0%) 2829 Townsgate Road Thousand Oaks, California(11)..... 100.0 Worldcom, Inc. (34.2%), Data Select Systems, Inc. (13.0%), Pepperdine University (12.7%), Anheuser Busch, Inc. (12.0%) 185 S. Douglas Street(12) El Segundo, California............ 100.0 Northwest Airlines, Inc. (100%) ----- Subtotal/Weighted Average 94.1 ----- Industrial Properties: 2031 E. Mariposa Avenue El Segundo, California............ 100.0 Mattel, Inc. (100%) 3332 E. La Palma Avenue Anaheim, California(15)........... 100.0 Furon Co., Inc. (59.2%), Cerplex Group, Inc.(40.8%) 2260 E. El Segundo Boulevard El Segundo, California(13)........ 100.0 Ace Medical Co. (100%) 2265 E. El Segundo Boulevard El Segundo, California............ 100.0 MSAS Cargo Intl., Inc. (100%) 1000 E. Ball Road Anaheim, California(14)........... 100.0 Allen-Bradley Company (100%) 1230 S. Lewis Street Anaheim, California............... 100.0 Extron Electronics (100%) 12681/12691 Pala Drive Garden Grove, California ......... 82.6 Rank Video Services America, Inc. (82.6%) 2270 E. El Segundo Boulevard El Segundo, California(15)........ 100.0 Pacific Southwest Realty (100%) 5115 N. 27th Avenue Phoenix, Arizona(16).............. 100.0 Festival Markets, Inc. (100%) ----- Subtotal/Weighted Average 98.4 ----- Office & Industrial--All Properties 95.8 =====
(footnotes on next page) 9 - -------- (1) Based on all leases at the respective Properties in effect as of December 31, 1995. (2) Total base rent for the year ended December 31, 1995, determined in accordance with generally accepted accounting principles ("GAAP"). All leases at the Industrial Properties are written on a triple net basis. Unless otherwise indicated, all leases at the Office Properties are written on a full service gross basis, with the landlord obligated to pay the tenant's proportionate share of taxes, insurance and operating expenses up to the amount incurred during the tenant's first year of occupancy ("Base Year") or a negotiated amount approximating the tenant's pro rata share of real estate taxes, insurance and operating expenses ("Expense Stop"). Each tenant pays its pro rata share of increases in expenses above the Base Year or Expense Stop. (3) Aggregate base rent received over their respective terms from all leases in effect at December 31, 1995 minus all tenant improvements, leasing commissions and other concessions for all such leases, divided by the terms in months for such leases, multiplied by 12. Tenant improvements, leasing commissions and other concessions are estimated using the same methodology used to calculate effective rent for the Properties as a whole in the charts set forth under the caption "Business and Properties-- General." (4) Base rent for the year ended December 31, 1995 divided by net rentable square feet leased at December 31, 1995. (5) Effective rent at December 31, 1995 divided by net rentable square feet leased at December 31, 1995. (6) Based on all leases at the respective Properties dated on or before June 30, 1996. (7) Excludes office space leased by the Company. (8) For this Property, a lease with Hughes Space & Communications, for approximately 96,000 rentable square feet, and with SDRC Software Products Marketing Division, Inc., for approximately 6,800 rentable square feet, are written on a full service gross basis except that there is no Expense Stop. (9) For this Property, the lease with Hughes Space & Communications is written on a modified full service gross basis under which Hughes Space & Communications pays for all utilities and other internal maintenance costs with respect to the leased space and, in addition, pays its pro rata share of real estate taxes, insurance, and certain other expenses including common area expenses. (10) For this Property, leases with Hughes Space & Communications for approximately 101,000 rentable square feet are written on a full service gross basis except that there is no Expense Stop. (11) This Property is an Acquisition Property. (12) For this Property, the lease is written on a triple net basis. (13) This Industrial Property was vacant until April 1995. The tenant began paying rent in mid-October 1995 at an annual rate of $4.86 per rentable square foot. (14) The tenant subleased this Industrial Property on May 15, 1996 to RGB Systems, Inc. (doing business as Extron Electronics), the tenant of the Property located at 1230 S. Lewis Street, Anaheim, California, which is adjacent to this Property. The sublease is at an amount less than the current lease rate, and the tenant is paying the difference between the current lease rate and the sublease rate. The lease and the sublease terminate in April 1998. Extron Electronics has executed a lease for this space from May 1998 through April 2005 at the current lease rate. Extron Electronics continues to occupy the space located at 1230 S. Lewis Street. (15) The leases for Cerplex Group, Inc. and Pacific Southwest Realty expired on June 30, 1996 and this space is presently available for rent. (16) This Industrial Property was originally designed for multi-tenant use and currently is leased to a single tenant and utilized as an indoor multi- vendor retail marketplace. 10 THE COMPANY'S SOUTHERN CALIFORNIA SUBMARKETS The Company retained Robert Charles Lesser & Co. ("Lesser"), nationally recognized experts in real estate consulting and urban economics, to study the Company's Southern California submarkets, and the discussion of such submarkets below is based upon Lesser's findings. While the Company believes that these estimates of economic trends are reasonable, there can be no assurance that these trends will in fact continue. The Company's Office and Industrial Properties are primarily located in Los Angeles, Orange and Ventura Counties which, together with Riverside and San Bernardino Counties, comprise the second largest Consolidated Metropolitan Statistical Area in the United States. Management believes that the region's economy, which in 1994 commenced recovery from a four-year economic recession, and the continuing growth in the region's foreign trade, tourism and entertainment industries, provide an attractive environment for owning and operating Class A office and industrial properties where occupancy rates and asking rents generally are increasing. In addition, since 1992 there has been virtually no increase in the region's office space, while the region's demand for quality industrial space and low vacancy rates has spurred modest new construction of industrial properties. Vacancy rates in the office space market in the Southern California Area are trending downward from a high in 1991 and 1992 of nearly 20.0% to a level at the end of 1995 of under 18.0%. At December 31, 1995, the vacancy rate for the Office Properties was approximately 10.7%. Vacancy rates in the industrial space market in the Southern California Area have decreased from a high of nearly 14% in 1992 to approximately 9.2% at December 31, 1995. At December 31, 1995, the vacancy rate for the Industrial Properties was approximately 1.6%. As of December 31, 1995, the Southern California Area had a total population of approximately 15.6 million people which accounted for approximately 5.9% of the total U.S. population. Beginning in 1990, annual population growth in the region has averaged approximately 217,000 persons. Of the total population at December 31, 1995, approximately 9.2 million and 2.6 million persons lived in Los Angeles and Orange Counties, respectively, the counties in which all but two of the Properties are located. Annual estimated growth in population over the next five years in these counties is expected to be approximately 94,000 and 32,000 persons, respectively. See "Business and Properties--The Company's Southern California Submarkets." THE FINANCING The Company, on behalf of the Operating Partnership, intends to obtain a written commitment for a mortgage loan of $75.0 million (the "Mortgage Loan"), the closing of which is a condition to the consummation of the Offering. The proceeds of the Mortgage Loan will principally be used to repay existing indebtedness on the Properties. Payment of principal and interest on the Mortgage Loan is expected to be secured by certain of the Properties. The Mortgage Loan is expected to require monthly principal and interest payments based on a fixed rate, amortizing over a 25-year period, maturing in 2003. The Company expects to obtain a written commitment to establish a $100.0 million revolving credit facility (the "Credit Facility" and, together with the Mortgage Loan, the "Financing") which the Company, on behalf of the Operating Partnership, expects to enter into concurrently with the consummation of the Offering. The Credit Facility will be used primarily to finance acquisitions of additional properties and to finance the development of properties, although a portion may be used for general working capital purposes. Payment of principal and interest is expected to be secured by certain of the Properties. In addition, borrowings under the Credit Facility are expected to be recourse obligations to the Company and the Operating Partnership. If the initial public offering price for the Common Stock is less than the midpoint of the range set forth on the cover page of this Prospectus, the Company expects to make up any shortfall between the aggregate net proceeds of the Offering and the Mortgage Loan, and the intended uses thereof, with borrowings under the Credit Facility. See "Use of Proceeds." 11 FORMATION AND STRUCTURE OF THE COMPANY The Company was formed in September 1996 and the Operating Partnership was formed in October 1996. The Services Company will be formed prior to consummation of the Offering. Prior to or simultaneous with the consummation of the Offering, the Company, the Operating Partnership, the Services Company and the Continuing Investors will engage in certain transactions (the "Formation Transactions"), designed to enable the Company to continue and expand the real estate operations of the Continuing Investors, to facilitate the Offering, to enable the Company to qualify as a REIT for federal income tax purposes commencing with its taxable year ending December 31, 1996 and to preserve certain tax advantages for the existing owners of the Properties. The Formation Transactions are as follows: . Pursuant to an omnibus option agreement (the "Omnibus Agreement"), the Operating Partnership may require the contribution of all of the Continuing Investors' interests in the Properties, as well as certain other assets, other than the Acquisition Properties, to the Operating Partnership in exchange for Units representing limited partnership interests in the Operating Partnership. Following the consummation of the Offering and the Formation Transactions, the Units received by the Continuing Investors will constitute in the aggregate an approximately 15.2% limited partnership interest in the Operating Partnership. . John B. Kilroy, Sr. and John B. Kilroy, Jr. will acquire all of the voting common stock of the Services Company (representing 5.0% of its economic value), and the Operating Partnership will acquire all of the non-voting preferred stock of the Services Company (representing 95.0% of its economic value). . The Company will sell shares of Common Stock in the Offering and contribute the net proceeds from the Offering (approximately $169.7 million) to the Operating Partnership in exchange for an 84.8% general partner interest in the Operating Partnership. . The Operating Partnership will borrow approximately $75.0 million in principal amount of long-term financing pursuant to the Mortgage Loan. . The Company, through the Operating Partnership, will apply the aggregate of the net Offering proceeds and the Financing toward the repayment of existing mortgage indebtedness on certain of the Properties, the purchase of the Acquisition Properties and the payment of its expenses from the Offering and the Financing. See "Use of Proceeds." . Certain of the current employees of KI will become employees of the Company, the Operating Partnership and/or the Services Company. . The Operating Partnership or the Services Company will enter into management agreements with respect to each of the Excluded Properties. . Pursuant to the Omnibus Agreement and certain other option agreements, the Operating Partnership will be granted exclusive options to acquire each of the Excluded Properties. The Continuing Investors are comprised of seven individuals, all of whom are "accredited investors" as defined in Regulation D ("Regulation D") under the Securities Act, and corporations, partnerships and trusts owned, directly or indirectly, solely by such individuals. Each such individual is an adult member of the family of John B. Kilroy, Sr. and/or a long-time officer of KI. Consent of such persons to the Formation Transactions was received on or before November 3, 1996 pursuant to a private solicitation thereof in compliance with Regulation D. 12 The following diagram illustrates the structure of the Company, the Operating Partnership and the Services Company after the consummation of the Offering and the Formation Transactions: Kilroy Realty Corporation (the "Company") 100% owned by public stockholders(/1/) Kilroy Realty, L.P. (the "Operating Partnership") 84.8% owned by the Company as general partner 15.2% owned by the Continuing Investors as limited partners Kilroy Services, Inc. (the "Services Company") 100% non-voting preferred stock owned by the Operating Partnership(/2/) 100% voting common stock owned by John B. Kilroy, Sr. and John B. Kilroy, Jr.(/3/) - -------- (1) If all Units of the Operating Partnership were exchanged for Common Stock, the Company would be owned approximately 84.8% by public stockholders and approximately 15.2% by the Continuing Investors. Beginning on the second anniversary of the consummation of the Offering, each Unit will be redeemable by the Operating Partnership at the request of the Unitholder for cash (based on the fair market value of an equivalent number of shares of Common Stock at the time of such redemption) or, at the Company's option, it may exchange Units for shares of Common Stock on a one-for-one basis, subject to certain antidilution adjustments and exceptions; provided, however, that if the Company does not elect to exchange such Units for shares of Common Stock, a Unitholder that is a corporation or limited liability company may require the Company to issue shares of Common Stock in lieu of cash, subject to the Ownership Limit, or such other limit as provided in the Company's Articles of Incorporation or as otherwise permitted by the Board of Directors. See "Partnership Agreement of Operating Partnership--Redemption/Exchange Rights." Under certain circumstances, the Units may be redeemed prior to the second anniversary of the consummation of the Offering in connection with the obligation of certain of the Continuing Investors to indemnify the Company in connection with the Formation Transactions. See "Formation and Structure of the Company--Allocation of Consideration in the Formation Transactions." Officers, directors and employees of the Company will have options to acquire approximately 430,000 shares of Common Stock which could reduce the percentage owned by public stockholders to approximately 81.6% (assuming exchange of all outstanding Units and the exercise of all outstanding options). (2)Represents 95.0% of the economic interest in the Services Company. (3)Represents 5.0% of the economic interest in the Services Company. 13 BENEFITS TO THE CONTINUING INVESTORS The principals of KI proposed the Formation Transactions to the Continuing Investors because they believe that the benefits of the organization of the Company for the Continuing Investors outweigh the detriments to them. Benefits to members of the Continuing Investors include: . improved liquidity of their interests in the Properties, increased diversification of investment and deferral of the tax consequences of the contribution of their interests in the Properties to the Operating Partnership; . repayment of indebtedness in the aggregate net amount of approximately $204.7 million resulting from the refinancing of existing mortgage indebtedness, approximately $34.8 million of which is guaranteed by certain members of the Kilroy Group, including the repayment of indebtedness of a Continuing Investor of approximately $3.4 million; and . employment agreements between the Company and John B. Kilroy, Jr. providing annual salary, incentive compensation (including Common Stock options) and other benefits for his services as an officer of the Company. See "Management--Employment Agreements." No third party determination of the value of the Properties was sought or obtained in connection with the acquisition by the Operating Partnership of the Properties, and the terms of each of the option agreements relating to the Excluded Properties were not determined through arm's-length negotiations. There can be no assurance that the aggregate value of the consideration received by the participants in the Formation Transactions, including the grant of the options relating to the Excluded Properties, is equivalent to the fair market value of the properties and assets acquired by the Company and the Operating Partnership in connection with the Formation Transactions. See "Risk Factors--No Appraisals; Consideration to be Paid for Properties and Other Assets May Exceed their Fair Market Value" and "--Conflicts of Interest-- Competitive Real Estate Activities of Management." DISTRIBUTION POLICY The Company presently intends to make regular quarterly distributions to holders of its Common Stock. The first distribution, for the period commencing upon the consummation of the Offering and ending 1997, is anticipated to be approximately $ per share (which is equivalent to a quarterly distribution of $.40 per share or an annual distribution of $1.60 per share) which results in an initial annual distribution rate of 8.0%, based on the initial public offering price set forth on the cover page of this Prospectus. The Company does not expect to change its estimated distribution rate if any of the Underwriters' over-allotment option is exercised. The Company currently expects to distribute approximately 90.4% of estimated cash available for distribution for the 12 months following the consummation of the Offering. Units and shares of Common Stock will receive equal distributions. The Board of Directors may vary the percentage of cash available for distribution which is distributed if the actual results of operations, economic conditions or other factors differ from the assumptions used in the Company's estimates. The Company established its initial distribution rate based on estimated cash flow for the 12 months following the consummation of the Offering and the Formation Transactions which the Company anticipates to be available for distribution, taking into account rents under existing leases, estimated operating expenses, capital improvements, debt service requirements and other factors. To maintain its qualification as a REIT, the Company must make annual distributions to stockholders of at least 95% of its taxable income, determined without regard to the deduction for dividends paid and by excluding any net capital gains. Under certain circumstances, the Company may be required to make distributions in excess of cash flow available for distribution to meet such distribution requirements. See "Distribution Policy." 14 The Company's estimate of the initial distribution rate for the Common Stock was based on the Company's estimate of cash available for distribution, which is being made solely for the purpose of setting the initial distribution rate and is not intended to be a projection or forecast of the Company's results of operations or of its liquidity. The Company believes that its estimate of cash available for distribution constitutes a reasonable basis for setting the initial distribution rate. However, no assurance can be given that the Company's estimate will be accurate. See "Risk Factors--Distribution Payout Percentage." TAX STATUS OF THE COMPANY The Company intends to elect to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its taxable year ending December 31, 1996 and believes its organization and proposed method of operation will enable it to meet the requirements for qualification as a REIT. To maintain REIT status, an entity must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 95% of its REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gains) to its stockholders. As a REIT, the Company generally will not be subject to federal income tax on net income it distributes currently to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax at regular corporate rates and may not be able to qualify as a REIT for the four subsequent taxable years. See "Risk Factors--Adverse Consequences of Failure to Qualify as a REIT" and "Federal Income Tax Considerations." Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain federal, state and local taxes on its income and property. In addition, the Services Company will be subject to federal and state income tax at regular corporate rates on its net income. THE OFFERING Common Stock Offered Hereby.. 9,260,000 shares Common Stock Outstanding af- ter the Offering............ 10,913,835 shares(/1/) Use of Proceeds.............. Together with the net proceeds of the Financing, repayment of approximately $204.7 million principal amount of existing mortgage and other indebtedness, approximately $36.3 million for the purchase of the Acquisition Properties and the remaining approximately $5.5 million to be available for expenses of the Formation Transactions, expenses of the Financing, expenses of the Offering and as working capital. NYSE symbol.................. KRC
- -------- (1) Includes 1,653,835 Units (calculated on an as-exchanged basis) issued in connection with the Formation Transactions, but excludes 1,000,000 shares of Common Stock reserved for issuance pursuant to the Stock Incentive Plan (as defined herein). See "Management--Stock Incentive Plan" and "Shares Eligible for Future Sale." 15 SUMMARY FINANCIAL DATA The following table sets forth certain financial data on a pro forma basis for the Company, and on an historical basis for the Kilroy Group, which consist of the combined financial statements of the Kilroy Group (the "Combined Financial Statements") whose financial results will be consolidated in the historical and pro forma financial statements of the Company. The financial data should be read in conjunction with the historical and pro forma financial statements and notes thereto included in this Prospectus. The combined historical summary financial data as of December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995 have been derived from the Combined Financial Statements of the Kilroy Group audited by Deloitte & Touche LLP, independent public accountants, whose report with respect thereto is included elsewhere in this Prospectus. The selected combined historical financial and operating information as of December 31, 1993, 1992 and 1991 and June 30, 1996, and for the years ended December 31, 1992 and 1991 and the six months ended June 30, 1995 and June 30, 1996, have been derived from the unaudited Combined Financial Statements of the Kilroy Group and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the operating information for the unaudited periods. The pro forma data assume the completion of the Formation Transactions, including acquisition of the Acquisition Properties and the consummation of the Offering (based upon the midpoint of the range of the initial public offering price set forth on the cover page of this Prospectus) and the Financing, and use of the aggregate net proceeds therefrom as described under "Use of Proceeds" as of the beginning of the periods presented for the operating data and as of the balance sheet date for the balance sheet data. The pro forma financial data does not give effect to the recent extension of the tenant lease with Hughes Space & Communications with respect to space leased in the Office Property located at 2250 E. Imperial Highway, El Segundo, California and a portion of the space leased in the Office Property located at 2240 E. Imperial Highway, El Segundo, California. The pro forma financial data are not necessarily indicative of what the actual financial position or results of operations of the Company would have been as of and for the periods indicated, nor does it purport to represent the future financial position and results of operations. 16 THE COMPANY (PRO FORMA) AND KILROY GROUP (HISTORICAL) (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ------------------------------- ------------------------------------------------------------- COMBINED HISTORICAL COMBINED HISTORICAL PRO FORMA -------------------- PRO FORMA -------------------------------------------------- 1996 1996 1995 1995 1995 1994 1993 1992 1991 --------- ---------- --------- --------- --------- --------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Rental income.......... $ 17,259 $ 14,837 $ 13,949 $ 32,884 $ 28,285 $ 27,518 $ 29,139 $ 27,935 $ 24,898 Tenant reimbursements.. 1,981 1,658 1,275 3,434 2,746 1,549 3,507 3,623 3,886 Parking income......... 800 800 727 1,447 1,447 1,216 1,205 1,143 1,199 Development and management fees....... 458 695 1,156 919 751 882 779 Sale of air rights..... 4,456 Other income........... 261 58 52 803 395 1,077 174 180 144 -------- -------- --------- --------- --------- --------- -------- -------- -------- Total revenues......... 20,301 17,811 16,698 38,568 38,485 32,279 34,776 33,763 30,906 -------- -------- --------- --------- --------- --------- -------- -------- -------- Property expenses...... 2,647 2,719 2,571 5,339 5,376 4,674 4,320 4,469 6,741 Real estate taxes (refunds)............. 726 518 670 1,503 1,139 (929) 2,500 3,276 96 General and administrative expense............... 2,199 876 881 4,389 2,050 2,406 1,033 932 773 Ground lease........... 399 230 216 813 475 591 772 696 568 Development expenses... 485 384 737 468 581 429 255 Interest expense....... 3,307 9,422 11,813 6,613 21,529 22,739 23,151 23,624 23,577 Depreciation and amortization.......... 4,571 4,051 4,013 9,352 8,313 8,740 8,990 8,954 8,196 -------- -------- --------- --------- --------- --------- -------- -------- -------- Total expenses......... 13,849 18,301 20,548 28,009 39,619 38,689 41,347 42,380 40,206 -------- -------- --------- --------- --------- --------- -------- -------- -------- Income (loss) before equity in income of subsidiary, minority interest and extraordinary item.... 6,452 (490) (3,850) 10,559 (1,134) (6,410) (6,571) (8,617) (9,300) Equity in income (loss) of subsidiary......... (36) 136 Minority interest...... (975) (1,625) Extinguishment of debt.................. 12,887 15,267 1,847 -------- -------- --------- --------- --------- --------- -------- -------- -------- Net income (loss)...... $ 5,441 $ 12,397 $ (3,850) $ 9,070 $ 14,133 $ (4,563) $ (6,571) $ (8,617) $ (9,300) ======== ======== ========= ========= ========= ========= ======== ======== ======== Pro forma net income per share(1).......... $ 0.59 $ .98 ======== ========= DECEMBER 31, -------------------------------------------------- JUNE 30, 1996 COMBINED HISTORICAL --------------------- -------------------------------------------------- COMBINED PRO FORMA HISTORICAL 1995 1994 1993 1992 1991 --------- ---------- --------- --------- -------- -------- -------- BALANCE SHEET DATA: Real estate assets, before accumu- lated depreciation and amortization.......... $229,410 $193,110 $ 191,744 $ 190,720 $189,079 $202,941 $201,873 Total assets........... 159,002 121,825 121,171 130,624 134,920 145,979 153,073 Mortgages and loans.... 75,000 204,601 206,858 222,038 218,769 221,921 216,558 Total liabilities...... 85,323 217,108 224,301 242,887 232,063 232,351 223,678 Minority interest...... 11,199 Stockholders' equity (deficit)............. 62,480 (95,283) (103,130) (112,263) (97,143) (86,372) (70,605)
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, -------------------------------- ------------------------------------------ COMBINED HISTORICAL COMBINED HISTORICAL PRO FORMA -------------------- PRO FORMA ------------------------------- 1996 1996 1995 1995 1995 1994 1993 ---------- --------- --------- --------- --------- --------- --------- OPERATING DATA: Funds from Operations(2)......... $11,023 $3,561 $163 $19,911 2,723 $2,330 $2,419 Office Properties: Square footage......... 1,463,028 1,156,787 1,156,787 1,463,028 1,156,787 1,156,787 1,156,787 Average occupancy...... 94.1% 93.2% 87.2% 89.3% 87.1% 87.6% 82.4% Industrial Properties: Square footage......... 916,570 916,570 916,570 916,570 916,570 916,570 916,570 Average occupancy...... 98.4% 98.4% 98.4% 98.4% 98.4% 79.7% 77.6%
- ------- (1) Pro forma net income per share equals pro forma net income divided by the 9,260,000 shares of Common Stock offered hereby. (2) Industry analysts generally consider Funds from Operations an alternative measure of performance of an equity REIT. As defined by the National Association of Real Estate Investment Trusts ("NAREIT"), Funds from Operations represents net income (loss) before minority interest of unit holders (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 after adjustments for unconsolidated partnerships and joint ventures. For all periods presented, depreciation and amortization and, in 1995 and 1994, gain on extinguishment of debt, were the only non-cash adjustments. Funds from Operations should not be considered as an alternative for net income as a measure of profitability nor is it comparable to cash flows provided by operating activities determined in accordance with GAAP. 17 RISK FACTORS This Prospectus contains certain forward looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Actual results could differ materially from those projected in the forward looking statements as a result of certain uncertainties set forth below and elsewhere in this Prospectus. An investment in the shares of Common Stock involves various material risks. Prospective investors should carefully consider the following risk factors, in addition to the other information set forth in this Prospectus, in connection with an investment in the shares of Common Stock offered hereby. DEPENDENCE ON SOUTHERN CALIFORNIA MARKET. Eighteen of the nineteen Properties, comprising an aggregate of approximately 2.3 million rentable square feet (representing approximately 94.5% of the aggregate rentable square feet of all of the Properties), are located in Southern California. Consequently, the Company's performance will be linked to economic conditions and the demand for office, industrial and retail space in this region. The Southern California economy has experienced significant recessionary conditions in the past several years, primarily as a result of the downsizing of the aerospace and defense industries; there is still a dependence on these industries in the Company's El Segundo and Long Beach Airport area submarkets. The recessionary conditions resulted in a general increase in vacancies and a general decrease in net absorption and rental rates in the Company's El Segundo and Long Beach Airport area submarkets. See "Business and Properties-- The Company's Southern California Submarkets." Any decline in the Southern California economy generally may result in a material decline in the demand for office, industrial and retail space, have a material adverse effect greater than if the Company had a more geographically diverse portfolio of properties, and may materially and adversely affect the ability of the Company to make distributions to stockholders. See "Business and Properties--The Company's Southern California Submarkets." In addition, eight Office Properties, representing approximately 90.4% of the aggregate office space of all of the Office Properties, are located in two office parks in El Segundo, California, and Long Beach, California, respectively. DEPENDENCE ON SIGNIFICANT TENANTS. The Company's ten largest office tenants represented approximately 52.3% of annual base rent for the year ended December 31, 1995 (giving pro forma effect to a recent extension of a lease with Hughes Space & Communications with respect to two of the Office Properties located at Kilroy Airport Center at El Segundo), and its eight industrial tenants represented approximately 16.0% of annual base rent for the same period. Of this amount, its largest tenant, Hughes Space & Communications, currently leases approximately 495,000 rentable square feet of office space in Kilroy Airport Center at El Segundo, representing approximately 29.6% of the Company's total base rent revenues for the year ended December 31, 1995 (giving pro forma effect to the Hughes Space & Communications lease extension). The base periods of the Hughes Space & Communications leases expire beginning in January 1999. The Company's revenues and cash available for distribution to stockholders would be disproportionately and materially adversely affected in the event of bankruptcy or insolvency of, or a downturn in the business of, or the nonrenewal of leases by, any of its significant tenants, or the renewal of such leases on terms less favorable to the Company than their current terms. CASH FLOW FROM DEVELOPMENT ACTIVITIES. A significant portion of the Company's anticipated cash flow may be generated from development activities which are partially dependent on the availability of development opportunities and which are subject to the risks inherent with development and general economic conditions. In addition, development activities will be subject to limitations imposed by the REIT tests. See "Federal Income Tax Consequences-- Taxation of the Company--Income Tests." There can be no assurance that the Company will realize such anticipated cash flows. See "Risk Factors--Real Estate Investment Considerations--Risks of Real Estate Acquisition and Development." DISTRIBUTIONS TO STOCKHOLDERS. Distributions by the Company to its stockholders will be based principally on cash available for distribution from the Properties. Increases in base rent under the leases of the Properties or the payment of rent in connection with future acquisitions will increase the Company's cash available for distribution to stockholders. However, in the event of a default or a lease termination by a lessee, there could be 18 a decrease or cessation of rental payments and thereby a decrease in cash available for distribution. In addition, the amount available to make distributions may decrease if properties acquired in the future yield lower than expected returns. The distribution requirements for REITs under federal income tax laws may limit the Company's ability to finance future developments, acquisitions and expansions without additional debt or equity financing. If the Company incurs additional indebtedness in the future, it will require additional funds to service such indebtedness and as a result amounts available to make distributions may decrease. Distributions by the Company will also be dependent on a number of other factors, including the Company's financial condition, any decision to reinvest funds rather than to distribute such funds, capital expenditures, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Company deems relevant. In addition, the Company may issue from time to time additional Units or shares of Common Stock in connection with the acquisition of properties or in certain other circumstances. No prediction can be made as to the number of such Units or shares of Common Stock which may be issued, if any, and, if issued, the effect on cash available for distribution on a per share basis to holders of Common Stock. Such issuances, if any, will have a dilutive effect on cash available for distribution on a per share basis to holders of Common Stock. See "The Company--Growth Strategies." The possibility exists that actual results of the Company may differ from the assumptions used by the Board of Directors in determining the initial distribution rate. In such event, the trading price of the Common Stock may be adversely affected. To obtain the favorable tax treatment associated with REITs, the Company generally will be required to distribute to its stockholders at least 95% of its taxable income (determined without regard to the dividends paid deduction and by excluding net capital gains) each year. In addition, the Company will be subject to tax at regular corporate rates to the extent that it distributes less than 100% of its taxable income (including net capital gains) each year. The Company will also be subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by it with respect to any calendar year are less than the sum of 85% of its ordinary income, 95% of its capital gain net income and 100% of its undistributed income from prior years. The Company intends to make distributions to its stockholders to comply with the distribution requirements of the Code and to reduce exposure to federal income taxes and the nondeductible excise tax. Differences in timing between the receipt of income and the payment of expenses in arriving at taxable income and the effect of required debt amortization payments could require the Company to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT. NO APPRAISALS; CONSIDERATION TO BE PAID FOR PROPERTIES AND OTHER ASSETS MAY EXCEED THEIR FAIR MARKET VALUE. No independent valuations or appraisals of the Properties were obtained in connection with the Formation Transactions. The valuation of the Company has been determined by considering the enterprise value of the Company as a going concern based primarily upon a capitalization of estimated and anticipated Funds from Operations (as defined) and cash available for distribution and the other factors discussed in this Prospectus under "Distribution Policy" and "Underwriting," rather than an asset-by-asset valuation based on historical cost or current market value. This methodology has been used because management believes it is appropriate to value the Company as an ongoing business rather than with the view to values that could be obtained from a liquidation of the Company or of individual assets owned by the Company. Accordingly, there can be no assurance that the consideration paid by the Company will not exceed the fair market value of the Properties and other assets acquired by the Company. A valuation of the Company determined solely by appraisals of the Properties and other assets of the Company may result in a significantly lower valuation of the Company from that which is reflected by the initial public offering price per share set forth on the cover of this Prospectus, which also takes into account the businesses of the Services Company, the earnings of the Properties and the going concern value of the Company. See "Underwriting." Since the liquidation value of the Company is likely to be significantly less than the value of the Company as a going concern, stockholders may suffer a significant loss in the value of their shares if the Company were required to sell its assets. 19 The valuation of the Company's development, leasing and management services business has been derived, in part, from a capitalization of the revenue derived from the Company's contracts with third parties for real estate development, leasing and management services. Upon consummation of the Offering, the Company expects to provide through the Operating Partnership leasing and management services, and through the Services Company third-party development services. The consideration paid and the allocation of Units of the Operating Partnership among the participants in connection with the Formation Transactions were not determined by arm's-length negotiations. Since no appraisals of the Properties and other assets were obtained, the value of the Units allocated to participants in the Formation Transactions may exceed the fair market value of their ownership of such Properties and assets. The terms of the option agreements relating to the Excluded Properties also were not determined by arm's-length negotiations, and such terms may be less favorable to the Company than those that may have been obtained through negotiations with a third party. In addition, approximately $34.8 million of mortgage indebtedness guaranteed by certain members of the Kilroy Group, including officers and directors of the Company, will be repaid in connection with the Formation Transactions. See "--Conflicts of Interest," "Use of Proceeds" and "Formation and Structure of the Company." REAL ESTATE INVESTMENT CONSIDERATIONS General. Real property investments are subject to varying degrees of risk. The yields available from equity investments in real estate depend on the amount of income earned and capital appreciation generated by the related properties as well as the expenses incurred in connection therewith. If the Properties do not generate income sufficient to meet operating expenses, including debt service and capital expenditures, the ability to make distributions to the Company's stockholders could be adversely affected. Income from, and the value of, the Properties may be adversely affected by the general economic climate, local conditions such as oversupply of office, industrial or retail space or a reduction in demand for office, industrial or retail space in the area, the attractiveness of the Properties to potential tenants, competition from other office, industrial and retail buildings, and the ability of the Company to provide adequate maintenance and insurance and increased operating costs (including insurance premiums, utilities and real estate taxes). In addition, revenues from properties and real estate values are also affected by such factors as the cost of compliance with regulations and the potential for liability under applicable laws, including changes in tax laws, interest rate levels and the availability of financing. The Company's income would be adversely affected if a significant number of tenants were unable to pay rent or if office, industrial or retail space could not be rented on favorable terms. Certain significant expenditures associated with an investment in real estate (such as mortgage payments, real estate taxes and maintenance costs) generally are not reduced when circumstances cause a reduction in income from the investment. Illiquidity of Real Estate. Real estate investments are relatively illiquid and, therefore, the Company has limited ability to vary its portfolio quickly in response to changes in economic or other conditions. In addition, the prohibition in the Code and related regulations on a REIT holding property for sale may affect the Company's ability to sell properties without adversely affecting distributions to the Company's stockholders. Competition. The Company plans to expand, primarily through the acquisition and development of additional office and industrial buildings in Southern California and other strategic markets. There are a number of office and industrial building developers and real estate companies that compete with the Company in seeking properties for acquisition, prospective tenants and land for development. All of the Properties are in developed areas where there are generally other properties of the same type. Competition from other office, industrial and retail properties may affect the Company's ability to attract and retain tenants, rental rates and expenses of operation (particularly in light of the higher vacancy rates of many competing properties which may result in lower-priced space being available in such properties). The Company may be competing with other entities that have greater financial and other resources than the Company. Lease Expirations. Certain leases expiring during the first several years following the Offering are at rental rates higher than those attained by the Company in its recent leasing activity. Such leases, or other leases of the 20 Company, may not be renewed or, if renewed, may be renewed at rental rates lower than rental rates in effect immediately prior to expiration. Decreases in the rental rates for the Company's properties, the failure of tenants to renew any such leases or the failure of the Company to re-lease any of the Company's space could materially adversely affect the Company and its ability to make distributions. See "Business and Properties--Lease Expirations." Ground Leases. The Company's five Office Properties located at Kilroy Airport Center in Long Beach are held subject to ground leases. A default by the Company under the terms of a ground lease could result in the loss of Properties located on the respective parcel, with the landowner becoming the owner of such Properties unless the default under the lease is cured or waived. In addition, upon expiration of the ground leases, including the options thereon, there is no assurance that the Company will be able to negotiate new ground leases at all or, if any leases were renewed, that they will be on terms consistent with or more favorable than existing terms, which may result in the loss of the Properties or increased rental expense to the Company. The ground leases for the Kilroy Airport Center Long Beach (including renewal options) will expire in 2084. See "Business and Properties--Office Properties--Kilroy Long Beach." Capital Improvements. The Properties vary in age and require capital improvements regularly. If the cost of improvements, whether required to attract and retain tenants or to comply with governmental requirements, substantially exceeds management's expectations, cash available for distribution could be reduced. Risks of Real Estate Acquisition and Development. The Company intends to actively seek to acquire office and industrial properties to the extent that they can be acquired on advantageous terms and meet the Company's investment criteria. Acquisitions of office and industrial properties entail risks that investments will fail to perform in accordance with expectations. Estimates of the costs of improvements to bring an acquired property up to standards established for the market position intended for that property may prove inaccurate. In addition, there are general investment risks associated with any new real estate investment. In addition to the Development Properties, the Company will pursue other development opportunities both for ownership by the Company and on a fee basis. The real estate development business involves significant risks in addition to those involved in the ownership and operation of established office or industrial buildings, including the risks that financing may not be available on favorable terms for development projects and construction may not be completed on schedule or within budget, resulting in increased debt service expense and construction costs and delays in leasing such properties and generating cash flow. In addition, new development activities, regardless of whether or not they are ultimately successful, typically require a substantial portion of management's time and attention. Development activities are also subject to risks relating to the inability to obtain, or delays in obtaining, all necessary zoning, land-use, building, occupancy, and other required governmental permits and authorizations. The Company anticipates that future acquisitions and developments will be financed, in whole or in part, through additional equity offerings, lines of credit and other forms of secured or unsecured financing. If new developments are financed through construction loans, there is a risk that, upon completion of construction, permanent financing for newly developed properties may not be available or may be available only on disadvantageous terms. Equity, rather than debt, financing of future acquisitions or developments could have a dilutive effect on the interests of existing stockholders of the Company. While the Company has focused primarily on the development and ownership of office and industrial properties, the Company plans in the future to develop properties, part or all of which will be for retail use. In addition, while the Company has historically limited its ownership of properties primarily to the Southern California market, the Company has entered into an agreement giving it the right to purchase office properties in the greater Seattle area and it is possible that the Company will in the future expand its business to this and other new geographic markets. See "Business and Properties--Excluded Properties--SeaTac Office Center at Seattle-Tacoma International Airport." The Company will not initially possess the same level of familiarity with new types of commercial development or new markets, which could adversely affect its ability to acquire or develop properties in any new localities or to realize expected performance. 21 Uninsured Loss. Management believes that the Properties are covered by adequate comprehensive liability, rental loss and all-risk (at full replacement cost) insurance provided by reputable companies and with commercially reasonable deductibles, limits and policy specifications customarily carried for similar properties. Certain types of losses, however, may be either uninsurable or not economically insurable, such as losses due to floods, riots or acts of war, or may be insured subject to certain limitations including large deductibles or copayments, such as losses due to seismic activity. See discussion of uninsured losses from seismic activity below. Should an uninsured loss or a loss in excess of insured limits occur, the Company could lose its investment in and anticipated profits and cash flow from a property and would continue to be obligated on any mortgage indebtedness or other obligations related to such property. Any such loss would adversely affect the Company and its ability to make distributions. Uninsured Losses from Seismic Activity. The Properties are located in areas that are subject to earthquake activity. Although the Company expects to have earthquake insurance on a substantial portion of its Properties, should any Property sustain damage as a result of an earthquake, or should losses exceed the amount of such coverage, the Company may incur uninsured losses or losses due to deductibles or co-payments on insured losses. See "Business and Properties--Uninsured Losses from Seismic Activity." Risks Involved in Property Ownership Through Partnerships and Joint Ventures. Although the Company will own fee simple interests in the Properties (other than Kilroy Long Beach, which is held subject to long-term ground leases), in the future the Company may also participate with other entities in property ownership through joint ventures or partnerships. Partnership or joint venture investments may, under certain circumstances, involve risks not otherwise present, including the possibility that the Company's partners or co-venturers might become bankrupt, that such partners or co-venturers might at any time have economic or other business interests or goals which are inconsistent with the business interests or goals of the Company, and that such partners or co-venturers may be in a position to take action contrary to the instructions or the requests of the Company or contrary to the Company's policies or objectives, including the Company's policy with respect to maintaining its qualification as a REIT. The Company will, however, seek to maintain sufficient control of such partnerships or joint ventures to permit the Company's business objectives to be achieved. There is no limitation under the Company's organizational documents as to the amount of available funds that may be invested in partnerships or joint ventures. REAL ESTATE FINANCING RISKS. The Company will be subject to the risks normally associated with debt financing, including the risk that the Company's cash flow will be insufficient to meet required payments of principal and interest, the risk that indebtedness on the Properties will not be refinanced at maturity or that the terms of such refinancing will not be as favorable as the terms of such indebtedness. If the Company were unable to refinance its indebtedness on acceptable terms, or at all, the Company might be forced to dispose of one or more of the Properties upon disadvantageous terms, which might result in losses to the Company and might adversely affect the cash available for distribution. If prevailing interest rates or other factors at the time of refinancing result in higher interest rates on refinancings, the Company's interest expense would increase, which would adversely affect the Company's cash flow and its ability to pay expected distributions to stockholders. Further, if a Property is mortgaged to secure payment of indebtedness and the Company is unable to meet mortgage payments, or is in default under the related mortgage or deed of trust, such Property could be transferred to the mortgagee, the mortgagee could foreclose upon the Property, appoint a receiver and receive an assignment of rents and leases or pursue other remedies, all with a consequent loss of income and asset value to the Company. Foreclosures could also create taxable income without accompanying cash proceeds, thereby hindering the Company's ability to meet the REIT distribution requirements of the Code. See "The Financing." CONFLICTS OF INTEREST Tax Consequences Upon Sale or Refinancing. Unlike persons acquiring shares of Common Stock in the Offering, holders of Units may suffer different and more adverse tax consequences than the Company upon the sale or refinancing of the Properties owned by the Operating Partnership, and therefore such holders may have different objectives regarding the appropriate pricing and timing of any sale or refinancing of such Properties. 22 While the Company, as the sole general partner of the Operating Partnership, will have the authority as to whether and on what terms to sell or refinance each Property owned solely by the Operating Partnership, those directors and officers of the Company who hold Units may seek to influence the Company not to sell or refinance the Properties, even though such a sale might otherwise be financially advantageous to the Company, or may seek to influence the Company to refinance a Property with a higher level of debt. Failure to Enforce Terms of Certain Agreements. As recipients of Units in the Formation Transactions, certain directors and officers of the Company will have a conflict of interest with respect to their obligations as directors or officers of the Company to enforce the terms of the agreements relating to the transfer to the Operating Partnership of their interests in the Partnerships and other assets to be acquired by the Company and relating to the Company's option to purchase certain additional properties owned by entities controlled by certain officers and directors. See "Business and Properties--Development, Leasing and Management Activities--Excluded Properties." The failure to enforce the material terms of those agreements (which would require the approval of the Independent Directors) could result in a monetary loss to the Company, which loss could have a material effect on the Company's financial condition or results of operations. While certain Continuing Investors will provide indemnities in connection with such transfers, such indemnities would be impaired to the extent that such Continuing Investors have other obligations, including obligations for taxes arising from the Formation Transactions or prior transactions, which they may not have sufficient assets to satisfy. Policies with Respect to Conflicts of Interest. The Company has adopted certain policies designed to eliminate or minimize conflicts of interest. However, there can be no assurance that these policies always will be successful in eliminating the influence of such conflicts, and, if they are not successful, decisions could be made that might fail to reflect fully the interests of all stockholders. See "Policies with Respect to Certain Activities--Conflict of Interest Policies." Competitive Real Estate Activities of Management. John B. Kilroy, Sr. and John B. Kilroy, Jr. will have controlling ownership interests in certain properties which the Company has the option to acquire, including a complex of three office properties which are located in the El Segundo submarket in which four of the Office Properties and four of the Industrial Properties are located and three office properties located at the SeaTac Office Center at the Seattle-Tacoma International Airport. These properties will be managed by the Operating Partnership and certain of the Company's officers, directors and employees will spend an immaterial portion of their time and effort managing these interests. In addition, John B. Kilroy, Sr. and John B. Kilroy, Jr. own Calabasas Park Centre, an undeveloped approximately 66-acre site (representing approximately 45 developable acres net of acreage required for streets and contractually required open areas). The Kilroy Group is actively marketing all but 18 acres for sale. Certain of the Company's officers, directors and employees will spend an immaterial amount of time in connection with any sales of such parcels. In addition, pursuant to the Omnibus Agreement and certain other option agreements, the Company has the exclusive option to acquire the SeaTac Office Center, the three office properties at a complex located on North Sepulveda Boulevard in El Segundo described above and the approximately 18 acres included in Calabasas Park Centre not currently held for sale. Each of these properties is currently owned by partnerships controlled by John B. Kilroy, Sr. and John B. Kilroy, Jr. The properties located at the SeaTac Office Center and on North Sepulveda Boulevard in El Segundo will be managed by the Operating Partnership pursuant to a management agreement on market terms. With respect to Calabasas Park Centre, the officers, directors and employees of the Company will spend an immaterial amount of time in connection with the entitlement, marketing and sales of such parcels. The implementation of the arrangements relating to each of these properties will involve a conflict of interest with John B. Kilroy, Sr. and John B. Kilroy, Jr. The Kilroy Group holds certain other real estate interests which are not being contributed to the Company as part of the Formation Transactions. All of such other real estate interests relate to miscellaneous properties and property rights that the Company believes are not of a type appropriate for inclusion in the Company's portfolio and the properties are not consistent with the Company's strategy. See "Business and Properties--Excluded Properties." 23 ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT Tax Liabilities as a Consequence of Failure to Qualify as a REIT. The Company intends to operate so as to qualify as a REIT under the Code, commencing with its taxable year ending December 31, 1996. Although management believes that it will be organized and will operate in such a manner, no assurance can be given that the Company will be organized or will be able to operate in a manner so as to qualify or remain so qualified. Qualification as a REIT involves the satisfaction of numerous requirements (some on an annual and others on a quarterly basis) established under highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within the Company's control. For example, in order to qualify as a REIT, at least 95% of the Company's gross income in any year must be derived from qualifying sources and the Company must pay distributions to stockholders aggregating annually at least 95% of its REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gains). The complexity of these provisions and of the applicable Treasury Regulations that have been promulgated under the Code is greater in the case of a REIT that holds its assets in partnership form. No assurance can be given that legislation, new regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification. The Company is relying on the opinion of Latham & Watkins, tax counsel to the Company, regarding various issues affecting the Company's ability to qualify, and continue to qualify, as a REIT. See "Federal Income Tax Consequences--Taxation of the Company" and "Legal Matters." Such legal opinion is based on various assumptions and factual representations by the Company regarding the Company's ability to meet the various requirements for qualification as a REIT, and no assurance can be given that actual operating results will meet these requirements. Such legal opinion is not binding on the Internal Revenue Service ("IRS") or any court. Among the requirements for REIT qualification is that the value of any one issuer's securities held by a REIT may not exceed 5% of the REIT's total assets on certain testing dates. See "Federal Income Tax Consequences-- Taxation of the Company--Requirements for Qualification." The Company believes that the aggregate value of the securities of the Services Company to be held by the Company will be less than 5% of the value of the Company's total assets, based on the initial allocation of Units among participants in the Formation Transactions and the Company's opinion regarding the maximum value that could be assigned to the expected assets and net operating income of the Services Company after the Offering. In rendering its opinion as to the qualification of the Company as a REIT, Latham & Watkins is relying on the conclusions of the Company regarding the value of the Services Company. If the Company were to fail to qualify as a REIT in any taxable year, the Company would be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates and would not be allowed a deduction in computing its taxable income for amounts distributed to its stockholders. Moreover, unless entitled to relief under certain statutory provisions, the Company also would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost. This treatment would reduce the net earnings of the Company available for investment or distribution to stockholders because of the additional tax liability to the Company for the years involved. In addition, distributions to stockholders would no longer be required to be made. See "Federal Income Tax Consequences--Taxation of the Company-- Requirements for Qualification." Other Tax Liabilities. Even if the Company qualifies for and maintains its REIT status, it will be subject to certain federal, state and local taxes on its income and property. For example, if the Company has net income from a prohibited transaction, such income will be subject to a 100% tax. In addition, the Company's net income, if any, from the third-party development conducted through the Services Company will be subject to federal income tax at regular corporate tax rates. See "Federal Income Tax Consequences--Services Company." ADVERSE CONSEQUENCES OF FAILURE OF THE OPERATING PARTNERSHIP TO QUALIFY AS A PARTNERSHIP FOR FEDERAL INCOME TAX PURPOSES. The Company will receive an opinion of Latham & Watkins, tax counsel to the Company, at the closing of the Formation Transactions to the effect that the Operating Partnership is properly 24 treated as a partnership for federal income tax purposes. Such opinion is not binding on the IRS or the courts. If the IRS were to successfully challenge the tax status of the Operating Partnership as a partnership for federal income tax purposes, the Operating Partnership would be treated as an association taxable as a corporation. In such event, the character of the Company's assets and income would change, which would preclude the Company from satisfying the asset tests and possibly the income tests (as imposed by the REIT provisions of the Code) and, in turn, would prevent the Company from qualifying as a REIT. The imposition of a corporate tax on the Operating Partnership, combined with the loss of REIT status of the Company, would also materially adversely affect the amount of cash available for distribution to the Company and its stockholders. See "Federal Income Tax Consequences--Tax Aspects of the Operating Partnership--Entity Classification." CHANGES IN INVESTMENT AND FINANCING POLICIES WITHOUT STOCKHOLDER VOTE. Subject to the Company's fundamental investment policy to maintain its qualification as a REIT (unless a change is approved by the Company's Board of Directors and stockholders), the Company's Board of Directors will determine its investment and financing policies, its growth strategy, and its debt, capitalization, distribution and operating policies. Although the Board of Directors has no present intention to revise or amend these strategies and policies, the Board of Directors may do so at any time without a vote of the Company's stockholders. See "Policies With Respect to Certain Activities-- Other Policies." Accordingly, stockholders will have no control over changes in strategies and policies of the Company, and such changes may not serve the interests of all stockholders and could adversely affect the Company's financial condition or results of operations, including its ability to distribute cash to stockholders. Issuance of Additional Securities. The Company has authority to offer its Common Stock or other equity or debt securities in exchange for property or otherwise. Similarly, the Company may cause the Operating Partnership to offer additional Units or preferred units of the Operating Partnership, including offers in exchange for property to sellers who seek to defer certain of the tax consequences relating to a property transfer. Existing stockholders will have no preemptive right to acquire any such securities, and any such issuance of equity securities could result in dilution in an existing stockholder's investment in the Company. Risks Involved in Acquisitions Through Partnerships or Joint Ventures. The Company may invest in office and industrial properties through partnerships or joint ventures instead of purchasing such properties directly or through wholly-owned subsidiaries. Partnership or joint venture investments may, under certain circumstances, involve risks not otherwise present in a direct acquisition of properties. These include the risk that the Company's co- venturer or partner in an investment might become bankrupt; a co-venturer or partner might at any time have economic or business interests or goals which are inconsistent with the business interests or goals of the Company and a co- venturer or partner might be in a position to take action contrary to the instructions or the requests of the Company or contrary to the Company's policies or objectives. Risks Involved in Investments in Securities Related to Real Estate. The Company may pursue its investment objectives through the ownership of securities of entities engaged in the ownership of real estate. Ownership of such securities may not entitle the Company to control the ownership, operation and management of the underlying real estate. In addition, the Company may have no ability to control the distributions with respect to such securities, which may adversely affect the Company's ability to make required distributions to stockholders. Furthermore, if the Company desires to control an issuer of securities, it may be prevented from doing so by the limitations on percentage ownership and gross income tests which must be satisfied by the Company in order for the Company to qualify as a REIT. See "Federal Income Tax Consequences--Taxation of the Company--Requirements for Qualification as a REIT." The Company intends to operate its business in a manner that will not require the Company to register under the Investment Company Act of 1940 and stockholders will therefore not have the protection of that Act. The Company may also invest in mortgages, and may do so as a strategy for ultimately acquiring the underlying property. In general, investments in mortgages include the risk that borrowers may not be able to make debt service payments or pay principal when due, the risk that the value of the mortgaged property may be less than the principal amount of the mortgage note securing such property and the risk that interest rates payable 25 on the mortgages may be lower than the Company's cost of funds to acquire these mortgages. In any of these events, Funds from Operations and the Company's ability to make required distributions to stockholders could be adversely affected. LIMITS ON OWNERSHIP AND CHANGE IN CONTROL. Certain provisions of the Maryland General Corporation Law (the "MGCL") and the Company's Articles of Incorporation and Bylaws, and certain provisions of the Operating Partnership's partnership agreement, could have the effect of delaying, deferring or preventing a change in control of the Company or the removal of existing management and, as a result, could prevent the stockholders of the Company from being paid a premium for their shares of Common Stock over then prevailing market prices. Limits on Ownership of Common Stock; Staggered Board; Capital Stock; Voting Rights. In order for the Company to maintain its qualification as a REIT, not more than 50% in value of the outstanding shares of its capital stock may be owned, actually or constructively, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of a taxable year (other than the first year for which the election to be treated as a REIT has been made). Furthermore, after the first taxable year for which a REIT election is made, the Company's shares must be held by a minimum of 100 persons for at least 335 days of a 12-month taxable year (or a proportionate part of a short tax year). In addition, if the Company, or an owner of 10% or more of the Company, actually or constructively, owns 10% or more of a tenant of the Company (or a tenant of any partnership in which the Company is a partner), the rent received by the Company (either directly or through any such partnership) from such tenant will not be qualifying income for purposes of the REIT gross income tests of the Code. See "Federal Income Tax Consequences--Taxation of the Company." In order to protect the Company against the risk of losing REIT status due to a concentration of ownership among its stockholders, the Articles of Incorporation of the Company limit actual or constructive ownership of the outstanding shares of Common Stock by any single stockholder to 8% (the "Ownership Limit") of the then outstanding shares of Common Stock. See "Description of Capital Stock--Restrictions on Ownership and Transfer." Although the Board of Directors presently has no intention of doing so (except as described below), the Board of Directors will consider waiving the Ownership Limit with respect to a particular stockholder if it is satisfied, based upon the advice of tax counsel or otherwise, that ownership by such stockholder in excess of the Ownership Limit would not jeopardize the Company's status as a REIT and the Board of Directors otherwise decided such action would be in the best interests of the Company. The Board of Directors has waived the Ownership Limit with respect to John B. Kilroy, Sr., John B. Kilroy, Jr., members of their families and certain affiliated entities and has permitted such individuals and entities to actually or constructively own, in the aggregate, up to 17% of the outstanding Common Stock. The Articles of Incorporation provide that any of John B. Kilroy, Sr., John B. Kilroy, Jr., members of their families and certain affiliates may acquire Common Stock pursuant to their rights to exchange Units for shares of Common Stock, subject to certain restrictions, or from other sources, but may not acquire Common Stock such that such individuals or affiliates would actually or constructively own in the aggregate Common Stock in excess of 17% of the then outstanding Common Stock. Actual or constructive ownership of shares of Common Stock in excess of the Ownership Limit, or, with the consent of the Board of Directors, such other limit, will cause the violative transfer or ownership to be void with respect to the transferee or owner as to that number of shares in excess of the Ownership Limit, or, with the consent of the Board of Directors, such other limit, as applicable, and such shares will be automatically transferred to a trust for the benefit of a qualified charitable organization. Such purported transferee or owner shall have no right to vote such shares or be entitled to dividends or other distributions with respect to such shares. See "Description of Capital Stock--Restrictions on Ownership and Transfer" for additional information regarding the Ownership Limit. Following the consummation of the Offering, the Board of Directors of the Company will be divided into three classes serving staggered three-year terms. The terms of the first, second and third classes will expire in 1997, 1998 and 1999, respectively. Directors for each class will be chosen for a three-year term upon the expiration of the current class' term, beginning in 1997. In addition, the Articles of Incorporation authorize the Board of Directors to issue up to 150,000,000 shares of Common Stock and 30,000,000 shares of preferred stock and to establish the rights and preferences of any shares of preferred stock issued. No shares of preferred stock 26 will be issued or outstanding at the consummation of the Offering. See "Description of Capital Stock--Preferred Stock." Under the Articles of Incorporation, stockholders do not have cumulative voting rights. The Ownership Limit, the staggered terms for directors, the issuance of additional common or preferred stock in the future and the absence of cumulative voting rights could have the effect of (i) delaying or preventing a change of control of the Company even if a change of control were in the stockholders' interest, (ii) deterring tender offers for the Common Stock that may be beneficial to the stockholders, or (iii) limiting the opportunity for stockholders to receive a premium for their Common Stock that might otherwise exist if an investor attempted to assemble a block of shares of Common Stock in excess of the Ownership Limit or otherwise to effect a change of control of the Company. See "Management" and "Description of Capital Stock." Maryland Business Combination Statute. Under the MGCL, certain "business combinations" (including certain issuances of equity securities) between a Maryland corporation and any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation's voting shares (an "Interested Stockholder") are prohibited for five years after the date on which the Interested Stockholder became an Interested Stockholder. Thereafter, any such business combination must be approved by two super-majority stockholder votes unless, among other things, the holders of the Common Stock receive a minimum price (as defined in the MGCL) for their Common Stock and the consideration is received in cash or in the same form as previously paid by the Interested Stockholder for its Common Stock. These provisions of the MGCL could have the effect of delaying or preventing a change of control of the Company or other transactions even if it were in the interest of some, or a majority, of the Company's stockholders. As permitted by the MGCL, the Company has exempted any "business combinations" involving the members of the Kilroy Group and their affiliates and associates, present or future, or any other person acting in concert or as a group with any of the foregoing persons and, consequently, the five year prohibition and the super-majority vote requirements will not apply to "business combinations" between any of them and the Company. As a result, members of the Kilroy Group, any present or future affiliate or associate thereof or any other person acting in concert or as a group with any of the foregoing persons may be able to enter into "business combinations" with the Company, which may or may not be in the best interest of the stockholders. See "Certain Provisions of Maryland Law and of the Company's Articles of Incorporation and Bylaws--Business Combinations." Maryland Control Share Acquisition. Maryland law provides that "control shares" of the Company acquired in a "control share acquisition" have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares owned by the acquiror or by officers or directors who are employees of the Company. "Control shares" are voting shares of stock which, if aggregated with all other such shares of stock previously acquired by the acquiror, or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: (i) one-fifth or more but less than one-third; (ii) one-third or more but less than a majority; or (iii) a majority of all voting power. "Control shares" do not include shares of stock the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A "control share acquisition" means the acquisition of control shares, subject to certain exceptions. The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if the Company is a party to the transaction or to acquisitions approved or exempted by the Company's Articles of Incorporation or Bylaws. As permitted by the MGCL, the Company has exempted control share acquisitions involving any of the members of the Kilroy Group, their affiliates and associates, directors, officers and employees of the Company, and any other person approved by the Board of Directors in its sole discretion. As a result, any of the members of the Kilroy Group, their affiliates and associates, directors, officers and employees of the Company, and any person approved by the Board of Directors in its sole discretion may be able to effect a control share acquisition of the Company, which may or may not be in the best interest of the stockholders. See "Certain Provisions of Maryland Law and of the Company's Articles of Incorporation and Bylaws--Control Share Acquisitions." 27 RISKS OF DEVELOPMENT BUSINESS AND RELATED ACTIVITIES BEING CONDUCTED BY THE SERVICES COMPANY; CONTROL OF THE SERVICES COMPANY Tax Liabilities. The Services Company will be subject to federal and state income tax on its taxable income at regular corporate rates. Any federal, state or local income taxes that the Services Company is required to pay will reduce the cash available for distribution by the Company to its stockholders. Adverse Consequences of Lack of Control Over the Businesses of the Services Company. To comply with the REIT asset tests that restrict ownership of shares of other corporations, upon consummation of the Offering, the Operating Partnership will own 100% of the non-voting preferred stock of the Services Company (representing approximately 95% of its economic value) and John B. Kilroy, Sr. and John B. Kilroy, Jr. will own all the outstanding voting common stock of the Services Company (representing approximately 5% of its economic value). This ownership structure is necessary to permit the Company to share in the income of the Services Company and also maintain its status as a REIT. Although it is anticipated that the Company will receive substantially all of the economic benefit of the businesses carried on by the Services Company through the Company's right to receive dividends through the Operating Partnership, the Company will not be able to elect directors or officers of the Services Company and, therefore, the Company will not have the ability to influence the operations of the Services Company. As a result, the board of directors and management of the Services Company may implement business policies or decisions that would not have been implemented by persons controlled by the Company and that are adverse to the interests of the Company or that lead to adverse financial results, which could adversely impact the Company's net operating income and cash flow. See "Formation and Structure of the Company." Adverse Consequence of REIT Status on the Businesses of the Services Company. Certain requirements for REIT qualification may in the future limit the Company's ability to receive increased distributions from the fee development operations conducted and related services offered by the Services Company. See "--Adverse Consequences of Failure to Qualify as a REIT." DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the efforts of its executive officers and directors, particularly John B. Kilroy, Sr., the Company's Chairman of the Board, and John B. Kilroy, Jr., the Company's President and Chief Executive Officer, for strategic business direction and experience in the Southern California real estate market. While the Company believes that it could find replacements for these key personnel, the loss of their services could have an adverse effect on the operations of the Company. The Company has entered into employment agreements with John B. Kilroy, Jr. and Jeffrey C. Hawken. See "Management--Employment Agreements." DISTRIBUTION PAYOUT PERCENTAGE. The Company's expected annual distributions for the 12 months following consummation of the Offering of $1.60 per share are expected to be approximately 90.4% of estimated cash available for distribution. If cash available for distribution generated by the Company's assets for such 12-month period is less than the Company's estimate, or if such cash available for distribution decreases in future periods from expected levels, the Company's ability to make the expected distributions would be adversely affected. Any such failure to make expected distributions could result in a decrease in the market price of the Common Stock. See "Distribution Policy." HISTORICAL OPERATING LOSSES OF THE OFFICE AND INDUSTRIAL PROPERTIES. Although the Office and Industrial Properties developed by the Company after their construction and initial lease-up periods have historically generated positive net cash flow, the effect of depreciation, amortization and other non-cash charges of the Company has resulted in net losses for financial reporting purposes in each of the last five fiscal years. Historical operating results of the Office and Industrial Properties may not be comparable to future operating results of the Company because, prior to the completion of the Offering and the Formation Transactions, the Office and Industrial Properties were encumbered with greater levels of debt (which has the effect of reducing net income) than that with which the Company intends to operate. In addition, the historical results of operations do not reflect the acquisition and development of the any of the Acquisition Properties or the Development Properties. 28 See "Management's Discussion and Analysis of Financial Condition and Results of Operations." However, there can be no assurance that the Company will acquire and successfully develop any of the Development Properties, and, even if such Properties are acquired and successfully developed, that they will not experience losses in the future. NO LIMITATION ON DEBT. The Board of Directors currently intends to fund acquisition opportunities and development partially through short-term borrowings, as well as out of undistributed cash available for distribution and other available cash. The Board of Directors expects to refinance projects purchased or developed with short-term debt either with long-term indebtedness or equity financing depending upon the economic conditions at the time of refinancing. Upon completion of the Offering and the Formation Transactions, the debt to total market capitalization ratio of the Company will be approximately 25.6% (assuming an initial public offering price of $20.00 per share of Common Stock). The Board of Directors has adopted a policy of limiting its indebtedness to approximately 50% of its total market capitalization (i.e., the market value of the issued and outstanding shares of Common Stock, including interests exchangeable therefor, plus total debt), but the organizational documents of the Company do not contain any limitation on the amount or percentage of indebtedness, funded or otherwise, that the Company may incur. The Board of Directors, without the vote of the Company's stockholders, could alter or eliminate its current policy on borrowing at any time at its discretion. If this policy were changed, the Company could become more highly leveraged, resulting in an increase in debt service that could adversely affect the Company's cash flow and its ability to make expected distributions to its stockholders and an increased risk of default on the Company's obligations. See "Policies With Respect to Certain Activities-- Financing." The Company has established its debt policy relative to the market capitalization of the Company rather than to the book value of its assets, a ratio that is frequently employed. The Company has used total market capitalization because it believes that the book value of its assets (which to a large extent is the depreciated value of real property, the Company's primary tangible asset) does not accurately reflect its ability to borrow and to meet debt service requirements. The total market capitalization of the Company, however, is more variable than book value, and does not necessarily reflect the fair market value of the underlying assets of the Company at all times. Although the Company will consider factors other than total market capitalization in making decisions regarding the incurrence of indebtedness (such as the purchase price of properties to be acquired with debt financing, the estimated market value of such properties upon refinancing and the ability of particular properties and the Company as a whole to generate cash flow to cover expected debt service), there can be no assurance that the ratio of indebtedness to total market capitalization (or to any other measure of asset value) will be consistent with the expected level of distributions to the Company's stockholders. GOVERNMENT REGULATIONS. Many laws and governmental regulations are applicable to the Properties and changes in these laws and regulations, or their interpretation by agencies and the courts, occur frequently. Costs of Compliance with Americans with Disabilities Act. Under the Americans with Disabilities Act of 1990 (the "ADA"), all places of public accommodation, effective beginning in 1992, are required to meet certain federal requirements related to access and use by disabled persons. Compliance with the ADA might require removal of structural barriers to handicapped access in certain public areas where such removal is "readily achievable." Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants. The impact of application of the ADA to the Company's properties, including the extent and timing of required renovations, is uncertain. If required changes involve a greater amount of expenditures than the Company currently anticipates or if the changes must be made on a more accelerated schedule than the Company currently anticipates, the Company's ability to make expected distributions to stockholders could be adversely affected. Environmental Matters. Under various federal, state and local laws, ordinances and regulations relating to the protection of the environment, an owner or operator of real estate may be held liable for the costs of removal or remediation of certain hazardous or toxic substances located on or in the property. These laws often impose liability without regard to whether the owner was responsible for, or even knew of, the presence of such 29 hazardous or toxic substances. The costs of investigation, removal or remediation of such substances may be substantial, and the presence of such substances may adversely affect the owner's ability to rent or sell the property or to borrow using such property as collateral and may expose it to liability resulting from any release of or exposure to such substances. Persons who arrange for the disposal or treatment of hazardous or toxic substances at another location may also be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may also seek recovery from owners or operators of real properties for personal injury associated with asbestos- containing materials and other hazardous or toxic substances. In connection with the ownership (direct or indirect), operation, management and development of real properties, the Company may be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, potentially liable for removal or remediation costs, as well as certain other related costs, including governmental penalties and injuries to persons and property. The Company believes that the Properties are in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances or petroleum products. The Company has not been notified by any governmental authority, and is not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances or petroleum products in connection with any of its present properties. All of the Properties were subject to Phase I or similar environmental assessments by independent environmental consultants in connection with the formation of the Company. Phase I assessments are intended to discover information regarding, and to evaluate the environmental condition of, the surveyed property and surrounding properties. Phase I assessments generally include an historical review, a public records review, an investigation of the surveyed site and surrounding properties, and preparation and issuance of a written report, but do not include soil sampling or subsurface investigations. The Company's environmental assessments of the Properties have not revealed any environmental liability that the Company believes would have a material adverse effect on the Company's business, assets or results of operations taken as a whole, nor is the Company aware of any such material environmental liability. Nonetheless, it is possible that the Company's assessments do not reveal all environmental liabilities or that there are material environmental liabilities of which the Company is unaware. Moreover, there can be no assurance that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of the Properties will not be affected by tenants, by the condition of land or operations in the vicinity of the Properties (such as the presence of underground storage tanks), or by third parties unrelated to the Company. If compliance with the various laws and regulations, now existing or hereafter adopted, exceeds the Company's budgets for such items, the Company's ability to make expected distributions to stockholders could be adversely affected. Other Regulations. The Properties are also subject to various federal, state and local regulatory requirements such as state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. The Company believes that the Properties are currently in compliance with all such regulatory requirements. However, there can be no assurance that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures by the Company and could have an adverse effect on the Company's Funds from Operations and expected distributions. The City of Los Angeles has enacted certain regulations relating to the repair of welded steel moment frame buildings located in certain areas damaged as a result of the Southern California Northridge earthquake on January 17, 1994. Such regulations do not apply to the Properties. There can be no assurance, however, that similar regulations will not be adopted by governmental agencies with the ability to regulate the Properties or that other requirements affecting the Properties will not be imposed which would require significant unanticipated expenditures by the Company and could have an adverse effect on the Company's Funds from Operations and cash available for distribution. The Company believes, based in part on recent engineering reports, that its Properties are in good condition. See "Business and Properties--Uninsured Losses from Seismic Activity." 30 IMMEDIATE AND SUBSTANTIAL DILUTION. As set forth more fully under "Dilution," as of June 30, 1996, the Properties to be contributed by the Kilroy Group in exchange for Units in the Operating Partnership had a pro forma net tangible book value for financial reporting purposes of approximately $62.5 million, or $6.75 per share of Common Stock. As a result, the pro forma net book value per share of Common Stock of the Company after the consummation of the Offering and the Formation Transactions will be less than the assumed initial public offering price of $20.00 per share. The purchasers of Common Stock offered hereby will experience immediate and substantial dilution of $13.25 per share of Common Stock (based on the assumed initial public offering price) in the net tangible book value of the shares of Common Stock. See "Dilution." NO PRIOR PUBLIC MARKET. Prior to the Offering, there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop as a result of the Offering or, if a trading market does develop, that it will be sustained or that the shares of Common Stock will be resold at or above the initial public offering price. The market for equity securities can be volatile and the trading price of the Common Stock could be subject to wide fluctuations in response to operating results, news announcements, trading volume, general market trends, changes in interest rates and other factors. Moreover, numerous other factors, such as governmental regulatory action and changes in tax laws, could have a significant impact on the future market price of the Common Stock. The initial public offering price of the Common Stock offered hereby will be determined through negotiations between the Company and the representatives (the "Representatives") of the Underwriters. Among the factors to be considered in such negotiations, in addition to prevailing market conditions, will be distribution rates and Funds from Operations of publicly traded REITs that the Company and the Representatives believe to be comparable to the Company, estimates of the business potential and earnings prospects of the Company, and the current state of the Company's industry and the economy as a whole. The assumed initial public offering price does not necessarily bear any relationship to the Company's book value, assets, financial condition or any other established criteria of value and may not be indicative of the market price for the Common Stock after the Offering. See "Underwriting." EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK. One of the factors that will influence the market price of the Common Stock in public markets will be the annual yield on the price paid for shares from distributions by the Company. An increase in prevailing market interest rates on fixed income securities may lead prospective purchasers of the Common Stock to demand a higher annual yield from future distributions. Such an increase in the required yield from distributions may adversely affect the market price of the Common Stock. SHARES AVAILABLE FOR FUTURE SALE. No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of the Common Stock. Sales of substantial amounts of shares of Common Stock in the public market (or upon exchange of Units) or the perception that such sales might occur could adversely affect the market price of the shares of Common Stock. Upon the consummation of the Offering and the Formation Transactions, the Company will have outstanding 9,260,000 shares of Common Stock (10,649,000 shares if the Underwriters' over-allotment option is exercised in full), all of which will be freely tradeable in the public market by persons other than "affiliates" of the Company without restriction or registration under the Securities Act. All of the shares of Common Stock that are issuable upon the redemption of Units will be deemed to be "restricted securities" within the meaning of Rule 144 under the Securities Act and may not be transferred unless registered under the Securities Act or an exemption from registration is available, including any exemption from registration provided under Rule 144 of the Securities Act. In general, upon satisfaction of certain conditions, Rule 144 of the Securities Act permits the sale of certain amounts of restricted securities two years following the date of acquisition of the restricted securities from the Company and, after three years, permits unlimited sales by persons unaffiliated with the Company. It is expected that the Operating Partnership will issue an aggregate of 1,653,835 Units to executive officers, directors and other Continuing Investors in connection with the formation of the Company which, after two years following the receipt of such Units, may be redeemed by the Operating Partnership at the request of the holders 31 for cash (based on the fair market value of an equivalent number of shares of Common Stock at the time of such redemption) or, at the Company's option, exchanged for an equal number of shares of Common Stock, subject to certain antidilution adjustments and the obligation of certain of the Continuing Investors to indemnify the Company in connection with the Formation Transactions. See "Formation and Structure of the Company--Allocation of Consideration in the Formation Transactions." However, if the Company does not elect to exchange such Units for shares, a Continuing Investor that is a corporation or a limited liability company may require the Company to issue shares of Common Stock in lieu of cash, subject to the Ownership Limit or, with the consent of the Board of Directors, such other limit which does not result in the failure of the Company to qualify as a REIT. See "Formation and Structure of the Company" and "Shares Available for Future Sale--Redemption Rights/Exchange Rights/Registration Rights." It is expected that immediately after the Offering the Company will grant options to purchase an aggregate of approximately 430,000 shares of Common Stock at the initial public offering price to certain directors, officers and employees of the Company and an additional approximately 570,000 shares of Common Stock will be reserved for issuance upon the exercise of options granted under the Stock Incentive Plan. See "Management--Stock Incentive Plan." In addition, the Company may issue from time to time additional shares of Common Stock or Units in connection with the acquisition of properties, including the possible issuance of Units upon the exercise of options to acquire the Excluded Properties. See "The Company--Growth Strategies" and "Business and Properties--Development, Management and Leasing Activities--Excluded Properties." The Company has agreed to file and generally keep continuously effective beginning two years after the completion of the Offering a registration statement covering the issuance of shares upon the exchange of Units and the resale thereof. See "Shares Available for Future Sale." The Company also anticipates that it will file a registration statement with respect to the shares of Common Stock issuable under the Stock Incentive Plan following the consummation of the Offering. Such registration statements generally will allow shares of Common Stock issuable upon exchange of Units or the exercise of options to be transferred or resold without restriction under the Securities Act. In addition to the limits placed on the sale of shares of Common Stock by operation of Rule 144 and other provisions of the Securities Act, (i) each of the Continuing Investors has agreed not to, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer to sell, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any Units or shares of Common Stock or other capital stock of the Company, or any securities convertible or exercisable or exchangeable for any Units or shares of Common Stock or other capital stock of the Company for a period of two years from the date of this Prospectus, and (ii) the Company has agreed not to offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any (other than pursuant to the Stock Incentive Plan) shares of Common Stock or other capital stock of the Company, or any securities convertible or exercisable or exchangeable for any Units or shares of Common Stock or other capital stock of the Company, for a period of one year from the date of this Prospectus, in each case without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, subject to certain limited exceptions. At the conclusion of the two-year period referenced in clause (i) above, Common Stock issued upon the subsequent exchange of Units may be sold in the public market pursuant to the registration rights described above. Notwithstanding the foregoing, the Units received by certain of the Continuing Investors in connection with the Formation Transactions will be pledged to secure their indemnification obligations pursuant to an agreement with the Company. See "Formation and Structure of the Company." Future sales of the shares of Common Stock described above could have an adverse effect on the market price of the shares of Common Stock and the existence of Units, options, shares of Common Stock reserved for issuance upon exchange of Units and the exercise of options and registration rights referred to above may adversely affect the terms upon which the Company may be able to obtain additional capital through the sale of equity securities. See "Shares Available for Future Sale" and "Underwriting." Such sales may be increased or accelerated to the extent that the Continuing Investors have personal obligations, including obligations for taxes, which may arise as a result of the Formation Transactions or prior transactions. 32 THE COMPANY GENERAL The Company has been formed to succeed to the business of the Kilroy Group consisting principally of a portfolio of Class A suburban office and industrial buildings in prime locations primarily in Southern California, and the Kilroy Group's real estate ownership, acquisition, development, leasing and management businesses. Upon the consummation of the Offering and the Formation Transactions, the Company (through the Operating Partnership) will own ten Office Properties encompassing an aggregate of approximately 1.5 million rentable square feet and nine Industrial Properties encompassing an aggregate of approximately 900,000 rentable square feet. All of the Office Properties and eight of the nine Industrial Properties are located in prime Southern California suburban submarkets (including a complex of three Office Properties located in El Segundo, adjacent to Los Angeles International Airport, presently the nation's second largest air-cargo port, and a complex of five Office Properties located adjacent to the Long Beach Municipal Airport), and one Industrial Property is located in Phoenix, Arizona. As of June 30, 1996, the Office Properties were approximately 94.1% leased to 88 tenants and the Industrial Properties were approximately 98.4% leased to nine tenants. The average age of the Office Properties and the Industrial Properties is approximately ten years and twenty-seven years, respectively. The Company developed and leased all but one of the Office Properties and seven of the nine Industrial Properties, and upon consummation of the Offering and acquisition of the Acquisition Properties will manage all of the Properties. The Company was founded in 1947 by John B. Kilroy, Sr., a nationally prominent member of the real estate community, and is led by John B. Kilroy, Jr., the Company's President since 1981. The Company's executive officers have served as members of the Company's executive management team for an average of approximately 15 years. The Company has been involved in the ownership, acquisition, entitlement, development, leasing and management of commercial properties, the majority of which are located in Southern California, for nearly 50 years and has been focusing primarily on office and industrial development for the past 30 years. The Company presently has 46 employees, 36 of whom are located at the Company's headquarters at Kilroy Airport Center at El Segundo, California. The Company's strategy has been to own, develop, acquire, lease and manage Class A properties in select locations in key suburban submarkets, primarily in Southern California, that the Company believes have strategic advantages compared to neighboring submarkets. The Company's extensive experience and long-term presence in Southern California have enabled it to form key alliances and working relationships with major corporate tenants, municipalities and landowners in Southern California that have resulted in a variety of development projects and provide an on-going source of development and acquisition opportunities. The Southern California Properties located in Los Angeles and Orange Counties are situated in locations which the Company believes are among the best within key submarkets, offering tenants: (i) lower business taxes and operating expenses than adjoining submarkets; (ii) access to highly skilled labor markets; (iii) access to major transportation facilities such as freeways, airports and the expanded Southern California light-rail system; (iv) proximity to the Los Angeles-Long Beach port complex, which presently ranks as the largest commercial port in the United States; and (v) for tenants with their names on certain Properties, visibility to freeway and airline travelers. The Company also has focused on the design and construction of its projects. The Office Properties were designed and developed to above-standard specifications, with an emphasis on long-term operating efficiency and tenant comfort. The Industrial Properties also were designed and developed to provide above-standard quality and meet the long-term needs of tenants and were designed as multi-use facilities to satisfy various types of manufacturing, distribution and office uses. As a result, the Industrial Properties continue to serve the evolving needs of their tenants, some of which have recently invested substantially in long-term tenant improvements. As a result of the high quality and strategic location of the Company's Properties, and the Company's attention to the highest quality management and service, the Company believes that the Properties attract major corporate tenants and historically have achieved among the highest occupancy, tenant retention and rental rates, both within their respective submarkets and as compared to their respective neighboring submarkets. See "Business and Properties--Office Properties" and "--Industrial Properties." 33 The Company has created value by effectively working with municipalities, large landowners and other members of the real estate community in Southern California, and has maintained strong relationships at all levels of government, as well as with financial institutions and major corporate tenants. In 1981, the Company initiated the El Segundo Employers' Association, a traffic and management organization composed of major employers in the El Segundo area. The organization has worked with local government and has been instrumental in the furtherance of infrastructure developments in El Segundo and throughout the surrounding area, including two recent developments that management believes will have a substantial economic benefit to the El Segundo submarket. First, in October 1994, Interstate Highway I-105 (the "I-105 Freeway") opened, which crosses Los Angeles from east to west and provides substantially improved access to El Segundo and Los Angeles International Airport. A second infrastructure development in the El Segundo submarket is a major east-west grade-separated light rail commuter line (the "Green Line"). The Green Line runs adjacent to Kilroy Airport Center at El Segundo. Management believes that the Green Line, which opened in August 1995, will add significant value to the El Segundo submarket. See "Business and Properties-- The Company's Southern California Submarkets--El Segundo Submarket." The Company's major tenants include, among others, Hughes Space & Communications, a tenant since 1984, which is engaged in high-technology commercial activities including satellite development and related applications such as DirecTV, as well as CompuServe, Inc., Employer's Health Insurance Co., the Federal Aviation Administration, First Nationwide Mortgage Corporation, Furon Co., Inc., GTE Directories Sales Corporation, Great Western Bank, HealthNet, Mattel, Inc. (which has its worldwide corporate headquarters in El Segundo), North American Title Company, Northwest Airlines, Inc., Olympus America, Inc., The Prudential Insurance Company of America, R.L. Polk & Company, SCAN HealthPlan, Senn-Delaney Leadership Consulting Group, Inc., Transamerica Financial Services, Inc., 20th Century Industries, UniCare Financial Corporation and Unihealth. As of December 31, 1995, the Company's ten largest office tenants (based upon annual base rents as of December 31, 1995 base rents) had leased office space from the Company for an average of 5.4 years. The Company's strong relationships with its tenants is further evidenced by its average tenant retention rate (based upon rentable square feet) for the three-year period ended December 31, 1995, which was 72.2%. The Company's extensive experience and long-term presence in Southern California have enabled it to form key alliances and working relationships with large corporate tenants, municipalities and landowners that have led to a variety of development projects and provide a continuing source of development and acquisition opportunities with institutional sellers. As a result of its experience and relationships, the Company currently has exclusive rights to develop approximately 24 acres of developable land (net of the acreage required for streets) at Kilroy Airport Center Long Beach, and has an exclusive agreement to negotiate to acquire an additional six acres of developable land (net of acreage reserved for open areas) at the Thousand Oaks Civic Arts Plaza Entertainment and Retail Center. These properties are presently entitled for over 1.0 million rentable square feet of office, industrial and retail space, creating acquisition and development opportunities without, in most cases, significant carrying costs. The Company believes that the foundation for its growth in future years will be the strengthening Southern California economy, the quality and strategic location of its Properties, the economic benefits of its submarkets to tenants, its capital structure, its access to public capital markets, the lack of new construction of office properties in its submarkets, its access to developable properties, the knowledge and experience of its senior management team and its long-term relationships with the Southern California real estate community, large corporate tenants, municipalities, landowners and institutional sellers. In addition, the Company believes that it will be one of a limited number of REITs focusing on office and industrial properties and that it will be the only REIT with a 50-year operating history concentrating primarily on suburban Southern California office and industrial properties. In the 12 months following the consummation of the Offering, the Company expects sources of potential growth in cash available for distribution per share from the amount set forth under the caption "Distribution Policy," through: (i) the further leasing of its available space, currently approximately 101,000 rentable square feet; (ii) the renewal of leases for approximately 35,000 rentable square feet which expire during such period; (iii) the acquisition of strategic properties with Units and/or with available cash and borrowings under the Credit Facility; and (iv) additional fees from development services and related activities. In the second 12-month period following consummation of the Offering, the Company expects sources of 34 potential growth in cash flow per share from: (i) contractual increases in base rent payments from tenants; (ii) continued leasing of available space; (iii) the contemplated completion of certain planned development activities; (iv) increased fee income, including development fees and related leasing and management activities provided to third parties; and (v) the acquisition of strategic properties. In addition, the Company presently plans to expand one or more of its Industrial Properties during the next two years, subject to substantial pre-leasing. There can be no assurance, however, that the Company will achieve any growth in cash available for distribution per share, that available space will be leased, that leases scheduled to expire will be renewed, that the Company will successfully complete any of its planned development activities or that the Company will be able to acquire and develop any of the Development Properties or other properties that may become available. See "Risk Factors--Real Estate Investment Considerations--Risks of Real Estate Acquisition and Development." The Company will continue its practice of managing or administering substantially all leasing, management, tenant improvements and construction on an "in-house" basis and will be self-administered and self-managed. The Company intends to elect to qualify as a REIT for federal income tax purposes beginning with its taxable year ending December 31, 1996. See "Federal Income Tax Consequences--Taxation of the Company." Kilroy Realty Corporation, a Maryland corporation, has executive offices at 2250 East Imperial Highway, El Segundo, CA 90245 and its telephone number is (213) 772-1193. GROWTH STRATEGIES The Company's objectives are to maximize growth in cash flow per share and to enhance the value of its portfolio through effective management, operating, acquisition and development strategies. The Company believes that opportunities exist to increase cash flow per share: (i) by acquiring office and industrial properties with attractive returns in strategic suburban submarkets where such properties complement its existing portfolio; (ii) from contractual increases in base rent; (iii) as a result of increasing rental and occupancy rates and decreasing concessions and tenant installation costs as vacancy rates in the Company's submarkets generally continue to decline; (iv) by developing properties for the benefit of the Company where such development will result in a favorable risk adjusted return on investment or, alternatively, on a fee basis for others; and (v) by expanding Properties within the Company's existing industrial portfolio. The Company believes that a number of factors will enable it to achieve its business objectives, including: (i) the opportunity to lease available space at attractive rental rates because of increasing demand and, with respect to the Office Properties, the present lack of new construction in the Southern California submarkets in which the Properties are located; (ii) the presence of distressed sellers and inadvertent owners (through foreclosure or otherwise) of office and industrial properties in the Company's markets, as well as the Company's ability to acquire properties with Units (thereby deferring the seller's taxable gain), all of which create enhanced acquisition opportunities; (iii) the quality and location of the Company's Properties; (iv) the Company's access to development opportunities as a result of its significant relationships with large Southern California corporate tenants, municipalities and landowners and its nearly 50-year presence in the Southern California market; and (v) the limited availability to competitors of capital for financing development, acquisitions or capital improvements. Management believes that the Company is well positioned to exploit existing opportunities because of its extensive experience in its submarkets, its seasoned management team and its proven ability to develop, lease and efficiently manage office and industrial properties. In addition, the Company believes that public ownership and its capital structure will provide new opportunities for growth. There can be no assurance, however, that the Company will be able to lease available space, complete any property acquisitions, successfully develop any land acquired or improve the operating results of any developed properties that are acquired. See "Business and Properties--Development, Leasing and Management Activities." Operating Strategies. The Company will focus on enhancing growth in cash flow per share by: (i) maximizing cash flow from existing Properties through active leasing, contractual base rent increases and effective property management; (ii) managing operating expenses through the use of in-house management, leasing, marketing, financing, accounting, legal, construction management and data processing functions; 35 (iii) maintaining and developing long-term relationships with a diverse tenant group; (iv) attracting and retaining motivated employees by providing financial and other incentives to meet the Company's operating and financial goals; and (v) continuing to emphasize capital improvements to enhance the Properties' competitive advantages in their markets. The Company believes that the strength of its leasing is demonstrated by the Company's leasing activity since 1993. In the period from January 1, 1993 to June 30, 1996, the Company leased or renewed leases for an aggregate of approximately 845,000 rentable square feet of office space and approximately 318,000 rentable square feet of industrial space. As of December 31, 1995, the Office Properties were approximately 89.3% leased as compared to approximately 82.0% for the Southern California Area, approximately 89.2% for the El Segundo submarket and approximately 85.4% in the Long Beach submarket. In addition, at December 31, 1995, the Industrial Properties were approximately 98.4% leased as compared to approximately 82.3% and approximately 87.1% for industrial properties located in Los Angeles and Orange Counties, respectively. As of June 30, 1996, (i) the Office Properties contained approximately 1.5 million rentable square feet and were approximately 94.1% leased, and (ii) the Industrial Properties contained an aggregate of approximately 900,000 rentable square feet and were approximately 98.4% leased. In addition, the number of individual lease transactions since 1992, including the results for the six- month period ended June 30, 1996, averaged over 26 per year. See "Business and Properties--General," "--Properties," "--Occupancy and Rental Information," and "--The Company's Southern California Submarkets." Approximately 800,000 aggregate rentable square feet in the Properties was leased by the Company from January 1, 1992 through December 31, 1994, a period which management characterizes as recessionary. Based on the leases the Company signed in 1996, and the findings in an independent study of the Southern California real estate market commissioned by the Company, management believes that the recent trend toward increasing rental rates in Class A office and industrial buildings in the Company's markets presents significant opportunities for growth. In addition, approximately 72.7% of the Company's net rentable square feet is subject to leases expiring in 2000 or beyond, when management expects asking rents for the respective Properties to be higher than the rents paid pursuant to such leases. In addition, approximately 34.2% of the Company's total base rent (representing approximately 26.0% of the Company's total rentable square feet) is attributable to leases with Consumer Price Index increases. No assurance can be given, however, that new leases will reflect rental rates higher than current rental rates greater than or equal to current or future economic conditions will support higher rental rates. See "Risk Factors--Real Estate Investment Considerations." Acquisition Strategies. The Company will seek to increase its cash flow per share by acquiring additional quality office and industrial properties, including properties that may: (i) provide attractive initial yields with significant potential for growth in cash flow from property operations; (ii) are strategically located, of high quality and competitive in their respective submarkets; (iii) are located in the Company's existing submarkets and/or in other strategic submarkets where the demand for office and industrial space exceeds available supply; or (iv) have been under-managed or are otherwise capable of improved performance through intensive management and leasing that will result in increased occupancy and rental revenues. The Company believes that the Southern California market is an established and mature real estate market in which property owners generally have a low tax basis (and, accordingly, the potential for large taxable gains) in their properties. Management believes that the Company's extensive experience, capital structure and ability to acquire properties for Units, and thereby defer a seller's taxable gain, if any, will enhance the ability of the Company to consummate transactions quickly and to structure more competitive acquisitions than other real estate companies in the market which lack its access to capital or the ability to issue Units. See "Business and Properties-- Development, Leasing and Management Activities." The Company has entered into an agreement to acquire the two office properties that comprise Phase I of Kilroy Airport Center Long Beach. Kilroy Airport Center Long Beach Phase I was developed by the Company in 1987 and has been leased and managed by the Company since its inception. In addition, the Company has entered into an agreement to purchase an office property located in Thousand Oaks, California. The acquisition of the Acquisition Properties by the Company is expected to occur concurrently with the consummation of the 36 Offering and, accordingly, the Acquisition Properties are included in the discussion of the Office Properties included throughout this Prospectus. The Company also has entered into agreements to acquire three industrial properties, each of which remains subject to satisfactory documentation and completion of the Company's due diligence procedures. Accordingly, there can be no assurance that any of such properties will be acquired. There can be no assurance, however, that the Company will be able to complete any property acquisitions, successfully develop any land acquired or improve the operating results of any developed properties that are acquired. See "Business and Properties--Acquisition Properties." Development Strategies. The Company's interests in the Development Properties provide it with significant growth opportunities. These projects allow the Company to control development on the land, while significant costs of carry prior to the completion of development are in most cases funded by others. The Company is the master ground lessee of, and has sole development rights in, Kilroy Airport Center Long Beach, a planned four-phase, approximately 53- acre property entitled for office, research and development, light industrial and other commercial projects at which the Company owns all five existing Office Properties and manages all ongoing leasing and development activities. The Company developed Phases I and II in 1987 and 1989/1990, respectively, encompassing an aggregate of approximately 620,000 rentable square feet of office and light industrial space. Phases III and IV presently are planned to be developed on the project's approximately 24 undeveloped acres and are entitled for an aggregate of approximately 900,000 rentable square feet. The Company is currently in discussions with several prospective tenants for office space presently planned to be included in Kilroy Long Beach Phase III. See "Business and Properties--Development, Leasing and Management Activities-- Kilroy Long Beach." The Company has entered into an exclusive agreement to negotiate a Development and Disposition Agreement in connection with the Thousand Oaks Civic Arts Plaza Retail and Entertainment Center project, an approximately 11- acre project (representing approximately six developable acres net of acreage reserved for open areas) presently contemplated to include an approximately 90,000 square foot multiplex theater and virtual reality entertainment center and retail space. The project is located in the City of Thousand Oaks, immediately adjacent to the City's recently completed $65 million Civic Arts Plaza Complex. See "Business and Properties--Development, Leasing and Management Activities--Thousand Oaks." The Company also has entered into a Development Management Agreement in connection with the development, on a fee basis, of the Riverside Judicial Center. See "Business and Properties--Development, Management and Leasing Activities--Riverside Judicial Center." In addition, the Company has been engaged on a fee basis as a consultant in connection with the development of an approximately 200-acre site presently owned by Northrop Grumman Corporation. See "Business and Properties--Development, Management and Leasing Activities--Northrop Grumman." In addition, certain of the Industrial Properties can support additional development, and the Company presently is planning to develop in the next two years, subject to substantial pre-leasing, approximately 105,000 rentable square feet of such additional space. The Company may engage in the development of other office and/or industrial properties primarily in Southern California submarkets when market conditions support a favorable risk-adjusted return on such development. The Company's activities with third-party owners in Southern California are expected to give the Company further access to development opportunities. There can be no assurance, however, that the Company will be able to successfully develop any of the Development Properties or any other properties. See "Business and Properties--Development, Leasing and Management Activities." Financing Policies. The Company intends to limit the ratio of debt to total market capitalization (total debt of the Company as a percentage of the market value of issued and outstanding shares of Common Stock, including interests exchangeable therefor, plus total debt) to approximately 50%, although the Company's organizational documents do not limit the amount of indebtedness that the Company may incur. Upon completion of the transactions outlined under the caption "Formation and Structure of the Company," total debt will constitute approximately 25.6% of the total market capitalization of the Company (assuming an initial public offering price of $20.00 per share of Common Stock). The Company anticipates that upon consummation of 37 the Offering all of the permanent indebtedness will bear interest at fixed rates. The Company intends to utilize one or more sources of capital for future acquisitions, including development and capital improvements, which may include undistributed cash flow, borrowings under the Credit Facility, issuance of debt or equity securities and other bank and/or institutional borrowings. There can be no assurance, however, that the Company will be able to obtain capital for any such acquisitions, developments or improvements on terms favorable to the Company. See "--Growth Strategies," "The Company-- Growth Strategies" and "Business and Properties--Development, Leasing and Management Activities" and "--Debt Structure." 38 USE OF PROCEEDS The net proceeds to the Company from the sale of Common Stock in the Offering (based on the midpoint of the range of the initial public offering price set forth on the cover page of this Prospectus), after deduction of underwriting discounts and commissions and estimated offering expenses, are expected to be approximately $169.7 million (approximately $195.6 million if the Underwriters' over-allotment option is exercised in full). In addition to the net proceeds from the Offering, the Operating Partnership expects to receive net proceeds from the Financing, after payment of expenses related thereto, of approximately $74.2 million. The Company intends to apply the net proceeds of the Offering and from the Financing as follows:
AMOUNT -------------- (IN THOUSANDS) Repayment of existing mortgage debt (net of discounts/premiums)...................................... $204,661 Acquisition of the Acquisition Properties................. 36,300 Financing expenses........................................ 1,500 Contribution to working capital........................... 1,525 -------- Total................................................. $243,986 ========
As of August 31, 1996, the estimated principal amount of certain indebtedness of the Kilroy Group secured by the Properties which is to be repaid with net proceeds of the Offering and the Financing was approximately $204.7 million (representing approximately $202.5 million of outstanding indebtedness and approximately $2.2 million of accrued expenses in connection with certain borrowings), of which approximately $34.8 million has been guaranteed by certain members of the Kilroy Group, including officers and directors of the Company. An aggregate of approximately $20.8 million of indebtedness was incurred within the last year, $1.1 million of which was incurred to finance tenant improvements and to pay leasing commissions related to Kilroy Airport Center Long Beach, and $19.7 million of which was used to repay $16.6 million of existing indebtedness (including $3.4 million of indebtedness of a Continuing Investor and accrued interest and prepayment penalties in connection with such repayments), and to pay approximately $940,000 in property taxes and approximately $454,000 in loan costs, legal fees and other expenses in connection with such financing, with the remainder being contributed to working capital. 39 The following mortgages and loans (which are all of the current outstanding mortgages and loans on the Properties) are intended to be repaid. The mortgages to be repaid upon completion of the Offering had a weighted average interest rate of approximately 8.76% and a weighted average remaining term to maturity of approximately 3.80 years as of June 30, 1996.
DEBT TO BE REPAID UPON COMPLETION OF THE PROPERTY LOCATION OFFERING - ----------------- ---------------------- (IN THOUSANDS) Kilroy Airport Center at El Segundo 2240 E. Imperial Highway 2250 E. Imperial Highway 2260 E. Imperial Highway El Segundo, California.................................. $ 95,000 Kilroy Airport Center Long Beach 3750 Kilroy Airport Way 3760 Kilroy Airport Way 3780 Kilroy Airport Way Long Beach, Californ.................................... 56,300 2031 E. Mariposa Avenue El Segundo, California(2)............................... 12,000 3332 E. La Palma Avenue Anaheim, California..................................... 7,600 2260 E. El Segundo Boulevard El Segundo, California 2265 E. El Segundo Boulevard El Segundo, California 2270 E. El Segundo Boulevard El Segundo, California 185 S. Douglas Street El Segundo, California.................................. 21,925(1) 1000 E. Ball Road Anaheim, California(2) 1230 S. Lewis Street Anaheim, California(2).................................. 5,566 12681/12691 Pala Drive, Garden Grove, California................................ 3,270 5115 N. 27th Avenue Phoenix, Arizona........................................ 3,000 -------- $204,661 ========
- -------- (1) This indebtedness is also secured by a second mortgage on the properties located at 1000 East Ball Road, Anaheim, California, 1230 S. Lewis Street, Anaheim, California and 2031 E. Mariposa Avenue, El Segundo, California. (2) This property is also subject to second mortgage indebtedness securing the $19.7 million aggregate principal amount of indebtedness which will be repaid with the net proceeds of the Offering. 40 In the event that the Underwriters' over-allotment option is exercised, the net proceeds thereof will be used by the Company for additional working capital and will be available for development and for future acquisitions of additional properties not yet identified. Pending application of such net proceeds, the Company will invest the net proceeds in interest-bearing accounts and short-term, interest-bearing securities, which are consistent with the Company's intention to qualify for taxation as a REIT. Such investments may include, for example, obligations of the Governmental National Mortgage Association, other government and government agency securities, certificates of deposit and interest-bearing bank deposits. DISTRIBUTION POLICY The Company presently intends to make regular quarterly distributions to holders of its Common Stock. The first distribution, for the period commencing upon the consummation of the Offering and ending , 1997, is anticipated to be approximately $ per share (which is equivalent to a quarterly distribution of $.40 per share or an annual distribution of $1.60 per share) which results in an initial annual distribution rate of 8.0%, based on the midpoint of the range of the initial public offering price set forth on the cover page of this Prospectus. The Company does not expect to change its estimated distribution rate if any of the Underwriters' over-allotment option is exercised. The Company currently expects to distribute approximately 90.4% of estimated cash available for distribution for the 12 months following the consummation of the Offering. Units and shares of Common Stock will receive equal distributions. The Board of Directors may vary the percentage of cash available for distribution which is distributed if the actual results of operations, economic conditions or other factors differ from the assumptions used in the Company's estimates. The Company believes that its estimate of cash available for distribution constitutes a reasonable basis for setting the initial distribution rate and is made solely for the purpose of setting the initial distribution rate and is not intended to be a projection or forecast of the Company's results of operations or of its liquidity. The Company presently intends to maintain the initial distribution rate for the 12 months following the consummation of the Offering unless actual results from operations, economic conditions or other factors differ significantly from the assumptions used in its estimate. However, no assurance can be given that the Company's estimate will prove accurate. The actual return that the Company will realize will be affected by a number of factors, including the revenue received from the Properties, the distributions and other payments received from the Operating Partnership and Services Company (which in turn is based in part on revenues received from third-party development activities), the operating expenses of the Company, the interest expense incurred on its borrowings, the ability of tenants to meet their obligations, general leasing activity and unanticipated capital expenditures. See "Risk Factors--Real Estate Investment Considerations." 41 The following table illustrates the adjustments made by the Company to its pro forma Funds from Operations for the twelve months ended June 30, 1996 in order to calculate estimated cash available for distribution;
AMOUNT ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Pro forma net income before minority interests for the year ended December 31, 1995.................................... $10,695 Plus pro forma net income before minority interests for the six months ended June 30, 1996............................. 6,416 Less pro forma net income before minority interests for the six months ended June 30, 1995............................. (5,168) ------- Pro forma net income before minority interests for the 12 months ended June 30, 1996(1).............................. 11,943 Add back non-cash items: Pro forma depreciation for the 12 months ended June 30, 1996(2).................................................. 8,250 Pro forma amortization for capitalized leasing commissions for the 12 months ended June 30, 1996(2)................. 1,139 ------- Pro forma Funds from Operations for the 12 months ended June 30, 1996................................................... 21,332 Adjustments: Net increases in contractual rental income(3)............. 238 Net increase from new leases(4)........................... 1,850 Net effect of lease expirations, assuming no renewals(5).. (2,236) Net effect of straight-line rents(6)...................... 111 ------- Estimated cash flow from operating activities for the 12 months ending June 30, 1997................................ 21,295 Estimated capitalized tenant improvements and leasing commissions(7)............................................. (957) Estimated capital expenditures(8)........................... (150) Scheduled debt principal payments(9)........................ (875) ------- Estimated cash available for distribution for the 12 months ending June 30, 1997....................................... $19,313 ======= Company's share of cash available for distribution(10).... $16,377 Minority interest's share of cash available for distribution............................................. $ 2,936 ======= Total estimated initial annual distribution................. $17,462 ======= Estimated initial annual distribution per share............. $ 1.60 ======= Estimated cash available for distribution payout ratio(11).. 90.4% =======
- -------- (1) Assumes that no dividends will be paid by the Services Company during such period. (2) Pro forma depreciation of $8,367,000 for the year ended December 31, 1995 plus $4,052,000 for the six months ended June 30, 1996 less $4,169,000 for the six months ended June 30, 1995. Pro forma amortization of $985,000 for the year ended December 31, 1995 plus $519,000 for the six months ended June 30, 1996 less $365,000 for the six months ended June 30, 1995. Amortization consists primarily of amortization of deferred leasing commissions. Non-cash interest expense of $107,000 related to amortization of the costs associated with the Mortgage Loan is not added back in this table in conformity with NAREIT's definition of Funds from Operations. (3) Represents an incremental increase in Funds from Operations attributable to contractual rental increases for the 12 months ending June 30, 1997 (over actual rental revenue included in pro forma Funds from Operations for the 12 months ended June 30, 1996). The contractual rental increases are limited to the actual number of months in which the increased rental rate will be in effect as to each lease. (footnotes continued on next page) 42 (4) Represents the incremental increase in Funds from Operations attributable to rental revenue from new executed leases commencing after June 30, 1995 for the 12 months ending June 30, 1997. (5) Represents the elimination of rental revenue reflected in rental revenue for the 12 months ended June 30, 1996 from: (i) leases which expired between June 30, 1995 and June 30, 1996 ($1,507,000) and (ii) leases which will expire between June 30, 1996 and June 30, 1997 for that portion of such fiscal year that such leases are no longer in effect ($729,000). This table assumes that leases which expire prior to June 30, 1997 will not be renewed or re-leased during the period. As a result of this assumption, the effective average occupancy rate of the Properties for the 12-month period ending June 30, 1997 will equal 94.3%, versus the actual occupancy rate for the Properties of 95.8% as of June 30, 1996. The Company's average tenant retention rate for expiring leases for 1993 through 1995 was approximately 72.2%. (6) Represents the effect of adjusting straight-line rental income and expense included in pro forma net income from an accrual basis under GAAP to a cash basis. (7) Reflects projected non-incremental revenue-generating tenant improvement ("TI") and leasing commission ("LC") for the 12-month period ending June 30, 1997 based on the weighted average TI and LC expenditures for all renewed and retenanted space incurred during 1993, 1994 and 1995, multiplied by the average annual net rentable square feet of leased space expiring during the three 12-month periods following the consummation of the Offering.
WEIGHTED 1993 1994 1995 AVERAGE ----- ------ ----- ---------- OFFICE PROPERTIES: Retenanted TI per net rentable square foot........ $9.23 $24.03 $4.80 $ 15.55 LC per net rentable square foot........ $2.94 $ 4.08 $4.27 3.97 ---------- Total weighted average TI and LC..... 19.52 Average annual net rentable square feet of leased space expiring during the three 12-month periods following the Offering........................ 109,758 ---------- Total estimated annual TI and LC..... 2,142,476 Rate of retenant(i).................. 30% ---------- Total cost of retenants.............. $ 642,808 Renewals TI per net rentable square foot........ $ -- $ .25 $4.14 $ 2.42 LC per net rentable square foot........ $ -- $ .07 $ .57 .35 ---------- Total weighted average TI and LC..... 2.77 Average annual net rentable square feet of leases expiring during the three 12-month periods following the Offering............................ 109,758 ---------- Total estimated annual TI and LC..... 304,030 Rate of renewal(i)................... 70% ---------- Total cost of renewals............. 213,168 ---------- Total TI and LC cost of Office Properties............................ $ 855,976 ---------- INDUSTRIAL PROPERTIES: TI per net rentable square foot.......... $ .14 $ 4.49 $2.00 $ 2.19 LC per net rentable square foot.......... $1.49 $ 3.49 $1.84 2.16 ---------- Total weighted average TI and LC....... 4.35 Average annual net rentable square feet of leases expiring during the three 12-month periods following the Offering.............................. 23,333 ---------- Total estimated annual TI and LC....... 101,497 ---------- Total.................................... $ 957,473 ==========
-------- (i) The historical weighted average renewal rate, based on square footage, for the Company from January 1, 1993 through December 31, 1995 is 72.2%. (footnotes continued on next page) 43 (8) Estimated annual capital expenditures not reimbursed by tenants. Represents the average of historical nonreimbursed capital expenditures at the Office and Industrial Properties during the years ended December 31, 1994 and 1995. All capital expenditures during 1993 were reimbursed by tenants. (9) Estimated principal payments on the Mortgage Loan. (10) The Company's share of estimated distributions based on its approximately 84.8% partnership interest in the Operating Partnership. (11) Calculated as the estimated initial annual distribution divided by the estimated cash flow available for distribution for the 12 months ending June 30, 1997. The payout ratio of estimated adjusted pro forma Funds from Operations (which is substantially equivalent to the Company's estimated pro forma cash flow from operating activities) for the 12 months ending June 30, 1997 equals 82.0%. The Company anticipates that its estimated cash available for distribution will exceed earnings and profits due to non-cash expenses, primarily depreciation and amortization, to be incurred by the Company. Distributions by the Company to the extent of its current or accumulated earnings and profits for federal income tax purposes, other than capital gain dividends, will be taxable to stockholders as ordinary dividend income. Capital gain distributions generally will be treated as long-term capital gains. Distributions in excess of earnings and profits generally will be treated as a non-taxable return of capital to the extent of each stockholder's basis in his or her Common Stock to the extent thereof, and thereafter as taxable gain. The non-taxable distributions will reduce each stockholder's tax basis in the Common Stock and, therefore, the gain (or loss) recognized on the sale of such Common Stock or upon liquidation of the Company will be increased (or decreased) accordingly. Based on the estimated cash flow available for distribution set forth in the table above, the Company believes that approximately % of distributions for the 12 months following consummation of the Offering would represent a return of capital. If actual cash available for distribution or taxable income vary from these amounts, the percentage of distributions which represent a return of capital may be materially different. For a discussion of the tax treatment of distributions to holders of Common Stock, see "Federal Income Tax Consequences--Taxation of U.S. Stockholders" and "--Taxation of Non-U.S. Stockholders." In order to qualify to be taxed as a REIT, the Company must make annual distributions to stockholders of at least 95% of its REIT taxable income (determined without regard to the dividends received deduction and by excluding any net capital gains) which the Company anticipates will be less than its share of adjusted Funds from Operations. Under certain circumstances, the Company may be required to make distributions in excess of cash available for distribution in order to meet such distribution requirements. Financing activities such as repayment or refinancing of loans also may affect the Company's assets and liabilities and the amount of cash available for distribution for future periods. Management will seek to control the timing and nature of investing and financing activities in order to maximize the Company's return on invested capital. Future distributions by the Company will be subject to the requirements of the MGCL and the discretion of the Board of Directors of the Company, and will depend on the actual cash flow of the Company, its financial condition, its capital requirements, any decision by the Board of Directors to reinvest the Operating Partnership's Funds from Operations rather than distribute such funds to the Company, the annual distribution requirements under the REIT provisions of the Code (see "Federal Income Tax Considerations--Taxation of the Company--Annual Distribution Requirements") and such other factors as the Board of Directors deems relevant. There can be no assurance that any distributions will be made or that the expected level of distributions will be maintained by the Company. See "Risk Factors--Real Estate Investment Considerations" and "--Distribution Payout Percentage." If revenues generated by the Company's properties in future periods decrease materially from current levels, the Company's ability to make expected distributions would be materially adversely affected, which could result in a decrease in the market price of the shares of Common Stock. The Company may in the future implement a distribution reinvestment program under which holders of shares of Common Stock may elect automatically to reinvest distributions in additional shares of Common Stock. The Company may, from time to time, repurchase shares of Common Stock in the open market for purposes of 44 fulfilling its obligations under this distribution reinvestment program, if adopted, or may elect to issue additional shares of Common Stock. If the Company adopts a distribution reinvestment program, it will solicit participation in the program after the Offering by means of a separate prospectus, and a purchase of shares of Common Stock in the Offering does not entitle any investor to participate in any such program. There can be no assurance that the Company will adopt such a program, and consequently, the probable date of adoption or number of shares of Common Stock that would be available under such program cannot be determined at this time. Cash available for distribution is based on Funds from Operations (which is defined by NAREIT as net income (loss) (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 after adjustments for unconsolidated partnerships and joint ventures. The calculation of adjustments to pro forma Funds from Operations is being made solely for the purpose of setting the initial distribution amount and is not intended to be a projection or prediction of the Company's actual results of operations nor is the methodology upon which such adjustments are made intended to be a basis for determining future distributions. Industry analysts generally consider Funds from Operations to be an appropriate measure of the performance of an equity REIT because it is predicated on cash flow analysis which such analysts believe is more reflective of the value of real estate companies such as the Company than a measure predicated on GAAP, which gives effect to non-cash items such as depreciation. In addition, pro forma results of operations do not purport to present the actual results that can be expected for future periods. Funds from Operations does not represent cash generated from operating activities in accordance with GAAP (which, unlike cash flow from operations, generally reflects all cash effects of transactions and other events that enter into the determination of net income), is not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income as an indication of performance or to cash flow as a measure of liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Funds from Operations." 45 CAPITALIZATION The following table sets forth the capitalization of the Company (based on the Combined Financial Statements of the Kilroy Group) as of June 30, 1996 on an historical basis, and on a pro forma basis as adjusted to give effect to the Formation Transactions, the Offering, the Financing and the application of the net proceeds therefrom as described under the caption "Use of Proceeds." The information set forth in the following table should be read in conjunction with the Combined Financial Statements of the Kilroy Group and notes thereto, the pro forma financial information of the Company and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" included elsewhere in this Prospectus.
JUNE 30, 1996 ------------------------- HISTORICAL PRO FORMA ----------- ----------- (DOLLARS IN THOUSANDS) Debt: Mortgage Loan(1)................................... $ 204,601 $ 75,000 Borrowings under Credit Facility(2)................ -- -- ----------- ----------- Total debt........................................... 204,601 75,000 ----------- ----------- Minority interest in the Operating Partnership(3).... -- 11,199 ----------- ----------- Stockholders' equity (deficit): Preferred Stock, $.01 par value, 30,000,000 shares authorized, none issued or outstanding............ Common Stock, $.01 par value, 150,000,000 shares authorized, 9,260,000 shares issued and outstanding(3)(4)................................. -- 93 Capital in excess of par value..................... -- 62,387 Accumulated deficit................................ (95,283) -- ----------- ----------- Total stockholders' equity (deficit)................. (95,283) 62,480 ----------- ----------- Total capitalization................................. $ 109,318 $ 148,679 =========== ===========
- -------- (1) The Company, on behalf of the Operating Partnership, intends to obtain a written commitment for the $75 million Mortgage Loan, the closing of which is a condition to the consummation of the Offering. See "The Financing-- The Mortgage Loan." (2) The Company, on behalf of the Operating Partnership, expects to obtain a written commitment to establish the $100 million Credit Facility, which the Company expects to enter into concurrently with the consummation of the Offering. See "The Financing--The Credit Facility." (3) Assumes no exchange of the Units to be issued to the Continuing Investors in connection with the Formation Transactions. If all of the Units were exchanged, 10,913,835 shares of Common Stock would be outstanding. (4) Excludes 1,000,000 shares of Common Stock reserved for issuance pursuant to the Stock Incentive Plan. See "Management--Stock Incentive Plan." 46 DILUTION Purchasers of the Common Stock offered hereby will experience an immediate and substantial dilution of the net tangible book value of their Common Stock from the assumed initial public offering price. At June 30, 1996, the Company had a negative combined net tangible book value of approximately $95.3 million, or $57.61 per share of Common Stock (assuming the exchange of Units issued to Continuing Investors in connection with the Formation Transactions into shares of Common Stock on a one-for-one basis). After giving effect to the sale of the shares of Common Stock offered hereby at an assumed initial public offering price of $20.00 per share of Common Stock, the deduction of underwriting discounts and commissions and estimated Offering expenses and the receipt by the Company of approximately $169.7 million in net proceeds from the Offering, the pro forma net tangible book value at June 30, 1996 would have been $62.5 million, or $6.75 per share of Common Stock. This amount represents an immediate increase in net tangible book value of $64.36 per Unit to Continuing Investors and an immediate dilution in pro forma net tangible book value of $13.25 per share of Common Stock to new public investors. The following table illustrates this per share dilution: Assumed initial public offering price per share............ $20.00 Pro forma net tangible book value before the Offering(1)............................................. $(57.61) Increase in pro forma net tangible book value attributable to the Offering and Formation Transactions............................................ 64.36 ------- Pro forma net tangible book value after the Offering(2).... 6.75 ------ Dilution in pro forma net tangible book value to new investors(3).............................................. $13.25 ======
- -------- (1) Net tangible book value per share of Common Stock before the Offering is determined by dividing net tangible book value (total tangible assets less total liabilities) of the Company by the number of shares of Common Stock of the Company representing the exchange in full of the Units to be issued to the Continuing Investors. (2) Based on pro forma net tangible book value of approximately $62.5 million divided by 9,260,000 shares of Common Stock outstanding. There is no impact on dilution attributable to the exchange of Units to be issued to the Continuing Investors due to the effect of minority interest. (3) Dilution is determined by subtracting pro forma net tangible book value per share of Common Stock after giving effect to the Formation Transactions and the Offering from the assumed initial public offering price paid by a new investor for a share of Common Stock. The following table sets forth, on a pro forma basis giving effect to the Offering and the Formation Transactions: (i) the number of shares of Common Stock to be sold by the Company in the Offering and the number of Units issued to the Continuing Investors in connection with the Formation Transactions; (ii) the net tangible book value as of June 30, 1996 of the assets contributed to the Operating Partnership in the Formation Transactions; and (iii) the net tangible book value of the average contribution per share/Unit based on total contributions. See "Risk Factors--Immediate and Substantial Dilution."
SHARES/UNITS BOOK VALUE OR CASH ISSUED(1) CONTRIBUTIONS AVERAGE PRICE ------------------ ------------------------ PER NUMBER PERCENT AMOUNT PERCENT SHARE/UNIT ---------- ------- ---------- --------- ------------- (IN THOUSANDS) New investors........... 9,260,000 84.8% $ 185,200 (2) 248.7 % $ 20.00 Units issued to Continuing Investors in connection with the Formation Transactions........... 1,653,835 15.2% (110,747)(3) (148.7)% $(66.55) ---------- ----- ---------- ------- Total............... 10,913,835 100.0% $ 74,453 100.0 % ========== ===== ========== =======
- -------- (1) Reflects the shares of Common Stock offered hereby and the Units to be issued to the Continuing Investors in exchange for assets contributed in connection with the Formation Transactions at the initial exchange ratio of one share of Common Stock for each Unit. There are, however, certain restrictions on the exchange of Units. See "Partnership Agreement of the Operating Partnership--Redemption/Exchange Rights." (2) This amount is based on the assumed initial public offering price of $20.00. (3) Based on the June 30, 1996 pro forma book value of the assets to be contributed to the Operating Partnership in connection with the Formation Transactions less underwriting discounts and commissions and estimated expenses of the Offering. 47 SELECTED FINANCIAL DATA The following table sets forth certain financial data on a pro forma basis for the Company, and on an historical basis for the Kilroy Group, which consist of the combined financial statements of the Kilroy Group (the "Combined Financial Statements") whose financial results will be consolidated in the historical and pro forma financial statements of the Company. The financial data should be read in conjunction with the historical and pro forma financial statements and notes thereto included in this Prospectus. The combined historical summary financial data as of December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995 have been derived from the Combined Financial Statements of the Kilroy Group audited by Deloitte & Touche LLP, independent public accountants, whose report with respect thereto is included elsewhere in this Prospectus. The selected combined historical financial and operating information as of December 31, 1993, 1992 and 1991 and June 30, 1996 and for the years ended December 31, 1992 and 1991 and the six months ended June 30, 1996 and June 30, 1995 have been derived from the unaudited Combined Financial Statements of the Kilroy Group and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the operating information for the unaudited periods. The pro forma data assume the completion of the Formation Transactions, including acquisition of the Acquisition Properties and the consummation of the Offering (based upon the midpoint of the range of the initial public offering price set forth on the cover page of this Prospectus) and the Financing and use of the aggregate net proceeds therefrom as described under "Use of Proceeds" as of the beginning of the periods presented for the operating data and as of the balance sheet date for the balance sheet data. The pro forma financial data do not give effect to the recent extension of the tenant lease with Hughes Space & Communications with respect to space leased in the Office Property located at 2250 E. Imperial Highway, El Segundo, California and a portion of the space leased in the Office Property located at 2240 E. Imperial Highway, El Segundo, California. The pro forma financial data are not necessarily indicative of what the actual financial position or results of operations of the Company would have been as of and for the periods indicated, nor does it purport to represent the future financial position and results of operations. 48 THE COMPANY (PRO FORMA) AND KILROY GROUP (HISTORICAL) (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ------------------------------- ------------------------------------------------------------- COMBINED HISTORICAL COMBINED HISTORICAL PRO FORMA -------------------- PRO FORMA -------------------------------------------------- 1996 1996 1995 1995 1995 1994 1993 1992 1991 --------- ---------- --------- --------- --------- --------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Rental income.......... $ 17,259 $ 14,837 $ 13,949 $ 32,884 $ 28,285 $ 27,518 $ 29,139 $ 27,935 $ 24,898 Tenant reimbursements.. 1,981 1,658 1,275 3,434 2,746 1,549 3,507 3,623 3,886 Parking income......... 800 800 727 1,447 1,447 1,216 1,205 1,143 1,199 Development and management fees....... 458 695 1,156 919 751 882 779 Sale of air rights..... 4,456 Other income........... 261 58 52 803 395 1,077 174 180 144 -------- -------- --------- --------- --------- --------- -------- -------- -------- Total revenues......... 20,301 17,811 16,698 38,568 38,485 32,279 34,776 33,763 30,906 -------- -------- --------- --------- --------- --------- -------- -------- -------- Property expenses...... 2,647 2,719 2,571 5,339 5,376 4,674 4,320 4,469 6,741 Real estate taxes (refunds)............. 726 518 670 1,503 1,139 (929) 2,500 3,276 96 General and administrative expense............... 2,199 876 881 4,389 2,050 2,406 1,033 932 773 Ground lease........... 399 230 216 813 475 591 772 696 568 Development expenses... 485 384 737 468 581 429 255 Interest expense....... 3,307 9,422 11,813 6,613 21,529 22,739 23,151 23,624 23,577 Depreciation and amortization.......... 4,571 4,051 4,013 9,352 8,313 8,740 8,990 8,954 8,196 -------- -------- --------- --------- --------- --------- -------- -------- -------- Total expenses......... 13,849 18,301 20,548 28,009 39,619 38,689 41,347 42,380 40,206 -------- -------- --------- --------- --------- --------- -------- -------- -------- Income (loss) before equity in income of subsidiary, minority interest and extraordinary item.... 6,452 (490) (3,850) 10,559 (1,134) (6,410) (6,571) (8,617) (9,300) Equity in income (loss) of subsidiary......... (36) 136 Minority interest...... (975) (1,625) Extinguishment of debt.................. 12,887 15,267 1,847 -------- -------- --------- --------- --------- --------- -------- -------- -------- Net income (loss)...... $ 5,441 $ 12,397 $ (3,850) $ 9,070 $ 14,133 $ (4,563) $ (6,571) $ (8,617) $ (9,300) ======== ======== ========= ========= ========= ========= ======== ======== ======== Pro forma net income per share(1).......... $ 0.59 $ .98 ======== ========= DECEMBER 31, -------------------------------------------------- JUNE 30, 1996 COMBINED HISTORICAL --------------------- -------------------------------------------------- COMBINED PRO FORMA HISTORICAL 1995 1994 1993 1992 1991 --------- ---------- --------- --------- -------- -------- -------- BALANCE SHEET DATA: Real estate assets, before accumu- lated depreciation and amortization.......... $229,410 $193,110 $ 191,744 $ 190,720 $189,079 $202,941 $201,873 Total assets........... 159,002 121,825 121,171 130,624 134,920 145,979 153,073 Mortgages and loans.... 75,000 204,601 206,858 222,038 218,769 221,921 216,558 Total liabilities...... 85,323 217,108 224,301 242,887 232,063 232,351 223,678 Minority interest...... 11,199 Stockholders' equity (deficit)............. 62,480 (95,283) (103,130) (112,263) (97,143) (86,372) (70,605)
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, -------------------------------- ------------------------------------------ COMBINED HISTORICAL COMBINED HISTORICAL PRO FORMA -------------------- PRO FORMA ------------------------------- 1996 1996 1995 1995 1995 1994 1993 ---------- --------- --------- --------- --------- --------- --------- OPERATING DATA: Funds from Operations(2)......... $11,023 $3,561 $163 $19,911 $2,723 $2,330 $2,419 Office Properties: Square footage......... 1,463,028 1,156,787 1,156,787 1,463,028 1,156,787 1,156,787 1,156,787 Average occupancy...... 94.1% 93.2% 87.2% 89.3% 87.1% 87.6% 82.4% Industrial Properties: Square footage......... 916,570 916,570 916,570 916,570 916,570 916,570 916,570 Average occupancy...... 98.4% 98.4% 98.4% 98.4% 98.4% 79.7% 77.6%
- ------- (1) Pro forma net income per share equals pro forma net income divided by the 9,260,000 shares of Common Stock offered hereby. (2) Industry analysts generally consider Funds from Operations an alternative measure of performance of an equity REIT. As defined by the National Association of Real Estate Investment Trusts ("NAREIT"), Funds from Operations represents net income (loss) before minority interest of unit holders (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 after adjustments for unconsolidated partnerships and joint ventures. For all periods presented, depreciation and amortization and, in 1995 and 1994, gain on extinguishment of debt, were the only non- cash adjustments. Funds from Operations should not be considered as an alternative for net income as a measure of profitability nor is it comparable to cash flows provided by operating activities determined in accordance with GAAP. 49 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the "Selected Financial Data" and the Combined Financial Statements for the Kilroy Group and notes thereto appearing elsewhere in this Prospectus. The Combined Financial Statements of the Kilroy Group are comprised of the operations, assets and liabilities of the Properties other than the Acquisition Properties. As part of the Formation Transactions, the Properties will be contributed to the Operating Partnership, of which the Company will be the sole general partner and the beneficial owner of an approximately 84.8% interest. As a result, for accounting purposes, the financial information of the Operating Partnership and the Company will be consolidated. RESULTS OF OPERATIONS Year Ended December 31, 1994 Compared to Year Ended December 31, 1993 Total revenues decreased $2.5 million, or 7.2%, for the year ended December 31, 1994 compared to the year ended December 31, 1993. Revenues from base rents decreased $1.6 million, or 5.6%, to $27.5 million for the year ended December 31, 1994 compared to $29.1 million for the year ended December 31, 1993, due to a lease renegotiation resulting in a lower rent rate effective June 1, 1994 for a lease on office space in the parking structure at Kilroy Airport Center at El Segundo, partially offset by continuing leasing activity at Kilroy Airport Center Long Beach. Tenant reimbursements decreased to $1.5 million in 1994 from $3.5 million in 1993, due principally to a $1.5 million refund to tenants in 1994 for property tax refunds (for the tax years 1990 through 1994) which were recorded by the Company in 1994. Parking revenues were approximately $1.2 million for both 1994 and 1993. Development fees increased $0.2 million, or 22.4%, to $0.9 million in 1994, resulting primarily from the commencement in February 1994 of preliminary design work on the Riverside Judicial Center. Other income increased $0.9 million, to $1.1 million in 1994 from $0.2 million in 1993, primarily as a result of interest income of $0.4 million on the property tax refunds recorded in 1994 and $0.3 million of lease termination fees ($0.2 million at Kilroy Airport Center at El Segundo and $0.1 million at Kilroy Airport Center Long Beach). Expenses in 1994 decreased $2.7 million, or 6.4%, to $38.7 million compared to $41.4 million in 1993. Property expenses increased $0.4 million, or 8.2%, principally from increased utility costs and increases in employee wages and benefits. Real estate taxes decreased $3.4 million to a credit balance of $0.9 million in 1994 from $2.5 million in 1993, primarily due to property tax refunds of $2.4 million (for the tax years 1990 through 1994) recorded by the Company in 1994. The $0.2 million decrease in ground rent expense to $0.6 million in 1994 from $0.8 million in 1993 resulted from a renegotiation of the ground lease for Phase III of Kilroy Airport Center Long Beach effective July 1, 1994. General and administrative expenses increased $1.4 million, to $2.4 million in 1994 from $1.0 million in 1993, principally due to a $0.6 million increase in the allowance for uncollectible rent attributable to a single tenant and a $0.3 million penalty in 1994 for late payment of property taxes. Interest expense decreased $0.4 million, to $22.7 million in 1994 due to a decrease in the interest rate on the variable rate mortgage secured by Kilroy Airport Center Long Beach. Depreciation and amortization decreased $0.3 million to $8.7 million in 1994 as a result of certain assets becoming fully amortized. The net loss decreased $2.0 million to $4.6 million in 1994 compared to a net loss of $6.6 million in 1993, due primarily to a gain on extinguishment of debt of $1.8 million in 1994 and, to a limited extent, the net effect of the items discussed above. Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 Total revenues increased $6.2 million, or 19.2%, for the year ended December 31, 1995 compared to the year ended December 31, 1994. Revenues from base rents increased $0.8 million, or 2.8%, to $28.3 million in 1995 from $27.5 million in 1994, due to the continued leasing of Kilroy Airport Center Long Beach and the effect of 12-months' rental for the Industrial Property located at 2265 E. El Segundo Boulevard compared to four-months' rental in 1994, offset in part by a full year of the lower rent rate for office space in the parking 50 structure at Kilroy Airport Center at El Segundo effective June 1, 1994. Tenant reimbursements increased to $2.7 million in 1995 from $1.5 million in 1994 due principally to the 1994 $1.5 million refund in 1994 to tenants for property tax refunds. Parking revenues increased to $1.4 million in 1995 from $1.2 million in 1994 due to recognition of 12-months' parking income for Kilroy Airport Center Long Beach in 1995 compared to two months in 1994, together with increased tenant parking revenues at Kilroy Airport Center at El Segundo. Revenues from development fees increased $0.3 million, to $1.2 million in 1995 from $0.9 million in 1994, primarily due to the continuing design work for the Riverside Judicial Center. Revenues for 1995 include a gain on the sale of air rights of $4.5 million at Kilroy Airport Center at El Segundo. See Note 2 to the Combined Financial Statements. Other income decreased $0.7 million to $0.4 million during 1995 compared to 1994, primarily as a result of nonrecurring interest income and lease termination fees received in 1994. Expenses in 1995 increased $0.9 million, or 2.0%, to $39.6 million. Property operating expenses increased $0.7 million, or 15.0%, primarily due to increased utility costs, increases in employee wages and benefits and a $0.3 million special management fee paid to Kilroy Industries to cover costs of the loan renegotiation at Kilroy Airport Center at El Segundo. Real estate taxes increased $2.1 million, to $1.1 million in 1995 from a credit balance of $0.9 million in 1994, due to the $2.4 million property tax refund recorded by the Company in 1994. General and administrative expenses decreased $0.4 million, or 14.8%, to $2.0 million in 1995 from $2.4 million in the 1994 period, primarily due to a $0.3 million penalty for late payment of property taxes in 1994. Interest expense decreased $1.2 million to $21.5 million in 1995 from $22.7 million in 1994 due to the September 1995 extension of the mortgage on Kilroy Airport Center at El Segundo at a lower interest rate and the forgiveness of certain debt, offset in part by the effect of higher interest rates on the variable rate mortgage secured by Kilroy Airport Center Long Beach. See Note 4 to the Combined Financial Statements. Ground lease expense decreased $0.1 million to $0.5 million in 1995, reflecting the effect of 12 months' reduction of ground rent for Phase III of Kilroy Airport Center Long Beach compared to six months in 1994. The $0.3 million increase in development expenses relates to increased costs associated with development services income. The $0.4 million decrease in depreciation expense to $8.3 million in 1995 results from certain assets becoming fully amortized. Net income increased $18.7 million to $14.1 million in 1995 compared to a net loss of $4.6 million in 1994, primarily due to the sale of air rights discussed above and a $13.4 million increase in gains on extinguishment of debt to $15.2 million in 1995 compared to $1.8 million in 1994. Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995 Total revenues increased $1.1 million, or 6.7%, for the six months ended June 30, 1996 compared to the same period for 1995. Revenues from base rents increased $0.9 million, or 6.4%, to $14.8 million in the 1996 period compared to $13.9 million in the 1995 period, due to the continued leasing of various properties, including the signing of a new lease in the 1996 period at Kilroy Airport Center Long Beach which alone resulted in a $0.5 million incremental increase in the 1996 period. Tenant reimbursements and parking revenues increased to $1.6 million and $0.8 million, respectively, in the 1996 period compared to $1.3 million and $0.7 million for the same period in 1995. The overall $0.4 million increase is primarily due to increased billable operating expenses resulting from new leases. Revenues from development and management fees decreased $0.2 million to $0.5 million in 1996 from $0.7 million in 1995 primarily due to the completion of major design work for the courthouse in Riverside Judicial Center and the infrastructure for the proposed Calabasas Park Centre. Expenses in the six months ended June 30, 1996 decreased by $2.2 million, or 10.9%, to $18.3 million compared to $20.5 million in the 1995 period. Property expenses increased $0.1 million, or 5.8%, due principally to higher maintenance costs in 1996 resulting from increased occupancy in 1996. Development expenses increased $0.1 million, or 26.3%, from $0.4 million in the first six months of 1995 to $0.5 million for the same period in 1996 primarily due to increases in wages. Interest expense decreased $2.4 million, or 20.3%, to $9.4 million in 1996 from $11.8 million in 1995, primarily as a result of the forgiveness and restructuring of certain debt in 1995 and 1996 (see Note 4 to the Kilroy Group Combined Financial Statements). 51 Net income was $12.4 million for the six months ended June 30, 1996 compared to a net loss of $3.8 million for the same period in 1995, due primarily to the decreases in debt and interest expense and the extraordinary gain of $12.3 million referred to above for the 1996 period. LIQUIDITY AND CAPITAL RESOURCES Upon the consummation of the Offering and the Formation Transactions and the use of proceeds therefrom, the Company will have (i) acquired the Acquisition Properties, (ii) reduced its total indebtedness by approximately $129.6 million and (iii) established working capital of approximately $0.9 million. The Company intends to obtain a written commitment for a $100.0 million Credit Facility, which the Company expects to enter into concurrently with the consummation of the Offering. The Credit Facility will be used primarily to finance acquisitions of additional properties and to finance the development of properties, although a portion may be used for general working capital purposes. See "The Financing--The Credit Facility." The Company anticipates that distributions will be paid from cash available for distribution, which is expected to exceed cash historically available for distribution as a result of the reduction in debt service anticipated to result from the repayment of indebtedness. The Company presently intends to make distributions quarterly, subject to the discretion of the Board of Directors. Amounts accumulated for distribution will be invested by the Company primarily in interest-bearing accounts and short-term, interest- bearing securities, which are consistent with the Company's intention to qualify for taxation as a REIT. Such investments may include, for example, obligations of the Government National Mortgage Association, other governmental agency securities, certificates of deposit and interest-bearing bank deposits. The Company expects to meet its short-term liquidity requirements generally through its initial working capital, net cash provided by operations and additional debt or equity financings. The Company estimates that for the 12 months ending June 30, 1997 it will incur approximately $957,000 of expenses attributable to non-incremental revenue generating tenant improvements and leasing commissions and $150,000 of capital expenditures not reimbursed by tenants. In connection with the Formation Transactions, the Company will pay to Hughes Space & Communications an aggregate of approximately $1.5 million in connection with the amendment and/or extension of leases of office space at the Office Properties located at Kilroy Airport Center, including $500,000 in connection with a tenant improvement allowance for the properties located at 2240 and 2250 E. Imperial Highway and the balance in connection with the cancellation of an option to purchase an equity interest in the Office Properties located at Kilroy Airport Center at El Segundo. See "Distribution Policy." The Company believes that it will have sufficient capital resources to satisfy its obligations during the 12-month period following completion of the Offering, and that its net cash provided by operations will be adequate to meet both operating requirements and expected distributions by the Company in accordance with REIT requirements. The Company expects to meet certain of its long-term liquidity requirements, including the repayment of long-term debt of approximately $75.0 million (less scheduled principal repayments) in 2003 and possible property acquisitions and development, through long-term secured and unsecured borrowings and the issuance of debt securities or additional equity securities of the Company or, possibly in connection with acquisitions of land or improved properties, the issuance of Units of the Operating Partnership. The Phase I Environmental Assessments of the Properties have not revealed any environmental liability that the Company believes would have a material adverse effect on the Company's business, assets or results of operations taken as a whole, nor is the Company aware of any such material environmental liability. See "Risk Factors--Government Regulations--Environmental Matters" and "Business and Properties--Government Regulations--Environmental Matters." 52 HISTORICAL CASH FLOWS Historically, the Kilroy Group's principal sources of funding for operations and capital expenditures were cash flow from operating activities and secured debt financings. The Kilroy Group incurred net losses before extraordinary items in each of the last five years and for the six-month period ended June 30, 1996. However, after adding back depreciation and amortization, the Properties have generated positive net operating cash flows for the last four years. The Company's net cash provided by operating activities increased to $7.1 million for the year ended December 31, 1994 from $5.2 million for the same period in 1993 primarily as a result of an increase in the 1994 period in rents received in advance and tenant security deposits. The Company's net cash from operating activities was substantially unchanged from the year ended December 31, 1994 compared to the same period in 1995, with $7.1 million in the 1994 period and $7.2 million in the 1995 period. The Company's net cash from operating activities was $0.9 million in the first six months of 1996. Such amount was less than one-half of the 1995 period amount due to increases in tenant receivables, other assets, and a reduction of accounts payable and accrued property taxes in 1996. Net cash received from investing activities of $2.2 million for the year ended December 31, 1993 decreased to net cash used in investing activities of $1.6 million for the same period in 1994 due to the receipt in the 1993 period of a $2.7 million reimbursement of tenant improvements. Net cash used in investing activities decreased $0.6 million to $1.0 million for the year ended December 31, 1995 from $1.6 million for the same period in 1994 due to a decrease in the level of tenant improvement activity. Net cash used in investing activities increased $1.0 million to $1.4 million in the six months ended June 30, 1996 from $0.4 million in the 1995 period primarily due to an increase in the level of tenant improvement activity. The Company's cash flows used in financing activities decreased $2.0 million to $5.4 million from $7.4 million for the year ended December 31, 1993 as a result of net borrowings of $5.1 million during the year ended December 31, 1994 compared to a net repayment of $3.2 million of debt in the 1993 period, together with an increase in deemed distributions to partners to $10.6 million during the year ended December 31, 1994 compared to $4.2 million in the 1993 period. Cash flows used in financing activities decreased $0.8 million to $6.2 million for the year ended December 31, 1995 compared to net cash used in financing activities of $5.4 million for the same period in 1994 as result of net repayments of debt in the 1995 period compared to net borrowings in the 1994 period and a $5.6 million decrease in deemed distributions to partners. Cash flows provided by financing activities was $0.5 million for the six months ended June 30, 1996 consisting of net proceeds from issuance of debt of $5.0 million, less $4.5 million in distributions to partners. FUNDS FROM OPERATIONS Industry analysts generally consider Funds from Operations, as defined by NAREIT, an alternative measure of performance of an equity REIT. Funds from Operations is defined by NAREIT to mean net income (loss) determined in accordance with GAAP, excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization (other than amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships and joint ventures. The Company believes that in order to facilitate a clear understanding of the combined historical operating results of the Company, Funds from Operations should be examined in conjunction with net income (loss) as presented in the audited and unaudited Combined Financial Statements and selected financial data included elsewhere in this Prospectus. Funds from Operations should not be considered as an alternative to net income (loss) as an indication of the Company's performance or to cash flows as a measure of liquidity or the ability to pay dividends or make distributions. INFLATION The Company's leases with the majority of its tenants require the 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. 53 BUSINESS AND PROPERTIES GENERAL Upon the consummation of the Offering and the Formation Transactions, the Company (through the Operating Partnership) will own ten Office Properties encompassing an aggregate of approximately 1.5 million rentable square feet and nine Industrial Properties encompassing an aggregate of approximately 900,000 rentable square feet. All of the Office Properties are located in prime Southern California suburban submarkets (including a complex of three Office Properties located adjacent to the Los Angeles International Airport, presently the nation's second largest air cargo port, and a complex of five Office Properties located adjacent to the Long Beach Municipal Airport), and one Industrial Property is located in Phoenix, Arizona. As of June 30, 1996, the Office Properties were approximately 94.1% leased to 88 tenants and the Industrial Properties were approximately 98.4% leased to nine tenants. The Company has developed, managed and leased all but one of the Office Properties and seven of the nine Industrial Properties. The Company believes that all of its Properties are well-maintained and, based on recent engineering reports, do not require significant capital improvements. In addition to the Office and Industrial Properties, the Company has development rights with respect to approximately 24 acres of developable land (net of acreage required for streets), located in Southern California. The Company also has an exclusive agreement to negotiate to acquire an additional six acres of developable land (net of acreage reserved for open areas) at the Thousand Oaks Civic Arts Plaza and Retail Center. See "--Development, Leasing and Management Activities." Upon consummation of the Offering, the Company also will have the option to purchase six office properties currently owned by the Kilroy Group which will not be contributed to the Operating Partnership immediately upon consummation of the Offering. The Company will have the right to acquire the option properties under the terms and conditions described below. All of these properties will be managed by the Company. See "--Excluded Properties." In general, the Office Properties are leased to tenants on a full service basis, with the landlord obligated to pay the tenant's proportionate share of taxes, insurance and operating expenses up to the amount incurred during the tenant's first year of occupancy ("Base Year") or a negotiated amount approximating the tenant's pro rata share of real estate taxes, insurance and operating expenses ("Expense Stop"). The tenant pays its pro rata share of increases in expenses above the Base Year or Expense Stop. All leases for the Industrial Properties are written on a triple net basis, with tenants paying their proportionate share of real estate taxes, operating costs and utility costs. The following table sets forth certain information (on a per net rentable square foot basis) regarding leasing activity at the Office Properties managed by the Company (i.e., all of the Office Properties other than the Thousand Oaks Office Property (as defined) which is being acquired concurrently upon consummation of the Offering) since January 1, 1992 (based upon an average of all lease transactions during the respective periods): OFFICE PROPERTIES
YEAR ENDED DECEMBER 31, SIX-MONTH -------------------------------- PERIOD ENDED 1992 1993 1994 1995 JUNE 30, 1996 ------- ------ ------- ------ ------------- Number of lease transactions during period(1)............. 18 12 27 17 24 Net rentable square feet during period(1)............. 145,102 77,362 322,357 96,574 265,765 Base rent ($)(1)(2)........... 23.86 21.83 19.77 19.67 20.64 Tenant improvements ($)(3).... 5.75 11.10 16.16 6.70 10.83 Leasing commissions ($)(4).... 2.10 3.31 2.84 3.20 3.16 Other concessions ($)(5)...... -- -- -- -- -- Effective rent ($)(6)......... 21.34 19.30 17.54 17.58 18.49 Expense stop ($)(7)........... 6.73 6.61 6.94 7.02 7.14 Effective equivalent triple net rent ($)(8).............. 14.61 12.69 10.60 10.56 11.35 Occupancy rate at end of period (%)................... 75.3% 76.2% 88.6% 88.7% 93.8%
- -------- (1) Includes only office tenants with lease terms of 12 months or longer. Excludes leases for amenity, parking, retail and month-to-month office tenants. 54 (2) Equals aggregate base rent received over their respective terms from all lease transactions during the period, divided by the terms in months for such leases, multiplied by 12, divided by the total net rentable square feet leased under all lease transactions during the period. (3) Equals work letter costs net of estimated profit and overhead. Actual tenant improvements may differ from estimated work letter costs. (4) Equals the aggregate of leasing commissions payable to employees and third parties based on standard commission rates and excludes negotiated commission discounts obtained from time to time. (5) Includes moving expenses, furniture allowances and other concessions. (6) Equals aggregate base rent received over their respective terms from all lease transactions during the period minus all tenant improvements, leasing commissions and other concessions from all lease transactions during the period, divided by the terms in months from such leases, multiplied by 12, divided by the total net rentable square feet leased under all lease transactions during the period. (7) Equals the amount of real estate taxes, operating costs and utility costs which the landlord is obligated to pay on an annual basis. The tenant is required to pay any increases above such amount. Expense Stop for 1996 is estimated. (8) Equals effective rent minus Expense Stop. The following table sets forth certain information (on a per net rentable square foot basis) regarding leasing activity at the Thousand Oaks Office Property since January 1, 1992 (based upon an average of all lease transactions during the respective periods):
YEAR ENDED DECEMBER 31, SIX-MONTH ----------------------- PERIOD ENDED 1992 1993 1994 1995 JUNE 30, 1996 ---- ----- ----- ------ ------------- Number of lease transactions during pe- riod(1)............................... -- 1 1 9 1 Net rentable square feet during peri- od(1)................................. -- 1,437 2,745 76,266 2,745 Base rent ($)(1)(2).................... -- 25.01 23.40 23.09 24.00 Tenant improvements ($)(3)............. -- 16.25 -- 5.04 -- Leasing commissions ($)(4)............. -- NA -- 4.90 -- Other concessions ($)(5)............... -- -- -- -- -- Effective rent ($)(6).................. -- 22.73 23.40 21.42 24.00 Expense stop ($)(7).................... -- 6.45 6.16 6.49 6.16 Effective equivalent triple net rent ($)(8)................................ -- 16.28 17.24 14.93 17.84 Occupancy rate at end of period (%)(9)................................ NA NA NA 100.0% 100.0%
- -------- (1) Includes only office tenants with lease terms of 12 months or longer. Excludes leases for amenity, parking, retail and month-to-month office tenants. (2) Equals aggregate base rent received over their respective terms from all lease transactions during the period, divided by the terms in months for such leases, multiplied by 12, divided by the total net rentable square feet leased under all lease transactions during the period. (3) Equals work letter costs net of estimated profit and overhead. Actual tenant improvements may differ from estimated work letter costs. (4) Equals the aggregate of leasing commissions payable to employees and third parties based on standard commission rates and excludes negotiated commission discounts obtained from time to time. (5) Includes moving expenses, furniture allowances and other concessions. (6) Equals aggregate base rent received over their respective terms from all lease transactions during the period minus all tenant improvements, leasing commissions and other concessions from all lease transactions during the period, divided by the terms in months from such leases, multiplied by 12, divided by the total net rentable square feet leased under all lease transactions during the period. (7) Equals the amount of real estate taxes, operating costs and utility costs which the landlord is obligated to pay on an annual basis. The tenant is required to pay any increases above such amount. Expense Stop for 1996 is estimated. (8) Equals effective rent minus Expense Stop. (9) Occupancy data is not available for the years ended December 31, 1992, 1993 and 1994. 55 The following table sets forth certain information (on a per net rentable square foot basis) regarding leasing activity at the Industrial Properties since January 1, 1992 (based upon an average of all lease transactions during the respective periods): INDUSTRIAL PROPERTIES
YEAR ENDED DECEMBER 31, SIX-MONTH -------------------------------- PERIOD ENDED 1992 1993 1994 1995 JUNE 30, 1996(1) ------- ------ ------ ------- ---------------- Number of lease transac- tions during period....... 1 1 1 2 0 Net Rentable square feet leased during period...... 100,000 70,000 76,570 171,550 -- Base rent ($)(2)........... 6.39 6.81 7.23 4.99 -- Tenant improvements ($)(3).................... 5.87 0.14 4.49 2.00 -- Leasing commissions ($)(4).................... 1.37 1.49 3.49 1.84 -- Other concessions ($)(5)... -- -- -- -- -- Effective rent ($)(6)...... 5.19 6.48 6.44 4.63 -- Expense stop ($)(7)........ -- -- -- -- -- Effective equivalent triple net rent ($)(8)........... 5.19 6.48 6.44 4.63 Occupancy rate at end of period (%)................ 86.0% 77.6% 79.7% 98.4% 98.4%
- -------- (1) No leasing activity occurred during the six-month period ended June 30, 1996. (2) Equals aggregate base rent received over their respective terms from all lease transactions during the period, divided by the terms in months for such leases, multiplied by 12, divided by the total rentable square feet leased under all lease transactions during the period. (3) Equals work letter costs net of estimated profit and overhead. Actual tenant improvements may differ from estimated work letter costs. (4) Equals the aggregate of leasing commissions payable to employees and third parties based on standard commission rates and excludes negotiated commission discounts obtained from time to time. (5) Includes moving expenses, furniture allowances and other concessions. (6) Equals aggregate base rent received over their respective terms from all lease transactions during the period minus all tenant improvements, leasing commissions and other concessions from all lease transactions during the period, divided by the terms in months from such leases, multiplied by 12, divided by the total net rentable square feet leased under all lease transactions during the period. (7) Leases for all Industrial Properties are written on a triple net basis, providing for each tenant to be responsible, in addition to base rent, for its proportionate share of real estate taxes, operating costs, utility costs and other expenses without regard to a base year. (8) Equals effective rent minus Expense Stop. 56 THE OFFICE AND INDUSTRIAL PROPERTIES The following table sets forth certain information relating to each of the Properties as of December 31, 1995, unless indicated otherwise. This table gives pro forma effect to a recent extension of one of the leases with Hughes Space & Communications with respect to two of the Office Properties located at Kilroy Airport Center at El Segundo as if such lease renewal had occurred on January 1, 1995. After completion of the Formation Transactions, the Company (through the Operating Partnership) will own a 100% interest in all of the Office and Industrial Properties other than the five Office Properties located at Kilroy Airport Center Long Beach, which are held subject to ground leases expiring in 2035.
AVERAGE PERCENTAGE PERCENTAGE BASE NET LEASED 1995 OF 1995 RENT RENTABLE AS OF BASE 1995 TOTAL PER EFFECTIVE SQUARE 12/31/95 RENT EFFECTIVE BASE SQ. FT. RENT PER PROPERTY LOCATION YEAR BUILT FEET (%)(1) ($000)(2) RENT($000)(3) RENT (%) ($)(4) SQ. FT. ($)(5) ----------------- ---------- --------- ---------- --------- ------------- ---------- ------- -------------- Office Properties: Kilroy Airport Center at El Segundo 2250 E. Imperial Highway(8)....... 1983 291,187 80.9 4,316 4,042 13.5 18.32 17.16 2260 E. Imperial Highway)(9)...... 1983 291,187 100.0 7,160 6,545 22.4 24.59 22.48 2240 E. Imperial Highway(10) El Segundo, California............ 1983 118,933 100.0 1,130 1,121 3.5 9.50 9.43 Kilroy Airport Center Long Beach 3900 Kilroy Airport Way(11)....... 1987 126,840 94.0 2,282 2,092 7.1 19.14 17.54 3880 Kilroy Airport Way(11)....... 1987 98,243 100.0 1,296 1,022 4.0 13.19 10.40 3760 Kilroy Airport Way........... 1989 165,278 92.1 3,372 2,807 10.6 22.16 18.45 3780 Kilroy Airport Way........... 1989 219,745 63.6 3,465 3,005 10.8 24.79 21.50 3750 Kilroy Airport Way Long Beach, California............ 1989 10,457 100.0 75 28 0.2 7.21 2.66 2829 Townsgate Road Thousand Oaks, California(11)..... 1990 81,158 100.0 1,888 1,760 5.9 23.26 21.69 185 S. Douglas Street(12) El Segundo, California............ 1978 60,000 100.0 1,313 898 4.1 21.89 14.96 --------- ----- ------ ------ ----- ----- ----- Subtotal/Weighted Average 1,463,028 89.3 26,297 23,320 82.1 20.12 17.84 --------- ----- ------ ------ ----- ----- ----- Industrial Properties: 2031 E. Mariposa Avenue El Segundo, California............ 1954 192,053 100.0 1,556 1,296 4.9 8.10 6.75 3332 E. La Palma Avenue Anaheim, California(15)........... 1966 153,320 100.0 881 790 2.8 5.74 5.16 2260 E. El Segundo Boulevard El Segundo, California(13)........ 1979 113,820 100.0 553 510 1.7 4.86 4.48 2265 E. El Segundo Boulevard El Segundo, California............ 1978 76,570 100.0 554 493 1.7 7.23 6.44 1000 E. Ball Road Anaheim, California(14)........... 1956 100,000 100.0 639 519 2.0 6.39 5.19 1230 S. Lewis Street Anaheim, California............... 1982 57,730 100.0 303 284 0.9 5.25 4.92 12681/12691 Pala Drive Garden Grove, California ......... 1970 84,700 82.6 476 454 1.5 6.81 6.48 2270 E. El Segundo Boulevard El Segundo, California(15)........ 1975 7,500 100.0 129 129 0.4 17.17 17.17 5115 N. 27th Avenue Phoenix, Arizona(16).............. 1962 130,877 100.0 640 612 2.0 4.89 4.68 --------- ----- ------ ------ ----- ----- ----- Subtotal/Weighted Average 916,570 98.4 5,731 5,087 17.9 6.36 5.64 --------- ----- ------ ------ ----- ----- ----- Office & Industrial--All Properties 2,379,598 92.8 32,028 28,407 100.0 14.50 12.86 ========= ====== ====== ===== TENANTS LEASING PERCENTAGE 10% OR MORE OF LEASED NET RENTABLE AS OF QUARE FEET PER 6/30/96 PROPERTY PROPERTY LOCATION (%)(6) AS OF 6/30/96(7) ----------------- ---------- ----------------- Office Properties: Kilroy Airport Center at El Segundo 2250 E. Imperial Highway(8)....... 85.2 Hughes Space & Communications (33.0%) 2260 E. Imperial Highway)(9)...... 100.0 Hughes Space & Communications 2240 E. Imperial Highway(10) (100.0%) El Segundo, California............ 100.0 Hughes Space & Communications Kilroy Airport Center Long Beach (94.6%) 3900 Kilroy Airport Way(11)....... 94.0 McDonnell Douglas Corporation (50.9%), Olympus America, Inc. (18.6%) 3880 Kilroy Airport Way(11)....... 100.0 Devry, Inc. (100.0%) 3760 Kilroy Airport Way........... 91.2 R.L. Polk & Co. (9.8%) 3780 Kilroy Airport Way........... 90.5 SCAN Health Plan (20.4%), Zelda Fay Walls (12.7%) 3750 Kilroy Airport Way Long Beach, California............ 100.0 Oasis Cafe (37.1%), Keywanfar & Baroukhim (16.1%), SR Impressions (15.0%) 2829 Townsgate Road Thousand Oaks, California(11)..... 100.0 Worldcom, Inc. (34.2%), Data Select Systems, Inc. (13.0%), Pepperdine University (12.7%), Anheuser Busch, Inc. (12.0%) 185 S. Douglas Street(12) El Segundo, California............ 100.0 Northwest Airlines, Inc. (100%) ----- Subtotal/Weighted Average 94.1 ----- Industrial Properties: 2031 E. Mariposa Avenue El Segundo, California............ 100.0 Mattel, Inc. (100%) 3332 E. La Palma Avenue Anaheim, California(15)........... 100.0 Furon Co., Inc. (59.2%), Cerplex Group, Inc.(40.8%) 2260 E. El Segundo Boulevard El Segundo, California(13)........ 100.0 Ace Medical Co. (100%) 2265 E. El Segundo Boulevard El Segundo, California............ 100.0 MSAS Cargo Intl., Inc. (100%) 1000 E. Ball Road Anaheim, California(14)........... 100.0 Allen-Bradley Company (100%) 1230 S. Lewis Street Anaheim, California............... 100.0 Extron Electronics (100%) 12681/12691 Pala Drive Garden Grove, California ......... 82.6 Rank Video Services America, Inc. (82.6%) 2270 E. El Segundo Boulevard El Segundo, California(15)........ 100.0 Pacific Southwest Realty (100%) 5115 N. 27th Avenue Phoenix, Arizona(16).............. 100.0 Festival Markets, Inc. (100%) ----- Subtotal/Weighted Average 98.4 ----- Office & Industrial--All Properties 95.8
(footnotes on next page) 57 - -------- (1) Based on all leases at the respective property in effect as of December 31, 1995. (2) Total base rent for the year ended December 31, 1995, determined in accordance with GAAP. All leases at the Industrial Properties are written on a triple net basis. Unless otherwise indicated, all leases at the Office Properties are written on a full service gross basis, with the landlord obligated to pay the tenant's proportionate share of taxes, insurance and operating expenses up to the amount incurred during the Base Year or a negotiated Expense Stop. Each tenant pays its pro rata share of increases in expenses above the Base Year or Expense Stop. (3) Aggregate base rent received over their respective terms from all leases in effect at December 31, 1995 minus all tenant improvements, leasing commissions and other concessions for all such leases, divided by the terms in months for such leases, multiplied by 12. Tenant improvements, leasing commissions and other concessions are estimated using the same methodology used to calculate effective rent for the Office Properties as a whole in the chart on page . (4) Base rent for the year ended December 31, 1995 divided by net rentable square feet leased at December 31, 1995. (5) Effective rent at December 31, 1995 divided by net rentable square feet leased at December 31, 1995. (6) Based on all leases dated on or before June 30, 1996. (7) Excludes office space leased by the Company. (8) For this Property, leases with Hughes Space & Communications, for approximately 96,000 rentable square feet, and with SDRC Software Products Marketing Division, Inc., for approximately 6,800 rentable square feet, are written on a full service gross basis, except that there is no Expense Stop. (9) For this Property, the lease with Hughes Space & Communications is written on a modified full service gross basis under which Hughes Space & Communications pays for all utilities and other internal maintenance costs with respect to the leased space and, in addition, pays its pro rata share of real estate taxes, insurance, and certain other expenses including common area expenses. (10) For this Property, leases with Hughes Space & Communications for approximately 101,000 rentable square feet are written on a full service gross basis except that there is no Expense Stop. (11) This property is an Acquisition Property. (12) For this Property, the lease is written on a triple net basis. (13) This Industrial Property was vacant until April 1995. The tenant began paying rent in mid-October 1995 at an annual rate of $4.86 per rentable square foot. (14) The tenant in this Industrial Property subleased this property on May 15, 1996 to RGB Systems, Inc. (doing business as Extron Electronics), the tenant of the Property located at 1230 S. Lewis Street, Anaheim, California, which is adjacent to this Property. The sublease is at an amount less than the current lease rate, and the tenant is paying the difference between the rent current lease rate and the sublease rate. The lease and the sublease terminate in April 1998. Extron Electronics has executed a lease for this space from May 1998 through April 2005 at the current lease rate. Extron Electronics continues to occupy the space located at 1230 S. Lewis Street. (15) The leases for Cerplex Group, Inc. and Pacific Southwest Realty expired on June 30, 1996 and this space is presently available for rent. (16) This Industrial Property was originally designed for multi-tenant use and currently is leased to a single tenant and utilized as an indoor multi- vendor retail marketplace. OCCUPANCY AND RENTAL INFORMATION The following table sets forth the average percentage leased and average annual base rent per leased square foot for the Properties for the past three years:
AVERAGE ANNUAL BASE RENT AVERAGE PER RENTABLE PERCENTAGE SQUARE YEAR LEASED (%)(1) FOOT($)(2) ---- ------------- ------------ OFFICE: 1995............................................ 89.4 19.40 1994............................................ 82.6(3) 21.01(3) 1993............................................ 75.7(3) 26.38(3) INDUSTRIAL: 1995............................................ 89.0 6.79 1994............................................ 78.7 6.51 1993............................................ 81.8 6.55
- -------- (1) Average of beginning and end-of-year aggregate percentage leased. (2) Total base rent for the year, determined in accordance with GAAP, divided by the average of the beginning and end-of-year aggregate rentable square feet leased. (3) Excludes data from the Thousands Oaks Office Property which is being acquired concurrently with the consummation of the Offering. 58 LEASE EXPIRATIONS The following table sets out a schedule of the lease expirations for the Office Properties for each of the ten years beginning with 1996, assuming that none of the tenants exercises renewal options or termination rights:
NET PERCENTAGE OF ANNUAL AVERAGE ANNUAL RENTABLE TOTAL LEASED BASE RENT PER NET AREA SUBJECT SQUARE FEET RENT UNDER RENTABLE SQUARE FOOT NUMBER OF TO EXPIRING REPRESENTED BY EXPIRING REPRESENTED BY YEAR OF LEASE EXPIRING LEASES EXPIRING LEASES EXPIRING EXPIRATION LEASES(1) (SQ. FT.) LEASES(%)(2) ($000)(3) LEASES($)(4) ------------- --------- ------------ -------------- ---------- -------------------- 7/01/96-12/31/1996...... 6 33,798 2.49 778 23.02 1997...... 9 38,297 2.82 875 22.85 1998...... 16 87,795 6.47 2,081 23.71 1999...... 20 228,369 16.83 3,875 16.97 2000...... 19 139,253 10.26 3,148 22.61 2001(4)... 15 246,019 18.13 4,373 17.78 2002...... 2 83,047 6.12 1,606 19.34 2003...... 2 14,331 1.06 310 21.61 2004...... 4 311,491 22.96 7,731 24.82 2005 and beyond.... 6 174,216 12.84 2,850 16.36 --- --------- ------ ------ Totals.............. 99 1,356,616 100.00 27,628 20.37 === ========= ====== ======
- -------- (1) Includes office tenants only. Excludes leases for amenity, retail, parking and month-to-month office tenants. Some tenants have multiple leases. (2) Excludes all space vacant as of December 31, 1995 unless a lease for a replacement tenant has been dated on or before June 30, 1996. (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 dated on or before June 30, 1996. Certain leases became effective subsequent to June 30, 1996. (4) Includes Hughes Space & Communications leases of 96,133 and 11,556 net rentable square feet at Kilroy Airport Center at El Segundo. These leases expire in October 2001 and are at a triple net base rental rate of $14.04 per square foot. The following table sets out a schedule of the lease expirations for the Industrial Properties for each of the ten years beginning with 1996, assuming that none of the tenants exercises renewal options or termination rights:
NET PERCENTAGE OF ANNUAL AVERAGE ANNUAL RENTABLE TOTAL LEASED BASE RENT PER NET AREA SUBJECT SQUARE FEET RENT UNDER RENTABLE SQUARE FOOT NUMBER OF TO EXPIRING REPRESENTED BY EXPIRING REPRESENTED BY YEAR OF LEASE EXPIRING LEASES EXPIRING LEASES EXPIRING EXPIRATION LEASES (SQ. FT.) LEASES(%)(1) ($000)(2) LEASES($) ------------- --------- ------------ -------------- ---------- -------------------- 7/01/96-12/31/1996...... 0 -- 0.00 -- 0.00 1997...... 0 -- 0.00 -- 0.00 1998...... 1 70,000 8.42 476 6.81 1999...... 0 -- 0.00 -- 0.00 2000...... 1 192,053 23.09 1,556 8.10 2001...... 1 130,877 15.73 640 4.89 2002...... 0 -- 0.00 -- 0.00 2003...... 0 -- 0.00 -- 0.00 2004...... 1 76,570 9.21 554 7.23 2005 and beyond.... 4 362,296 43.56 2,039 5.63 --- ------- ------ ----- Totals.............. 8 831,796 100.00 5,265 6.33 === ======= ====== =====
- -------- (1) Excludes all space vacant as of December 31, 1995 unless a lease for a replacement tenant has been dated on or before June 30, 1996. (2) Determined based upon aggregate base rent to be received over the term divided by the term in months multiplied by 12, including all leases dated on or before June 30, 1996. 59 TENANT INFORMATION The Company's tenants include significant corporate and other commercial enterprises representing a range of industries including, among others, satellite communications, manufacturing, entertainment, banking, insurance, telecommunications, health care, computer software, finance, engineering, technology, legal and accounting. The following table sets forth information as to the Company's largest tenants based upon annualized rental revenues for the year ended December 31, 1995:
PERCENTAGE OF TENANT COMPANY'S ANNUAL TOTAL LEASE BASE RENTAL BASE RENTAL INITIAL LEASE EXPIRATION REVENUE($)(2) REVENUES(%) DATE(3) DATE ------------- ------------- -------------- -------------- Office Tenants(1): - ----------------- Hughes Electronic Corporation's Space & Communications Company(4)........... 9,757,877(5) 29.59 August 1984 January 1999 Northwest Airlines, Inc.................. 1,313,418 3.98 August 1978 February 2001 Devry, Inc............ 1,296,270 3.93 November 1994 October 2009 McDonnell Douglas Corporation.......... 1,149,922 3.49 February 1992 January 2002 SCAN Health Plan(6)... 941,325 2.85 February 1996 May 2006 Zelda Fay Walls....... 823,896 2.50 August 1989 August 2000 Worldcom, Inc......... 674,592 2.05 January 1995 December 1999 C.E.O., The Walls Group................ 456,220 1.38 October 1991 September 2002 Olympus America, Inc.................. 443,375 1.34 September 1993 December 1998 SITA.................. 378,359 1.15 June 1984 May 1999 ---------- ----- Total............... 17,235,254 52.27 ========== ===== Industrial Tenants: - ------------------ Mattel, Inc........... 1,556,321 4.72 May 1990 October 2000 Festival Markets, Inc. ................ 640,348 1.94 May 1991 May 2001 Allen-Bradley Company (Rockwell)........... 639,432 1.94 May 1992 April 1998 MSAS Cargo International Inc.... 553,934 1.68 September 1994 August 2004 Ace Medical Co. ...... 553,300 1.68 April 1995 April 2006 Furon Co., Inc........ 543,180 1.65 February 1990 July 2005 Rank Video Services America, Inc. ....... 476,358 1.44 October 1984 May 1998 Extron Electronics.... 302,930 0.92 February 1995 January 2005 ---------- ----- Total............... 5,265,803 15.97 ========== =====
- -------- (1) Table excludes the lease with LACTC (total base rent of $449,935) which expired on April 30, 1996, the lease with Cerplex Group, Inc./Incert (total base rent of $337,530) which expired on June 30, 1996, and the lease with Pacific Southwest Realty (total base rent of $128,783) which expired on June 30, 1996. (2) Determined in accordance with GAAP. (3) Represents date of first relationship between tenant and the Kilroy Group. (4) Includes Hughes Space & Communication's leases of (i) 96,133 and 11,556 net rentable square feet at Kilroy Airport Center at El Segundo which expire in October 2001, (ii) 286,151 net rentable square feet at Kilroy Airport Center at El Segundo which expires in July 2004 and (iii) 100,978 net rentable square feet at Kilroy Airport Center at El Segundo which expires in January 1999. (5) Tenant annual base rental revenue for Hughes Space & Communications gives pro forma effect to the recent extension of the tenant lease with respect to 96,133 rentable square feet of office space located at 2250 E. Imperial Highway (along with 11,556 rentable square feet located at 2240 E. Imperial Highway) as if such lease renewal had occurred on January 1, 1995. See "Business and Properties--Kilroy LAX." (6) Tenant executed leases during 1995 representing approximately 44,825 square feet effective on February 15, 1996. Base rental revenue figure included on a contract basis. 60 OFFICE PROPERTIES All but one of the Office Properties are Class A office buildings. Each of the Kilroy LAX and Kilroy Long Beach (each as defined) Office Properties was designed and developed to above-standard specifications to accommodate the long-term needs of tenants and include features such as extra-floor loading capacity and extra-high ceilings. Each of the Kilroy LAX and Kilroy Long Beach Office Properties also was designed with an emphasis on long-term operating efficiency and tenant comfort and includes above-standard climate controls, redundant telecommunication capability and utility leads, on-site management and security, covered parking, heliports and retail services, all in professionally landscaped environments. The Office Properties range in size from two to 12 stories and are easily accessible from major highways and airports. Management believes that as a result of these factors the Office Properties achieve among the highest rent, occupancy and tenant retention rates when compared to other properties within their respective submarkets and in neighboring submarkets. Management believes that the location, quality of construction and amenities at the complexes as well as the Company's reputation for providing a high level of tenant service have enabled the Company to attract and retain a national tenant base. Kilroy LAX. The Company developed, owns, leases and manages three Office Properties at Kilroy Airport Center at El Segundo ("Kilroy LAX"), a Class A high-rise, multi-tenant corporate office complex situated in what the Company considers to be the premier location in El Segundo immediately adjacent to Los Angeles International Airport ("LAX"), the new light rail system servicing Los Angeles County and the new I-105 Freeway with a freeway off-ramp and, upon completion, freeway on-ramp providing immediate access to and from the project's parking facilities. Kilroy LAX was built in 1983 to high quality specifications to address the anticipated demands of the submarket's aerospace and high technology tenants. The Company believes Kilroy LAX has the premier location in the El Segundo office submarket for a number of reasons, including: (i) unobstructed views of LAX, West Los Angeles and Downtown Los Angeles; (ii) excellent access to LAX, the new I-105 Freeway and the new light rail system; (iii) close proximity to corporate office users including Hughes Space & Communications and its satellite manufacturing facility, and other related enterprises such as DirectTV; and (iv) for tenants with their names on the Property, visibility to freeway and airline travelers. The complex is comprised of two 12-story towers and a 13-level parking structure with two floors of office space on top, encompassing an aggregate of approximately 700,000 rentable square feet, of which 93.9% was leased as of June 30, 1996. Kilroy LAX features fiber optic/telecommunications dual redundancy (one of the few properties in Southern California so equipped) and multiple lead-lines for both water and power, thereby mitigating the risk of temporary loss of such services to the facility. The Property was designed and constructed with above-standard floor loadings and floor-to-ceiling heights to accommodate the weight and raised floors requirements of computer and other equipment. The facility is climate controlled in smaller areas which, while increasing tenant comfort, allows for separate thermostat controls for areas housing temperature sensitive equipment and reduces costs for after-hour operations. The facility was designed toward tenant efficiency and convenience and features an above-standard ratio of elevators to rentable square feet and provides 24-hour on-site security and management, private dual heliports, shuttle service to LAX and on-site retail, banking and dining facilities. In addition, the two 12-story towers are joined by an atrium and are professionally landscaped creating a pleasant environment. In addition, the facility has been recognized by the local utility for its energy efficient heating, ventilating and air conditioning systems which reduce operating costs for both the Company and its tenants. Management believes because of these and other high quality features, Kilroy LAX continues to attract long-term major corporate tenants at rates above those offered by other facilities in the El Segundo and neighboring submarkets. The occupancy rates for Kilroy LAX as of the years ended December 31, 1993 through 1995, and the six-month period ended June 30, 1996, were 90.8%, 91.6%, 92.1% and 93.9%, respectively. Major tenants of the facility include Hughes Space & Communications (the Company's largest tenant), the Federal Aviation Administration and Realtime Associates. Hughes Space & Communications has been a tenant at Kilroy LAX since its development in 1983 and, over the past five years, has consolidated operations into its owned facilities in El Segundo (which includes its satellite manufacturing facility) and into leased facilities at 61 Kilroy LAX which also serves as its headquarters. In addition, Hughes Space & Communications has invested substantial amounts in tenant improvements, including approximately $3.3 million during the year ended December 31, 1994 and $23.5 million since 1984, and repeatedly has renewed leases at the facilities, including one lease for approximately 101,000 rentable square feet which has been renewed twice. Hughes Space and Communications is a major employer and owner of technical facilities in El Segundo, including facilities for the development of satellite technology and its applications, such as DirecTV. Because the book value of the Office Property located at 2240 E. Imperial Highway will be in excess of 10% of the Company's total assets, additional information regarding this Property is presented below. The information presented below gives pro forma effect to the recent extension of the tenant lease with Hughes Space & Communications with respect to this Office Property as if such lease renewal had occurred on January 1, 1995. The property located at 2240 E. Imperial Highway had an occupancy rate of 100.0% for each of the years ended December 31, 1991 through 1995. As of June 30, 1996, Hughes Space & Communications occupied approximately 94.6% of the Property's net rentable square feet under two leases. Under the principal lease for this space, Hughes Space & Communications commenced occupancy of 100,978 square feet on August 11, 1986 and renewed the lease on February 1, 1989 and again on June 1, 1994. In connection with the latter renewal, Hughes made a one time payment of $4,000,000 to the Company in consideration of a lease amendment to relieve Hughes Space & Communications of the obligation to remove certain tenant improvements upon termination of the lease. The current lease term under this lease expires on January 31, 1999, subject to a five- year option to renew at fair market value, but not less than $15.84 per annum per net rentable square foot, on a triple net basis. Hughes Space & Communications also leases 11,556 rentable square feet (along with the 96,133 rentable square feet located at 2250 E. Imperial Highway) under a second lease which expires October 31, 2001, at an annualized triple net base rental rate of $14.04 and, for the first year of the lease term, the tenant's allocable share of operating costs shall not exceed $7.32 per rentable square foot. The lease also is subject to a five-year option to renew at fair market value, adjusted bi-annually for CPI adjusted increases in base rent. The total annual rental income per net rentable square foot for the years ended December 31, 1991 through December 31, 1995 was $23.17, $24.42, $25.22, $17.15 and $11.83, respectively. The following table sets forth for such Property for each of the ten years following the date of Offering (i) the number of tenants whose leases will expire, (ii) the total net rentable square feet covered by such leases, (iii) the percentage of total leased net rentable square feet represented by such leases, (iv) the annual base rent represented by such leases and (v) the average annual rent per net rentable square foot represented by such leases.
PERCENTAGE OF TOTAL LEASED AVERAGE ANNUAL NET RENTABLE RENT PER NET RENTABLE SQUARE FEET NET RENTABLE YEAR OF NUMBER OF SQUARE FOOTAGE REPRESENTED SQUARE FOOT LEASE LEASES SUBJECT TO BY EXPIRING ANNUAL BASE RENT UNDER REPRESENTED BY EXPIRATION EXPIRING EXPIRING LEASES LEASES(%) EXPIRING LEASES ($)(1) EXPIRING LEASES($) ---------- --------- --------------- ------------- ---------------------- ------------------ 1996.................... 0 -- -- -- -- 1997.................... 0 -- -- -- -- 1998.................... 0 -- -- -- -- 1999.................... 1(2) 100,978 86.4 $1,085,716 $10.75 2000.................... 0 -- 2001.................... 2(3) 15,898 13.6 196,670 12.37 2002.................... 0 -- -- -- -- 2003.................... 0 -- -- -- -- 2004.................... 0 -- -- -- -- 2005.................... 0 -- -- -- -- --- ------- ----- ---------- Totals.............. 3 116,876(4) 100.0 $1,282,386 $10.97 === ======= ===== ==========
62 - -------- (1) Determined based upon aggregate base rent to be received over the term divided by the term in months multiplied by 12, including all leases dated on or before June 30, 1996. (2) The terms of this lease are described in the text preceding this table. (3) The terms of a lease representing 11,556 rentable square feet are described in the text preceding this table. (4) The aggregate square footage reflected in each of the respective leases differs from the actual aggregate square footage for this Property of 118,933 as shown on the table under the caption "The Office and Industrial Properties." Subsequent to the execution of the leases, the Property was remeasured at a larger aggregate number of square feet than is reflected in the executed leases. The Company's tax basis in the Property for federal income tax purposes as of December 31, 1995 was approximately $4.1 million (net of accumulated depreciation and reductions in depreciable basis). The Property is depreciated using the modified accelerated cost recovery system straight-line method, based on an estimated useful life ranging from 31 1/2 years to 39 years, depending upon the date of certain capitalized improvements to the Property. For the year ended December 31, 1995, the estimated average depreciation rate for this Property under the modified accelerated cost recovery system was 4.3%. For the 12-month period ending June 30, 1996, the Company was assessed property taxes on this Property at an effective annual rate of approximately 1.0%. Property taxes on this Property for the 12-month period ending June 30, 1996 totaled $128,341. Management does not believe that any capital improvements made during the 12-month period immediately following the Offering should result in an increase in annual property taxes. Because the gross revenues for the Office Property located at 2250 E. Imperial Highway for the year ended December 31, 1995 were in excess of 10% of the aggregate gross revenues for all of the Properties, additional information regarding this Property is presented below. The information presented below gives pro forma effect to the recent extension of the tenant lease with Hughes Space & Communications with respect to this Office Property as if such lease renewal had occurred on January 1, 1995. The property located at 2250 E. Imperial Highway had an occupancy rate of 84.0%, 82.5%, 77.8%, 79.8% and 80.9% as of the years ended December 31, 1991 through 1995, respectively. As of June 30, 1996, Hughes Space & Communications occupied 33.0% of the Property's net rentable square feet. The Property's other tenants include companies engaged in the communications, technology, transportation and healthcare industries. Hughes Space & Communications commenced occupancy of 96,133 rentable square feet on November 1, 1986 and has entered into an agreement to renew this space (along with the 11,556 square feet located at 2240 E. Imperial Highway) through October 31, 2001, at a triple net annual base rental rate of $14.04 per square foot and, for the first year of the lease term, the tenant's allocable share of operating costs shall not exceed $7.32 per rentable square foot. The lease also is subject to a five-year option to renew at fair market value, adjusted bi-annually for CPI increases in base rent. The total annual rental income per net rentable square foot for the years ended December 31, 1991 through December 31, 1995 was $17.82, $18.73, $19.48, $18.19 and $18.86, respectively. The following table sets forth for such Property for each of the ten years following the date of the Offering (i) the number of tenants whose leases will expire, (ii) the total net rentable square feet covered by such leases, (iii) the percentage of total leased net rentable square feet represented by such leases, (iv) the annual base rent represented by such leases and (v) the average annual rent per net rentable square foot represented by such leases. 63
PERCENTAGE OF TOTAL LEASED AVERAGE ANNUAL NET RENTABLE RENT PER NET RENTABLE SQUARE FEET NET RENTABLE NUMBER OF SQUARE FOOTAGE REPRESENTED ANNUAL BASE SQUARE FOOT LEASES SUBJECT TO BY EXPIRING RENT UNDER REPRESENTED BY YEAR OF LEASE EXPIRATION EXPIRING EXPIRING LEASES LEASES(%)(1) EXPIRING LEASES($)(2) EXPIRING LEASES($) - ------------------------ --------- --------------- ------------- --------------------- ------------------ 1996.................... 6 32,212 11.9 $ 705,336 $21.90 1997.................... 3 4,385 1.6 83,025 18.93 1998.................... 6 23,033 8.5 464,705 20.18 1999.................... 4 29,148 10.7 695,821 23.87 2000.................... 2 18,201 6.7 302,853 16.64 2001.................... 4 124,271 45.8 1,805,281 14.53 2002.................... 1 18,517 6.8 456,220 24.64 2003.................... 0 -- -- -- -- 2004.................... 2 21,418 7.9 485,244 22.66 2005.................... 0 -- -- -- -- --- ------- ----- ---------- Totals.............. 28 271,185 100.0 $4,998,485 $18.43 === ======= ===== ==========
- -------- (1) Excludes all space vacant as of December 31, 1995 unless a lease for a replacement tenant has been dated on or before June 30, 1996. (2) Determined based upon aggregate base rent to be received over the term divided by the term in months multiplied by 12, including all leases dated on or before June 30, 1996. Certain leases became effective subsequent to June 30, 1996. The Company's tax basis in the Property for federal income tax purposes as of December 31, 1995 was approximately $2.0 million (net of accumulated depreciation and reductions in depreciable basis), and was fully depreciated for federal tax purposes. For the 12-month period ending June 30, 1996, the Company was assessed property taxes on this Property at an effective annual rate of approximately 1.0%. Property taxes on this Property for the 12-month period ending June 30, 1996 totaled $237,400. Management does not believe that any capital improvements made during the 12-month period immediately following the Offering should result in an increase in annual property taxes. Because the 1995 gross revenues for the Office Property located at 2260 E. Imperial Highway were in excess of 10% of the aggregate gross revenues for all of the Properties, additional information regarding this Property is presented below. The property located at 2260 E. Imperial Highway had an occupancy rate of 100.0% for the years ended December 31, 1991 through 1995. As of June 30, 1996, Hughes Space & Communications occupied 100.0% of the Property's net rentable square feet. Hughes Space & Communications commenced occupancy of 291,187 square feet on August 1, 1984. This lease runs through July 31, 2004 with CPI adjusted increases in base rent every two years. The next CPI adjustment is scheduled to occur on August 1, 1998 and provides for an increase in base rent to the extent that such CPI adjustment exceeds a minimum floor of 1.86% compounded annually. The remaining CPI adjustments scheduled for August 1, 2000 and August 1, 2002, respectively, provide for similar increases to the extent that the CPI adjustment exceeds a minimum floor of 3% compounded annually. The total annual rental income per net rentable square foot was $25.35, $26.16, $26.66, $24.59 and $24.59 for the years ended December 31, 1991 through December 31, 1995, respectively. The following table sets forth for such Property for each of the ten years following the date of Offering (i) the number of tenants whose leases will expire, (ii) the total net rentable square feet covered by such leases, (iii) the percentage of total leased net rentable square feet represented by such leases, (iv) the annual base rent represented by such leases and (v) the average annual rent per net rentable square foot represented by such leases. 64
PERCENTAGE OF TOTAL LEASED AVERAGE ANNUAL NET RENTABLE RENT PER NET RENTABLE SQUARE FEET NET RENTABLE NUMBER OF SQUARE FOOTAGE REPRESENTED ANNUAL BASE SQUARE FOOT LEASES SUBJECT TO BY EXPIRING RENT UNDER REPRESENTED BY YEAR OF LEASE EXPIRATION EXPIRING EXPIRING LEASES LEASES(%) EXPIRING LEASES($)(1) EXPIRING LEASES($) - ------------------------ --------- --------------- ------------- --------------------- ------------------ 1996.................... 0 -- -- -- -- 1997.................... 0 -- -- -- -- 1998.................... 0 -- -- -- -- 1999.................... 0 -- -- -- -- 2000.................... 0 -- -- -- -- 2001.................... 0 -- -- -- -- 2002.................... 0 -- -- -- -- 2003.................... 0 -- -- -- -- 2004.................... 1(2) 286,151 100.0 $7,160,207 $25.02 2005.................... 0 -- -- -- -- --- ------- ----- ---------- Totals.............. 1 286,151(3) 100.0 $7,160,207 $25.02 === ======= ===== ==========
- -------- (1) Determined based upon aggregate base rent to be received over the term divided by the term in months multiplied by 12, including all leases dated on or before June 30, 1996. (2) The terms of this lease are described in the text preceding this table. (3) The square footage reflected in the lease differs from the actual square footage for this Property of 291,187 as shown on the table under the caption "The Office and Industrial Properties." Subsequent to the execution of the lease, the Property was remeasured at a larger aggregate number of square feet than is reflected in the executed lease. The Company's tax basis in the Property for federal income tax purposes as of December 31, 1995 was approximately $2.0 million (net of accumulated depreciation and reductions in depreciable basis), and was fully depreciated for federal tax purposes. For the 12-month period ending June 30, 1996, the Company was assessed property taxes on this Property at an effective annual rate of approximately 1.0%. Property taxes on this Property for the 12-month period ending June 30, 1996 totaled $273,849. Management does not believe that any capital improvements made during the 12-month period immediately following the Offering should result in an increase in annual property taxes. Kilroy Long Beach. The Company developed, owns, leases and manages the three Office Properties which comprise Phase II of Kilroy Airport Center Long Beach ("Kilroy Long Beach Phase II"), part of a planned four-phase, 53-acre Class A corporate office headquarters, business park and retail and entertainment center strategically located adjacent to the San Diego freeway (Interstate 405, the major coastal north-south highway in Southern California between Los Angeles and Orange Counties) (the "I-405 Freeway") and immediately adjacent to the Long Beach Airport. The Company has sole development rights for the remaining 24 developable acres. Upon consummation of the Offering, the Company also will own the two office buildings comprising Kilroy Long Beach Phase I ("Kilroy Long Beach Phase I") which were developed by the Company and which have been leased and managed by the Company since their inception. See "-- Acquisition Properties--Kilroy Long Beach Phase I." Kilroy Long Beach Phase II includes an eight-story and a six-story office building, and a multi-level parking structure with retail facilities on the ground floor, encompassing an aggregate of approximately 400,000 net rentable square feet, of which 91.0% was leased as of June 30, 1996. The facility is the only GTE SmartPark in Los Angeles County and offers tenants an array of advanced telecommunications functions through a pre-laid fiber optic network, emergency backup loop and ISDN interfaces. The facility also includes state-of-the-art mechanical and electrical systems designed to accommodate the highest tenant demands including above-standard floor-to-ceiling heights and floor loading and four high-speed passenger elevators. Each of the office structures offers efficient 28,000 square foot floors. Other amenities include a spacious lobby with an atrium, and a central courtyard with a fountain and pedestrian arcade. The facility also features 24-hour on-site security and management, a fitness center, group conference facilities, helipad facilities, and various retail and business services including banking facilities, dining facilities and printer services. The occupancy rates for 65 Kilroy Long Beach Phase II as of the years ended December 31, 1993 through 1995, and the six month period ended June 30, 1996, were 64.8%, 78.7%, 76.5% and 91.0%, respectively. Major tenants include AIG Claim Services, Inc., Assistance in Marketing, Inc., CompuServe, Inc., Employer's Health Insurance, Co., GTE Directories Sales Corporation, Great Northern Insured Annuities Corp., Great Western Bank, HealthNet, Mutual of America Life Insurance Company, North American Title Company, The Prudential Insurance Company of America, R.L. Polk & Company, SCAN Health Plan, Senn-Delaney Leadership Consulting Group, Inc., 20th Century Industries, UniCare Financial Corporation, Unihealth and Zelda Fay Walls. Kilroy Airport Center Long Beach was developed in response to a desire by the City of Long Beach to promote development in the airport area. Phase I of the project, encompassing approximately 225,000 rentable square feet, was developed by the Company in 1987 and was sold in 1993. The Company has entered into a letter of intent to reacquire the Phase I properties. As of June 30, 1996 the Phase I properties were 96.6% leased to eight tenants with total annual rental income per leased net rentable square foot of $15.67 (calculated on the basis of base rent of signed leases at June 30, 1996, adjusted for contractual increases in base rent in effect during the 12-month period ending June 30, 1996). Major tenants include McDonnell Douglas Corporation, Olympus America, Inc. and Devry, Inc. See "--Acquisition Properties--Kilroy Long Beach Phase I." The Company has overseen and continues to oversee all leasing and management of Phase I. Kilroy Long Beach Phase II was developed by the Company in 1989/1990 and encompasses an aggregate of approximately 400,000 net rentable square feet. Phases III and IV are planned for future development. See "--Development, Leasing and Management Activities--Kilroy Airport Center Long Beach." Kilroy Airport Center Long Beach is subject to three long-term ground leases under which the Company is ground lessee (assuming the assignment to the Company of the approximately 14-acre parcel in connection with the acquisition of Kilroy Long Beach Phase I). The City of Long Beach is the ground lessor with respect to Kilroy Long Beach Phases I through III and the Board of Water Commissioners of the City of Long Beach, acting on behalf of the City of Long Beach, is the ground lessor with respect to Kilroy Long Beach Phase IV. The basic term under each of the ground leases expires on July 17, 2035, with four 10-year renewals and a final renewal term of 9 years. Primary rent under the leases for Kilroy Long Beach Phases I, II, III and IV is currently approximately $338,000 per year, $295,000 per year, $75,000 per year and $76,764 per year, respectively, with such amounts adjusted periodically to take account of changes in the fair market rental value of the land underlying each lease. Because the book value of the Office Property located at 3780 Kilroy Airport Way will be in excess of 10% of the Company's total assets, additional information regarding this Property is presented below. The property located at 3780 Kilroy Airport Way had an occupancy rate of 70.2%, 70.5%, 69.1%, 78.6% and 63.6% as of the years ended December 31, 1991 through 1995, respectively. As of June 30, 1996, SCAN Health Plan, a group health insurer, and Zelda Fay Walls, an operator of executive office suites, occupied approximately 20.4% and 12.7%, respectively, of the Property's net rentable square feet. The Property's other tenants include companies engaged in the insurance, healthcare, finance, high technology, law and accounting industries. Base rent under the SCAN Health Plan lease is $941,325 per year. The lease expires on August 31, 2000, subject to two successive five-year options to renew. Base rent under Zelda Fay Walls lease is currently $823,896 per year although the tenant has been paying only approximately $640,200 since August 1993 and the balance is expensed quarterly by the Company as an increase to its bad debt reserve. The lease expires on September 30, 2002, subject to a five-year option to renew. The average effective annual rent per net rentable square foot for the years ended December 31, 1991 through 1995 was $13.02, $17.53, $18.90, $19.70 and $17.42, respectively. The following table sets forth for such Property for each of the ten years following the date of Offering (i) the number of tenants whose leases will expire, (ii) the total net rentable square feet covered by such leases, (iii) the percentage of total leased net rentable square feet represented by such leases, (iv) the annual base rent represented by such leases and (v) the average annual rent per net rentable square foot represented by such leases. 66
PERCENTAGE OF TOTAL LEASED AVERAGE ANNUAL NET RENTABLE RENT PER NET RENTABLE SQUARE FEET NET RENTABLE NUMBER OF SQUARE FOOTAGE REPRESENTED ANNUAL BASE SQUARE FOOT LEASES SUBJECT TO BY EXPIRING RENT UNDER REPRESENTED BY YEAR OF LEASE EXPIRATION EXPIRING EXPIRING LEASES LEASES(%)(1) EXPIRING LEASES($)(2) EXPIRING LEASES($) - ------------------------ --------- --------------- ------------- --------------------- ------------------ 1996.................... 4 18,867 8.79 $ 363,225 $19.25 1997.................... 4 22,469 10.46 532,872 23.72 1998.................... 1 2,088 0.97 47,606 22.80 1999.................... 2 4,339 2.02 89,709 20,68 2000.................... 7 74,093 34.50 1,816,896 24.52 2001.................... 5 28,251 13.15 638,222 22.59 2002.................... 0 0 0.00 0 0.00 2003.................... 1 9,439 4.40 209,299 22.17 2004.................... 1 3,922 1.83 85,656 21.84 2005 and beyond......... 2 51,290 23.88 1,077,090 21.00 --- ------- ------ ---------- Totals.............. 27 214,758 100.00 $4,860,575 $22.63 === ======= ====== ==========
- -------- (1) Excludes all space vacant as of December 31, 1995 unless a lease for a replacement tenant has been dated on or before June 30, 1996. (2) Determined based upon aggregate base rent to be received over the term divided by the term in months multiplied by 12, including all leases dated on or before June 30, 1996. Certain leases became effective subsequent to June 30, 1996. The Company's tax basis in the Property for federal income tax purposes was $11.4 million (net of accumulated depreciation) as of December 31, 1995. The Property is depreciated using the modified accelerated cost recovery system straight-line method, based on an estimated useful life ranging from 31 1/2 years to 39 years, depending upon the date of certain capitalized improvements to the Property. For the year ended December 31, 1995, the estimated average depreciation rate for this Property under the modified accelerated cost recovery system was 3.4%. For the 12-month period ending June 30, 1996, the Company was assessed property taxes on this Property at an effective annual rate of approximately 1.2%. Property taxes on this Property for the 12-month period year ending June 30, 1996 totaled $170,256. Management does not believe that any capital improvements made during the 12-month period immediately following the Offering should result in an increase in annual property taxes. INDUSTRIAL PROPERTIES Like the Office Properties, the Industrial Properties were designed and developed to provide above-standard quality and meet the long-term needs of tenants. The Company was among the first Southern California developers to air-condition its Industrial Properties, increasing each facility's multidimensional use while providing environments for increased tenant operating efficiency and comfort. The Industrial Properties, all but one of which are located in Southern California, are primarily comprised of single- story, tilt-up concrete buildings ranging in size from approximately 57,000 to 192,000 square feet. The Industrial Properties feature high-tech assembly areas and supporting office space for management and administrative functions. While most of the buildings are occupied by a single tenant, they were designed for multi-tenant operations and can be reconfigured for such use. The Industrial Property leases are written on a triple net basis with initial terms of five to eleven years and options to renew for up to an additional five years at the then current fair market value. The leases generally provide for rent increases based on the applicable regional CPI or contain specific contractual increases. The leases do not contain purchase options. Certain of the Industrial Properties can support additional development and the Company presently is planning to develop in the next two years, subject to substantial pre-leasing, approximately 105,000 square feet of additional leasable area. The Company anticipates that any such development would be funded with amounts 67 available under the Credit Facility. There can be no assurance, however, that the Company will be able to successfully develop any of the Industrial Properties, or obtain financing for any such development on terms favorable to the Company. See "Risk Factors--Real Estate Financing Risks" and "--No Limitation on Debt." DEVELOPMENT, LEASING AND MANAGEMENT ACTIVITIES Since 1947, the Company and its affiliates have developed millions of square feet of office and industrial space, including high technology facilities, primarily located in Southern California, for its own portfolio and for third parties. Development activities include site selection, land entitlement, project design and construction, build-to-suit activities and tenant renovations. The Company has successfully developed numerous sophisticated development projects for some of the nation's most prominent corporations both in Southern California and around the country. The Company's extensive experience has enabled it to form key alliances with major corporate tenants, municipalities and landowners in Southern California with respect to the Development Properties described below. As a result of these relationships, the Company has various rights to a significant source of developable land in key locations where a substantial portion of the costs of carry are, in most cases, the obligation of the respective landowner. The Company's relationships with tenants and users has enabled it to receive fees in connection with its role as developer of these projects, or, in the case of Kilroy Long Beach and the Thousand Oaks Civic Arts Plaza Retail and Entertainment Center, to develop the land for its own account where such development will result in a favorable risk adjusted return on investment. In connection with the Formation Transactions, the Company will succeed to the Kilroy Group's rights in and to the Development Properties. The Company or the Operating Partnership will be the manager of the Properties and may provide building management services for independent building owners for terms that vary in length but which generally provide for management fees of 4% to 5% of collected revenue and may also provide for reimbursement of expenses. The following is a description of the Development Properties as presently contemplated. Kilroy Airport Center Long Beach. In conjunction with the Company's role as master ground lessee of Kilroy Long Beach, the Company manages all ongoing leasing and development activities for the four-phase, approximately 53-acre office and retail development project, including sole development rights to the approximately 24 remaining developable acres. To date the Company has developed Phases I and II. See "--Office Properties--Kilroy Airport Center Long Beach" and "Acquisition Properties." Current development activities are focused on Phase III of the project ("Kilroy Long Beach Phase III") which will be developed and owned by the Company. Kilroy Long Beach Phase III presently is contemplated to initially include a seven-story office building with approximately 186,000 rentable square feet and a five-story office building with approximately 132,000 rentable square feet. In addition, Kilroy Long Beach Phase III may be developed, subject to site plan approval by the City of Long Beach, to include an additional office building with up to 150,000 rentable square feet of space. Kilroy Long Beach Phase III presently is being marketed to build-to-suit tenants. Kilroy Long Beach also is planned to include Phase IV ("Kilroy Long Beach Phase IV"), which will be developed and owned by the Company. Kilroy Long Beach Phase IV presently is contemplated to include an aggregate of up to 550,000 rentable square feet of office and retail space including high quality retail and specialty shops, sit-down and convenience restaurants and, subject to site-plan approval by the City of Long Beach, a multitheater and virtual reality entertainment center. To date the Company has invested approximately $8.8 million in infrastructure improvements which are in place for Kilroy Long Beach Phases III and IV and has available an additional approximately $2.6 million of revenue bond proceeds held by the City of Long Beach which the Company believes is sufficient to provide for further traffic mitigation improvements, if any, which may be required by the City in connection with the future development. Because of the over 900,000 aggregate rentable square feet entitled at Kilroy Long Beach Phases III and IV, and the significant infrastructure improvements already in place, the Company believes that Kilroy Long Beach offers substantial opportunity for tenant expansion from a location servicing both Los Angeles and Orange Counties. See "--Office Properties-- Kilroy Long Beach." 68 Kilroy Long Beach Phase III and Phase IV will be developed by the Company or the Services Company for the benefit of the Company. Prior to the Formation Transactions, the Kilroy Group and its affiliates acquired construction materials at a cost of approximately $6.5 million in connection with the development of Kilroy Long Beach Phase III. These construction materials will not be contributed to the Company and the Company will have no obligation to purchase the materials from the Kilroy Group or to in any way use the materials in the development and completion of the project. Any decision on the part of the Company to purchase the materials from the Kilroy Group in the future will be determined by a majority of the Independent Directors. Kilroy Airport Center Long Beach is subject to three long-term ground leases under which the Company is ground lessee. The City of Long Beach is the ground lessor with respect to Kilroy Long Beach Phase III and the Board of Water Commissioners of the City of Long Beach, acting on behalf of the City of Long Beach, is the ground lessor with respect to Kilroy Long Beach Phase IV. The basic term under each of the ground leases expires on July 17, 2035, with four 10-year renewals and a final renewal term of 9 years. Primary rent under the leases for Kilroy Long Beach Phases III and IV is currently approximately $75,000 per year and $76,764 per year, respectively, with such amounts adjusted periodically to take account of changes in the fair market rental value of the land underlying each lease. Thousand Oaks Civic Arts Plaza Retail and Entertainment Center. The Kilroy Group has entered into an exclusive agreement with the City of Thousand Oaks Redevelopment Agency to negotiate a Development and Disposition Agreement with respect to a private-public partnership to develop the Thousand Oaks Civic Arts Plaza Retail and Entertainment Center, an approximately 11-acre commercial property (representing approximately six developable acres net of acreage reserved for open areas) directly adjacent to the City's recently completed Civic Arts Plaza complex. The Thousand Oaks Civic Arts complex was constructed by the City at a cost of approximately $65 million and includes an 1,800-seat main auditorium designed for theater and concert performances. The complex also includes a second 400-seat theater. The Company's proposed project is planned to contain a mixed-use entertainment and retail center and is expected to be under construction in 1997. Upon consummation of the Formation Transactions, the Kilroy Group will assign to the Services Company the exclusive negotiation agreement to enter into a Development and Disposition Agreement and related documents and agreements pursuant to which the Company would acquire, develop and lease the Thousand Oaks Civic Arts Plaza Retail and Entertainment Center. The Thousand Oaks Civic Arts Plaza Retail and Entertainment Center is expected to have easy freeway access to and from U.S. Highway 101, the major highway running through the City of Thousand Oaks, and the only major coastal highway between the City of Los Angeles and northern communities including Oxnard, Ventura, Santa Barbara and the San Francisco Bay Area ("U.S. Highway 101"). The Civic Arts Plaza Retail and Entertainment Center is anticipated to be anchored by a state-of-the art movie theater and virtual reality venue and will include high quality retail and specialty shops. The project is presently planned to include a total of approximately 170,000 gross square feet of building area in three primary, single-story structures, supported by an above-grade parking structure with approximately 1,000 vehicle spaces. Approximately 90,000 square feet of the project is expected to be developed as the entertainment component and would include approximately 60,000 square feet within a 2-story, 12- to 14-auditorium movie theater, containing approximately 3,100 seats and approximately 30,000 square feet as the virtual reality venue. See""--Agreement with United Artists Theater Circuit, Inc." The remaining building area of the project (totaling approximately 80,000 square feet) is expected to be incorporated within several single-story structures. These buildings will include a total of approximately 54,000 square feet which will be occupied by retail and specialty shops, while the remaining approximately 26,000 square feet will be occupied by both formal and casual sit down restaurants and convenience food restaurants. Riverside Judicial Center. In a unique "public-private partnership" with the City of Riverside Redevelopment Agency and the County of Riverside, the Company has entered into a Development Management Agreement to develop and manage for a fee a comprehensive master planning, design, entitlement and development effort for a multi-jurisdictional judicial center complex (the "Riverside Judicial Center") in downtown Riverside that is expected to serve the entire greater Riverside and San Bernardino area. Riverside is located approximately 56 miles east of Los Angeles. The project is expected to include a United States 69 Bankruptcy Court and administrative complexes. In addition, the site may also include a United States District Court. Construction of the Riverside Judicial Center began in February 1996. Upon consummation of the Formation Transactions, the Services Company will be assigned the Development Management Agreement in connection with the project. Northrop Grumman. The Company has been retained on a fee basis by Northrop Grumman Corporation ("Northrop Grumman") to undertake a comprehensive, multi- phased effort to analyze, entitle and manage the future reuse, planning, entitlement, marketing and disposition of the approximately 200-acre property located in the City of Pico Rivera, located approximately 13 miles east of Los Angeles, which currently serves as Northrop Grumman's headquarters for activities related to the U.S Air Force's B-2 "Stealth" Bomber Program. Early stages of the project are underway, including the execution of a Memorandum of Understanding with the City of Pico Rivera and a community outreach program and submission of a conceptual reuse plan to the City of Pico Rivera. Under the terms of the agreement, the Company, including its predecessor, will receive up to $653,930 in fees and reimbursable expenses for the services performed. The agreement runs through February 15, 1997, unless earlier terminated by the parties. The Company has also been engaged on a commission basis with a cooperating broker as exclusive broker through December 31, 1996, to sell on behalf of Northrop Grumman approximately 40 acres of land at the site. Upon consummation of the Offering, the rights to perform all such services will be assigned to the Services Company. Agreement with United Artists Theater Circuit, Inc. The Company has recently entered into a lease with United Artists Theater Circuit, Inc. in connection with the development of a multiplex theater complex and virtual reality entertainment center at the Thousand Oaks Civic Arts Plaza Retail and Entertainment Center. In addition, the Company presently is negotiating with United Artists Theater Circuit, Inc. to lease sites to develop similar entertainment centers at Kilroy Long Beach (which would be included as part of Kilroy Long Beach Phase IV). See "--Development, Leasing and Management Activities--Kilroy Long Beach" and "--Thousand Oaks Civic Arts Plaza Retail and Entertainment Center." The proposed entertainment element would provide a major, regional-scale, state-of-the-art attraction for local residents in the respective communities and provide an additional amenity to users of office buildings at Kilroy Long Beach. ACQUISITION PROPERTIES The Company has entered into agreements to acquire three office properties (the "Acquisition Properties"). In the event one or more of the Acquisition Properties are purchased, the Company expects to finance the acquisition cost (approximately $36.3 million in the aggregate) with long-term borrowings, new mortgage financing and/or the proceeds of the Offering. Acquisition of each of these properties is subject to negotiation of satisfactory documentation and completion by the Company of its due diligence procedures. Accordingly, there is no assurance that any of the Acquisition Properties will be acquired. Unless otherwise indicated, all calculations and information contained in this Prospectus give pro forma effect to the acquisition of the Acquisition Properties. Kilroy Long Beach Phase I. Two of the Acquisition Properties comprise Kilroy Long Beach Phase I, a Class A office complex which includes a two-story office building and a combination two/three-story office building encompassing an aggregate of 225,000 rentable square feet. Kilroy Long Beach Phase I was developed by the Company in 1987 and sold by the Company to the current owner in 1993. The Company has overseen all leasing and management activity at the property since its development. As of December 31, 1995, the properties were 96.6% leased to eight tenants at an average annual base rent per net rentable square foot of $15.90. See "--Office Properties--Kilroy Long Beach." Thousand Oaks Office Property. The third Acquisition Property is a stand- alone three-story Class A office property located in Thousand Oaks, California, which encompasses approximately 81,100 rentable square feet and, as of December 31, 1995, was 100.0% leased to eleven tenants at an average annual base rent per net rentable square foot of $23.26. 70 Other Industrial Properties. The Company also has entered into agreements to acquire three industrial properties comprising an aggregate of approximately 800,000 net rentable square feet, located in El Segundo, Anaheim and Costa Mesa, California. Each of the proposed acquisitions remains subject to satisfactory documentation and completion of the Company's due diligence procedures. Accordingly, there can be no assurance that any of such properties will be acquired. In addition, because the Company is in the preliminary stages of its due diligence review with respect to each of these properties, the financial calculations and information contained in this Prospectus do not give pro forma effect to such acquisitions. THE COMPANY'S SOUTHERN CALIFORNIA SUBMARKETS* The Company believes that Los Angeles, Orange and Ventura Counties have been and will continue to be excellent markets in which to own and operate Class A office, industrial and retail property over the long term. The Company believes that these counties are attractive for a number of reasons: . These counties, together with Riverside and San Bernardino Counties, comprise the second largest Consolidated Metropolitan Statistical Area in the United States (the "Southern California Area") and rank as the world's 12th largest economy; . The continuing expansion of the service-producing sector of the economy; . Employment sectors using Class A office and industrial properties continue to expand with the Southern California Area's continuing growth in foreign trade and diversification of industries; . Since 1992 there has been virtually no increase in the Southern California Area's inventory of office space; and . The Southern California Area's demand for quality industrial space has spurred new construction of industrial properties. As of December 31, 1995, the Southern California Area had a total population of approximately 15.6 million people which accounted for approximately 5.9% of the total U.S. population. Annual population growth in the Southern California Area since 1990 has averaged approximately 217,000 persons. Of the approximately 15.6 million people in the Southern California Area, approximately 9.2 million persons lived in Los Angeles County and approximately 2.6 million persons lived in Orange County. Annual estimated growth in population in these counties over the next five years is expected to be approximately 94,000 and 32,000 persons, respectively. The following table presents the total population as a proportion of the United States population for the Southern California Area and California for 1980, 1990 and 1995 and the estimated population for 2000 and 2010. - -------- * The Company retained Robert Charles Lesser & Co. ("Lesser"), nationally recognized experts in real estate consulting and urban economics, to study the Company's Southern California submarkets, and the discussion of such submarkets below and under the caption "Summary--The Company's Southern California Submarkets" is based upon Lesser's findings. While the Company believes that these estimates of economic trends are reasonable, there can be no assurance that these trends will in fact continue. 71 TOTAL POPULATION AS A PROPORTION OF THE UNITED STATES SOUTHERN CALIFORNIA AREA AND CALIFORNIA 1980-2010 [GRAPH APPEARS HERE]
1980 1990 1995 2000 2010 California 10.50% 12.00% 12.30% 12.70% 13.50% Southern California Area 3.65% 5.80% 5.90% 6.10% 6.30%
72 Increasing Employment. The Southern California Area economy experienced significant recessionary conditions during the 1990-1993 period. While the Southern California Area lagged behind the rest of the country in entering the recession, it also lagged in the economic recovery, in part due to the cutbacks in the aerospace and defense industries. Employment growth recovered in 1995. The passage of the North American Free Trade Agreement (NAFTA) in the first quarter of 1995 and the General Agreement on Tariffs and Trade (GATT) in the fourth quarter of 1994 provide optimism for new jobs and economic growth for California. In 1995, the Southern California Area experienced a net increase in employment with the addition of approximately 113,000 jobs, representing an approximately 1.9% increase over the prior year. Of the total, approximately 61,000 jobs (approximately 53.9% of the total) were created in Los Angeles County. Employment in the Southern California Area is expected to increase during 1996 through 1998, with an expected average increase of approximately 125,000 to 135,000 jobs annually, representing an annual growth rate of approximately 2.1% to 2.2%, nearly twice the expected national growth rate of 1.2%. The following table shows the annual non-agricultural change in jobs for the Southern California Area for the period from 1980 through 1995, and the expected change in jobs for the period from 1996 through 1998. ANNUAL NON-AGRICULTURAL EMPLOYMENT CHANGE SOUTHERN CALIFORNIA AREA 1980-1998 [GRAPH APPEARS HERE]
ANNUAL CHANGE IN JOBS Southern California Area 1980 -0- 1981 67,900 1982 (127,300) 1983 42,100 1984 222,700 1985 190,800 1986 188,500 1987 194,700 1988 189,300 1989 155,700 1990 90,600 1991 (173,000) 1992 (189,000) 1993 (102,500) 1994 29,200 1995 112,800 1996 124,448 1997 127,062 1998 135,907
Unemployment rate in the Southern California Area is moving downward from its 1993 peak. For the U.S., the 1995 unemployment rate was approximately 6.2% versus approximately 7.7% in California. By comparison, the 1993 unemployment rates for the U.S. and California were approximately 6.9% and 9.2%, respectively. While the unemployment rate in the Southern California Area has been declining in the last couple of years, it probably will remain higher than the unemployment rate for the nation as a whole. Within the Southern California Area, the 1995 unemployment rates vary from a low of approximately 5.4% in Orange County to a high of approximately 8.7% in Riverside and San Bernardino Counties. Los Angeles County's unemployment rate stood at approximately 7.7%--the same as California's. Diversification of Industries. Los Angeles and Orange Counties are widely regarded as major centers for corporate and international business and the growth of international trade through the Los Angeles-Long Beach port complex, which presently ranks as the largest commercial port in the United States, is driving the growth of business in the surrounding area. While the southern coastal Los Angeles County market, including the EL Segundo and Long Beach submarkets, has historically been, and continues to be, associated with the 73 aerospace and defense industries, the downsizing of those industries has resulted in the region becoming more diversified, with major corporations in emerging industries such as telecommunications and healthcare. The Company believes this diversity, which is reflected in the Company's tenant base, has strengthened these submarkets in which the Properties are located. Foreign Trade. The growth in the region's employment is attributable in part to the increase in the volume of trade in the region's ports and airports, which at the end of 1995 accounted for over 13.0% of the total trading volume in the United States and which has grown at an average annual rate of approximately 11.4% during the ten-year period ended in 1994 compared to an approximately 8.0% growth rate nationally during the same period. In addition, during 1995 the trading volume among the region's ports and airports increased another approximately 16.0%, further securing the region's position as the nation's leader in international trade activity. The following table shows the growth in the Los Angeles Customs District's share of U.S. Trade for the period from 1972 through 1994. LOS ANGELES CUSTOMS DISTRICT SHARE OF U.S. TRADE 1972-1994 [GRAPH APPEARS HERE] 1972 6% 1973 6% 1974 7% 1975 6% 1976 7% 1977 7% 1978 7% 1979 7% 1980 8% 1981 8% 1982 8% 1983 9% 1984 9% 1985 11% 1986 12% 1987 12% 1988 12% 1989 12% 1990 12% 1991 12% 1992 12% 1993 12% 1994 13% 1995 12% 74 Growing Service Economy. Over the last 15 years the composition of employment in the Southern California Area has shifted, generally mirroring national patterns. The goods-producing sector (mining, construction and manufacturing) has declined from an approximately 28.7% share in 1980 to approximately 20.1% in 1995. Within this sector, manufacturing accounted for the entire decline. Correspondingly, the services-producing sector (transportation, communications and utilities; wholesale and retail trade; finance, insurance and real estate services; and government) has expanded from approximately 71.3% of total employment in 1980 to approximately 79.9% in 1995. The following table presents the total employment growth from 1980 to 1995 for various employment sectors in the Southern California Area. TOTAL NON-AGRICULTURAL EMPLOYMENT GROWTH BY INDUSTRY SOUTHERN CALIFORNIA AREA 1980-1995 [GRAPH APPEARS HERE] Mining -10.2 Construction 16.9 Manufacturing -260 Transportation and Public Utilities 38.2 Wholesale and Retail Trade 238.5 F.I.R.E. 32.9 Services 697.6 Government 138.5 Goods Producing Employment -253.3 Service Producing Employment 1145.7 75 In particular, the entertainment industry now accounts for over 200,000 jobs in the region. The following table shows the growth of tourism and entertainment-related jobs for the period from 1972 through 1995. GROWTH OF TOURISM AND ENTERTAINMENT-RELATED JOBS SOUTHERN CALIFORNIA AREA 1972-1995 [GRAPH APPEARS HERE]
YEAR Thousands of Jobs % Change 1972 110 --- 1973 120 9.1% 1974 120 0.0% 1975 123 2.5% 1976 130 5.7% 1977 140 7.7% 1978 145 3.6% 1979 150 3.4% 1980 148 -1.3% 1981 165 11.5% 1982 167 1.2% 1983 175 4.8% 1984 180 2.9% 1985 190 5.6% 1986 200 5.3% 1987 218 9.0% 1988 225 3.2% 1989 242 7.6% 1990 254 5.0% 1991 262 3.1% 1992 245 -6.5% 1993 251 2.4% 1994 263 4.8% 1995 297 12.9%
In addition, recent developments in the Southern California Area aerospace industry, such as additional orders for the McDonnell Douglas C-17 military cargo jets and the announcements of new orders for McDonnell Douglas airliners by commercial carriers and the hiring of up to 700 employees by TRW Corporation, should help to stabilize related employment. The following table shows the number of jobs in the aerospace/high technology industries in the Southern California Area for the period from 1988 through 1995. AEROSPACE/HIGH TECHNOLOGY EMPLOYMENT TRENDS SOUTHERN CALIFORNIA AREA 1988-1997 [GRAPH APPEARS HERE]
1988 1989 1990 1991 1992 1993 1994 1995 Aerospace/High Technology 274.2 265.6 253.3 228.6 199 168.7 146.7 135
76 Office Submarkets. Total office space in the Southern California Area amounts to approximately 222.7 million square feet. The Southern California Area is the second largest office market in the country after the New York City Metro Area (with over approximately 800 million square feet). Los Angeles County comprises two-thirds of the metro office inventory, roughly 149.8 million square feet; Orange County accounts for approximately 54 million square feet. Vacancy rates in the office space market in the Southern California Area are trending downward from a high in 1991 and 1992 of approximately 19.7% to a level at the end of 1995 of approximately 18.0%. At December 31, 1995, the vacancy rate for the Office Properties was approximately 10.7%. The following table shows the U.S. and Southern California Area office vacancy rates for the period from 1988 through 1995. OFFICE MARKET VACANCY TRENDS SOUTHERN CALIFORNIA AREA VERSUS U.S. 1988-1995 [GRAPH APPEARS HERE]
1988 1989 1990 1991 1992 1993 1994 1995 U.S. 18.2% 18.6% 19.5% 19.4% 18.7% 17.0% 15.5% 14.1% Southern California Area 0.0% 17.2% 0.0% 19.8% 19.7% 19.2% 18.3% 17.8%
77 Net absorption in the Southern California Area in 1995 amounted to approximately 2.2 million square feet, down from approximately 2.7 million square feet in the prior year but ahead of 1993's approximately 1.7 million square feet. By comparison, absorption in the Southern California Area ranged from approximately 11.1 million to 11.7 million square feet during the mid- to late 1980s. Annual increases in employment during the 1980s fluctuated between approximately 160,000 and 200,000 jobs per year, as opposed to job losses during 1991 to 1994. The following table shows the annual absorption of office space in the Southern California Area for each of the years from 1986 through 1995. ANNUAL NET ABSORPTION OF OFFICE SPACE SOUTHERN CALIFORNIA AREA 1986-1995 [GRAPH APPEARS HERE] 1986 11,116 1987 11,684 1988 11,687 1989 11,260 1990 7,635 1991 5,005 1992 3,301 1993 1,689 1994 2,657 1995 2,153 78 No Additional Supply of Office Space. During the last four years only approximately 521,000 square feet of office space has been added to the Southern California Area. The following table shows the additions in square footage to the Southern California office market for each of the last six years. ADDITIONS TO THE SOUTHERN CALIFORNIA AREA'S OFFICE MARKET* [GRAPH APPEARS HERE]
Year Square Feet 1989 21,097 1990 11,033 1991 9,384 1992 3,188 1993 720 1994 - 1995 -
- -------- * In 1994 and 1995, the total square footage in the market decreased by approximately 2.0 million square feet and approximately 1.3 million square feet, respectively. The addition in the near-term of any new speculative office space to the market remains unlikely as effective rents for multi-tenant properties are currently well below the level needed to make new construction economically feasible. El Segundo Office Submarket. In the El Segundo submarket the Company owns and operates three Office Properties at Kilroy LAX, and one stand alone two- story office building. The aggregate rentable square feet of the Office Properties in the El Segundo submarket represent approximately 21% of the approximately 3.4 million rentable square feet of all Class A office properties located in this submarket as of December 31, 1995. The El Segundo submarket is an approximately 5.4 square mile area in the southwestern coastal section of Los Angeles County. The El Segundo submarket has the advantages of proximity to LAX without the disadvantages of being located within the City of Los Angeles, as is the case with the submarket located on the northeast side of LAX (the "LAX/Century Boulevard submarket"). The El Segundo submarket has a highly qualified computer and technology-based work force. El Segundo's tax structure is as much as $6.00 per square foot per annum lower than neighboring Los Angeles, principally attributable to lower gross receipts and utility taxes. As a result, the El Segundo submarket has historically enjoyed higher rental occupancy and tenant retention rates than neighboring submarkets, such as LAX/Century Boulevard, Torrance and Carson. The El Segundo submarket tenant base has broadened from its historic concentration of aerospace industry tenants. A number of major corporations have a significant presence in the El Segundo submarket, including 79 Xerox Corporation, Mattel, Inc., Chevron USA, Inc., AT&T, TRW Corporation and Hughes Space & Communications. Management believes that because of the high quality and strategic location of the four Office Properties located in the El Segundo submarket, the El Segundo Office Properties have had higher occupancy and tenant retention than other properties within this submarket and have achieved higher rental rates. As of December 31, 1995, the direct vacancy rate of Class A office buildings in the El Segundo submarket was approximately 10.8% as compared to approximately 7% for the Company's El Segundo Office Properties as a whole. The average asking annual rental rate in the El Segundo submarket as of December 31, 1995 was $21.00 per square foot for Class A office buildings compared to an average asking annual rental rate of $23.50 per square foot for the Company's Office Properties. For the year ended December 31, 1995, there was net absorption of approximately 237,000 rentable square feet of Class A office space. No new office buildings are under construction and, to the Company's knowledge, no new construction is presently projected for the remainder of 1996 in the El Segundo submarket. The following tables show the comparative vacancy rates of Class A office space in the El Segundo submarket and Kilroy LAX, and the comparative mean asking rents of Class A office space in the El Segundo submarket and Kilroy LAX, respectively. HISTORICAL CLASS A OFFICE VACANCY KILROY PROPERTIES VERSUS EL SEGUNDO CLASS A 1990-1995 [GRAPH APPEARS HERE]
Year Kilroy Properties El Segundo Class A 1990 8.0% 8.3% 1991 6.9% 4.4% 1992 6.8% 8.5% 1993 5.5% 5.5% 1994 4.3% 19.5% 1995 4.3% 10.8%
80 HISTORICAL CLASS A OFFICE RENTS KILROY PROPERTIES VERSUS EL SEGUNDO CLASS A 1990-1995 [GRAPH APPEARS HERE]
Kilroy Properties El Segundo Class A Mean Asking Rents Mean Asking Rents 1990 $23.30 $22.30 1991 $23.85 $22.65 1992 $23.91 $22.55 1993 $23.70 $21.30 1994 $23.40 $21.80 1995 $23.40 $21.10
Subsequent to December 31, 1995, Hughes Space & Communications vacated an approximately 502,000 square foot Class A office space owned by an unaffiliated third-party located at 200 North Sepulveda Boulevard in El Segundo. Through June 30, 1996, approximately 87,000 square feet had been leased, leaving approximately 415,000 available, and putting the vacancy rate for Class A office space in the El Segundo submarket at approximately 23.0%. Local brokers indicate that the office property located at 200 North Sepulveda Boulevard is among the lower quality Class A office buildings in the El Segundo submarket. According to Lesser, the asking rents for quality Class A office space in the El Segundo submarket should be relatively unaffected by the addition of the lower quality office property space to the submarket's available inventory. Notwithstanding the increase in overall available Class A office space in the El Segundo submarket through June 30, 1996, the decrease in the El Segundo submarket vacancy rate for quality Class A office space, and the indications of improvement and diversification in the submarket's economy, should apply some short-term upward pressure on rents for quality Class A office space, by as much as 5.0% within the next year. Asking rents with respect to lower quality Class A office space should remain relatively flat until the related vacancy rate drops to 15%. Long Beach Airport Area Office Submarket. Upon consummation of the Offering and the Formation Transactions, the Company will own five Office Properties at Kilroy Long Beach Phases I and II which represent approximately 22% of the total rentable square feet of all Class A office properties located in the Long Beach Airport area submarket. The Long Beach Airport area submarket is strategically located near the border of Los Angeles and Orange Counties, adjacent to the I-405 Freeway and is in close proximity to several other freeways which serve the area. The submarket is also near the Long Beach Airport which, through AmericaWest Airlines, provides commercial airline access to all regions of the country. The Long Beach Airport area submarket provides tenants with the ability to draw a workforce from and to provide services to clients in both Los Angeles and Orange Counties, making it an ideal location for companies operating in both counties to consolidate their operations to a convenient single location. In addition, portions of the submarket, including the Properties located at Kilroy 81 Airport Center Long Beach, are located within a favorable tax zone which permits qualifying tenants to receive a variety of tax credits and deductions not available in neighboring submarkets. The submarket also offers tenants a secure environment within a first class office park with the potential for substantial expansion, whereas the Long Beach central business district submarket is hampered by traffic congestion and limited opportunities for tenant expansion. As of December 31, 1995, the direct vacancy rate of Class A office buildings in the Long Beach Airport area submarket was approximately 17.4% as compared to approximately 16% for the Company's Long Beach Office Properties as a whole. For the year ended December 31, 1995, there was net absorption of approximately 458,000 rentable square feet of Class A office space. The current mean asking annual rental rate in the Long Beach Airport area submarket is approximately $24.40 per rentable square foot for Class A office buildings compared to the current mean asking annual rental rate at Kilroy Long Beach of $24.30 per rentable square foot. The decrease in the submarket's vacancy rate, the indications of improvement in the submarket's aerospace industry and the present difficulty in locating large blocks of contiguous space should apply some short-term upward pressure on rents for Class A office space within the next two years. Available space for technology companies is particularly difficult to find and buildings which offer current telephone communication capabilities and electrical support are more likely to benefit earlier. Thousand Oaks Submarket. Upon consummation of the Offering and the Formation Transactions, the Company will own a stand-alone three-story office building located in Thousand Oaks, California. The City of Thousand Oaks has approximately 112,600 residents, and is located 40 miles northwest of Los Angeles in Ventura County, which is located along the coast immediately north of Los Angeles County. As of December 31, 1995, Ventura County had a population of approximately 720,000 persons. The County is home to companies in various industries including high technology, pharmaceuticals and finance. As of December 31, 1995, the vacancy rate of office space in the Ventura County office submarket was approximately 14.1%. During 1995, there was net absorption in the Ventura County office submarket of approximately 157,000 rentable square feet of office space. The average annual effective gross rent for office space in the Ventura County office submarket as of December 31, 1995 was $15.00 per square foot. 82 Industrial Submarkets. As of May 1996, available industrial space in the Southern California Area totaled approximately 1.1 billion square feet. Vacancy rates in the industrial space market in the Southern California Area have declined from a high of approximately 13.8% in 1992 to approximately 9.2% at December 31, 1995. At December 31, 1995, the vacancy rate for the Industrial Properties was approximately 1.6%. The following table shows the U.S. and Southern California Area industrial vacancy rates for the period from 1991 through 1995. INDUSTRIAL MARKET VACANCY TRENDS U.S. AND THE SOUTHERN CALIFORNIA AREA 1991-1995 [GRAPH APPEARS HERE]
1991 1992 1993 1994 1995 U.S. 7.9% 8.7% 8.3% 7.4% 6.9% Southern California Area 13.0% 13.8% 13.5% 12.6% 9.2%
Much of the existing space on the market in the Southern California Area is considered to be functionally obsolete due to its age, services, and/or configuration. As a result, the Southern California Area inventory for industrial space is beginning to experience a modest growth in new construction primarily of build-to-suit. In addition, speculative construction also grew modestly in 1995 with approximately 6.0 million square feet of new construction representing approximately 0.5% of the region's inventory. However, this amount still is relatively modest when compared to 1989 levels when new construction for the year reached approximately 34.0 million square feet, and the existing building inventory exceeded approximately 1.1 billion square feet. El Segundo Industrial Submarket. The Company owns four Industrial Properties located in the City of El Segundo. At June 30, 1996, the Company's El Segundo Industrial Properties were fully leased. The El Segundo industrial submarket is part of the South Bay industrial market which includes the cities of Torrance, Carson and Long Beach. At December 31, 1995, the South Bay industrial market contained approximately 185 million rentable square feet of industrial space, with a vacancy rate of approximately 8.2%. Orange County Industrial Submarket. The Company owns four Industrial Properties in Orange County, three of which are in the City of Anaheim and one of which is in the City of Garden Grove, which contain an aggregate of approximately 395,000 rentable square feet. These properties accounted for approximately 7.2% of the Company's base rent. At June 30, 1996, the Company's Orange County Industrial Properties were 96.3% leased to five tenants. At December 31, 1995, the Orange County industrial submarket contained approximately 187 million rentable square feet, with a vacancy rate of approximately 12.9%. The low current vacancy rate in the Southern California industrial submarket as a whole is likely to put upward pressure on rents for Southern California Class A buildings during 1996, with increases by as much as 9% by the end of 1997. 83 Development Property Submarkets. Thousand Oaks Submarket. The Company has entered into an exclusive agreement to negotiate a Development and Disposition Agreement in connection with the Thousand Oaks Civic Arts Plaza Retail and Entertainment Center, an approximately 11-acre project in the City of Thousand Oaks. See "--Office Submarkets--Thousand Oaks Submarket." As of December 31, 1995, the vacancy rate of retail facilities in the greater City of Thousand Oaks (including certain smaller surrounding communities and unincorporated areas) was approximately 7.1% of a total of approximately 3.4 million rentable square feet in the area. During 1995, there was net absorption of approximately 65,000 rentable square feet of retail space in this same area. EXCLUDED PROPERTIES The Company will hold options to acquire (i) the SeaTac Office Center, located just south of Seattle, Washington, (ii) a three-building office complex located in El Segundo, California and (iii) parcels comprising an aggregate of approximately 18 acres located at Calabasas Park Centre, in Calabasas, California at the respective purchase price for each of the properties as discussed below. Each of the office properties was developed and has been leased and managed by the Kilroy Group and each option property is currently owned by a partnership controlled by John B. Kilroy, Sr. and John B. Kilroy, Jr. The SeaTac Office Center option is exercisable on or before the first anniversary of the Offering. If, however, the owners of the SeaTac Office Center have not satisfied certain conditions to the transfer of such property within 270 days following consummation of the Offering, the option term shall be extended to the date 90 days following the date such conditions are satisfied. The option for Calabasas Park Centre is exercisable on or before the first anniversary of the Offering. The option for the office complex located on North Sepulveda Boulevard in El Segundo is exercisable on or before the seventh anniversary of the consummation of the Offering. The net purchase price for the SeaTac Office Center will be payable in Units. The purchase price for the office complex in El Segundo, California and the parcels located at the Calabasas Park Centre will be payable in cash, provided, however, that if the option for the office complex in El Segundo is exercised after the first anniversary of the consummation of the Offering, the purchase price will be payable in cash or Units at the election of the seller. In the event that the owner of a property receives an offer from a third party for the master lease or purchase of such property, such owner may give notice to the Company, which notice shall include the proposed purchase price, leasing terms and/or other economic terms of the proposed transfer or lease of such property. The Company shall then have 60 days to give notice of its election to acquire or lease such property at the lower of the applicable option price or the proposed purchase price or lease terms. In the event that the Company does not give such notice, the option to such property shall be suspended and the owner may proceed with the sale or lease of such parcel pursuant to the terms of such offer, provided that the economic terms may be up to 5% below that described in such notice; provided, however, that (i) with respect to the SeaTac Office Center, if the owner enters into an agreement to sell or lease the SeaTac Office Center for an amount in excess of the option price, and the conditions to the transfer of such property to the Company were not satisfied at the date the owner gave notice of the proposed transfer, and (ii) with respect to any sale of the approximately 18 acres located at Calabasas Park Centre discussed below, then in either event the Company shall have the right to acquire at the option price the owners' rights and related monetary obligations under the respective sales agreement. In the event the owners of such property (i) have not entered into a letter of intent for the sale or lease of such property within 180 days following the notice to the Company referenced above, or (ii) have not completed the sale of the respective property within 270 days following such notice, then the Company's option with respect to such property shall be reinstated, up to the expiration date of the option. The Company's option shall be subject to any arrangements entered into by the Kilroy Group in connection with any financing, recapitalization or leasing of the Property including, without limitation, any rights of the lender(s) with respect to such property with respect to a transfer pursuant to the applicable option. In addition, the office properties will be managed by the Operating Partnership pursuant to a management agreement on market terms. SeaTac Office Center at Seattle-Tacoma International Airport. The Kilroy Group developed and operates the SeaTac Office Center ("SeaTac"), south of Seattle in SeaTac, Washington, a Class A office development in the Southend submarket of the Puget Sound region. SeaTac is comprised of two 12-story towers (constructed in 1977 and 1980, respectively) and a 4-level office and garage structure with two floors of office space on top (constructed in 1980), all with views of the Olympic and Coastal mountain ranges. The site is located directly 84 across from the Seattle-Tacoma International Airport. The facility currently contains an aggregate of approximately 530,000 square feet of office space. Current zoning permits up to an additional 500,000 square feet of development. The facility features 24-hour on-site security and management, parking for over 1,900 vehicles, computer training and consultation, travel agencies, a 24-hour restaurant and an airport shuttle service that is free to tenants. As of June 30, 1996, SeaTac had approximately 334,000 rentable square feet of available office space. Major tenants include First Nationwide Mortgage Corporation, Key Bank of Washington, Lynden, Inc., National Chemsearch, Northwest Airlines, Inc., ITT Rayonier, Inc., Seattle-First National Bank and Transamerica Financial Services, Inc. SeaTac is situated on an approximately 17-acre site subject to two long-term ground leases and an airspace lease. The initial term of the ground leases runs through December 31, 2032, and may be extended for an additional period of thirty years. Payments under the ground leases are subject to adjustment for increases in the CPI every five years. Payments under the airspace lease are made monthly. Aggregate payments under the two ground leases and the airspace lease for the year ended December 31, 1995 totaled approximately $317,500. As of June 30, 1996, the properties were encumbered by a first mortgage loan having an outstanding principal balance of $20,153,300. The loan bears interest at a rate of 9.75% per year and is scheduled to mature on May 15, 2001. The exercise price for SeaTac Office Center will be an amount equal to the approximate fair market value as of the date of the Offering, less liabilities, if any, assumed by the Company. Calabasas Park Centre. The Kilroy Group also owns Calabasas Park Centre, an approximately 66-acre site (representing approximately 45 developable acres net of acreage required for streets and contractually required open areas) in the City of Calabasas located immediately west of the San Fernando Valley which is presently entitled for over one million rentable square feet of office, retail and hotel development, and for which future entitlements are expected to include residential development. The property has substantially all significant infrastructure improvements in place. The Kilroy Group is actively marketing for sale various parcels totaling approximately 27 acres for neighborhood retail, hotel and residential development, of which approximately 1.7 acres is proposed to be dedicated to the City of Calabasas for civic use. The Kilroy Group has received offers with respect to certain parcels and is pursuing such offers in the ordinary course of business, although there is no assurance that any such transactions will be completed in the near term. The principals of KI who are directors and/or executive officers of the Company will spend an immaterial amount of time in connection with any sales of parcels of Calabasas Park Centre. The remaining approximately 18 acres for which the Company has been granted an option is entitled for over 500,000 rentable square feet for office, hotel and limited retail use. Management believes that such property will be used primarily as office space and may be appropriate for possible acquisition by the Company. Pursuant to the terms of the applicable option agreement, the purchase price for the parcels located at Calabasas Park Centre will be equal to the total accumulated costs, as of the date such option is exercised, in connection with acquisition of rights with respect to, and the entitlement and development of such property, including, without limitation, property taxes, predevelopment and entitlement costs and fees, and related bond financing costs. North Sepulveda Boulevard, El Segundo. The Kilroy Group developed and operates a three-building office complex located on an over 3.5-acre parcel in El Segundo, California, adjacent to LAX. The complex is comprised of an 11- story office building (constructed in 1972), an eight-story office building (constructed in 1962) and a seven-level parking structure with retail space on the ground floor (constructed in 1972), encompassing an aggregate of approximately 360,000 rentable square feet of office space and approximately 5,600 rentable square feet of retail space. The properties have convenient access to LAX and the I-105 Freeway. As of June 30, 1996, the office space was 100% leased to Hughes Space & Communications (of which approximately 60% is occupied) at an average annual triple net base rent per net rentable square foot of $17.91, subject to a lease scheduled to expire on February 28, 1998. Management believes that in light of the near-term expiration of the current lease and the uncertainty of whether the current rental rate will approximate market rental rates at the time of expiration, this office complex is not appropriate for inclusion in the Company's portfolio at this time. As of June 30, 1996, the properties were encumbered by a first mortgage loan having an outstanding principal balance of approximately $61.6 million. The loan bears interest at a rate of 9.63% per year 85 and is scheduled to mature on February 1, 2005. This property is also encumbered by a second mortgage loan having an outstanding principal balance as of June 30, 1996 of $4.4 million. This loan bears interest at a rate of 9.75% per year and is scheduled to mature on February 28, 1998. Pursuant to the terms of the applicable option agreement, the purchase price for the North Sepulveda Boulevard properties is equal to the sum of (i) the then outstanding mortgage indebtedness secured by the respective properties, plus (ii) $1, plus (iii) the aggregate amount of capital contributed by the beneficial owners of the property, net of actual cash distributions distributed in respect of such beneficial owners, during the period beginning on the date of the consummation of the Offering, plus (iv) an annualized return of 8.0% on the amount in excess of $5.0 million, if any, as determined pursuant to clause (iii) preceding. The Company's option to purchase the North Sepulveda Boulevard properties is subject to a right of first offer held by Hughes Space & Communications. In addition to the properties described above, the Company will not acquire certain properties being held for sale by members of the Kilroy Group or which are not of a type appropriate for inclusion in the Company's portfolio or consistent with the Company's strategy, including an approximately three-acre undeveloped parcel in Tampa, Florida, and a parcel which is subject to an easement for railroad use, each beneficially owned and controlled by KI. Each of the principals of KI who are directors and/or executive officers of the Company will spend an immaterial amount of time managing these properties. INSURANCE Management believes that the Properties are covered by adequate comprehensive liability, rental loss, and all-risk (at full replacement cost) insurance, provided by reputable companies, with commercially reasonable deductibles, limits and policy specifications customarily carried for similar properties. There are, however, certain types of losses which may be either uninsurable or not economically insurable, such as losses due to floods, riots or acts of war. Should an uninsured loss occur, the Company could lose both its invested capital in and anticipated profits from the property. UNINSURED LOSSES FROM SEISMIC ACTIVITY The Properties are located in areas that are subject to seismic activity. Although the Company expects to have earthquake insurance on certain of the Properties, should any Property sustain damage as a result of an earthquake, or should losses exceed the amount of such coverage, the Company may incur uninsured losses or losses due to deductibles or co-payments on insured losses. All of the Properties were reviewed by an independent engineering consultant. The review of each of the Properties included a review of the probable loss associated with certain seismic activity. The estimated loss for each of the Properties was determined based upon magnitudes for once in 50 year seismic event and once in 200 year seismic event. This analysis indicated that in a once in 50 year seismic event, none of the Office Properties would be expected to suffer damage loss in excess of 6% of the Properties' respective estimated replacement cost, and only two of the Industrial Properties would be expected to suffer damage loss in excess of 10% of the Properties' respective estimated replacement cost. These two Industrial Properties, located at 12691 Pala Drive, Garden Grove, California and 1230 South Lewis Street, Anaheim, California, are expected to suffer damage of approximately 13% and 16%, respectively, of their estimated replacement cost in a once in 50 year seismic event. In a once in 200 year seismic event, only one of the Office Properties would be expected to suffer damage loss in excess of 16% of its respective estimated replacement cost, while the Office Property located at 185 South Douglas Street, El Segundo, California would be expected to suffer damage loss of approximately 35% of its respective estimated replacement cost. With respect to the Industrial Properties, only four would be expected to suffer damage loss in excess of 25% of their respective estimated replacement cost in a once in 200 year event, while the Industrial Properties located at 12691 Pala Drive, Garden Grove, California and 1230 South Lewis Street, Anaheim, California, 2260 East El Segundo Boulevard, El Segundo, California, 2270 East El Segundo Boulevard, El Segundo, California, each would be expected to suffer damage loss of approximately 40% of their respective estimated replacement cost. During the January 17, 1994 Northridge earthquake in the Los Angeles area, which had a magnitude of approximately 6.7 on the Richter scale, the Properties in the Southern California area sustained insignificant damage. 86 GOVERNMENT REGULATIONS Many laws and governmental regulations are applicable to the Properties and changes in these laws and regulations, or their interpretation by agencies and the courts, occur frequently. Costs of Compliance with Americans with Disabilities Act. Under the Americans with Disabilities Act of 1990 (the "ADA"), all places of public accommodation, effective beginning in 1992, are required to meet certain federal requirements related to access and use by disabled persons. Compliance with the ADA might require removal of structural barriers to handicapped access in certain public areas where such removal is "readily achievable." Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants. The impact of application of the ADA to the Company's properties, including the extent and timing of required renovations, is uncertain. If required changes involve a greater amount of expenditures than the Company currently anticipates or if the changes must be made on a more accelerated schedule than the Company currently anticipates, the Company's ability to make expected distributions to stockholders could be adversely affected. Environmental Matters. Under various federal, state and local laws, ordinances and regulations relating to the protection of the environment, an owner or operator of real estate may be held liable for the costs of removal or remediation of certain hazardous or toxic substances located on or in the property. These laws often impose liability without regard to whether the owner was responsible for, or even knew of, the presence of such hazardous or toxic substances. The costs of investigation, removal or remediation of such substances may be substantial and, the presence of such substances may adversely affect the owner's ability to rent or sell the property or to borrow using such property as collateral. In addition, the presence of such substances may expose it to liability resulting from any release or exposure of such substances. Persons who arrange for the disposal or treatment of hazardous or toxic substances at another location may also be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws impose liability for release of asbestos- containing materials into the air, and third parties may also seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials and other hazardous or toxic substances. In connection with the ownership (direct or indirect), operation, management and development of real properties, the Company may be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, potentially liable for removal or remediation costs, as well as certain other related costs, including governmental penalties and injuries to persons and property. The Company believes that the Properties are in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances or petroleum products. The Company has not been notified by any governmental authority, and is not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances or petroleum products in connection with any of its present properties. All of the Properties were subject to Phase I or similar environmental assessments by independent environmental consultants in connection with the formation of the Company. Phase I assessments are intended to discover information regarding, and to evaluate the environmental condition of, the surveyed property and surrounding properties. Phase I assessments generally include an historical review, a public records review, an investigation of the surveyed site and surrounding properties, and preparation and issuance of a written report, but do not include soil sampling or subsurface investigations. The Company's environmental assessments of the Properties have not revealed any environmental liability that the Company believes would have a material adverse effect on the Company's business, assets or results of operations taken as a whole, nor is the Company aware of any such material environmental liability. Nonetheless, it is possible that the Company's assessments do not reveal all environmental liabilities or that there are material environmental liabilities of which the Company is unaware. Moreover, there can be no assurance that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of the Properties will not be affected by tenants, by the condition of land or operations in the vicinity of the Properties (such as the 87 presence of underground storage tanks), or by third parties unrelated to the Company. If compliance with the various laws and regulations, now existing or hereafter adopted, exceeds the Company's budgets for such items, the Company's ability to make expected distributions to stockholders could be adversely affected. Other Regulations. The Properties are also subject to various federal, state and local regulatory requirements such as state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. The Company believes that the Properties are currently in material compliance with all such regulatory requirements. However, the requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures by the Company and could have an adverse effect on the Company's Funds from Operations and expected distributions. The City of Los Angeles has enacted certain regulations relating to the repair of welded steel moment frame buildings located in certain areas damaged as a result of the Northridge Earthquake. As currently enacted, such regulations do not apply to the Properties. There can be no assurance, however, that similar regulations will not be adopted by other cities in which the Properties are located or that new requirements will not be imposed which would require significant unanticipated expenditures by the Company and could have a material adverse effect on the Company's Funds from Operations and cash available for distribution. Except as described in this Prospectus, there are no other laws or regulations which have a material effect on the Company's operations, other than typical state and local laws affecting the development and operation of real property, such as zoning laws. See "Risk Factors--Government Regulations," "Certain Provisions of Maryland Law and of the Company's Articles of Incorporation and Bylaws," "Partnership Agreement of Operating Partnership," "Federal Income Tax Consequences" and "ERISA Considerations." MANAGEMENT AND EMPLOYEES The Operating Partnership has been structured as the entity through which the Company will conduct substantially all of its operations. The Services Company has been structured as an entity through which the Company will conduct substantially all of its development activities and related operations. The Company generally has full, exclusive and complete responsibility and discretion in the management and control of the Operating Partnership, but not the Services Company. The Company (primarily through the Operating Partnership and the Services Company) initially will employ approximately 46 persons. The Company, the Operating Partnership and the Services Company will employ substantially all of the professional employees of KI that are currently engaged in asset management and administration. The Operating Partnership will employ approximately 17 on-site building employees who currently provide services for the Properties. The Company, the Operating Partnership and the Services Company believe that relations with their employees are good. LEGAL PROCEEDINGS Neither the Company nor any of the Properties is subject to any material litigation nor, to the Company's knowledge, is any material litigation threatened against any of them, other than routine litigation arising in the ordinary course of business, which is expected to be covered by liability insurance. In May 1994, KI permitted an uncontested foreclosure by the Bank of America on a five-story office building located in El Segundo, California as part of an overall renegotiation of KI's loans and lines of credit. In July 1993, KI sold Kilroy Long Beach Phase I to the mortgagee thereof, at a purchase price slightly in excess of the outstanding balance of such mortgage. KI continued to lease and manage such facility after such sale. In December 1994, the owner of Hidden River Corporate Park located in Tampa, Florida permitted the uncontested foreclosure of the deeds of trust and certain other property pledged as collateral to secure certain development loans related to such property. KI developed the property, an approximately 210-acre office park, and at the time of the foreclosure John B. Kilroy, Sr. and John B. Kilroy, Jr. were limited partners in the company which owned the property. 88 POLICIES WITH RESPECT TO CERTAIN ACTIVITIES The Company's policies with respect to the following activities have been determined by the Board of Directors of the Company and may be amended or revised from time to time at the discretion of the Board of Directors, without a vote of the stockholders of the Company, if they determine in the future that such a change is in the best interests of the Company and its stockholders. INVESTMENT POLICIES Investment in Real Estate or Interests in Real Estate. The Company will conduct all its investment activities through the purchase of interests in the Operating Partnership until all Units have been redeemed or exchanged for shares of Common Stock and the Operating Partnership ceases to exist. During such period, the proceeds of all equity capital raised by the Company will be contributed to the Operating Partnership in exchange for Units in the Operating Partnership. The investment objectives of the Company are to achieve stable cash flow available for distributions and, over time, to increase cash flow and portfolio value by actively managing the Properties, developing properties, acquiring additional properties that, either as acquired or after value-added activities by the Company (such as improved management and leasing services and renovations), will produce additional cash flows and by extending its management, development and leasing business with third-parties. The Company's policy is to develop and acquire properties primarily for generation of current income and appreciation of long-term value. The Company expects to pursue its investment objectives primarily through the ownership of quality office, industrial and retail properties. The Properties will initially consist of ten Office Properties and nine Industrial Properties. The Company currently contemplates developing and acquiring additional office buildings and industrial buildings primarily in Southern California, although future investments could be made outside of such area or in different property categories if the Board of Directors determines that such acquisitions and developments would be desirable. The Company also will be developing retail properties in connection with the development of the Thousand Oaks Civic Arts Plaza, and may develop other retail properties as favorable development opportunities arise. The Company will not have any limit on the amount or percentage of its assets invested in any single property or group of related properties. The Board of Directors may establish limitations as it deems appropriate from time to time. No limitations have been set on the number of properties in which the Company will seek to invest or on the concentration of investments in any one geographic region. The Company may develop, purchase or lease income-producing properties for long-term investment and expand, improve or sell its Properties, in whole or in part, when circumstances warrant. The Company may also participate with other entities in property ownership through joint ventures or other types of co-ownership. Equity investments by the Company may be subject to existing or future mortgage financing and other indebtedness which will have priority over the equity interests of the Company. As the sole general partner of the Operating Partnership, the Company will also determine the investment policies of the Operating Partnership. Under the Partnership Agreement, all future investments must be made through the Operating Partnership. See "Partnership Agreement of the Operating Partnership--Management." Investments in Real Estate Mortgages. While the Company will emphasize equity real estate investments, the Company may, in its discretion, invest in mortgages and other real estate interests consistent with the Company's qualification as a REIT. The Company has not previously invested in mortgages and does not presently intend to invest in mortgages or deeds of trust, but may invest in participating or convertible mortgages if the Company concludes that it may benefit from the cash flow or any appreciation in the value of the subject property. Such mortgages are similar to equity participations. Investments in real estate mortgages run the risk that one or more borrowers may default under such mortgages and that the collateral securing such mortgages may not be sufficient to enable the Company to recoup its full investment. 89 Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers. Subject to the percentage of ownership limitations and gross income tests necessary for the Company to qualify and maintain its status as a REIT, the Company may invest in securities of other entities engaged in real estate activities or securities of other issuers. See "Federal Income Tax Considerations--Taxation of the Company." The Company does not currently intend to invest in the securities of other issuers except in connection with acquisitions of indirect interests in properties (normally general or limited partnership interests in special purpose partnerships owning properties) and in connection with the acquisition of substantially all of the economic interest in a real estate-related operating business where such investments would be consistent with the Company's investment policies. Investment in these securities is also subject to the Company's policy not to be treated as an investment company under the Investment Company Act of 1940. The risks of investing in real estate-related operating businesses include the risk that contracts with third parties may be terminated by such third parties, not renewed upon expiration or renewed on less favorable terms, and the risk that fee income will decrease as a result of a decline in general real estate market conditions. DISPOSITIONS The Company has no current intention to cause the disposition of any of the Properties, although it reserves the right to do so if the Board of Directors determines that such action would be in the best interests of the Company. FINANCING The Company has established its debt policy relative to the market capitalization of the Company rather than to the book value of its assets, a ratio that is frequently employed. Upon completion of the Offering and the Formation Transactions, the debt to total market capitalization ratio (i.e., the total consolidated debt of the Company as a percentage of the market value of the issued and outstanding shares of Common Stock and Units plus total consolidated debt) of the Company will be approximately 25.6% (assuming an initial public offering price of $20.00 per share of Common Stock). This ratio will fluctuate with changes in the price of the Common Stock (and the issuance of additional shares of Common Stock) and differs from the debt-to-book capitalization ratio, which is based upon book value. As the debt-to-book capitalization ratio may not reflect the current income potential of a company's assets and operations, the Company believes that debt-to-total market capitalization ratio provides a more appropriate indication of leverage for a company whose assets are primarily income-producing real estate. The total market capitalization of the Company, however, is more variable than book value, and does not necessarily reflect the fair market value of the underlying assets of the Company at all times. Although the Company will consider factors other than total market capitalization in making decisions regarding the incurrence of indebtedness (such as the purchase price of properties to be acquired with debt financing, the estimated market value of such properties upon refinancing and the ability of particular properties and the Company as a whole to generate cash flow to cover expected debt service), there can be no assurance that the ratio of indebtedness to total market capitalization (or to any other measure of asset value) will be consistent with the expected level of distributions to the Company's stockholders. The Board of Directors has adopted a policy of limiting the Company's indebtedness to approximately 50% of its total market capitalization, but the organizational documents of the Company do not contain any limitation on the amount or percentage of indebtedness, funded or otherwise, that the Company may incur. In addition, the Company may from time to time modify its debt policy in light of then current economic conditions, relative costs of debt and equity capital, market values of its properties, general conditions in the market for debt and equity securities, fluctuations in the market price of its Common Stock, growth and acquisition opportunities and other factors. Accordingly, the Company may increase or decrease its debt to market capitalization ratio beyond the limits described above. To the extent that the Board of Directors decides to obtain additional capital, the Company may raise such capital through additional equity offerings (including offerings of senior or convertible securities and preferred 90 stock), sales of investments, bank and other institutional borrowings, the issuance of debt securities (which may be convertible into or exchangeable for shares of Common Stock or be accompanied by warrants to purchase shares of Common Stock) or retention of cash flow (subject to provisions in the Code concerning taxability of undistributed REIT income), or a combination of these methods. In the event that the Board of Directors determines to raise additional equity capital, the Board has the authority, without stockholder approval, to issue additional shares of Common Stock or other capital stock (including securities senior to the Common Stock) of the Company in any manner, and on such terms and for such consideration, it deems appropriate, including in exchange for property. Existing stockholders would have no preemptive right to purchase shares issued in any offering, and any such offering might cause a dilution of a stockholder's investment in the Company. As long as the Operating Partnership is in existence, the net proceeds of the sale of Common Stock by the Company will be contributed to the Operating Partnership as a contribution to capital in exchange for a number of Units in the Operating Partnership equal to the number of shares of Common Stock sold by the Company. The Company presently anticipates that any additional borrowings would be made by the Operating Partnership, although the Company might incur indebtedness, the proceeds of which would be re-loaned to the Operating Partnership on the same terms and conditions as are applicable to the Company's borrowing of such funds. See "Partnership Agreement of the Operating Partnership--Capital Contribution." Borrowings may be unsecured or may be secured by any or all of the assets of the Company, the Operating Partnership or any existing or new property-owning partnership and may have full or limited recourse to all or any portion of the assets of the Company, the Operating Partnership or any existing or new property-owning partnership. Indebtedness incurred by the Company may be in the form of bank borrowings, purchase money obligations to the sellers of the properties, publicly or privately placed debt instruments or financing from institutional investors or other lenders. There are no limits on the number or amount of mortgages or interests which may be placed on any one property. In addition, such indebtedness may be recourse to all or any part of the property of the Company or may be limited to the particular property for which the indebtedness relates. The proceeds from any borrowings by the Company may be used for working capital, to refinance existing indebtedness, to finance the acquisition, expansion or development of properties and for the payment of distributions. The Board of Directors also has the authority to cause the Operating Partnership to issue additional Units in any manner (and on such terms and for such consideration) as it deems appropriate, including in exchange for property. See "Partnership Agreement of the Operating Partnership--Issuance of Additional Units." In the future, the Company may seek to extend, expand, reduce or renew the Credit Facility, or obtain new credit facilities or lines of credit, subject to its general policy of debt capitalization. Future credit facilities and lines of credit may be used for the purpose of making acquisitions or capital improvements, providing working capital or meeting the taxable income distribution requirements for REITs under the Code if the Company has taxable income without receipt of cash sufficient to enable the Company to meet such distribution requirements. WORKING CAPITAL RESERVES The Company will maintain working capital reserves (and when not sufficient, access to borrowings) in amounts that the Board of Directors determines from time to time to be adequate to meet normal contingencies in connection with the operation of the Company's business and investments. CONFLICT OF INTEREST POLICIES Directors and officers of the Company may be subject to certain conflicts of interests in fulfilling their responsibilities to the Company. The Company has adopted certain policies designed to minimize potential conflicts of interest. Terms of Transfers. The terms of the transfers of the Properties to the Operating Partnership by the Continuing Investors, and the terms of each of the option agreements relating to the Excluded Properties, were not determined through arm's-length negotiation. Partners and affiliates of the Kilroy Group who are directors 91 and officers of the Company had a substantial economic interest in the entities transferring the Properties and granting the options. Consequently, such directors and officers may be subject to a conflict of interest with respect to their obligations as management of the Company to enforce the terms of the agreements relating to such transfers, including the indemnification provisions thereof. However, the Independent Directors must approve any transactions between the Company and members of the Kilroy Group including the enforcement of the terms of the transfers. See "Risk Factors--Conflicts of Interests" and "Management." Sale or Refinancing of Properties. The sale of certain of the Properties may cause adverse tax consequences to members of the Kilroy Group, as compared to the effects on the Company. In addition, a significant reduction in debt encumbering such Properties could cause adverse tax consequences to the members of the Kilroy Group, as compared to the effects on the holders of Units or shares of Common Stock. As a result, certain officers and directors who are members of the Kilroy Group might not favor such a sale of the Properties or a significant reduction in debt even though such sale or debt reduction could be beneficial to the Company. The decision as to whether to proceed with any such sale or debt reduction would be made by the Board of Directors. Noncompetition Agreements. John B. Kilroy, Sr. has agreed, during the term of his service as a member of the Company's Board of Directors, not to conduct property development, acquisition or management activities with respect to office and industrial property in greater Southern California or in any other market in which the Company owns, develops or manages property. John B. Kilroy, Sr. will not be restricted, however, from continuing to own, manage and lease certain other existing real estate investments owned by him including, without limitation, certain properties described under "Business and Properties--Excluded Properties." John B. Kilroy, Jr. has agreed, during the term of his employment agreement and for one year thereafter (unless terminated by the Company without cause), and for so long as he is a member of the Company's Board of Directors, not to conduct property development, acquisition, sale or management activities in any market. Notwithstanding the foregoing, John B. Kilroy, Jr. will not be restricted from continuing to own, manage, lease, transfer and exchange certain existing real estate investments owned by him described under the caption "Business and Properties--Excluded Properties" or owning interests in real property not competitive with the Company. In addition, with respect to the property located at Calabasas Park Centre, each of Mr. John B. Kilroy, Sr. and Mr. John B. Kilroy, Jr. has agreed to be limited solely to activities related to the marketing, entitlement and sale of such properties. Such properties are being actively marketed for sale and are expected to be sold in the ordinary course of business. Mr. John B. Kilroy, Sr. and Mr. John B. Kilroy, Jr. each will spend an immaterial amount of time in connection with the sale of such properties. In addition, each has agreed not to sell such properties located at Calabasas Park Centre to a real estate investment trust with an existing portfolio of office or industrial properties unless first offered to the Company on the same economic terms. Policies Applicable to All Directors. Under the Company's bylaws and Maryland law, a contract or transaction between the Company and any of its directors or between the Company and any other corporation, firm or other entity in which any of its directors is a director or has a material financial interest is not void or voidable solely because of such interest if (i) the contract or transaction is approved, after disclosure of the interest, by the affirmative vote of a majority of the disinterested directors, or by the affirmative vote of a majority of the votes cast by disinterested stockholders, or (ii) the contract or transaction is established to have been fair and reasonable to the Company. The Company's Articles of Incorporation provide that a majority of the Company's Board of Directors must be Independent Directors. See "Certain Provisions of Maryland Law and of the Company's Articles of Incorporation and Bylaws--Board of Directors." OTHER POLICIES The Company intends to operate in a manner that will not subject it to regulation under the Investment Company Act of 1940. The Company does not intend (i) to invest in the securities of other issuers (other than the Operating Partnership and the Services Company) for the purpose of exercising control over such issuer, (ii) to underwrite securities of other issuers or (iii) to trade actively in loans or other investments. 92 The Company has authority to offer shares of Common Stock or other securities and to repurchase or otherwise reacquire shares of Common Stock or any other securities in the open market or otherwise and may engage in such activities in the future. The Company may, under certain circumstances, purchase shares of Common Stock in the open market, if such purchases are approved by the Board of Directors. The Board of Directors has no present intention of causing the Company to repurchase any of the shares of Common Stock, and any such action would be taken only in conformity with applicable federal and state laws and the requirements for qualifying as a REIT under the Code and the Treasury Regulations. Although it may do so in the future, except in connection with the Formation Transactions, the Company has not issued Common Stock or any other securities in exchange for property, nor has it reacquired any of its Common Stock or any other securities. The Company expects to issue shares of Common Stock to holders of Units upon exercise of their exchange rights in the Partnership Agreement of the Operating Partnership. The Company has not made loans to other entities or persons, including its officers and directors. The Company may in the future make loans to joint ventures in which it participates in order to meet working capital needs. The Company has not engaged in trading, underwriting or agency distribution or sale of securities of other issuers other than the Operating Partnership, nor has the Company invested in the securities of other issuers other than the Operating Partnership and the Services Company for the purposes of exercising control, and does not intend to do so. At all times, the Company intends to make investments in such a manner as to be consistent with the requirements of the Code for the Company to qualify as a REIT unless, because of changing circumstances or changes in the Code (or in Treasury Regulations), the Board of Directors of the Company determines that it is no longer in the best interests of the Company to qualify as a REIT. 93 THE FINANCING THE MORTGAGE LOAN The Company, on behalf of the Operating Partnership, intends to obtain a written commitment for a mortgage loan of $75.0 million (the "Mortgage Loan"), the closing of which is a condition to the consummation of the Offering. The proceeds of the Mortgage Loan will principally be used to repay existing indebtedness on the Properties. Payment of principal and interest on the Mortgage Loan is expected to be secured by certain Properties. The Mortgage Loan is expected to require monthly principal and interest payments based on a fixed rate, amortizing over a 25-year period, maturing in 2003. Subject to certain limited exceptions, the Mortgage Loan will be non- recourse to the Company. In addition, the terms of the Mortgage Loan will include customary representations, warranties and events of default and will require the Operating Partnership to comply with certain affirmative and negative covenants. The Company and the Operating Partnership will be responsible for payment of the lender's fees and expenses associated with providing the Mortgage Loan. THE CREDIT FACILITY The Company, on behalf of the Operating Partnership, expects to obtain a written commitment to establish a three-year, $100 million revolving credit facility (the "Credit Facility") which the Company and the Operating Partnership expect to enter into concurrently with the consummation of the Offering. The Credit Facility will be used primarily to finance acquisitions of additional properties and to finance the development of properties, although a portion may be used for general working capital purposes. Payment of principal and interest is expected to be secured by certain Properties. In addition, borrowings under the Credit Facility are expected to be recourse obligations to the Operating Partnership and the Company. The Operating Partnership's ability to borrow under the Credit Facility will be subject to its compliance with a number of customary financial and other covenants on an ongoing basis, including maintenance of loan-to-value and debt service coverage ratios, limitations on additional indebtedness and a minimum net worth requirement. The Credit Facility is expected to require monthly interest only (LIBOR based) payments on the total borrowings outstanding under the Credit Facility each month. The Company and the Operating Partnership anticipate that the Credit Facility will be either extended, renewed or refinanced through the issuance of debt or equity securities at its maturity. The Company and the Operating Partnership will be responsible for payment of the lender's fees and expenses associated with providing the Credit Facility. Neither the Company nor the Operating Partnership will have any variable rate debt at the time of the Offering. If the initial public offering price for the Common Stock is less than the midpoint of the range set forth on the cover page of this Prospectus, the Company expects to make up any shortfall between the aggregate net proceeds of the Offering and the Mortgage Loan, and the intended uses thereof, with borrowings under the Credit Facility. See "Use of Proceeds." 94 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Upon consummation of the Offering, the Board of Directors will consist of five members, including a majority of directors who are Independent Directors. Directors of the Company will be divided into three classes serving staggered three-year terms (except initial terms expiring in 1997 and 1998) with directors serving until the election and qualification of their successors. The first annual meeting of stockholders of the Company after the Offering will be held in 1997. Each of the proposed directors named below has been nominated for election upon the consummation of the Offering and has consented to serve. In addition to the proposed directors listed below, prior to the consummation of the Offering, the Company will appoint three additional members to serve as Independent Directors to the Board of Directors. See "Certain Provisions of Maryland Law and of the Company's Articles of Incorporation and Bylaws--Board of Directors." Subject to rights pursuant to any employment agreements, officers of the Company serve at the pleasure of the Board of Directors. The following table sets forth certain information with respect to the directors, proposed directors and executive officers of the Company immediately following the completion of the Formation Transactions and consummation of the Offering:
NAME AGE POSITION TERM EXPIRES ---- --- -------- ------------ John B. Kilroy, Sr...... 74 Chairman of the Board of Directors John B. Kilroy, Jr...... 47 President, Chief Executive Officer and Director Jeffrey C. Hawken....... 37 Chief Operating Officer Campbell Hugh Greenup... 43 General Counsel A. Christian Krogh...... 48 Vice President, Asset Management
The following is a biographical summary of the experience of the directors, proposed directors and executive officers of the Company: JOHN B. KILROY, SR., age 74, is founder and Chairman of KI and is a nationally recognized member of the real estate community, providing the Company with strategic leadership and a broadly-based network of relationships. Mr. Kilroy is a trustee of the Independent Colleges of Southern California, serves on the Board of Directors of Pepperdine University, and is a past trustee of Harvey Mudd College. JOHN B. KILROY, JR., age 47, has been responsible for the overall management of all facets of KI and its various affiliates since 1981. Mr. Kilroy has been involved in all aspects of commercial and industrial real estate acquisition, sales, development, construction, leasing, financing, and entitlement since 1967 and has worked for KI for over twenty-five years. Mr. Kilroy became President of KI in 1981 and was elected Chief Executive Officer in 1991. Prior to that time he held positions as Executive Vice President and Vice President--Leasing & Marketing. He is a member of the National Realty Committee and the Urban Land Institute, and is a trustee of the El Segundo Employers Association, and a past trustee of Viewpoint School, the Jefferson Center For Character Education and of the National Fitness Foundation. JEFFREY C. HAWKEN, age 37, has been responsible for the management and operations of KI's real estate portfolio. Mr. Hawken's activities have included leasing, asset and facility management, with an emphasis on quality of service, operational cost reduction and code compliance. He has also served on KI's acquisitions and executive committees. Mr. Hawken joined KI in 1980, as a Senior Financial Analyst, and has been involved in property and asset management with the Company since May 1983. Since that time, he attained the designation of Real Property Administrator (RPA) through the Building Owner's and Manager's Association (BOMA). CAMPBELL HUGH GREENUP, age 43, has over fourteen years of experience in the real estate industry. Mr. Greenup joined KI in 1986 as Assistant General Counsel and had responsibility for a significant portion of the Company's legal affairs, including transaction negotiation and documentation. In addition, he has 95 been responsible for all the Company's development activities, including land acquisition and entitlement, project development, leasing and disposition. In this role, he was also President of Kilroy Technologies Company, LLC, the Kilroy services entity, and directed all of the Company's fee development activities. Mr. Greenup is a member of the American Bar Association, the Urban Land Institute-IOPC Gold Committee, the National Association of Corporate Real Estate Executives and the Los Angeles County Beach Advisory Commission. A. CHRISTIAN KROGH, age 48, was previously Treasurer for KI and was responsible for all cash flow forecasting, preparing variance reports, monitoring short-term cash needs and investments, interfacing with lenders, performing credit analysis for prospective tenants, interfacing with asset management on the day-to-day activities of the Company, as well as other traditional treasurer's functions. Mr. Krogh was responsible for overseeing KI's personnel functions, obtaining and monitoring property insurance and coordinating employee benefit programs. In the 15 years prior to joining KI Mr. Krogh held similar positions with two other real estate companies. COMMITTEES OF THE BOARD OF DIRECTORS Audit Committee. Promptly following the consummation of the Offering, the Board of Directors will establish an audit committee (the "Audit Committee"). The Audit Committee will be established to make recommendations concerning the engagement of independent public accountants, review with the independent public accountants the scope and results of the audit engagement, approve professional services provided by the independent public accountants, review the independence of the independent public accountants, consider the range of audit and non-audit fees and review the adequacy of the Company's internal accounting controls. The Audit Committee will initially consist of two or more Independent Directors. Independent Committee. Promptly following the consummation of the Offering, the Board of Directors will establish an independent committee (the "Independent Committee") consisting solely of Independent Directors. The Independent Committee will be established to approve transactions between the Company and John B. Kilroy, Sr. or John B. Kilroy, Jr. and their respective affiliates. Executive Committee. Promptly following the consummation of the Offering, the Board of Directors will establish an executive committee (the "Executive Committee"). Subject to the Company's conflict of interest policies, the Executive Committee will be granted the authority to acquire and dispose of real property and the power to authorize, on behalf of the full Board of Directors, the execution of certain contracts and agreements, including those related to the borrowing of money by the Company (and, consistent with the Partnership Agreement of the Operating Partnership, to cause the Operating Partnership to take such actions.) The Executive Committee will include John B. Kilroy, Sr., John B. Kilroy, Jr. and at least one Independent Director. Executive Compensation Committee. Promptly following the consummation of the Offering, the Board of Directors will establish an executive compensation committee (the "Executive Compensation Committee") to establish remuneration levels for executive officers of the Company and implementation of the Company's Stock Incentive Plan (as defined) and any other incentive programs. The Executive Compensation Committee will initially consist of two or more Independent Directors. The membership of the committees of the Board of Directors will be established after the completion of the Formation Transactions and the Offering. The Board of Directors may from time to time establish certain other committees to facilitate the management of the Company. COMPENSATION OF DIRECTORS The Company intends to pay its directors who are not officers of the Company annual compensation which may include options to purchase shares of Common Stock at the then current market value on the date of grant. These options will have a term of ten years from the date of grant. Such directors will also be reimbursed for expenses incurred to attend director and committee meetings. Officers of the Company who are directors will not be paid any directors' fees. 96 EXECUTIVE COMPENSATION Since the Company has no operating history, meaningful individual compensation information for executive officers is not available for prior periods. The compensation table below sets forth the annual base salary rates and other compensation expected to be paid in 1997 to the Chief Executive Officer and the Company's other executive officers who are expected to have a total annual salary and bonus in excess of $100,000. The Company has entered into employment agreements with certain of its executive officers as described below. See "--Employment Agreements."
ESTIMATED ANNUAL NAME POSITION COMPENSATION ---- -------- ---------------- John B. Kilroy, Jr...... President and Chief Executive Officer Jeffrey C. Hawken....... Chief Operating Officer Campbell Hugh Greenup... General Counsel A. Christian Krogh...... Vice President, Asset Management
EMPLOYMENT AGREEMENTS Each of John B. Kilroy, Jr. and Jeffrey C. Hawken will enter into employment agreements with the Company providing for annual compensation in the amounts set forth under "Executive Compensation" above with the amount of any bonus to be determined by the Executive Compensation Committee. Each executive officer's compensation may be increased in accordance with criteria to be established by the Executive Compensation Committee. Each employment agreement will require the executive officer to devote substantially all of such executive's time to the affairs of the Company. The employment agreements also will provide for certain severance payments and continued receipt of certain benefits including medical insurance, life and disability insurance and participation in all pension, 401(k) and other employee plans and benefits established by the Company for a specified period of time following the date of termination. In addition, John B. Kilroy, Jr.'s employment agreement will contain certain noncompete provisions which will restrict his conduct during the term of his employment and for one year thereafter, and for so long as he is a member of the Company's Board of Directors. See "Policies With Respect to Certain Activities--Conflict of Interest Policies." STOCK INCENTIVE PLAN The Company has established the Stock Incentive Plan to enable executive officers, key employees and directors of the Company, the Operating Partnership and the Services Company to participate in the ownership of the Company. The Stock Incentive Plan is designed to attract and retain executive officers, other key employees and directors of the Company, the Operating Partnership and the Services Company and to provide incentives to such persons to maximize the Company's cash flow available for distribution. The Stock Incentive Plan provides for the award to such executive officers and employees of the Company, the Operating Partnership and the Services Company (subject to the Ownership Limit, or such other limit as provided in the Company's Articles of Incorporation or as otherwise permitted by the Board of Directors) of a broad variety of stock-based compensation alternatives such as nonqualified stock options, incentive stock options and restricted stock, and provides for the grant to Independent Directors and directors of the Services Company (subject to the Ownership Limit, or such other limit as provided in the Company's Articles of Incorporation or as otherwise permitted by the Board of Directors) of nonqualified stock options. The Stock Incentive Plan will be administered by the Executive Compensation Committee, which is authorized to select from among the eligible employees of the Company, the Operating Partnership and the Services Company the individuals to whom options, restricted stock purchase rights and performance awards are to be granted and to determine the number of shares to be subject thereto and the terms and conditions thereof. 97 The Executive Compensation Committee is also authorized to adopt, amend and rescind rules relating to the administration of the Stock Incentive Plan. Nonqualified stock options shall be granted to Independent Directors in accordance with the formula set forth in the Stock Incentive Plan. Awards under the Stock Incentive Plan Nonqualified stock options. Nonqualified stock options will provide for the right to purchase Common Stock at a specified price which may be less than fair market value on the date of grant (but not less than par value), and usually will become exercisable in installments after the grant date. Nonqualified stock options may be granted for any reasonable term. Option grants to Independent Directors are limited to automatic awards of nonqualified options to purchase shares of Common Stock at the fair market value on the date of grant. See "--Compensation of Directors." Incentive stock options. Incentive stock options, if granted, will be designed to comply with the provisions of the Code and will be subject to restrictions contained in the Code, including exercise prices equal to at least 100% of fair market value of Common Stock on the grant date and a ten- year restriction on their term, but may be subsequently modified to disqualify them from treatment as an incentive stock option. Restricted stock. Restricted stock may be sold to participants at various prices (but not below par value) and made subject to such restrictions as may be determined by the Executive Compensation Committee. Restricted stock, typically, may be repurchased by the Company at the original purchase price if the conditions or restrictions are not met. In general, restricted stock may not be sold, or otherwise transferred or hypothecated, until restrictions are removed or expire. Purchasers of restricted stock, unlike recipients of options, will have voting rights and will receive dividends prior to the time when the restrictions lapse. Promptly after the closing of the Offering, the Company expects to issue to certain officers, directors and key employees of the Company, the Operating Partnership and the Services Company options to purchase, subject to the Ownership Limit, or such other limit as provided in the Company's Articles of Incorporation or as otherwise permitted by the Board of Directors, 430,000 shares of Common Stock pursuant to the Stock Incentive Plan. The term of each of such option will be ten years from the date of grant. Each such option will vest 25% per year over four years, except that the options granted to the Independent Directors will vest 33 1/3% per year over three years, and is exercisable at a price per share equal to the initial public offering price per share of Common Stock in the Offering. The table below sets forth the expected allocation of the options to such persons.
NAME OPTIONS ---- ------- John B. Kilroy, Sr................................................. John B. Kilroy, Jr................................................. Independent Directors (as a group)................................. Other employees (as a group).......................................
A maximum of 570,000 additional shares of Common Stock will be reserved for issuance under the Stock Incentive Plan. There is no limit on the number of awards that may be granted to any one individual so long as the aggregate fair market value (determined at the time of grant) of shares with respect to which an incentive stock option is first exercisable by an optionee during any calendar year cannot exceed $ and the grant does not violate the Ownership Limit or cause the Company to fail to qualify as a REIT for federal income tax purposes. See "Description of Capital Stock--Restrictions on Ownership and Transfer." SECTION 401(K) PLAN Effective upon the consummation of the Offering, the Company intends to establish the Company's Section 401(k) Savings/Retirement Plan (the "Section 401(k) Plan") to cover eligible employees of the Company and any designated affiliate. 98 The Section 401(k) Plan will permit eligible employees of the Company to defer up to 15% of their annual compensation, subject to certain limitations imposed by the Code. The employees' elective deferrals are immediately vested and non-forfeitable upon contribution to the Section 401(k) Plan. The Company currently does not intend to make matching contributions to the Section 401(k) Plan; however, it reserves the right to make matching contributions or discretionary profit sharing contributions in the future. INDEMNIFICATION For a description of the limitation of liability and indemnification rights of the Company's officers and directors, see "Certain Provisions of Maryland Law and of the Company's Articles of Incorporation and Bylaws--Limitation of Directors' and Officers' Liability" and "--Indemnification Agreements." 99 FORMATION AND STRUCTURE OF THE COMPANY Kilroy Realty was formed in September 1996 and the Operating Partnership was formed in October 1996. The Services Company will be formed prior to consummation of the Offering. FORMATION TRANSACTIONS Prior to or simultaneous with the consummation of the Offering, the Company, the Operating Partnership, the Services Company and the Continuing Investors will engage in certain transactions (the "Formation Transactions") designed to enable the Company to continue and expand the real estate operations of KI, to facilitate the Offering, to enable the Company to qualify as a REIT for federal income tax purposes commencing with its taxable year ending December 31, 1996 and to preserve certain tax advantages for the existing owners of the Properties. The Formation Transactions are as follows: . Pursuant to the Omnibus Agreement, the Operating Partnership may require the contribution of all of the Continuing Investors' interests in the Properties, as well as certain other assets, other than the Acquisition Properties, to the Operating Partnership in exchange for Units representing limited partnership interests in the Operating Partnership. Following the consummation of the Offering and the Formation Transactions, the Units received by the Continuing Investors will constitute in the aggregate an approximately 15.2% limited partnership interest in the Operating Partnership. . John B. Kilroy, Sr. and John B. Kilroy, Jr. will acquire all of the voting common stock of the Services Company (representing 5.0% of its economic value), and the Operating Partnership will acquire all of the non-voting preferred stock of the Services Company (representing 95.0% of its economic value). . The Company will sell shares of Common Stock in the Offering and contribute the net proceeds from the Offering (approximately $169.7 million) to the Operating Partnership in exchange for an 84.8% general partner interest in the Operating Partnership. . The Company, through the Operating Partnership will borrow approximately $75.0 million principal amount of long-term financing pursuant to the Mortgage Loan. . The Operating Partnership, will apply the aggregate of the net Offering proceeds and the Financing toward the repayment of existing mortgage indebtedness on certain of the Properties, the purchase of the Acquisition Properties and payment of its expenses arising in connection with the Offering and the Financing. See "Use of Proceeds." . Certain of the current employees of KI will become employees of the Company, the Operating Partnership and the Services Company. . The Operating Partnership or the Services Company will enter into management agreements with respect to each of the Excluded Properties. . Pursuant to the Omnibus Agreement and certain other option agreements, the Operating Partnership will be granted options to acquire each of the Excluded Properties. As a result of the foregoing transactions, the Company will own 9,260,000 Units of the Operating Partnership, which will represent an approximately 84.8% economic interest in the Operating Partnership, and the Continuing Investors will own 1,653,835 Units, which will represent the remaining approximately 15.2% economic interest in the Operating Partnership. If the Underwriters' over-allotment option is exercised in full and the net proceeds from the additional shares of Common Stock sold by the Company are contributed to the Operating Partnership, the Company's percentage ownership interest in the Operating Partnership will increase to approximately 86.6%. The Company will be the sole general partner and retain management control over the Operating Partnership. Holders of Units will have the opportunity after two years following the receipt of such Units to have their Units redeemed by the Operating Partnership at the request of the Unitholder for cash (based on the fair market value of an equivalent number of shares of Common Stock at the time of such redemption) or, at the Company's 100 option, it may exchange Units for shares of Common Stock on a one-for-one basis, subject to certain antidilution adjustments and the obligation of certain of the Continuing Investors to indemnify the Company in connection with the Formation Transactions, provided, however, that if the Company does not elect to exchange such Units for shares of Common Stock, a Unitholder that is a corporation or limited liability company may require the Company to issue shares of Common Stock in lieu of cash, subject to the Ownership Limit or such other limit as provided in the Company's Articles of Incorporation, as applicable. See "Formation and Structure of the Company--Allocation of Consideration in the Formation Transactions," Under certain circumstances, the Units may be redeemed prior to the first anniversary of the consummation of the Offering in connection with the obligation of certain of the Continuing Investors to indemnify the Company in connection with the Formation Transactions. See "--Allocation of Consideration in the Formation Transactions." The Continuing Investors are comprised of seven individuals, all of whom are "accredited investors" as defined in Regulation D under the Securities Act of 1933, as amended, and corporations, partnerships and trusts owned, directly or indirectly, solely by such individuals. Each such individual is an adult member of the family of John B. Kilroy, Sr. and/or a long-time officer of KI. Consent of such persons to the Formation Transactions was received on or before November 3, 1996 pursuant to a private solicitation thereof in compliance with Regulation D. REASONS FOR THE REORGANIZATION OF THE COMPANY The Company believes that the benefits of the Formation Transactions outweigh the detriments to the Company. The benefits of the Company's REIT status and structure, as opposed to the status and structure of the Partnerships, include the following: . Access to Capital. The Company's structure will, in the Company's judgment, provide it with greater access to capital for refinancing and growth. Sources of capital include the Common Stock sold in the Offering and possible future issuances of debt or equity through public offerings or private placements. The financial strength of the Company should enable it to obtain financing at better rates and on better terms than would otherwise be available to the Partnerships, some of which are single asset entities. . Growth of the Company. The Company's structure will allow stockholders, including the Continuing Investors through their ownership of Units, an opportunity to participate in the growth of the real estate market through an ongoing business enterprise. In addition to the existing portfolio of Properties, the Company gives stockholders an interest in all future development by the Company and in the fee-producing service businesses being contributed by the Company to the Services Company. . Risk Diversification. The Company's structure provides stockholders a diversification of risk and reward not available in single asset entities by providing them with an equity interest in a REIT in which there has been a pooling together of similar properties and by consolidating the operating business and future development projects. . Deleveraging. Upon completion of the Offering and the Formation Transactions, the Company will have substantially reduced the debt encumbering the Properties. This reduction, with a consequent reduction in debt service, will increase the aggregate amount of cash available for distribution to stockholders. The Formation Transactions also will permit the Company to refinance its existing indebtedness at more favorable rates. . Liquidity. The equity interests in the Partnerships are typically not marketable. The Company's structure allows stockholders, including the Continuing Investors, the opportunity to liquidate their capital investment through the disposition of Common Stock or Units. Holders of Units will have the opportunity, no later than one year after receipt, to have their Units redeemed by the Operating Partnership for cash equal to the value of an equal number of shares of the Company's Common Stock, or the Company may elect to exchange such Units, for an equivalent number of shares of Common Stock, provided, however, if the Company does not elect to exchange such units for shares of Common Stock, a holder of Units that is a corporation or limited liability company may require the Company to 101 issue Common Stock in lieu thereof, subject to the Ownership Limit or such other limit as provided in the Company's Articles of Incorporation, as applicable. . Public Market Valuation of Real Estate Assets. The Company's structure may allow investors to benefit potentially from the current public market valuation of REITs, which is favorable in light of the current private market valuation of comparable assets. . Tax Deferral. The Formation Transactions provide to the members of the Continuing Investors the opportunity to defer the tax consequences that would arise from a sale or contribution of their interests in the Properties and other assets to the Company. The detriments of the Company's REIT status and structure as opposed to the status and structure of the Partnerships include the following (see also "Risk Factors"): . Conflicts of Interest. Management of the Company will be subject to a number of conflicts of interest in the operation of the Operating Partnership as well as the formation of the Company. Among other conflicts, there will be no independent valuation or appraisal of the Properties, and no arm's-length negotiation of the terms of the option agreements relating to the Excluded Properties, and there can be no assurance that the value given to the Continuing Investors by the Company for such assets is equal to their fair market value. Because certain Continuing Investors will be directors or officers of the Company, they will have a conflict of interest with respect to enforcing the agreements transferring their interest in certain assets to the Company. In addition, because the Continuing Investors and officers of the Company may suffer different tax consequences than the Company upon the sale or refinancing of any of the Properties, their interests regarding the timing and pricing of such sale or refinancing may conflict with those of the Company. . Loss of Individual Asset Growth Opportunity. Any given asset may over time outperform the Common Stock. Any investor who exchanges an interest in a single asset for a smaller interest in a group of assets will receive a lower return on investment if the asset from which the investor traded outperforms the Common Stock. . No Anticipated Distributions from Asset Sales. Unlike the Partnerships, in which the net proceeds from the sale of assets were generally distributed to the partners, the Company is not expected to have significant asset sales. Moreover, the Company may decide to reinvest the proceeds from asset sales rather than distribute them to stockholders. Although stockholders will have the ability to sell their shares of Common Stock (subject to certain restrictions discussed herein), they would not be able to rely upon the mere passage of time to realize their share of the gains, if any, that might be recognized at any point in time from a liquidation of all or part of the assets of the Company. . Public Market Valuation. Although the Company has been advised that the public market currently values real estate assets on a basis that is attractive in relation to private market real estate values, there is no assurance that this will be a permanent condition. In the 1980s, REIT shares generally traded at a discount to the underlying private market values of the REIT properties, rather than at a premium. This condition could return. In addition, an increase in interest rates could adversely affect the market value of the shares of Common Stock. . Costs of the Transaction. The aggregate expenses of the Offering, including the underwriting discount, are expected to be approximately $15.5 million, assuming gross proceeds of the Offering of approximately $185.2 million. In addition, the Operating Partnership will incur costs of approximately $1.5 million in the aggregate in connection with the Financing. . Costs of Operating Public Company. The Company expects to incur expenses in connection with the requirements of being a public company, including without limitation, preparation of financial statements and proxies, printing and filing costs and fees paid to the Company's certified public accountants. 102 COMPARISON OF COMMON STOCK AND UNITS Conducting the Company's operations through the Operating Partnership allows the Continuing Investors to defer certain tax consequences by contributing their interests in Properties to the Operating Partnership and also offers favorable methods of accessing capital markets. Units in the Operating Partnership will be held by the Continuing Investors and the Company. Each Unit was designed to result in a distribution per Unit equal to a distribution per share of Common Stock (assuming the Company distributes to its shareholders all amounts it receives as distribution from the Operating Partnership). Beginning one year following the consummation of the Offering, each Unit issued in the Formation Transactions is redeemable by the Operating Partnership at the request of the Unitholder for cash payable by the Operating Partnership or, at the Company's option, the Company may exchange Units for Common Stock on a one-for-one basis (subject to certain antidilution adjustments and certain limitations on exchange to preserve the Company's status as a REIT), provided, however, that if the Operating Partnership elects to redeem such Units for cash, a Unitholder that is a corporation or a limited liability company may require the Company to issue shares of Common Stock in lieu of cash. There are, however, certain differences between the ownership of Common Stock and Units, including: . Voting Rights. Holders of Common Stock may elect the Board of Directors of the Company, which, as the general partner of the Operating Partnership, controls the business of the Operating Partnership. Unitholders may not elect directors of the Company. . Transferability. The shares of Common Stock sold in the Offering will be freely transferable under the Securities Act by holders who are not affiliates of the Company or the Underwriters. The Units and the shares of Common Stock into which they are exchangeable are subject to transfer restrictions under applicable securities laws and under the Partnership Agreement, including the required consent of the general partner to the admission of any new limited partner, and the Units of certain Continuing Investors will be pledged to secure certain indemnity obligations. See "Shares Available for Future Sale" for a description of the Registration Rights Agreement applicable to holders of Units. . Distributions. Because the relative tax basis of the contributions by the public investors and the Continuing Investors are expected to be different, it is possible that the public investors' distribution will include a return of capital that exceeds that of the Continuing Investors. See "Federal Income Tax Consequences." ADVANTAGES AND DISADVANTAGES OF THE FORMATION TRANSACTIONS TO UNAFFILIATED STOCKHOLDERS The potential advantages of the Formation Transactions to unaffiliated stockholders of the Company include their ability to participate in the cash flow of the Properties through their ownership in the Company and in all future office and industrial property acquisitions and development by the Company. The potential disadvantages of such transactions to unaffiliated stockholders of the Company may be several, including the impact of shares available for future sale and substantial and immediate dilution in the tangible book value per share, and the lack of arm's-length negotiations to determine the terms of the transfers of the Properties to the Company and the Operating Partnership and the terms of the option agreements relating to the Excluded Properties. See the discussion of such matters under "Risk Factors." 103 BENEFITS OF THE FORMATION TRANSACTIONS TO THE CONTINUING INVESTORS The principals of KI proposed the Formation Transactions to the Continuing Investors because they believe that the benefits of the organization of the Company for the Continuing Investors outweigh the detriments to them. Benefits to members of the Continuing Investors include: . improved liquidity of their interests in the Properties, increased diversification of investment and deferral of a portion the tax consequences of the contribution of their interests in the Properties to the Operating Partnership; . repayment of indebtedness in the aggregate net amount of approximately $204.7 million resulting from the refinancing of existing mortgage indebtedness, approximately $34.8 million of which was guaranteed by certain members of the Kilroy Group, and including the repayment of approximately $3.4 million personal indebtedness of a Continuing Investor; and . employment agreements between the Company and John B. Kilroy, Jr. providing annual salary, incentive compensation (including options) and other benefits for his services as an officer of the Company. See "Management--Employment Agreements." ALLOCATION OF CONSIDERATION IN THE FORMATION TRANSACTIONS No independent valuations or appraisals of the Properties were obtained in connection with the Formation Transactions. The allocation of Units among the Kilroy Group was based primarily on the relative contributions to net operating income and other factors relating to the value of the Company as an on-going enterprise, and generally was not determined through arm's-length negotiations. There can be no assurance that the fair market value of the Properties transferred to the Company will equal the sum of the value of the Units issued to the Kilroy Group. Certain Continuing Investors (the "Indemnitors") have agreed pursuant to a supplemental representations, warranties and indemnity agreement, a form of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part, to make certain representations and warranties concerning the Properties, and have also agreed to indemnify the Company against breaches of such representations and warranties. These representations and warranties will survive the closing of the Offering until June 1998 and the related indemnification obligations will be joint and several among the Indemnitors. The Units received by these Continuing Investors in the Formation Transactions will be pledged to secure their indemnification obligations under the agreement. 104 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain directors and executive officers of the Company (or members of their immediate families) and persons who will hold more than 5% of the outstanding shares of Common Stock (or interests exchangeable therefor) have direct or indirect interests in transactions which have been or will be consummated by the Company, the Operating Partnership or the Services Company, including the transfer of certain Properties to the Operating Partnership by the Continuing Investors, the grant of options with respect to the Excluded Properties and, if exercised, the purchase by the Company of one or more of the Excluded Properties from the respective Continuing Investors, the repayment of certain indebtedness encumbering the Properties and the performance of management and leasing activities by the Operating Partnership and certain development and other activities by the Services Company at the Excluded Properties. See "Formation Transactions." In addition, John B. Kilroy, Sr. has contributed $1,000 to the Company in exchange for an aggregate of 50 shares of Common Stock, and upon consummation of the Offering, John B. Kilroy, Jr. and John B. Kilroy, Sr. each will have contributed equity to the Services Company, which, upon consummation of the Offering and the Formation Transactions, will represent a 5.0% economic interest in the Services Company. PARTNERSHIP AGREEMENT Concurrently with the completion of the Offering, the Company will enter into the Partnership Agreement of the Operating Partnership with the various limited partners of the Operating Partnership. See "Partnership Agreement of Operating Partnership." Certain of the limited partners of the Operating Partnership are directors and/or officers of the Company and the Services Company. ASSIGNMENT OF LEASE; VARIOUS SERVICES PROVIDED BY THE SERVICES COMPANY TO THE KILROY GROUP Concurrently with the completion of the Offering, KI will assign to the Services Company all of its interest as a tenant in a lease with a partnership affiliated with the Continuing Investors covering the space currently serving as the headquarters of KI at Kilroy LAX in El Segundo, California. The Company, the Operating Partnership and the Services Company will occupy such space, with the Company and the Operating Partnership subleasing some of such space from the Services Company and paying rent to the Services Company therefor, at rates which the Company believes are equal to the fair rental value of the space. Pursuant to management agreements, the Operating Partnership will provide management and leasing services, and the Services Company will provide development services, with respect to the Excluded Properties, each of which is owned in whole or in part by certain executive officers and directors, for fees equivalent to the fair market value of such services. See "Business and Properties--Development, Management and Leasing--Excluded Properties." BENEFITS OF THE FORMATION TRANSACTIONS TO CERTAIN EXECUTIVE OFFICERS Certain of the Company's executive officers are Continuing Investors and will receive Units and/or repayment of loans and related guarantees in connection with consummation of the Formation Transactions. Certain of the executive officers also hold interests in one or more affiliates of the Kilroy Group which, upon the exercise of certain options by the Company, may transfer property to the Operating Partnership in exchange for cash or Units. In the event that the Independent Directors determine to cause the Company to exercise its options to purchase these properties, the executive officers may receive a portion of the consideration paid therefor. See "Business and Properties--Development, Management and Leasing--Excluded Properties." 105 PRINCIPAL STOCKHOLDERS The following table sets forth the beneficial ownership of shares of Common Stock immediately following the consummation of the Offering and the Formation Transactions for (i) each person who is expected to be the beneficial owner of 5% or more of the outstanding Common Stock immediately following the consummation of the Offering, (ii) directors, proposed directors and certain executive officers of the Company, and (iii) directors, proposed directors and executive officers of the Company as a group. None of the persons or entities listed below currently owns any shares of Common Stock, but rather owns Units exchangeable for shares of Common Stock. See "Partnership Agreement of the Operating Partnership--Redemption/Exchange Rights." This table assumes that (i) the Formation Transactions and the Offering are completed and (ii) the Underwriters' over-allotment option will not be exercised. Each person named in the table has sole voting and investment power with respect to all of the shares of Common Stock shown as beneficially owned by such person, except as otherwise set forth in the notes to the table. This table reflects the ownership interests each of the following persons would have if each person exchanged all of his Units for shares of Common Stock at an initial exchange ratio of one Unit for each share of Common Stock (without regard to the Ownership Limit and the prohibition on redemption or exchange of Units until two years after the date of the Offering). See "Partnership Agreement of the Operating Partnership--Redemption/Exchange Rights." Unless otherwise indicated, the address of each named person is c/o Kilroy Realty Corporation, 2250 East Imperial Highway, Suite 1200, El Segundo, California 90245.
PERCENTAGE OF NUMBER OF SHARES OUTSTANDING SHARES NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OF COMMON STOCK ------------------------ --------------------- ------------------ John B. Kilroy, Sr................ (2) John B. Kilroy, Jr................ (2) Directors and executive officers as a group ( persons)...........
- -------- (1) Excludes options to purchase 430,000 shares of Common Stock granted to executive officers and directors at the consummation of the Offering. (2) These Units have been pledged to secure certain indemnification obligations to the Company arising in connection with the Formation Transactions. See "Certain Relationships and Related Transactions." 106 DESCRIPTION OF CAPITAL STOCK The following summary of the terms of the Company's capital stock does not purport to be complete and is subject to and qualified in its entirety by reference to the Company's Articles of Incorporation and Bylaws, copies of which are attached as exhibits to the Registration Statement of which this Prospectus is a part. See "Additional Information." GENERAL Under the Articles of Incorporation, the authorized capital stock of the Company consists of 150,000,000 shares of Common Stock, par value $.01 per share, and 30,000,000 shares of preferred stock, par value $.01 per share ("Preferred Stock"). Upon completion of the Offering and Formation Transactions, there will be 9,260,000 shares of Common Stock issued and outstanding (10,649,000 shares if the Underwriters' over-allotment option is exercised in full), excluding shares that may be issued upon the exchange of outstanding Units, and no shares of Preferred Stock will be issued and outstanding. COMMON STOCK Each outstanding share of Common Stock will entitle the holder to one vote on all matters presented to stockholders for a vote, including the election of directors, and, except as otherwise required by law and except as provided in any resolution adopted by the Board of Directors with respect to any other class or series of stock establishing the designation, powers, preferences and relative, participating, optional or other special rights and powers of such series, the holders of such shares will possess the exclusive voting power, subject to the provisions of the Company's Articles of Incorporation regarding the ownership of shares of Common Stock in excess of the Ownership Limit, or such other limit as provided in the Company's Articles of Incorporation or as otherwise permitted by the Board of Directors described below. Holders of shares of Common Stock will have no conversion, exchange, sinking fund, redemption or appraisal rights and have no preemptive rights to subscribe for any securities of the Company or cumulative voting rights in the election of directors. All shares of Common Stock to be issued and outstanding following the consummation of the Offering will be duly authorized, fully paid and nonassessable. Subject to the preferential rights of any other shares or series of stock and to the provisions of the Articles of Incorporation regarding ownership of shares of Common Stock in excess of the Ownership Limit, or such other limit as provided in the Company's Articles of Incorporation or as otherwise permitted by the Board of Directors described below, distributions may be paid to the holders of shares of Common Stock if and when authorized and declared by the Board of Directors of the Company out of funds legally available therefor. The Company intends to make quarterly distributions, beginning with distributions for the portion of the quarter from the consummation of the Offering through , 1997. See "Distribution Policy." Under Maryland law, stockholders are generally not liable for the Company's debts or obligations. If the Company is liquidated, subject to the right of any holders of Preferred Stock to receive preferential distributions, each outstanding share of Common Stock will be entitled to participate pro rata in the assets remaining after payment of, or adequate provision for, all known debts and liabilities of the Company, including debts and liabilities arising out of its status as general partner of the Operating Partnership. Subject to the provisions of the Articles of Incorporation regarding the ownership of shares of Common Stock in excess of the Ownership Limit, or such other limit as provided in the Company's Articles of Incorporation or as otherwise permitted by the Board of Directors described below, all shares of Common Stock will have equal distribution, liquidation and voting rights, and will have no preference or exchange rights. See "--Restrictions on Ownership and Transfer." Under the MGCL, a Maryland corporation generally cannot dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business unless approved by the affirmative vote of stockholders holding at least two-thirds of the 107 shares entitled to vote on the matter unless a lesser percentage (but not less than a majority of all of the votes entitled to be cast on the matter) is set forth in the corporation's charter. The Articles of Incorporation of the Company do not provide for a lesser percentage in any such situation. The Articles of Incorporation authorize the Board of Directors to reclassify any unissued shares of Common Stock into other classes or series of classes of stock and to establish the number of shares in each class or series and to set the preferences, conversion and other rights, voting powers, restrictions, limitations and restrictions on ownership, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each such class or series. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock will be . PREFERRED STOCK Preferred Stock may be issued from time to time, in one or more series, as authorized by the Board of Directors. No Preferred Stock is currently issued or outstanding. Prior to the issuance of shares of each series, the Board of Directors is required by the MGCL and the Company's Articles of Incorporation to fix for each series the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms or conditions of redemption, as permitted by Maryland law. Because the Board of Directors has the power to establish the preferences, powers and rights of each series of Preferred Stock, it may afford the holders of any series of Preferred Stock preferences, powers and rights, voting or otherwise, senior to the rights of holders of shares of Common Stock. The issuance of Preferred Stock could have the effect of delaying or preventing a change of control of the Company that might involve a premium price for holders of Common Stock or otherwise be in their best interest. The Board of Directors has no present plans to issue any Preferred Stock. RESTRICTIONS ON OWNERSHIP AND TRANSFER Ownership Limits. For the Company to qualify as a REIT under the Code, no more than 50% in value of its outstanding shares of stock may be owned, actually or constructively, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of a taxable year (other than the first year for which an election to be treated as a REIT has been made). In addition, if the Company, or an owner of 10% or more of the Company, actually or constructively owns 10% or more of a tenant of the Company (or a tenant of any partnership in which the Company is a partner), the rent received by the Company (either directly or through any such partnership) from such tenant will not be qualifying income for purposes of the REIT gross income tests of the Code. A REIT's stock must also be beneficially owned by 100 or more persons during at least 335 days of a taxable year of twelve months or during a proportionate part of a shorter taxable year (other than the first year for which an election to be treated as a REIT has been made). Because the Company expects to qualify as a REIT, the Articles of Incorporation contain restrictions on the ownership and transfer of Common Stock which are intended to assist the Company in complying with these requirements. The Ownership Limit set forth in the Company's Articles of Incorporation provides that, subject to certain specified exceptions, no person or entity may own, or be deemed to own by virtue of the applicable constructive ownership provisions of the Code, more than 8.0% (by number or value, whichever is more restrictive) of the outstanding shares of Common Stock. The constructive ownership rules are complex, and may cause shares of Common Stock owned actually or constructively by a group of related individuals and/or entities to be constructively owned by one individual or entity. As a result, the acquisition of less than 8.0% of the shares of Common Stock (or the acquisition of an interest in an entity that owns, actually or constructively, Common Stock) by an individual or entity, could, nevertheless cause that individual or entity, or another individual or entity, to own constructively in excess of 8.0% of the outstanding Common Stock and thus violate the Ownership Limit, or such other limit as provided in the Company's Articles of Incorporation or as otherwise permitted by the Board of Directors. The Board of Directors may, but in no event will be required to, waive the Ownership 108 Limit with respect to a particular stockholder if it determines that such ownership will not jeopardize the Company's status as a REIT and the Board of Directors otherwise decides such action would be in the best interest of the Company. As a condition of such waiver, the Board of Directors may require opinions of counsel satisfactory to it and/or undertakings or representations from the applicant with respect to preserving the REIT status of the Company. The Board of Directors has obtained such undertakings and representations from John B. Kilroy, Sr., John B. Kilroy, Jr., members of their families and certain affiliated entities and, as a result, has waived the Ownership Limit with respect to such individuals and entities. John B. Kilroy, Sr., John B. Kilroy, Jr., members of their families and certain affiliated entities (including the Operating Partnership) will be permitted to own, in the aggregate, actually or constructively, up to 17% (by number of shares or value, whichever is more restrictive) of the outstanding Common Stock. The Company's Articles of Incorporation further prohibits (i) any person from actually or constructively owning shares of stock of the Company that would result in the Company being "closely held" under Section 856(h) of the Code or otherwise cause the Company to fail to qualify as a REIT, and (ii) any person from transferring shares of stock of the Company if such transfer would result in shares of stock of the Company being owned by fewer than 100 persons. Any person who acquires or attempts or intends to acquire actual or constructive ownership of shares of stock of the Company that will or may violate any of the foregoing restrictions on transferability and ownership is required to give notice immediately to the Company and provide the Company with such other information as the Company may request in order to determine the effect of such transfer on the Company's status as a REIT. The foregoing restrictions on transferability and ownership will not apply if the Board of Directors determines that it is no longer in the best interest of the Company to attempt to qualify, or to continue to qualify, as a REIT. Except as otherwise described above, any change in the Ownership Limit would require an amendment to the Articles of Incorporation. Amendments to the Articles of Incorporation require the affirmative vote of holders owning 66 2/3% of the outstanding Common Stock. Pursuant to the Articles of Incorporation, if any purported transfer of Common Stock of the Company or any other event would otherwise result in any person violating the Ownership Limit or such other limit as provided in the Company's Articles of Incorporation or as otherwise permitted by the Board of Directors, then any such purported transfer will be void and of no force or effect with respect to the purported transferee (the "Prohibited Transferee") as to that number of shares in excess of the Ownership Limit or such other limit, and the Prohibited Transferee shall acquire no right or interest (or, in the case of any event other than a purported transfer, the person or entity holding record title to any such excess shares (the "Prohibited Owner") shall cease to own any right or interest) in such excess shares. Any such excess shares described above will be transferred automatically, by operation of law, to a trust, the beneficiary of which will be a qualified charitable organization selected by the Company (the "Beneficiary"). Such automatic transfer shall be deemed to be effective as of the close of business on the business day prior to the date of such violative transfer. Within 20 days of receiving notice from the Company of the transfer of shares to the trust, the trustee of the trust (who shall be designated by the Company and be unaffiliated with the Company and any Prohibited Transferee or Prohibited Owner) will be required to sell such excess shares to a person or entity who could own such shares without violating the Ownership Limit, or such other limit as provided in the Company's Articles of Incorporation or as otherwise permitted by the Board of Directors, and distribute to the Prohibited Transferee or Prohibited Owner an amount equal to the lesser of the price paid by the Prohibited Transferee or Prohibited Owner for such excess shares or the sales proceeds received by the trust for such excess shares. In the case of any excess shares resulting from any event other than a transfer, or from a transfer for no consideration (such as a gift), the trustee will be required to sell such excess shares to a qualified person or entity and distribute to the Prohibited Owner an amount equal to the lesser of the fair market value of such excess shares as of the date of such event or the sales proceeds received by the trust for such excess shares. In either case, any proceeds in excess of the amount distributable to the Prohibited Transferee or Prohibited Owner, as applicable, will be distributed to the Beneficiary. Prior to a sale of any such excess shares by the trust, the trustee will be entitled to receive, in trust for the Beneficiary, all dividends and other distributions paid by the Company with respect to such excess shares, and also will be entitled to exercise all voting rights with respect to such excess shares. Subject to Maryland law, effective as of the date that such shares have been transferred to the trust, the trustee shall have the authority (at the trustee's 109 sole discretion) (i) to rescind as void any vote cast by a Prohibited Transferee or Prohibited Owner, as applicable, prior to the discovery by the Company that such shares have been transferred to the trust and (ii) to recast such vote in accordance with the desires of the trustee acting for the benefit of the Beneficiary. However, if the Company has already taken irreversible corporate action, then the trustee shall not have the authority to rescind and recast such vote. Any dividend or other distribution paid to the Prohibited Transferee or Prohibited Owner (prior to the discovery by the Company that such shares had been automatically transferred to a trust as described above) will be required to be repaid to the trustee upon demand for distribution to the Beneficiary. In the event that the transfer to the trust as described above is not automatically effective (for any reason) to prevent violation of the Ownership Limit or such other limit as provided in the Company's Articles of Incorporation or as otherwise permitted by the Board of Directors, then the Articles of Incorporation provide that the transfer of the excess shares will be void. In addition, shares of stock of the Company held in the trust shall be deemed to have been offered for sale to the Company, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that resulted in such transfer to the trust (or, in the case of a devise or gift, the Market Price (as defined in the Company's Articles of Incorporation) at the time of such devise or gift) and (ii) the Market Price on the date the Company, or its designee, accepts such offer. The Company shall have the right to accept such offer until the trustee has sold the shares of stock held in the trust. Upon such a sale to the Company, the interest of the Beneficiary in the shares sold shall terminate and the trustee shall distribute the net proceeds of the sale to the Prohibited Transferee or Prohibited Owner. If any purported transfer of shares of Common Stock would cause the Company to be beneficially owned by fewer than 100 persons, such transfer will be null and void in its entirety and the intended transferee will acquire no rights to the stock. All certificates representing shares of Common Stock will bear a legend referring to the restrictions described above. The foregoing ownership limitations could delay, defer or prevent a transaction or a change in control of the Company that might involve a premium price for the Common Stock or otherwise be in the best interest of stockholders. Under the Articles of Incorporation, every owner of a specified percentage (or more) of the outstanding shares of Common Stock must file a completed questionnaire with the Company containing information regarding their ownership of such shares, as set forth in the Treasury Regulations. Under current Treasury Regulations, the percentage will be set between 0.5% and 5.0%, depending upon the number of record holders of the Company's shares. In addition, each stockholder shall upon demand be required to disclose to the Company in writing such information as the Company may request in order to determine the effect, if any, of such stockholder's actual and constructive ownership of Common Stock on the Company's status as a REIT and to ensure compliance with the Ownership Limit, or such other limit as provided in the Company's Articles of Incorporation or as otherwise permitted by the Board of Directors. CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS The following paragraphs summarize certain provisions of the MGCL and the Company's Articles of Incorporation and Bylaws. The summary does not purport to be complete and is subject to and qualified in its entirety by reference to the MGCL and the Company's Articles of Incorporation and Bylaws, copies of which are exhibits to the Registration Statement of which this Prospectus is a part. BOARD OF DIRECTORS The Company's Articles of Incorporation provide that the number of directors of the Company shall be established by the Bylaws but shall not be less than the minimum number required by the MGCL, which in the 110 case of the Company is three. The Bylaws currently provide that the Board of Directors will consist of not fewer than three nor more than 13 members. Any vacancy will be filled, at any regular meeting or at any special meeting called for that purpose, by a majority of the remaining directors or, in the case of a vacancy resulting from an increase in the number of directors, by a majority of the entire Board of Directors. The Bylaws provide that a majority of the Board must be "Independent Directors." An "Independent Director" is a director who is not an employee or officer of the Company or a subsidiary or division thereof, or a relative of a principal executive officer, or who is not an individual member of an organization acting as advisor, consultant or legal counsel receiving compensation on a continuing basis from the Company in addition to director's fees. Pursuant to the Articles of Incorporation, the directors are divided into three classes as nearly equal in size as practicable. One class will hold office initially for a term expiring at the annual meeting of stockholders to be held in 1997, another class will hold office initially for a term expiring at the annual meeting of stockholders to be held in 1998 and another class will hold office initially for a term expiring at the annual meeting of stockholders to be held in 1999. As the term of each class expires, directors in that class will be elected for a term of three years and until their successors are duly elected and qualified and the directors in the other two classes will continue in office. The Company believes that classification of the Board of Directors will help to assure the continuity and stability of the Company's business strategies and policies as determined by the Board of Directors. The classified director provision could have the effect of making the removal of incumbent directors more time consuming and difficult, which could discourage a third party from making a tender offer or otherwise attempting to obtain control of the Company, even though such an attempt might be beneficial to the Company and its stockholders. At least two annual meetings of stockholders, instead of one, will generally be required to effect a change in a majority of the Board of Directors. Thus, the classified board provision could increase the likelihood that incumbent directors will retain their positions. Holders of shares of Common Stock will have no right to cumulative voting for the election of directors. Consequently, at each annual meeting of stockholders, the holders of a majority of the shares of Common Stock will be able to elect all of the successors of the class of directors whose term expires at that meeting. REMOVAL OF DIRECTORS The Company's Articles of Incorporation provide that a director may be removed only for cause and only by the affirmative vote of at least two-thirds of the votes entitled to be cast in the election of directors. This provision, when coupled with the provision in the Bylaws authorizing the Board of Directors to fill vacant directorships, precludes stockholders from removing incumbent directors except upon a substantial affirmative vote and filling the vacancies created by such removal with their own nominees. BUSINESS COMBINATIONS Under the MGCL, certain "business combinations" (including a merger, consolidation, share exchange, or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between the Company and any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the Company's shares, or an affiliate of the Company who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the Company's then outstanding shares (an "Interested Stockholder") or an affiliate thereof are prohibited for five years after the most recent date on which the Interested Stockholder became an Interested Stockholder. Thereafter, any such business combination must be recommended by the Board of Directors and approved by the affirmative vote of at least (i) 80% of the votes entitled to be cast by holders of outstanding shares of the Company's voting stock and (ii) two- thirds of the votes entitled to be cast by holders of outstanding shares of the Company's voting stock other than shares held by the Interested Stockholder with whom the business combination is to be effected, unless, among other things, the Company's stockholders receive a minimum price (as defined in the MGCL) for their shares of stock and the consideration is received in cash or in the same form as previously paid by the Interested Stockholder for its shares. These provisions of the MGCL do not apply, however, to business 111 combinations that are approved or exempted by the Board of Directors prior to the time that the Interested Stockholder becomes an Interested Stockholder. An amendment to a Maryland corporation's charter electing not to be subject to the foregoing requirements must be approved by the affirmative vote of at least 80% of the votes entitled to be cast by all holders of outstanding voting shares and two-thirds of the votes entitled to be cast by holders of outstanding voting shares who are not Interested Stockholders. Any such amendment is not effective until 18 months after the vote of stockholders and does not apply to any business combination of a corporation with a stockholder who was an Interested Stockholder on the date of the stockholder vote. The Company has exempted from these provisions of the MGCL any business combination involving the members of the Kilroy Group and their affiliates and associates, present or future, or any other person acting in concert or as a group with any of the foregoing persons. As a result, the members of the Kilroy Group, any present or future affiliate or associate thereof or any other person acting in concert or as a group with any of the foregoing persons may be able to enter into business combinations with the Company, which may or may not be in the best interest of the stockholders. CONTROL SHARE ACQUISITIONS The MGCL provides that "control shares" of the Company acquired in a "control share acquisition" have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares owned by the acquiror or by officers or directors who are employees of the Company. "Control shares" are voting shares of stock which, if aggregated with all other such shares of stock previously acquired by the acquiror, or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: (i) one-fifth or more but less than one-third; (ii) one-third or more but less than a majority; or (iii) a majority of all voting power. "Control shares" do not include shares of stock the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A "control share acquisition" means the acquisition of control shares, subject to certain exceptions. A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses), may compel the Board of Directors to call a special meeting of stockholders to be held within 50 days of demand to consider voting rights for the shares. If no request for a meeting is made, the Company may itself present the question at any stockholders' meeting. If voting rights are not approved at the stockholders' meeting or if the acquiring person does not deliver an acquiring person statement as required by the MGCL, then, subject to certain conditions and limitations, the Company may redeem any or all of the control shares (except those for which voting rights have previously been approved) for fair value determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquiror or of any meeting of stockholders at which the voting rights of such shares are considered and not approved. If voting rights for control shares are approved at a stockholders' meeting and the acquiror becomes entitled to vote a majority of the shares of stock entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares of stock as determined for purposes of such appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition, and certain limitations and restrictions otherwise applicable to the exercise of dissenters' rights do not apply in the context of a control share acquisition. The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if the Company is a party to the transaction, or to acquisitions approved or exempted by the Company's Articles of Incorporation or Bylaws. Pursuant to the MGCL, the Company has exempted control share acquisitions involving any member of the Kilroy Group and its affiliates and associates. As a result, any members of the Kilroy Group and its affiliates and associates may be able to effect a control share acquisition of the Company, which may or may not be in the best interest of the stockholders. 112 AMENDMENT TO THE ARTICLES OF INCORPORATION AND BYLAWS The Company's Articles of Incorporation may not be amended without the affirmative vote of at least two-thirds of the shares of capital stock outstanding and entitled to vote thereon voting together as a single class. The Company's Bylaws may be amended by the vote of one more than the majority of the Board of Directors. MEETINGS OF STOCKHOLDERS The Company's Bylaws provide for annual meetings of stockholders, commencing with the year 1997, to elect the Board of Directors and transact such other business as may properly be brought before the meeting. Special meetings of stockholders may be called by the President, the Board of Directors or the Chairman of the Board and shall be called at the request in writing of the holders of 25% or more of the outstanding stock of the Company entitled to vote. The MGCL provides that any action required or permitted to be taken at a meeting of stockholders may be taken without a meeting by unanimous written consent, if such consent sets forth such action and is signed by each stockholder entitled to vote on the matter and a written waiver of any right to dissent is signed by each stockholder entitled to notice of the meeting but not entitled to vote at it. ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS The Company's Bylaws provide that (i) with respect to an annual meeting of stockholders, nominations of persons for election to the Board of Directors and the proposal of business to be considered by stockholders may be made only (a) pursuant to the Company's notice of the meeting, (b) by or at the direction of the Board of Directors or (c) by a stockholder who is entitled to vote at the meeting and has complied with the advance notice procedures set forth in the Bylaws, and (ii) with respect to special meetings of stockholders, only the business specified in the Company's notice of meeting may be brought before the meeting of stockholders and where the Company's notice of the meeting specifies that directors are to be elected at such special meeting, nominations of persons for election to the Board of Directors may be made only (x) by or at the direction of the Board of Directors or (y) provided that the Board of Directors has determined that directors shall be elected at such meeting, by a stockholder who is entitled to vote at the meeting and has complied with the advance notice provisions set forth in the Bylaws. The provisions in the Company's Articles of Incorporation on classification of the Board of Directors, amendments to the Articles of Incorporation, the business combination and control share acquisition provisions of the MGCL and the advance notice provisions of the Bylaws could have the effect of discouraging a takeover or other transaction in which holders of some, or a majority, of the shares of Common Stock might receive a premium for their shares of Common Stock over the then prevailing market price or which such holders might believe to be otherwise in their best interests. DISSOLUTION OF THE COMPANY Under the MGCL and the Company's Articles of Incorporation, the Company may be dissolved by (i) the affirmative vote of a majority of the entire Board of Directors declaring such dissolution to be advisable and directing that the proposed dissolution be submitted for consideration at any annual or special meeting of stockholders, and (ii) upon proper notice, stockholder approval by the affirmative vote of the holders of two-thirds of the total number of shares of capital stock outstanding and entitled to vote thereon voting as a single class. LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY The Company's officers and directors are and will be indemnified under Maryland law, the Company's Articles of Incorporation of the Company and the Partnership Agreement (as defined) of the Operating Partnership against certain liabilities. The Articles of Incorporation and Bylaws require the Company to indemnify its directors and officers to the fullest extent permitted from time to time by the laws of Maryland. 113 The MGCL permits a corporation to indemnify its directors and officers and certain other parties against judgments, penalties, fines, settlements, and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities unless it is established that the act or omission of the director or officer was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty, or the director or officer actually received an improper personal benefit in money, property or services, or in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. Indemnification may be made against judgments, penalties, fines, settlements and reasonable expenses actually incurred by the director or officer in connection with the proceeding; provided, however, that if the proceeding is one by or in the right of the corporation, indemnification may not be made with respect to any proceeding in which the director or officer has been adjudged to be liable to the corporation. In addition, a director or officer may not be indemnified with respect to any proceeding charging improper personal benefit to the director or officer in which the director or officer was adjudged to be liable on the basis that personal benefit was received. The termination of any proceeding by conviction, or upon a plea of nolo contendere or its equivalent, or an entry of any order of probation prior to judgment, creates a rebuttable presumption that the director or officer did not meet the requisite standard of conduct required for indemnification to be permitted. The MGCL permits the articles of incorporation of a Maryland corporation to include a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages, subject to specified restrictions, and the Articles of Incorporation of the Company contain this provision. The law does not, however, permit the liability of directors and officers to the corporation or its stockholders to be limited to the extent that (i) it is proved that the person actually received an improper personal benefit in money, property or services, (ii) a judgment or other final adjudication is entered in a proceeding based on a finding that the person's action, or failure to act, was committed in bad faith or was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding or (iii) in the case of any criminal proceeding, the director had reasonable cause to believe that the act or failure to act was unlawful. This provision does not limit the ability of the Company or its stockholders to obtain other relief, such as an injunction or rescission. The Partnership Agreement also provides for indemnification of the Company, as general partner, and its officers and directors to the same extent indemnification is provided to officers and directors of the Company in its Articles of Incorporation, and limits the liability of the Company and its officers and directors to the Operating Partnership and the partners of the Operating Partnership to the same extent liability of officers and directors of the Company to the Company and its stockholders is limited under the Company's Articles of Incorporation. See "Partnership Agreement of the Operating Partnership--Indemnification." Insofar as indemnification for liability arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. INDEMNIFICATION AGREEMENTS The Company will enter into indemnification agreements with each of its executive officers and directors. The indemnification agreements will require, among other matters, that the Company indemnify its executive officers and directors to the fullest extent permitted by law and advance to the executive officers and directors all related expenses, subject to reimbursement if it is subsequently determined that indemnification is not permitted. Under the agreements, the Company must also indemnify and advance all expenses incurred by executive officers and directors seeking to enforce their rights under the indemnification agreements and may cover executive officers and directors under the Company's directors' and officers' liability insurance. Although the form of indemnification agreement offers substantially the same scope of coverage afforded by law, it provides greater assurance to directors and executive officers that indemnification will be available, because, as a contract, it cannot be modified unilaterally in the future by the Board of Directors or the stockholders to eliminate the rights it provides. 114 PARTNERSHIP AGREEMENT OF THE OPERATING PARTNERSHIP The following summary of the Agreement of Limited Partnership of the Operating Partnership (the "Partnership Agreement") and the descriptions of certain provisions set forth elsewhere in this Prospectus, are qualified in their entirety by reference to the Partnership Agreement, which will be filed as an exhibit to the Registration Statement of which this Prospectus is a part. MANAGEMENT The Operating Partnership will be organized as a Delaware limited partnership pursuant to the terms of the Partnership Agreement. The Company will be the sole general partner of, and will initially hold approximately 83.8% of the economic interests in, the Operating Partnership. The Company will conduct substantially all of its business through the Operating Partnership, except for development and certain other services (which will be conducted through the Services Company) in order to preserve the Company's REIT status. The Operating Partnership will own a 95% economic interest in the Services Company. Generally, pursuant to the Partnership Agreement, the Company, as the sole general partner of the Operating Partnership, will have full, exclusive and complete responsibility and discretion in the management and control of the Operating Partnership, including the ability to cause the Operating Partnership to enter into certain major transactions including acquisitions, dispositions and refinancings and to cause changes in the Operating Partnership's line of business and distribution policies. The Continuing Investors, as limited partners of the Operating Partnership, will have no authority to transact business for, or participate in the management activities or decisions of, the Operating Partnership, except as provided in the Partnership Agreement and as required by applicable law. INDEMNIFICATION To the extent permitted by law, the Partnership Agreement provides for indemnification of the Company, as general partner, its officers and directors and such other persons as the Company may designate to the same extent indemnification is provided to officers and directors of the Company in its Articles of Incorporation, and limits the liability of the Company and its officers and directors to the Operating Partnership to the same extent liability of officers and directors of the Company is limited under the Articles of Incorporation. TRANSFERABILITY OF INTERESTS Except for a transaction described in the following two paragraphs, the Partnership Agreement provides that the Company may not voluntarily withdraw from the Operating Partnership, or transfer or assign its interest in the Operating Partnership, without the consent of the holders of 66 2/3% of the Units representing limited partner interests. Pursuant to the Partnership Agreement, the Limited Partners have agreed not to transfer, assign, sell, encumber or otherwise dispose of, without the consent of the Company, their interest in the Operating Partnership, other than to family members or accredited investors who agree to assume the obligations of the transferor under the Partnership Agreement subject to a right of first refusal for the benefit of the Company. The Continuing Investors are subject to additional restrictions on their ability to transfer shares of Common Stock. See "Underwriting." The Company may not engage in any merger, consolidation or other combination with or into another person, sale of all or substantially all of its assets or any reclassification, recapitalization or change of its outstanding equity interests (each a "Termination Transaction") unless the Termination Transaction has been approved by holders of at least 66 2/3% of the Units (including Units held by the Company which will represent 84.8% of all Units outstanding upon consummation of the Offering) and in connection with which all Limited Partners either will receive, or will have the right to elect to receive, for each Unit an amount of cash, securities or other property equal to the product of the number of shares of Common Stock into which each Unit is then exchangeable and the greatest amount of cash, securities or other property paid to the holder of one share of 115 Common Stock in consideration of one share of Common Stock pursuant to the Termination Transaction. If, in connection with the Termination Transaction, a purchase, tender or exchange offer shall have been made to and accepted by the holders of more than 33 1/3% of the outstanding shares of Common Stock, each holder of Units will receive, or will have the right to elect to receive, the greatest amount of cash, securities or other property which such holder would have received had it exercised its right to redemption and received shares of Common Stock in exchange for its Units immediately prior to the expiration of such purchase, tender or exchange offer and had thereupon accepted such purchase, tender or exchange offer. The Company may also merge or otherwise combine its assets with another entity if the following conditions are met: (i) substantially all of the assets directly or indirectly owned by the surviving entity are held directly or indirectly by the Operating Partnership or another limited partnership or limited liability company which is the survivor of a merger, consolidation or combination of assets with the Operating Partnership (in each case, the "Surviving Partnership"); (ii) the Limited Partners own a percentage interest of the Surviving Partnership based on the relative fair market value of the net assets of the Operating Partnership and the other net assets of the Surviving Partnership immediately prior to the consummation of such transaction; (iii) the rights, preferences and privileges of the Limited Partners in the Surviving Partnership are at least as favorable as those in effect immediately prior to the consummation of such transaction and as those applicable to any other limited partners or non-managing members of the Surviving Partnership; and (iv) such rights of the Limited Partners include the right to exchange their interests in the Surviving Partnership for at least one of the following: (a) the consideration available to such persons pursuant to the preceding paragraph, or (b) if the ultimate controlling person of the Surviving Partnership has publicly traded common equity securities, such common equity securities, with an exchange ratio based on the relative fair market value of such securities and the Common Stock. For purposes of this paragraph, the determination of relative fair market values shall be reasonably determined by the Company as of the time of the Termination Transaction and, to the extent applicable, shall be no less favorable to the Limited Partners than the relative values reflected in the terms of the Termination Transaction. In respect of any transaction described in the preceding two paragraphs, the Company is required to use its commercially reasonable efforts to structure such transaction to avoid causing the Limited Partners to recognize gain for federal income tax purposes by virtue of the occurrence of or their participation in such transaction. The Operating Partnership will also use commercially reasonable efforts to cooperate with the Limited Partners to minimize any taxes payable in connection with any repayment, refinancing, replacement or restructuring of indebtedness of the Operating Partnership. ISSUANCE OF ADDITIONAL UNITS As sole general partner of the Operating Partnership, the Company has the ability to cause the Operating Partnership to issue additional Units representing general and limited partnership interests in the Operating Partnership. CAPITAL CONTRIBUTION The Partnership Agreement provides that if the Operating Partnership requires additional funds at any time or from time to time in excess of funds available to the Operating Partnership from borrowings or capital contributions, the Company may borrow such funds from a financial institution or other lender or through public or private debt offerings and lend such funds to the Operating Partnership on the same terms and conditions as are applicable to the Company's borrowing of such funds. As an alternative to borrowing funds required by the Operating Partnership, the Company may contribute the amount of such required funds as an additional capital contribution to the Operating Partnership. If the Company so contributes additional capital to the Operating Partnership, the Company's partnership interest in the Operating Partnership will be increased on a proportionate basis. Conversely, the partnership interests of the limited partners will be decreased on a proportionate basis in 116 the event of additional capital contributions by the Company. See "Policies With Respect to Certain Activities--Financing." AWARDS UNDER STOCK INCENTIVE PLAN If options granted in connection with the Stock Incentive Plan are exercised at any time or from time to time, the Partnership Agreement requires the Company to contribute to the Operating Partnership as an additional contribution the exercise price received by the Company in connection with the issuance of shares of Common Stock to such exercising participant. Upon such contribution the Company will be issued a number of Units in the Operating Partnership equal to the number of shares of Common Stock so issued. REDEMPTION/EXCHANGE RIGHTS Limited partners will have rights to require the Operating Partnership to redeem part or all of their Units for cash (based upon the fair market value of an equivalent number of shares of Common Stock at the time of such redemption) or the Company may elect to exchange such Units for shares of Common Stock (on a one-for-one basis, subject to adjustment in the event of stock splits, stock dividends, issuance of certain rights, certain extraordinary distributions and similar events), provided, however, that if the Company does not elect to exchange such Units for shares of Common Stock, a holder of Units that is a corporation or a limited liability company may require the Company to issue Common Stock in lieu thereof, subject to the Ownership Limit or such other limit as provided in the Company's Articles of Incorporation or as otherwise permitted by the Board of Directors, as applicable. The Company presently anticipates that it will elect to issue Common Stock in exchange for Units in connection with each such redemption request, rather than having the Operating Partnership pay cash. With each such redemption or exchange, the Company's percentage ownership interest in the Operating Partnership will increase. This redemption/exchange right may be exercised by limited partners from time to time, in whole or in part, subject to the limitations that such right may not be exercised (i) prior to the expiration of two years following the consummation of the Offering or (ii) at any time to the extent such exercise would result in any person actually or constructively owning Common Stock in excess of the Ownership Limit or such other amount as provided in the Company's Articles of Incorporation or as otherwise permitted by the Board of Directors, as applicable, assuming Common Stock was issued in such exchange. See "Description of Capital Stock-- Restrictions on Ownership and Transfer." In addition, under certain circumstances the Units may be redeemed prior to the second anniversary of the consummation of the Offering in connection with the obligation of certain of the Continuing Investors to indemnify the Company in connection with the Formation Transactions. See "Formation and Structure of the Company-- Allocation of Consideration in the Formation Transactions." REGISTRATION RIGHTS For a description of certain registration rights held by the Continuing Investors, see "Shares Available for Future Sale--Redemption/Exchange Rights/Registration Rights." TAX MATTERS Pursuant to the Partnership Agreement, the Company will be the tax matters partner of the Operating Partnership and, as such, will have authority to make tax elections under the Code on behalf of the Operating Partnership. The net income or net loss of the Operating Partnership will generally be allocated to the Company and the limited partners in accordance with their respective percentage interests in the Operating Partnership, subject to compliance with the provisions of Sections 704(b) and 704(c) of the Code and the Treasury Regulations promulgated thereunder. See "Federal Income Tax Consequences--Tax Aspects of the Operating Partnership." 117 OPERATIONS The Partnership Agreement requires that the Operating Partnership be operated in a manner that will enable the Company to satisfy the requirements for being classified as a REIT and to avoid any federal income tax liability. The Partnership Agreement provides that the net operating cash revenues of the Operating Partnership, as well as net sales and refinancing proceeds, will be distributed from time to time as determined by the Company (but not less frequently than quarterly) pro rata in accordance with the partners' respective percentage interests. Pursuant to the Partnership Agreement, the Operating Partnership will assume and pay when due, or reimburse the Company for payment of, all expenses it incurs relating to the ownership and operation of, or for the benefit of, the Operating Partnership and all costs and expenses relating to the operations of the Company. DUTIES AND CONFLICTS Except as otherwise set forth in "Policies with Respect to Certain Activities--Conflicts of Interest Policies" and "Management--Employment Agreements," any limited partner of the Operating Partnership may engage in other business activities outside the Operating Partnership, including business activities that directly compete with the Operating Partnership. CERTAIN LIMITED PARTNER APPROVAL RIGHTS The Partnership Agreement provides that if the Limited Partners own at least 5% of the outstanding Units (including Units held by the Company), the Company shall not, on behalf of the Operating Partnership, take any of the following actions without the prior consent of the holders of at least 50% of the Units representing limited partner interests: (i) dissolve the Operating Partnership, other than incident to a merger or sale of substantially all of the Company's assets; or (ii) prior to the seventh anniversary of the consummation of the Offering, sell certain specified assets, other than incident to a merger or sale of substantially all of the Company's assets. TERM The Operating Partnership will continue in full force and effect for 99 years or until sooner dissolved pursuant to the terms of the Partnership Agreement. 118 SHARES AVAILABLE FOR FUTURE SALE GENERAL Upon the consummation of the Offering and the Formation Transactions, the Company will have outstanding 9,260,000 shares of Common Stock 10,649,000 shares if the Underwriters' over-allotment option is exercised in full), all of which will be freely tradeable in the public market by persons other than "affiliates" of the Company without restriction or registration under the Securities Act. Each of the Continuing Investors has agreed not to, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer to sell, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any Units or shares of Common Stock or other capital stock of the Company, or any securities convertible or exercisable or exchangeable for any Units or shares of Common Stock or other capital stock for a period of two years from the date of this Prospectus, and the Company has agreed not to offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any (other than pursuant to the Stock Incentive Plan) shares of Common Stock or other capital stock of the Company, or any securities convertible or exercisable or exchangeable for any Units or shares of Common Stock or other capital stock of the Company, for a period of one year from the date of this Prospectus, in each case without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, subject to certain limited exceptions. Notwithstanding the foregoing, the Units received by certain of the Continuing Investors in connection with the Formation Transactions will be pledged to secure their indemnification obligations pursuant to an agreement with the Company. See "Formation and Structure of the Company." The shares of Common Stock owned by "affiliates" of the Company, and the shares of Common Stock issuable upon exchange of Units (other than those issued pursuant to registration rights, as described below), will be subject to Rule 144 promulgated under the Securities Act ("Rule 144") and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including exemptions contained in Rule 144. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated with them in accordance with Rule 144) who has beneficially owned "restricted shares" (defined generally as shares acquired from the issuer or an affiliate in a non-public transaction) for at least two years, as well as any person who purchased unrestricted shares on the open market who may be deemed an affiliate of the Company, would be entitled to sell, subject to certain manner of sale, public information and notice requirements, within any three-month period, a number of shares of Common Stock that does not exceed the greater of 1% of the then-outstanding number of shares of Common Stock or 1% of the average weekly trading volume of those shares during the four calendar weeks preceding each such sale. After restricted shares are held for three years, a person who is not then deemed an affiliate of the Company is entitled to sell such shares under Rule 144 without regard to these volume limitations. Sales of shares of Common Stock by affiliates of the Company will continue to be subject to the volume limitations, unless resold under an effective registration statement under the Securities Act. The Commission has published a notice of proposed rulemaking which, if adopted as proposed, would shorten the applicable holding period under Rule 144(d) and Rule 144(k) to one and two years, respectively (from the current two- and three-year periods described above). The Company cannot predict whether such amendments will be adopted or the effect thereof on the trading market for its Common Stock. The Company has established the Stock Incentive Plan for the purpose of attracting and retaining executive officers, directors and other key employees. See "Management--Stock Incentive Plan." Upon the consummation of the Offering, the Company will issue in the aggregate options to purchase 430,000 shares of Common Stock to executive officers, directors and certain key employees and has reserved 570,000 additional shares of Common Stock for future issuance under the Stock Incentive Plan. 119 Prior to the date of this Prospectus, there has been no public market for the shares of Common Stock. The shares of Common Stock have been approved for listing on the NYSE, subject to official notice of issuance. No prediction can be made as to the effect, if any, that future sales of shares of Common Stock (including sales pursuant to Rule 144) or the availability of shares of Common Stock for future sale will have on the market price prevailing from time to time. Sales of substantial amounts of shares of Common Stock (including shares of Common Stock issued upon the exercise of options or the exchange of Units), or the perception that such sales could occur, could adversely affect prevailing market prices of the shares of Common Stock and impair the Company's ability to obtain additional capital through the sale of equity securities. See "Risk Factors--Shares Available for Future Sale." For a description of certain restrictions on transfers of Common Stock held by certain stockholders of the Company, see "Underwriting" and "Description of Capital Stock--Restrictions on Ownership and Transfer." REDEMPTION/EXCHANGE RIGHTS/REGISTRATION RIGHTS Each limited partner of the Operating Partnership will have the right to require the Operating Partnership to redeem part or all of their Units for cash (based on the fair market value of an equivalent number of shares of Common Stock at the time of such redemption) or, at the election of the Company, to exchange such Units for shares of Common Stock, at any time beginning two years after the completion of the Offering subject to the obligation of certain of the Continuing Investors to indemnify the Company in connection with the Formation Transactions. See "Formation and Structure of the Company--Allocation of Consideration in the Formation Transactions." If the corporation does not elect to exchange such Units for shares of Common Stock, a Unitholder that is a corporation or a limited liability company may require the Company to issue shares of Common Stock in lieu of cash, subject to the Ownership Limit or such other amount as provided in the Company's Articles of Incorporation, as applicable. Upon completion of the Formation Transactions, an aggregate of approximately 1,653,835 Units will be held by limited partners of the Operating Partnership. If the Company elects to exchange Units for Common Stock, each Unit will be exchangeable for one share of Common Stock, subject to adjustment in the event of stock splits, distribution of rights, extraordinary dividends and similar events. In order to protect the Company's status as a REIT, a holder of Units is prohibited from exchanging such Units for shares of Common Stock, to the extent that as a result of such exchange any person would own or would be deemed to own, actually or constructively, more than 8.0% of the Common Stock, except to the extent such holder has been granted an exception to the Ownership Limit. See "Description of Capital Stock--Restrictions on Ownership and Transfer." The Company has granted the Continuing Investors receiving Units in connection with the Formation Transactions certain registration rights (collectively, the "Registration Rights") with respect to the shares of Common Stock acquired upon exchange of Units (the "Registrable Shares"). The Company has agreed to file and generally keep continuously effective beginning two years after the completion of the Offering a registration statement covering the issuance of shares upon exchange of Units and the resale thereof. The Company will bear expenses incident to its registration obligations upon exercise of the Registration Rights, including the payment of federal securities law and state Blue Sky registration fees, except that it will not bear any underwriting discounts or commissions or transfer taxes relating to registration of Registrable Shares. REINVESTMENT AND SHARE PURCHASE PLAN The Company is considering the adoption of a Distribution Reinvestment and Share Purchase Plan that would allow stockholders to automatically reinvest cash distributions on their outstanding shares of Common Stock and/or Units to purchase additional shares of Common Stock at a discounted price and without the payment of any brokerage commission or service charge. Stockholders would also have the option of investing limited additional amounts by making cash payments. No decision has been made yet by the Company whether or not to adopt such a plan and there can be no assurance that such a plan will ever be adopted by the Company. 120 FEDERAL INCOME TAX CONSEQUENCES The following summary of material federal income tax considerations regarding the Company and the Offering is based on current law, is for general information only and is not tax advice. The information set forth below, to the extent that it constitutes matters of law, summaries of legal matters or legal conclusions, is the opinion of Latham & Watkins, tax counsel to the Company, as to the material federal income tax considerations relevant to purchasers of the Common Stock. This discussion does not purport to deal with all aspects of taxation that may be relevant to particular stockholders in light of their personal investment or tax circumstances, or to certain types of stockholders subject to special treatment under the federal income tax laws, including, without limitation, certain financial institutions, life insurance companies, dealers in securities or currencies, stockholders holding Common Stock as part of a conversion transaction, as part of a hedge or hedging transaction, or as a position in a straddle for tax purposes, tax- exempt organizations (except to the extent discussed under the heading "-- Taxation of Tax-Exempt Stockholders") or foreign corporations, foreign partnerships and persons who are not citizens or residents of the United States (except to the extent discussed under the heading "Taxation of Non-U.S. Stockholders"). In addition, the summary below does not consider the effect of any foreign, state, local or other tax laws that may be applicable to prospective stockholders. EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP AND SALE OF THE COMMON STOCK, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS. TAXATION OF THE COMPANY General. The Company plans to make an election to be taxed as a REIT under Sections 856 through 860 of the Code commencing with its taxable year ending December 31, 1996. The Company believes that, commencing with its taxable year ending December 31, 1996, it will be organized and will operate in such a manner as to qualify for taxation as a REIT under the Code commencing with such taxable year, and the Company intends to continue to operate in such a manner, but no assurance can be given that it will operate or continue to operate in such a manner so as to qualify or remain qualified. These sections of the Code and the corresponding Treasury Regulations are highly technical and complex. The following sets forth the material aspects of the sections that govern the federal income tax treatment of a REIT and its stockholders. This summary is qualified in its entirety by the applicable Code provisions, rules and regulations promulgated thereunder, and administrative and judicial interpretations thereof. Latham & Watkins has acted as tax counsel to the Company in connection with the Offering and the Company's election to be taxed as a REIT. In the opinion of Latham & Watkins, commencing with the Company's taxable year ending December 31, 1996, the Company will be organized in conformity with the requirements for qualification as a REIT, and its proposed method of operation will enable it to meet the requirements for qualification and taxation as a REIT under the Code. It must be emphasized that this opinion is based on various factual assumptions relating to the organization and operation of the Company, the Operating Partnership and the Services Company, and is conditioned upon certain representations made by the Company as to factual matters. In addition, this opinion is based upon the factual representations of the Company concerning its business and properties as set forth in this Prospectus and assumes that the actions described in this Prospectus are completed in a timely fashion. Moreover, such qualification and taxation as a REIT depends upon the Company's ability to meet (through actual annual operating results, distribution levels and diversity of stock ownership) the various qualification tests imposed under the Code discussed below, the results of which will not be reviewed by Latham & Watkins. Accordingly, no assurance can be given that the actual results of the Company's operation for any particular taxable year will satisfy such requirements. Further, the anticipated income tax treatment described in this Prospectus may be changed, perhaps retroactively, by legislative, administrative or judicial action at any time. See "--Failure to Qualify." 121 If the Company qualifies for taxation as a REIT, it generally will not be subject to federal corporate income taxes on its net income that is currently distributed to stockholders. This treatment substantially eliminates the "double taxation" (at the corporate and stockholder levels) that generally results from investment in a regular corporation. However, the Company will be subject to federal income tax as follows. First, the Company will be taxed at regular corporate rates on any undistributed "REIT taxable income," including undistributed net capital gains. Second, under certain circumstances, the Company may be subject to the "alternative minimum tax" on its items of tax preference. Third, if the Company has (i) net income from the sale or other disposition of "foreclosure property" (defined generally as property acquired by the Company through foreclosure or otherwise after a default on a loan secured by the property or a lease of the property) which is held primarily for sale to customers in the ordinary course of business or (ii) other nonqualifying income from foreclosure property, it will be subject to tax at the highest corporate rate on such income. Fourth, if the Company has net income from prohibited transactions (which are, in general, certain sales or other dispositions of property held primarily for sale to customers in the ordinary course of business other than foreclosure property), such income will be subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75% gross income test or the 95% gross income test (as discussed below), but has nonetheless maintained its qualification as a REIT because certain other requirements have been met, it will be subject to a 100% tax on an amount equal to (a) the gross income attributable to the greater of the amount by which the Company fails the 75% or 95% test multiplied by (b) a fraction intended to reflect the Company's profitability. Sixth, if the Company should fail to distribute during each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any undistributed taxable income from prior periods, the Company would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. Seventh, with respect to any asset (a "Built-In Gain Asset") acquired by the Company from a corporation which is or has been a C corporation (i.e., generally a corporation subject to full corporate-level tax) in a transaction in which the basis of the Built-In Gain Asset in the hands of the Company is determined by reference to the basis of the asset in the hands of the C corporation, if the Company recognizes gain on the disposition of such asset during the ten-year period (the "Recognition Period") beginning on the date on which such asset was acquired by the Company, then, to the extent of the Built-In Gain (i.e., the excess of (a) the fair market value of such asset over (b) the Company's adjusted basis in such asset, determined as of the beginning of the Recognition Period), such gain will be subject to tax at the highest regular corporate rate pursuant to Treasury Regulations that have not yet been promulgated. The results described above with respect to the recognition of Built-In Gain assume that the Company will make an election pursuant to IRS Notice 88-19 and that such treatment is not modified by certain revenue proposals in the Administration's 1997 Budget Proposal. Requirements for Qualification. The Code defines a REIT as a corporation, trust or association; (i) which is managed by one or more trustees or directors; (ii) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; (iii) which would be taxable as a domestic corporation, but for Sections 856 through 859 of the Code; (iv) which is neither a financial institution nor an insurance company subject to certain provisions of the Code; (v) the beneficial ownership of which is held by 100 or more persons; (vi) during the last half of each taxable year not more than 50% in value of the outstanding stock of which is owned, actually or constructively, by five or fewer individuals (as defined in the Code to include certain entities); and (vii) which meets certain other tests, described below, regarding the nature of its income and assets. The Code provides that conditions (i) to (iv), inclusive, must be met during the entire taxable year and that condition (v) must be met during at least 335 days of a taxable year of twelve months, or during a proportionate part of a taxable year of less than twelve months. Conditions (v) and (vi) will not apply until after the first taxable year for which an election is made to be taxed as a REIT. For purposes of conditions (v) and (vi), pension funds and certain other tax-exempt entities are treated as individuals, subject to a "look-through" exception in the case of condition (vi). The Company believes that upon consummation of the Offering it will have issued sufficient shares of Common Stock with sufficient diversity of ownership pursuant to the Offering to allow it to satisfy conditions (v) and (vi). In addition, the Company's Articles of Incorporation provides for restrictions regarding the transfer and ownership of shares, which restrictions are intended to assist the Company in continuing to satisfy the share 122 ownership requirements described in (v) and (vi) above. Such ownership and transfer restrictions are described in "Description of Capital Stock-- Restrictions on Ownership and Transfer." These restrictions, however, may not ensure that the Company will, in all cases, be able to satisfy the share ownership requirements described above. If the Company fails to satisfy such share ownership requirements, the Company's status as a REIT will terminate. See "--Failure to Qualify." In addition, a corporation may not elect to become a REIT unless its taxable year is the calendar year. The Company will have a calendar taxable year. Ownership of a Partnership Interest. In the case of a REIT which is a partner in a partnership, Treasury Regulations provide that the REIT will be deemed to own its proportionate share of the assets of the partnership and will be deemed to be entitled to the income of the partnership attributable to such share. In addition, the character of the assets and gross income of the partnership shall retain the same character in the hands of the REIT for purposes of Section 856 of the Code, including satisfying the gross income tests and the asset tests. Thus, the Company's proportionate share of the assets and items of income of the Operating Partnership (including the Operating Partnership's share of such items of any subsidiary partnerships) will be treated as assets and items of income of the Company for purposes of applying the requirements described herein. A summary of the rules governing the federal income taxation of partnerships and their partners is provided below in "--Tax Aspects of the Operating Partnership." The Company has direct control of the Operating Partnership and intends to operate it consistent with the requirements for qualification as a REIT. Income Tests. In order to maintain its qualification as a REIT, the Company annually must satisfy three gross income requirements. First, at least 75% of the Company's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived directly or indirectly from investments relating to real property or mortgages on real property (including "rents from real property" and, in certain circumstances, interest) or from certain types of temporary investments. Second, at least 95% of the Company's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from such real property investments, dividends, interest and gain from the sale or disposition of stock or securities (or from any combination of the foregoing). Third, subject to certain exceptions in the year in which the Company is liquidated, short-term gain from the sale or other disposition of stock or securities, gain from prohibited transactions and gain on the sale or other disposition of real property held for less than four years (apart from involuntary conversions and sales of foreclosure property) must represent less than 30% of the Company's gross income (including gross income from prohibited transactions) for each taxable year. For purposes of applying the 30% gross income test, the holding period of Properties acquired by the Operating Partnership in the Formation Transactions will be deemed to have commenced on the date of acquisition. Rents received by the Company will qualify as "rents from real property" in satisfying the gross income requirements for a REIT described above only if several conditions are met. First, the amount of rent must not be based in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term "rents from real property" solely by reason of being based on a fixed percentage or percentages of receipts or sales. Second, the Code provides that rents received from a tenant will not qualify as "rents from real property" in satisfying the gross income tests if the REIT, or an actual or constructive owner of 10% or more of the REIT, actually or constructively owns 10% or more of such tenant (a "Related Party Tenant"). Third, if rent attributable to personal property, leased in connection with a lease of real property, is greater than 15% of the total rent received under the lease, then the portion of rent attributable to such personal property will not qualify as "rents from real property." Finally, for rents received to qualify as "rents from real property," the REIT generally must not operate or manage the property or furnish or render services to the tenants of such property, other than through an independent contractor from whom the REIT derives no revenue. The REIT may, however, directly perform certain services that are "usually or customarily rendered" in connection with the rental of space for occupancy only and are not otherwise considered "rendered to the occupant" of the property. The Company does not and will not; (i) charge rent for any property that is based in whole or in part on the income or profits of any person (except by reason of being based on a percentage of receipts or sales, as described above); (ii) rent any property to a Related Party Tenant (unless the Board of Directors determines in its discretion that the rent received from such Related Party Tenant is not material and 123 will not jeopardize the Company's status as a REIT); (iii) derive rental income attributable to personal property (other than personal property leased in connection with the lease of real property, the amount of which is less than 15% of the total rent received under the lease); or (iv) perform services considered to be rendered to the occupant of the property, other than through an independent contractor from whom the Company derives no revenue. The Services Company will receive fees in exchange for the performance of certain development activities. Such fees will not accrue to the Company, but the Company will derive its allocable share of dividends from the Services Company through its interest in the Operating Partnership, which qualify under the 95% gross income test, but not the 75% gross income test. The Company believes that the aggregate amount of any nonqualifying income in any taxable year will not exceed the limit on nonqualifying income under the gross income tests. The Operating Partnership will receive fees in exchange for the performance of certain management activities for third parties with respect to properties in which the Operating Partnership does not own an interest, including certain of the Excluded Properties. Such fees will result in nonqualifying income to the Company under the 95% and 75% gross income tests. The Company believes that the aggregate amount of nonqualifying income, including such fees, in any taxable year will not exceed the limit on nonqualifying income under the gross income tests. The term "interest" generally does not include any amount received or accrued (directly or indirectly) if the determination of such amount depends in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term "interest" solely by reason of being based on a fixed percentage or percentages of receipts or sales. If the Company fails to satisfy one or both of the 75% or 95% gross income tests for any taxable year, it may nevertheless qualify as a REIT for such year if it is entitled to relief under certain provisions of the Code. These relief provisions will be generally available if the Company's failure to meet such tests was due to reasonable cause and not due to willful neglect, the Company attaches a schedule of the sources of its income to its federal income tax return, and any incorrect information on the schedule was not due to fraud with intent to evade tax. It is not possible, however, to state whether in all circumstances the Company would be entitled to the benefit of these relief provisions. For example, if the Company fails to satisfy the gross income tests because nonqualifying income that the Company intentionally incurs exceeds the limits on such income, the IRS could conclude that the Company's failure to satisfy the tests was not due to reasonable cause. If these relief provisions are inapplicable to a particular set of circumstances involving the Company, the Company would not qualify as a REIT. As discussed above in "Federal Income Tax Considerations--Taxation of the Company--General," even if these relief provisions apply, a 100% tax would be imposed on an amount equal to (a) the gross income attributable to the greater of the amount by which the Company failed the 75% or 95% test multiplied by (b) a fraction intended to reflect the Company's profitability. No similar mitigation provision provides relief if the Company fails the 30% gross income test. In such case, the Company would cease to qualify as a REIT. Any gain realized by the Company on the sale of any property held as inventory or other property held primarily for sale to customers in the ordinary course of business (including the Company's share of any such gain realized by the Operating Partnership) will be treated as income from a prohibited transaction that is subject to a 100% penalty tax. Such prohibited transaction income may also have an adverse effect upon the Company's ability to satisfy the income tests for qualification as a REIT. Under existing law, whether property is held as inventory or primarily for sale to customers in the ordinary course of a trade or business is a question of fact that depends on all the facts and circumstances with respect to the particular transaction. The Operating Partnership intends to hold the Properties for investment with a view to long-term appreciation, to engage in the business of acquiring, developing, owning, and operating the Properties (and other properties) and to make such occasional sales of the Properties as are consistent with the Operating Partnership's investment objectives. There can be no assurance, however, that the IRS might not contend that one or more of such sales is subject to the 100% penalty tax. 124 Asset Tests. The Company, at the close of each quarter of its taxable year, must also satisfy three tests relating to the nature of its assets. First, at least 75% of the value of the Company's total assets (including its allocable share of the assets held by the Operating Partnership) must be represented by real estate assets including (i) its allocable share of real estate assets held by partnerships in which the Company owns a direct or indirect interest (such as the Operating Partnership) and (ii) stock or debt instruments held for not more than one year purchased with the proceeds of a stock offering or long-term (at least five years) public debt offering of the Company, cash, cash items and government securities. Second, not more than 25% of the Company's total assets (including its allocable share of the assets held by the Operating Partnership) may be represented by securities other than those in the 75% asset class. Third, of the investments included in the 25% asset class, the value of any one issuer's securities owned by the Company may not exceed 5% of the value of the Company's total assets and the Company may not own more than 10% of any one issuer's outstanding voting securities. As described above, the Operating Partnership owns 100% of the non-voting preferred stock of the Services Company, and by virtue of its ownership of interests in the Operating Partnership, the Company will be considered to own its pro rata share of such stock. See "Structure and Formation of the Company." The Operating Partnership does not and will not own any of the voting securities of the Services Company, and therefore the Company will not be considered to own more than 10% of the voting securities of the Services Company. In addition, the Company believes (and has represented to tax counsel to the Company for purposes of its opinion, as described above) that the value of its pro rata share of the securities of the Services Company to be held by the Operating Partnership will not exceed, at the closing of the Offering, 5% of the total value of the Company's assets, and will not exceed such amount in the future. Latham & Watkins, in rendering its opinion as to the qualification of the Company as a REIT, is relying on the representation of the Company to such effect. No independent appraisals have been obtained to support this conclusion. There can be no assurance that the IRS will not contend that the value of the securities of the Services Company held by the Company (through the Operating Partnership) exceeds the 5% value limitation. The 5% value test must be satisfied not only on the date that the Company (directly or through the Operating Partnership) acquires securities in the Services Company, but also each time the Company increases its ownership of securities of the Services Company (including as a result of increasing its interest in the Operating Partnership as a result of Company capital contributions to the Operating Partnership or as limited partners exercise their redemption/exchange rights). Although the Company plans to take steps to ensure that it satisfies the 5% value test for any quarter with respect to which retesting is to occur, there can be no assurance that such steps will always be successful, or will not require a reduction in the Operating Partnership's overall interest in the Services Company. After initially meeting the asset tests at the close of any quarter, the Company will not lose its status as a REIT for failure to satisfy the asset tests at the end of a later quarter solely by reason of changes in asset values. If the failure to satisfy the asset tests results from an acquisition of securities or other property during a quarter (including as a result of the Company increasing its interest in the Operating Partnership), the failure can be cured by the disposition of sufficient nonqualifying assets within 30 days after the close of that quarter. The Company intends to maintain adequate records of the value of its assets to ensure compliance with the asset tests and to take such other actions within 30 days after the close of any quarter as may be required to cure any noncompliance. If the Company fails to cure noncompliance with the asset tests within such time period, the Company would cease to qualify as a REIT. Annual Distribution Requirements. The Company, in order to qualify as a REIT, is required to distribute dividends (other than capital gain dividends) to its stockholders in an amount at least equal to (i) the sum of (a) 95% of the Company's "REIT taxable income" (computed without regard to the dividends paid deduction and by excluding the Company's net capital gain) and (b) 95% of the excess of the net income, if any, from foreclosure property over the tax imposed on such income, minus (ii) the excess of the sum of certain items of noncash income (i.e., income attributable to leveled stepped rents, original issue discount or purchase money debt, or a like-kind exchange that is later determined to be taxable) over 5% of "REIT Taxable Income" as described in clause (i)(a) above. In addition, if the Company disposes of any Built-In Gain Asset during its 125 Recognition Period, the Company will be required, pursuant to Treasury Regulations which have not yet been promulgated, to distribute at least 95% of the Built-in Gain (after tax), if any, recognized on the disposition of such asset. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before the Company timely files its tax return for such year and if paid on or before the first regular dividend payment after such declaration. Such distributions are taxable to holders of Common Stock (other than tax-exempt entities, as discussed below) in the year in which paid, even though such distributions relate to the prior year for purposes of the Company's 95% distribution requirement. The amount distributed must not be preferential--i.e., each holder of shares of Common Stock must receive the same distribution per share. A REIT may have more than one class of capital stock, as long as distributions within each class are pro rata and non-preferential. To the extent that the Company does not distribute all of its net capital gain or distributes at least 95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be subject to tax thereon at regular ordinary and capital gain corporate tax rates. The Company intends to make timely distributions sufficient to satisfy these annual distribution requirements. In this regard, the Partnership Agreement authorizes the Company, as general partner, to take such steps as may be necessary to cause the Operating Partnership to distribute to its partners an amount sufficient to permit the Company to meet these distribution requirements. It is expected that the Company's REIT taxable income will be less than its cash flow due to the allowance of depreciation and other non-cash charges in computing REIT taxable income. Accordingly, the Company anticipates that it will generally have sufficient cash or liquid assets to enable it to satisfy the distribution requirements described above. It is possible, however, that the Company, from time to time, may not have sufficient cash or other liquid assets to meet these distribution requirements due to timing differences between (i) the actual receipt of income and actual payment of deductible expenses and (ii) the inclusion of such income and deduction of such expenses in arriving at taxable income of the Company. In the event that such timing differences occur, in order to meet the distribution requirements, the Company may find it necessary to arrange for short-term, or possibly long-term, borrowings, to pay dividends in the form of taxable stock dividends. If the Company fails to meet the 95% distribution test due to certain adjustments (e.g., an increase in the Company's income or a decrease in its deduction for dividends paid) by reason of a judicial decision or by agreement with the IRS, the Company may pay a "deficiency dividend" to holders of shares of Common Stock in the taxable year of the adjustment, which dividend would relate back to the year being adjusted. In such case, the Company would also be required to pay interest to the IRS and would be subject to any applicable penalty provisions. Furthermore, if the Company should fail to distribute during each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain income for such year, and (iii) any undistributed taxable income from prior periods, the Company would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. FAILURE TO QUALIFY If the Company fails to qualify for taxation as a REIT in any taxable year, and the relief provisions do not apply, the Company will be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Distributions to stockholders in any year in which the Company fails to qualify will not be deductible by the Company nor will they be required to be made. As a result, the Company's failure to qualify as a REIT would reduce the cash available for distribution by the Company to its stockholders. In addition, if the Company fails to qualify as a REIT, all distributions to stockholders will be taxable as ordinary income, to the extent of the Company's current and accumulated earnings and profits, and, subject to certain limitations of the Code, corporate distributees may be eligible for the dividends received deduction. Unless entitled to relief under specific statutory provisions, the Company will also be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether in all circumstances the Company would be entitled to such statutory relief. 126 TAXATION OF TAXABLE U.S. STOCKHOLDERS GENERALLY As used herein, the term "U.S. Stockholder" means a holder of shares of Common Stock who (for United States federal income tax purposes) (i) is a citizen or resident of the United States, (ii) is a corporation, partnership, or other entity created or organized in or under the laws of the United States or of any political subdivision thereof, or (iii) is an estate or trust the income of which is subject to United States federal income taxation regardless of its source. As long as the Company qualifies as a REIT, distributions made by the Company out of its current or accumulated earnings and profits (and not designated as capital gain dividends) will constitute dividends taxable to its taxable U.S. Stockholders as ordinary income. Such distributions will not be eligible for the dividends received deduction otherwise available with respect to dividends received by U.S. Stockholders that are corporations. Distributions made by the Company that are properly designated by the Company as capital gain dividends will be taxable to taxable U.S. Stockholders as long-term capital gains (to the extent that they do not exceed the Company's actual net capital gain for the taxable year) without regard to the period for which a U.S. Stockholder has held his shares of Common Stock. U.S. Stockholders that are corporations may, however, be required to treat up to 20% of certain capital gain dividends as ordinary income. To the extent that the Company makes distributions (not designated as capital gain dividends) in excess of its current and accumulated earnings and profits, such distributions will be treated first as a tax-free return of capital to each U.S. Stockholder, reducing the adjusted basis which such U.S. Stockholder has in his shares of Common Stock for tax purposes by the amount of such distribution (but not below zero), with distributions in excess of a U.S. Stockholder's adjusted basis in his shares taxable as long-term capital gains (or short-term capital gain if the shares have been held for one year or less), provided that the shares have been held as a capital asset. Dividends declared by the Company in October, November, or December of any year and payable to a stockholder of record on a specified date in any such month shall be treated as both paid by the Company and received by the stockholder on December 31 of such year, provided that the dividend is actually paid by the Company on or before January 31 of the following calendar year. Stockholders may not include in their own income tax returns any net operating losses or capital losses of the Company. Distributions made by the Company and gain arising from the sale or exchange by a U.S. Stockholder of shares of Common Stock will not be treated as passive activity income, and, as a result, U.S. Stockholders generally will not be able to apply any "passive losses" against such income or gain. Distributions made by the Company (to the extent they do not constitute a return of capital) generally will be treated as investment income for purposes of computing the investment income limitation. Gain arising from the sale or other disposition of Common Stock, however, will not be treated as investment income unless the U.S. Stockholder elects to reduce the amount of such U.S. Stockholder's total net capital gain eligible for the 28% maximum capital gains rate by the amount of such gain with respect to such Common Stock. Upon any sale or other disposition of Common Stock, a U.S. Stockholder will recognize gain or loss for federal income tax purposes in an amount equal to the difference between (i) the amount of cash and the fair market value of any property received on such sale or other disposition and (ii) the holder's adjusted basis in such shares of Common Stock for tax purposes. Such gain or loss will be capital gain or loss if the shares have been held by the U.S. Stockholder as a capital asset, and will be long-term gain or loss if such shares have been held for more than one year. In general, any loss recognized by a U.S. Stockholder upon the sale or other disposition of shares of Common Stock that have been held for six months or less (after applying certain holding period rules) will be treated as a long-term capital loss, to the extent of capital gain dividends received by such U.S. Stockholder from the Company which were required to be treated as long-term capital gains. BACKUP WITHHOLDING The Company will report to its U.S. Stockholders and the IRS the amount of dividends paid during each calendar year, and the amount of tax withheld, if any. Under the backup withholding rules, a stockholder may be subject to backup withholding at the rate of 31% with respect to dividends paid unless such holder (a) is a 127 corporation or comes within certain other exempt categories and, when required, demonstrates this fact, or (b) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with applicable requirements of the backup withholding rules. A U.S. Stockholder that does not provide the Company with his correct taxpayer identification number may also be subject to penalties imposed by the IRS. Any amount paid as backup withholding will be creditable against the stockholder's income tax liability. In addition, the Company may be required to withhold a portion of capital gain distributions to any stockholders who fail to certify their non-foreign status to the Company. See "--Taxation of Non-U.S. Stockholders." TAXATION OF TAX-EXEMPT STOCKHOLDERS The IRS has ruled that amounts distributed as dividends by a qualified REIT do not constitute unrelated business taxable income ("UBTI") when received by a tax-exempt entity. Based on that ruling, provided that a tax-exempt shareholder (except certain tax-exempt shareholders described below) has not held its shares of Common Stock as "debt financed property" within the meaning of the Code and such shares are not otherwise used in a trade or business, the dividend income from the Company will not be UBTI to a tax-exempt shareholder. Similarly, income from the sale of Common Stock will not constitute UBTI unless such tax-exempt shareholder has held such shares as "debt financed property" within the meaning of the Code or has used the shares in a trade or business. For tax-exempt shareholders which are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans exempt from federal income taxation under Code Sections 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an investment in the Company will constitute UBTI unless the organization is able to properly deduct amounts set aside or placed in reserve for certain purposes so as to offset the income generated by its investment in the Company. Such prospective investors should consult their own tax advisors concerning these "set aside" and reserve requirements. Notwithstanding the above, however, a portion of the dividends paid by a "pension held REIT" shall be treated as UBTI as to any trust which (i) is described in Section 401(a) of the Code, (ii) is tax-exempt under Section 501(a) of the Code, and (iii) holds more than 10% (by value) of the interests in the REIT. Tax-exempt pension funds that are described in Section 401(a) of the Code are referred to below as "qualified trusts." A REIT is a "pension held REIT" if (i) it would not have qualified as a REIT but for the fact that Section 856(h)(3) of the Code provides that stock owned by qualified trusts shall be treated, for purposes of the "not closely held" requirement, as owned by the beneficiaries of the trust (rather than by the trust itself), and (ii) either (a) at least one such qualified trust holds more than 25% (by value) of the interests in the REIT, or (b) one or more such qualified trusts, each of which owns more than 10% (by value) of the interests in the REIT, hold in the aggregate more than 50% (by value) of the interests in the REIT. The percentage of any REIT dividend treated as UBTI is equal to the ratio of (i) the UBTI earned by the REIT (treating the REIT as if it were a qualified trust and therefore subject to tax on UBTI) to (ii) the total gross income of the REIT. A de minimis exception applies where the percentage is less than 5% for any year. The provisions requiring qualified trusts to treat a portion of REIT distributions as UBTI will not apply if the REIT is able to satisfy the "not closely held" requirement without relying upon the "look-through" exception with respect to qualified trusts. As a result of certain limitations on transfer and ownership of Common Stock contained in the Articles of Incorporation, the Company does not expect to be classified as a "pension held REIT." TAXATION OF NON-U.S. STOCKHOLDERS The rules governing United States federal income taxation of the ownership and disposition of stock by persons that are, for purposes of such taxation, nonresident alien individuals, foreign corporations, foreign partnerships or foreign estates or trusts (collectively, "Non-U.S. Stockholders") are complex, and no attempt is made herein to provide more than a brief summary of such rules. Accordingly, the discussion does not address all aspects of United States federal income tax and does not address state, local or foreign tax consequences that 128 may be relevant to a Non-U.S. Stockholder in light of its particular circumstances, including, for example, if the investment in the Company is connected to the conduct by a Non-U.S. Stockholder of a U.S. trade or business. In addition, this discussion is based on current law, which is subject to change, and assumes that the Company qualifies for taxation as a REIT. Prospective Non-U.S. Stockholders should consult with their own tax advisers to determine the impact of federal, state, local and foreign income tax laws with regard to an investment in Common Stock, including any reporting requirements. Distributions. Distributions by the Company to a Non-U.S. Stockholder that are neither attributable to gain from sales or exchanges by the Company of United States real property interests nor designated by the Company as capital gains dividends will be treated as dividends of ordinary income to the extent that they are made out of current or accumulated earnings and profits of the Company. Such distributions ordinarily will be subject to withholding of United States federal income tax on a gross basis (that is, without allowance of deductions) at a 30% rate or such lower rate as may be specified by an applicable income tax treaty, unless the dividends are treated as effectively connected with the conduct by the Non-U.S. Stockholder of a United States trade or business. Dividends that are effectively connected with such a trade or business will be subject to tax on a net basis (that is, after allowance of deductions) at graduated rates, in the same manner as domestic stockholders are taxed with respect to such dividends and are generally not subject to withholding. Any such dividends received by a Non-U.S. Stockholder that is a corporation may also be subject to an additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. Pursuant to current Treasury Regulations, dividends paid to an address in a country outside the United States are generally presumed to be paid to a resident of such country for purposes of determining the applicability of withholding discussed above and the applicability of a tax treaty rate. Under proposed Treasury Regulations, not currently in effect, however, a Non-U.S. Stockholder who wished to claim the benefit of an applicable treaty rate would be required to satisfy certain certification and other requirements. Under certain treaties, lower withholding rates generally applicable to dividends do not apply to dividends from a REIT, such as the Company. Certain certification and disclosure requirements must be satisfied to be exempt from withholding under the effectively connected income exemption discussed above. Distributions in excess of current or accumulated earnings and profits of the Company will not be taxable to a Non-U.S. Stockholder to the extent that they do not exceed the adjusted basis of the stockholders's Common Stock, but rather will reduce the adjusted basis of such stock. To the extent that such distributions exceed the adjusted basis of a Non-U.S. Stockholder's Common Stock, they will give rise to gain from the sale or exchange of his stock, the tax treatment of which is described below. If it cannot be determined at the time a distribution is made whether or not such distribution will be in excess of current or accumulated earnings and profits, the distribution will generally be treated as a dividend for withholding purposes. However, amounts thus withheld are generally refundable if it is subsequently determined that such distribution was, in fact, in excess of current or accumulated earnings and profits of the Company. Distributions to a Non-U.S. Stockholder that are designated by the Company at the time of distribution as capital gains dividends (other than those arising from the disposition of a United States real property interest) generally will not be subject to United States federal income taxation, unless (i) investment in the Common Stock is effectively connected with the Non-U.S. Stockholder's United States trade or business, in which case the Non-U.S. Stockholder will be subject to the same treatment as domestic stockholders with respect to such gain (except that a stockholder that is a foreign corporation may also be subject to the 30% branch profits tax, as discussed above), or (ii) the Non-U.S. Stockholder is a nonresident alien individual who is present in the United States for 183 days or more during the taxable year and has a "tax home" in the United States, in which case the nonresident alien individual will be subject to a 30% tax on the individual's capital gains. Distributions to a Non-U.S. Stockholder that are attributable to gain from sales or exchanges by the Company of United States real property interests will cause the Non-U.S. Stockholder to be treated as recognizing such gain as income effectively connected with a United States trade or business. Non-U.S. Stockholders would thus generally be entitled to offset its gross income by allowable deductions and would pay 129 tax on the resulting taxable income at the same rates applicable to domestic stockholders (subject to a special alternative minimum tax in the case of nonresident alien individuals). Also, such gain may be subject to a 30% branch profits tax in the hands of a Non-U.S. Stockholder that is a corporation and is not entitled to treaty relief or exemption, as discussed above. The Company is required to withhold 35% of any such distribution. That amount is creditable against the Non-U.S. Stockholder's United States federal income tax liability. To the extent that such withholding exceeds the actual tax owed by the Non-U.S. Stockholder, the Non-U.S. Stockholder may claim a refund from the IRS. The Company or any nominee (e.g., a broker holding shares in street name) may rely on a certificate of non-foreign status on Form W-8 or Form W-9 to determine whether withholding is required on gains realized from the disposition of United States real property interests. A domestic person who holds shares of Common Stock on behalf of a Non-U.S. Stockholder will bear the burden of withholding, provided that the Company has properly designated the appropriate portion of a distribution as a capital gain dividend. Sale of Common Stock. Gain recognized by a Non-U.S. Stockholder upon the sale or exchange of shares of Common Stock generally will not be subject to United States taxation unless such shares constitute a "United States real property interest" within the meaning of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). The Common Stock will not constitute a "United States real property interest" so long as the Company is a "domestically controlled REIT." A "domestically controlled REIT" is a REIT in which at all times during a specified testing period less than 50% in value of its stock is held directly or indirectly by Non- U.S. Stockholders. The Company believes that at the closing of the Offering it will be a "domestically controlled REIT," and therefore that the sale of shares of Common Stock will not be subject to taxation under FIRPTA. However, because the shares of Common Stock will be publicly traded, no assurance can be given that the Company will continue to be a "domestically-controlled REIT." Notwithstanding the foregoing, gain from the sale or exchange of shares of Common Stock not otherwise subject to FIRPTA will be taxable to a Non-U.S. Stockholder if the Non-U.S. Stockholder is a nonresident alien individual who is present in the United States for 183 days or more during the taxable year and has a "tax home" in the United States. In such case, the nonresident alien individual will be subject to a 30% United States withholding tax on the amount of such individual's gain. If the Company does not qualify as or ceases to be a "domestically- controlled REIT," gain arising from the sale or exchange by a Non-U.S. Stockholder of shares of Common Stock would be subject to United States taxation under FIRPTA as a sale of a "United States real property interest" unless the shares are "regularly traded" (as defined by applicable Treasury Regulations) on an established securities market (e.g., the New York Stock Exchange) and the selling Non-U.S. Stockholder held no more than 5% (after applying certain constructive ownership rules) of the shares of Common Stock during the shorter of (i) the period during which the taxpayer held such shares, or (ii) the 5-year period ending on the date of the disposition of such shares. If gain on the sale or exchange of shares of Common Stock were subject to taxation under FIRPTA, the Non-U.S. Stockholder would be subject to regular United States income tax with respect to such gain in the same manner as a U.S. Stockholder (subject to any applicable alternative minimum tax, a special alternative minimum tax in the case of nonresident alien individuals and the possible application of the 30% branch profits tax in the case of foreign corporations), and the purchaser of the stock would be required to withhold and remit to the IRS 10% of the purchase price. Backup Withholding Tax and Information Reporting. Backup withholding tax (which generally is a withholding tax imposed at the rate of 31% on certain payments to persons that fail to furnish certain information under the United States information reporting requirements) and information reporting will generally not apply to distributions paid to Non-U.S. Stockholders outside the United States that are treated as (i) dividends subject to the 30% (or lower treaty rate) withholding tax discussed above, (ii) capital gains dividends or (iii) distributions attributable to gain from the sale or exchange by the Company of United States real property interests. As a general matter, backup withholding and information reporting will not apply to a payment of the proceeds of a sale of Common Stock by or through a foreign office of a foreign broker. Information reporting (but not backup withholding) will apply, however, to a payment of the proceeds of a sale of Common Stock by a foreign office 130 of a broker that (a) is a United States person, (b) derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States or (c) is a "controlled foreign corporation" (generally, a foreign corporation controlled by United States stockholders) for United States tax purposes, unless the broker has documentary evidence in its records that the holder is a Non-U.S. Stockholder and certain other conditions are met, or the stockholder otherwise establishes an exemption. Payment to or through a United States office of a broker of the proceeds of a sale of Common Stock is subject to both backup withholding and information reporting unless the stockholder certifies under penalty of perjury that the stockholder is a Non-U.S. Stockholder, or otherwise establishes an exemption. A Non-U.S. Stockholder may obtain a refund of any amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS. New Proposed Regulations. The United States Treasury has recently issued proposed Treasury Regulations regarding the withholding and information reporting rules discussed above. In general, the proposed Treasury Regulations do not alter the substantive withholding and information reporting requirements but unify current certification procedures and forms and clarify and modify reliance standards. If finalized in their current form, the proposed Treasury Regulations would generally be effective for payments made after December 31, 1997, subject to certain transition rules. TAX ASPECTS OF THE OPERATING PARTNERSHIP General. Substantially all of the Company's investments will be held indirectly through the Operating Partnership. In general, partnerships are "pass-through" entities which are not subject to federal income tax. Rather, partners are allocated their proportionate shares of the items of income, gain, loss, deduction and credit of a partnership, and are potentially subject to tax thereon, without regard to whether the partners receive a distribution from the partnership. The Company will include in its income its proportionate share of the foregoing partnership items for purposes of the various REIT income tests and in the computation of its REIT taxable income. Moreover, for purposes of the REIT asset tests, the Company will include its proportionate share of assets held by the Operating Partnership. See "--Taxation of the Company." Entity Classification. The Company's interest in the Operating Partnership involves special tax considerations, including the possibility of a challenge by the IRS of the status of the Operating Partnership as a partnership (as opposed to an association taxable as a corporation) for federal income tax purposes. If the Operating Partnership was treated as an association, it would be taxable as a corporation and therefore be subject to an entity-level tax on its income. In such a situation, the character of the Company's assets and items of gross income would change and preclude the Company from satisfying the asset tests and possibly the income tests (see "--Taxation of the Company--Asset Tests" and "--Income Tests"), and in turn would prevent the Company from qualifying as a REIT. See "Federal Income Tax Consequences-- Taxation of the Company--Failure to Qualify" above for a discussion of the effect of the Company's failure to meet such tests for a taxable year. In addition, a change in the Operating Partnership's status for tax purposes might be treated as a taxable event in which case the Company might incur a tax liability without any related cash distributions. An organization formed as a partnership will be treated as a partnership for federal income tax purposes rather than as a corporation only if it has no more than two of the four corporate characteristics that the Treasury Regulations use to distinguish a partnership from a corporation for tax purposes. These four characteristics are (i) continuity of life, (ii) centralization of management, (iii) limited liability and (iv) free transferability of interests. The Company has not requested, and does not intend to request, a ruling from the IRS that the Operating Partnership will be treated as a partnership for federal income tax purposes. However, in connection with the closing of the Formation Transactions, Latham & Watkins will deliver an opinion to the Company stating that based on the provisions of the Partnership Agreement and certain factual assumptions and representations described in the opinion, the Operating Partnership will be treated as a partnership for federal income tax purposes (and not as an association or a publicly traded partnership taxable as a corporation). Unlike a private letter ruling, an opinion of counsel is not binding on the IRS, and no assurance can be given that the IRS will not challenge the status of the Operating Partnership as a partnership for federal income tax purposes. 131 If such challenge were sustained by a court, the Operating Partnership could be treated as a corporation for federal income tax purposes. Recently proposed Treasury Regulations (the "Proposed Regulations"), if finalized in their present form, would eliminate the four factor test described above and, in its place, permit a partnership or limited liability company to elect to be taxed as a partnership for federal income tax purposes without regard to the number of corporate characteristics possessed by such entity. The Proposed Regulations are proposed to apply for tax periods beginning on or after the date that final regulations are published by the IRS. Until that time, the existing regulations will continue to apply. The Proposed Regulations provide that the IRS will not challenge the classification of an existing partnership or limited liability company for tax periods to which the existing Treasury Regulations apply if (i) the entity had a reasonable basis for its claimed classification, (ii) the entity claimed that same classification in all prior years, and (iii) as of the date that the Proposed Regulations were published, neither the entity nor any partner or member of the entity had been notified in writing that the classification of the entity is under examination by the IRS. Therefore, if the Proposed Regulations are finalized in their present form and the Operating Partnerships meets the conditions above, the IRS will not challenge the status of the Operating Partnership as a partnership for tax purposes. Partnership Allocations. Although a partnership agreement will generally determine the allocation of income and loss among partners, such allocations will be disregarded for tax purposes if they do not comply with the provisions of Section 704(b) of the Code and the Treasury Regulations promulgated thereunder. Generally, Section 704(b) and the Treasury Regulations promulgated thereunder require that partnership allocations respect the economic arrangement of the partners. If an allocation is not recognized for federal income tax purposes, the item subject to the allocation will be reallocated in accordance with the partners' interests in the partnership, which will be determined by taking into account all of the facts and circumstances relating to the economic arrangement of the partners with respect to such item. The Operating Partnership's allocations of taxable income and loss are intended to comply with the requirements of Section 704(b) of the Code and the Treasury Regulations promulgated thereunder. The Partnership Agreement provides that net income or net loss of the Operating Partnership will generally be allocated to the Company and the limited partners in accordance with their respective percentage interests in the Operating Partnership. Notwithstanding the foregoing, such agreement provides that certain interest deductions and income from the discharge of certain indebtedness of the Operating Partnership, attributable to loans transferred to the Operating Partnership by certain Continuing Investors, will be allocated disproportionately to such Continuing Investors. In addition, allocations of net income or net loss will be subject to compliance with the provisions of Sections 704(b) and 704(c) of the Code and the Treasury Regulations promulgated thereunder. Tax Allocations with Respect to the Properties. Pursuant to Section 704(c) of the Code, income, gain, loss and deduction attributable to appreciated or depreciated property (such as the Properties) that is contributed to a partnership in exchange for an interest in the partnership, must be allocated in a manner such that the contributing partner is charged with, or benefits from, respectively, the unrealized gain or unrealized loss associated with the property at the time of the contribution. The amount of such unrealized gain or unrealized loss is generally equal to the difference between the fair market value of contributed property at the time of contribution and the adjusted tax basis of such property at such time (a "Book-Tax Difference"). Such allocations are solely for federal income tax purposes and do not affect the book capital accounts or other economic or legal arrangements among the partners. The Operating Partnership was formed by way of contributions of appreciated property (including the Properties). Consequently, the Partnership Agreement requires that such allocations be made in a manner consistent with Section 704(c) of the Code. In general, the principals of KI and other Continuing Investors who are limited partners of the Operating Partnership will be allocated depreciation deductions for tax purposes which are lower than such deductions would be if determined on a pro rata basis. In addition, in the event of the disposition of any of the contributed 132 assets which have a Book-Tax Difference, all income attributable to such Book- Tax Difference will generally be allocated to such limited partners, and the Company will generally be allocated only its share of capital gains attributable to appreciation, if any, occurring after the closing of the Formation Transactions. This will tend to eliminate the Book-Tax Difference over the life of the Operating Partnership. However, the special allocation rules of Section 704(c) do not always entirely eliminate the Book-Tax Difference on an annual basis or with respect to a specific taxable transaction such as a sale. Thus, the carryover basis of the contributed assets in the hands the Operating Partnership may cause the Company to be allocated lower depreciation and other deductions, and possibly an amount of taxable income in the event of a sale of such contributed assets in excess of the economic or book income allocated to it as a result of such sale. This may cause the Company to recognize taxable income in excess of cash proceeds, which might adversely affect the Company's ability to comply with the REIT distribution requirements. See "--Taxation of the Company--Annual Distribution Requirements." Treasury Regulations under Section 704(c) of the Code provide partnerships with a choice of several methods of accounting for Book-Tax Differences, including retention of the "traditional method" or the election of certain methods which would permit any distortions caused by a Book-Tax Difference to be entirely rectified on an annual basis or with respect to a specific taxable transaction such as a sale. The Operating Partnership and the Company have not yet decided which will be used to account for Book-Tax Differences with respect to the Properties initially contributed to the Operating Partnership. With respect to any property purchased by the Operating Partnership subsequent to the admission of the Company to the Operating Partnership, such property will initially have a tax basis equal to its fair market value, and Section 704(c) of the Code will not apply. Basis in Operating Partnership Interest. The Company's adjusted tax basis in its interest in the Operating Partnership generally (i) will be equal to the amount of cash and the basis of any other property contributed to the Operating Partnership by the Company, (ii) will be increased by (a) its allocable share of the Operating Partnership's income and (b) its allocable share of indebtedness of the Operating Partnership and (iii) will be reduced, but not below zero, by the Company's allocable share of (a) losses suffered by the Operating Partnership, (b) the amount of cash distributed to the Company and (c) by constructive distributions resulting from a reduction in the Company's share of indebtedness of the Operating Partnership. If the allocation of the Company's distributive share of the Operating Partnership's loss exceeds the adjusted tax basis of the Company's partnership interest in the Operating Partnership, the recognition of such excess loss will be deferred until such time and to the extent that the Company has adjusted tax basis in its interest in the Operating Partnership. To the extent that the Operating Partnership's distributions, or any decrease in the Company's share of the indebtedness of the Operating Partnership (such decreases being considered a constructive cash distribution to the partners), exceeds the Company's adjusted tax basis, such excess distributions (including such constructive distributions) will constitute taxable income to the Company. Such taxable income will normally be characterized as a capital gain, and if the Company's interest in the Operating Partnership has been held for longer than the long-term capital gain holding period (currently one year), such distributions and constructive distributions will constitute long-term capital gain. SERVICES COMPANY A portion of the cash to be used by the Operating Partnership to fund distributions to partners, and in turn to fund distributions by the Company to its stockholders, is expected to come from the Services Company, through dividends on non-voting preferred stock to be held by the Operating Partnership. The Services Company will not qualify as a REIT and will pay federal, state and local income taxes on its taxable income at normal corporate rates. The federal, state and local income taxes that the Services Company is required to pay will reduce the cash available for distribution by the Company to its stockholders. As described above, the value of the Company's indirect interest in the securities of the Services Company held by the Operating Partnership cannot exceed 5% of the value of the Company's total assets at the end of any 133 calendar quarter in which the Company acquires such securities or increases its interest in such securities (including as a result of the Company increasing its interest in the Operating Partnership). See "--Taxation of the Company--Asset Tests." This limitation may restrict the ability of the Services Company to increase the size of its business unless the value of the assets of the Company or the Operating Partnership is increasing at a commensurate rate. OTHER TAX CONSEQUENCES The Company and its stockholders may be subject to state or local taxation in various state or local jurisdictions, including those in which it or they transact business or reside. The state and local tax treatment of the Company and its stockholders may not conform to the federal income tax consequences discussed above. Consequently, prospective stockholders should consult their own tax advisors regarding the effect of state and local tax laws on an investment in the Company. 134 ERISA CONSIDERATIONS The following is a summary of material considerations arising under ERISA and the prohibited transaction provisions of Section 4975 of the Code that may be relevant to a prospective purchaser (including, with respect to the discussion contained in "--Status of the Company, the Operating Partnership and the Partnerships under ERISA," to a prospective purchaser that is not an employee benefit plan, another tax-qualified retirement plan or an individual retirement account ("IRA")). This discussion does not propose to deal with all aspects of ERISA or Section 4975 of the Code or, to the extent not preempted, state law that may be relevant to particular employee benefit plan shareholders (including plans subject to Title I of ERISA, other employee benefit plans and IRAs subject to the prohibited transaction provisions of Section 4975 of the Code, and governmental plans and church plans that are exempt from ERISA and Section 4975 of the Code but that may be subject to state law requirements) in light of their particular circumstances. A FIDUCIARY MAKING THE DECISION TO INVEST IN SHARES OF COMMON STOCK ON BEHALF OF A PROSPECTIVE PURCHASER WHICH IS AN ERISA PLAN, A TAX-QUALIFIED RETIREMENT PLAN, AN IRA OR OTHER EMPLOYEE BENEFIT PLAN IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE CODE, AND (TO THE EXTENT NOT PRE-EMPTED) STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP OR SALE OF SHARES OF COMMON STOCK BY SUCH PLAN OR IRA. Plans should also consider the entire discussion under the heading "Federal Income Tax Considerations," as material contained therein is relevant to any decision by an employee benefit plan, tax-qualified retirement plan or IRA to purchase the Common Stock. EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS AND IRAS Each fiduciary of an employee benefit plan subject to Title I of ERISA (an "ERISA Plan") should carefully consider whether an investment in shares of Common Stock is consistent with its fiduciary responsibilities under ERISA. In particular, the fiduciary requirements of Part 4 of Title I of ERISA require (i) an ERISA Plan's investments to be prudent and in the best interests of the ERISA Plan, its participants and beneficiaries, (ii) an ERISA Plan's investments to be diversified in order to reduce the risk of large losses, unless it is clearly prudent not to do so, (iii) an ERISA Plan's investments to be authorized under ERISA and the terms of the governing documents of the ERISA Plan and (iv) that the fiduciary not cause the ERISA Plan to enter into transactions prohibited under Section 406 of ERISA. In determining whether an investment in shares of Common Stock is prudent for purposes of ERISA, the appropriate fiduciary of an ERISA Plan should consider all of the facts and circumstances, including whether the investment is reasonably designed, as a part of the ERISA Plan's portfolio for which the fiduciary has investment responsibility, to meet the objectives of the ERISA Plan, taking into consideration the risk of loss and opportunity for gain (or other return) from the investment, the diversification, cash flow and funding requirements of the ERISA Plan, and the liquidity and current return of the ERISA Plan's portfolio. A fiduciary should also take into account the nature of the Company's business, the length of the Company's operating history and other matters described under "Risk Factors." The fiduciary of an IRA or of an employee benefit plan not subject to Title I of ERISA because it is a governmental or church plan or because it does not cover common law employees (a "Non-ERISA Plan") should consider that such an IRA or Non-ERISA Plan may only make investments that are authorized by the appropriate governing documents, not prohibited under Section 4975 of the Code and permitted under applicable state law. STATUS OF THE COMPANY, THE OPERATING PARTNERSHIP AND THE PARTNERSHIPS UNDER ERISA A prohibited transaction may occur if the assets of the Company are deemed to be assets of the investing Plans and disqualified persons deal with such assets. In certain circumstances where a Plan holds an interest in an entity, the assets of the entity are deemed to be Plan assets (the "look-through rule"). Under such circumstances, any person that exercises authority or control with respect to the management or disposition of 135 such assets is a Plan fiduciary. Plan assets are not defined in ERISA or the Code, but the United States Department of Labor has issued regulations, effective March 13, 1987 (the "Regulations"), that outline the circumstances under which a Plan's interest in an entity will be subject to the look-through rule. The Regulations apply only to the purchase by a Plan of an "equity interest" in an entity, such as common stock of a REIT. However, the Regulations provide an exception to the look-through rule for equity interests that are "publicly- offered securities." Under the Regulations, a "publicly-offered security" is a security that is (i) freely transferable, (ii) part of a class of securities that is widely- held and (iii) either (a) part of a class of securities that is registered under section 12(b) or 12(g) of the Exchange Act or (b) sold to a Plan as part of an offering of securities to the public pursuant to an effective registration statement under the Securities Act and the class of securities of which such security is a part is registered under the Exchange Act within 120 days (or such longer period allowed by the Securities and Exchange Commission) after the end of the fiscal year of the issuer during which the offering of such securities to the public occurred. Whether a security is considered "freely transferable" depends on the facts and circumstances of each case. Generally, if the security is part of an offering in which the minimum investment is $10,000 or less, any restriction on or prohibition against any transfer or assignment of such security for the purposes of preventing a termination or reclassification of the entity for federal or state tax purposes will not of itself prevent the security from being considered freely transferable. A class of securities is considered "widely-held" if it is a class of securities that is owned by 100 or more investors independent of the issuer and of one another. The Company anticipates that the Common Stock will meet the criteria of the publicly-offered securities exception to the look-through rule. First, the Company anticipates that the Common Stock will be considered to be freely transferable, as the minimum investment will be less than $10,000 and the only restrictions upon its transfer are those required under federal tax laws to maintain the Company's status as a REIT. Second, the Company believes that the Common Stock will be held by 100 or more investors and that at least 100 or more of these investors will be independent of the Company and of one another. Third, the Common Stock will be part of an offering of securities to the public pursuant to an effective registration statement under the Securities Act and will be registered under the Exchange Act within 120 days after the end of the fiscal year of the Company during which the offering of such securities to the public occurs. Accordingly, the Company believes that if a Plan purchases the Common Stock, the Company's assets should not be deemed to be Plan assets and, therefore, that any person who exercises authority or control with respect to the Company's assets should not be a Plan fiduciary. 136 UNDERWRITING The Underwriters named below (the "Underwriters"), for whom Prudential Securities Incorporated ("Prudential Securities"), Donaldson, Lufkin & Jenrette Securities Corporation, J.P. Morgan Securities Inc. and Smith Barney Inc. are acting as representatives ("Representatives"), have severally agreed, subject to the terms and conditions contained in the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock set forth below opposite their respective names:
NUMBER OF UNDERWRITER SHARES ----------- --------- Prudential Securities Incorporated................................ Donaldson, Lufkin & Jenrette Securities Corporation............... J.P. Morgan Securities Inc........................................ Smith Barney Inc.................................................. --------- Total........................................................... 9,260,000 =========
The Company is obligated to sell, and the Underwriters are obligated to purchase, all of the shares of Common Stock offered hereby if any are purchased. The Underwriters, through their Representatives, have advised the Company that they propose to offer the shares of Common Stock to the public initially at the public offering price set forth on the cover page of this Prospectus; that the Underwriters may allow to selected dealers a concession of $ per share, and that such dealers may re-allow a concession of $ per share to certain other dealers. After the initial public offering, the offering price and the concessions may be changed by the Representatives. The Company has granted the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to 1,389,000 additional shares of Common Stock at the initial public offering price, less the underwriting discounts and commissions, as set forth on the cover page of this Prospectus. The Underwriters may exercise such option solely for the purpose of covering over-allotments incurred in the sale of shares of Common Stock offered hereby. To the extent such option to purchase is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of Common Stock as the number set forth next to such Underwriter's name in the preceding table bears to 9,260,000. The Company has agreed to indemnify the several Underwriters against or to contribute to losses arising out of certain liabilities, including liabilities under the Securities Act of 1933, as amended. The Representatives of the Underwriters have informed the Company that the Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. Each of the Continuing Investors has agreed not to, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer to sell, pledge, grant of any option to purchase or other sale or disposition) of any Units or shares of Common Stock or other capital stock of the Company, or any securities convertible or exercisable or exchangeable for any Units or shares of Common Stock or other capital stock for a period of two years from the date of this Prospectus, and the Company has agreed not to offer, sell, offer to sell, contract to sell, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any (other than pursuant to the Stock Incentive Plan) shares of Common Stock or other capital stock of the Company, or any securities convertible or exercisable or exchangeable for any Units or shares of Common Stock or other capital stock of the Company, for a period of one year from the date of this Prospectus, in each case without the prior written consent of Prudential Securities, on behalf of the Underwriters, subject to certain limited exceptions. Notwithstanding the foregoing, the Units received by certain of the Continuing Investors in connection with the Formation Transactions will be pledged to secure their indemnification obligations pursuant to an agreement with the Company. See "Formation and Structure of the Company." 137 The shares of Common Stock have been approved for listing on the NYSE, subject to official notice of issuance. In order to meet one of the requirements for listing the shares of Common Stock on the NYSE, the Underwriters have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial holders. Prior to the Offering, there has been no public market for the Common Stock. The initial public offering price will be determined through negotiations between the Company and the Representatives. Among the factors to be considered in such determination were prevailing market conditions, dividend yields and financial characteristics of publicly traded REITs that the Company and the Representatives believe to be comparable to the Company, the present state of the Company's financial and business operations, the Company's management, estimates of the business and earnings potential of the Company and the prospects for the industry in which the Company operates. Upon consummation of the Offering, Prudential Securities will receive approximately $ of the net proceeds from the Offering as repayment of indebtedness, fees and related interest expected to be accrued and unpaid as of such date. See "Use of Proceeds." The Prudential Insurance Company of America, an affiliate of Prudential Securities, is a tenant in one of the Office Properties located in Kilroy Long Beach, leasing approximately 2,189 square feet of space. The Company will pay to the Representatives advisory fees equal, in the aggregate, to 0.75% of the gross proceeds received by the Company in the Offering, for investment banking services relating to, among other things, the structuring of the Formation Transactions and the Offering. LEGAL MATTERS Certain legal matters in connection with the Offering will be passed upon for the Company by Latham & Watkins, Los Angeles, California. Legal matters relating to Maryland law, including the validity of the issuance of the shares of Common Stock offered hereby, will be passed upon for the Company by Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland. Certain legal matters will be passed upon for the Underwriters by Kaye, Scholer, Fierman, Hays & Handler, LLP, New York, New York. In addition, the description of federal income tax consequences contained in this Prospectus under "Federal Income Tax Consequences" is, to the extent that it constitutes matters of law, summaries of legal matters or legal conclusions, the opinion of Latham & Watkins, special tax counsel to the Company as to the material federal income tax consequences of the Offering. EXPERTS The financial statements of Kilroy Realty Corporation as of September 30, 1996, the Kilroy Group as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995, and the Acquisition Properties for the year ended December 31, 1995 included in this Prospectus and the related financial statement schedule included elsewhere in the Registration Statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and elsewhere in the registration statement, and are included in reliance on the reports of such firm, given upon their authority as experts in auditing and accounting. In addition, certain statistical information provided under the captions "Prospectus Summary--The Company's Southern California Submarkets" and "Business and Properties--The Company's Southern California Submarkets" has been prepared by Robert Charles Lesser & Co., and is included herein in reliance upon the authority of such firm as expert in, among other things, real estate consulting and urban economics. 138 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), 450 Fifth Street N.W., Washington, D.C. 20599, a Registration Statement (of which this Prospectus is a part) on Form S-11 under the Securities Act and the rules and regulations promulgated thereunder with respect to the securities offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and financial statements thereto, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. Statements contained in this Prospectus as to the content of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference and the exhibits and schedules hereto. For further information regarding the Company and the Common Stock offered hereby, reference is hereby made to the Registration Statement and such exhibits and schedules, copies of which may be examined without charge at, or copies obtained upon payment of prescribed fees from, the Public Reference Section of the Commission at Room 1204, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: 7 World Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, or by way of the Commission's Internet address, http://www.sec.gov. Following the consummation of the Offering, the Company will be required to file reports and other information with the Commission pursuant to the Exchange Act. In addition to applicable legal or New York Stock Exchange requirements, if any, the Company intends to furnish its stockholders with annual reports containing consolidated audited financial statements with a report thereon by the Company's independent certified public accountants and with quarterly reports containing unaudited condensed consolidated financial statements for each of the first three quarters of each fiscal year. 139 GLOSSARY "Acquisition Properties" means the two office buildings and related assets that comprise Kilroy Long Beach Phase I and the Thousand Oaks Office Property that are expected to be acquired by the Company concurrently with the completion of the Offering, including, with respect to Kilroy Long Beach Phase I, the ground lease with respect thereto. "ADA" means the Americans with Disabilities Act, enacted on July 26, 1990. "Audit Committee" means the audit committee of the Board of Directors. "base rent" means gross rent excluding payments by tenants on account of real estate taxes, operating expenses and utility expenses. "Class A office buildings" means office buildings that have excellent location and access, attract major corporate tenants, have high quality finishes, are well maintained, professionally managed and are either new buildings or buildings that are competitive with new buildings. "Code" means the Internal Revenue Code of 1986, as amended. "Commission" means the Securities and Exchange Commission. "Common Stock" means common stock, par value $.01 per share, of the Company. "Company" means Kilroy Realty Corporation and its subsidiaries on a consolidated basis, including the Operating Partnership and the Services Company. "Continuing Investors" shall mean the persons and entities receiving Units in connection with the Formation Transactions. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Executive Committee" means the executive committee of the Board of Directors. "Executive Compensation Committee" means the compensation committee of the Board of Directors. "Formation Transactions" means those transactions relating to the organization of the Company and its subsidiaries, including the transfer of the Properties and other assets to the Company, as described under "Formation and Structure of the Company--Formation Transactions." "Funds from Operations" means, in accordance with the resolution adopted by the Board of Governors of NAREIT, net income (loss) 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 after adjustments for unconsolidated partnerships and joint ventures. "Independent Director" means a director of the Company who is not an employee or officer of the Company or a subsidiary or division thereof, or a relative of a principal executive officer, and who is not an individual member of an organization acting as advisor, consultant or legal counsel, receiving compensation on a continuing basis from the Company in addition to director's fees. "Industrial Properties" means the nine industrial properties in which the Company will have an ownership interest upon completion of the Offering. 140 "IRAs" means individual retirement accounts. "IRS" means the Internal Revenue Service. "KI" means Kilroy Industries, a California corporation, operating the Company's business prior to the consummation of the Offering and the Formation Transactions. "Kilroy Group" means KI and the partnerships and trusts affiliated with KI that prior to the Offering owned the Properties and other assets being transferred to the Company in the Formation Transactions. "Kilroy Realty Corporation" means Kilroy Realty Corporation, a Maryland corporation with its principal office at 2250 East Imperial Highway, Suite 1200, El Segundo, California 90245. "LAX" means Los Angeles International Airport. "look-through rule" means the ERISA rule providing that in certain circumstances where a Plan holds an interest in an entity, the assets of the entity are deemed to be the Plan's assets. "MGCL" means the Maryland General Corporation Law. "Mortgage Loan" means the $75 million mortgage loan, the closing of which is a condition to the completion of the Offering, to be obtained by the Company concurrently with the consummation of the Offering. "NAREIT" means the National Association of Real Estate Investment Trusts. "net absorption" means with respect to a specified area the net increase in occupied rentable space. "NYSE" means the New York Stock Exchange, Inc. "Offering" means the initial public offering of shares of Common Stock of Kilroy Realty Corporation pursuant to and as described in this Prospectus. "Office Properties" means the ten Class A office properties in which the Company will have an ownership interest upon completion of the Offering, including consummation of the formation transactions and acquisition of the Acquisition Properties. "Omnibus Agreement" means the agreement by and among each of the members of the Continuing Investors and the Company pursuant to which the Continuing Investors will contribute their interests in the Properties (other than the Acquisition Properties), and certain other related assets, in exchange for Units representing limited partnership interests in the Operating Partnership. "Operating Partnership" means Kilroy Realty, L.P., a Delaware limited partnership with its office at 2250 East Imperial Highway, Suite 1200, El Segundo, California 90245, organized in the Formation Transactions and through which all of the Company's interests in the Properties will be held and real estate activities will be conducted. "Ownership Limit" means the restriction contained in the Company's Articles of Incorporation providing that, subject to certain exceptions, no holder may own, or be deemed to own by virtue of the constructive ownership provisions of the Code, more than 8.0% (by number or value, whichever is more restrictive) of the outstanding shares of Common Stock. "Partnership Agreement" means the Agreement of Limited Partnership of the Operating Partnership, as amended from time to time. "Partnerships" means those corporations, general and limited partnerships and trusts affiliated with Kilroy Industries whose Properties are being acquired by the Operating Partnership. 141 "Plans" means employee benefit plans and IRAs. "Preferred Stock" means shares of preferred stock, par value $.01 per share, of the Company. "Properties" means the assets owned by the Partnerships and contributed to the Company by the Continuing Investors in connection with the Formation Transactions, including, but not limited to, real property and the Acquisition Properties. "Prospectus" means this prospectus relating to the sale of up to 8,750,000 shares of Common Stock of the Company in the Offering, plus the 1,312,500 shares subject to the Underwriters' over-allotment option. "Regulations" means regulations issued by the United States Department of Labor defining "plan assets." "REIT" means a real estate investment trust as defined in Section 856 of the Code which meets the requirements for qualification as a REIT described in Sections 856 through 860 of the Code. "Related Party Tenant" means a tenant of a REIT in which the REIT, or an owner of 10% or more of the REIT, actually or constructively owns a 10% or greater ownership interest. "rentable square feet" means a building's usable area plus common areas and penetrations, expressed collectively in square feet which are allocated pro rata to tenants. "Representatives" means Prudential Securities Incorporated and Donaldson, Lufkin & Jenrette Securities Corporation and Smith Barney Inc., as representatives of the Underwriters. "Rule 144" means Rule 144 promulgated under the Securities Act. "Securities Act" means the Securities Act of 1933, as amended. "Services Company" means Kilroy Services, Inc., a Maryland corporation with its principal office at 2250 East Imperial Highway, Suite , El Segundo, CA 90245, which will perform certain development services, and the economic value of which will be owned 95% by the Operating Partnership and 5% collectively by John B. Kilroy, Sr. and John B. Kilroy, Jr. "Stock Incentive Plan" means the Company's stock incentive plan, as further described in this Prospectus under the caption entitled "Management--Stock Incentive Plan." "Thousand Oaks Office Property" means the office building and related realty located at 2829 Townsgate Road, Thousand Oaks, California. "Treasury Regulations" means regulations of the U.S. Department of Treasury under the Code. "Underwriters" means each of the Underwriters named in the section of this Prospectus entitled "Underwriting." "Underwriting Agreement" means the Underwriting Agreement between the Company and the Representatives relating to the purchase of the Common Stock offered hereby. "Units" means limited and general partnership interests representing an ownership interest in the Operating Partnership. 142 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Kilroy Realty Corporation Pro Forma (Unaudited): Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1996...... F-2 Notes to Pro Forma Condensed Consolidated Balance Sheet................. F-3 Pro Forma Condensed Consolidated Statements of Operations for the six months ended June 30, 1996 and the Year Ended December 31, 1995..................... F-6 Notes to Pro Forma Condensed Consolidated Statements of Operations...... F-7 Historical: Independent Auditors' Report............................................ F-8 Balance Sheet as of September 30, 1996.................................. F-9 Notes to Balance Sheet.................................................. F-10 Kilroy Group (Predecessor Affiliates) Independent Auditors' Report............................................ F-12 Combined Balance Sheets as of June 30, 1996 (unaudited), and December 31, 1995 and 1994...................................................... F-13 Combined Statements of Operations for the six months ended June 30, 1996 and 1995 (unaudited) and the three years Ended December 31, 1995....... F-14 Combined Statements of Accumulated Deficit for the six months ended June 30, 1996 (unaudited) and for the three years Ended December 31, 1995... F-15 Combined Statements of Cash Flows for the six months ended June 30, 1996 and 1995 (unaudited) and the three years Ended December 31, 1995....... F-16 Notes to Combined Financial Statements.................................. F-17 Acquisition Properties Independent Auditors' Report............................................ F-26 Combined Historical Summaries of Certain Revenues and Certain Expenses for the six months ended June 30, 1996 (unaudited) and for the year ended December 31, 1995................................................ F-27 Notes to Combined Historical Summaries of Certain Revenues and Certain Expenses............................................................... F-28
F-1 KILROY REALTY CORPORATION PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 1996 (UNAUDITED) (IN THOUSANDS) This unaudited pro forma condensed consolidated balance sheet is presented as if (i) the transfer of the Properties and business and operations of the Kilroy Group pursuant to the Formation Transactions and (ii) the Offering, the Mortgage Loan and use of proceeds to repay indebtedness and purchase the Acquisition Properties had each occurred on June 30, 1996. Such pro forma information is based upon the historical balance sheet of the Kilroy Group at June 30, 1996. The acquisition of the Properties (other than the Acquisition Properties, which will be recorded at the Company's cost) and business and operations of the Kilroy Group will be recorded by the Company at the historical cost reflected in the Kilroy Group financial statements. This pro forma condensed balance sheet should be read in conjunction with the pro forma condensed statement of operations of the Company and the historical combined financial statements and notes thereto of the Kilroy Group and the historical combined financial statements of the Acquisition Properties included elsewhere in this Prospectus. See "The Company" and "Use of Proceeds." The unaudited pro forma condensed balance sheet is not necessarily indicative of what the actual financial position of the Company would have been assuming the Company had been formed and the consummation of the Formation Transactions, the Offering and the Mortgage Loan and the use of proceeds thereof, and the acquisition of the Acquisition Properties at June 30, 1996, nor does it purport to represent the future financial position of the Company.
JUNE 30, 1996 --------------------------------------- KILROY REALTY KILROY REALTY KILROY CORPORATION CORPORATION GROUP PRO FORMA PRO FORMA HISTORICAL HISTORICAL ADJUSTMENTS CONSOLIDATED ------------- ---------- ----------- ------------- (A) (B) ASSETS Rental properties, net of accumulated depreciation and amortization........... $ -- $110,320 $ 36,300 (C) $146,620 Cash and cash equivalents............ 1 942 (D) 943 Tenant receivables, net.................... 3,892 3,892 Deferred charges and other assets, net of accumulated amortization........... 7,613 (66)(E) 7,547 --------- -------- --------- -------- Total................ $ 1 $121,825 $ 37,176 $159,002 ========= ======== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Liabilities: Debt................... $ -- $204,601 $(129,601)(F) $ 75,000 Accounts payable and accrued expenses...... 2,029 2,029 Accrued construction costs................. 804 (804)(G) Accrued property taxes................. 220 220 Accrued interest payable............... 1,380 (1,380)(H) Rent received in advance and tenant security deposits..... 8,074 8,074 --------- -------- --------- -------- Total liabilities.... 217,108 (131,785) 85,323 --------- -------- --------- -------- Minority interest....... 11,199 (I) 11,199 --------- -------- Stockholders' equity (deficit): Common stock........... 93 (J) 93 Additional paid-in capital............... 1 168,868 (J) 62,387 (11,199)(I) (95,283)(K) Accumulated deficit.... (95,283) 95,283 (K) --------- -------- --------- -------- Total stockholders' equity (deficit).... 1 (95,283) 157,762 62,480 --------- -------- --------- -------- Total................ $ 1 $121,825 $ 37,176 $159,002 ========= ======== ========= ========
F-2 KILROY REALTY CORPORATION NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) PRO FORMA ADJUSTMENTS These pro forma adjustments are to reflect the Offering, the Formation Transactions, including the transfer of the Properties, the purchase of the Acquisition Properties and the Mortgage Loan and the use of proceeds thereof. (A) Reflects Kilroy Realty Corporation audited balance sheet as of September 30, 1996. (B) Reflects Kilroy Group unaudited historical combined balance sheet as of June 30, 1996. (C) Reflects the cost of the Acquisition Properties. (D) The adjustment to pro forma cash and cash equivalents was determined as follows: . Net proceeds from the Offering after underwriting discount and estimated issuance costs of $15,464............................ $ 169,736 . Net proceeds from the 8.72% Mortgage Loan after estimated issuance cost of $750.......................................... 74,250 --------- . Net proceeds................................................... 243,986 . Repayment of mortgage debts ................................... (204,601) . Purchase of Acquisition Properties............................. (36,300) . Payment of accrued interest.................................... (643) . Payment of Debt Issuance Costs................................. (1,500) --------- Net increase in cash and cash equivalents........................ $ 942 ========= (E)Reflects the net decrease as follows: . Issuance costs of the Mortgage Financing and Line of Credit.... $ 2,250 . Write-off of loan costs relating to repayment of mortgage debt............................................................ (2,316) --------- Net decrease in deferred charge.................................. $ (66) ========= (F) Reflects the net decrease as follows: . Issuance of $75,000 aggregate principal amount of 8.72% Mortgage Loan payable principal and interest monthly only until maturity in 2003............................................... $ 75,000 . Repayment of mortgage debt from net proceeds of the Offering and the Mortgage Loan.......................................... (204,601) --------- Net decrease in mortgage debt.................................... $(129,601) =========
(G) Amount represents a liability for construction costs which will not be assumed by Kilroy Realty Corporation. (H) Amount represents accrued interest which will not be assumed by Kilroy Realty Corporation ($737) and accrued interest paid ($643) in connection with the repayment of mortgage debt. F-3 KILROY REALTY CORPORATION NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)--(CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (I) Reflects the estimated minority interest of the Continuing Investors in the Operating Partnership computed as follows: Pro forma total assets................................................ $159,001 Pro forma total liabilities........................................... (85,323) -------- Pro forma net book value of Operating Partnership..................... $ 73,678 ======== Continuing Investors minority interest at 15.2%....................... $ 11,199 ========
(J) Reflects the issuance of 9,260,000 shares of Common Stock, par value $.01 per share, at an assumed initial Offering price of $20.00 per share. The following table sets forth the adjustments to additional paid-in capital: . Net proceeds from the Offering of Common Stock after underwriting discounts and commissions and estimated issuance costs of $15,464................................................ $169,736 Less: par value of Common Stock of 9,260,000 shares at $.01 par per share....................................................... (93) . Accrued interest of $737 which will not be assumed by Kilroy Realty Corporation.............................................. 737 . Write-off of loan costs relating to repayment of mortgage debt.. (2,316) . Liability for construction costs which will not be assumed by Kilroy Realty Corporation....................................... 804 -------- Net adjustment to additional paid-in capital...................... $168,868 ========
(K) Reflects the reclassification of the accumulated deficit. F-4 KILROY REALTY CORPORATION PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1996 AND YEAR ENDED DECEMBER 31, 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The unaudited pro forma condensed consolidated statements of operations are presented as if (i) the transfer of the Properties (other than the Acquisition Properties) and business and operations of the Kilroy Group pursuant to the Formation Transactions and (ii) the Offering and the Mortgage Loan, and the use of proceeds thereof to repay indebtedness and purchase the Acquisition Properties, each had occurred on January 1, 1995. Such pro forma information is based upon the historical results of operations of the Kilroy Group for the six months ended June 30, 1996, and the year ended December 31, 1995. This pro forma condensed consolidated statements of operations should be read in conjunction with the pro forma condensed consolidated balance sheet of the Company and the historical combined financial statements and notes thereto of the Kilroy Group and the Combined Historical Summaries of Certain Revenues and Certain Expenses of the Acquisition Properties and notes thereto included elsewhere in this Prospectus. Reference is also made to "The Company" and "Use of Proceeds." The unaudited pro forma condensed consolidated statement of operations is not necessarily indicative of what the actual results of operations of the Company would have been assuming the Company had been formed and the consummation of the Formation Transactions, the Offering and the Mortgage Loan and the use of proceeds thereof, and the acquisition of the Acquisition Properties at January 1, 1995, nor does it purport to represent the results of operations of future periods of the Company. F-5 KILROY REALTY CORPORATION PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, 1996 -------------------------------------------------------------- KILROY COMPANY PRO GROUP ACQUISITION PRO FORMA PRO FORMA FORMA HISTORICAL PROPERTIES SUBSIDIARY(B) ADJUSTMENTS CONSOLIDATED ---------- ----------- ------------- ----------- ------------ REVENUES: Rental income.... $14,837 $2,663 $ (241)A $ 17,259 Tenant reimbursements... 1,658 323 1,981 Parking.......... 800 800 Development and management fees.. 458 $(458)B Lease termination fees............. Sale of air rights........... Other income..... 58 203 261 ------- ------ ----- ------- --------- Total revenues.. 17,811 3,189 (458) (241) 20,301 ------- ------ ----- ------- --------- EXPENSES: Property expenses......... 2,719 552 (624)D 2,647 Real estate taxes............ 518 169 39 E 726 General and administrative... 876 116 1,207 F 2,199 Ground lease..... 230 169 399 Development and management expenses......... 485 (485)B Interest expense.......... 9,422 (6,115)G 3,307 Depreciation and amortization..... 4,051 520(J) 4,571 ------- ------ ----- ------- --------- Total expenses.. 18,301 1,526 (485) (5,493) 13,849 ------- ------ ----- ------- --------- Income (loss) from operations before equity in income of subsidiaries and minority interest......... (490) 1,663 27 5,252 6,452 Equity in income of subsidiary.... (36)B (36) Minority interest......... (975)H (975) ------- ------ ----- ------- --------- Net income (loss) $ (490) $1,663 $ 27 $ 4,241 $ 5,441 ======= ====== ===== ======= ========= Average number of shares outstanding...... 9,260,000 ========= Net income per common share(I).. $ 0.59 ========= YEAR ENDED DECEMBER 31, 1995 --------------------------------------------------------------- KILROY COMPANY PRO GROUP ACQUISITION PRO FORMA PRO FORMA FORMA HISTORICAL PROPERTIES SUBSIDIARY(H) ADJUSTMENTS CONSOLIDATED ---------- ------------ ------------- ------------ ------------ REVENUES: Rental income.... $ 28,285 $5,082 $ (483)A $ 32,884 Tenant reimbursements... 2,746 688 3,434 Parking.......... 1,447 1,447 Development and management fees.. 1,156 $(1,156)B Lease termination fees............. 100 100 Sale of air rights........... 4,456 (4,456)C Other income..... 295 408 703 ---------- ------------ ------------- ------------ ------------ Total revenues.. 38,485 6,178 (1,156) (4,939) 38,568 ---------- ------------ ------------- ------------ ------------ EXPENSES: Property expenses......... 5,376 1,352 (1,389)D 5,339 Real estate taxes............ 1,139 286 78 E 1,503 General and administrative... 2,050 244 2,095 F 4,389 Ground lease..... 475 338 813 Development and management expenses......... 737 (737)B Interest expense.......... 21,529 (14,916)G 6,613 Depreciation and amortization..... 8,313 1,039(J) 9,352 ---------- ------------ ------------- ------------ ------------ Total expenses.. 39,619 3,259 (737) (14,132) 28,009 ---------- ------------ ------------- ------------ ------------ Income (loss) from operations before equity in income of subsidiaries and minority interest......... (1,134) 2,919 (419) 9,193 10,559 Equity in income of subsidiary.... 136 B 136 Minority interest......... (1,625)H (1,625) ---------- ------------ ------------- ------------ ------------ Net income (loss) $(1,134) $2,919 $ (419) $ 7,704 $ 9,070 ========== ============ ============= ============ ============ Average number of shares outstanding...... 9,260,000 ============ Net income per common share(I).. $ 0.98 ============
F-6 KILROY REALTY CORPORATION NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS) (A) Represents the elimination of rental income received from Kilroy Industries. (B) Represents the elimination of the Services Company's gross revenues and expenses and the recording of the equity in income of the Services Company net of income taxes.
SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, 1996 1995 -------------- ------------ Development and management fees................ $458 $1,156 Development and management expenses............ (485) (737) Elimination of nonrecurring Services Company expenses...................................... 80 ---- ------ 53 419 Elimination of management fees earned on one of the Acquisition Properties.................... 91 181 ---- ------ (38) 238 Income tax expense............................. 95 ---- ------ Estimated service company net income (loss).... (38) 143 ---- ------ At 95% economic interest....................... $(36) $ 136 ==== ======
(C) Represents the elimination of nonrecurring sale of air rights. (D) Represents the elimination of management fees charged to the Kilroy Group by Kilroy Industries. (E) Represents incremental property taxes on the Acquisition Properties due to change of ownership. (F) Estimated incremental general and administrative expenses to be incurred as a public company. (G) Reflects reduction of interest expenses associated with the mortgage debts assumed to be repaid using net proceeds from the Offering:
SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, 1996 1995 -------------- ------------ . Interest expense on the Mortgage Loan (fixed interest rate of 8.72% on $75,000).......... $ 3,253 $ 6,506 . Amortization of the issuance costs on the Mortgage Loan............................... 54 107 . Interest expense on debt assumed to be retired..................................... (9,422) (21,529) ------- -------- Net interest expense reduction.............. $(6,115) $(14,916) ======= ========
(H) Represents the income allocated to the estimated 15.2% minority interest (Units) in the Operating Partnership owned by Continuing Investors. (I) Pro forma net income per share of Common Stock is based upon 9,260,000 shares of Common Stock assumed to be outstanding in connection with the Offering. (J) Represents depreciation expense calculated based on the cost of the Aquisition Properties depreciated on the straight-line method over a 35 year life. F-7 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Kilroy Realty Corporation: We have audited the accompanying balance sheet of Kilroy Realty Corporation (the "Company") as of September 30, 1996. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such balance sheet presents fairly, in all material respects, the financial position of the Company at September 30, 1996 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Los Angeles, California October 25, 1996 F-8 KILROY REALTY CORPORATION BALANCE SHEET SEPTEMBER 30, 1996 ASSETS Cash............................................................... $1,000 ====== STOCKHOLDER'S EQUITY Common Stock, $.01 par value, 10,000,000 shares authorized; 50 shares issued and outstanding.................................. $1,000 ======
See notes to balance sheet. F-9 KILROY REALTY CORPORATION NOTES TO BALANCE SHEET SEPTEMBER 30, 1996 1. FORMATION OF THE COMPANY Kilroy Realty Corporation (the "Company") was incorporated in Maryland on September 13, 1996. The Company will file a Registration Statement on Form S- 11 with the Securities and Exchange Commission with respect to a proposed public offering (the "Offering") of 9,260,000 shares of Common Stock. The Company has been formed to succeed to the business of the Kilroy Group consisting of a portfolio of seven office properties and nine industrial properties (the "Kilroy Properties") and the real estate ownership, acquisition, development, leasing and management businesses historically conducted by Kilroy Industries and related partnerships. The Company's assets will be owned and controlled by, and all of its operations will be conducted through, Kilroy Realty, L.P. (the "Operating Partnership") and other subsidiaries. The Company will control, as the sole general partner, and will initially own an 84.8% interest in, the Operating Partnership. The Operating Partnership will conduct certain development services through Kilroy Services, Inc. ("Services Company"). The Operating Partnership will own 100% of the nonvoting preferred stock representing 95% of the economic interest in the Services Company. John B. Kilroy, Sr. and John B. Kilroy, Jr. together will own 100% of the voting common stock. The Operating Partnership's investment in the Services Company will be accounted for under the equity method. Prior to and simultaneous with the consummation of the Offering, the Company, the Operating Partnership and the Kilroy Group intend to engage in certain formation transactions (the "Formation Transactions") summarized as follows: (i) The Kilroy Group will contribute all of their interests in the Kilroy Properties to the Operating Partnership in exchange for units representing limited partnership interests in the Operating Partnership ("Units"); (ii) The Company will sell shares of Common Stock in the Offering and will contribute the net proceeds from the Offering (estimated to be approximately $169.7 million) to the Operating Partnership in exchange for Units in the Operating Partnership. The Operating Partnership will use substantially all of such net proceeds, together with the net proceeds of borrowings under the Mortgage Loan, discussed below, for the repayment of certain existing mortgage and loan indebtedness on the Kilroy Properties, and the acquisition of certain properties (the "Acquisition Properties"); (iii) The Operating Partnership will enter into an $75 million secured mortgage financing (the "Mortgage Loan"), which will be a recourse obligation of the Operating Partnership; and (iv) The Company will amend its charter and authorize 150,000,000 shares of Common Stock, $.01 par value per share, and 30,000,000 shares of Preferred Stock, par value $.01 per share. 2. INCOME TAXES It is the intent of the Company to qualify as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended. As a REIT, the Company generally will not be subject to federal income tax to the extent that it distributes at least 95% of its REIT taxable income to its stockholders. REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates. 3. OFFERING COSTS In connection with the Offering, affiliates have or will incur legal, accounting and related costs which will be reimbursed by the Company upon the consummation of the Offering. These costs will be deducted from the gross proceeds of the Offering. F-10 KILROY REALTY CORPORATION NOTES TO BALANCE SHEET--(CONTINUED) SEPTEMBER 30, 1996 4. STOCK INCENTIVE PLAN Prior to the consummation of the Offering, the Company intends to adopt and have its shareholders approve a stock incentive plan (the "Stock Incentive Plan"), for the purpose of attracting and retaining executive officers, directors and employees. A maximum of 1,000,000 shares of Common Stock (subject to adjustment) will be reserved by the Company for issuance under the Stock Option Plan. The exercise price may not be less than the market value of the Common Stock on the date of the grant. ****** F-11 INDEPENDENT AUDITORS' REPORT To the Partners of Kilroy Group: We have audited the accompanying combined balance sheets of Kilroy Group (described in Note 1) as of December 31, 1995 and 1994, and the related combined statements of operations, accumulated deficit, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the management of Kilroy Group. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform our audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Kilroy Group as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Los Angeles, California September 20, 1996 F-12 KILROY GROUP COMBINED BALANCE SHEETS JUNE 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994 (IN THOUSANDS)
DECEMBER 31, JUNE 30, -------------------- 1996 1995 1994 ----------- --------- --------- (UNAUDITED) ASSETS RENTAL PROPERTIES (Notes 1, 2, 4, 5, 6 and 9): Land....................................... $ 12,490 $ 12,490 $ 12,490 Buildings and improvements................. 180,620 179,254 178,230 -------- --------- --------- Total rental properties.................. 193,110 191,744 190,720 Accumulated depreciation and amortization.. (82,790) (79,251) (71,924) -------- --------- --------- Rental properties, net................... 110,320 112,493 118,796 TENANT RECEIVABLES, NET (Note 2)............. 3,892 3,642 3,590 DEFERRED CHARGES AND OTHER ASSETS, NET (Notes 2, 3 and 7).......................... 7,613 5,036 8,238 -------- --------- --------- TOTAL........................................ $121,825 $ 121,171 $ 130,624 ======== ========= ========= LIABILITIES AND ACCUMULATED DEFICIT LIABILITIES: Debt (Notes 4, 8 and 9).................... $204,601 $ 206,858 $ 222,038 Accounts payable and accrued expenses...... 2,029 2,409 3,210 Accrued construction costs (Note 2)........ 804 874 Accrued property taxes (Note 2)............ 220 1,399 1,563 Property tax refund payable to tenants (Note 3).................................. 1,500 Accrued interest payable (Note 4).......... 1,380 4,731 6,471 Rents received in advance and tenant security deposits......................... 8,074 8,030 8,105 -------- --------- --------- Total liabilities........................ 217,108 224,301 242,887 COMMITMENTS AND CONTINGENCIES (Note 6)....... ACCUMULATED DEFICIT (Note 1)................. (95,283) (103,130) (112,263) -------- --------- --------- TOTAL........................................ $121,825 $ 121,171 $ 130,624 ======== ========= =========
See notes to combined financial statements. F-13 KILROY GROUP COMBINED STATEMENTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (UNAUDITED) AND YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, DECEMBER 31, ---------------- ------------------------- 1996 1995 1995 1994 1993 ------- ------- ------- ------- ------- (UNAUDITED) REVENUES (Notes 2 and 5): Rental income (Note 7)........... $14,837 $13,949 $28,285 $27,518 $29,139 Tenant reimbursements (Note 3)... 1,658 1,275 2,746 1,549 3,507 Parking.......................... 800 727 1,447 1,216 1,205 Development and management fees.. 458 695 1,156 919 751 Sale of air rights (Note 2)...... 4,456 Other income (Note 3)............ 58 52 395 1,077 174 ------- ------- ------- ------- ------- Total revenues................. 17,811 16,698 38,485 32,279 34,776 ------- ------- ------- ------- ------- EXPENSES: Property expenses (Notes 2 and 7).............................. 2,719 2,571 5,376 4,674 4,320 Real estate taxes (Note 3)....... 518 670 1,139 (929) 2,500 General and administrative....... 876 881 2,050 2,406 1,033 Ground leases (Note 6)........... 230 216 475 591 772 Development and management expenses........................ 485 384 737 468 581 Interest expense................. 9,422 11,813 21,529 22,739 23,151 Depreciation and amortization.... 4,051 4,013 8,313 8,740 8,990 ------- ------- ------- ------- ------- Total expenses................. 18,301 20,548 39,619 38,689 41,347 ------- ------- ------- ------- ------- LOSS BEFORE EXTRAORDINARY GAINS... (490) (3,850) (1,134) (6,410) (6,571) EXTRAORDINARY GAINS (Note 4)......................... 12,887 15,267 1,847 ------- ------- ------- ------- ------- NET INCOME (LOSS)................. $12,397 $(3,850) $14,133 $(4,563) $(6,571) ======= ======= ======= ======= =======
See notes to combined financial statements. F-14 KILROY GROUP COMBINED STATEMENTS OF ACCUMULATED DEFICIT YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (IN THOUSANDS) BALANCE, JANUARY 1, 1993............................................. $(86,372) Deemed and actual distributions to partners, net of contributions.. (4,200) Net loss........................................................... (6,571) -------- BALANCE, DECEMBER 31, 1993........................................... (97,143) Deemed and actual distributions to partners, net of contributions.. (10,557) Net loss........................................................... (4,563) -------- BALANCE, DECEMBER 31, 1994........................................... (112,263) Deemed and actual distributions to partners, net of contributions.. (5,000) Net income......................................................... 14,133 -------- BALANCE, DECEMBER 31, 1995........................................... (103,130) Deemed and actual distributions to partners, net of contributions (Unaudited)....................................................... (4,550) Net income (Unaudited)............................................. 12,397 -------- BALANCE, JUNE 30, 1996 (Unaudited)................................... $(95,283) ========
See notes to combined financial statements. F-15 KILROY GROUP COMBINED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (UNAUDITED) AND YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, DECEMBER 31, ----------------- --------------------------- 1996 1995 1995 1994 1993 -------- ------- -------- -------- ------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............. $ 12,397 $(3,850) $ 14,133 $ (4,563) $(6,571) Adjustment to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization................ 4,051 4,013 8,313 8,740 8,990 Net (increase) decrease: Provision for bad debts..... 365 546 1,103 866 317 Extraordinary gains......... (12,887) (15,267) (1,847) Changes in assets and liabilities: Tenant receivables.......... (615) (520) (1,157) (565) (665) Deferred charges and other assets, net ............... (776) 3,132 2,218 (3,103) 219 Accounts payable and accrued expenses................... (380) (413) 73 713 (202) Accrued construction costs.. (70) 874 Accrued property taxes...... (1,178) (607) (164) (2,411) 1,677 Property tax refund payable to tenants................. (1,500) (1,500) 1,500 Accrued interest payable.... (64) 349 (473) 1,496 946 Rents received in advance and tenant security deposits................... 43 70 (949) 6,257 443 -------- ------- -------- -------- ------- Net cash provided by operating activities...... 886 1,220 7,204 7,083 5,154 -------- ------- -------- -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for rental properties................... (1,366) (434) (1,024) (1,642) (463) Reimbursement of tenant improvements................. 2,661 -------- ------- -------- -------- ------- Net cash (used in) provided by investing activities... (1,366) (434) (1,024) (1,642) 2,198 -------- ------- -------- -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds received from debt......................... 20,410 489 752 11,127 6,788 Principal payments on debt.... (15,380) (794) (1,932) (6,011) (9,940) Deemed and actual distributions to partners.... (4,550) (481) (5,000) (10,557) (4,200) -------- ------- -------- -------- ------- Net cash (used in) provided by financing activities... $ 480 $ (786) $ (6,180) $ (5,441) $(7,352) ======== ======= ======== ======== ======= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for interest................. $ 8,844 $11,385 $ 19,306 $ 21,152 $21,421 ======== ======= ======== ======== =======
See notes to combined financial statements. F-16 KILROY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (UNAUDITED) AND YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 1. ORGANIZATION AND BASIS OF PRESENTATION Organization--Kilroy Group (not a legal entity) consists of the combination of general and limited partnerships and trusts, all of which were under common control and management of Kilroy Industries ("KI"), its stockholders, or executive officers. The entities referred to collectively as Kilroy Group ("KG") are engaged in the acquisition, development, ownership and operation of 16 office and industrial properties (the "Kilroy Properties") located in California and Arizona. KI has historically provided acquisition, financing, construction and leasing services with respect to the Kilroy Properties. KI has also provided development services to third-party owners of properties for a fee. The names and locations of the Kilroy Properties are as follows:
PROPERTY LOCATION -------- -------- OFFICE: Kilroy Airport Center at El Segundo: 2240 E. Imperial Highway El Segundo, California 2250 E. Imperial Highway El Segundo, California 2260 E. Imperial Highway El Segundo, California Kilroy Airport Center Long Beach: 3750 Kilroy Airport Way Long Beach, California 3760 Kilroy Airport Way Long Beach, California 3780 Kilroy Airport Way Long Beach, California 185/181 S. Douglas Street El Segundo, California INDUSTRIAL: 2031 E. Mariposa Avenue El Segundo, California 3332 E. La Palma Avenue Anaheim, California 2260 E. El Segundo Boulevard El Segundo, California 2265 E. El Segundo Boulevard El Segundo, California 2270 E. El Segundo Boulevard El Segundo, California 5115 N. 27th Avenue Phoenix, Arizona 1000 E. Ball Road Anaheim, California 1230 S. Lewis Street Anaheim, California 12681/12691 Pala Drive Garden Grove, California
Basis of Presentation--The accompanying combined financial statements of KG have been presented on a combined basis because of the common ownership and management and because the entities are expected to be the subject of a business combination with Kilroy Realty Corporation (the "Company"), a recently formed Maryland corporation which is expected to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended. Concurrently with the business combination, the Company intends to raise capital through an initial public offering of Common Stock, a debt offering and a credit facility to be secured by mortgage liens on the properties. The business combination has been structured to allow the partners of KG to receive limited partnership interests in Kilroy Realty, L.P. (the "Operating Partnership"). The Company will be the managing general partner of the Operating Partnership, which will hold the operating assets and will manage the Kilroy Properties. Certain other properties and operations affiliated with KI have been excluded as they are not compatible with the investment purposes of the Company. Deemed and actual cash distributions to partners, F-17 KILROY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) net of contributions, included in the combined statements of accumulated deficit generally represent distributions of the cash flows generated by KG, and advances to partners and KI, as well as related-party transactions (see Note 7). Unaudited Financial Statements--The combined financial statements including the note disclosures included herein as of June 30, 1996 and for the six months ended June 30, 1996 and 1995 are unaudited; however, in the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the combined financial statements for these interim periods have been included. The results for the interim period ended June 30, 1996 are not necessarily indicative of the results to be obtained for the full fiscal year. 2. SIGNIFICANT ACCOUNTING POLICIES Rental Properties--Rental properties are stated at historical cost less accumulated depreciation, which, in the opinion of KG's management, is not in excess of net realizable value. Net realizable value does not purport to represent fair market value. Costs incurred for the acquisition, renovation and betterment of the properties are capitalized. Maintenance and repairs are charged to expense as incurred. The Company reviews the recoverability of real estate assets to determine if there has been any impairment. This assessment is performed based on the estimated undiscounted cash flows from operating activities compared with the carrying value of real estate assets. If the future cash flows (undiscounted and without interest charges) are less than the carrying value, a writedown would be recorded to reduce the related asset to its estimated fair value. Depreciation and Amortization--The cost of buildings and improvements are depreciated on the straight-line method over estimated useful lives, as follows: Buildings--25 to 40 years Tenant improvements--shorter of lease term or useful lives ranging from 5 to 20 years Deferred Charges--Deferred charges include deferred leasing costs and loan fees. Leasing costs include leasing commissions that are amortized on the straight-line basis over the initial lives of the leases, which range from 5 to 10 years. Deferred loan fees are amortized on a straight-line basis over the terms of the respective loans, which approximates the effective interest method. Accrued Property Taxes--As of June 30, 1996 and December 31, 1995 and 1994, $220,000, $534,000 and $621,000, respectively, of accrued property taxes were past due. Revenue Recognition and Tenant Receivables--Leases with tenants are accounted for as operating leases. Minimum annual rentals are recognized on a straight-line basis over the lease term. Unbilled deferred rent represents the amount that expected straight-line rental income exceeds rents currently due under the lease agreement. Total tenant receivables consists of the following amounts:
JUNE DECEMBER 31, 30, --------------- 1996 1995 1994 ------- ------- ------ (IN THOUSANDS) Tenant rent and reimbursements receivable.......... $ 3,500 $ 2,893 $1,774 Allowance for uncollectible rent................... (2,158) (1,793) (835) Unbilled deferred rent............................. 2,550 2,542 2,651 ------- ------- ------ Tenants receivables, net........................... $ 3,892 $ 3,642 $3,590 ======= ======= ======
F-18 KILROY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) Included in tenant rent and reimbursements receivable are additional rentals based on common area maintenance expenses and certain other expenses that are accrued in the period in which the related expenses are incurred. Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Parking--The Kilroy Airport Center--LAX includes parking facilities. KG records as revenue the gross parking receipts. KG contracts with parking management companies to operate the parking facilities, and such contract costs are included in property expenses. Development Services--Development and management fees represent fees earned by KG for supervision services provided for building development and management of nonowned properties. Fees are typically a percentage of total development costs plus reimbursement for certain expenses. Unreimbursed expenses are recorded as development expenses and include items such as wages, equipment rental, supplies, etc. Sale of Air Rights--In 1995, based on an agreement between KG and the California Transportation Commission, KG received $4,456,000, net of related expenses, for granting temporary construction and permanent air right easements over a portion of its property for the construction of a freeway on- ramp. In connection with this transaction, KG accrued $874,000 for the costs of restoration of the property after construction of the on-ramp. 3. DEFERRED CHARGES AND OTHER ASSETS Deferred charges and other assets are summarized as follows:
JUNE DECEMBER 31, 30, ---------------- 1996 1995 1994 ------- ------- ------- (IN THOUSANDS) Deferred assets: Deferred financing costs........................ $ 2,407 $ 3,333 $ 3,468 Deferred leasing costs (Note 7)................. 10,091 10,382 10,023 ------- ------- ------- Total deferred assets......................... 12,498 13,715 13,491 Accumulated amortization.......................... (5,250) (9,425) (8,951) ------- ------- ------- Deferred assets, net.............................. 7,248 4,290 4,540 Prepaid expenses.................................. 365 746 878 Property tax refunds receivable................... 2,820 ------- ------- ------- Total deferred charges and other assets....... $ 7,613 $ 5,036 $ 8,238 ======= ======= =======
Property tax refunds, which were collected in 1995, relate to appeals filed by KG in the fourth quarter of 1994 for refunds of property taxes paid in 1990 through 1994 and include related interest income of $441,000. Such amounts were recorded as a reduction of property taxes and as other income during the year ended December 31, 1994. Of these property tax recoveries, approximately $1,500,000 was refunded to tenants of the related properties and has been recorded as a reduction to tenant reimbursements income during the year ended December 31, 1994. F-19 KILROY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 4. DEBT Debt consists of the following:
DECEMBER 31, JUNE 30, ----------------- 1996 1995 1994 -------- -------- -------- (IN THOUSANDS) Bank notes payable, due in December 1994, bearing interest at prime (8.5% at December 31, 1995)(a)........................................ $ $ 9,700 $ 23,700 Bank notes payable, due in January 1999, bearing interest at LIBOR + 1.15% (6.9% at December 31, 1995)........................................... 56,009 54,811 54,186 Notes payable to finance company and related pension funds, maturing in 1997 and 1998, bearing interest at rates from 8.5% to 12.7%(b)........................................ 28,623 33,447 33,705 Notes payable to insurance companies, maturing March 2006, bearing interest at 9.5%............ 2,021 10,722 11,170 Note payable to insurance company due April 2002, bearing interest at 9.25%(c).................... 95,546 97,283 98,347 Notes payable to underwriter due in June 1997, bearing interest at LIBOR + 3% (8.46% at June 30, 1996)(d)........................................ 21,525 Bank notes payable, due in July 2008, bearing interest at 10%................................. 877 895 930 -------- -------- -------- $204,601 $206,858 $222,038 ======== ======== ========
- -------- (a) In September 1995, a note payable to a bank of $14,000,000 due in December 1994 and accrued interest payable of $3,867,000 was retired by a cash payment of $2,600,000. KG recorded an extraordinary gain of $15,267,000 as a result of this transaction. The remaining notes payable of $9,700,000 were in default as of December 31, 1995 and 1994. Past due interest on the remaining notes, approximately $3,107,000 and $2,903,000 at March 31, 1996 and December 31, 1995, respectively, is included in accrued interest. See discussion below regarding settlement of this loan. (b) During the six months ended June 30, 1996, three of the notes payable totaling $16,608,000 were amended to extend the maturity dates from 1996 to 1997 and 1998. In May, 1996, an additional note with a principal balance of $2,500,000 which was due in February 1996 and was amended to extend the maturity date from February 1996 to 1997. During June 1996, notes payable of $5,765,000 were amended to extend the maturity date from June 1996 to April 1998. (c) Under an agreement with the insurance company, monthly payments of principal and interest are calculated based on gross receipts from leases of the property that secures the loan. All receipts from the property are deposited into a lock box account from which all operating costs, which must be approved by the lender, are to be paid. Monthly installments of principal and interest of $881,475 and property taxes are payable from the lockbox account and any deficiency must be funded by KG. There are certain provisions in the agreement that may require additional payments of principal. (d) On June 20, 1996, KG obtained a mortgage loan of $21,525,000 from one of the underwriters of the proposed public offering of common stock referred to in Note 1. Such loan is due on June 20, 1997 and bears interest at 3% above LIBOR. At any time prior to October 15, 1996, KG can (subject to certain conditions) convert the loan to a 10 year loan with a 25 year amortization with interest at LIBOR plus 2.75%. Fees of $2,279,000 were incurred in connection with obtaining this loan. An additional fee of $337,500 is payable if the loan is not repaid within 150 days. The proceeds were used to pay: $100,000 as settlement of bank notes with an aggregate principal balance of $9,700,000 and $3,287,000 of unpaid interest, a note payable to an insurance company with a principal balance of $8,549,000 and a note payable to finance company with a principal balance of $4,600,000. The forgiveness of $12,887,000, has been recorded as an extraordinary gain. F-20 KILROY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) In 1994, two notes payable to insurance companies, with an aggregate unpaid balance of $6,782,000 were paid after forgiveness of $1,847,000 of principal by the lenders, which has been recorded as an extraordinary gain. The notes payable are secured by deeds of trust on all Kilroy Properties and the assignment of certain rents and leases associated with the related properties. The notes are generally due in monthly installments of principal and interest or interest only. Approximately $34.8 million of notes payable are guaranteed by certain members of KG. Several notes contain restrictive covenants with which KG has complied as well as penalties for early repayment of principal equal to a percentage of the unpaid balance. Aggregate future principal payments on notes payable are as follows:
JUNE 30, DECEMBER 31, YEAR ENDING 1996 1995 ----------- -------- ------------ (IN THOUSANDS) 1996................................................ $ 3,796 $ 4,301 1997................................................ 42,113 42,936 1998................................................ 9,874 10,626 1999................................................ 58,542 57,301 2000................................................ 2,779 2,722 Thereafter.......................................... 87,497 88,972 -------- -------- Total............................................. $204,601 $206,858 ======== ========
5. FUTURE MINIMUM RENT KG has operating leases with tenants that expire at various dates through 2005 and are either subject to scheduled fixed increases or adjustments based on the Consumer Price Index. Generally, the leases grant tenants renewal options. Leases also provide for additional rents based on certain operating expenses as well as sales volume of certain retail space within the office buildings. Future minimum rent to be received under operating leases, excluding tenant reimbursements of certain costs, as of December 31, 1995:
YEAR ENDING ----------- (IN THOUSANDS) 1996....................................................... $32,193 1997....................................................... 27,070 1998....................................................... 24,996 1999....................................................... 21,487 2000....................................................... 18,686 Thereafter................................................. 55,047 -------- Total.................................................... $179,479 ========
Rental income from one tenant, Hughes Electronic Corporation's Space & Communications Company ("Hughes"), was $4,261,000, $10,817,000, $11,395,000 and $12,258,000 for the six months ended June 30, 1996 and in 1995, 1994 and 1993, respectively. Future minimum rents from this tenant are $66,949,000 at December 31, 1995. On September 18, 1996, KG and Hughes amended the terms of certain of their lease agreements. Such amendments included the extension of one lease through October 31, 2001 and a $500,000 allowance for tenant improvements to be paid by KG not later than November 1, 1996. In addition, KG agreed to pay Hughes not later than November 1, 1996 $3.15 million in consideration for the cancellation of an option to purchase a 50% equity interest in Kilroy Airport Center at El Segundo. F-21 KILROY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) The majority of Kilroy Properties are located in Southern California. The ability of the tenants to honor the terms of their respective leases is dependent upon the economic, regulatory and social factors affecting the communities and industries in which the tenants operate. 6. COMMITMENTS AND CONTINGENCIES Guarantee--Pursuant to the terms of a promissory note for a related entity, one of the Kilroy Properties, the rents received from it, and the personal property located on or used in connection with it are held as collateral for the loan up to a maximum of $2,000,000. Operating Leases--KG has noncancelable ground lease obligations on Kilroy Airport Center--Long Beach with an initial lease period expiring on July 31, 2035, classified as an operating lease. KG has an option for four lease extensions of ten years each and a final lease extension of nine years. The minimum commitment under this lease at December 31, 1995 is as follows:
YEAR ENDING ----------- (IN THOUSANDS) 1996....................................................... $ 447 1997....................................................... 447 1998....................................................... 465 1999....................................................... 627 2000....................................................... 760 Thereafter................................................. 26,294 ------- Total.................................................... $29,040 =======
Litigation--KG is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of such matters will not have a material adverse effect on the financial position or results of operations of KG. 7. RELATED-PARTY TRANSACTIONS KI provides management, legal, accounting and general administrative services pursuant to agreements that provide for management fees based upon a percentage of gross revenues from the Kilroy Properties and reimbursement of other costs incurred by KI in connection with providing the aforementioned services. Kilroy Company ("KC"), an affiliated entity, provides marketing and leasing services. Charges by KC include leasing commissions paid to employees and outside leasing brokers as well as fees to cover its general administrative costs. Management fees are expensed as incurred and are included in property expenses. Leasing fees are capitalized and amortized over the life of the related leases. In the opinion of KG management, the fees paid to KI and KC for management and leasing services are comparable to the rates which KG would have paid an independent company to provide similar services. In addition, KI is a tenant at the Kilroy Airport Center--LAX and Kilroy Airport Center--Long Beach, under month-to-month leases. Charges for services provided by KI and KC and rental income from KI are summarized as follows:
SIX MONTHS ENDED ------------- YEAR ENDED JUNE 30, DECEMBER 31, ------------- ------------------ 1996 1995 1995 1994 1993 ------ ------ ------ ------ ---- (IN THOUSANDS) Management fees................................ $ 583 $ 432 $1,208 $ 904 $997 Leasing fees................................... $1,073 $1,106 $ 910 $1,280 $397 Rental income.................................. $ 241 $ 242 $ 483 $ 483 $672
F-22 KILROY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) Management fees in 1995 include a fourth quarter charge of $321,000 relating to management time incurred for the renegotiation of loans. 8. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS The following disclosure of estimated fair value was determined by KG using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data and develop the related estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Receivables, accounts payable and other liabilities are carried at amounts that reasonably approximate their fair value. The fixed rate mortgage notes payable totaling $142,348,000 and $144,153,000 as of December 31, 1995 and 1994 have fair values of $144,601,000 and $146,320,000, respectively (excluding prepayment penalties), as estimated based upon interest rates available for the issuance of debt with similar terms and remaining maturities. These notes were subject to prepayment penalties of $235,000 and $245,000 at December 31, 1995 and 1994, respectively, that would be required to retire these notes prior to maturity. The carrying values of floating rate mortgages totaling $64,510,000 and $77,885,000 at December 31, 1995 and 1994, respectively, reasonably approximate their fair values. The fair value estimates presented herein are based on information available to KG management as of December 31, 1995 and 1994. Although KG management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and current estimates of fair value may differ significantly from the amounts presented herein. F-23 KILROY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 9. SCHEDULE OF RENTAL PROPERTY
DECEMBER 31, 1995 ------------------------------------------------------------------------------------------------------ GROSS AMOUNTS AT WHICH CARRIED AT CLOSE OF INITIAL COST COSTS PERIOD -------------------- CAPITALIZED ----------------------------- BUILDINGS SUBSEQUENT TO DATE OF AND ACQUISITION/ BUILDING AND ACCUMULATED ACQUIS. (A) PROPERTY ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENT LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTR. (C) -------- ------------ ------- ------------ ------------- ------- ------------ -------- ------------ ----------- (IN THOUSANDS) Kilroy Airport Center El Segundo, CA..... $97,283 $ 6,141 $69,195 $18,884 $ 6,141 $88,079 $94,220 $42,495 1983(C) Kilroy Airport Center Long Beach, CA..... 54,811 47,387 11,041 58,428 58,428 15,322 1989(C) 185/181 S. Douglas Street El Segundo, California(1)...... 15,639 525 4,687 1,845 628 6,429 7,057 3,509 1978(C) 2270 E. El Segundo Boulevard El Segundo, California(1)...... 361 100 76 419 118 537 73 1977(C) 2260 E. El Segundo Boulevard, El Segundo, California(1)...... 1,423 4,194 1,236 1,703 5,150 6,853 2,914 1979(C) 2031 E. Mariposa Avenue, El Segundo, California......... 12,000 132 867 2,668 132 3,535 3,667 2,328 1954(C) 3332 E. La Palma Avenue, El Segundo, California......... 7,683 67 1,521 2,851 67 4,372 4,439 3,028 1987(A) 2265 E. El Segundo Boulevard, El Segundo, California......... 4,600 1,352 2,028 644 1,570 2,454 4,024 1,550 1978(C) 5115 N. 27th Avenue, Phoenix, Arizona... 3,000 125 1,206 (27) 126 1,178 1,304 1,168 1962(C) 1000 E. Ball Road, Anaheim, California(2)...... 5,846 838 1,984 719 838 2,703 3,541 1,563 1979(A)(3) 1230 S. Lewis Street, Anaheim, California(2)...... 395 1,489 1,994 395 3,483 3,878 2,444 1982(C) 12681/12691 Pala Drive, Garden Grove, California......... 5,996 471 2,115 1,210 471 3,325 3,796 2,857 1980(A) -------- ------- -------- ------- ------- -------- -------- ------- Total........... $206,858 $11,830 $136,773 $43,141 $12,490 $179,254 $191,744 $79,251 ======== ======= ======== ======= ======= ======== ======== =======
- ---- (1) Two notes payable of $8,639,000 and $7,000,000 are secured by the buildings located at 2260 and 2270 E. El Segundo Boulevard, El Segundo, California, and the buildings located at 185/181 S. Douglas Street, El Segundo, California. (2) A note payable of $5,846,000 is secured by the buildings located at 1000 East Ball Road, Anaheim, California and 1230 South Lewis Street, Anaheim, California . (3) The Property located at 1000 E. Ball Road, Anaheim, California, was developed for a third party by the Company in 1956, and acquired by the Company in 1979. F-24 KILROY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) The aggregate gross cost of property included above, for federal income tax purposes, approximated $171,294,000 as of December 31, 1995. The following table reconciles the historical cost of the Kilroy Properties from January 1, 1993 to December 31, 1995:
YEAR ENDED DECEMBER 31, -------------------------- 1995 1994 1993 -------- -------- -------- (IN THOUSANDS) Balance, beginning of period.................... $190,720 $189,078 $202,741 Additions during period--Acquisition, improvements, etc............................ 1,024 1,642 463 Deductions during period--Write-off of tenant improvements................................. (14,126) -------- -------- -------- Balance, close of period........................ $191,744 $190,720 $189,078 ======== ======== ========
The following table reconciles the accumulated depreciation from January 1, 1993 to December 31, 1995:
YEAR ENDED DECEMBER 31, ------------------------ 1995 1994 1993 ------- ------- -------- (IN THOUSANDS) Balance, beginning of period...................... $71,924 $64,248 $ 67,678 Additions during period--Depreciation and amortization for the year...................... 7,327 7,676 8,035 Deductions during period--Accumulated depreciation of written-off tenant improvements................................... (11,465) ------- ------- -------- Balance, close of period.......................... $79,251 $71,924 $ 64,248 ======= ======= ========
F-25 INDEPENDENT AUDITORS' REPORT To the Partners of Kilroy Group: We have audited the accompanying combined historical summary of certain revenues and certain expenses (defined as operating revenues less direct operating expenses) of the Acquisition Properties for the year ended December 31, 1995. This financial statement is the responsibility of the Acquisition Properties management. Our responsibility is to express an opinion on this combined statement of revenues and certain expenses based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined historical summary of certain revenues and certain expenses is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined historical summary of certain revenues and certain expenses. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the combined historical summary of certain revenues and certain expenses. We believe our audit provides a reasonable basis for our opinion. The accompanying combined historical summary of certain revenues and certain expenses was prepared for purpose of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in the Form S-11 Registration Statement of Kilroy Realty Corporation. Material amounts, described in Note 1 to the historical summary of certain revenues and certain expenses, that would not be comparable to those resulting from the proposed future operation of the Acquisition Properties are excluded, and the summary is not intended to be a complete presentation of the revenues and expenses of these properties. In our opinion, such historical summary of certain revenues and certain expenses presents fairly, in all material respects, the combined certain revenues and certain expenses, as defined in Note 1, of the Acquisition Properties for the year ended December 31, 1995 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Los Angeles, California June 7, 1996 F-26 ACQUISITION PROPERTIES COMBINED HISTORICAL SUMMARIES OF CERTAIN REVENUES AND CERTAIN EXPENSES YEAR ENDED DECEMBER 31, 1995 AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, 1996 1995 ----------- ------------ (UNAUDITED) CERTAIN REVENUES: Rental income........................................ $2,663 $5,082 Tenant reimbursements................................ 323 688 Other income......................................... 203 408 ------ ------ Total certain revenues............................. 3,189 6,178 ------ ------ CERTAIN EXPENSES: Property expenses (Note 3)........................... 552 1,352 Real estate taxes.................................... 169 286 Ground rent (Note 4)................................. 169 338 General and administrative........................... 116 244 ------ ------ Total certain expenses............................. 1,006 2,220 ------ ------ CERTAIN REVENUES IN EXCESS OF CERTAIN EXPENSES......... $2,183 $3,958 ====== ======
See notes to combined statements of certain revenues and certain expenses. F-27 ACQUISITION PROPERTIES NOTES TO COMBINED HISTORICAL SUMMARIES OF CERTAIN REVENUES AND CERTAIN EXPENSES 1. BASIS OF PRESENTATION The combined historical summaries of certain revenues and certain expenses relate to the operations of two properties, Westlake Plaza Centre, located in Thousand Oaks, and Long Beach I (collectively, the "Acquisition Properties"), which are expected to be acquired by Kilroy Realty Corporation (the "Company") from two unaffiliated third parties. Operating revenues and operating expenses are presented on the accrual basis of accounting. The accompanying statements of certain revenues and certain expenses are not representative of the actual operations for the period presented, as certain revenues and certain expenses that may not be comparable to the revenues and expenses expected to be incurred by the Company in the proposed future operation of the Acquisition Properties have been excluded. Revenues excluded consist of termination fees and interest income. Expenses excluded consist of interest, depreciation, professional fees and other costs not directly related to the future operations of the Acquisition Properties. 2. OPERATING LEASES Rental income is recognized on the accrual method as earned, which approximates recognition on a straight line basis. The Acquisition Properties are leased to tenants under operating leases with expiration dates extending to the year 2009. Future minimum rents under the Acquisition Property's office leases, excluding tenant reimbursements are as follows:
YEAR ENDING DECEMBER 31, ------------ (IN THOUSANDS) 1996...................................................... $ 5,393 1997...................................................... 4,246 1998...................................................... 3,838 1999...................................................... 2,820 2000...................................................... 2,072 Thereafter................................................ 14,510 ------- Total................................................... $32,879 =======
3. RELATED-PARTY TRANSACTIONS Property expenses include $90,000 and $181,000 of management fees for the six months ended June 30, 1996 and for the year ended December 31, 1995, respectively, related to Long Beach I, which was paid to an affiliate of the Company. 4. COMMITMENTS Long Beach I is located on land that is under a noncancelable ground lease which expires in 2035 and is classified as an operating lease. Minimum annual lease payments are as follows:
YEAR ENDING DECEMBER 31, ------------ (IN THOUSANDS) 1996...................................................... $ 338 1997...................................................... 338 1998...................................................... 338 1999...................................................... 338 2000...................................................... 338 Thereafter................................................ 11,661 ------- Total................................................... $13,351 =======
F-28 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN- FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAW- FUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPEC- TUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IM- PLICATION THAT ANY INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUB- SEQUENT TO THE DATE HEREOF. UNTIL , 1997 (25 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL DEALERS EF- FECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPAT- ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. -------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................................................... 1 Risk Factors............................................................. 18 The Company.............................................................. 33 Use of Proceeds.......................................................... 39 Distribution Policy...................................................... 41 Capitalization........................................................... 46 Dilution................................................................. 47 Selected Financial Data.................................................. 48 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 50 Business and Properties.................................................. 54 Policies with Respect to Certain Activities.............................. 89 The Financing............................................................ 94 Management............................................................... 95 Formation and Structure of the Company................................... 100 Certain Relationships and Related Transactions........................... 105 Principal Stockholders................................................... 106 Description of Capital Stock............................................. 107 Certain Provisions of Maryland Law and of the Company's Articles of Incorporation and Bylaws................................................ 110 Partnership Agreement of the Operating Partnership....................... 115 Shares Available for Future Sale......................................... 119 Federal Income Tax Consequences.......................................... 121 ERISA Considerations..................................................... 135 Underwriting............................................................. 137 Legal Matters............................................................ 138 Experts.................................................................. 138 Additional Information................................................... 139 Glossary................................................................. 140 Index to Financial Statements............................................ F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 9,260,000 Shares [LOGO] KILROY REALTY CORPORATION Common Stock ---------- PROSPECTUS ---------- PRUDENTIAL SECURITIES INCORPORATED DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION J.P. MORGAN & CO. SMITH BARNEY INC. , 1996 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the fees and expenses in connection with the issuance and distribution of the securities being registered hereunder. Except for the SEC registration fee, all amounts are estimates. SEC Registration Fee.............................................. $64,539 NYSE Filing Fee................................................... Printing and Engraving Expenses................................... Legal Fees and Expenses........................................... Accounting Fees and Expenses...................................... Registrar and Transfer Agent Fees and Expenses.................... Blue Sky Fees and Expenses........................................ Miscellaneous Expenses............................................ ------- Total........................................................... $ =======
All of the costs identified above will be paid by the Company. ITEM 31. SALES TO SPECIAL PARTIES. See Item 32. ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES. In connection with the Formation Transactions, an aggregate of 1,653,835 Units will be issued to certain partners of the Kilroy Group transferring interests in the Properties and certain other assets to the Company in consideration of the transfer of such Properties and assets. The issuance of such Units will be effected in reliance upon an exemption from registration under Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering. See "The Formation and Structure of the Company." ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 2-418 of the Maryland General Corporation law empowers the Company to indemnify, subject to the standards set forth therein, any person who is a party in any action in connection with any action, suit or proceeding brought or threatened by reason of the fact that the person was a director, officer, employee or agent of such company, or is or was serving as such with respect to another entity at the request of such company. The Maryland General Corporation Law also provides that the Company may purchase insurance on behalf of any such director, officer, employee or agent. The Company's Articles of Incorporation and Bylaws provide in effect for the indemnification by the Company of the directors and officers of the Company to the fullest extent permitted by applicable law. ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED. Not applicable. II-1 ITEM 35. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES AND EXHIBITS. (A)(1) FINANCIAL STATEMENTS Kilroy Realty Corporation Pro Forma (Unaudited): Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1996 Notes to Pro Forma Condensed Consolidated Balance Sheet Pro Forma Condensed Consolidated Statements of Operations for the six months ended June 30, 1996 and the Year Ended December 31, 1995 Notes to Pro Forma Condensed Consolidated Statements of Operations Historical: Independent Auditors' Report Balance Sheet as of September 30, 1996 Notes to Balance Sheet Kilroy Group (Predecessor Affiliates) Independent Auditors' Report Combined Balance Sheets as of June 30, 1996 (unaudited), and December 31, 1995 and 1994 Combined Statements of Operations for the six months ended June 30, 1996 and 1995 (unaudited) and the three years ended December 31, 1995 Combined Statements of Partners' Deficit for the six months ended June 30, 1996 (unaudited) and for the three years ended December 31, 1995 Combined Statements of Cash Flows for the six months ended June 30, 1996 and 1995 (unaudited) and the three years ended December 31, 1995 Notes to Combined Financial Statements Acquisition Properties Independent Auditors' Report Combined Historical Summaries of Certain Revenues and Certain Expenses for the six months ended June 30, 1996 (unaudited) and for the year ended December 31, 1995 Notes to Combined Historical Summaries of Certain Revenues and Certain Expenses
(A)(2) FINANCIAL STATEMENT SCHEDULE Schedule II--Valuation and qualifying accounts for the three years ended December 31, 1995
(B) EXHIBITS
EXHIBIT NO. DESCRIPTION ------- ----------- *1.1 Form of Underwriting Agreement among the Registrant and the Underwriters named therein. **3.1 Articles of Incorporation of the Registrant. **3.2 Bylaws of the Registrant. *3.3 Form of Certificate for Common Stock of the Registrant. *5.1 Opinion of Ballard, Spahr, Andrews & Ingersoll regarding the validity of the Common Stock being registered. *8.1 Opinion of Latham & Watkins regarding certain federal income tax matters. *10.1 Form of Agreement of Limited Partnership of Kilroy Realty, L.P. *10.2 Form of Registration Rights Agreement among the Registrant and the persons named therein. *10.3 Form of 1996 Stock Option and Incentive Plan for Key Employees of the Registrant, Kilroy Realty, L.P. and Kilroy Services, Inc. *10.4 Form of Indemnification Agreement between the Registrant and its directors and officers. *10.5 Employment Agreement between the Registrant and John B. Kilroy, Jr. *10.6 Employment Agreement between the Registrant and Jeffrey C. Hawken.
II-2
EXHIBIT NO. DESCRIPTION ------- ----------- *10.7 Form of Management Agreement between Kilroy Services, Inc. and Kilroy Realty, L.P. *10.8 Omnibus Option Agreement by and among Kilroy Realty, L.P. and the parties named therein. **10.9 Real Estate Purchase Agreement between Northwestern Mutual Life Insurance Company and Kilroy Industries. **10.10 Lease Agreement dated July 17, 1985 by and between Kilroy Long Beach Associates and the City of Long Beach for Kilroy Long Beach Phase III. **10.11 Lease Agreement dated April 21, 1988 by and between Kilroy Long Beach Associates and the Board of Water Commissioners of the city of Long Beach, acting for and on behalf of the City of Long Beach, for Long Beach Phase IV. **10.12 Lease Agreement dated December 30, 1988 by and between Kilroy Long Beach Associates and the City of Long Beach for Kilroy Long Beach Phase II. **10.13 First Amendment to Lease, dated January 24, 1989, by and between Kilroy Long Beach Associates and the City of Long Beach for Kilroy Long Beach Phase III. **10.14 Second Amendment to Lease Agreement, dated December 28, 1990, by and between Kilroy Long Beach Associates and the City of Long Beach for Kilroy Long Beach Phase III. **10.15 First Amendment to Lease Agreement, dated December 28, 1990, by and between Kilroy Long Beach Associates and the City of Long Beach for Kilroy Long Beach Phase II. **10.16 Third Amendment to Lease Agreement, dated October 10, 1994, by and between Kilroy Long Beach Associates and the City of Long Beach for Kilroy Long Beach Phase III. **10.17 Development Agreement by and between Kilroy Long Beach Associates and the City of Long Beach. **10.18 Amendment No. 1 to Development Agreement by and between Kilroy Long Beach Associates and the City of Long Beach. *10.19 Supplemental Representations, Warranties and Indemnity Agreement by and between the parties named therein. *10.20 Form of Option Properties Agreement by and between KAICO and Kilroy Realty, L.P. **10.21 Purchase and Sale Agreement and Joint Escrow Instructions by and between Westlake Plaza Partners and Kilroy Industries. **10.22 First Amendment to Purchase and Sale Agreement and Joint Escrow Instructions by and between Westlake Plaza Partners and Kilroy Industries. **10.23 Development Management Agreement by and between Kilroy Technology Company and the Redevelopment Agency of the City of Riverside. *10.24 Form of Mortgage Loan. *10.25 Form of Revolving Credit Facility. *10.26 Form of Waiver and Recontribution Agreement between Kilroy Realty, L.P. and the Registrant. *10.27 Form of Indemnity Agreement among Executive Officers and Kilroy Realty, L.P. *10.28 Form of Contribution Agreement between Kilroy Realty, L.P. and the Registrant. *10.29 Development and Disposition Agreement by and between Kilroy Industries and the City of Thousand Oaks Redevelopment Agency. *10.30 Form of Option Properties Agreement by and between Kilroy Calabasas Company and Kilroy Realty, L.P.
II-3 EXHIBIT NO. DESCRIPTION ------- ----------- *21.1 List of Subsidiaries of the Registrant. *23.1 Consent of Latham & Watkins. *23.2 Consent of Ballard, Spahr, Andrews & Ingersoll. **23.3 Consent of Deloitte & Touche LLP. **23.4 Consent of Robert Charles Lesser & Co. **24.1 Power of Attorney. (Filed herewith on page II-5.) **27.1 Financial Data Schedule
- -------- * To Be Filed By Amendment ** Filed Herewith ITEM 36. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the provisions described under Item 33 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The Registrant hereby undertakes: (1) For purposes of determining any liability under the Act, the information omitted from the form of Prospectus filed as part of the Registration Statement in reliance upon Rule 430A and contained in the form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of the Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-11 AND HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED IN THE CITY OF EL SEGUNDO, STATE OF CALIFORNIA, ON THE 5TH DAY OF NOVEMBER, 1996. Kilroy Realty Corporation /s/ John B. Kilroy, Jr. By: _________________________________ JOHN B. KILROY, JR. President and Chief Executive Officer Date: November 5, 1996 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John B. Kilroy, Sr., John B. Kilroy, Jr., and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE /s/ John B. Kilroy, Sr. Chairman of the November 5, - ------------------------------------- Board and Director 1996 JOHN B. KILROY, SR. /s/ John B. Kilroy, Jr. President, Chief November 5, - ------------------------------------- Executive Officer, 1996 JOHN B. KILROY, JR. Secretary, Treasurer and Director (Principal Executive Officer and Principal Accounting Officer) II-5 KILROY GROUP SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS EACH OF THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)
CHARGED TO BALANCE AT COSTS AND BALANCE BEGINNING EXPENSES OR AT END OF PERIOD RENTAL REVENUE DEDUCTIONS OF PERIOD ---------- -------------- ---------- --------- Year Ended December 31, 1995 Allowance for uncollectible rent......................... $835 $1,103 $(145) $1,793 ==== ====== ===== ====== Year Ended December 31, 1994 Allowance for uncollectible rent......................... $428 $ 866 $(459) $ 835 ==== ====== ===== ====== Year Ended December 31, 1993 Allowance for uncollectible rent......................... $284 $ 317 $(173) $ 428 ==== ====== ===== ======
S-1 EXHIBIT INDEX
SEQUENTIAL EXHIBIT PAGE NO. DESCRIPTION OF EXHIBIT NO. ------- ---------------------- ---------- *1.1 Form of Underwriting Agreement among the Registrant and the Underwriters named therein. **3.1 Articles of Incorporation of the Registrant. **3.2 Bylaws of the Registrant. *3.3 Form of Certificate for Common Stock of the Registrant. *5.1 Opinion of Ballard, Spahr, Andrews & Ingersoll regarding the validity of the Common Stock being registered. *8.1 Opinion of Latham & Watkins regarding certain federal income tax matters. *10.1 Form of Agreement of Limited Partnership of Kilroy Realty, L.P. *10.2 Form of Registration Rights Agreement among the Registrant and the persons named therein. *10.3 Form of 1996 Stock Option and Incentive Plan for Key Employees of the Registrant, Kilroy Realty, L.P. and Kilroy Services, Inc. *10.4 Form of Indemnification Agreement between the Registrant and its directors and officers. *10.5 Employment Agreement between the Registrant and John B. Kilroy, Jr. *10.6 Employment Agreement between the Registrant and Jeffrey C. Hawken. *10.7 Form of Management Agreement between Kilroy Services, Inc. and Kilroy Realty, L.P. *10.8 Omnibus Option Agreement by and among Kilroy Realty, L.P. and the parties named therein. **10.9 Real Estate Purchase Agreement between Northwestern Mutual Life Insurance Company and Kilroy Industries. **10.10 Lease Agreement dated July 17, 1985 by and between Kilroy Long Beach Associates and the City of Long Beach for Kilroy Long Beach Phase III. **10.11 Lease Agreement dated April 21, 1988 by and between Kilroy Long Beach Associates and the Board of Water Commissioners of the city of Long Beach, acting for and on behalf of the City of Long Beach, for Long Beach Phase IV. **10.12 Lease Agreement dated December 30, 1988 by and between Kilroy Long Beach Associates and the City of Long Beach for Kilroy Long Beach Phase II. **10.13 First Amendment to Lease, dated January 24, 1989, by and between Kilroy Long Beach Associates and the City of Long Beach for Kilroy Long Beach Phase III. **10.14 Second Amendment to Lease Agreement, dated December 28, 1990, by and between Kilroy Long Beach Associates and the City of Long Beach for Kilroy Long Beach Phase III. **10.15 First Amendment to Lease Agreement, dated December 28, 1990, by and between Kilroy Long Beach Associates and the City of Long Beach for Kilroy Long Beach Phase II. **10.16 Third Amendment to Lease Agreement, dated October 10, 1994, by and between Kilroy Long Beach Associates and the City of Long Beach for Kilroy Long Beach Phase III. **10.17 Development Agreement by and between Kilroy Long Beach Associates and the City of Long Beach. **10.18 Amendment No. 1 to Development Agreement by and between Kilroy Long Beach Associates and the City of Long Beach. *10.19 Supplemental Representations, Warranties and Indemnity Agreement by and between the parties named therein. *10.20 Form of Option Properties Agreement by and between KAICO and Kilroy Realty, L.P.
SEQUENTIAL EXHIBIT PAGE NO. DESCRIPTION OF EXHIBIT NO. ------- ---------------------- ---------- **10.21 Purchase and Sale Agreement and Joint Escrow Instructions by and between Westlake Plaza Partners and Kilroy Industries. **10.22 First Amendment to Purchase and Sale Agreement and Joint Escrow Instructions by and between Westlake Plaza Partners and Kilroy Industries. **10.23 Development Management Agreement by and between Kilroy Technology Company and the Redevelopment Agency of the City of Riverside. *10.24 Form of Mortgage Loan. *10.25 Form of Revolving Credit Facility. *10.26 Form of Waiver and Recontribution Agreement between Kilroy Realty, L.P. and the Registrant. *10.27 Form of Indemnity Agreement among Executive Officers and Kilroy Realty, L.P. *10.28 Form of Contribution Agreement between Kilroy Realty, L.P. and the Registrant. *10.29 Development and Disposition Agreement by and between Kilroy Industries and the City of Thousand Oaks Redevelopment Agency. *10.30 Form of Option Properties Agreement by and between Kilroy Calabasas Company and Kilroy Realty, L.P. *21.1 List of Subsidiaries of the Registrant. *23.1 Consent of Latham & Watkins. *23.2 Consent of Ballard, Spahr, Andrews & Ingersoll. **23.3 Consent of Deloitte & Touche LLP. **23.4 Consent of Robert Charles Lesser & Co. **24.1 Power of Attorney. (filed herewith on page II-5.) **27.1 Financial Data Schedule
- -------- * To Be Filed By Amendment ** Filed Herewith EX-3.1 2 ARTICLES OF INCORPORATION OF THE REGISTRANT EXHIBIT 3.1 KILROY REALTY CORPORATION ARTICLES OF INCORPORATION ------------------------- FIRST: The undersigned, Charles R. Moran, whose address is c/o Ballard Spahr Andrews & Ingersoll, 300 East Lombard Street, 19th Floor, Baltimore, Maryland 21202, being at least eighteen years of age, acting as incorporator, does hereby form a corporation under the General Laws of the State of Maryland. SECOND: The name of the corporation (which is hereinafter called the "Corporation") is: Kilroy Realty Corporation 9-13-96 at 12:23 p.m. THIRD: The purposes for which and any of which the Corporation is formed and the business and objects to be carried on and promoted by it are: (1) To engage in business as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"), or any successor statute of similar import. (2) To engage in and perform any other activities or functions which may lawfully be performed by a business corporation organized under the General Laws of the State of Maryland. The foregoing enumerated purposes and objects shall be in no way limited or restricted by reference to, or inference from, the terms of any other clause of this or any other Article of the Charter of the Corporation, and each shall be regarded as independent; and they are intended to be and shall be construed as powers as well as purposes and objects of the Corporation and shall be in addition to and not in limitation of the general powers of corporations under the General Laws of the State of Maryland. FOURTH: The present address of the principal office of the Corporation in the State of Maryland is c/o Ballard Spahr Andrews & Ingersoll, 300 East Lombard Street, 19th Floor, Baltimore, Maryland 21202. FIFTH: The name and address of the resident agent of the Corporation is Charles R. Moran, c/o Ballard Spahr Andrews & Ingersoll, 300 East Lombard Street, 19th Floor, Baltimore, Maryland 21202. Said resident agent is a Maryland resident. SIXTH: The total number of shares of stock of all classes which the Corporation has authority to issue is Ten Million (10,000,000) shares of common stock, par value One Cent ($.01) per - -------------------------------------------------------------------------------- STATE OF MARYLAND ----------------- I hereby certify that this is a true and complete copy of the 6 page document on file in this office. DATED: 9-13-96 STATE DEPARTMENT OF ASSESSMENTS AND TAXATION BY: /s/ SIGNATURE , Custodian -------------------------- This stamp replaces our previous certification system. Effective: 6/95 - -------------------------------------------------------------------------------- share (the "Common Stock"), having an aggregate par value of One Hundred Thousand Dollars ($100,000). SEVENTH: The business and affairs of the Corporation shall be managed by a Board of Directors which may exercise all of the powers of the Corporation except those conferred on, or reserved to, the stockholders by law. The number of directors of the Corporation initially shall be two (2), which number may be increased or decreased pursuant to the By-laws of the Corporation but in no event shall be less than the minimum number required by the General Laws of the State of Maryland. Each director shall hold office until the next annual meeting of the stockholders of the Corporation and until his or her successor shall have been elected and qualified. The names of the directors who will serve until the first annual meeting of stockholders of the Corporation and until their successors are elected and qualified are as follows: John B. Kilroy, Sr. John B. Kilroy, Jr. EIGHTH: The following provisions are hereby adopted for the purposes of defining, limiting and regulating the powers of the Corporation and of the directors and stockholders: (1) The Board of Directors shall have power from time to time and in its sole discretion (a) to determine in accordance with sound accounting practice what constitutes annual or other net profits, earnings, surplus or net assets in excess of capital; (b) to fix and vary from time to time the amount to be reserved as working capital, or determine that retained earnings or surplus shall remain in the hands of the Corporation; (c) to set apart out of any funds of the Corporation such reserve or reserves in such amount or amounts and for such proper purposes as it shall determine and to abolish or redesignate any such reserve or any part thereof; (d) to borrow or raise money upon any terms for any corporate purposes; (e) to distribute and pay distributions or dividends in stock, cash or other securities or property, out of surplus or any other funds or amounts legally available there for, at such times and to the stockholders of record on such dates as it may, from time to time, determine; and (f) to determine whether and to what extent and at what times and places and under what conditions and regulations the books, accounts and documents of the Corporation, or any of them shall be open to the inspection of stockholders, except as otherwise provided by statute or by the By-laws of the Corporation, and, except as so provided, no stockholder shall have the right to inspect any book, account or document of the Corporation unless authorized so to do by resolution of the Board of Directors. (2) The liability of the directors and officers of the Corporation to the Corporation or its stockholders for money -2- damages shall be limited to the fullest extent permitted under the General Laws of the State of Maryland now or hereafter in force, including, but not limited to, Section 5-349 of the Courts and Judicial Proceedings Article of the Annotated Code of Maryland, or any successor provision of law of similar import, and the directors and officers of the Corporation shall have no liability whatsoever to the Corporation or its stockholders for money damages except to the extent which such liability can not be limited or restricted under the General Laws of the State of Maryland now or hereafter in force. Neither the amendment nor repeal of the foregoing sentence of this Section (2) of Article EIGHTH nor the adoption nor amendment of any other provision of the Charter or By-laws of the Corporation inconsistent with the foregoing sentence shall apply to or affect in any manner the applicability of the foregoing sentence with respect to any act or omission of any director or officer occurring prior to any such amendment, repeal or adoption. (3) The Corporation shall indemnify, in the manner and to the fullest extent permitted by law, any person who is or was a party to, or is threatened to be made a party to, any threatened, pending or completed action, suit or proceeding, whether or not by or in the right of the Corporation and whether civil, criminal, administrative, investigative or otherwise, by reason of the fact that such person is or was a director or officer of the Corporation, or that such person, while an officer or director of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner or trustee of another corporation, partnership, trust, employee benefit plan or other enterprise. To the fullest extent permitted by law, the indemnification provided herein shall include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement and any such expenses may be paid by the Corporation in advance of the final disposition of any such action, suit or proceeding. Upon authorization by the Board of Directors, the Corporation may indemnify employees and/or agents of the Corporation to the same extent provided herein for directors and officers. Any repeal or modification of any of the foregoing sentences of this Section (3) of Article EIGHTH shall be prospective in operation and effect only, and shall not adversely affect any right to indemnification or advancement of expenses hereunder existing at the time of any such repeal or modification. (4) No holders of shares of stock of the Corporation of any class shall have any preemptive rights or preferential right to purchase, subscribe for or otherwise acquire any shares of stock of the Corporation of any class now or hereafter authorized or any securities convertible into or exchangeable for shares of stock of the Corporation of any class now or hereafter authorized or any warrants, options or other instruments evidencing rights to purchase, subscribe for or otherwise acquire shares of stock of the Corporation of any class -3- now or hereafter authorized, other than such preferential rights, if any, as the Board of Directors in its sole discretion may determine, and at such price as the Board of Directors in its sole discretion may fix. (5) The Board of Directors of the Corporation shall have the power in its sole discretion and without limitation, to authorize the issuance at any time and from time to time of shares of stock of the Corporation, with or without par value, of any class now or hereafter authorized and of securities convertible into or exchangeable for shares of the stock of the Corporation, with or without par value, of any class now or hereafter authorized, for such consideration (irrespective of the value or amount of such consideration) and in such manner and by such means as said Board of Directors may deem advisable. (6) The Board of Directors shall have the power in its sole discretion and without limitation to classify or reclassify any unissued shares of stock, whether now or hereafter authorized, by setting, altering or eliminating in any one or more respects, from time to time before the issuance of such shares, any feature of such shares, including but not limited to the designation, preferences, conversion or other rights, voting powers, qualifications, and terms and conditions of redemption of, and limitations as to dividends and any restrictions on, such shares. (7) The Corporation reserves the right at any time and from time to time to make any amendments to its Charter including any amendments changing the terms of contract rights, as expressly set forth in its Charter, of any of its outstanding stock by classification, reclassification or otherwise; and all contract or other rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors and officers by and pursuant to the Charter of the Corporation are granted subject to this reservation. The enumeration and definition of particular powers of the Board of Directors included in the foregoing shall in no way be limited or restricted by reference to or inference from the terms of any other clause of this or any other Article of the Charter of the corporation, or construed as or deemed by inference or otherwise in any manner to exclude or limit any powers conferred upon the Board of Directors under the General Laws of the State of Maryland now or hereafter in force. -4- IN WITNESS WHEREOF, I have signed these Articles of Incorporation, acknowledging the same to be my act on this 13th day of September, 1996. ---- WITNESS: /s/ SIGNATURE /s/ Charles R. Moran - ------------------------------------ ------------------------------------ Charles R. Moran -5- EX-3.2 3 BYLAWS OF THE REGISTRANT EXHIBIT 3.2 KILROY REALTY CORPORATION BYLAWS ------ ARTICLE I STOCKHOLDERS ------------ Section 1 - ANNUAL MEETING -------------- The annual meeting of the stockholders of the Corporation shall be held in May of each year at the time and place as shall be designated by the Board of Directors by resolution and stated in the notice of the meeting. The business to be transacted at the annual meeting shall include the election of directors and any other corporate business as may come before the meeting. Section 2 - SPECIAL MEETING --------------- At any time in the intervals between annual meetings, a special meeting of the stockholders may be called by the President or by the Board of Directors, and shall be called by the President at the request in writing of stockholders owning twenty five percent (25%) in amount of the entire capital stock of the Corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. No business shall be transacted at a special meeting save that specially named in the notice. Section 3 - NOTICE OF MEETING ----------------- Not less than ten (10) days nor more than ninety (90) days before the date of every stockholders' meeting, the Secretary shall give to each stockholder entitled to vote at such meeting, and to each stockholder not entitled to vote who is entitled to notice by statute, written or printed notice stating the date, time and place of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, either by presenting it to him personally or by leaving it at his residence or usual place of business or by mailing it to him at his address as it appears on the records of the Corporation. Notice which is mailed in accordance with the preceding sentence shall be deemed to be given at the time when the same shall be deposited in the United States mail with postage thereon prepaid. Any stockholder may waive notice of any meeting by written waiver filed with the records of the meeting, either before or after the holiday thereof. The attendance of a stockholder at a meeting shall constitute a waiver of notice of such meeting, except where a stockholder attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. No business shall be transacted at a special meeting save that specially named in the notice. Section 4 - NOMINATION AND STOCKHOLDER BUSINESS ----------------------------------- (a) Annual Meetings of Stockholders (1) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by stockholders may be made at an annual meeting of stockholders (i) pursuant to the Corporation's notice of the meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who was a stockholder of record at the time of giving notice provided for in this Section 4(a), who is entitled to vote at the meeting and who has complied with the notice procedure set forth in this Section 4(a). (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of this Section 4, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to the secretary at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and of the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (x) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (y) the class and number of shares of stock of -2- the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (a) (2) of this Section 4 to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section 4(a) shall also be considered timely, but only with respect to nominees for any new positions created by such increase, it shall be delivered to the secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation. (b) Special Meetings of Stockholders. Only such business shall be -------------------------------- conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) provided that the Board of Directors has determined that directors shall be elected at such special meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Section 4 (b) who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 4 (b). In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be) for election to such position as specified in the Corporation's notice of meeting, if the stockholder's notice required by paragraph (a) (2) of this Section 4 shall be delivered to the secretary at the principal executive offices of the Corporation not earlier than the 90th day prior to such special meting and not later than the close of business on the later of the 60th days prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. (c) General. ------- (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 4 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the -3- meeting in accordance with the procedures set forth in this Section 4. The presiding officer of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting made in accordance with the procedures set forth in this Section 4 and, if any proposed nomination of business is not in compliance with this Section 4, to declare that such defective nomination or proposal be disregarded. (2) For purposes of this Section 4, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section 4, a stockholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 4. Nothing in this Section 4 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. Section 5 - QUORUM ------ At any meeting of stockholders the presence in person or by proxy of stockholders entitled to cast a majority of the votes thereat shall constitute a quorum; but this section shall not affect any requirement under any statute or the Articles of Incorporation (the "Articles") of the Corporation for the vote necessary for the adoption of any measure. A majority of the votes cast at a meeting of stockholders, duly called and at which a quorum is present, shall be sufficient to take or authorize action upon any matter which may properly come before the meeting unless more than a majority of votes is required by statute, by the Articles or by these Bylaws. In the absence of a quorum a majority of the shares represented in person or by proxy may adjourn the meeting from time to time not more than one hundred twenty (120) days without further notice other than by announcement at such meeting. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting originally called. If the adjournment is for more than thirty (30) days, or if after adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder entitled to vote at the meeting. -4- Section 6 - VOTING ------ Each share of Common Stock shall be entitled to one (1) vote. Section 7 - VOTING OF STOCK BY CERTAIN HOLDERS ---------------------------------- Stock registered in the name of a corporation, partnership, trust or other entity if entitled to be voted may be voted by the president or vice president, a general partner, or trustee thereof as the case may be, or a proxy appointed by any of the foregoing individual, unless some other person who has been appointed to vote such stock pursuant to a bylaw or a resolution of the board of directors of such corporation or other entity presents a certified copy of such bylaw or resolution, in which case such person may vote such stock. Any director or other fiduciary may vote stock registered in his name as such fiduciary, either in person or by proxy. Shares of stock of the Corporation directly or indirectly owned by it shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares entitled to be voted at any given time unless they are held by it in a fiduciary capacity in which case they may be voted and shall be counted in determining the total number of outstanding shares at any given time. The Board of Directors may adopt, by resolution, a procedure by which a stockholder may certify, in writing, to the Corporation that any shares of stock registered in the name of the stockholder are held for the account of a specified person other than a stockholder. The resolutions shall set forth: the class of stockholders who may make the certification, the purpose for which the certification may be made, the form of certification and the information to be contained in it; if the certification is with respect to a record date of closing of the stock transfer books, the time after the record date of the stock transfer books within which the certification must be reviewed by the Corporation; and any other provisions with respect to the procedure which the Board of Directors considers necessary or desirable. On receipt of such certification, the person specified in the certification shall be regarded as, for the purposes set forth in the certification, the stockholder of record of the specified stock in place of the stockholder who makes certificates. Notwithstanding any provision of the Charter of the Corporation or these Bylaws, Subtitle 7 of Title 3 of the Maryland General Corporation Law ("MGCL") (as the same be hereafter be amended from time to time), and/or hereafter acquired or held by John B. Kilroy, Sr. and John B. Kilroy, Jr. and/or any affiliates (as defined in Section 3-601 of the MGCL) or associates (as defined in Section 3-701 of the MGCL) of any of the foregoing. -5- Section 8 - PROXIES ------- At all meetings of stockholders, a stockholder may vote the shares owned of record by him either in person or by proxy executed in writing by the stockholder or by his duly authorized attorney in fact. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. Section 9 - PLACE OF MEETING ---------------- The Board of Directors may designate any place, either within or without the State of Maryland, as the place of meeting for any annual or special meeting of stockholders. If no designation is made, or if a special meeting be otherwise called, the place of the meeting shall be the principal office of the Corporation. Section 10 - INFORMAL ACTION --------------- Any action required or permitted to be taken at a meeting of stockholders may be taken without a meeting if there is filed with the records of stockholders meetings a unanimous written consent which sets forth the action and is signed by each stockholder entitled to vote on the matter and a written waiver of any right to dissent signed by each stockholder entitled to notice of the meeting but not entitled to vote thereat. ARTICLE II DIRECTORS --------- Section 1 - POWERS ------ The business and affairs of the Corporation shall be managed by its Board of Directors, which may exercise all of the powers of the Corporation, except such as are by statute or by the Charter or Bylaws of the Corporation expressly conferred upon or reserved to the stockholders. Section 2 - NUMBER AND TENURE ----------------- At any regular meeting or at any special meeting called for that purpose, a majority of the entire Board of Directors may establish, increase or decrease the number of directors, provided that the number thereof shall never be less than the minimum number required by the MGCL, nor more than thirteen (13), and further provided that the tenure of office of a director shall not be affected by any decrease in the number of directors. Each director shall hold office until the next annual meeting of stockholders and until his successor shall have been elected and qualified or until -6- his resignation, removal (in accordance with the Articles and these Bylaws) or death, if earlier. Section 3 - VACANCIES --------- Any vacancy occurring on the Board of Directors shall be filled by the election by the remaining directors at any regular or special meeting, except that a vacancy resulting from an increase in the number of directors shall be filled by a majority vote of the entire board of board directors. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office, provided that a director elected to fill a vacancy resulting from an increase in the number of directors shall be elected to serve until the next annual meeting of stockholders and until his successor is elected and qualified. Section 4 - REGULAR MEETINGS ---------------- The Board of Directors shall meet for the purpose of the election of officers and the transaction of other business as soon as practicable after each annual meeting of stockholders. Other regular meetings of the Board of Directors shall be held at such times and such places, either within or without the State of Maryland, as may be designated from time to time by the President or by the Board of Directors. Section 5 - SPECIAL MEETINGS ---------------- Special meetings of the Board of Directors may be called by the President or by a majority of the directors. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of Maryland, as the place for holding the special meeting of the Board of Directors called by such person or persons. Section 6 - NOTICE ------ Notice of every regular or special meeting of the Board shall be given to each director at least two (2) days-prior thereto either by written notice delivered personally or mailed or telegrammed to his last known business or residence address or by personal telephone call. Notice which is mailed in accordance with the preceding sentence shall be deemed to be given at the time when the same shall be deposited in the United States mail with postage thereon prepaid. Any director may waive notice of any meeting by written waiver filed with the records of the meeting, either before or after the holding thereof. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be -7- transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Section 7 - QUORUM ------ A majority of the Board of Directors shall constitute a quorum for the transaction of business, but if less than such quorum is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting, until a quorum shall be present. Section 8 - MANNER OF ACTING ---------------- The action of a majority of the directors present at a meeting at which a quorum is present shall constitute action of the Board of Directors unless the concurrence of a greater proportion is required for such action by statute, by the Charter of the Corporation or by these Bylaws. Section 9 - COMPENSATION ------------ By resolution of the Board of Directors a fixed sum and expenses, if any, of attendance at each regular or special meeting of the Board of Directors or of committees hereof, and other compensation for their services as such or on committees of the Board of Directors, may be paid to the Directors. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor, pursuant to a resolution of the Board of Directors. Section 10 - INFORMAL ACTION --------------- Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if a written consent to such action is signed by all members of the Board of Directors and such written consent is filed with the minutes of proceedings of the Board of Directors. Section 11 - MEETING BY CONFERENCE TELEPHONE ------------------------------- Members of the Board of Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participating in a meeting by such means constitutes presence in person at a meeting. Section 12 - REMOVAL ------- A director may be removed, with or without cause, upon the affirmative vote of not less than two-thirds (2/3) of the votes -8- entitled to be cast in the election of members of the Board of Directors and by the vote required to elect a director, the stockholders may fill a vacancy on the Board of Directors resulting from removal. Section 13 - RESIGNATION ----------- A director may resign at any time by giving written notice to the Board of Directors, the President or the Secretary of the Corporation. Unless otherwise specified in the notice, the resignation shall take effect upon the receipt thereof by the Board of Directors or such officer and the acceptance of such resignation shall not be necessary to make it effective. ARTICLE III COMMITTEES ---------- Section 1 - COMMITTEES ---------- The Board of Directors may appoint from among its members an Executive Committee and other committees composed of two (2) or more directors and delegate to these committees in the intervals between meetings of the Board of Directors any of the powers of the Board of Directors, except the power to declare dividends or distributions on stock, approve any merger or share exchange which does not require stockholder approval, amend the Bylaws, issue stock other than as permitted by statute, or recommend to the stockholders any action which requires stockholder approval. Each committee may fix rules of procedure for its business. A majority of the members of a committee shall constitute a quorum for the transaction of business and the act of- a majority of-those present at a meeting at which a quorum is present shall be the act of the committee. The members of a committee present at any meeting, whether or not they constitute a quorum, may appoint a director to act in place of an absent member. The members of a committee may conduct any meeting thereof by conference telephone in accordance with the provisions of Article II, Section 11. Section 2 - MINUTES ------- Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. Section 3 - INFORMAL ACTION --------------- Any action required or permitted to be taken at any committee meeting may be taken without a meeting if a written consent to such action is signed by all of the members of the committee and such written consent is filed with the minutes of proceedings of the Board of Directors. -9- ARTICLE IV OFFICERS -------- Section 1 - NUMBER ------ The officers of the Corporation shall include a Chief Executive Officer, President, any number of Vice Presidents, a Secretary, any number of Assistant Secretaries, a Treasurer, any number of Assistant Treasurers and may include a Chairman of the Board (or one or more Chairmen of the Board), a Vice Chairman of the Board, a Chief Operating Officer, a Chief Financial Officer and such other officers as the Board of Directors may elect. Any two (2) offices may be held by the same person, except those of President and Vice President. In addition, the Board of Directors may from time to time appoint such other officers with such powers and duties as they shall deem necessary or desirable. Section 2 - ELECTION AND TENURE ------------------- The officers of the Corporation shall be elected by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of the stockholders, or as soon after such first meeting as may be convenient, except that the Chief Executive Officer may appoint one or more vice presidents, assistant secretaries and assistant treasurers. Each officer shall hold office until his successor shall have been duly elected and shall have qualified, or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. The Board of Directors may, at any time, and from time to time, authorize the making or adoption by the Corporation of special contracts with an officer or officers for services of such officer or officers for a fixed period and on such terms and conditions, and with such powers, duties and compensation, as may be fixed by such contract, and may elect such officer or officers for such term or terms as may be specified by such contract. Section 3 - REMOVAL; RESIGNATION -------------------- Any officer or agent of the Corporation may be removed by the Board of Directors whenever, in its Judgment, the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. An officer may resign at any time by giving written notice to the Board of Directors, the President or the Secretary of the Corporation. Unless otherwise specified in the notice, the resignation shall take effect upon the receipt thereof by the Board of Directors or such officer and the acceptance of such resignation shall not be necessary to make it effective. -10- Section 4 - VACANCIES --------- A vacancy in an office may be filled by the Board of Directors for the unexpired portion of the term. Section 5 - CHIEF EXECUTIVE OFFICER ----------------------- The Board of Directors shall designate a Chief Executive Officer. In the absence of such designation, the Chairman of the Board (or, if more than one, the co-chairmen of the Board in the order designated at the time of their election or, in the absence of any designation, then, in the order of their election) shall be the Chief Executive Officer of the Corporation. The Chief Executive Officer shall have general responsibility for implementation of the policies of the Corporation, as determined by the Board of Directors, and for the management of the business and affairs of the Corporation. In addition, the Chief Executive Officer, together with the President, shall have the power to determine the cash compensation of employees of the Corporation other than its Senior Executive Officers. Section 6 - CHIEF OPERATING OFFICER ----------------------- The Board of Directors may designate a Chief Operating Officer. The Chief Operating Officer shall have the responsibilities and duties as set forth by the Board of Directors or the Chief Executive Officer. Section 7 - CHIEF FINANCIAL OFFICER ----------------------- The Board of Directors may designate a Chief Financial Officer. The Chief Financial Officer shall have the responsibilities and duties as set forth by the Board of Directors of the Chief Executive Officer. Section 8 - CHAIRMAN OF THE BOARD --------------------- The Board of Directors may designate a Chairman of the Board (or one of more co-chairmen of the Board). The Chairman of the Board shall preside over the meeting of the Board of Directors and of the stockholders at which he shall be present. If there be more than one, the co-chairmen designated by the Board of Directors will perform such duties. The Chairman of the Board shall perform such other duties as may be assigned to him or them by the Board of Directors. Section 9 - PRESIDENT --------- The President shall preside at all meetings of the Board of Directors and of the stockholders at which he is present. He shall be the chief executive officer of the Corporation and, subject to -11- the control of the Board of Directors, shall, in general, supervise and administer all of the business and affairs of the Corporation. He may sign and execute all authorized bonds, contracts or other obligations in the name of the Corporation. In general, the President shall have all powers and shall perform all duties incident to the office of President and such as may from time to time be prescribed by the Board of Directors. Section 10 - VICE PRESIDENT -------------- In the absence or incapacity of the President, or in the event of a vacancy in the office of the President, the Vice President, if one (or in the event there be more than one, the Vice Presidents in the order designated by the Board of Directors, or, in the absence of such designation, then in the order of their election) shall have the powers and perform the duties of President. A Vice President shall also have such powers and perform such duties as may from time to time be prescribed by the Board of Directors or by the President. A Vice President may have such additional descriptive designations, if any, in his title as may be assigned by the Board of Directors. Section 11 - SECRETARY --------- The Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings thereof in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders of the Board of Directors, and shall perform such other duties incident to the office of Secretary as from time to time may be prescribed by the Board of Directors or by the President, under whose supervision he shall be. He shall have general charge of the stock ledger and custody of the corporate records and of the seal of the Corporation and he, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. Section 12 - ASSISTANT SECRETARY ------------------- The Assistant Secretary, if one (1) (or if there be more than one (1), the Assistant Secretaries in the order determined by the Board of Directors, or, in the absence of such determination, then in the order of their election) shall, in the absence of the Secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the Secretary and -12- shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Section 13 - TREASURER --------- The Treasurer shall have general charge of the financial affairs of the Corporation. He shall in general have all powers and perform all duties incident to the office of Treasurer and such as may from time to time be prescribed by the Board of Directors or by the President. If required by the Board of Directors, he shall give the Corporation a bond (which shall be renewed every six (6) years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. Section 14 - ASSISTANT TREASURER ------------------- The Assistant Treasurer, if one (1) (or if there shall be more than one (1), the Assistant Treasurers in the order determined by the Board of Directors, or if there be no such determination, then in the order of their election), shall, in the absence of the Treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Section 15 - OTHER OFFICERS -------------- Such other officers as may be elected by the Board of Directors shall have such powers and perform such duties as the Board may from time to time prescribe. Section 16 - SALARIES -------- The salaries of the officers shall be fixed from time to time by the Board of Directors, and no officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the Corporation. Section 17 - SPECIAL APPOINTMENTS -------------------- In the absence or incapacity of any officer, or in the event of a vacancy in any office, the Board of Directors may designate any person to fill any such office pro tempore or for any particular purpose. -13- ARTICLE V CONTRACTS, LOANS, CHECKS AND DEPOSITS ------------------------------------- Section 1 - CONTRACTS --------- The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances. Section 2 - LOANS ----- No loans shall be contracted on behalf of the Corporation and no evidence of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances. Section 3 - CHECKS, DRAFTS, ETC. -------------------- All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation, shall be signed by such officer or officers of the corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors. Section 4 - DEPOSITS -------- All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board of Directors may select. -14- ARTICLE VI ISSUE AND TRANSFER OF STOCK --------------------------- Section 1 - ISSUE ----- Certificates representing shares of the Corporation shall be in such form as shall be determined by the Board of Directors. Each certificate shall be signed by the President or a Vice President and countersigned by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, and shall be sealed with the corporate seal. The signatures may be either manual or facsimile signatures; and the seal may be the actual corporate seal or a facsimile of it or in any other form. All certificates surrendered to the Corporation for transfer shall be canceled, and no new certificates shall be issued until the former certificate or certificates for a like number of shares shall have been surrendered and cancelled, except that in case of a lost, stolen, destroyed or mutilated certificate, a new one may be issued therefor upon such terms and indemnity to the Corporation as the Board of Directors may prescribe. Section 2 - TRANSFER OF SHARES ------------------ Transfer of shares of the Corporation shall be made only on its stock transfer books by the holder of record thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation, and on surrender for cancellation of the certificate for such shares. The person in whose name shares stand on the books of the Corporation shall be deemed to be the owner thereof for all purposes. Section 3 - STOCK LEDGER ------------ The Corporation shall maintain a stock ledger which contains the name and address of each stockholder and the number of shares of stock of each class which the stockholder holds. The stock ledger may be in written form or in any form which can be converted within a reasonable time into written form for visual inspection. The original or a duplicate of the stock ledger shall be kept at the principal office or the principal executive offices of the Corporation in the State of Maryland. ARTICLE VII FIXING DATE FOR DETERMINATION OF STOCKHOLDERS' RIGHTS ----------------------- The Board of Directors may fix, in advance, a date as the record date for the purpose of determining stockholders entitled to notice of, or to vote at, any meeting of stockholders, or stockholders entitled to receive payment of any dividend or the -15- allotment of any rights, or in order to make a determination of stockholders for any other proper purpose. Only stockholders of record on such date shall be entitled to notice of, and to vote at, such meeting or to receive such dividends or rights, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after such record date fixed as aforesaid. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. ARTICLE VIII AMENDMENTS ---------- The Board of Directors shall have the exclusive right and power to alter, amend or repeal the Bylaws of the Corporation and to adopt new Bylaws. ARTICLE IX FISCAL YEAR ----------- The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. ARTICLE IX INDEMNIFICATION --------------- The Corporation shall indemnify, in the manner and to the fullest extent permitted by law, any person who is or was a party to, or is threatened to be made a party to, any threatened, pending or completed action, suit or proceeding, whether or not by or in the right of the Corporation and whether civil, criminal, administrative, investigative or otherwise, by reason of the fact that such person is or was a director or officer of the Corporation, or that such person, while an officer or director of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner or trustee of another corporation, partnership, trust, employee benefit plan or other enterprise. To the fullest extent permitted by law, the indemnification provided herein shall include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement and any such expenses may be paid by the Corporation in advance of the final disposition of any such action, suit or proceeding. Upon authorization by the Board of Directors, the Corporation may indemnify employees and/or agents of the Corporation to the same extent provided herein for directors and officers. Any repeal or modification of any of the foregoing sentences of this Article IX, shall be prospective in operation and effect only, and shall not adversely affect any right to indemnification or advancement of -16- expenses hereunder existing at the time of any such repeal or modification. The indemnification and reimbursement of expenses provided herein shall not be deemed to limit the right of the Corporation to indemnify any other person against any liability and expenses to the fullest extent permitted by law, nor shall it be deemed exclusive of any other right to which any person seeking indemnification from the Corporation may be entitled under any agreement, the Article, a vote of the stockholders or disinterested directors, or otherwise, both as to action in such person's official capacity as an officer or director of the Corporation and as to action in another capacity, at the request of the Corporation, while acting as an officer or director of the Corporation. -17- EX-10.9 4 REAL ESTATE PURCHASE AGREEMENT EXHIBIT 10.9 REAL ESTATE PURCHASE AGREEMENT BETWEEN THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, A WISCONSIN CORPORATION, SELLER AND KILROY INDUSTRIES, BUYER 1 REAL ESTATE PURCHASE AGREEMENT Table of Contents Article 1. Agreement. Article 2. Recital. Article 3. Basic Terms. Article 4. The Transaction. 4.1. Purchase and Sale. 4.2. Escrow. 4.3. Purchase Price. 4.3.1. Initial Earnest Money. 4.3.2. Additional Earnest Money. 4.3.3. Retention and Disbursement of Earnest Money. 4.3.4. Cash at Closing. Article 5. Title. 5.1. Title Insurance Commitment. 5.2. Subsequent Matters Affecting Title. 5.3. Survey. Article 6. Condition of the Property. 6.1. Inspection of Property. 6.2. Certain Environmental Matters. 6.2.1. Buyer's Environmental Investigation. 6.2.2. Seller's Environmental Reports. 6.3. Termination/Approval. 6.3.1. Buyer's Approval/Right to Terminate. 6.3.2. Seller's Right to Termination. 6.4. Entry Onto Property. 6.5. Estoppel Certificates. 6.6. Representations and Warranties of Seller. 2 6.7. No Other Representations and Warranties by Seller. 6.8. Survival of Representations and Warranties of Seller. 6.9. Seller Indemnity. 6.10. Representations and Warranties of Buyer. 6.11. Buyer Indemnity. 6.12. Management of the Property. 6.13. Leasing. Article 7. Closing. 7.1. Buyer's Obligations. 7.2. Seller's Obligations. 7.3. Deposits in Escrow. 7.3.1. Seller's Deposits. 7.3.2. Buyer's Deposits. 7.3.3. Joint Deposits. 7.3.4. Other Documents. 7.4. Costs. 7.5. Title Insurance. 7.6. Prorations. 7.7. Insurance. 7.8. Close of Escrow. 7.9. Deliveries to Buyer. 7.10. Recorded Instruments. 7.11. Possession. Article 8. Casualty. Article 9. Condemnation. Article 10. Notices. Article 11. Successors and Assigns. Article 12. Brokers. Article 13. Covenant Not to Record. Article 14. Default. 3 14.1. Default By Buyer. 14.2. Default By Seller. Article 15. Non-Default Termination. Article 16. Miscellaneous. 16.1. Survival of Representations, Covenants, and Obligations. 16.2. Attorneys' Fees. 16.3. Publicity. 16.4. Captions. 16.5. Waiver. 16.6. Time. 16.7. Controlling Law. 16.8. Severability. 16.9. Construction. 16.10. Finance Committee Approval. 16.11. Execution. 16.12. Amendments. 16.13. Entire Agreement. 16.14. Exhibits. 4 SRE 331269 REAL ESTATE PURCHASE AGREEMENT 1. Agreement. --------- This Real Estate Purchase Agreement ("Agreement") is made and entered into as of the Date of Agreement between The Northwestern Mutual Life Insurance Company ("NML" or "Seller") and Kilroy Industries ("Industries" or "Buyer"). 2. Recitals. -------- A. "Kilroy" (as defined below) was the owner, free and clear of all liens and claims except the Mortgage (as defined in the "Settlement Agreement" referenced below), of a leasehold interest created by the "Ground Lease" (described below) in and to the Property described below. As used herein, "Kilroy" refers to Kilroy Long Beach Associates, a California limited partnership in which Kilroy Industries (the Buyer hereunder) was the general partner. The "Ground Lease" means that certain Lease Agreement made the 24th day of January 1989 by and between Kilroy Long Beach Associates, as "Developer", and the City of Long Beach, as "Landlord"; a Short Form of which Ground Lease was recorded in Los Angeles County, California, on January 31, 1989 as Document No. 89 159802. B. As owner, Kilroy developed and leased the "Improvements" on the "Land" (both as defined below). C. Pursuant to a Settlement Agreement made as of the 21st day of July, 1993, by and between Kilroy and Seller (the "Settlement Agreement"), the Ground Lease and the lessee's interest under the Ground Lease in the Improvements were conveyed by Kilroy to Seller by an Assignment of Developer's Interest as Lessee in Ground Lease dated July 21, 1993 which was recorded in Los Angeles County, California, on July 23rd 1993 as Document No.931422619. 5 D. NML, as "Owner", and Kilroy, as "Operator", entered into a Management and Operating Agreement (the "Management Agreement") pursuant to which Kilroy has managed the Property for NML. E. NML, as "Landlord", and De Vry, Inc., as "Tenant", entered into an Office Building Lease for the Property dated July 29, 1994 for reference purposes (the "De Vry Lease"). F. Kilroy and Industries, as "Licensor", and De Vry, Inc., as "Licensee", entered into a Parking License Agreement (the "License Agreement") dated July 29, 1994 for reference purposes, pursuant to which the Licensor granted to De Vry a license to use a portion of certain property owned by Kilroy (as described in the License Agreement) as off-site parking for the Property. Kilroy, De Vry, Inc. and the City of Long Beach entered into a Non-Disturbance Agreement from the Master Lessor dated August 8, 1994 with regard to the License Agreement. G. Buyer desires to purchase from Seller and Seller desires to sell to Buyer all of Seller's interest in the Property. NOW, THEREFORE, it is agreed as follows: 3. Basic Terms. ----------- As used herein, the following Basic Terms are hereby defined to mean: Approval Date. September 20, 1996. - -------------- Broker. Eastdil Broker Services, Inc. - ------- Broker's Commission. $552,187.50 - -------------------- Buyer's Address for Notices. 2250 East Imperial Highway, Suite 1200 - ---------------------------- El Segundo, California 90245 Attn: Jeffrey Hawken with a copy to: Marshall L. McDaniel, Esq. McDaniel & McDaniel 2250 East Imperial Highway, Suite 1200 El Segundo, CA 90245 6 Closing Date. October 25, 1996 - ------------- Date of Agreement. September 2, 1996 - ------------------ Initial Earnest Money. $25,000.00 - ---------------------- Additional Earnest Money. $100,000 - ------------------------- Escrowholder. Chicago Title Insurance Company - ------------- Estoppel Tenants. Olympus America, Inc. - ----------------- McDonnell Douglas Corporation Federal Express Lanier Worldwide Urban Science Application Leviton Manufacturing Company Chilton Company De Vry, Inc. Involved Seller Employee(s) Gary Farmer and Robert Ralls - --------------------------- Materiality Limit $1,000,000 - ----------------- (re: Casualty and Condemnation) - ------------------------------- Property. The Seller's interest in certain real property - --------- commonly known as Kilroy Airport Center, Long Beach, Phase I located at 3880 and 3900 Kilroy Airport Way, Long Beach, California, 90806 within the County of Los Angeles and State of California, which real property is more particularly described on Exhibit "A-1" attached hereto and incorporated herein by this reference (the "Land"), together with the following: (a) all buildings, improvements and structures located on the Land (hereinafter collectively referred to as the "Improvements"); (b) the Seller's interest in all personal property owned by the Seller and used in the operation of the Land or Improvements to the extent any exist, including all fixtures and appliances, furniture and furnishings, 7 equipment and supplies, signage and lighting systems (hereinafter collectively referred to as the "Personal Property" as described on Exhibit G hereto); (c) all of Seller's interest in and to all leases for space in the Property; and (d) such other rights, interests and properties as may be specified in this Agreement to be sold, transferred, assigned or conveyed by Seller to Buyer. (The Seller's interest in the Land, Improvements, Personal Property, together with the other rights and interests described above, are hereinafter collectively referred to herein as the "Property".) Purchase Price. $23,250,000.00 - --------------- Seller's Address for Notices. The Northwestern Mutual Life Insurance Company - ----------------------------- AT&T Building Suite 2100 611 West Sixth Street Los Angeles, CA 90017 Attn: Robert Ralls with copy to: The Northwestern Mutual Life Insurance Company 720 East Wisconsin Avenue Milwaukee, WI 53202 Attn: Susan Koleas Tenant Lease or Leases. Each lease listed on Exhibit B-1 hereto, and - ----------------------- those leases entered into by Seller after the Date of Agreement. Title Insurer. Chicago Title Insurance Company - -------------- 4. The Transaction. ---------------- 4.1 Purchase and Sale. Subject to the provisions hereof, Seller shall, ------------------ on or before the Closing Date, convey the Property to Buyer by an 8 Assignment (the "Assignment") in substantially the form as Exhibit A attached hereto, subject to those matters permitted therein. 4.2 Escrow. In order to effect the conveyance contemplated by this ------ Agreement, the parties hereto agree to open escrow at Escrowholder. Escrowholder shall serve in the capacity of escrowholder hereunder if, and only if, Seller has received an insured closing letter from Title Insurer, satisfactory to Seller, insuring Seller against any loss or damage that Seller may incur as a result of Escrowholder's failure to comply with Seller's closing instructions; otherwise, Title Insurer shall serve as Escrowholder. A copy of this Agreement shall be furnished to the Escrowholder upon full execution hereof. 4.3 Purchase Price. Subject to the provisions hereof, Buyer agrees to -------------- pay the Purchase Price for the Property to Seller as follows: 4.3.1 Initial Earnest Money. At the time of execution of this Agreement by --------------------- Buyer and Seller, Buyer shall deposit with Escrowholder the Initial Earnest Money and Buyer shall cause Escrowholder to notify Seller, no later than two (2) business days after Escrowholder's receipt thereof, that Escrowholder has received the Initial Earnest Money in cash and is holding same in accordance with the terms hereof. Failure of Buyer to timely deposit the Initial Earnest Money with Escrowholder shall constitute a material default by Buyer hereunder. 4.3.2 Additional Earnest Money, At the expiration of the Inspection ------------------------ Period (as defined in Section hereof entitled "Inspection of Property"), if Buyer has not terminated this Agreement, Buyer shall deposit with Escrowholder the Additional Earnest Money and Buyer shall cause Escrowholder to notify Seller, no later than two (2) business days after Escrowholder's receipt thereof, that Escrowholder has received the Additional Earnest Money in cash and is holding same in accordance with the terms hereof. Failure of Buyer to timely deposit the Additional Earnest Money with Escrowholder shall constitute a material default by Buyer hereunder (the Initial Earnest Money and the Additional Earnest Money hereinafter collectively referred to as the "Earnest Money"). 4.3.3 Retention and Disbursement of Earnest Money. In accordance with the ------------------------------------------- terms of this Agreement, the Earnest Money shall be either (i) applied against the Purchase Price, (ii) refunded to Buyer, or (iii) retained by Seller as otherwise provided herein. The Earnest Money shall be held in an interest bearing account at a bank in the name of Escrowholder. 9 The Escrowholder shall not disburse any of the Earnest Money except: (i) by application of same against the Purchase Price at Closing (as defined in the Section hereof entitled "Closing"), (ii) in accordance with written instructions executed by both Buyer and Seller, or (iii) in accordance with the following procedure: If Buyer or Seller, by notice to the Escrowholder, makes demand upon the Escrowholder for the Earnest Money (the "Demanding Party"), the Escrowholder shall, at the expense of the Demanding Party, give notice of such demand (the "Notice of Demand") to the other party (the "Other party"). If the Escrowholder does not receive notice from the Other Party contesting such disbursement of the Earnest Money within five (5) business days from the date on which the Notice of Demand was given, the Escrowholder shall disburse the Earnest Money to the Demanding Party. In the event that the Escrowholder does receive notice from the Other Party contesting such disbursement of the Earnest Money within five (5) business days from the date on which the Notice of Demand was given, the Escrowholder shall thereafter disburse the Earnest Money only in accordance with written instructions executed by both Buyer and Seller, or if no such instructions are received by Escrowholder, then in accordance with a final, non- appealable court order. 4.3.4 Cash at Closing. Buyer shall pay to Seller the Purchase Price in --------------- cash at the Closing, plus or minus the amount of any prorations required by this Agreement, and the amount of Earnest Money then held by Escrowholder, plus any interest thereon, shall be applied against the Purchase Price. Seller and Buyer agree that no portion of the Purchase Price shall be allocated to the Personal Property. 5. Title. ----- 5.1 Title Insurance Commitment. Seller shall, as soon as reasonably -------------------------- possible after the Date of Agreement, obtain a title insurance commitment from Title Insurer with respect to the Property, together with legible copies of the exceptions set forth in such commitment, with the cost thereof to be paid in accordance with the Section hereof entitled "Costs". Buyer shall have ten (10) business days after its receipt of the Commitment to examine same and to notify Seller in writing of its objections to title due to (i) the existence of any items which would adversely affect the then current use of the Property or (ii) constitute liens upon the Property in favor of Seller relating to Seller's former interest therein as leasehold mortgagee (all items so objected to being hereinafter referred to as the "Objectionable Items"), 10 provided, however, that Buyer may not object to any matter affecting title to the Property as of the date of the Settlement Agreement (except only for the Mortgage or other liens in favor of Seller relating to Seller's former interest therein as leasehold mortgagee), all of which shall conclusively be deemed to be "Permitted Exceptions". All other matters affecting title to the Property as of the date of the Commitment, except those specifically and timely objected to by Buyer in accordance with this Section shall be deemed approved by Buyer and shall also be deemed to be "Permitted Exceptions". If Buyer timely notifies Seller of any Objectionable Items, Seller may, but shall not be obligated to, cure or remove same. If Seller does cure or remove all such Objectionable Items, Buyer shall be obligated to proceed with Closing. Such Objectionable Items shall be deemed removed or cured if Buyer obtains, at Closing, an ALTA extended coverage Owner's Policy of Title Insurance (1970 form) in the amount of the Purchase Price in favor of Buyer as the grantee of Seller's interest in the Property with such Objectionable Items having been removed as exceptions or insured over by Title Insurer. Seller shall notify Buyer, within ten (10) business days after Seller's receipt of Buyer's notice of Objectionable Items, as to which Objectionable Items Seller is willing to remove or cure ("Seller's Election"); and if no such notice is given within such time period, Seller shall be deemed to have elected not to cure any of the Objectionable Items. If Seller is unwilling or unable to cure some or all of the Objectionable Items, Buyer shall, as its sole and exclusive remedy in such event, make an election in writing ("Buyer's Election"), within five (5) business days after receipt by Buyer of Seller's Election (or the expiration of the time period for Seller to make Seller's Election if Seller fails to send notice of Seller's Election) either: (a) To accept title to the Property subject to the Objectionable Items which Seller is unwilling or unable to cure (all such items being thereafter included in "Permitted Exceptions"), in which event the obligations of the parties hereunder shall not be affected by reason of such matters, the sale contemplated hereunder shall be consummated without reduction of the Purchase Price, and Buyer shall have no further right to terminate this Agreement pursuant to this Section; or, (b) To terminate this Agreement in accordance with the Section hereof entitled "Non-Default Termination". If Seller has not received Buyer's Election within such five (5) business day period, Buyer shall be deemed conclusively to have elected to accept title to the Property subject to the Objectionable Items which Seller is unwilling or unable to cure (all such items being thereafter included in "Permitted 11 Exceptions"), without reduction of the Purchase Price in accordance with Subsection (a) above. Seller shall use good faith efforts to obtain the consent of the City of Long Beach to the Assignment, in the form set forth on Exhibit "A" hereto, but if for any reason whatsoever Seller does not obtain such consent of the City of Long Beach on or before the Closing, this Agreement shall terminate in accordance with the Section hereof entitled "Non-Default Termination". Anything to the contrary herein notwithstanding, under no circumstances shall Seller be obligated to give the Title Insurer any certificate, affidavit or other undertaking of any sort which might result in potential liability to Seller in excess of the liability being undertaken by Seller in delivering the Assignment to Buyer in accordance with the terms of this Agreement. 5.2 Subsequent Matters Affecting Title. If, for any reason whatsoever, ---------------------------------- the title insurance policy which would otherwise be delivered to Buyer at Closing reflects, as exceptions, any items other than Permitted Exceptions or such Objectionable Items which Buyer has previously elected to accept in accordance with the Section hereof entitled "Title Insurance Commitment", which would materially, adversely affect the then current use of the Property, such items shall, if and only if Buyer shall give written notice thereof to Seller no later than the date of Closing, be deemed "Objectionable Items," and, if Buyer shall so give notice to Seller, then: (a) The Closing shall, at Seller's option, be postponed to the first business day which is at least thirty (30) days after the date previously set for Closing; and (b) The rights and obligations of Buyer and Seller with regard to such Objectionable Items shall be as set forth in the Section hereof entitled "Title Insurance Commitment". 5.3 Survey. Buyer has the option, provided that Buyer does so promptly ------ after the Date of Agreement, at Buyer's sole cost and expense, to obtain a survey of the Property, and upon completion shall provide certified original surveys to Seller and Title Insurer, and cause the Title Insurer to issue a supplement to the title insurance commitment setting forth those items which such survey and any inspection reveal and which would be listed as exceptions in an ALTA policy of title insurance covering the Property ("ALTA Supplement"). If as a result of reviewing the survey and the ALTA Supplement, the Buyer or Title Insurer determines there are additional 12 exceptions to title other than Permitted Exceptions which, in Buyer's sole judgment, would materially adversely affect Buyer's intended use of the Property, such items shall, if and only if Buyer shall give written notice thereof to Seller no later than ten (10) business days after Buyer's receipt of the survey, be deemed "Objectionable Items," and, if Buyer shall so give notice to Seller, then the rights and obligations of Buyer and Seller with regard to such Objectionable Items shall be as set forth in the Section hereof entitled "Title Insurance Commitment". 6. Condition of the Property. -------------------------- 6.1 Inspection of Property. Subject to the provisions of the Sections ----------------------- hereof entitled "Entry onto Property", "Buyer Indemnity" and "Seller's Environmental Reports", from the Date of Agreement until the Approval Date (the "Inspection Period"), Buyer shall have the right to conduct, at its own expense, an inspection of the Property to do the following: (a) at its election and cost, determine zoning and financial aspects of the Property, enter upon the Property for purposes of examining its terrain, access thereto and physical condition, conducting environmental and other studies, doing engineering work, conducting site analyses and making any test or inspection Buyer may deem necessary related to the Property. During the Inspection Period Seller will provide Buyer and its representatives with reasonable access to the Property subject to the provisions of the Section hereof entitled "Entry Onto Property". Buyer's inspection rights shall be subject to the rights of the Tenant(s), including without limitation, rights of quiet enjoyment, and Buyer agrees that it will not unreasonably interfere with any Tenant(s) or contractors on the Property. Except to the extent that Buyer would be in violation of any law, Buyer agrees to hold in strict confidence any information obtained during the Inspection Period and the documents and information disclosed to Buyer pursuant hereto and pursuant to this Agreement, provided, however that Buyer may share such information with the consultants, legal counsel, lender's representatives and other similar parties it retains in connection with the purchase of the Property provided that Buyer takes all reasonable steps to ensure that they hold such information in strict confidence. Buyer agrees to provide Seller with copies of any reports generated in connection with the Property ("Inspection Reports"). Failure to so hold such information obtained during the Inspection Period in strict confidence, or to promptly provide Seller 13 with copies of any Inspection Reports, shall constitute a material default hereunder on the part of Buyer. (b) As an affiliate of the Operator of the Property (pursuant to the Management Agreement), Buyer has access to the following to the extent Seller has in its possession relating to the Property: (i) copies of the income and expense operating statements for the Property for the most recent two (2) calendar years and the partial current year, (ii) Tenant Leases, along with a standard form lease, if any, (iii) the real property tax assessment and tax bills with respect to the Property for the past year, (iv) utility bills which have been the obligation of Seller for the preceding twelve (12) months, (v) all available warranties and guarantees, (vi) available licenses and permits, if any; (vii) all vendor service contracts which Seller is proposing to assign, including any and all amendments thereto, as described in Exhibit J hereto, (viii) available soils reports, if any, (ix) maintenance reports, (x) invoices and (xi) any correspondence with Tenant(s). 6.2 Certain Environmental Matters. ------------------------------ 6.2.1 Buyer's Environmental Investigation. Buyer, at its option, may ------------------------------------ conduct, at Buyer's cost, such independent investigation and inspection of the Property as Buyer shall deem reasonably necessary to ascertain the environmental condition of the Property. Buyer shall immediately deliver to Seller any reports or other results of Buyer's environmental investigation of the Property ("Buyer's Environmental Report(s)"). Seller shall permit Buyer to undertake testing on the Property to assess its environmental condition provided that, prior to undertaking any such testing, Buyer and Seller shall enter into an agreement which sets forth Buyer's and Seller's rights and obligations with respect to such testing, in a form as set forth in Exhibit K attached hereto and incorporated herein to be completed with specifics of such testing as deemed reasonably acceptable to Seller. Buyer agrees not to disturb any asbestos which may be on the Property, and if this transaction is not consummated for any reason, to immediately repair any damage to the Property directly or indirectly caused by any acts of Buyer or Buyer's agents in connection with Buyer's Environmental Report(s). BUYER HAS BEEN EXPRESSLY ADVISED BY SELLER TO CONDUCT AN INDEPENDENT INVESTIGATION AND INSPECTION OF THE PROPERTY (subject to the provisions hereof), UTILIZING EXPERTS AS BUYER DEEMS NECESSARY. This Section shall survive Closing or termination of this Agreement. 14 6.2.2 Seller's Environmental Reports. Buyer may examine the ------------------------------- environmental reports in Seller's possession ("Existing Environmental Report(s)") which have been prepared on the Property as described on Exhibit "C" hereto, copies of which are being furnished to Buyer contemporaneously with the full execution of this Agreement. In addition, Seller may, but shall not be required to conduct further environmental testing of the Property by a firm selected by Seller, the cost of which shall be paid by Seller of Future Environmental Report") (Existing Environmental Report(s) and any Future Environmental Report(s) are hereinafter collectively referred to as "Seller's Environmental Reports"). Seller Shall provide Buyer with a copy of any final Future Environmental Report as soon as possible after the Date of Agreement. Anything to the contrary herein notwithstanding, Seller shall have no responsibility or liability with respect to the results or any inaccuracies of any Seller's Environmental Report(s), and makes no representations or warranties whatsoever regarding (i) the completeness of Seller's Environmental Report(s), (ii) the truth or accuracy of Seller's Environmental Report(s) or (iii) the existence or nonexistence of any hazardous or toxic wastes or materials in, on or about the Property. Further, Seller is not assigning Seller's Environmental Report(s) to Buyer or granting Buyer any rights with respect to the environmental firms used by Seller. 6.3 Termination/ Approval. ---------------------- 6.3.1 Buyer's Approval Notice/Right to Terminate. ------------------------------------------- (a) On or before the expiration of the Approval Date, Buyer shall deliver to Seller and Escrowholder a written notice of "Approval Notice") to the effect that Buyer has approved the condition of the Property and chooses to proceed under the terms of the Agreement. At the time of Buyer's delivery of the Approval Notice, Buyer shall deposit with Escrowholder the Additional Earnest Money, was required in accordance with the Section hereof entitled "Additional Earnest Money". Buyer shall also specify in the Approval Notice those contracts which Buyer elects to have assigned to it, and the failure of Buyer to so specify shall be deemed to be an election by Buyer to have all contracts assigned to it and assume all contracts (except Seller's contract with the management company for the Property). If Buyer fails to timely send an Approval Notice, Buyer will be conclusively deemed to have terminated the Agreement, in which event this Agreement shall terminate in accordance with the Section hereof entitled "Non-Default Termination". 15 (b) In addition to Buyer's rights under Subsection (a) above, in the event Seller shall deliver to Buyer Seller's Environmental Report at any time after the date which is ten (10) business days before the Approval Date, and if Buyer is not satisfied with Seller's Environmental Report based solely on matters not previously disclosed or known to Buyer, Buyer shall have the right to terminate this Agreement, in accordance with the Section hereof entitled "Non-Default Termination", by giving Seller notice of such termination on or before the date which business days after Buyer's receipt of Seller's Environmental Report ("Buyer's Review Date"). If Buyer receives any of Seller's Environmental Reports less than ten (10) business days before the Closing, then the Closing shall be postponed to one (1) business day after Buyer's Review Date, or such other date to which Buyer and Seller may mutually agree upon. If Seller shall not timely receive a notice of termination from Buyer, Buyer shall be conclusively deemed to have approved the results of Seller's Environmental Report and Buyer shall have no further right to terminate this Agreement with respect to matters set forth in this Section. 6.3.2 Seller's Right to Terminate. If Seller is not satisfied with Buyer's ---------------------------- Environmental Report or with any Future Environmental Report, Seller shall have the right to terminate this Agreement, in accordance with the Section hereof entitled "Non-Default Termination", by giving Buyer notice of termination on or before the date which is ten (10) business days after Seller's receipt of Buyer's Environmental Report or of any Future Environmental Report (the "Seller's Review Date"). If Seller receives Buyer's Environmental Report, or any Future Environmental Report less than ten (10) business days before Closing, then Closing shall, at Seller's option, be postponed one (1) business day after Seller's Review Date, or such other date to which Buyer and Seller may mutually agree upon. If Buyer shall not timely receive notice of termination from Seller, Seller shall be conclusively deemed to have reviewed the results of Buyer's Environmental Report and any Future Environmental Report, and Seller shall have no further right to terminate this Agreement with respect to matters set forth in this Section. 6.4 Entry onto Property. Buyer and its agents shall observe all ------------------- appropriate safety precautions in conducting Buyer's inspection of the Property. Buyer shall indemnify, defend and hold Seller harmless from and against any losses, damages, expenses, liabilities, claims, demands and causes of action (together with any legal fees and other expense incurred by Seller in connection therewith), resulting directly or indirectly from, or in connection with, any inspection of or other entry upon the Property (including 16 any investigation of the Property necessary for completion of Buyer's Environmental Report and any entry onto the Property with the authorization of Seller) by Buyer, or its agents, employees, contractors or other representatives, including, without limitation, any losses, damages, expenses, liabilities, claims, demands and causes of action resulting, or alleged to be resulting, from injury or death of persons, or damage to the Property or any other property, or mechanic's or materialmen's liens placed against the Property in connection with Buyer's inspection thereof. This Section shall survive Closing or termination of this Agreement. 6.5. Estoppel Certificates. On or before the Closing Date, with respect ---------------------- to each Estoppel Tenant then in the Property, Seller shall use its best efforts to furnish to Buyer, an estoppel certificate completed by the Tenant, on Tenant's form reasonably acceptable to Buyer and Seller. Without affecting Buyer's or Seller's rights or obligations pursuant to this Agreement, Buyer and Seller agree to negotiate in good faith with each other and with any Estoppel Tenant to resolve any claim disclosed in an estoppel certificate against Seller, as landlord, which Buyer reasonably deems will materially and adversely affect Buyer's interest in the Property after the Closing Date. If Seller is not reasonably able to obtain an estoppel certificate from any Estoppel Tenant on or before the Closing Date, the same shall not be a default by Seller and Buyer shall nonetheless be obligated to close the purchase of the Property. In light of the fact that Buyer is intimately familiar with the operation and leasing of the Property as a result of its role as manager thereof, Buyer shall be deemed to have full knowledge of all matters relating to all leases affecting the Property. 6.6 Representations and Warranties of Seller. Subject to the limitations ----------------------------------------- set forth in the Sections hereof entitled "No Other Representations and Warranties by Seller" and "Seller Indemnity", Seller hereby represents and warrants that, except as set forth in Exhibit "D" hereto, to the best of Seller's actual knowledge as of the Date of Agreement: (a) Seller has received no notice, not subsequently cured, from any governmental entity citing the Seller for any material violation of any building or zoning laws which are applicable to the present use and occupancy of the Property. (b) Seller has not been served in any litigation, arbitration or other judicial, administrative or other similar proceedings involving, related to, or arising out of the Property which is currently pending, and which 17 would have a material impact on Buyer's ownership or operation of the Property. (c) Subject to the provisions of the Section hereof entitled "Finance Committee Approval", Seller, and the individuals signing this Agreement on behalf of Seller, have the full legal power, authority and right to execute and deliver, and to perform their legal obligations under this Agreement, and Seller's performance hereunder and the transactions contemplated hereby, have been duly authorized by all requisite action on the part of Seller and no remaining corporate action is required to make this Agreement binding on Seller. (d) There are no service or maintenance contracts in effect regarding the Property which will become obligations of Buyer following the Closing, except those contracts, if any, which Seller has agreed to assign and Buyer has agreed to assume. (e) Seller has received no written notice from any governmental agency with respect to any Hazardous Materials contamination on the Property, or with respect to any investigation, administrative order, consent order or agreement, litigation or settlement with respect to Hazardous Material or Hazardous Material contamination that is in existence with respect to the Property. As used herein, "Hazardous Material" means any hazardous, toxic or dangerous waste, substance or material, as defined for purposes of the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or any other federal, state or local law, ordinance, rule or regulation, applicable to the Property, and establishing liability standards or required action as to reporting, discharge, spillage, storage, uncontrolled loss, seepage, filtration, disposal, removal, use or existence of a hazardous, toxic or dangerous waste, substance or material. Buyer hereby acknowledges that "Seller's actual knowledge", upon which all of the representations and warranties set forth are based, means only the current actual knowledge of the Involved Seller Employee(s), without conducting any investigations whatsoever. The sole and exclusive obligations of Seller with respect to the representations and warranties set forth in this Section shall be as set forth in the Section hereof entitled "Seller Indemnity". 18 6.7 No Other Representations and Warranties by Seller. Except as set -------------------------------------------------- forth in the Section hereof entitled "Representations and Warranties of Seller", and the warranty expressly set forth in the Assignment, Seller makes no other, and specifically negates and disclaims any other representations, warranties, promises, covenants, agreements or guarantees of any kind or character whatsoever, whether express or implied, oral or written, past, present or future, of, as to, concerning, with respect to or regarding title to the Property, the physical condition of the Property and any Personal Property listed in Exhibit "G-1" hereof, the compliance of the Property with applicable government regulations, including, without limitation, the Americans with Disabilities Act, or the past or future operating results of the Property. 6.8 Survival of Representations and Warranties of Seller. Except for the ----------------------------------------------------- warranties set forth in the Assignment, which shall survive indefinitely, all representations and warranties set forth in this Agreement or in any document to be executed by Seller and delivered to Buyer at the Closing, shall survive for a period of one year after the Closing Date only. 6.9 Seller Indemnity. Seller hereby gives Buyer the following ----------------- indemnities, which, subject to the limitations set forth herein, shall be the sole and exclusive obligations of Seller from and after Closing with respect to the Property: (a) As Buyer's sole and exclusive remedy with regard to the condition of the Property, Seller shall indemnify Buyer against any actual, direct damages (and reasonable attorneys' fees and other legal costs) which Buyer can prove Buyer would not have incurred absent inaccuracy in the representations and warranties of Seller set forth in the Section hereof entitled "Representations and Warranties of Seller" as of the Closing, provided, however, that such agreement by Seller to so indemnify, defend and hold Buyer harmless: (1) shall be inapplicable to any claims, suits, actions, damages, costs, charges and expenses attributable to any state of facts of which Buyer (or any affiliate of Buyer) has or should have knowledge on or before the Closing (including, without limitation, any information Buyer and its affiliates should have known as manager, developer and former owner of the Property); and (2) shall be null and void except to the extent that Seller has received notice from Buyer within one year of Closing referring to this 19 Section and specifying the amount, nature and facts underlying any claim being made by Buyer under this indemnity by Seller. (b) As Buyer's sole and exclusive remedy with regard to the operation of the Property, Seller shall indemnify Buyer against any actual, direct damages resulting from the claims of third parties concerning the overt acts of Seller in connection with Seller's operation of the Property prior to the date the Closing occurs, but only if and to the extent that such claims relate to: (1) matters which are in fact insured against by commercial liability insurance; or (2) intentional torts committed by Seller. The provisions of this Section shall survive Closing, subject to limitations set forth herein. 6.10 Representations and Warranties of Buyer. Buyer hereby represents and ---------------------------------------- warrants to Seller that: (a) Buyer, has the full legal power, authority and right to execute and deliver, and to perform its legal obligations under this Agreement, and Buyer's performance hereunder and the transactions contemplated hereby have been duly authorized by all requisite action on the part of Buyer and no remaining action is required to make this Agreement binding on Buyer. The individuals signing this Agreement on behalf of Buyer have authority to do so. The provisions of this Section shall survive Closing. (b) Having been given the opportunity to inspect the Property, Buyer is relying, and will rely, solely on its own investigations of the title to, and physical condition of, the Property and the operating history and future potential of the Property as it deems appropriate and, to the maximum extent permitted by law, Buyer acknowledges and agrees that the Buyer is buying the Property on an "AS IS" and "WHERE IS" condition and basis, with all faults. Buyer is not relying on any statement or information made or given, directly or indirectly, orally or in writing, express or implied, by the Seller or its agents as to the physical and economic nature and/or condition of the Property but, rather, is and will be relying on independent evaluations by its own 20 personnel or consultants to make a determination as to the physical and economic nature, condition and prospects of the Property. (c) Buyer has either: (i) delivered to Seller, at least thirty (30) days prior to Closing, any and all environmental reports on or concerning the Property that were prepared by Buyer or on Buyer's behalf; or (ii) has not prepared, or has not caused to be prepared, any environmental reports on or concerning the Property. (d) The License Agreement is in full force and effect, and there is no default thereunder by any party. 6.11 Buyer Indemnity. Buyer agrees that after the Closing Date, Buyer will --------------- indemnify, defend and hold Seller harmless from and against any and all costs, losses, liabilities, damages, lawsuits, claims and expenses, including, without limitation, attorneys' fees and expenses incurred in defending against same, incurred in connection with, arising out of, or resulting from all risks incumbent in ownership of real property (including, without limitation, all environmental risks), except as expressly set forth in the Section hereof entitled "Seller Indemnity". Without limiting the foregoing, Buyer agrees that after the Closing Date, Buyer hereby assumes, and Buyer will indemnify, defend and hold Seller harmless from and against any and all costs, losses, liabilities, damages, lawsuits, claims and expenses, including, without limitation, attorneys' fees and expenses incurred in defending against same, incurred in connection with, arising out of, or resulting, whenever accruing or arising, from (I) the Ground Lease and/or the License Agreement, and (ii) any "environmental" claims, problems, liabilities or other matters affecting the Property. The provisions of this Section shall survive Closing or other termination of this Agreement. 6.12 Management of the Property. Until the Closing occurs, Seller shall -------------------------- have the right to manage the Property in a manner deemed reasonable in Seller's sole discretion; Seller intends, but shall not be legally bound (other than as expressly set forth in the Management Agreement) to retain Kilroy as Operator of the Property until Closing. Buyer shall be unconditionally obligated to accept the Property "as is", without reduction of the Purchase Price as the result of any actual or alleged mismanagement of the Property prior to the Closing. 21 6.13 Leasing. Until the Closing occurs, Seller shall have the right to ------- lease the Property in its sole discretion. Seller shall send a copy of the proposed lease to Buyer for its approval, prior to execution (together with a statement of the amount of the brokerage commission and the estimated amount of the tenant improvements, if any, which will be due with respect to such lease), which approval Buyer shall not unreasonably withhold or delay. If seller shall not receive notice of objection from Buyer on or before 5 pm Central time five (5) business days following Buyer's receipt of a proposed lease, Buyer shall be conclusively deemed to have approved the proposed lease and the amount of the brokerage commission set forth in Seller's notice (all leases set forth on Exhibit "B-1" hereto, and all leases subsequently approved or deemed approved by Buyer are referred to herein as "Approved Leases" and all commissions approved or deemed approved by Buyer are referred to herein as "Approved Commissions"; and at Closing Exhibit "B-1" shall be amended to include all Approved Leases). Because the benefits of new leases shall primarily accrue to the benefit of Buyer, Buyer hereby agrees to reimburse Seller at Closing for all amounts expended by Seller with respect to the Approved Leases for tenant improvements, together with any Approved Commissions paid by Seller pursuant to the terms of the Approved Leases from the Date of Agreement through the Closing Date provided, however, that it is understood and agreed that Seller shall be solely responsible for the cost of Approved Commissions and tenant improvements to premises occupied by Urban Science Application under an Approved Lease. In addition, except as otherwise set forth herein, Buyer hereby assumes all unpaid obligations of the landlord that are required by the express written terms of the Approved Leases (and all unpaid Approved Commissions due with respect to such Approved Leases), including, without limitation, all unpaid obligations required by the express written terms of the Approved Leases for tenant improvements and other tenant concessions, Buyer agreeing to assume all tenant improvement construction contracts for work required by the express written terms of the Approved Leases which is in progress as of the Closing. This provision shall survive the Closing. 7. Closing. ------- As used herein, the term "Closing" shall refer to the later to occur of: (i) the date on which the Escrowholder is authorized to record the Assignment deposited in escrow by Seller; or (ii) the day on which Seller receives the Purchase Price, adjusted in accordance with the provisions of the Section hereof entitled "Prorations". 22 7.1. Buyer's Obligations. The obligations of Buyer with regard to Closing ------------------- under this Agreement are, at its option, subject to the fulfillment of each and all of the following conditions prior to or at the Closing: (a) Seller shall have performed and complied with all the agreements and conditions required in this Agreement to be performed and complied with by Seller prior to Closing; and Escrowholder may deem all such items to have been performed and complied with when Seller has deposited all items in Escrow as required hereunder; (b) The Title Insurer shall have given to Buyer written confirmation that Title Insurer will issue its ALTA extended coverage Owner's Policy of Title Insurance in the amount of the Purchase Price showing title vested in Buyer subject only to the Permitted Exceptions and the usual exceptions found in said policy; and (c) The representations of Seller contained herein shall be true and correct in all material respects as of the Closing Date. (d) Seller having obtained the written consent of the City of Long Beach, California to the grant, conveyance and assignment of Seller's interest in the Ground Lease to Buyer. 7.2 Seller's Obligations. The obligations of Seller with regard to Closing under this Agreement are, at Seller's option, subject to the fulfillment of each and all of the following conditions prior to or at the Closing: (a) Buyer performing and complying with all the agreements and conditions required by this Agreement to be performed and complied with by Buyer prior to Closing; and Escrowholder may deem all such items to have been performed and complied with when Buyer has deposited with Escrowholder all items required hereunder; (b) The results of Buyer's Environmental Report and Future Environmental Report, if any, shall be satisfactory to Seller in its sole discretion; and (c) The representations of Buyer contained herein shall be true and correct in all material respects on the Closing Date. 7.3 Deposits in Escrow. On or before the Closing Date: ------------------ 23 7.3.1 Seller's Deposits. Seller shall deliver into escrow the following, ----------------- executed by a duly authorized officer of Seller: (a) The Assignment of Lessee's Interest in Ground Lease in the form as -------------- Exhibit "A" attached hereto; (b) "FIRPTA" Affidavit in the form as Exhibit "E" attached hereto; ------------------ (c) Certificate of Corporate Authorization in the form as Exhibit "F" -------------------------------------- attached hereto; (d) Bill of Sale in the form as Exhibit "G" attached hereto; ------------ (e) Seller's closing instructions to the Escrowholder; and ----------------------------- (f) Seller's Certificate of Reaffirmation of Representations and Warranties ----------------------------------------------------------------------- in the form as Exhibit "H" attached hereto; 7.3.2 Buyer's Deposits. Buyer shall deliver into escrow the following, ---------------- executed by a duly authorized officer of Buyer: (i) The Purchase Price, less the Earnest Money then held by Escrowholder, ------------------ plus costs to be paid by Buyer pursuant to the terms of this Agreement, and plus or minus prorations and adjustments shown on the Closing Statement executed by Buyer and Seller; (ii) Buyer's closing instructions to the Escrowholder; and ---------------------------- (iii) Buyer's Certificate of Reaffirmation of Representations and ----------------------------------------------------------- Warranties in the form as Exhibit "I" attached hereto. ---------- 7.3.3 Joint Deposits. Buyer and Seller shall jointly deposit with -------------- Escrowholder the following documents, each executed by persons or entities duly authorized to execute same on behalf of Buyer and Seller: (a) Closing Statement prepared by Escrowholder for approval by Buyer and ----------------- Seller two (2) business days prior to the Closing Date and such Closing Statements shall be deposited with Escrowholder after the same have been executed by Buyer and Seller; 24 (b) Assignment and Assumption of Tenant Leases in the form of Exhibit "B" ------------------------------------------ attached hereto; and (c) Assignment and Assumption of Contracts and Other Obligations in the ------------------------------------------------------------ form attached as Exhibit "J" hereto, pursuant to which Seller assigns and Buyer assumes all of Seller's interest in maintenance and service contracts, licenses, real estate tax refunds and equipment leases (except insurance policies and the Management Agreement, which shall terminate at Closing). Kilroy shall join in the execution of the Assignment and Assumption of Contracts and Other Obligations to evidence the termination of the Management Agreement. 7.3.4 Other Documents. Buyer, Seller and Escrowholder shall deposit with --------------- Escrowholder all other documents which are required to be deposited in Escrow by the terms of this Agreement. 7.4 Costs. Seller and Buyer shall each pay one half of the cost of a ----- standard ALTA extended coverage Owner's Title Insurance Policy, but Buyer shall pay the cost of all endorsements to such owner's policy. Seller shall pay to the Broker the Broker's Commission referred to in Section hereof entitled "Basic Terms". If applicable, Broker shall pay to any co-broker the commission or fee agreed to between Broker and co-broker. Buyer and Seller shall each pay one-half of the Escrowholder's charge for the Escrow, if any. Buyer and Seller shall share equally the cost of realty transfer or stamp taxes, and recording fees. Buyer shall pay the cost of a survey, and all other costs and expenses of the sale and Closing, except that the Buyer and Seller shall each pay its own legal fees incurred in connection with the drafting and negotiating of this Agreement and the Closing of the transaction contemplated herein. 7.5 Title Insurance. As a condition to Closing, Buyer shall receive the ---------------- written assurance of the Title Insurer that it will issue to Buyer an ALTA extended coverage Owner's Title Insurance Policy, which policy shall contain all endorsements agreed upon between Buyer and Title Insurer and shall insure title to the Property in the amount of the Purchase Price and showing title vested in Buyer subject only to the "Permitted Exceptions" (as defined in the Section hereof entitled "Title"). 7.6 Prorations. The following items shall be prorated between Buyer and ---------- Seller as of the Closing Date: 25 (a) Taxes and Assessments. General real estate taxes and assessments and --------------------- other similar charges which are a lien on the Property, but not yet due and payable as of the Closing Date. The prorations shall be based upon the most recent tax bill and will be final. Any assessments levied against the Property which are payable on an installment basis and which installments are due, payable and outstanding on the Closing Date shall be paid by Seller on the Closing Date, except that where general real estate taxes, assessments, utilities and other expenses are paid by the Tenant under the Lease, no proration will be made. (b) Rentals. Other Income and Expenses. Rentals and other amounts and items ---------------------------------- of income relating to the Property, including prepaid rents and percentage rentals. Buyer shall, at Closing, purchase accounts receivable relating to the Property from Seller by a price equal to the following percentage of such outstanding accounts receivable: 100% of the amount of accounts receivable less than 31 days old; 95% of the amount of accounts receivable 31 to 60 days old; 90% of the amount of accounts receivable at least 61 to 90 days old; and 80% of the amount of accounts receivable over 90 days old. (c) Expenses. All expenses of operating the Property which have been -------- prepaid by Seller (except insurance pursuant to Section hereof entitled "Insurance"). (d) Security Deposits. All security and other deposits of Tenant(s) not ----------------- heretofore applied, together with accrued interest, if any, shall be credited to Buyer at the Closing. (e) Utilities. Seller shall receive credit for any assignable utility --------- deposits, if any, which are assigned to Buyer at Buyer's request or with Buyer's consent. To the extent possible, Seller shall cause all electric, gas and water meters which are not payable by Tenants, to be read as of the Closing Date, and Seller shall pay all charges for electricity and water which have accrued to and including the day of Closing and Buyer shall pay all such expenses accruing after the Closing Date. 26 (f) Leasing Reimbursements. Seller shall receive a credit from Buyer at ---------------------- Closing for certain leasing expenses, to the extent any exist, required by the provisions of the Section hereof entitled "Leasing". Buyer and Seller agree to estimate any amounts which cannot be determined accurately as of the Closing Date. All of the foregoing prorations shall be final as of the Closing Date. Prorations and adjustments shall be made by credits to or against the Purchase Price. Expenses incurred in operating the Property that Seller customarily pays and any other costs incurred in the ordinary course of business or the management and operation of the Property shall be prorated on an accrual basis. For purposes of calculating prorations, Seller shall be deemed to be entitled to the income and responsible for the expenses for the entire day upon which the Closing occurs. All apportionments shall be made ill accordance with customary practice in the county in which the Property is located, except as expressly provided herein; in the event of dispute between Buyer and Seller, the advice of the Title Insurer shall be determinative as to what is customary. 7.7 Insurance. The fire, hazard and other insurance policies relating to --------- the Property shall be canceled by Seller as of the Closing Date and shall not, under any circumstances, be assigned to Buyer. All unearned premiums for fire and any additional hazard insurance premium or other insurance policy premiums with respect to the Property shall be retained by Seller. 7.8 Close of Escrow. Subject to the provisions of the Section below --------------- entitled "Wire Transfer", pursuant to the terms of this Agreement, as soon as Buyer and Seller have deposited all items required with Escrowholder, and upon satisfaction of the Sections hereof entitled "Buyer's Obligations" and "Seller's Obligations", Escrowholder shall cause the Closing to occur in accordance with the terms hereof by immediately: (a) Wire Transfer. Wire transferring the Purchase Price (including the ------------- Earnest Money held by Escrowholder, but less the Broker's Commission, and the amount of costs paid by Seller at Closing, and plus or minus the amount of any prorations pursuant to the terms hereof, all as set forth on the Closing Statement signed by Seller) to Seller directly as follows: Firstar Bank Milwaukee, N.A. Milwaukee, Wisconsin ABA Number 0750 0002 2 27 for the account of The Northwestern Mutual Life Insurance Company Account No. 111000978 Attn: Donna Butler SRE 331269 Provided, however, that if, in the opinion of the Escrowholder, such wire transfer cannot be accomplished so that the Seller will receive the wire transfer on or before 11 am Central Time on the date otherwise set for Closing, at the sole discretion of Seller, said Closing shall be delayed one business day with appropriate adjustments to the prorations but without releasing Buyer or Seller from their obligations hereunder. (b) Recordation. Recording the Assignment; ----------- (c) Delivery of Other Escrowed Documents. ------------------------------------ (I) Joint Delivery. Delivering to each of Buyer and Seller at least one executed counterpart of each of the (i) Assignment and Assumption of Leases, (ii) the Closing Statement; (II) Buyer's Delivery. Delivering to Buyer the (i) Bill of Sale, (ii) FIRPTA affidavit, (iii) Certificate of Corporate Authorization, and (iv) Seller's Certificate of Reaffirmation of Representations and Warranties. (Ill) Seller's Delivery. Delivering to Seller Buyer's Certificate of Reaffirmation of Representations and Warranties. (d) Broker's Commission. Delivering to Broker the Broker's Commission for ------------------- services rendered to Seller, as reflected on the Closing Statement executed by Seller and Buyer. In the event there is a co-broker, Broker shall be responsible for delivering to any co-broker the commission agreed to between Broker and co-broker and neither Buyer nor Seller shall have any responsibility for payment of any commission or fee to any co-broker. 7.9 Deliveries to Buyer. As soon as reasonably possible after the Closing, ------------------- Seller shall deliver the following to Buyer: 28 (a) Tenant Lease(s). The original of each Tenant Lease and any amendments --------------- thereto (if available), or a copy of each Tenant Lease and any amendments thereto in the possession of Seller, if not previously delivered to Buyer. (b) Contracts. The originals of all Contracts in the possession of Seller --------- that have been assigned to and assumed by Buyer. (c) Keys. Any keys to any door or lock on the Property in the possession of ---- Seller. (d) Licenses and Permits. All original licenses or permits or certified -------------------- copies thereof issued by governmental authorities having jurisdiction over the Property which Seller has in its possession and which are transferable. (e) Tenant Notice(s). Copies of the Tenant Notice(s) distributed by Seller ---------------- via US. Mail or other delivery service selected by Seller to the Tenant(s) of the Property, advising the Tenant(s) of the sale of the Property to Buyer and directing the Tenant(s) to pay future rents to Buyer. 7.10 Recorded Instruments. As soon after the Closing as possible, -------------------- Escrowholder shall deliver to Buyer the original recorded Assignment, and shall deliver to Seller a copy of the recorded Assignment, with recordation information noted thereon. 7.11 Possession. As of the Close Date, possession of the Property shall be ---------- delivered to Buyer subject to any right of possession under any items described in the Assignment. 8. Casualty. -------- In the event of any loss or damage by fire or other casualty to the Property prior to the Closing which is not material, Closing shall be consummated just as if such loss or damage had not occurred, and Seller shall deliver to Buyer any and all proceeds paid to Seller by Seller's insurer with respect to such casualty. At Closing, Seller shall give Buyer a credit on the Purchase Price in the amount of any deductible. In the event of any material loss or damage by fire or other casualty to the Property prior to the Closing, at Buyer's sole option, either: 29 (a) This Agreement shall terminate in accordance with the Section hereof entitled "Non Default Termination" if Buyer shall so notify Seller within ten (10) business days of Buyer having actual knowledge of the casualty; or (b) If Buyer shall not have timely notified Seller of its election to terminate this Agreement in accordance with Subsection (a) above, Closing shall be consummated just as if such loss or damage had not occurred, without reduction in the Purchase Price, and Seller shall deliver to Buyer any and all proceeds paid to Seller by Seller's insurer with respect to such casualty. At Closing, Seller shall give Buyer a credit on the Purchase Price in the amount of any deductible. For purposes of the foregoing, a casualty shall be deemed to be material if the estimated cost of restoration exceeds the Materiality Limit. 9. Condemnation. ------------ In the event of any condemnation or taking of all or a part of the Property prior to the Closing which is not material, Closing shall be consummated just as if such loss or damage had not occurred, and Seller shall assign to Buyer all of Seller's interest in any condemnation actions and proceeds. In the event of any material condemnation of all or a part of the Property prior to the Closing at Buyer's sole option, either: (a) This Agreement shall terminate in accordance with the Section hereof entitled "Non Default Termination" if Buyer shall so notify Seller within ten (10) business days of Buyer having actual knowledge of the condemnation; or (b) If Buyer shall not have timely notified Seller of its election to terminate this Agreement in accordance with Subsection (a) above, Closing shall be consummated just as if such loss or damage had not occurred, without reduction in the Purchase Price, and Seller shall assign to Buyer all of Seller's interest in any condemnation actions and proceeds. For purposes of the foregoing, a condemnation or taking shall be deemed to be material if the value of the Property taken, as determined by the condemning authority, exceeds the Materiality Limit. 30 10. Notices. All notices which are required or permitted hereunder must be ------- in writing and shall be deemed to have been given, delivered or made, as the case may be, (i) when delivered by personal delivery; (ii) three (3) business days after having been deposited in the United States mail, certified or registered, return receipt requested, sufficient postage affixed and prepaid, property addressed; or (iii) one (1) business day after having been deposited with a nationally recognized overnight courier service (such as, by way of example but not limitation, U.S. Express Mail, UPS, Federal Express or Purolator), addressed to the party to whom notice is intended to be given at the address set forth in the Basic Terms, or to such other address as either party may from time to time designate by written notice given to the other party; provided, however that no party may require notice be given to more than 3 addresses. 11. Successors and Assigns. ---------------------- This Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties hereto; provided, however, that Buyer shall not transfer, sell, or assign all or any portion of Buyer's rights under this Agreement, provided, however that Buyer may, with at least five (5) business days prior notice, direct Seller to cause title to be vested in an affiliate of Buyer. 12. Brokers. ------- Buyer and Seller represent to each other that they have dealt with no broker or other person except the Broker, in connection with the sale of the Property in any manner which might give rise to any claim for commission. Seller agrees to be responsible for payment of Broker's fees only and has not, nor will, assume any liability with respect to any fee or commission payable to any co-broker or any other party. No broker or person other than Broker is entitled to receive any broker's commissions, finder's fees, or similar compensation from Seller in connection with any aspect of the transaction contemplated herein. It is agreed that if any claims for brokerage commissions or fees are ever made against Seller or Buyer in connection with this transaction, all such claims shall be handled and paid by the party whose actions or alleged commitments form the basis of such claim. The party against whom the claim for such fees is made shall indemnify and hold the other party harmless against and in respect of any claim for brokerage or finder's fees or other like payment based in any way upon agreements, arrangements, or understandings made or claimed to have been made by Buyer or Seller with any third person. 31 13. Covenant not to Record. ---------------------- Buyer will not record this Agreement or any memorandum or other evidence thereof. Any such recording shall constitute a material default hereunder on the part of Buyer. 14. Default ------- It is agreed by both Seller and Buyer that the remedies for default are provided for in the following Sections and shall constitute the sole and exclusive remedies of the aggrieved party in the event of default by the other party. Without limiting the foregoing, in no event shall Seller have any liability for damages whatsoever. 14.1 Default by Buyer. In the event of default by Buyer, Seller's sole and ---------------- exclusive remedy, except as set forth further in this Section, is to retain all Earnest Money (including all interest thereon) and all money paid on account of the Purchase Price as liquidated damages, in which event this Agreement shall become null and void and both parties shall thereupon be released of all further liability hereunder. Such amount is agreed upon by and between Seller and Buyer as liquidated damages acknowledging the difficulty and inconvenience of ascertaining and measuring actual damages, and the uncertainty thereof; provided that nothing herein contained shall limit the right of Seller to seek damages from Buyer due to any slander of title by Buyer after the termination of this agreement, or due to any other action taken by Buyer with respect to the Property after the termination of this Agreement, no other damages, rights or remedies shall in any case be collectible, enforceable or available to Seller other than as defined in this Section. 14.2 Default by Seller. In the event of default by Seller, Buyer may elect ----------------- either: (i) to terminate this Agreement and receive from Seller reimbursement of the Earnest Money (including all interest thereon) and money paid on account of the Purchase Price; or (ii) to proceed with an action for specific performance of Seller's express obligations hereunder. Seller shall not be obligated to return Earnest Money (including all interest thereon) to Buyer unless Buyer gives Seller written notice terminating all of Buyer's interest in the Property and this Agreement; provided, however, that failure of Buyer to give Seller such notice shall not be construed to expand Buyer's rights or remedies in any manner. 32 15. Non-Default Termination. ----------------------- In the event of any termination of this Agreement (except only a termination of this Agreement to which the Section hereof entitled "Default" is applicable), the following provisions shall apply: (a) All Obligations Terminate. Except for those obligations which ------------------------- expressly survive termination of this Agreement, neither Buyer nor Seller shall have any further obligations hereunder after termination of this Agreement. (b) Return of Earnest Money. The Earnest Money plus accrued interest ----------------------- shall be returned to Buyer upon Seller's receipt of written notice from Buyer terminating this Agreement, expressly acknowledging the termination of all of Buyer's interest in the Property and this Agreement; provided, however, that failure of Buyer to give Seller such notice shall not be construed to expand Buyer's rights or remedies in any manner. 16. Miscellaneous. ------------- 16.1 Survival of Representations, Covenants, and Obligations. Except as ------------------------------------------------------- otherwise expressly provided herein, no representations, covenants, or obligations contained herein made by Seller or Buyer shall survive Closing or termination of this Agreement. 16.2 Attorneys' Fees. In the event of any litigation between the parties ---------------- hereto concerning the terms hereof, the losing party shall pay the reasonable attorneys' fees and costs incurred by the prevailing party in connection with such litigation, including appeals. 16.3 Publicity. Except to the extent that Buyer would be in violation of --------- any law and except as set forth in Section 6.1(a) hereof, Buyer agrees that it shall (i) treat this transaction strictly confidentially prior to Closing (ii) make no public announcement of the transactions contemplated herein and (iii) neither directly nor indirectly contact the Property's vendors or contractors until after Closing occurs. Neither party will publicly advertise or announce the facts of the sale of the Property, except by mutual written consent, until after the Closing Date. In no event will either party advertise or announce the terms of this Agreement, except by mutual written consent. 33 16.4 Captions. The Section headings or captions appearing in this -------- Agreement are for convenience only, are not a part of this Agreement, and are not to be considered in interpreting this Agreement. 16.5 Waiver. No waiver by any party of any breach hereunder shall be ------ deemed a waiver of any other or subsequent breach. 16.6 Time. Time is of the essence with regard to each provision of this ---- Agreement. If the final date of any period provided for herein for the performance of an obligation or for the taking of any action falls on a Saturday, Sunday or banking holiday, then the time of that period shall be deemed extended to the next day which is not a Sunday, Saturday or banking holiday. 16.7 Controlling Law. This Agreement shall be construed in accordance with --------------- the laws of the state of California. 16.8 Severability. In the event that any one or more of the provisions of ------------ this Agreement shall be determined to be void or unenforceable by a court of competent jurisdiction or by law, such determination will not render this Agreement invalid or unenforceable, and the remaining provisions hereof shall remain in full force and effect. 16.9 Construction. Buyer and Seller agree that each party and its counsel ------------ (if applicable) have reviewed, and if necessary, revised this Agreement, and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments, exhibits or schedules hereto. 16.10 Finance Committee Approval. The obligations of Seller hereunder are -------------------------- subject to Seller obtaining appropriate authorization from its Finance Committee and all other necessary authority to perform its obligations under this Agreement, to proceed to close the transaction contemplated hereby, and to execute and deliver all documents to be executed by Seller and Buyer pursuant hereto. In the event Seller has not obtained such approval on or before the Approval Date, Either Buyer or Seller may terminate this Agreement in accordance with the Section hereof entitled "Non-Default Termination". 16.11 Execution. This Agreement may be executed in any number of --------- counterparts, each of which, when so executed and delivered, shall be 34 deemed an original, but such counterparts together shall constitute but one agreement. 16.12 Amendments. This Agreement may be amended only by a written ---------- instrument executed by Buyer and Seller. 16.13 Entire Agreement. This written Agreement constitutes the entire and ---------------- complete agreement between the parties hereto and supersedes any prior oral or written agreements between the parties with respect to the Property. 16.14 Exhibits. The following Exhibits are attached hereto and made a part -------- hereof: Exhibit A - Assignment of Lessee's Interest in Ground Lease Exhibit B - Assignment and Assumption of Leases Exhibit C - Existing Environmental Reports Exhibit D - Exceptions to Representations and Warranties Exhibit E - "FIRPTA Affidavit" Exhibit F - Certificate of Authorization Exhibit G - Quit Claim Bill of Sale Exhibit H - Seller's Certificate of Reaffirmation of Representations Exhibit I - Buyer's Certificate of Reaffirmation of Representations Exhibit J - Assignment and Assumption of Contracts and Other Obligations Exhibit K - Access and Indemnification Agreement 35 IN WITNESS WHEREOF, this Agreement has been executed as of the Date of Agreement, as herein defined in the Section entitled "Basic Terms." SELLER: THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY By: /s/ Robert M. Ruess -------------------------- Robert M. Ruess Its: Vice President ------------------------- Date: September 3, 1996 ------------------------ [LAW DEPARTMENT STAMP APPEARS BUYER: KILROY INDUSTRIES HERE] By: [SIGNATURE APPEARS HERE] -------------------------- Its: ------------------------- Date: ------------------------ 36 Exhibit A ASSIGNMENT OF LESSEE'S INTEREST IN GROUND LEASE THIS ASSIGNMENT OF LESSEE'S INTEREST IN GROUND LEASE is made as of this _____ day of __________, 1996 between THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, a Wisconsin corporation, ("Assignor") and KILROY INDUSTRIES, a ________________________________, ("Transferee"). Assignor, in consideration of the sum of Ten ($10.00) Dollars and other good and valuable consideration from Transferee, the receipt whereof is hereby acknowledged, hereby GRANTS, CONVEYS and ASSIGNS to Assignee the following "Estate": (a) the interest of the "Developer" in the "Ground Lease" (the "Property"); and (b) Assignor's interest in any improvements (the "Improvements") situated on the Property; and (c) assignor's interest in any and all other right, title, and interest of Assignor in and to the Property. "Ground Lease" means that certain Lease Agreement made the 24th day of January 1989 by and between Kilroy Long Beach Associates, as "Developer", and the City of Long Beach, as Landlord; a Short Form of Ground Lease was recorded in Los Angeles County, California, on January 31, 1989 as Document No. 89 159802. "Developer" has the meaning defined for it in the Ground Lease. Assignor hereby warrants to Assignee for itself and its successors and assigns, that: (a) as of the date hereof, Assignor has not conveyed the Estate, or any right, title or interest therein, to any person other than Assignee; and, 37 (b) the Estate is, as of the date hereof, free from encumbrances done, made, or suffered by Assignor, or any person claiming under Assignor, except only for the rights of the Lessor under the Ground Lease. PROVIDED, HOWEVER, that Assignor shall have no liability whatsoever with respect to: 1. Real Estate Taxes not yet due and payable; 2. General and Special Assessments payable after the date hereof; 3. Liens, claims, easements, covenants, restrictions, encumbrances and other matters of record; 4. Zoning and other laws, ordinances and regulations; 5. Public Utility, Drainage and Highway easements, whether or not of record; 6. Rights of parties in possession; 7. Encroachments and other matters which would be disclosed by an accurate survey or an inspection of the above premises; and, 8. Consequences of any attack on the title conveyed hereunder under any creditor's rights law, including state insolvency law and federal bankruptcy law. 38 IN WITNESS WHEREOF, said The Northwestern Mutual Life Insurance Company, has caused these presents to be executed by ______________________, Vice President thereof, and attested by its Assistant Secretary pursuant to authority duly conferred on such officers by its Board of Trustees. THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY 720 East Wisconsin Avenue Milwaukee, Wisconsin 53202 By: ------------------------- Vice President Attest: ------------------------- Assistant Secretary On this _______ day of _____,1996, the City of Long Beach, as Landlord under the Ground Lease, hereby acknowledges the GRANT, CONVEYANCE and ASSIGNMENT to Kilroy Industries set forth herein and further agrees that it is a permitted sale, transfer and assignment of the estate described herein. THE CITY OF LONG BEACH By: ------------------------- 39 STATE OF WISCONSIN ) ) SS. COUNTY OF MILWAUKEE ) On this______ day of____________, A.D., 19__, before me appeared _________________________________________ and __________________________ Vice President and Assistant Secretary, respectively, of The Northwestern Mutual Life Insurance Company, who are personally to me known and known to me to be such Vice President and Assistant Secretary and to be the same persons who, as such officers, executed the foregoing instrument of writing in the name of said corporation and duly and severally acknowledged the execution thereof as the free act and deed of said corporation. And then and there the said ________________ and __________________,being by me first duly sworn, did say, each for himself, that the said ________________ is Vice President and the said ________________ is Assistant Secretary of The Northwestern Mutual Life Insurance Company, that the seal affixed to the foregoing instrument is the corporate seal of said corporation and that said instrument was signed and sealed in its behalf by authority of its Board of Trustees. _________________________________ Notary Public, State of Wisconsin My Commission expires: ________ This instrument was prepared for THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY by _______________, Attorney, 720 East Wisconsin Avenue, Milwaukee, Wisconsin 53202. 40 Exhibit A Legal Description PARCELS 1 AND 2 OF PARCEL MAP NO. 16960, IN THE CITY OF LONG BEACH, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP FILED IN BOOK 208 PAGES 92 THROUGH 100 INCLUSIVE OF PARCEL MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY, TOGETHER WITH IMPROVEMENTS LOCATED THEREON. EXCEPT THEREFROM ALL OIL, GAS, AND OTHER HYDROCARBONS IN AND UNDER, OR WHICH MAY BE PRODUCED OR SAVED FROM SAID LAND, TOGETHER WITH ALL RIGHTS OF EVERY KIND AND DESCRIPTION WHATSOEVER TO DRILL FOR, DEVELOP, TAKE, REMOVE, AND SEVER THE SANE, OR ANY PART THEREOF, FROM SAID LAND, WITHOUT, HOWEVER, THE RIGHT TO THE USE OF THE SURFACE OF SAID LAND IN CONNECTION WITH THE DEVELOPMENT OR REMOVAL OF SAID OIL, GAS OR OTHER HYDROCARBONS, ALL DRILLING AND BORING FOR SAID PURPOSES TO BE DONE BENEATH THE SURFACE OF SAID LAND AT ANY LEVEL, 100 FEET, OR MORE, BELOW THE SURFACE THEREOF, THE SURFACE OPENING OF THE WELL HOLE TO BE LOCATED ON LAND OTHER THAN THE LAND ABOVE DESCRIBED, AS RESERVED IN THE DEED FROM BIXBY LAND COMPANY, A CORPORATION, RECORDED AUGUST 25, 1948 IN BOOK 28072 PAGE 204, OFFICIAL RECORDS, AND RECORDED FEBRUARY 10, 1950 IN BOOK 32238 PAGE 67, OFFICIAL RECORDS, AND RECORDED DECEMBER 28, 1950 IN BOOK 35178 PAGE 303, OFFICIAL RECORDS, AND RECORDED DECEMBER 28, 1950 IN BOOK 35179 PAGE 310, OFFICIAL RECORDS. 41 EXHIBIT B Assignment and Assumption of Leases BY THIS AGREEMENT, made this ______day of_________, 1996, The Northwestern Mutual Life Insurance Company, a Wisconsin corporation, ("Assignor"), and Kilroy Industries, a ______________ ("Assignee"), confirm and agree as follows: I. RECITALS 1.1 Assignor has agreed to sell its interest in the Property the real property described on Schedule 2 (the "Property") to Assignee on or before ___________________________________ , 199__ 1.2 Assignor desires to assign to Assignee and Assignee desires to acquire the Assignor's interest under the leases described on Schedule I (the "Leases"), effective upon the closing of the sale described in 1.1 above (the "Closing"). II. AGREEMENT 2.1 In consideration of the sum of Ten Dollars ($10.00) paid by Assignee, the receipt of which is hereby acknowledged, the Assignor hereby assigns to Assignee, all of its interest in the Leases, subject to the terms, covenants, provisions, and conditions set forth therein. 2.2 In order to induce Assignor to execute and deliver this instrument and to assign the interest hereby conveyed, Assignee covenants with the Assignor as follows: a) To promptly pay or cause to be paid to the person or persons, corporations, who from time to time may be entitled thereto, all taxes and assessments, and all other amounts of any nature provided by the terms of such Leases to be paid by the landlord; b) To assume, keep, observe, and perform duly and punctually, all of the terms, covenants, provisions, and conditions contained in such Leases on the part of the landlord to be kept, observed, and performed 42 in the same manner and with the same effect as though Assignee were the original and named landlord to such leases, and specifically Assignee agrees to pay to the existing and future tenants all sums that have been or may be collected as security deposits if such payments are required in accordance with the terms of such leases; c) To indemnify Assignor against any claims arising under such Leases subsequent to the date of Closing. IN WITNESS WHEREOF, Assignor and Assignee by their proper officers thereunder duly authorized, have executed these presents as of the day and year first hereinabove written. Assignor: THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY By: ------------------------------- Its: Vice President Attest: --------------------------- Its: Assistant Secretary Assignee: KILROY INDUSTRIES By: ------------------------------- Its: ------------------------------ Attest: --------------------------- Its: ------------------------------ 43 STATE OF WISCONSIN ) ) ss. COUNTY OF MILWAUKEE ) The foregoing instrument was acknowledged before me this_____day of ______________, 199__, __________________ and ___________ the Vice President and Assistant Secretary respectively, of The Northwestern Mutual Life Insurance Company, and acknowledged the execution of the foregoing instrument as the act and deed of said corporation. - ---------------------------------- Notary Public My commission expires: STATE OF ) ) ss. COUNTY OF) The foregoing instrument was acknowledged before me this ______ day of ____________, 199__, _____________ and _____________ the Vice President and Assistant Secretary respectively, of ______________________________________ and acknowledged the execution of the foregoing instrument as the act and deed of said trust. - ---------------------------------- Notary Public My commission expires: 44 SCHEDULE 1 ASSIGNMENT OF LANDLORD'S INTEREST IN LEASES List of Leases Leases between The Northwestern Mutual Life Insurance Company, as assignee of the interests of Kilroy Long Beach Associates and 1. Olympus America, Inc. 2. McDonnell Douglas Corporation 3. Federal Express 4. Lanier Worldwide 5. Urban Science Application 6. Chilton Company Leases between The Northwestern Mutual Life Insurance Company and 1. Leviton Manufacturing Company 2. De Vry, Inc. 45 SCHEDULE 2 ASSIGNMENT AND ASSUMPTION OF LEASES Legal Description PARCELS 1 AND 2 OF PARCEL MAP NO. 16960, IN THE CITY OF LONG BEACH, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP FILED IN BOOK 208 PAGES 92 THROUGH 100 INCLUSIVE OF PARCEL MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY, TOGETHER WITH IMPROVEMENTS LOCATED THEREON. EXCEPT THEREFROM ALL OIL, GAS, AND OTHER HYDROCARBONS IN AND UNDER, OR WHICH MAY BE PRODUCED OR SAVED FROM SAID LAND, TOGETHER WITH ALL RIGHTS OF EVERY KIND AND DESCRIPTION WHATSOEVER TO DRILL FOR, DEVELOP, TAKE, REMOVE, AND SEVER THE SAME, OR ANY PART THEREOF, FROM SAID LAND, WITHOUT, HOWEVER, THE RIGHT TO THE USE OF THE SURFACE OF SAID LAND IN CONNECTION WITH THE DEVELOPMENT OR REMOVAL OF SAID OIL, GAS OR OTHER HYDROCARBONS, ALL DRILLING AND BORING FOR SAID PURPOSES TO BE DONE BENEATH THE SURFACE OF SAID LAND AT ANY LEVEL, 100 FEET, OR MORE, BELOW THE SURFACE THEREOF, THE SURFACE OPENING OF THE WELL HOLE TO BE LOCATED ON LAND OTHER THAN THE LAND ABOVE DESCRIBED, AS RESERVED IN THE DEED FROM BIXBY LAND COMPANY, A CORPORATION, RECORDED AUGUST 25, 1948 IN BOOK 28072 PAGE 204, OFFICIAL RECORDS, AND RECORDED FEBRUARY 10, 1950 IN BOOK 32238 PAGE 67, OFFICIAL RECORDS, AND RECORDED DECEMBER 28, 1950 IN BOOK 35178 PAGE 303, OFFICIAL RECORDS, AND RECORDED DECEMBER 28, 1950 IN BOOK 35179 PAGE 310, OFFICIAL RECORDS. 46 EXHIBIT C Existing Environmental Reports 1. Environmental Assessment Report performed by Targhee, Incorporated, dated May 19, 1988 and corollary documents under cover letter from Targhee, Incorporated, dated July 14, 1988. 2. Environmental Site Assessment performed by CTL Environmental Services for the Northwestern Mutual Life Insurance Company, dated August 3, 1993. 3. Phase I Environmental Site Assessment performed by CTL Environmental Services for The Northwestern Mutual Life Insurance Company, dated June 3, 1993. 47 EXHIBIT D Exceptions to Seller's Representations and Warranties NONE 48 EXHIBIT E "FIRPTA" Affidavit Section 1445 of the Internal Revenue Code provides that a transferee of a U.S. real property must withhold tax if the transferor is a foreign person. To inform the transferee that withholding of tax is not required upon the disposition of a U.S. real property interest by The Northwestern Mutual Life Insurance Company, the undersigned hereby certifies the following on behalf of The Northwestern Mutual Life Insurance Company. 1. The Northwestern Mutual Life Insurance Company is a Wisconsin corporation and is not a foreign corporation; 2. The Northwestern Mutual Life Insurance Company's U.S. employer identification number is 39-0509570; and 3. The Northwestern Mutual Life Insurance Company's home office address is 720 East Wisconsin Avenue, Milwaukee, WI 53202. The undersigned understands that this certification may be disclosed to the Internal Revenue Service by transferee and that any false statement contained herein could be punished by fine, imprisonment or both. Under penalty of perjury, I declare that I have examined this certificate and to the best of my knowledge and belief, it is true, correct and complete, and I further declare that I have authority to sign this document on behalf of The Northwestern Mutual Life Insurance Company. THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY Dated: By: ------------------ ------------------------------ Its: ----------------------------- 49 EXHIBIT F CERTIFICATE OF CORPORATE AUTHORIZATION I, ____________________, do hereby certify that I am an Assistant Secretary of The Northwestern Mutual Life Insurance Company, a Wisconsin corporation (the "Company"); and that the following are true and correct excerpts from the By- Laws of the Company, now in full force and effect, relating to the powers of the Finance Committee of the Company and the execution of instruments on behalf of the Company: "Section 2.6 Finance Committee. (a) COMPOSITION AND POWERS. The ----------------- ---------------------- finance committee shall consist of such number of trustees as the board may determine, to be elected annually by the board, plus the chairman of the board, if any, and the president, if a trustee. When the board is not in session, the finance committee shall have and may exercise all of the powers of the board in regard to the assets and investments of the Company (except assets used in the operation of the Company's principal office and agencies) including, without limitation, the power directly or by delegation to do all such acts and things as it may deem necessary and proper to (i) establish the Company's financial and investment policy, (ii) invest, reinvest, manage, select, sell and otherwise dispose of the Company's assets, (iii) designate depositories for the Company's funds and authorize persons to make deposits in and withdrawals from such depositories, (iv) appoint one or more managers of the Company's regional loan and real estate offices, (v) borrow money for the use and benefit of the Company in such amount and on such terms as it shall determine, and (vi) pledge the Company's assets as security for the payment of such loan or other purposes." ****************** "Section 6.3 Other Instruments. The chairman of the board, the ----------------- president, the vice presidents, and such other persons as the board, the executive committee or the finance committee may designate shall each have authority to execute and acknowledge on behalf of the Company all instruments executed in the name of the Company; and the chairman of the board, the president and the vice presidents shall each have authority to execute powers of attorney authorizing other 50 persons to execute and acknowledge such instruments in specific instances. The secretary and any associate or assistant secretary shall each have authority to attest, countersign and acknowledge all such instruments requiring attestation, countersignature or acknowledgment. Insurance policies and annuity contracts issued by the Company and endorsements thereto shall be executed in the manner provided by the board or executive committee." I further certify that the Finance Committee of the Company, by resolution approved on _________, 1996, which resolution is now in full force and effect, has authorized the sale of _______________________. I further certify that _____________________ is a Vice President and _______________ is an Assistant Secretary of the Company. IN WITNESS WHEREOF, I have hereunto affixed my name as Assistant Secretary, and caused the corporate seal of the Company to be hereto affixed this __ day of ________________, 19__. ____________________________________ Assistant Secretary of The Northwestern Mutual Life Insurance Company 51 STATE OF WISCONSIN ) ) ss. COUNTY OF MILWAUKEE ) On __________________, before me, __________________, personally appeared _____________, Assistant Secretary of THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY. personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity (ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. _________________________________ Notary Public, State of Wisconsin My commission expires: _______________________ 52 EXHIBIT "A" TO CERTIFICATE OF CORPORATE AUTHORIZATION PARCELS 1 AND 2 OF PARCEL MAP NO.16960, IN THE CITY OF LONG BEACH, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP FILED IN BOOK 208 PAGES 92 THROUGH 100 INCLUSIVE OF PARCEL MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY, TOGETHER WITH IMPROVEMENTS LOCATED THEREON. EXCEPT THEREFROM ALL OIL, GAS, AND OTHER HYDROCARBONS IN AND UNDER, OR WHICH MAY BE PRODUCED OR SAVED FROM SAID LAND, TOGETHER WITH ALL RIGHTS OF EVERY KIND AND DESCRIPTION WHATSOEVER TO DRILL FOR, DEVELOP, TAKE, REMOVE, AND SEVER THE SAME, OR ANY PART THEREOF, FROM SAID LAND, WITHOUT, HOWEVER, THE RIGHT TO THE USE OF THE SURFACE OF SAID LAND IN CONNECTION WITH THE DEVELOPMENT OR REMOVAL OF SAID OIL, GAS OR OTHER HYDROCARBONS, ALL DRILLING AND BORING FOR SAID PURPOSES TO BE DONE BENEATH THE SURFACE OF SAID LAND AT ANY LEVEL, 100 FEET, OR MORE, BELOW THE SURFACE THEREOF, THE SURFACE OPENING OF THE WELL HOLE TO BE LOCATED ON LAND OTHER THAN THE LAND ABOVE DESCRIBED, AS RESERVED IN THE DEED FROM BIXBY LAND COMPANY, A CORPORATION, RECORDED AUGUST 25, 1948 IN BOOK 28072 PAGE 204, OFFICIAL RECORDS, AND RECORDED FEBRUARY 10, 1950 IN BOOK 32238 PAGE 67, OFFICIAL RECORDS, AND RECORDED DECEMBER 28, 1950 IN BOOK 35178 PAGE 303, OFFICIAL RECORDS, AND RECORDED DECEMBER 28, 1950 IN BOOK 35179 PAGE 310, OFFICIAL RECORDS. 53 EXHIBIT G QUIT CLAIM BILL OF SALE Know all men by these presents, that THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, a Wisconsin corporation, with its principal office located at 720 East Wisconsin Avenue, Milwaukee, Wisconsin 53202 ("Seller"), in consideration of the sum of Ten and no/100 Dollars ($10.00) and other good and valuable consideration, to it in hand paid by KILROY INDUSTRIES ("Buyer") the receipt and sufficiency of which is hereby acknowledged, quit claims to Buyer its interests in the personal property described on Exhibit 2 attached hereto which is located on, or is used or intended for use in connection with the land described on Exhibit I attached hereto or the improvements located on such land. SELLER MAKES NO WARRANTIES WHATSOEVER, INCLUDING WITHOUT LIMITATION, WARRANTIES OF CONDITION, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. IN WITNESS WHEREOF, Seller has executed this instrument as of __________________________, 199__. THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY (CORPORATE SEAL) By: ----------------------------- Its Vice President Attest: ------------------------- Its Vice President 54 EXHIBIT I TO QUIT CLAIM BILL OF SALE Legal Description PARCELS 1 AND 2 OF PARCEL MAP NO.16960, IN THE CITY OF LONG BEACH, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP FILED IN BOOK 208 PAGES 92 THROUGH 100 INCLUSIVE OF PARCEL MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY, TOGETHER WITH IMPROVEMENTS LOCATED THEREON. EXCEPT THEREFROM ALL OIL, GAS, AND OTHER HYDROCARBONS IN AND UNDER, OR WHICH MAY BE PRODUCED OR SAVED FROM SAID LAND, TOGETHER WITH ALL RIGHTS OF EVERY KIND AND DESCRIPTION WHATSOEVER To DRILL FOR, DEVELOP, TAKE, REMOVE, AND SEVER THE SAME, OR ANY PART THEREOF, FROM SAID LAND, WITHOUT, HOWEVER, THE RIGHT TO THE USE OF THE SURFACE OF SAID LAND IN CONNECTION WITH THE DEVELOPMENT OR REMOVAL OF SAID OIL, GAS OR OTHER HYDROCARBONS, ALL DRILLING AND BORING FOR SAID PURPOSES TO BE DONE BENEATH THE SURFACE OF SAID LAND AT ANY LEVEL, 100 FEET, OR MORE, BELOW THE SURFACE THEREOF, THE SURFACE OPENING OF THE WELL HOLE TO BE LOCATED ON LAND OTHER THAN THE LAND ABOVE DESCRIBED, AS RESERVED IN THE DEED FROM BIXBY LAND COMPANY, A CORPORATION, RECORDED AUGUST 25, 1948 IN BOOK 28072 PAGE 204, OFFICIAL RECORDS, AND RECORDED FEBRUARY 10, 1950 IN BOOK 32238 PAGE 67, OFFICIAL RECORDS, AND RECORDED DECEMBER 28, 1950 IN BOOK 35178 PAGE 303, OFFICIAL RECORDS, AND RECORDED DECEMBER 28, 1950 IN BOOK 35179 PAGE 310, OFFICIAL RECORDS. 55 KILROY AIRPORT CENTER LONG BEACH SRE 331269 PERSONAL PROPERTY Exterior Furnishings - -------------------- Item Quantity - ---- -------- Concrete Ash/Trash Urns 8 Concrete Planters 27 Metal Benches 7 "Mini" Concrete Ash Urns 1 Interior Furnishings - -------------------- Item Quantity - ---- -------- Teak Benches 4 Teak Planters 22 Steelcase Partitions - -------------------- (see next page) EXHIBIT "2" Page 1 DESCRIPTION OF STEELCASE PARTITIONS ================================================================================ SIZE QTY./1/ ================================================================================ 65" Panels - -------------------------------------------------------------------------------- 65"x20" 164ea - -------------------------------------------------------------------------------- 65"x25" 116ea - -------------------------------------------------------------------------------- 65"x30" 232ea - -------------------------------------------------------------------------------- 65"x36" 711ea - -------------------------------------------------------------------------------- 65"x42" 553ea - -------------------------------------------------------------------------------- 65"x45" 191ea - -------------------------------------------------------------------------------- 65"x60" 815ea ================================================================================ 42" Low Panels - -------------------------------------------------------------------------------- 42"x20" 30ea - -------------------------------------------------------------------------------- 42"x25" 8ea - -------------------------------------------------------------------------------- 42"x30" 252ea - -------------------------------------------------------------------------------- 42"x36" 158ea - -------------------------------------------------------------------------------- 42"x42" 52ea - -------------------------------------------------------------------------------- 42"x45" 206ea - -------------------------------------------------------------------------------- 42"x60" 155ea ================================================================================ 75" Extra High Panels - -------------------------------------------------------------------------------- 75"x20" 13ea - ------------------------------------------------------------------------------- 75"x25" 3ea - -------------------------------------------------------------------------------- 75"x30" 7ea - ------------------------------------------------------------------------------- 75"x35" 5ea - ------------------------------------------------------------------------------- 75"x36" 3ea - ------------------------------------------------------------------------------- 75"x42" 7ea - ------------------------------------------------------------------------------- 75"x45" 24ea =============================================================================== /1/Seller does not warrant or represent the number of panels and Buyer shall accept the same "as is," "where is" and irrespective of the actual number of panels now existing. EXHIBIT "2" Page 2 EXHIBIT H SELLER'S CERTIFICATE OF REAFFIRMATION OF REPRESENTATIONS KNOW ALL MEN BY THESE PRESENTS that pursuant to Section 6.8 of the Real Estate Purchase Agreement dated ___________________________, by and between The Northwestern Mutual Life Insurance Company, as Seller, and Kilroy Industries, as Buyer (the "Agreement"), Seller hereby certifies and confirms to Buyer, that all of the representations and warranties of Seller contained in the Agreement are true and correct in all material respects on and as of the date hereof with the same effect as though such representations and warranties had been made on and as of such date. As provided in Section 6.8 of the Agreement, this certification and all of the representations and warranties made by Seller in the Agreement shall automatically expire, terminate and be of no further force and effect as of ____________________________. IN WITNESS WHEREOF the undersigned has executed this Certificate this _____ day of ______________, 1996. THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY By: ------------------------------- Name: Its: Vice President Attest: --------------------------- Name: Its: Assistant Secretary 57 EXHIBIT I BUYERS CERTIFICATE OF REAFFIRMATION OF REPRESENTATIONS KNOW ALL MEN BY THESE PRESENTS that pursuant to Section ___ of the Real Estate Purchase Agreement dated __________________, by and between The Northwestern Mutual Life Insurance Company, as Seller, and Kilroy Industries, as Buyer (the "Agreement"), Buyer hereby certifies and confirms to Seller, that all of the representations and warranties of Buyer contained in the Agreement are true and correct in all material respects on and as of the date hereof with the same effect as though such representations and warranties had been made on and as of such date. IN WITNESS WHEREOF the undersigned has executed this Certificate this ______ day of ____________, 1996. ---------------------------------- By: ------------------------------- Name: ----------------------------- Title: ---------------------------- By: ------------------------------- Name: ----------------------------- Title: ---------------------------- 58 EXHIBIT J Assignment and Assumption of Contracts and Other Obligations BY THIS AGREEMENT, made this ___ day of _____________________, 1996 The Northwestern Mutual Life Insurance Company, a Wisconsin corporation, ("Assignor"), and Kilroy Industries, a _____________ ("Assignee"), confirm and agree as follows: I. RECITALS 1.1 Assignor has agreed to sell its interest in the "Property" to Assignee on or before ___________, 1996. As used herein, the term "Property" means certain property commonly known as 3880 and 3900 Kilroy Airport Way, Long Beach, CA 90806 (the "Property"), which is more particularly described on Exhibit "A" hereto. 1.2 Assignor desires to assign to Assignee and Assignee desires to acquire the Assignor's interest in all service and maintenance contracts, licenses, real estate tax refunds and equipment leases affecting the Property, except for insurance policies and that certain Management Agreement entered into between Buyer, as Operator and Seller, as Owner on July 21, 1993, (the "Contracts") effective upon the closing of the sale described in 1.1 above (the "Closing"). II. AGREEMENT 2.1 In consideration of the sum of Ten Dollars ($10.00) paid by Assignee, the receipt of which is hereby acknowledged, the Assignor hereby assigns to Assignee, all of its right, title, and interest in and for Contracts, subject to the terms, covenants, provisions, and conditions set forth therein. 2.2 In order to induce Assignor to execute and deliver this instrument and to assign the interest hereby conveyed, Assignee covenants with the Assignor as follows: a) To promptly pay or cause to be paid to the person or persons, corporations, who from time to time may be entitled thereto, 59 all amounts of any nature provided by the terms of such Contracts, to be paid by the owner of the Property; b) To assume, keep, observe, and perform duly and punctually, all of the terms, covenants, provisions, and conditions contained in such Contracts on the part of the landlord to be kept, observed, and performed in the same manner and with the same effect as though Assignee were the original and named party to such Contracts; c) To indemnify Assignor against any claims arising under such Contracts. IN WITNESS WHEREOF, Assignor and Assignee by their proper officers thereunder duly authorized, have executed these presents as of the day and year first hereinabove written. Assignor: THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY By: ------------------------------------ Its: Vice President Attest: -------------------------------- Its: Assistant Secretary Assignee: KILROY INDUSTRIES By: ------------------------------------ Its: ----------------------------------- Attest: -------------------------------- Its: ----------------------------------- 60 EXHIBIT K Access and Indemnification Agreement This ACCESS AND INDEMNIFICATION AGREEMENT (the "Agreement") is entered into as of the __ day of __________, 1996, by and between THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, a Wisconsin corporation, ("NML"}, and KILROY INDUSTRIES, INC., ("Kilroy"). WHEREAS, NML is the owner of a leasehold interest in land described on Exhibit A attached hereto, created by a ground lease between Kilroy Long Beach Associates and the City of Long Beach dated January 24, 1989; WHEREAS, the Property contains one or more underground storage tanks and was the former site of a gasoline station and aircraft painting operation; WHEREAS, Kilroy has retained ________________________ ("_____")to perform various tests and/or inspections of the Property, including but not limited to examining the terrain, physical and environmental conditions of the Property and, ______________________________________; and WHEREAS, NML, has agreed to allow such work on the Property under the terms of this Agreement. NOW THEREFORE, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, NML and Kilroy agree as follows: 1. NML hereby grants to Kilroy a revocable license to permit _____ to enter the Property and perform the following work on the Property in accordance with this Agreement: a. ---------------------------------- ---------------------------------- b. ---------------------------------- 61 ------------------------------------ c. ------------------------------------ ------------------------------------ d. ------------------------------------ ------------------------------------ Any work in addition to the specific activities described above will require the written consent of NML. 2. Kilroy hereby agrees that neither it, nor its contractors or agents, will enter onto the Property without two (2) days prior written notice to NML at the following address: The Northwestern Mutual Life Insurance Company AT&T Building, Suite 2100 611 West Sixth Street Los Angeles, California 90017 Attn: Robert Ralls 3. Kilroy hereby agrees that its agents or contractors will observe all appropriate safety precautions in conducting any inspections of the Property. At the sole discretion of NML, Kilroy's agents and contractors may be required to observe safety precautions which exceed any limits as required by law. 4. Kilroy hereby agrees that it shall provide NML with satisfactory certificates of insurance evidencing that Kilroy's agents or contractors have insurance in full force and effect meeting the requirements set forth below. Nothing herein contained shall in any way limit Kilroy's liability under this Agreement or otherwise. Type Limits ---- ------ Worker's Compensation and $ Statutory Employer's Liability General Liability $1,000,000/occurrence $1,000,000/aggregate 62 Automobile Liability $1,000,000/person $1,000,000/occurrence Professional Liability $1,000,000/occurrence $1,000,000/aggregate Pollution Liability $1,000,000/occurrence $1,000,000/aggregate Kilroy will guarantee that its agents and contractors maintain the aforesaid coverages throughout the term of this Agreement and for a minimum period of three (3) years following the termination of this Agreement. 5. Kilroy hereby agrees that the rights granted herein shall be subject to the rights of any tenants occupying the Property, including without limitation, rights of quiet enjoyment, and Kilroy agrees that Kilroy, and its agents and contractors, will not interfere with any tenants, contractors, or invitees on the Property. 6. Kilroy hereby agrees that Kilroy, and its agents and contractors, will hold in strict confidence any information obtained regarding the Property, and agrees to provide NML with copies of any reports generated in connection with the rights granted herein provided that Kilroy may disclose the information permitted to be disclosed by 6.1(a) of the Real Estate Purchase Agreement entered into by NML and Kilroy, as Seller and Buyer respectively on ________________, 1996. 7. Kilroy hereby acknowledges and agrees that it is only authorized to install and operate ___________ monitoring wells at the locations described in Exhibit B attached hereto and incorporated herein, and that such installation shall be completed with a flush mounted and locked design. Kilroy further agrees to properly abandon all wells and other disturbances and restore, to the reasonable satisfaction of NML, the Property to its condition prior the conduct of any Work by or on behalf of Kilroy 8. Kilroy hereby agrees to indemnify, defend and hold NML and its employees, tenants, invitees, contractors and agents (the "Indemnified Parties") harmless from and against any losses, damages, expenses, liabilities, claims, demands and causes of action (together with any legal fees and other expense incurred by the Indemnified Parties in connection therewith), resulting directly or indirectly from, or in connection with, (i) 63 contamination of the Property by Kilroy or its agents or contractors, or (ii) any entry on the Property (whether or not permitted by this Agreement) by Kilroy or its agents, contractors or other representatives, including, without limitation, any losses, damages, expenses, liabilities, claims, demands and causes of action resulting, or alleged to be resulting, from injury or death of persons, or damage to the Property or any other property, or mechanic's or materialmen's liens. 9. The rights granted Kilroy hereunder shall terminate on July ___, 1996. The indemnifications contained in section 8 hereof shall survive such termination. Any extension of the aforesaid rights shall require written approval of NML. Such approval will not be unreasonably withheld by NML. 10. No action or proceeding brought or instituted under this Agreement and no recovery made as a result thereon shall be a bar or defense to any further action or proceeding under this Agreement. 11. In the event that any lien is placed upon all or any portion of the Property as a result of the work being performed hereunder, Kilroy shall pay or bond and discharge such lien within five (5) days after notice of such lien. 12. Neither NML's granting of nor Kilroy's exercise of the rights given hereunder shall be deemed to be a right to remediate or a remediation of an environmental problem on the Property. 13. This Agreement and the provisions herein shall be interpreted, construed, and enforced in accordance with the laws of the State of California. 14. Nothing in this agreement shall prevent NML from transferring this agreement to any subsequent owner of the Property. Any subsequent owner of the Property shall have all the same rights and privileges afforded NML in this agreement. 64 IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY By: ---------------------------- Title: ------------------------- KILROY INDUSTRIES By: ---------------------------- Title: ------------------------- 65 EXHIBIT A LEGAL DESCRIPTION PARCELS 1 AND 2 OF PARCEL MAP NO. 16960, IN THE CITY OF LONG BEACH, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP FILED IN BOOK 208 PAGES 92 THROUGH 100 INCLUSIVE OF PARCEL MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY, TOGETHER WITH IMPROVEMENTS LOCATED THEREON. EXCEPT THEREFROM ALL OIL, GAS, AND OTHER HYDROCARBONS IN AND UNDER, OR WHICH MAY BE PRODUCED OR SAVED FROM SAID LAND, TOGETHER WITH ALL RIGHTS OF EVERY KIND AND DESCRIPTION WHATSOEVER TO DRILL FOR, DEVELOP, TAKE, REMOVE, AND SEVER THE SAME, OR ANY PART THEREOF, FROM SAID LAND, WITHOUT, HOWEVER, THE RIGHT TO THE USE OF THE SURFACE OF SAID LAND IN CONNECTION WITH THE DEVELOPMENT OR REMOVAL OF SAID OIL, GAS OR OTHER HYDROCARBONS, ALL DRILLING AND BORING FOR SAID PURPOSES TO BE DONE BENEATH THE SURFACE OF SAID LAND AT ANY LEVEL, 100 FEET, OR MORE, BELOW THE SURFACE THEREOF, THE SURFACE OPENING OF THE WELL HOLE TO BE LOCATED ON LAND OTHER THAN THE LAND ABOVE DESCRIBED, AS RESERVED IN THE DEED FROM BIXBY LAND COMPANY, A CORPORATION, RECORDED AUGUST 25, 1948 IN BOOK 28072 PAGE 204, OFFICIAL RECORDS, AND RECORDED FEBRUARY 10, 1950 IN BOOK 32238 PAGE 67, OFFICIAL RECORDS, AND RECORDED DECEMBER 28,1950 IN BOOK 35178 PAGE 303, OFFICIAL RECORDS, AND RECORDED DECEMBER 28, 1950 IN BOOK 35179 PAGE 310, OFFICIAL RECORDS. 66 EXHIBIT B LOCATION OF MONITORING WELLS 46859/22 67 EX-10.10 5 LEASE AGREEMENT DATED JULY 17, 1985 EXHIBIT 10.10 LONG BEACH MUNICIPAL AIRPORT LEASE AGREEMENT KILROY LONG BEACH ASSOCIATES a California Limited Partnership "DEVELOPER" CITY OF LONG BEACH "LANDLORD" TABLE OF CONTENTS -----------------
Page ---- 1. SUBJECT OF LEASE 1 1.1 Purpose of Lease.............................................. 1 1.2 Lease of Premises............................................. 1 1.3 The Project Area.............................................. 1 1.4 The Premises.................................................. 2 1.4.1 Adjacent Properties................................. 2 1.5 Parties to the Lease Agreement................................ 3 1.5.1 Landlord............................................ 3 1.5.2 Developer........................................... 3 1.5.3 Association by Developer............................ 4 2. TERM................................................................. 4 2.1 Basic Term ................................................... 4 2.2 Options for Extensions ....................................... 4 3. RENT................................................................. 5 3.1 Minimum Ground Rent .......................................... 5 3.1.1 Amount of Ground Rent .............................. 5 3.1.2 Allocation of Ground Rent........................... 5 3.1.3 Payment of Ground Rent ............................. 6 3.1.4 Initial Ground Rent................................. 7 3.1.5 Change in Scope of Development...................... 8 3.1.6 Delays in Commencement of Ground Rent .............. 9 3.1.7 Due Dates and Place of Payment...................... 9 3.2 Ground Rent Adjustments ...................................... 10 3.2.1 Adjustment Dates.................................... 10 3.2.2 Ground Rent Adjustments by Appraisal................ 10 3.2.2.1 Adjustments for Predevelopment and Infrastructure Costs.......................... 11 3.2.3 Appraisal .......................................... 11 3.2.4 Maximum Rent Increase .............................. 13 3.2.4.1 Allocation to Parcels....................... 13 3.2.4.2 Base Sublease Rental........................ 14 3.2.4.3 Sublease Rental Percentage Change........... 14 3.2.4.4 Adjusted Ground Rent........................ 14 3.2.4.5 Sale or Assignment of Leasehold Interest.... 15 3.3 Ground Rent Adjustments Following Reconstruction.............. 15 3.3.1 Ground Rent Adjustments............................. 16 3.3.1.1 Adjustment Date ............................ 16 3.3.1.2 Alternate Adjustment Date................... 16 3.3.2 No Adjustment At Next Scheduled Adjustment Date..... 17
i TABLE OF CONTENTS ----------------- (continued)
Page ---- 3.3.3 Maximum Ground Rent Adjustment............... 17 3.4 Adjustments to Ground Rent During Option Term........... 17 3.5 Maximum Ground Rent Increase ........................... 17 3.6 Definition of Predevelopment and Infrastructure Costs.................................. 18 3.7 Approval of Improvement Plans........................... 18 3.8 Determination of Predevelopment and Infrastructure Costs.................................. 19 3.9 Construction by Landlord................................ 20 3.10 Phasing of Improvements................................. 21 3.11 Exceptions to Maximum Predevelopment and Infrastructure Costs.................................. 21 3.11.1 Rights-of-Way................................ 21 3.11.2 Sewer and Storm Drain........................ 22 3.11.3 Traffic Mitigation........................... 22 4. LEASEHOLD MORTGAGES.............................................. 22 4.1 Leasehold Mortgage Authorized........................... 22 4.2 Notice to Landlord...................................... 23 4.2.1 Leasehold Mortgage Requirements.............. 23 4.2.2 Assignment of Leasehold Mortgage............. 23 4.2.3 Landlord's Acknowledgement of Notice......... 23 4.2.4 Developer to Provide Copies.................. 24 4.3 Definitions............................................. 25 4.3.1 Institutional Lender......................... 25 4.3.2 Leasehold Mortgage........................... 25 4.3.3 Leasehold Mortgagee.......................... 25 4.4 Consent of Leasehold Mortgagee Required................. 25 4.5 Default Notice.......................................... 26 4.6 Notice to Leasehold Mortgagee........................... 26 4.6.1 Landlord's Termination Notice................ 26 4.6.2 Proper Address of Leasehold Mortgagee........ 28 4.7 Procedure on Default.................................... 28 4.7.1 Extension of Termination Notice Period ...... 28 4.7.1.1 Payment of Monetary Obligations...... 29 4.7.1.2 Foreclosure of Leasehold Mortgage.... 29 4.7.2 Cure of Default ............................. 29 4.7.3 Compliance of Leasehold Mortgagee............ 30 4.7.4 Leasehold Mortgage Not an Assignment......... 30
ii TABLE OF CONTENTS ----------------- (continued)
Page ---- 4.7.5 Obligation of Leasehold Mortgagee to Repair or Reconstruct........................... 31 4.7.6 Leasehold Mortgagee's Right to Transfer............. 32 4.7.7 Leasehold Mortgagee Transfer a Permitted Sale....... 32 4.8 New Lease...................................................... 33 4.8.1 Terms of New Lease................................... 33 4.8.1.1 Written Request to Landlord.................. 33 4.8.1.2 Payment of Obligations....................... 33 4.8.1.3 Remedy of Developer's Defaults............... 34 4.8.1.4 New Lease to Have First Priority............. 35 4.8.1.5 Developer's Obligations Under New Lease...... 35 4.9 New Lease Priorities........................................... 35 4.10 Eminent Domain................................................. 36 4.11 Notice of Arbitration.......................................... 36 4.12 Amendment to Facilitate Leasehold Financing.................... 36 4.13 Security Deposit............................................... 36 4.14 Estoppel Certificate........................................... 37 4.15 Notices........................................................ 38 4.16 Erroneous Payments............................................. 38 4.17 Request for Notice for Benefit of Landlord..................... 38 4.18 Release or Forebearance........................................ 39 4.19 Notice......................................................... 39 4.20 No Merger...................................................... 39 4.21 No Payment by Landlord......................................... 39 4.22 Self Liquidating Mortgage...................................... 40 4.23 Leasehold Mortgagee Need Not Cure Specified Defaults........... 40 4.24 Casualty Loss.................................................. 40 5. ASSIGNMENT AND SUBLETTING.............................................. 40 5.1 Prohibition Against Change in Ownership, Management and Control................................................... 40 5.1.1 Name and Address for Notices........................ 41 5.1.2 Type of Entity...................................... 41 5.1.3 Other Transfers .................................... 41 5.1.4 Buildings or Land................................... 42 5.2 Assignments Not Subject to Approval............................. 42 5.2.1 Death or Incapacity................................. 42 5.2.2 Family Transfer..................................... 42 5.2.3 Affiliated Corporation.............................. 42 5.2.4 IRS Transfer ....................................... 43 5.2.5 Public Entity....................................... 43 5.2.6 Partner............................................. 43
iii TABLE OF CONTENTS ----------------- (continued)
Page ---- 5.2.7 Comprising Entity.................................. 44 5.3 Assignment Invalid.............................................. 44 5.4 Approval of Assignments ........................................ 44 5.4.1 Name............................................... 44 5.4.2 Description........................................ 44 5.4.3 Nature of Business................................. 44 5.4.4 Financial Information.............................. 45 5.4.5 Officers .......................................... 45 5.4.6 Additional Information............................. 45 5.4.7 Informational Purposes............................. 45 5.4.8 Confidentiality.................................... 46 5.4.9 Disapproval by Landlord............................ 46 5.5 No Release..................................................... 47 5.6 Unauthorized Change ........................................... 47 5.7 Subletting..................................................... 48 5.7.1 Minor Subleases.................................... 50 5.7.2 Consent to Sublease................................ 50 5.7.2.1 Description................................. 50 5.7.2.2 Name........................................ 51 5.7.2.3 Nature of Business.......................... 51 5.7.2.4 Financial Information....................... 51 5.7.2.5 Officers ................................... 51 5.7.2.6 Additional Information...................... 51 5.7.2.7 Informational Purposes...................... 52 5.7.3 Confidentiality..................................... 52 5.7.4 Disapproval by Landlord............................. 52 5.8 Sale of Buildings.............................................. 53 6. INDEMNITY, INSURANCE, CASUALTY DAMAGE ................................ 53 6.1 Indemnification and Hold Harmless.............................. 53 6.2 Insurance...................................................... 54 6.2.1 Liability Insurance................................ 54 6.2.2 Fire and Extended Coverage......................... 56 6.2.3 Aviation Facilities................................ 58 6.2.4 Miscellaneous...................................... 59 6.2.5 Blanket policies................................... 60 6.2.6 Self-Insurance..................................... 61 6.2.7 Insurance Adjustments.............................. 61 6.3 Damage or Destruction.......................................... 61 6.3.1 Restoration of Premises............................ 61 6.3.2 Right to Terminate................................. 62 6.3.3 No Reduction in Rent............................... 63 7. DEVELOPMENT OF THE PROJECT............................................ 63 7.1 Scope of Development........................................... 63 7.2 Developer's Obligation to Develop Premises..................... 64 7.2.1 Best Efforts to Sublease .......................... 65
iv TABLE OF CONTENTS ----------------- (continued)
Page ---- 7.3 Architectural Approval ......................................... 65 7.3.1 Restriction ........................................ 65 7.3.2 Basic Concept Documents............................. 66 7.3.3 Landscaping......................................... 66 7.3.4 Exterior Elevations................................. 67 7.3.5 Security and Security Plans......................... 67 7.3.6 Amendments.......................................... 68 7.3.7 Landlord Approval .................................. 68 7.3.8 Communication and Consultation...................... 70 7.3.9 Requirements of Institutional Lender or Major Occupant............................ 70 7.3.10 Interior Improvements............................... 71 7.3.11 Modification of Plans............................... 71 7.4 Performance and Payment Bonds................................... 72 7.4.1 Agreement to Provide................................ 72 7.4.2 Term of the Bond.................................... 73 7.4.3 Penal Sum........................................... 73 7.4.4 Alternative Performance............................. 73 7.5 Construction.................................................... 74 7.5.1 Costs of Construction............................... 74 7.5.2 Right to Improve.................................... 74 7.5.3 Governmental Permits................................ 75 7.5.4 Rights of Access.................................... 76 7.5.5 Local, State and Federal Laws....................... 76 7.5.6 Antidiscrimination During Construction ............. 77 7.5.7 Responsibilities of Landlord........................ 77 7.5.7.1 Governmental Approvals....................... 77 7.5.7.2 Easements.................................... 77 7.5.7.3 Off-Site Improvements........................ 78 7.5.7.4 Bond Financing .............................. 78 7.5.8 Responsibilities of Developer....................... 79 7.5.9 Maintenance......................................... 79 7.5.10 Acceptance of Premises.............................. 80 7.6 Subdivided Leases............................................... 80 7.6.1 Same Parties........................................ 81 7.6.2 Obligations of Subdivided Leases.................... 81 7.6.3 Terms, Covenants.................................... 81 7.6.3.1 Ground Rent.................................. 82 7.6.3.2 Improvements ................................ 82 7.6.3.3 Easements and CC & R's....................... 82 7.6.3.4 Description of Property...................... 83 7.6.3.5 Excluded Matters............................. 83 7.7 Combining Leases................................................ 83 7.7.1 Ground Rent......................................... 83 7.7.2 Easements and CC & R's.............................. 84
v TABLE OF CONTENTS ----------------- (continued)
Page ---- 8. USE................................................................. 84 8.1 Permitted Development........................................ 84 8.2 Aviation Related Uses........................................ 84 8.3 Access Taxiway............................................... 85 8.4 Vehicle Parking ............................................. 85 8.5 Federal Aviation Administration.............................. 85 8.6 Inspection................................................... 86 9. LIENS............................................................... 86 9.1 Developer's Responsibility................................... 86 9.2 Notice of Work .............................................. 86 9.3 Discharge of Liens .......................................... 87 9.4 Landlord's Right to Pay ..................................... 87 9.5 Reimbursement of Landlord.................................... 88 10. CONDEMNATION....................................................... 88 10.1 Definition of Terms ........................................ 88 10.1.1 Total Taking ................................... 88 10.1.2 Partial Taking ................................. 88 10.1.3 Voluntary Conveyance ........................... 89 10.1.4 Date of Taking ................................. 89 10.1.5 Leased Land .................................... 89 10.2 Effect of Taking ........................................... 89 10.3 Allocation of Award......................................... 90 10.4 Reduction of Ground Rent on Partial Taking.................. 90 10.5 Temporary Taking ........................................... 91 11. ALTERATIONS BY DEVELOPER........................................... 91 12. TAXES AND ASSESSMENTS.............................................. 92 12.1 Payment by Developer........................................ 92 12.2 Installment Payments........................................ 92 12.3 Proration................................................... 93 12.4 Right to Contest............................................ 93 13. CERTIFICATES BY DEVELOPER AND LANDLORD............................. 94 13.1 Developer to Provide........................................ 94 13.2 Landlord to Provide......................................... 95 14. QUIET ENJOYMENT.................................................... 95 15. TERMINATION AND FURTHER LEASING.................................... 96 15.1 Termination ................................................ 96 15.2 Termination by Developer.................................... 96 15.3 Termination by Landlord..................................... 96
vi TABLE OF CONTENTS ----------------- (continued)
Page ---- 16. BONDS AND SECURITY DEPOSITS......................................... 97 16.1 Good Faith Deposit ......................................... 97 16.1.1 Receipt by Landlord............................. 97 16.1.2 Form of Deposit ................................ 97 16.1.3 Interest........................................ 98 16.1.4 If Bond is Posted............................... 98 16.2 Construction Security Deposits.............................. 98 16.2.1 Form of Construction Deposit.................... 99 16.2.2 Interest........................................ 100 16.2.3 Incorporation by Reference...................... 100 16.2.4 Return of Deposit............................... 100 16.2.5 Retention of Deposit by Landlord................ 101 17. GENERAL PROVISIONS................................................. 101 17.1 Notices, Demands and Communication between the Parties...... 101 17.2 Conflict of Interest ....................................... 102 17.3 Enforced Delay: Extension of Time of Performance............ 103 17.4 Inspection of Books and Records............................. 103 17.5 Defaults and Remedies....................................... 104 17.5.1 Defaults - General.............................. 104 17.5.2 Institution of Legal Actions.................... 104 17.5.3 Applicable Law ................................. 105 17.5.4 Service of Process.............................. 105 17.5.5 Rights and Remedies Are Cumulative.............. 105 17.5.6 Inaction Not a Waiver of Default................ 105 17.5.7 Remedies ....................................... 106 17.5.8 Developer's Rights.............................. 107 17.5.9 Lease Termination............................... 107 17.5.10 Landlord's Exercise of Remedies................. 107 17.5.11 Payment to Developer ........................... 108 17.5.11.1 Reimbursement to Landlord............... 109 17.5.11.2 Reimbursement to Developer.............. 110 17.5.11.3 Ground Rent ............................ 110 17.5.11.4 Remaining Balance....................... 110 17.5.12 Delivery of Plans............................... 111 17.6 Right to Contest Laws....................................... 111 17.7 Trade Fixtures.............................................. 111 17.8 Continued Possession of Developer........................... 112 17.9 Utilities................................................... 112 17.10 Surrender................................................... 113 17.11 Partial Invalidity.......................................... 113 17.12 Section Headings............................................ 114 17.13 Short Form Lease............................................ 114
vii TABLE OF CONTENTS ----------------- (continued)
Page ---- 17.14 Exhibits Incorporated...................................... 114 17.15 Entire Agreement, Waivers and Amendments................... 114 17.16 Waivers.................................................... 114 17.17 Approvals.................................................. 115 17.18 Successors in Interest..................................... 115 17.19 "And/Or"................................................... 115 17.20 "Including" Defined........................................ 115 17.21 Right of First Refusal to Purchase......................... 115 17.22 If Developer is a Trustee.................................. 116 17.23 Limitation of Liability of Partners........................ 117 17.24 Approvals.................................................. 118
viii LIST OF EXHIBITS ----------------
First Appearing at Ltr. Description Paragraph Page - ---- ----------- --------- ---- A Legal Description of Premises 1.2 1 B Site Map of Project Area and 1.4 2 Adjacent Properties C Parcel Map 3.1.2 6 D Categories of Predevelopment 3.6 18 and Infrastructure Costs E Form of Nondisturbance 5.7 49 Agreement F Off-Site Improvements 7.3 78 G Landscaping Plans 7.3.3 67 H Exterior Elevations 7.3.4 67 I Form of Performance Bond and 7.4.1 72 Labor and Material Bond J Construction Schedule 7.2 64 K Master FBO Lease 8.2 84 L FAA Conditions 8.5 85 M Form of Short Form Lease 17.13 114
ix DEFINED WORDS -------------
Defined Word Paragraph Page - ------------ --------- ---- "Adjacent Properties" 1.4.1 2 "Adjusted Fair Market Land Value" 3.2.2 11 "Adjusted Ground Rent" 3.2.4.4 14 "adjustment dates" 3.2.1 10 "Affiliated Corporation" 5.2.3 43 "Agreement Establishing Developer" 1.5.2 3 "and/or" 17.19 115 "Approved Plans" 3.8 19 "as-is" 7.5.10 79 "Basic Concept Documents" 7.3.2 66 "Commencement of Construction" 3.1.3 6 "Completion Date" 5.5 47 "date of taking" 10.1.4 89 "Developer" Intro (P) 1 "Developer's Long Beach Airport 7.1 63 Center Submittal" "FAA" 8.5 85 "Ground Rent" 3.1 5 "Ground Sublease" 5.7 48 "include" 17.20 115 "including" 17.20 115 "Institutional Lender" 4.3.1 25 "Landlord" Intro (P) 1 "Lease" Intro (P) 1 "leased land" 10.1.5 89
x DEFINED WORDS ------------- (continued)
Defined Word Paragraph Page - ------------ --------- ---- "Leasehold Mortgage" 4.3.2 25 "Leasehold Mortgagee" 4.3.3 25 "manage" 1.5.3 4 "Master FBO Lease" 8.2 84 "Net Square Footage" 3.1.2 6 "New Lease" 4.8.1 33 "nondisturbance agreement" 5.7 48 "partial taking" 10.1.2 88 "Predevelopment and Infrastructure 3.2.2 11 Costs" "Premises" 1.2 1 "Project" 1.1 1 "Single Lease" 7.7 83 "Subdivided Lease" 7.6 80 "sublease" 5.7 48 "sublessee" 5.7 48 "Supplement to Kilroy Industries 7.1 63 December 7, 1983, Proposal" "Termination Notice" 4.6.1 27 "Termination Notice Period" 4.6.1 27 "total taking" 10.1.1 88
xi LEASE AGREEMENT --------------- THIS LEASE AGREEMENT (the "Lease") is made this 17th day of July, 1985, by and between KILROY LONG BEACH ASSOCIATES, a California Limited Partnership, hereinafter referred to as "Developer", and the CITY OF LONG BEACH, a municipal corporation, hereinafter referred to as "Landlord". Landlord and Developer hereby agree as follows: 1. SUBJECT OF LEASE: 1.1 Purpose of Lease. The purpose of this Lease is to provide for ---------------- the lease and improvement of certain Premises, hereinafter described, as ("Project"). This Lease is entered into in order to develop the Project and not for speculation in land holding. The development of the Project pursuant to and as contemplated by this Lease is in the best interests of Landlord and in accord with the public purposes and provisions of applicable State and local laws and requirements under which the Project is to be undertaken. 1.2 Lease of Premises. Subject to the terms, covenants and conditions ----------------- of this Lease, Landlord hereby leases to Developer and Developer hereby takes and hires from Landlord that certain real property (the "Premises") legally described on Exhibit "A" attached hereto and made a part hereof, upon the terms and conditions hereinafter set forth. 1.3 The Project Area. The area within which the Project is located in ---------------- the City of Long Beach is the area generally described as the area bounded by Spring Street on the northwest, 1 Taxiway D on the northeast, the San Diego Freeway on the south and southeast, and the National Guard facility on the west. 1.4 The Premises. The Premises include those portions of the Project ------------ area illustrated and designated on the site map attached hereto as Exhibit "B" and forming a part of this Lease and are legally described in the attached Exhibit "A". 1.4.1 Adjacent Properties. Subject to approval of the Board ------------------- of Water Commissioners of the City of Long Beach, and of Landlord, as to that portion under jurisdiction of Landlord, Developer shall have the first opportunity to include the adjacent properties ("Adjacent Properties") identified in Exhibit "B", into the Premises for creation of an integrated development. The fair market value and fair market Ground Rent and periodic adjustments thereof of said properties shall be as mutually agreed by said Board of Water Commissioners and Developer, and by Landlord, as to that portion under jurisdiction of Landlord. Development of the Adjacent Properties shall be governed by separate leases entered into between Developer and the Board of Water Commissioners of the City of Long Beach (and Landlord, as to its property). Developer may terminate this Lease in the event Developer is unable to enter into option agreements covering the Adjacent Properties with the Board of Water Commissioners, and Landlord, on terms and conditions mutually satisfactory to the parties thereto, within ninety (90) days following execution of this Lease. Developer may give Landlord 2 sixty (60) days notice of its intention to terminate any time within said ninety (90) day period. However, the Lease shall not terminate if during said sixty (60) day period the Board of Water Commissioners and Landlord authorize option agreements as described herein. 1.5 Parties to the Lease Agreement. ------------------------------ 1.5.1 Landlord. Landlord is a municipal corporation organized -------- and existing under the laws of the State of California acting in its proprietary capacity. The principal office of Landlord is located at City Hall, 333 West Ocean Boulevard, Long Beach, California 90802. The term "Landlord" as used in this Lease includes the City of Long Beach, California, and any assignee of or successor to its rights, powers and responsibilities. 1.5.2 Developer. Developer is a California limited --------- partnership having a principal place of business at 2250 East Imperial Highway, Suite 1200, El Segundo, California 90245. A written agreement has been executed creating Developer ("Agreement Establishing Developer") an executed copy of which has been delivered to Landlord. Developer agrees, upon request of Landlord, to provide Landlord with any amendments to the Agreement Establishing Developer, so long as Kilroy Long Beach Associates, a California Limited Partnership, is the party acting as Developer under this Lease. The provisions of the foregoing sentence shall apply to any entity becoming a successor to Developer under this Lease or any other lease which may be established pursuant hereto covering the 3 Premises or one or more of the Adjacent Properties. 1.5.3 Association by Developer. Notwithstanding any other ------------------------ provisions hereof, Developer reserves the right, at its discretion, to join and associate with other entities in joint ventures, partnerships or otherwise for the purpose of leasing and developing the Premises and the Adjacent Properties, and Developer may assign this Lease to any such entity, provided that Developer, or any partner of Developer having a controlling interest in Developer, continues to manage and retain policy control over the development and operation of the Premises, until such time as Developer's interests under this Lease are assigned as permitted under subsection 5.1, below. As used herein, "manage" shall mean to direct or supervise the operation and execution of the development of the Premises and to have authority to act for and bind the entity in all dealings with Landlord under this Lease. This definition shall be deemed to require Developer to retain policymaking authority. 2. TERM. ---- 2.1 Basic Term. The term of this Lease shall commence on the date ---------- of execution of this Lease and shall continue thereafter for a period of fifty (50) years. 2.2 Options for Extensions. Subject to approval by the Long Beach ---------------------- City Council and subject to the review by Landlord of Lease provisions pursuant to Section 37380(b)(l) of the 4 Government Code, Developer shall have an option for four (4) Lease extensions of ten (10) years each and a final Lease extension of nine (9) years, so that the total possible duration of this Lease will be ninety-nine (99) years. Developer may request at any time after six (6) months following the effective date of this Lease that Landlord formally consider the granting of such Lease extensions, and Landlord shall act upon such request within ninety (90) days after receipt thereof. 3. RENT: ---- 3.1 Minimum Ground Rent. From commencement of the term of this ------------------- Lease, the Ground Rent ("Ground Rent") payments shall be as follows: 3.1.1 Amount of Ground Rent. Developer shall pay as initial --------------------- Ground Rent, the sum of One Million and No/100 Dollars ($1,000,000.00) per year, which is stated by the parties to be ten percent (10%) of the initial stated value of the land included in the Premises, which, in turn is agreed by the parties to be Ten Million and No/100 Dollars ($10,000,000.00). 3.1.2 Allocation of Ground Rent. Developer initially intends ------------------------- to develop the Premises as six (6) distinct parcels, which are tentatively identified on the preliminary Parcel Map attached hereto and marked Exhibit "C" for reference, with one or more buildings per parcel. The initial Ground Rent obligation described in this subsection 3.1.1 shall be allocated among those parcels in the proportion that the net 5 square footage of land contained in each parcel bears to the net square footage of the land in the entire Premises. "Net square footage" of land means that portion of the land not subject to dedication for public streets and sidewalks. 3.1.3 Payment of Ground Rent. The obligation to pay Ground ---------------------- Rent shall commence as to the first parcel on the date that construction commences on that parcel. Construction on the first parcel shall commence on or before September 1, 1985, subject to granting of all required governmental approvals. The obligation to pay Ground Rent shall commence as to the second through sixth parcels on the earlier of (a) the date that construction commences on each parcel, or (b) one parcel every twelve (12) months following commencement of construction on the first parcel. Construction shall be deemed to have commenced upon the date of issuance of a foundation permit for the first building intended to produce revenue on any given parcel ("Commencement of Construction"). Commencement of the initial Ground Rent upon all subsequent parcels shall occur, one parcel at a time, in the sequence of the numbers of the parcels on the parcel map of the Project. However, if Ground Rent is commenced on a parcel in a sequence other than the order of numbering of parcels as a result of the commencement of construction on such parcel, Developer shall not also be required to commence payment of fifty percent (50%) of Ground 6 Rent on the next numbered parcel. At the next date when payment of initial Ground Rent is to be commenced, such rent shall be commenced as to the lowest numbered remaining parcel. The shift of sequence of required payments resulting from construction on parcels in different order than their numbers may delay, but shall not permanently terminate the obligation to pay rent as to such parcel. 3.1.4 Initial Ground Rent. The initial Ground Rent due for ------------------- each parcel shall be a sum equal to fifty percent (50%) of the Ground Rent attributable to such parcel. Payment of Ground Rent shall continue at that rate until either six (6) months after issuance of an Initial Temporary Certificate of Occupancy on the building shell or commencement of subtenant rent, whichever occurs earlier, at which time the full Ground Rent attributable to that parcel shall become payable. In the event initial rental payment at the fifty percent (50%) level commences on any parcel prior to the commencement of construction of that parcel, then payment of full Ground Rent on said parcel shall commence not later than sixteen (16) months after the commencement of initial rental payments. 3.1.4.1 The commencement of a building or buildings on more than one parcel in any year shall satisfy Developer's obligation to commence payment of rent on parcels in sequence for a number of years equal to the number of parcels on 7 which buildings shall have commenced. Thus, for example, if Developer commences construction of buildings as provided for in this Lease on four (4) parcels in the first year, no automatic annual rent commencement shall occur until the fifth (5th) year, in which case initial Ground Rent shall commence as to the lowest numbered parcel on which construction has not begun on the fifth (5th) anniversary of the date rent first became due on the first parcel, unless, in the intervening years, construction shall have also commenced on one or more other parcels. 3.1.4.2 If initial Ground Rent shall have commenced during any lease year on a parcel because construction of buildings on a requisite number of parcels has not begun, but thereafter, within the same lease year construction of a building is begun on another parcel, the initial rent on the vacant parcel shall cease upon commencement of construction on the other parcel and the obligation to pay rent as described in this Lease shall simultaneously shift to the parcel upon which construction has begun so that to the greatest extent possible rental obligations shall be related to parcels on which construction has commenced rather than vacant parcels. 3.1.5 Change in Scope of Development. Should the scope of ------------------------------ development of a building or buildings on 8 the Premises be substantially changed from the concept of one or more buildings on six (6) different parcels, with Landlord's consent as provided in subsection 7.6, as for example one large building to be constructed upon two or more parcels, Ground Rent shall commence simultaneously with respect to all parcels upon which the foundation of any such building shall be located. 3.1.6 Delays in Commencement of Ground Rent. Developer shall ------------------------------------- not delay the commencement of payment of Ground Rent for a parcel except to the extent of delays incurred for reasons set out in subsection 17.3 which render impossible or impractical the construction upon said parcel. In such case, a delay in the commencement of payment of Ground Rent for a specific parcel shall not delay the commencement of payment of Ground Rent for any other parcel, except to the extent that the reason for delay in subsection 17.3 applies directly to such other parcel and renders impossible or impractical the construction upon said parcel. 3.1.7 Due Dates and Place of Payment. Ground Rents described ------------------------------ herein shall be payable in installments due the first day of each month. Payment shall be made to the City of Long Beach at the office of the Airport Manager, 4100 Donald Douglas Drive, Long Beach, California 90808. Ground Rent installments will be deemed late on the tenth (10th) day of the month and shall bear interest until the installment is paid at the rate received by the City of Long Beach on its investment 9 portfolio during the preceding quarter, provided said interest rate shall not exceed twenty percent (20%) per year. 3.2 Ground Rent Adjustments. ----------------------- 3.2.1 Adjustment Dates. In order to adjust the annual Ground ---------------- Rent for each parcel (or the entire Premises, if not divided into parcels), the fair market land value of each parcel and the prevailing rate of return shall be determined in the tenth (10th) year after commencement of payment of the full Ground Rent for such parcel, and adjusted Ground Rent payments shall take effect on the first (1st) day of the eleventh (11th) year. The fair market land value and prevailing rate of return for each parcel shall also be determined in the year 2000, with respect to Ground Rent payable commencing January 1, 2001, and every five (5) years thereafter, and the Ground Rent shall be adjusted accordingly on the first (1st) day of each sixth (6th) year. Said dates of adjustment of Ground Rent shall be referred to for convenience as "adjustment dates". 3.2.2 Ground Rent Adjustments by Appraisal. With respect to ------------------------------------ each Ground Rent adjustment date, the fair market land value and prevailing rate of return shall be determined by agreement between Landlord and Developer, but should they not be able to agree at least two hundred ten (210) days prior to an adjustment date, then such fair market land value and prevailing rate of return shall be determined by appraisal by an 10 analysis of comparable land transactions committed to the same usage and either zoned for or improved with facilities of similar density and height considerations, and/or such other appraisal method(s) recognized by the appraisal profession as are appropriate for fair market land value appraisals and mutually agreed to by the appraisers at time of reevaluation as being appropriate, recognizing market conditions that prevail as of the date of value. 3.2.2.1 Adjustment for Predevelopment and --------------------------------- Infrastructure Costs. The fair market land value (as agreed upon -------------------- by Landlord and Developer or as determined by appraisal) shall be adjusted (the "Adjusted Fair Market Land Value") in the proportion that Ten Million and No/100 Dollars ($10,000,000.00) bears to the original stated land value of the Premises of Ten Million and No/100 Dollars ($10,000,000.00), plus the actual onsite and off-site "Predevelopment and Infrastructure Costs", determined according to subsection 3.8. The Adjusted Fair Market Land Value shall be converted into an annual Ground Rent obligation based on the prevailing rate of return as determined pursuant to subsection 3.2.2. 3.2.3 Appraisal. In the event the parties are unable to --------- agree upon the fair market rental value or the prevailing rate of return or the method of appraisal of the Premises at any adjustment date, the 11 fair rental value of the subject land and/or the prevailing rate of return shall be determined by appraisals prepared by two appraisers, one appointed by the Landlord at its expense and one appointed by the Developer at its expense, both of whom shall be MAI members of the American Institute of Real Estate Appraisers or a successor organization in the event the American Institute of Real Estate Appraisers ceases to exist. Said appraisers shall be appointed not more than six (6) months prior to the commencement of the rental adjustment period but, in any event, within thirty (30) days after either party has given notice in writing of inability to agree. Both appraisals must be completed and submitted to the Landlord and Developer respectively within sixty (60) days after the appointment of the appraisers. The two appraisals shall be averaged unless the higher of the two appraisals exceeds the lesser by ten percent (10%) or more, in which case the two appraisers shall appoint a third appraiser, also an MAI member of the American Institute. In order to select such third appraiser, if the two appraisers do not agree, the appraisers shall obtain a list of five appraisers from the President of the American Institute of Real Estate Appraisers and shall alternately strike names from such list until one remains to become the third appraiser. The third appraiser shall be appointed by the first two appraisers within fourteen (14) days after notice from either of the parties to this Lease 12 that the appointment of a third appraiser is necessary. The cost of such third appraiser shall be shared equally by the parties to this Lease. The third appraiser shall complete and submit the required appraisal to both parties within sixty (60) days after appointment. All appraisals shall be in the form of written reports supported by facts and analysis. The two of the three appraisers arriving at values closest to each other shall attempt to concur on a value. If they are unable to do so within thirty (30) days, the two closest appraisals shall be averaged and that value shall be the fair market value of the land or the prevailing rate of return, as appropriate. The total appraised value of all parcels shall not exceed the appraised value of the Premises. The Adjusted Fair Market Land Value shall be converted into an annual Ground Rent obligation based on the prevailing rate of return on similar ground leases then current in the market. Disagreements between the two appraisers as to the method of appraisal shall be resolved by a third appraiser, appointed in the manner described in this subsection. 3.2.4 Maximum Rent Increase. The increase, if any, in Ground --------------------- Rent at the time of any adjustment date shall be limited for parcels upon which one or more buildings have been constructed by the increase in subtenant rents as described in this section: 3.2.4.1 Allocation to Parcels. At the time of execution --------------------- of the Lease, the Ground Rent 13 shall be allocated among the parcels within the project in the manner set out in subsection 3.1.2. The percentage of rent attributable to each parcel shall remain in effect during the term of the Lease unless parcel areas change. 3.2.4.2. Base Sublease Rental. The base sublease rental -------------------- for each parcel shall be the total annualized rent, stabilized to exclude free rent, reduced rent or excess tenant improvement amortization or other similar concessions or considerations measured in the first year in which more than eighty percent (80%) of the rentable space on a given parcel is rented, prorated to full occupancy. 3.2.4.3 Sublease Rental Percentage Change. The sublease --------------------------------- rental percentage change shall be determined by calculating the percentage changes in sublease rental between the base sublease rental for a parcel described in subsection 3.2.4.2 above and the actual sublease rental due to Developer for the same parcel in the full year preceding a Ground Rent Adjustment date, stabilized to exclude any free rent, reduced rent or excess tenant improvement amortization or other similar concessions or considerations. 3.2.4.4 Adjusted Ground Rent. The "Adjusted Ground -------------------- Rent" for each parcel at any given adjustment period shall be the lesser of the Adjusted Fair Market Rental Value for such parcel 14 as determined in subsection 3.2.2 above or the initial Ground Rent for such parcel plus the product of the Sublease Rental Percentage Change determined in 3.2.4.3 above times the initial Ground Rent for such parcel. To the extent that the Adjusted Fair Market Rental Value is greater than the Adjusted Ground Rent, the difference may be carried forward into the next five (5) year adjusted rental period but not into any subsequent five (5) year adjusted rental periods, and thereby recovered by Landlord. The amount of Ground Rent during a five (5) year adjusted rental period where there has been such a carry forward shall not exceed one hundred ten percent (110%) of the fair market Ground Rent as determined for that period. 3.2.4.5 Sale or Assignment of Leasehold Interest. Should ---------------------------------------- Developer sell, assign or otherwise transfer its leasehold interest to an owner-user such that sublease rental is not paid to Developer, the fair market sublease rental for such building, using the criteria and methods set out in subsection 3.2.2, shall become the basis for calculating the maximum rental adjustment using the process described in 3.2.4.3 above. 3.3 Ground Rent Adjustments Following Reconstruction. Developer ------------------------------------------------ contemplates, pursuant to Section 11 hereof, that during the term of this Lease, any or all of the buildings devel- 15 oped on the Premises may be demolished and new buildings constructed in their place in order to meet the then current market demand, subject to Landlord approval pursuant to Section 7. In the event of such demolition and new construction on a particular parcel, the provisions of subsection 3.2 shall be modified with respect to such parcel as set forth below in subsections 3.3.1 and 3.3.2. This subsection 3.3 shall not apply to demolition and new construction which is due to damage or destruction, as described in subsection 6.3, where said new construction is limited to one for one replacement of useable or rentable floor area in the same general building configuration as that which previously existed. 3.3.1 Ground Rent Adjustments. Ground Rent for such parcel ----------------------- shall be adjusted according to the process set out in subsections 3.2.2 and 3.2.3 but the limitations in subsection 3.2.4 shall not apply to such adjustment. 3.3.1.1 Adjustment Date. The adjustment shall be --------------- effective either six (6) months after issuance of an Initial Temporary Certificate of Occupancy of the building shell or commencement of subtenant rent, whichever occurs earlier; or 3.3.1.2 Alternate Adjustment Date. In the event a regular ------------------------- five (5) year Ground Rent adjustment date for the parcel, as established in subsection 3.2.1, occurs after commencement of demolition of a building on said parcel and prior to completion of construction of a new building in 16 its place, said adjustment shall take place on schedule and shall be based upon the assumption that construction of the planned new building has been completed. 3.3.2 No Adjustment At Next Scheduled Adjustment Date. There ----------------------------------------------- shall be no Ground Rent adjustment for such parcel at the next scheduled adjustment date, but all subsequent Ground Rent adjustments shall occur on the schedule set out in subsection 3.2.1. 3.3.3 Maximum Ground Rent Adjustment. For purposes of ------------------------------ determining the maximum Ground Rent increase under subsection 3.2.4 at the time of the next Ground Rent adjustment and thereafter, the base sublease rental described in subsection 3.2.4 shall be established with respect to the new building or buildings constructed on the parcel. 3.4 Adjustments to Ground Rent During Option Term. At the --------------------------------------------- commencement of each option term, and at the end of each five (5) years of each option term, the Ground Rent shall be determined as provided in subsection 3.2.2, but with no adjustment thereto as is provided in said subsection 3.2.2.1. The fair market land value shall be converted into an annual Ground Rent obligation based on the rate of return then current in the market for parcels which are currently and fairly appraised. 3.5 Maximum Ground Rent Increase. However, the increase in Ground ---------------------------- Rent at the end of five (5) years of each option term shall be subject to the provisions of subsection 3.2.4, with the first year of the option term as the base period 17 for determining sublease rental and the fifth (5th) year of the option term being the adjustment year for determining actual rental received, both to be stabilized to exclude any free rent, reduced rent, excess tenant improvement amortization or other similar concessions or considerations. The Ground Rent commencing the sixth (6th) year of any option term cannot increase at a percentage rate greater than the percentage increase in sublease rentals from the base year to the adjustment year. 3.6 Definition of Predevelopment and Infrastructure Costs. For ----------------------------------------------------- purposes of this Lease, Predevelopment and Infrastructure Costs shall include all costs actually incurred by Developer for those items identified in Exhibit "D", subject to the limitations of this subsection, which costs are necessary to initially render the Premises suitable for development according to Developer's Basic Concept Documents as described in Section 7. Predevelopment and Infrastructure Costs shall include all off-site and on-site improvements required to create six (6) buildable parcels, but shall not include any costs directly associated with the construction of buildings or parking upon such parcels. It is understood and agreed by Landlord that certain improvements, particularly landscaping, may exceed the standards normally used by the City of Long Beach, and that such improvements shall be included in Predevelopment and Infrastructure Costs to the extent they are consistent with Developer's Basic Concept Documents and landscape plans described in Section 7. 3.7 Approval of Improvement Plans. Prior to commencement of any ----------------------------- construction on the Premises, Developer shall submit to Landlord engineering plans and costs estimates for 18 those items identified in Exhibit "D" which are included in Predevelopment and Infrastructure Costs. Specifications for all improvements shall meet or, at Developer's election, exceed the standard specifications of the City of Long Beach for such improvements. Landlord shall review said plans for conformity with the Basic Concept Documents and approve or disapprove them as to such conformity in accordance with the procedures and criteria set out in subsection 7.3.7. 3.8 Determination of Predevelopment and Infrastructure Costs. -------------------------------------------------------- Following receipts of bids, and prior to the award of a contract for construction of items shown on the plans approved pursuant to subsections 3.7 and 7.5.3 ("Approved Plans") and identified in Exhibit "D", Developer shall submit to Landlord all bids received and a statement indicating which bid Developer intends to accept. The bid shall identify each item of cost in the same manner as the estimate of costs submitted pursuant to subsection 3.7. Landlord shall have the right to assert that any such item of cost is excessive on the basis of Landlord's experience with comparable construction, taking into consideration the total cost of the work, and Developer and Landlord shall attempt to arrive at an agreed cost for said item. In the event Developer and Landlord are unable to arrive at an agreed cost, then Developer and Landlord shall accept the decision of a jointly appointed independent registered civil engineer with experience in similar matters, who shall be directed to consider the positions of both Developer and Landlord and to establish within five (5) days, or such longer time as may be mutually agreed by Developer and Landlord, the agreed cost for any contested items, 19 again taking into consideration the total cost of the work. The actual bid cost, or the agreed cost, where the bid cost is disputed, shall be deemed to be the actual cost of construction for each cost item to the extent that such costs are actually incurred as a result of the installation or construction of items or quantities of materials. Landlord shall have the right to monitor the construction of all items included in the Approved Plans to ensure that such construction is in accordance with the Approved Plans and the approved costs. During the period of construction, Landlord, through its Director of Public Works, and Developer may agree upon modifications to the Approved Plans and to the bid costs or agreed costs as may be required by unforseen conditions. Upon completion of construction, the aggregate of all costs which have been approved by the operation of this subsection, and which are actually incurred, including costs under paragraph 18 of Exhibit "D", less any costs paid by Landlord, shall become the amount of "Predevelopment and Infrastructure Costs" referred to in subsection 3.2.2.1, provided that such amount shall not exceed Nine Million and No/100 Dollars ($9,000,000.00), less any costs paid by Landlord. Landlord shall have the right to audit and review all contracts, invoices, payments, and other pertinent materials as may be necessary to confirm the actual costs incurred. 3.9 Construction by Landlord. Landlord shall design and install all ------------------------ traffic signals and modifications thereto included in the plans approved pursuant to subsection 3.7. Such installation shall be paid for by Landlord or Developer, at Land- 20 lord's option. In addition, Landlord, prior to September 1, 1985, and at its sole option, may elect to construct and pay for all Predevelopment and Infrastructure Costs, except landscaping and appurtenant structures. All Predevelopment and Infrastructure Costs not paid by Landlord shall be paid by Developer. Construction done by Landlord shall be in accordance with Developer's plans approved pursuant to subsection 3.7 and in accordance with Developer's construction schedule, which shall be reasonably achievable by industry standards. 3.10 Phasing of Improvements. Developer shall have the right to ----------------------- design and construct improvements in phases, in accordance with a phasing plan which shall be approved by Landlord. Plans, estimates of costs, and bids for phases of work shall be treated in the same manner as set out in subsections 3.7 through 3.9, provided that the total cost of all phased improvements shall not exceed the Nine Million and No/100 Dollars ($9,000,000.00) limit on the total of all Predevelopment and Infrastructure Costs. 3.11 Exceptions to Maximum Predevelopment and Infrastructure Costs. ------------------------------------------------------------- Landlord agrees that, due to the uncertain nature of the following costs which are beyond the control of Developer, the Nine Million and No/100 Dollars ($9,000,000.00) limit on "Predevelopment and Infrastructure Costs," as reduced by any amounts paid or carried out by Landlord, may be exceeded to the extent that these costs, when added to other Predevelopment and Infrastructure Costs paid by Developer, actually exceeds Nine Million and No/100 Dollars ($9,000,000.00): 3.11.1 Rights-of-Way. Costs of right-of-way ------------- 21 acquisition and of the acquisition of leasehold interest as may be necessary in order to acquire needed rights-of-way. 3.11.2 Sewer and Storm Drain. Construction of sewer and --------------------- storm drain lines from the ultimate downstream point of connection to the Premises. 3.11.3 Traffic Mitigation. Off-site street improvements and ------------------ traffic mitigation measures required by City, other than those indicated on the attached Exhibit "F". In the event that the costs of items in subsections 3.11.1, 3.11.2 and 3.11.3, which are paid by Developer, exceed Two Million Dollars ($2,000,000.00), then Developer shall receive credit against future increases in Ground Rent over the base rent of One Million Dollars ($1,000,000.00) per year, for the actual amount that said costs paid by Developer exceed Two Million Dollars ($2,000,000.00), plus interest. Interest shall commence as costs of items in subsections 3.11.1, 3.11.2 and 3.11.3 are incurred, and shall be charged on the declining balance of the amount of rent credit due to Developer until the full rent credit has been given. Said interest shall be at the average of the prime interest rates quoted monthly by Security Pacific National Bank during the term that said interest is accrued to the date credited. 4. LEASEHOLD MORTGAGES: ------------------- 4.1 Leasehold Mortgage Authorized. On one or more occasions ----------------------------- Developer may take back a Purchase Money Leasehold Mort- 22 gage upon a sale and assignment of the Leasehold Estate created by this Lease or may mortgage or otherwise encumber Developer's Leasehold Estate to an Institutional Lender (as hereinafter defined), under one or more Leasehold Mortgages and assign this Lease as security for such Mortgage or Mortgages. 4.2 Notice to Landlord. ------------------ 4.2.1 Leasehold Mortgage Requirements. If Developer shall, ------------------------------- on one or more occasions, take back a Purchase Money Leasehold Mortgage upon a sale and assignment of the Leasehold Estate or shall mortgage Developer's Leasehold Estate to an Institutional Lender, and if the Holder of such Leasehold Mortgage shall provide Landlord with notice of such Leasehold Mortgage together with a true copy of such Leasehold Mortgage and the name and address of the Mortgagee, Landlord and Developer agree that, following receipt of such notice by Landlord, the provisions of this Section 4 shall apply in respect to each such Leasehold Mortgage. 4.2.2 Assignment of Leasehold Mortgage. In the event of any -------------------------------- assignment of a Leasehold Mortgage or in the event of a change of address of a Leasehold Mortgagee or of an assignee of such Mortgage, notice of the new name and address shall be provided to Landlord within ten (10) days after completion of such assignment. 4.2.3 Landlord's Acknowledgement of Notice. Landlord shall ------------------------------------ promptly upon receipt of a communication purporting to constitute the notice provided for by subsections 4.2.1 or 4.2.2, above, acknowledge by an 23 instrument in recordable form receipt of such communication as constituting the notice provided for by subsections 4.2.1 or 4.2.2, or, in the alternative, notify Developer and the Leasehold Mortgagee of the rejection of such communication as not conforming with the provisions of subsections 4.2.1 or 4.2.2, and specify the specific basis of such rejection. 4.2.4 Developer to Provide Copies. After Landlord has received --------------------------- the notice provided for by subsections 4.2.1 or 4.2.2 above, Developer, upon being requested to do so by Landlord, shall within ten (10) days provide Landlord with copies of the note or other obligation secured by such Leasehold Mortgage and of any other documents pertinent to the Leasehold Mortgage as specified by Landlord. If requested to do so by Landlord, Developer shall thereafter also provide Landlord from time to time with a copy of each amendment or other modification or supplement to such instruments. All recorded documents shall be accompanied by the appropriate certification of the Custodian of the Recording Office as to their authenticity as true and correct copies of the official records and all non-recorded documents shall be accompanied by a certification by Developer that such documents are true and correct copies of the originals. From time to time upon being requested to do so by Landlord, Developer shall also notify Landlord of the date and place of recording and other pertinent recording data with 24 respect to such instruments as have been recorded. 4.3 Definitions. ----------- 4.3.1 Institutional Lender. The term "Institutional Lender" -------------------- as used in this Section 4 shall refer to a savings bank, savings and loan association, commercial bank, trust company, credit union, insurance company, college, university, real estate investment trust or pension fund. The term "Institutional Lender" shall also include other lenders of substance which have assets in excess of Fifty Million and No/100 Dollars ($50,000,000.00) at the time the Leasehold Mortgage is made. 4.3.2 Leasehold Mortgage. The term "Leasehold Mortgage" as ------------------ used in this Section 4 shall include a mortgage, a deed of trust, a deed to secure debt, or other security instrument by which Developer's Leasehold Estate is mortgaged, conveyed, assigned or otherwise transferred, to secure a debt or other obligation. 4.3.3 Leasehold Mortgagee. The term "Leasehold Mortgagee" as ------------------- used in this Section 4 shall refer to a holder of a Leasehold Mortgage in respect to which the notice provided for by subsection 4.2 has been given and received and as to which the provisions of this Section 4 are applicable. 4.4 Consent of Leasehold Mortgagee Required. No cancellation, --------------------------------------- surrender or modification of this Lease shall be effective as to any Leasehold Mortgagee unless consented to in writing by such Leasehold Mortgagee. 25 4.5 Default Notice. Landlord upon providing Developer any notice -------------- of: (i) default under this Lease, (ii) a termination of this Lease, or (iii) a matter of which Landlord may predicate or claim a default, shall at the same time provide a copy of such notice to every Leasehold Mortgagee. No such notice by Landlord to Developer shall be deemed to have been duly given unless and until a copy thereof has been so provided to every Leasehold Mortgagee having a lien upon the Premises. From and after the date such notice has been given to a Leasehold Mortgagee, such Leasehold Mortgagee shall have the same period, after giving of such notice upon it, for remedying any default or acts or omissions which are the subject matter of such notice or causing the same to be remedied, as is given Developer after the giving of such notice to Developer, plus in each instance, the additional periods of time specified in subsections 4.6 and 4.7 to remedy, commence remedying or cause to be remedied the defaults or acts or omissions which are the subject matter of such notice specified in any such notice. Landlord shall accept such performance by or at the instigation of such Leasehold Mortgagee as if the same had been done by Developer. Developer authorizes each Leasehold Mortgagee to take any such action at such Leasehold Mortgagee's option and does hereby authorize entry upon the Premises by the Leasehold Mortgagee for such purpose. 4.6 Notice to Leasehold Mortgagee. ----------------------------- 4.6.1 Landlord's Termination Notice. Anything contained in ----------------------------- this Lease to the contrary notwithstanding, if any default shall occur which entitles Landlord to 26 terminate this Lease, Landlord shall have no right to terminate this Lease unless, following the expiration of the period of time given Developer to cure such default or the act or omission which gave rise to such default, Landlord shall notify every Leasehold Mortgagee of Landlord's intent to so terminate ("Termination Notice") at least thirty (30) days in advance of the proposed effective date of such termination if such default is capable of being cured by the payment of money ("Termination Notice Period"), and at least sixty (60) days in advance of the proposed effective date of such termination if such default is not capable of being cured by the payment of money (also a "Termination Notice Period"). The provisions of subsection 4.7, shall apply if, during such thirty (30) or sixty (60) day Termination Notice Period, any Leasehold Mortgagee shall: 4.6.1.1 Notify Landlord of such Leasehold Mortgagee's desire to nullify such notice; and 4.6.1.2 Pay or cause to be paid all Ground Rent, additional rent and other payments then due and in arrears as specified in the Termination Notice to such Leasehold Mortgagee and which may become due during such thirty (30) or sixty (60) day Termination Notice Period; and 4.6.1.3 Comply or in good faith, with reasonable diligence and continuity, commence to comply with all nonmonetary requirements of this 27 Lease then in default and reasonably susceptible of being complied with by such Leasehold Mortgagee; provided however, that such Leasehold Mortgagee shall not be required during such sixty (60) day Termination Notice Period to cure or commence to cure any default consisting of Developer's failure to satisfy and discharge any lien, charge or encumbrance against the Developer's interest in this Lease or the Premises junior in priority to the lien of the mortgage held by such Leasehold Mortgagee. 4.6.2 Proper Address of Leasehold Mortgagee. Any notice to be ------------------------------------- given by Landlord to a Leasehold Mortgagee pursuant to any provision of this Section 4 shall be deemed properly addressed if sent to the Leasehold Mortgagee who served the notice referred to in subsection 4.2.1 unless notice of a change of Mortgage ownership has been given to Landlord pursuant to subsection 4.2.2. 4.7 Procedure on Default. -------------------- 4.7.1 Extension of Termination Notice Period. If Landlord -------------------------------------- shall elect to terminate this Lease by reason of any default of Developer, and a Leasehold Mortgagee shall have proceeded in the manner provided for by subsection 4.6, the specified date for the termination of this Lease as fixed by Landlord in its Termination Notice shall be extended for a period of six (6) months, provided that such Leasehold Mortgagee shall during such six (6) month period: 28 4.7.1.1 Payment of Monetary Obligations. Pay or cause to be ------------------------------- paid the Ground Rent, additional rent and other monetary obligations of Developer under this Lease as the same become due, and continue its good faith efforts to perform all of Developer's other obligations under this Lease. 4.7.1.2 Foreclosure of Leasehold Mortgage. If not --------------------------------- enjoined or stayed, take steps to acquire or sell Developer's interest in this Lease by foreclosure of the Leasehold Mortgage or other appropriate means and prosecute the same to completion with due diligence. 4.7.2 Cure of Default. If at the end of such six (6) --------------- month period such Leasehold Mortgagee is complying with subsections 4.7.1.1 and 4.7.1.2, this Lease shall not then terminate, and the time for completion by Leasehold Mortgagee of its proceedings shall continue so long as such Leasehold Mortgagee is enjoined or stayed and thereafter for so long as such Leasehold Mortgagee proceeds to complete steps to acquire or sell Developer's interest in this Lease by foreclosure of the Leasehold Mortgage or by other appropriate means with reasonable diligence and continuity. Nothing in this subsection 4.7, however, shall be construed to extend this Lease beyond the original term thereof as extended by any options to extend the term of this Lease properly exercised by Developer or a Leasehold Mortgagee in accordance with subsection 2.1, nor to 29 require a Leasehold Mortgagee to continue such foreclosure proceedings after the default has been cured. If the default shall be cured and the Leasehold Mortgagee shall discontinue such foreclosure proceedings, this Lease shall continue in full force and effect as if Developer had not defaulted under this Lease. 4.7.3 Compliance of Leasehold Mortgagee. If a Leasehold --------------------------------- Mortgagee is complying with subsection 4.7.1, upon the acquisition of Developer's Leasehold Estate herein by such Leasehold Mortgagee or its designee or any other purchaser at a foreclosure sale or otherwise this Lease shall continue in full force and effect as if Developer had not defaulted under this Lease. 4.7.4 Leasehold Mortgage Not an Assignment. For the ------------------------------------ purposes of this Section 4, the making of a Leasehold Mortgage issued by an institutional lender shall not be deemed to constitute an assignment or transfer of this Lease or of the Leasehold Estate hereby created, nor shall any Leasehold Mortgagee, as such, be deemed to be an assignee or transferee of this Lease or of the Leasehold Estate hereby created so as to require such Leasehold Mortgagee, as such, to assume the performance of any of the terms, covenants or conditions on the part of Developer to be performed hereunder, but the purchaser at any sale of this Lease and of the Leasehold Estate hereby created in any proceedings for the foreclosure of any Leasehold Mortgage, or the assignee or transferee of this Lease and of the 30 Leasehold Estate hereby created under any instrument of assignment or transfer in lieu of the foreclosure of any Leasehold Mortgage shall be deemed to be an assignee or transferee within the meaning of this Section 4, and shall be deemed to have agreed to perform all of the terms, covenants and conditions on the part of Developer to be performed hereunder from and after the date of such purchase and assignment, but only for so long as such purchaser or assignee is the owner of the Leasehold Estate. Provided, however, that Developer shall, as to such Leasehold Mortgagee, provide to Landlord the same information which Developer must supply pursuant to this Lease as assignee. 4.7.5 Obligation of Leasehold Mortgagee to Repair or ---------------------------------------------- Reconstruct. If the Leasehold Mortgagee or its designee shall ----------- become holder of the Leasehold Estate, and if the buildings and improvements on the Premises shall have been or be come materially damaged on, before or after the date of such purchase and assignment, the Leasehold Mortgagee or its designee shall be obligated to repair, replace or reconstruct the building or other improvements only to the extent of the net insurance proceeds received by the Leasehold Mortgagee or its designee by reason of such damage. However, should such net insurance proceeds be insufficient to repair, replace or reconstruct the building or other improvements to the extent required by subsection 6.3, and should the Leasehold Mortgagee or its 31 designee choose not to fully reconstruct the building or other improvements to the extent required by subsection 6.3, such failure shall constitute an event of default under this Lease which shall entitle Landlord to commence proceedings to terminate the Lease. 4.7.6 Leasehold Mortgagee's Right to Transfer. Any --------------------------------------- Leasehold Mortgagee or other acquirer of the Leasehold Estate of Developer pursuant to foreclosure, assignment in lieu of foreclosure or other proceedings may, upon acquiring Developer's Leasehold Estate, without further consent of Landlord, assign the Leasehold Estate one time on such terms and to such persons and organizations as are acceptable to such Mortgagee or acquirer and thereafter be relieved of all obligations under this Lease; provided that such assignee has delivered to Landlord its written agreement to be bound by all of the provisions of this Lease. Any further attempts by the Leasehold Mortgagee to assign shall comply with the provisions of this Lease relating to Assignment. 4.7.7 Leasehold Mortgagee Transfer a Permitted Sale. --------------------------------------------- Notwithstanding any other provisions of this Lease, any sale of this Lease and of the Leasehold Estate hereby created in any proceedings for the foreclosure of any Leasehold Mortgage, or the assignment or transfer of this Lease and of the Leasehold Estate hereby create in lieu of the foreclosure of any Leasehold Mortgage shall be deemed to be a permitted sale, 32 transfer or assignment of this Lease and of the Leasehold Estate hereby created. 4.8 New Lease. --------- 4.8.1 Terms of New Lease. In the event of the termination ------------------ of this Lease as a result of Developer's default Landlord shall, in addition to providing the notices of default and termination as required by subsections 4.5 and 4.6, provide each Leasehold Mortgagee with written notice that the Lease has been terminated, together with a statement of all sums which would at that time be due under this Lease but for such termination, and of all other defaults, if any, then known to Landlord. Landlord agrees to enter into a new lease ("New Lease") of the Premises with such Leasehold Mortgagee, or its designee for the remainder of the term of this Lease, effective as of the date of termination, at the Ground Rent and additional rent, and upon the terms, covenants and conditions, including all first rights of refusal and options to renew or purchase, but excluding requirements which are not applicable or which have already been fulfilled of this Lease, provided: 4.8.1.1 Written Request to Landlord. Such Leasehold --------------------------- Mortgagee shall make written request upon Landlord for such New Lease within thirty (30) days after the date such Leasehold Mortgagee receives Landlord's Notice of Termination of this Lease given pursuant to this subsection 4.8. 4.8.1.2 Payment of Obligations. Such ---------------------- 33 Leasehold Mortgagee or its designee shall pay or cause to be paid to Landlord at the time of execution and delivery of such New Lease, any and all sums which would at the time of execution and delivery thereof be due pursuant to this Lease but for such termination and, in addition thereto, all reasonable expenses, including reasonable attorney's fees, which Landlord shall have incurred by reason of such termination and the execution and delivery of the New Lease and which would not otherwise have been received by Landlord from Developer or other party in interest under Developer. In the event of a controversy as to the amount to be paid to Landlord pursuant to this subsection 4.8.1.2, the payment obligation shall be satisfied if Landlord shall be paid the amount not in controversy, and the Leasehold Mortgagee or its designee shall agree to pay any additional sum ultimately determined to be due plus interest at the rate set forth in subsection 3.1.7, and such obligation shall be adequately secured. 4.8.1.3 Remedy of Developer's Defaults. Such Leasehold ------------------------------ Mortgagee or its designee shall agree to remedy any of Developer's defaults of which said Leasehold Mortgagee is or may be notified by Landlord's Notice of Termination and which are reasonably susceptible of being so cured by Leasehold Mortgagee or its designee. 34 4.8.1.4 New Lease to Have First Priority. Any New Lease made -------------------------------- pursuant to this subsection 4.8 and any Subdivided Lease entered into pursuant to subsection 7.6 and any Single Lease entered into pursuant to subsection 7.7, shall be prior to any mortgage or other lien, charge or encumbrance on the fee of the Premises and the Developer under such New Lease, Single Lease or Subdivided Lease, as the case may be, shall have the same right, title and interest in and to the Premises and the buildings and improvements thereon as Developer had under this Lease. 4.8.1.5 Developer's Obligations Under New Lease. The Developer --------------------------------------- under any such New Lease, Single Lease or Subdivided Lease shall be liable to perform the obligations imposed on the Developer by such New Lease, Single Lease or Subdivided Lease only during the period such person or entity has ownership of such Leasehold Estate. 4.9 New Lease Priorities. If more than one Leasehold Mortgagee -------------------- shall request a New Lease pursuant to subsection 4.8.1, Landlord shall enter into such New Lease with the Leasehold Mortgagee whose mortgage is prior in lien or with the designee of such Leasehold Mortgagee. Landlord, without liability to Developer or any Leasehold Mortgagee with an adverse claim, may rely upon a mortgagee title insurance policy issued by a responsible title insurance company doing business within the State of California as the basis for determining the appropriate Leasehold Mortgagee 35 who is entitled to such New Lease. 4.10 Eminent Domain. Developer's share, as provided by -------------- subsection 10.3, of the proceeds arising from an exercise of the power of Eminent Domain shall, subject to the provisions of such subsection 10.3, be disposed of as provided for by any Leasehold Mortgagee. 4.11 Notice of Arbitration. Landlord shall give each --------------------- Leasehold Mortgagee prompt notice of any appraisal, arbitration or legal proceedings between Landlord and Developer involving obligations under this Lease. Landlord shall give the Leasehold Mortgagee notice of, and a copy of any award or decision made in any such proceedings, which shall be binding on all Leasehold Mortgagees. 4.12 Amendment to Facilitate Leasehold Financing. Landlord ------------------------------------------- hereby agrees that if any Institutional Lender to whom Developer proposes to make a Leasehold Mortgage on Developer's Leasehold Estate shall require as a condition to making any loan secured by such mortgage that Landlord agree to modifications of this Lease, then Landlord agrees that it will enter into an agreement with Developer in recordable form making the modifications that are requested by such lender, provided that such changes do not adversely affect any right of Landlord under this Lease. 4.13 Security Deposit. If any Leasehold Mortgagee, its ---------------- designee or other purchaser has acquired the Leasehold Estate of Developer pursuant to foreclosure, conveyance in lieu of foreclosure or other proceedings, or has entered into a New Lease with Landlord in accordance with subsection 4.8, such Leasehold 36 Mortgagee, its designee or other purchaser shall succeed to the rights of Developer, if any, in and to the security deposits paid by Developer to Landlord pursuant to subsections 16.1 and 16.2. In such event, Developer shall no longer have any rights to such security deposits, and Landlord shall hold such security deposits for and on behalf of such Leasehold Mortgagee, its designee or other purchaser. 4.14 Estoppel Certificate. Landlord shall at any time and -------------------- from time to time hereafter, but not more frequently than twice in any one-year period (or more frequently if such request is made in connection with any sale or mortgaging of Developer's Leasehold Interest or permitted subletting by Developer), within ten (10) days after written request of Developer to do so, certify by written instrument duly executed and acknowledged to any Mortgagee or purchaser, or proposed Mortgagee or proposed purchaser, or any other person, firm or corporation specified in such request: (i) as to whether this Lease has been supplemented or amended, and if so, the substance and manner of such supplement or amendment; (ii) as to the validity and force and effect of this Lease, in accordance with its tenor; (iii) as to the existence of any default hereunder; (iv) as to the existence of any offsets, counter claims or defenses hereto on the part of Developer; (v) as to the commencement and expiration dates of the term of this Lease; and (vi) as to any other matters as may be reasonably so requested. Any such certificate may be relied upon by Developer and any other person, firm or corporation to whom the same may be exhibited or delivered, and the contents of such certificate shall be binding on Landlord. 37 Any party requesting such estoppel certificate shall reimburse Landlord for its costs and expenses incurred in issuing such certificate. 4.15 Notices. Notices from Landlord to the Leasehold ------- Mortgagee shall be mailed to the address furnished Landlord pursuant to subsection 4.2 , and those from the Leasehold Mortgagee to Landlord shall be mailed to the address designated pursuant to the provisions of subsection 1.5.1 hereof, attention the City Manager. Such notices, demands and requests shall be given in the manner described in subsection 17.1 and shall in all respects be governed by the provisions of that subsection. 4.16 Erroneous Payments. No payment made to Landlord by a ------------------ Leasehold Mortgagee shall constitute agreement that such payment was, in fact, due under the terms of this Lease; and a Leasehold Mortgagee having made any payment to Landlord pursuant to Landlord's wrongful, improper or mistaken notice or demand shall be entitled to the return of any such payment or portion thereof provided such Leasehold Mortgagee shall have made demand therefor not later than ninety (90) days after the date of its payment. 4.17 Request for Notice for Benefit of Landlord. Immediately ------------------------------------------ after recording any Leasehold Mortgage encumbering Developer's Leasehold Estate, Developer, at Developer's expense, shall cause to be recorded in the Office of the Recorder of Los Angeles County, California, a written request of notice under Section 2924(b) of the California Civil Code providing that a copy of any notice of default and a copy of any notice of sale under such Leasehold Mortgage shall be delivered to Landlord as 38 provided for under said Section 2924(b) of the California Civil Code. Such request shall be executed by Landlord. Concurrently, with Developer's forwarding such notice for recordation, Developer shall furnish to Landlord a complete copy of the Leasehold Mortgage and the note secured thereby, together with the name and address of the holder thereof. Said note and mortgage are to be kept by Landlord on a confidential basis to the extent permitted by law. 4.18 Release or Forebearance. If any such lender shall fail ----------------------- or refuse to comply with any and all of the conditions of this section, then and thereupon Landlord shall be released from its covenant of forebearance with such lender herein contained. 4.19 Notice. Landlord's obligation to observe its covenants ------ of forebearance in this section for the benefit of any lender on the security of the Leasehold Estate, except as may be otherwise provided by law, shall be conditioned upon there having been first delivered to the Airport Manager of the City of Long Beach, a written notice of such encumbrance which shall state the name and address of such lender for the purpose of enabling notices to be given under subsection 4.2 above. 4.20 No Merger. No merger of Developer's Leasehold Estate --------- into Landlord's fee title shall result by reason of the ownership of Landlord's or Developer's estates by the same party or by reason of any other circumstances, without the prior consent of any and all lenders on the security of the Leasehold Estate. 4.21 No Payment by Landlord. Landlord shall not be required ---------------------- to execute any instrument which would obligate Land- 39 lord to the payment of any loan or any part thereof. 4.22 Self Liquidating Mortgage. The Leasehold Mortgage shall ------------------------- be a self liquidating mortgage, to be paid over a period not longer than elapses up to three (3) years prior to the end of the term of this Lease, or any option term if such option has been exercised. 4.23 Leasehold Mortgagee Need Not Cure Specified Defaults. ---------------------------------------------------- Nothing herein contained shall require any Leasehold Mortgagee or its designee as a condition to its exercise of right hereunder to cure any default of Developer which cannot be cured by such Leasehold Mortgagee or its designee, in order to comply with the provisions of subsections 4.6 or 4.7 or as a condition of entering into the New Lease provided for by subsection 4.8. 4.24 Casualty Loss. A Standard Mortgagee Clause naming each ------------- Leasehold Mortgagee may be added to any and all insurance policies required to be carried by Developer hereunder on condition that the insurance proceeds are to be applied in the manner specified in this Lease and the Leasehold Mortgage age shall so provide, except that the Leasehold Mortgage may provide a manner for the disposition of such proceeds, if any, otherwise payable directly to Developer. 5. ASSIGNMENT AND SUBLETTING: ------------------------- 5.1 Prohibition Against Change in Ownership, Management and ------------------------------------------------------- Control. The qualifications and identities of Developer are of particular - ------- concern to Landlord. It is because of those qualifications and identities that Landlord has entered into this Lease with Developer. No voluntary or involuntary 40 successor in interest shall acquire any rights or powers under this Lease except as expressly provided for in this Lease. Except as otherwise permitted by this Section 5 and subsection 1.5.3, Developer shall not permit any significant change (voluntary or involuntary) in the ownership, management or control of Developer to occur unless such change is approved by Landlord, subject to the requirements of this section and reasonable conditions imposed by Landlord. Except as otherwise permitted by this Section 5 and subsection 1.5.3, Developer may not assign this Lease or any interest herein without first obtaining the written consent of Landlord, pursuant to subsection 5.4 of this Lease. Any assignee shall assume and agree to perform the obligations of Developer under this Lease. Promptly following any permitted assignment, Developer shall deliver to Landlord a copy of such assignment, together with a statement setting forth the following information: 5.1.1 Name and Address for Notices. The name and address ---------------------------- of the assignee for the purpose of enabling notices to be given. 5.1.2 Type of Entity. Whether the assignee is an -------------- individual, a corporation, a partnership or a joint venture, and if such assignee is a corporation, the names of such corporation's principal officers and of its directors and State of incorporation, and if such assignee is a partnership or joint venture, the names and addresses of the general partners of such partnership or venture. 5.1.3 Other Transfers. In the event that --------------- 41 Developer is a partnership, joint venture or corporation, any assignment of twenty-five percent (25%) or more of the partnership or joint venture interest or outstanding capital stock of such an entity shall constitute an assignment by Developer of this Lease for the purposes of this Section 5 and shall not be permitted to occur without first obtaining the written consent of Landlord, which consent shall not unreasonably be withheld, delayed or conditioned. 5.1.4 Buildings or Land. In addition to all other ----------------- assignments, which must be approved in advance by Landlord, any assignment of 50,000 square feet of land or office space must be approved in advance by Landlord. 5.2 Assignments Not Subject to Approval. The provisions of ----------------------------------- this Section 5 shall not be applicable to the following types of assignments and transfers, which shall be permitted without the prior consent of Landlord. 5.2.1 Death or Incapacity. Assignments resulting from ------------------- the death or mental or physical incapacity of an individual, provided, however, that any person replacing an individual who departs because of physical or mental disability shall have education and experience comparable to that of the person replaced. 5.2.2 Family Transfer. A transfer or assignment for the --------------- benefit of a spouse, children, grandchildren or other family members. 5.2.3 Affiliated Corporation. A transfer to an ---------------------- "Affiliated Corporation" as hereinafter defined. An 42 "Affiliated Corporation" shall be (i) any corporation which owns fifty-one percent (51%) or more of the outstanding capital stock of the assigning corporation; or (ii) any corporation, fifty-one percent (51%) or more of the outstanding capital stock of which is owned by the assigning corporation; or (iii) any corporation, fifty-one percent (51%) or more of the outstanding capital stock of which is owned by a shareholder or group of shareholders who also owns at least fifty-one percent (51%) of the outstanding capital stock of the assigning corporation. 5.2.4 IRS Transfer. A transfer of stock resulting from ------------ or in connection with a reorganization as contemplated by the provisions of the Internal Revenue Code of 1954, as amended, or otherwise, in which the ownership interests of a corporation are assigned directly or by operation of law to a person or persons, firm or corporation which acquires the control of the voting capital stock of such corporation or all or substantially all of the assets of such corporation. 5.2.5 Public Entity. A transfer of stock in a publicly ------------- held corporation or of the beneficial interest in any publicly held partnership or real estate investment trust. 5.2.6 Partner. A transfer by a limited partner or joint ------- venturer to a partnership or joint venture in which the assignor is a partner or venturer. 43 5.2.7 Comprising Entity. A transfer or assignment from ----------------- one partner or joint venturer comprising Developer to another; or if Developer is a corporation, from one shareholder to another. 5.3 Assignment Invalid. Any transfer or assignment to which ------------------ Landlord's consent is required by subsection 5.1 shall be void and shall confer no right to occupancy upon the assignee unless and until such consent of Landlord is obtained. Such approval may be conditioned or refused in response to the matters specified herein. 5.4 Approval of Assignments. Landlord agrees that it shall ----------------------- consent to an assignment to a subtenant and to an assignee which, at the time of such assignment, is of such financial standing and responsibility as to give reasonable assurance that the payment of all Ground Rent and other amounts reserved in this Lease will be made in compliance with all the terms, covenants, provisions and conditions of this Lease. In requesting an approval by Landlord of assignment pursuant to subsection 5.l, Developer shall provide the following information to Landlord with respect to proposed assignments of 50,000 square feet of rentable building area or land area, or more, of sublease space, with respect to any Ground Sublease and with respect to assignments of a parcel or an interest in this Ground Lease. 5.4.1 Name. Name and address of the assignee. ---- 5.4.2 Description. Description of the Premises to be ----------- assigned. 5.4.3 Nature of Business. The nature of the business ------------------ conducted by assignee on the Premises to be 44 assigned. 5.4.4 Financial Information. Financial strength of the --------------------- subtenant or assignee (if the subtenant is a publicly held company, a copy of its most recent annual report; if the subtenant or assignee will not disclose financial information, a report from recognized credit rating agency, such as Dun & Bradstreet). 5.4.5 Officers. The identity, background and experience -------- of all officers and directors of assignee, at executive vice president level and above and senior operational officer relating to the Premises, if a corporation or general partners of a partnership or sole proprietor of a proprietorship (Principals). 5.4.6 Additional Information. To the extent known by ---------------------- Developer, the following information: 5.4.6.1 Criminal record of the subtenant, assignee or any of the Principals. 5.4.6.2 Nature and extent of litigation to which the subtenant, assignee or any Principal is a party. 5.4.6.3 Any course of conduct which a prudent person would deem materially detrimental to the Project or to the intended use of the Premises by the subtenant or assignee. 5.4.7 Informational Purposes. For informational ---------------------- purposes only: 5.4.7.1 Number of anticipated employees of the assignee. 45 5.4.7.2 At the time of submission of the request, the terms and conditions of the assignment. 5.4.7.3 With respect to all assignments a copy thereof after execution by all parties thereto. 5.4.8 Confidentiality. If requested by Developer at the --------------- time of submission of the information described above, Landlord shall keep such information and the identity of the proposed sublessee or assignee confidential and Landlord shall execute a confidentiality statement so providing to the extent Landlord is permitted by law to do so. 5.4.9 Disapproval by Landlord. Landlord reserves the ----------------------- right to reject any proposed assignee where the matters specified in 5.4.3, 5.4.4, 5.4.5 or 5.4.6 above indicate that the presence of assignee would not be in the public interest or would adversely affect the financial viability of the Project. Landlord shall either approve or disapprove any proposed assignee within fifteen (15) days after receipt by Landlord of a request to do so. Failure of Landlord to act within said fifteen (15) days shall constitute approval. If Landlord does not approve any proposed assignee, Landlord shall state in writing the reasons for such disapproval. Developer shall have the right to challenge the validity of such disapproval. No damages shall be payable to Developer in any action arising from such disapproval unless Landlord shall have acted unreasonably or in bad faith or with actual malice. 46 5.5 No Release. Notwithstanding any assignment by Developer ---------- permitted by subsection 5.1 with Landlord's consent, and notwithstanding any assignment by a partner or joint venturer of Developer permitted by subsection 5.1.3 with Landlord's consent or made without Landlord's consent pursuant to subsection 5.2, the assigning party shall remain fully liable for the performance of all of the covenants to be performed by Developer under this Lease prior to the effective date of such assignment or the "Completion Date", as defined below, whichever last occurs, but shall be released from liability with respect to the performance of such covenants to be performed after the last to occur of such dates, Landlord's approval of or consent to any such assignment or transfer shall not be a waiver of any right to object to further or future assignments, and Landlord's consent to each such successive assignment must be first obtained in writing from Landlord unless otherwise permitted by this Lease without Landlord's prior consent. The term "Completion Date", as used herein, shall mean the date that Developer completes the construction of the initial building described in subsection 7.2 and a certificate of occupancy with respect to such building has been obtained. 5.6 Unauthorized Change. This Lease may be terminated by the ------------------- Landlord if there is any significant change (voluntary or involuntary) other than those authorized in Section 5 or subsection 1.5.3 hereof, or not requiring Landlord's approval of ownership, management or control of the Developer prior to the completion of the development of the site, unless such changes have been approved by the Landlord. 47 5.7 Subletting. Developer shall be entitled, with the prior written ---------- consent of Landlord, to sublet the whole or any portion of the Premises or the improvements constructed thereon by or under Developer and, without limiting the foregoing, may establish a leasehold condominium regime on the Premises, or portions thereof, in accordance with the provisions of California law, including California Civil Code Sections 783 and 1350-1360. Developer shall, at all times, remain liable for the performance of all of the covenants on its part to be so performed, notwithstanding any subletting. Each sublease shall be subject and subordinate not only to this Lease, but also to any New Lease made by Landlord as provided in Section 4.8 above. If the term of this Lease shall end while any such sublease is in effect, Landlord may, at its option, for a period of ninety (90) days thereafter, either terminate the said sublease or succeed to all of the rights of Developer thereunder. Where any sublease which is consistent with this Lease is approved, Landlord may grant to the subtenant, under such an approved sublease entered into in good faith and for reasonable consideration, a right of quiet enjoyment in recordable from (a "nondisturbance agreement") during the term of the sublease, notwithstanding the expiration, termination or cancellation of this Lease; provided that (i) the term of the sublease, plus extension or renewal options, does not extend beyond the term of this Lease, plus extension options; (ii) such subtenant agrees that in the event this Lease expires, terminates or is cancelled during the term of the sublease, the sublease shall be deemed a direct lease between Landlord and such subtenant and the subtenant shall attorn to Landlord. In the 48 event that Landlord objects to any proposed nondisturbance agreement or sublease, Landlord agrees to notify Developer in writing of such objection and of its reasons for such objection within twenty (20) days of its receipt of the proposed nondisturbance agreement and sublease. Subject to the foregoing provisions of this subsection 5.7, Landlord hereby approves generally of the form of nondisturbance agreement attached hereto as Exhibit "E". Any approvals or grants of quiet enjoyment given or made by Landlord pursuant to this subsection 5.7 shall be binding upon Landlord, its successors or assigns, including without limitation any person or entity succeeding to the interest of Landlord by way of judicial foreclosure or trustee sale proceedings pursuant to any mortgage or deed of trust, the lien or charge of which is subject and subordinate to this Lease. Any sublease, with respect to which Landlord agrees to execute a nondisturbance agreement pursuant to this subsection 5.7, may be a sublease pursuant to which the subtenant is responsible for the construction of the building improvements upon the subleased premises (a "Ground Sublease" herein). Any Ground Sub-lease may contain a hypothecation provision similar to Section 4 of this Lease for the benefit of the holder of any mortgage or deed of trust constituting a lien on the subleasehold estate created by virtue of the Ground Sublease. Any nondisturbance agreement executed and delivered by Landlord for the benefit of the sublessee under a Ground Sublease shall specifically recite that it is for the benefit of any such holder of a deed of trust or mortgage constituting a lien on the subleasehold estate created by such Ground Sublease; that the term "sublease" as used in 49 the nondisturbance agreement shall be deemed to include any new sublease executed and delivered to any such holder of a first deed of trust or first mortgage following a termination of the sublease pursuant to a provision in the sublease similar to subsection 4.8 of this Lease, and that the term "sublessee" under the nondisturbance agreement shall be deemed to include any encumbrances or other party succeeding to the sublessee under the Ground Sublease by virtue of judicial or private power of sale foreclosure proceedings or by delivery of an assignment in lieu of foreclosure, or otherwise. Where Landlord agrees to execute a nondisturbance agreement for the benefit of the sublessee under any Ground Sublease, such agreement shall be subject to the obligations of the sublessee thereunder being no less than the obligations of the Developer hereunder with respect to the subleased premises. 5.7.1 Minor Subleases. Consent of Landlord shall not be --------------- required to a sublease of any unit of space smaller than 50,000 square feet, not including parking areas; however, notice of any such sublease shall be sent to Landlord's Airport Manager within ten (10) days of the execution of the sublease. 5.7.2 Consent to Sublease. Prior to review of any proposed ------------------- sublease, the following information and assurances shall be provided to Landlord as part of the request for consent to proposed subleases of 50,000 square feet of rentable building area, or more, of sublease space, with respect to any Ground Sublease: 5.7.2.1 Description. Description of ----------- 50 the sublease Premises. 5.7.2.2 Name. The name and address of the sublessee for ---- the purpose of enabling notices to be given under subsection 17.1 hereof. 5.7.2.3 Nature of Business. The nature of the business ------------------ conducted on the sublease Premises. 5.7.2.4 Financial Information. Financial strength of --------------------- the subtenant or assignee (if the subtenant is a publicly held company, a copy of its most recent annual report; if the subtenant or assignee will not disclose financial information, a report from a recognized credit rating agency, such as Dun & Bradstreet). 5.7.2.5 Officers. The identity, background and -------- experience of all officers and directors of sublessee, at executive vice president level and above and senior operational officer relating to the Premises, if sublessee is a corporation, general partners of a partnership or sole proprietor of a proprietorship (Principals). 5.7.2.6 Additional Information. To the extent known by ---------------------- Developer, the following information: 5.7.2.6.1 Criminal record of the subtenant, assignee or any of the Principals. 5.7.2.6.2 Nature and extent of litigation to which the subtenant, assignee or any Principal is a party. 51 5.7.2.6.3 Any course of conduct which a prudent person would deem materially detrimental to the Project or to the intended use of the Premises by the subtenant or assignee. 5.7.2.7 Informational Purposes. For informational ---------------------- purposes only: 5.7.2.7.1 Number of anticipated employees of the subtenant or assignee. 5.7.2.7.2 At the time of submission of the request, the terms and conditions of the sublease or assignment. 5.7.2.7.3 With respect to all subleases and assignments a copy thereof after execution by all parties thereto. 5.7.2.7.4 Any proposed nondisturbance or attornment agreements. 5.7.3 Confidentiality. If requested by Developer at the time --------------- of submission of the information described above, Landlord shall keep such information and the identity of the proposed sublessee or assignee confidential and Landlord shall execute a confidentiality statement so providing, to the extent Landlord is permitted by law to do so. 5.7.4 Disapproval by Landlord. Landlord reserves the right ----------------------- to reject any proposed sublessee where the matters specified in 5.7.2.3, 5.7.2.4, 5.7.2.5 or 5.7.2.6 above indicate that the presence of sublessee would not be in the public interest or would adversely 52 affect the financial viability of the Project. Landlord shall either approve or disapprove any proposed sublessee within fifteen (15) days after receipt by Landlord of a request to do so. Failure of Landlord to act within said fifteen (15) days shall constitute approval. If Landlord does not approve any proposed sublessee, it shall state in writing the reasons for such disapproval. Developer shall have the right to contest such disapproval. No damages shall be payable to Developer in any action challenging such disapproval unless Landlord shall have acted unreasonably, in bad faith or with actual malice. 5.8 Sale of Buildings. Developer shall have the right to sell ----------------- buildings constructed pursuant to the terms of this Lease, provided, however, that such buildings shall be and remain subject to the terms and conditions of this Lease. No sale of such buildings shall be valid unless this requirement is expressly included in the deed as a covenant running with the land. 6. INDEMNITY, INSURANCE, CASUALTY DAMAGE: ------------------------------------- 6.1 Indemnification and Hold Harmless. Developer expressly --------------------------------- agrees to defend, protect, indemnify and hold harmless the Landlord, its officers, agents and employees free and harmless from and against any and all claims, demands, damages, expenses, losses or liability of any kind or nature whatsoever which Landlord, its officers, agents or employees may sustain or incur or which may be imposed upon them or any of them for injury to or death of persons or damage to property arising out of or 53 resulting from the alleged acts or omissions of Developer, its officers, agents or employees or in any manner connected with this Lease or with the occupancy, use or misuse of the Premises by Developer, its officers, agents, employees, subtenants, licensees, patrons or visitors. Developer also agrees to defend at its own cost, expense and risk all claims or legal actions that may be instituted against Developer or Landlord with respect to the Premises, and the design and construction of off-site improvements except traffic signals, and Developer agrees to pay settlements and to satisfy any judgment that may be rendered against either Developer or Landlord as a result of any injuries or damages which are alleged to have resulted from or be connected with this Lease or the occupancy or use of the Premises by Developer or its officers, agents, employees, subtenants, licensees, patrons or visitors. Nothing herein shall be deemed to require Developer to indemnify Landlord for liability determined by a court of law to have arisen from negligence of Landlord, provided, however, that as between the parties to this Lease, in any matter in which the doctrine of joint and several liability applies, Landlord shall not be required to pay any larger share of such judgment than its actual contribution as determined by the Court. 6.2 Insurance. --------- 6.2.1 Liability Insurance. At all times during the term ------------------- of this Lease, Developer shall obtain and maintain or cause to be obtained and maintained bodily injury and property damage insurance by a combined single limit policy in an amount of at least Ten Million Dollars and No/l00 ($10,000,000.00) naming the 54 Landlord and its officers, agents and employees as coinsureds with Developer and others designated by Developer. Developer shall also maintain workers' compensation insurance in the amount required by statute. Prior to entry upon the Premises, and upon each insurance renewal, Developer shall deliver the policies of insurance required by this subsection 6.2, or certified photostatic copies thereof, to the City of Long Beach Airport Manager for approval as to sufficiency and for approval as to form by the City Attorney. When said policies of insurance have been so approved, Developer shall substitute a certificate of insurance issued by the insurance company or companies issuing such policies certifying that said insurance coverage is in full force and effect and upon the filing of said certificate, the policies will be returned by Landlord to Developer, if Developer has deposited the original policies with Landlord. Said liability and property damage insurance policy shall contain a provision or endorsement substantially as follows: "The inclusion hereof of any person or entity as an insured shall not affect any right such person or entity would have as a claimant hereunder if not so included. This insurance shall be primary and not contributing with any other insurance maintained by Landlord." Notwithstanding any other provision to the contrary contained in this Lease, Developer shall not 55 have the right to enter upon the Premises for any purpose whatsoever until such certificate has been filed with the Landlord's Airport Manager. 6.2.2 Fire and Extended Coverage. Developer shall, at no -------------------------- cost or expense to Landlord, keep insured for the benefit of Developer and Landlord, and such other parties, having an insurable interest, as Developer may designate, the improvements constructed by or under Developer upon the Premises against loss or damage by fire and lightning and risks customarily covered by extended coverage endorsement, in amounts not less than one hundred percent (100%) of the actual replacement cost of said improvements, except that Developer, at Developer's option may exclude the cost of excavations, foundations and footings. Landlord shall be named as an insured under any such policy. Such fire and extended coverages shall also be required to be furnished by Developer during the construction of improvements on the Premises as contemplated by Section 7 below. Any loss payable under such insurance shall be payable to Developer, Landlord and such other parties having an insurable interest in the property as Developer may designate and may be endorsed with a standard mortgagee's loss payable endorsement in favor of the holder of any Leasehold Mortgagee holding a Leasehold Mortgage. Landlord will release the entire sum of the proceeds to Developer or to a lender for purposes of reconstruction, replacement or repair of any damaged improvement. 56 The proceeds of such insurance shall be paid to Developer to the extent the amount of the recovery is for damages to interior, non-structural or subtenant improvements, equipment, fixtures, personal property or for rental value insurance to the extent such recoveries are separate identifiable items. If Developer shall within five (5) years after such damage or destruction commence construction of the damaged or destroyed building, or a new building in accordance with Section 7 hereof, the proceeds of any insurance payable by reason of such damage or destruction shall be paid to Developer. If Developer shall fail to commence such construction within such five (5) year period Landlord reserves the right to receive such portion of the insurance proceeds so that Landlord may, if appropriate, carry out such reconstruction of the destroyed building, with all excess amounts to Developer. If at any time during the last five (5) years of the term of the Lease whether the original term or any extension thereof, a building then on the Premises shall be so damaged by fire or other casualty that the cost of restoration shall exceed fifty percent (50%) of the replacement value thereof, exclusive of foundations, immediately prior to such damage, either party hereto may, within sixty (60) days of such damage, give notice of its election to terminate this Lease with respect to the parcel upon which the building is located and, subject to further provisions of this subsection this 57 Lease shall cease and come to an end on the date of the expiration of ten (10) days from the delivery of such notice with the same force and effect as if such date were the date herein fixed for the expiration of the term hereof, and the Ground Rent shall be apportioned and paid to the date of such termination. In such event Developer shall remove all debris and level the land, and Developer shall have no obligation to repair or rebuild or restore. The insurance proceeds shall then be divided as follows: If five (5) years remain before the end of the Lease or any extension thereof, Developer shall receive seventy-five percent (75%) of the proceeds, and Landlord shall receive twenty-five percent (25%); if four (4) years remain before the end of the Lease, Developer shall receive fifty percent (50%) of the proceeds, and Landlord shall receive fifty percent (50%); if three (3) years remain before the end of the Lease, Developer shall receive twenty-five percent (25%) of the proceeds, and Landlord shall receive seventy-five percent (75%); if two (2) years remain before the end of the Lease, Developer shall receive ten percent (10%) of the proceeds, and Landlord shall receive ninety percent (90%); if one (1) year remains before the end of the Lease, Landlord shall receive the entire proceeds. 6.2.3 Aviation Facilities. Insurance for any aviation ------------------- facility developed pursuant to this Lease shall include all of the types and amounts specified 58 herein to the extent such coverages are applicable to operations performed. Depending upon the nature of the physical improvements made upon and the use of the Premises, aviation insurance coverages shall be maintained, to the extent such coverages are applicable, as follows: Hangar Liability, Hangar Keeper's Legal Liability; Airport Legal Liability, Hangar Material Damage Coverage. To the extent any of the above liability coverages are required, said policies shall be maintained with a combined single limit in the amount of at least Ten Million and No/l00 Dollars ($10,000,000.00). 6.2.4 Miscellaneous. The insurance policies to be secured by ------------- Developer pursuant to this subsection 6.2 shall be obtained from insurers having a rating in Best's Insurance Guide of A-10, or better (or a comparable rating in any similar Guide, if Best's Guide is no longer published or if Best's rating system changes), and shall require that the insurer give Landlord notice of any modification, termination or cancellation of any policy of insurance no less than thirty (30) days prior to the effective date of such modification, termination or cancellation. In addition, Developer shall notify Landlord of any modification, termination or cancellation of any policy of insurance secured by Developer pursuant to this subsection 6.2 as soon as Developer learns of any such modification, termination or cancellation. The policy of public liability and 59 property damage insurance to be obtained under subsection 6.2.1 above shall stipulate that said policy provides primary coverage and is not subordinate to nor contributing with any other insurance coverage held or maintained by Landlord. The procuring of any such policy of insurance shall not be construed to be a limitation upon Developer's liability or its full performance on Developer's part of the indemnification and hold harmless provisions of this Lease; and Developer understands and agrees that notwithstanding any such policy of insurance, Developer's obligation to protect, indemnify and hold harmless Landlord under this Lease is for the full and total amount of any damage, injuries, loss, expense, costs or liabilities caused by or in any manner connected with or attributed to the acts or omission of Developer, its officers, agents, employees, licensees, patrons or visitors, or the operations conducted by Developer, or Developer's use or misuse of the Premises, except to the extent resulting from the negligent or willful acts of Landlord or any such indemnitee. 6.2.5 Blanket Policies. Nothing contained in this section ---------------- shall prevent Developer from requiring its subtenants, or any of them, or any other third party, to provide the insurance required by this Section 6, nor prevent Developer, or any of its subtenants, or any such third party from taking out insurance of the kind provided for under this section under a blanket insur- 60 ance policy or policies which cover other personal and real property owned or operated by Developer or any subtenant provided that the protection afforded Landlord and Developer under any policy of blanket insurance hereunder shall be no less than that which would have been afforded under a separate policy or policies relating only to the Premises. 6.2.6 Self-Insurance. If a subtenant is self-insured as a -------------- matter of such subtenant's usual and customary business policy and such self-insurance is accepted by institutional lenders, Developer may request Landlord to waive the insurance requirement and to consent and permit such subtenant to self-insure. Such request shall be accompanied by information deemed necessary by Landlord to review the request. Consent to self-insure shall not be unreasonably withheld if the conditions specified in this section have been met. 6.2.7 Insurance Adjustments. The amounts of insurance --------------------- specified in subsections 6.2.1 and 6.2.3 may be adjusted in the year 2000 and not more often then every third year thereafter for the duration of the Lease to take into account circumstances at the time of such adjustments. 6.3 Damage or Destruction. --------------------- 6.3.1 Restoration of Premises. If any building or ----------------------- improvement on the Premises is totally or partially destroyed or damaged as a result of any casualty, Developer shall promptly repair, replace or rebuild 61 such building or other improvement at least to the extent of its value immediately prior to such occurrence, subject, however, to delays resulting from force majeure, the cancellation of existing leases due to such casualty, settling with insurers and/or negotiating new financing if necessary. If less than twenty (20) years remain of the term of this Lease or any extension thereof, Developer may remove all damaged or destroyed improvements and place the portions of the Premises from which improvements are removed in a clean and level condition following which all insurance proceeds attributable to such destruction or damage shall be the property of Developer. After the commencement of such repair, replacement or rebuilding, Developer shall continue such work with reasonable diligence until completion. Developer may cause any such work to be performed by or under its subtenants. In no event shall Landlord be liable to Developer for any damages resulting to Developer from the happening of any such fire or other casualty or from the repair or reconstruction of the Premises or from the termination of this Lease as provided in subsection 6.3.2 below. 6.3.2 Right to Terminate. Notwithstanding the provisions of ------------------ subsection 6.3.1 above, if the buildings and improvements on the Premises shall be damaged or destroyed as a result of a hazard against which Developer is not required to carry insurance to an extent in excess of fifty percent (50%), or more, of 62 their then insurable value, or if such damage or destruction shall occur during the last ten (10) years of the term of this Lease or during the last ten (10) years of any extended term of this Lease, then Developer shall have the right to elect not to repair, replace or rebuild such casualty damage and to cancel this Lease by giving written notice thereof to Landlord within three hundred sixty-five (365) days after the date of any such damage or destruction. Upon such termination, it will be the obligation of Developer to remove all damaged or destroyed improvements and to place the portions of the Premises from which improvements are removed in a clean and level condition. 6.3.3. No Reduction in Rent. In case of destruction, there -------------------- shall be no abatement or reduction of rent. 7. DEVELOPMENT OF THE PROJECT: -------------------------- 7.1 Scope of Development. The Project will be an aviation -------------------- oriented business, office, research and development and industrial park. It is agreed by the parties that the Project will be built to include when fully developed, at least 665,500 square feet of building area in one (1) or more buildings per parcel, no one of which shall exceed the height limits established by Federal Aviation Regulations (FAR). However, it is recognized that the scope of development may be changed, enlarged or redistributed to meet a subtenant's or user's needs or changed conditions. The facade treatment, landscaping and character of the 63 development will be substantially as proposed in the Long Beach Airport Center submittal of December 7, 1983, as supplemented by a spiral bound document entitled "Supplement to Kilroy Industries' December 7, 1983, Proposal", and included therein is a transmittal letter from Kilroy Industries to the City of Long Beach, dated January 12, 1984, ("Developer's Long Beach Airport Center Submittal") on file in the offices of Landlord's Director of Community Development, or the equivalent of the submitted proposal if approved by Landlord pursuant to subsection 7.3 hereof. Three (3) acres of the site must be made available for aircraft use if a reasonable demand for same is expressed by the subtenants of the site. The three (3) acre allocation need not be restricted to any designated section of the site and can change in configuration and location depending on the needs of the remainder of the parcel and changes in subtenant requirements. The three (3) acres at any time designated for aircraft use may be used for other purposes consistent with the Lease and the PD-2 zoning, such as motor vehicle parking and trucking, as approved by Landlord's Airport Manager, prior to any actual demand from tenants of the site for aircraft storage. The precise amount up to three (3) acres, configuration and location of improvements shall be based on and consistent with the PD-2 zoning ordinance to be adopted, and any amendment or replacement thereof. 7.2 Developer's Obligation to Develop Premises. Developer ------------------------------------------ agrees to commence the construction of improvements upon the Premises, including the first building, on or before September 1, 1985, subject to granting of all required governmental approvals and subject to subsection 17.3. After completion of 64 the initial building, Developer shall use its best efforts to undertake as expeditiously and fully as is reasonably possible in the exercise of sound business judgment, the planning and construction of improvements upon Premises and to further the interest thereof to the end that there will be ultimately constructed on the Premises the development contemplated in the Basic Concept Documents or its alternative as approved by Landlord pursuant to subsection 7.3.7. Developer intends to conform to the construction schedule attached as Exhibit "J" entitled "Construction Schedule" but is not required to do so, except as provided in this subsection. In the event Developer has not commenced construction on the last parcel by January 1, 1993, then the fair market rental value of said parcel shall be adjusted in the manner set forth in subsection 3.2, as of January, 1993, upon the assumption that the building or buildings planned for construction upon said parcel had, in fact, been completed. 7.2.1 Best Efforts to Sublease. Developer shall at all ------------------------ times use its best efforts to expedite to the fullest extent consistent with the exercise of sound business the making and entering into of subleases with subtenants upon terms and conditions satisfactory to subtenants and not inconsistent with any of the requirements of this Lease. 7.3 Architectural Approval. ---------------------- 7.3.1 Restriction. No buildings or other improvements, ----------- including without limitation, grading, street, landscaping and parking area improvements shall 65 be constructed or maintained upon the Premises unless the same conform to and are consistent with the zoning for the site, building code requirements and other adopted construction standards for public improvements of the City of Long Beach and the scope of the Project, as defined in subsection 7.1 above, and are approved by Landlord as provided in subsection 7.3.7 below. 7.3.2 Basic Concept Documents. Landlord has heretofore ----------------------- approved certain documents, including a site development plan, which documents are more particularly described in subsection 7.1. Said documents, as the same may from time to time be modified and/or supplemented with the approval of Landlord pursuant to subsection 7.3.7 below are herein referred to as the "Basic Concept Documents". To the extent that said documents refer to land included in the Adjacent Properties shown on Exhibit "B", additional approval is required as provided in subsection 1.4.1. 7.3.3 Landscaping. Prior to the construction of any ----------- landscaping upon the Premises, Developer shall prepare and submit to Landlord for Landlord's approval pursuant to subsection 7.3.7 below preliminary landscape plans for such work. Following Landlord's approval of Developer's preliminary landscape plans for such work and prior to the commencement of such work, Developer shall prepare and submit to Landlord for Landlord's approval pursuant to subsection 7.3.7 below final landscape plans for such work. Said landscape plans need 66 not include landscaping between building walls and adjacent curbs and/or parking areas, it being understood that preliminary and final plans for such landscaping may be submitted separately by Developer to Landlord for Landlord's approval under subsection 7.3.7 below when the requirements of building occupants have been ascertained. Said landscape plans shall be consistent with the Basic Concept Documents and/or modifications or amendments thereto from time to time approved by Landlord. The landscaping plans, if any, itemized on the attached Exhibit "G" have been approved in concept by Landlord for purposes of this Lease and for no other purposes. In general, Developer shall be permitted freedom of selection of landscaping plants, trees and other materials consistent with the Basic Concept Documents and the provisions of subsection 3.6. 7.3.4 Exterior Elevations. Prior to the construction of ------------------- any building improvements upon the Premises, Developer shall prepare and submit to Landlord for Landlord's approval pursuant to subsection 7.3.7 below exterior elevations for such building improvements. Such exterior elevations need not include exterior building signs. The exterior elevations, if any, itemized on the attached Exhibit "H" have been approved in concept by Landlord for purposes of this Lease and for no other purposes. 7.3.5 Security and Security Plans. Prior to taking --------------------------- possession of the Premises, Developer shall sub- 67 mit to the Landlord for approval a site security plan both for the construction period and for the Project as partially and fully developed which shall comply with applicable Federal Aviation Regulations and the requirements of the Airport Manager. During construction, Developer shall maintain in place at all times a site security fence. Developer shall comply with FAR Part 107 regarding Airport Security and FAR Part 77 regarding height limitations. It is particularly important that Developer notify the Airport Manager and such other persons as he may direct twenty-four (24) hours in advance of erecting cranes on the Premises for any purpose. Developer shall pay any fine or penalty imposed on Landlord as a result of security violations on the Premises. Developer shall have the right to contest such fine or penalty. 7.3.6 Amendments. Developer may from time to time submit ---------- to Landlord for Landlord's approval pursuant to subsection 7.3.7 below modifications and/or amendments to any of the items described in subsections 7.3.3 through 7.3.5 above theretofore approved by Landlord. 7.3.7 Landlord Approval. Developer shall submit all ----------------- plans required by subsections 7.3 and 3.7 to Landlord, attention Director of Community Development, who shall coordinate the review and approval of such plans with the Airport Manager. Landlord shall either approve or disapprove of any item submitted for approval 68 to Landlord by Developer pursuant to subsections 7.3.3 through 7.3.6 above and subsection 3.7 within fifteen (15) days of Landlord's receipt thereof by giving written notice of such approval or disapproval to Developer. Any such disapproval shall state in writing the reasons for disapproval. Failure by Landlord to expressly so disapprove of any such item within such fifteen (15) day period shall constitute Landlord's approval of such item. The criteria to be used by Landlord in approving or disapproving any such item shall be (i) compliance with the Basic Concept Documents and PD-2 zoning, (ii) exterior aesthetics, (iii) consistency with prior improvement on the Premises, (iv) relationship of improvements to adjacent land, including public rights-of-way, (v) the general function of the spaces within the Project between building areas and adjacent public rights-of-way, consistent with overall project design. In general, Developer shall be permitted freedom of design of all exteriors. In the event Landlord disapproves of any such item, Developer may cause such item to be appropriately revised and resubmit the same to Landlord for approval pursuant to this subsection 7.3.7. Landlord and Developer agree to cooperate reasonably each with the other in resolving any objections of the other to such item and/or requested modifications by the other party. The provisions of this section with respect 69 to notice, time for and method of approval shall apply to any such revised item resubmitted to Landlord for approval. Upon the approval of any such item, Landlord shall execute and return a copy of such item to Developer marked approved by Landlord with the date of such approval. Any item to be approved or disapproved by Landlord shall be deemed to have been submitted to and received by Landlord on the date such item is delivered to or received at the office of the Director of Community Development of Landlord. 7.3.8 Communication and Consultation. Landlord and Developer ------------------------------ agree to communicate and consult informally as frequently as is necessary to insure that the formal submittal of any item pursuant to this section can receive prompt and speedy consideration. In addition, during the period that Developer is preparing drawings and specifications for buildings and other improvements to the Premises, Landlord agrees, upon request of Developer, to schedule and hold regular progress meetings in order to coordinate the compliance of such drawings and specifications with the construction requirements of this Lease. 7.3.9 Requirements of Institutional Lender or Major Occupant. ------------------------------------------------------ If any revisions or corrections of drawings and specifications, landscape and grading plans and/or site plans consistent with the items heretofore approved by Landlord or approved by Landlord pursuant 70 to this section are required by any institutional lender providing or proposing to provide financing to Developer or major occupant or proposed major occupant for a building, Developer and Landlord shall cooperate with each other in efforts to obtain the waiver of such requirements or to develop a mutually acceptable alternative. A major occupant shall be deemed a person or entity occupying or proposed to occupy all of a freestanding building or in excess of 50,000 square feet of building floor area upon initial occupancy. If no such waiver is obtained and no such alternative is developed, Landlord shall amend the items so approved by Landlord pursuant to this section as may reasonably be required for consistency with such revisions or corrections. Any amendment of items approved by the Landlord does not constitute a waiver of other legal, governmental approvals. 7.3.10 Interior Improvements. During the term hereof, --------------------- Developer shall have the right to make, at no expense to Landlord, interior improvements to any building, and thereafter to make changes, alterations, further improvements and additions in and to the interior of any building as Developer may desire, subject to all applicable codes, ordinances and statutes. 7.3.11 Modification of Plans. Developer may make changes and --------------------- modifications to plans and specifications for buildings which are not material or to resolve an inconsistency or ambiguity without obtaining Land- 71 lord's prior approval. Landlord agrees that Developer may cause the plans for any building to be modified to the extent required to adapt the same to soil or other conditions found on the Premises and to the extent modification thereof is required by any governmental agencies or authorities having jurisdiction to approve such plans, all without resubmitting the same to Landlord for Landlord's reapproval. 7.4 Performance and Payment Bonds. ----------------------------- 7.4.1 Agreement to Provide. On or before the date of -------------------- commencement of construction of any building, structure or other improvements on the Premises having an estimated cost of One Million and No/l00 Dollars ($1,000,000.00) or greater, Developer shall file or cause to be filed with Landlord a performance-bond and labor and material payment bond executed by Developer or Developer's contractor or subtenant, as principal, and by a surety authorized to do business in the State of California, as surety, conditioned upon the contractor's performance of its construction contract with Developer and payment to all claimants for labor and materials used or reasonably required for use in the performance of such contract, in a form and with a surety reasonably acceptable to Landlord. Forms of bond which generally are acceptable hereunder are attached hereto and marked Exhibit "I". Said bond shall name or be endorsed to name Landlord as a joint obligee with Developer and/or Developer and Developer's 72 lender. Landlord agrees to either approve or disapprove of any such proposed bond submitted to Landlord for approval within ten (10) days of Landlord's receipt thereof. Any notice of disapproval shall specify the reasons for disapproval and the modifications required to secure Landlord's approval. Landlord's failure to expressly so disapprove of any such bond within said ten (10) day period shall constitute Landlord's approval of the form of such bond and of the surety issuing such bond. 7.4.2 Term of the Bond. The term of both bonds shall ---------------- commence on or before the date of filing with Landlord. The Performance Bond shall remain in effect until the date of completion of the work to the reasonable satisfaction of Landlord's City Manager or his designee. The Payment Bond shall remain in effect until the expiration of the period of filing a claim of lien as provided in Title 15 of Part 4 of the California Civil Code, and as hereafter amended, or if a claim of lien is filed, the expiration of the period for filing an action to foreclose such lien, or until the Premises are freed from the effect of such claim of lien and any action brought to foreclose such lien pursuant to the provisions of said Title 15 of Part 4 or the lien is otherwise discharged. 7.4.3 Penal Sum. The Performance Bond shall be in the --------- amount and provide a penalty of one hundred percent (100%) of the cost of the improvements to be 73 constructed as such cost shall be determined by the Developer. The Payment Bond shall be in the amount and provide a penalty of one hundred percent (100%) of the valuation of the improvements to be constructed. 7.4.4 Alternative Performance. In lieu of the ----------------------- Performance Bond and Payment Bond required by this subsection 7.4, Developer may furnish cash, assignment of account, or a time certificate of deposit or irrevocable letter of credit conditioned only on the terms of this Lease or such other form of security as may be agreed upon by the parties. 7.5 Construction. ------------ 7.5.1 Costs of Construction. Except as provided in --------------------- subsections 3.8, 3.9, 3.11 and 7.5.10, the entire cost and expense of constructing any and all improvements on the Premises, including without limitation any and all on and off-site improvements required by applicable governmental authorities under applicable zoning ordinances or as a condition to parcel or final map approvals, shall be borne and paid by Developer, or its subtenants, and Developer shall hold and save Landlord and the Premises harmless from any liability whatsoever on account thereof. 7.5.2 Right to Improve. Developer shall have the right ---------------- to construct buildings and other improvements upon the Premises and shall have the right to change the grade of the Premises and to perform all off-site work included within the scope and intent of the Basic 74 Concept Documents and/or to demolish and remove any and all structures, foliage and trees situated upon the Premises as of the date of this Lease as may reasonably be required for the purpose of improving the same incidental to Developer's or a subtenant's use of the Premises; provided, that such work shall be performed in accordance with the applicable requirements of this Section 7, and such laws of any governmental entity as may be applicable thereto and that arrangements for access to adjacent leaseholds are completed prior to commencement of work on those areas. Any and all improvements, constructed by or for the Developer, except off-site improvements, shall be owned by Developer and its successors or assigns during the term of this Lease and, unless removed by Developer upon the expiration of the term of this Lease as permitted by subsection 17.10 below, shall become a part of the realty and the absolute property of Landlord upon the expiration or earlier termination of the term of this Lease. 7.5.3 Governmental Permits. Before commencement of -------------------- construction or development of any buildings, structures, or other work or improvements upon the Premises or within the Project area, Developer shall, at its own expense with the cooperation of Landlord, secure or cause to be secured any and all permits which may be required by the City of Long Beach or any other governmental agency having authority over such construction, development or work. Developer shall provide a copy of each such permit to the Landlord prior to commencing the subject work or activity. 7.5.4 Rights of Access. For the purposes of assuring ---------------- compliance with this Lease, representatives of Landlord in addition to those conducting inspections required by Landlord, shall have the right of access to the Premises without charges or fees, at normal construction hours, during the period of construction for the purposes of this Lease, including but not limited to the inspection of the work being performed in constructing the improvements required by this Lease. Such representatives of Landlord shall be those who are so identified in writing by the Director of Community Development of Landlord, except that those employees of the City of Long Beach conducting inspections required by law need not be so identified. 7.5.5 Local, State and Federal Laws. Developer shall ----------------------------- carry out or cause to be carried out the construction of any buildings, structures or other work or improvements upon the Premises in conformity with all applicable laws. Any buildings, structures or other improvements constructed or placed upon the Premises by or under Developer, shall be constructed or placed in accordance with the laws and regulations of the State of California and of the City of Long Beach applicable to the Premises. Any applicable Federal Aviation Regulation (FAR) shall also be complied with. 76 7.5.6 Antidiscrimination During Construction. Developer -------------------------------------- for itself and its successors and assigns agrees agrees that in the construction of any improvements provided for in this Lease, that Developer will not discriminate against any employee, or applicant for employment because of age, sex, marital status, race, handicaps, color, religion, creed, ancestry or national origin. 7.5.7 Responsibilities of Landlord. ---------------------------- 7.5.7.1 Governmental Approvals. Landlord will ---------------------- assist and cooperate with Developer in connection with requests by Developer for lot line adjustments, tentative or final, parcel, tract or subdivision map approval, condominium plan approval, variances and any other governmental approvals necessary for or which will facilitate the development of the Premises, pursuant to this Lease including, without limitation, the execution of documents required to dedicate or offer for dedication or restrict or otherwise encumber or subdivide by parcel or final maps or condominium plans portions of the Premises as may be required by applicable governmental authorities. 7.5.7.2 Easements. Landlord agrees to join in --------- granting or dedicating such public or private utility company easements as may be required for the development of the Premises, for which no consideration is given. With the exception of 77 landscaping and appurtenant structures as provided in subsection 7.5.9, Developer shall have no responsibility for maintaining public rights-of-way, sewers, storm drains and other facilities after dedication of same to Landlord by Developer, and Landlord agrees to accept the same for maintenance purposes. 7.5.7.3 Off-Site Improvements. Subject to any --------------------- limitation of law, Landlord shall take all such action as is necessary and prudent in order to permit Developer to install and construct the off-site improvements which are necessary to initially make the Premises suitable for development according to Developer's Basic Concept Documents. The nature of such actions by Landlord and the nature and extent of such off-site improvements are defined in the attached Exhibit "F" ("Off-site Improvements"). The costs of all rights-of-way and improvements described in Exhibit "F" shall be included in Predevelopment and Infrastructure Costs in the manner set out in subsections 3.6 through 3.11. 7.5.7.4 Bond Financing. Landlord further agrees to -------------- assist with Developer's financing of the development of the Premises by cooperating reasonably with Developer and using reasonable efforts to sell or to cause any appropriate agency of the City of Long Beach to sell industrial 78 development bonds as a source for such financing, if such action is legally permissible; by granting to or for the benefit of the holders of any special assessment or district bonds constituting a first lien on Developer's Leasehold Estate, or their trustee, rights and remedies of a similar nature afforded Leasehold Mortgagees under Section 4 hereof. 7.5.8 Responsibilities of Developer. Developer, without expense ----------------------------- to Landlord, shall perform all work specified of Developer in this Lease. In addition, Developer shall furnish Landlord's Director of Community Development with semi-annual progress reports demonstrating good faith compliance with the construction requirements of this Lease on or before each semi-annual period commencing with the sixth month anniversary of the date of this Lease, through the occurrence of the completion date of such construction. 7.5.9 Maintenance. In addition to the responsibilities ----------- mentioned herein, Developer shall have sole and exclusive responsibility for maintaining the Premises and all building structures and improvements which may be constructed upon the Premises in good condition and repair, at no cost or expense to Landlord, reasonable wear and tear excepted. Developer shall also maintain all landscaping and appurtenant structures installed in accordance with plans approved pursuant to Section 7. Landlord will consider a request 79 to maintain landscaping in public rights-of-way. 7.5.10 Acceptance of Premises. Developer accepts the ---------------------- Premises in an "as-is" condition, except for subsurface hazardous materials and munitions, which are the responsibility of Landlord to remove at Landlord's expense, and also except for subsurface conditions under existing leased premises demised to Tommie E. Rutherford dba Stripbright Company, and acknowledges that Developer has not received and Landlord has not made any warranty, express or implied, as to the condition of the Premises. Developer agrees to bear all expenses incurred in the development, operation and maintenance of the Premises, except for improvements and facilities dedicated for public use to Landlord or other governmental authority, and except for removal and disposition of subsurface hazardous materials and munitions. 7.6 Subdivided Leases. For the purpose of facilitating the ----------------- development of the Project and obtaining financing and refinancing of improvements to be constructed thereon, at any time and from time to time during the term, within thirty (30) days after notice of demand from Developer, Landlord shall enter into separate new leases ("Subdivided Lease") so that there shall be one lease for each developable parcel in the Premises. The Subdivided Leases described herein shall be for the sole purpose of lease, sale or financing of the development. In all matters affecting the relationship, rights or obligations of the parties hereto, or in the case of any inconsistency between 80 the language of the documents, this Lease as undivided and unmodified shall govern except that as to the individual subdivided lease parcels, rents, security deposits, legal descriptions and requirements governing amount and level of construction may be varied to conform to the specifics of such parcel, as long as the totals in all such categories for all subdivided leases added together correspond to the totals expressed in this document. Developer shall pay to Landlord as a separate charge apart from rents a one time charge, payable in advance to reimburse Landlord's costs and expenses in separating the leases and reviewing and administering all the leases as separated in the sum of Five Thousand Dollars ($5,000.00). Each Subdivided Lease shall: 7.6.1 Same Parties. Have the same parties as the parties to ------------ this Lease. 7.6.2 Obligations of Subdivided Leases. Be released from the -------------------------------- overall obligations expressed in this Lease to pay rent and to carry out specific levels of construction within specific periods, provided, however that each such parcel shall be subject to an appropriate proportionate share of such obligations such that the total of such obligations divided among separated leases is not less than the total of such obligations expressed in this Lease. All other obligations imposed by this Lease shall apply to each such separate parcel as an undivided shared obligation. As to any conflict between the Subdivided Leases or all of them and this Lease, the terms of this Lease shall govern. 7.6.3 Terms, Covenants. Contain the same ---------------- 81 terms, covenants, provisions, conditions and agreements as those contained in this Lease except that: 7.6.3.1 Ground Rent. The Ground Rent and other periodic ----------- payments to be made by Developer as part of Developer's obligation under this Lease and the security deposit under subsection 16.1 shall, under the Subdivided Lease, bear substantially the same proportion to amounts provided in this Lease as the area of the Premises in the Subdivided Lease bears to the area of the Premises in this Lease. Provided, however, that if the fair market value of any land included in a Subdivided Lease is substantially greater or less than the balance of the land included in this Lease, then the Ground Rent may be appropriately varied between the Subdivided Lease and this Lease in order to take into account such variance in the fair market land value. 7.6.3.2 Improvements. Any improvements constructed upon the ------------ Premises demised by a Subdivided Lease shall satisfy Developer's obligations imposed by this Lease. The right of Developer to make improvements shall be apportioned around the Subdivided Leases substantially as is provided in subsection 7.6.3.1. 7.6.3.3 Easements and CC & R's. Each Subdivided Lease shall ---------------------- contain all cross-easements, covenants, conditions, restrictions and agreements requested by Developer, and approved by Landlord, 82 provided they reasonably facilitate separating this Lease into individual Subdivided Leases within the overall intent of this Lease. 7.6.3.4 Description of Property. Each Subdivided Lease shall ----------------------- cover only that portion of the Premises specified by Developer in Developer's notice of demand, provided that Developer shall accompany each notice of demand with an accurate survey and metes and bounds description of the portion of the Premises to be covered by the Subdivided Lease; or if the Premises have been divided into separate parcels, with the appropriate parcel map description of such Premises. 7.6.3.5 Excluded Matters. Obligations under this Lease which ---------------- have been satisfied or which are not applicable shall be excluded from a Subdivided Lease. 7.7 Combining Leases. At any time and from time to time after the ---------------- execution of any such Subdivided Lease, within thirty (30) days after notice of demand from Developer, Landlord shall enter into a single lease ("Single Lease") combining any two or more of the Subdivided Leases, covering all the portions of the Premises covered by the component Subdivided Leases, and containing the same terms, covenants, provisions, conditions and agreements as those contained in the component Subdivided Leases, except that: 7.7.1 Ground Rent. The Ground Rent and other periodic payments to ----------- be made by Developer as part of 83 Developer's obligation under the Single Lease shall be the sum of the Ground Rent and other periodic payments payable under the component Subdivided Leases; 7.7.2 Easements and CC & R's. The Single Lease shall ---------------------- contain all cross easements, covenants, conditions, restrictions and agreements requested by Developer and approved by Landlord provided they reasonably facilitate combining the component Subdivided Leases and integrating the operation of the Single Lease with that of any Subdivided Leases still outstanding within the overall intent of this Lease. 8. USE: --- 8.1 Permitted Development. The Project shall be an aviation oriented --------------------- business, office, research and development and industrial park, with offices and facilities and space for sublease to subtenants, including tenant-required aviation and other ancillary and related uses. 8.2 Aviation Related Uses. Any aviation and/or aircraft related uses --------------------- shall be subject to the terms and conditions of this Lease and to the terms and conditions governing Fixed Base Operations on the Long Beach Municipal Airport, "Master FBO Lease", which terms and conditions are incorporated in the Master FBO Lease attached hereto, marked Exhibit "K" and made a part hereof and shall be binding upon Developer, its tenants, subtenants and assigns, provided, however, as to Developer only in case of any conflict between this Lease and the Fixed Base Operation Lease, the business terms of this Lease shall prevail, 84 and the aviation operation requirements of the Fixed Base Operation Lease shall prevail as to aviation uses. Access to the Airport operating areas shall be made available for any aircraft based on the Premises. All non-aviation areas shall be separated from the Airport operating areas by security fencing approved by the Airport Manager. 8.3 Access Taxiway. To service aircraft use or development of the -------------- Premises, Developer shall construct an access taxiway connecting the Premises to existing Taxiway D concurrent with such aviation aircraft development of the Premises, and additional taxiways if needed by Developer's subtenants. Said access taxiway shall be constructed to conform to federal standards and to the standards of the Airport Manager for construction at the Airport. After construction, Developer shall maintain said taxiway or any apron area constructed to a distance of twenty-five (25) feet from Taxiway D. 8.4 Vehicle Parking. No vehicle not related to or used in the --------------- business of Developer or its subtenants or their respective employees, agents, guests or invitees shall be parked on the Premises for any period greater than twenty-four (24) hours. 8.5 Federal Aviation Administration. Use of the Premises shall ------------------------------- conform to and be limited by applicable zoning regulations, any conditions lawfully imposed by duly empowered governmental authority having jurisdiction over the Premises, the terms, covenants, conditions and restrictions imposed by this Lease and such lawful rules and regulations of the Federal Aviation Administration ("FAA") as may be applicable from time to time to the Premises. The conditions imposed by the FAA as of 85 the date of this Lease are attached hereto, marked Exhibit "L" and made a part hereof. The conditions set out in Exhibit "L" are applicable only to those portions of the Premises used for aviation or aircraft purposes. Landlord shall cooperate fully with Developer in obtaining all required FAA approvals. Landlord understands that FAA has been made aware of the nature of the development proposed for the Premises and as of the date of this Lease, Landlord has not received communication from FAA indicating that the type of development proposed would not be permitted if it complied with all applicable regulations. 8.6 Inspection. At all times during the term of this Lease, Landlord ---------- shall retain the right of access to and ingress and egress over the Premises to inspect aviation related operations and to enforce codes or ordinances and provisions of this Lease, subject to governmental and reasonable subtenant security requirements. 9. LIENS: ----- 9.1 Developer's Responsibility. Developer shall not permit any liens -------------------------- to be enforced against Landlord's interests in and to the land comprising the Premises, nor against Developer's leasehold interest therein by reason of work, labor, services or materials supplied or claimed to have been supplied to Developer or anyone holding the Premises, or any part thereof, through or under Developer, and Developer agrees to indemnify Landlord against such liens. 9.2 Notice of Work. Before any buildings, structures or other -------------- improvements or additions thereto, having a cost 86 in excess of One Hundred Fifty Thousand and No/100 Dollars ($150,000.00) are constructed or reconstructed upon the Premises, Developer shall serve written notice upon the Landlord in the manner specified in this Lease of Developer's intention to perform such work for the purpose of enabling Landlord to post notices on non-responsibility under the provisions of Section 3094 of the Civil Code of the State of California, or any other similar notices which may be required by law. 9.3 Discharge of Liens. If any mechanics liens or other liens shall ------------------ be filed by reason of work, labor, services or materials supplied or claimed to have been supplied to Developer or anyone holding the Premises, or any part thereof, through or under Developer, Developer shall cause the same to be discharged of record within sixty (60) days after notice to Developer of the filing thereof, or otherwise free the Premises from the effect of such claim of lien and any action brought to foreclose such lien within such sixty (60) day period, or Developer, within such sixty (60) day period, shall promptly furnish to Landlord a bond in an amount and issued by a surety company satisfactory to Landlord securing Developer against payment of such lien and against any and all loss or damage whatsoever in any way arising from the failure of Developer to discharge such lien. 9.4 Landlord's Right to Pay. In the event Developer fails to perform ----------------------- its obligations under subsection 9.3 above with respect to any lien within the sixty (60) day period specified in subsection 9.3 above, Landlord may, but shall not be obligated to pay the amount thereof, inclusive of any interest thereon, and any costs assessed against Developer in said litiga- 87 tion, or may discharge such lien by contesting its validity or by any other lawful means. 9.5 Reimbursement of Landlord. Any amount paid by Landlord for any of ------------------------- the expenses described in subsection 9.4 above, and all reasonable legal and other expense of Landlord, including reasonable counsel fees, and costs of suit, in defending any such action or in connection with procuring the discharge of such lien, with all necessary disbursements in connection therewith, together with interest thereon at the rate provided by law from the date of payment shall be repaid by Developer to Landlord on demand. 10. CONDEMNATION: ------------ 10.1 Definition of Terms. The following definitions shall govern ------------------- interpretation of this subsection. 10.1.1 Total Taking. The term "total taking" as used in this ------------ Section 10 means the taking of the entire Premises under the power of eminent domain or the taking of so much thereof as the parties mutually agree will prevent or substantially impair the use of the Premises of the uses and purposes than being made or proposed to be made by Developer of the Premises. If the parties do not agree as to whether prevention or substantial impairment has occurred, that issue may be arbitrated as provided in the rules for arbitration published by the American Arbitration Association. Each party shall pay half of the cost of such arbitration. 10.1.2 Partial Taking. The term "partial -------------- 88 taking" means the taking of a portion only of the Premises which does not constitute a total taking as defined above. 10.1.3 Voluntary Conveyance. Neither party to this Lease -------------------- will voluntary convey any interest related to this Lease to any agency, authority or public utility under threat of a taking under the power of eminent domain in lieu of formal proceedings without first providing written notice to the other of any request or intention to do so. 10.1.4 Date of Taking. The term "date of taking" shall be -------------- the date title to the Premises or portion thereof passes and vests in the condemnor or the date of entry of an order for immediate possession with any judicial proceeding in eminent domain or the date physical possession of the Premises is taken or interfered with, whichever first occurs. 10.1.5 Leased Land. The term "leased land" means the real ----------- property demised hereby, but exclusive of any and all improvements situated upon the Premises at the commencement of the Lease term and also exclusive of all improvements constructed or placed thereon by or under Developer and exclusive of any grading and other site work performed by or under Developer. 10.2 Effect of Taking. If during the term hereof there shall be a ---------------- total or partial taking under the power of eminent domain, then the Leasehold Estate of Developer in and to the Premises, in the event of a total taking, or the portion 89 thereof taken, in the event of a partial taking, shall cease and terminate, as of the date of taking thereof. If this Lease is so terminated in whole or in part, all Ground Rent and other charges payable by Developer to Landlord hereunder attributable to the Premises, or portion thereof taken, shall be paid by Developer up to and prorated through the date of taking by the condemnor. Any portion of the security deposit provided for in subsection 16.1.1 fairly attributable to the terminated portion of the Leasehold Estate shall be repaid to Developer and the parties shall thereupon be released from all further liability in relation thereto. 10.3 Allocation of Award. All compensation and damages awarded in ------------------- connection with any taking, total or partial, of the Premises including any improvements thereon shall be allocated so that Developer shall receive that portion of the award attributable to the value determined for improvements then existing on the Premises, the value of Developer's leasehold interest in the Premises and severance or other damages to buildings or the Leasehold Estate. The remainder of the award, including all portions of the award attributable to the value of the land as affected by the leasehold, and any severance or other damages to the land, shall be payable to Landlord. 10.4 Reduction of Ground Rent on Partial Taking. In the event of a ------------------------------------------ partial taking, the Ground Rent payable by Developer shall be adjusted from the date of taking to the next adjustment date (see subsection 3.2.1). Such Ground Rent adjustment caused by the partial taking shall be made by reducing the Ground Rent payable by Developer based on the ratio between the 90 fair market value of the leased land at the date of taking and the fair market value of the leased land remaining immediately thereafter, valued for the use being made of the leased land by Developer prior to such taking. 10.5 Temporary Taking. If all or any portion of the Premises shall ---------------- be taken by any competent authority for temporary use or occupancy, this Lease, at the option of Developer, shall continue in full force and effect without reduction or abatement of rent, notwithstanding any other provision of this Lease, statute or rule of law to the contrary, and Developer shall, in such event, be entitled to the entire award for such taking to the extent that the same shall be applicable to the period of such temporary use or occupancy included in the term of this Lease and Landlord shall be entitled to the remainder thereof. 11. ALTERATIONS BY DEVELOPER: ------------------------ Developer shall have the right at any time and from time to time during the Lease term to make, at its sole cost and expense, such changes and alterations, structural or otherwise, in or to the improvements, other than dedicated public improvements, constructed upon the Premises as Developer shall deem necessary or desirable, including without limitation, the right to remove and/or demolish buildings and other improvements provided that other buildings or improvements are constructed in their place if such demolition occurs when twenty (20) or more years are remaining in the term of this Lease, including any extensions hereof. The rights granted by this section shall be 91 limited to and their exercise shall comply with the terms of Section 7 and subsection 3.3 hereof. 12. TAXES AND ASSESSMENTS: --------------------- 12.1 Payment by Developer. Developer recognizes and understands -------------------- that this Lease may create a possessory interest subject to property taxation and that Landlord may be subject to the payment of property taxes on such interest. Developer shall pay prior to delinquency all real estate taxes and assessments on the Premises and/or Developer's possessory interests therein levied during the term of this Lease. Developer shall not place or allow to be placed on the Premises, or any part thereof, any mortgage, trust deed, encumbrance or lien unauthorized by this Lease. Developer shall remove or have removed any levy or attachment made on any of the Premises, or any part thereof, or assure the satisfaction thereof within a reasonable time, but in any event prior to a sale thereof. Nothing herein contained shall be deemed to prohibit Developer from contesting the validity or amounts of any tax, assessment, encumbrance or lien, nor to limit the remedies available to Developer in respect thereto. 12.2 Installment Payments. If any real estate, special tax or -------------------- assessments are at any time during the term of this Lease, levied or assessed against the Premises or Developer's Leasehold Estate hereunder, which, upon exercise of any option permitted by the assessing authority, may be paid in installments or converted to an installment payment basis (irrespective of whether interest shall accrue on unpaid installments), Developer may elect to pay such taxes or assessments in installments with 92 accrued interest thereon. In the event of such election, Developer shall be liable only for those installments of such taxes or assessments which become payable during the term of this Lease, and Developer shall not be required to pay any such installment which becomes due and payable after the expiration of the term of this Lease. Landlord shall execute whatever documents may be necessary to convert any such taxes or assessments to such an installment payment basis if requested so to do by Developer and if such action is authorized by law then in effect. 12.3 Proration. Any real estate taxes and assessments which are --------- payable by Developer hereunder shall be prorated between Landlord and Developer at the commencement and expiration or earlier termination of the term of this Lease if such real estate taxes and assessments relate to a fiscal period of the levying authority which arose before the term commenced or extends beyond the expiration or earlier termination of the term hereof. 12.4 Right to Contest. Developer and any subtenant, with ---------------- Developer's consent, shall have the right to contest the amount or validity of any real estate taxes and assessments, in whole or in part, by appropriate administrative and legal proceedings, without any cost or expense to Landlord, and Developer may postpone payment of any such contested real estate taxes and assessments pending the prosecution of such proceedings and any appeals so long as such proceedings shall operate to prevent the collection of such real estate taxes and the sale of the Premises to satisfy any lien arising out of the nonpayment of the same, provided, however that if at any time payment of the whole 93 or any part thereof shall become necessary in order to prevent the termination of the right of redemption of any property affected thereby, or if there is to be an eviction of Developer because of nonpayment thereof, Developer shall pay the same in order to prevent such termination of the right of redemption or such eviction. Landlord shall execute and deliver to Developer whatever documents may be within Landlord's legal authority necessary or proper to permit Developer or any subtenants, with Developer's consent, to so contest any real estate taxes or which may be necessary to obtain payment of any refund which may result from any such proceedings. Any such contest shall be at no cost or expense to Landlord. Each refund of any tax or assessment so contested shall be paid to Developer. 13. CERTIFICATES BY DEVELOPER AND LANDLORD: -------------------------------------- 13.1 Developer to Provide. Developer agrees upon not less than -------------------- twenty (20) days' notice by Landlord to execute, acknowledge and deliver to Landlord a statement in writing certifying (i) that this Lease is unmodified and in full force and effect (or if there have been modifications that the same is in full force and effect as modified and stating the modifications); (ii) whether or not to the best knowledge of Developer there are then existing any offsets or defenses against the enforcement of any of the terms, covenants or conditions hereof upon the part of Developer to be performed and, if so, specifying the same; and (iii) the dates to which the Ground Rent and other charges have been paid, it being intended that any such statement delivered pursuant to this subsection may be relied upon by any prospective 94 purchaser of the fee of the real property comprising the Premises. 13.2 Landlord to Provide. Landlord agrees upon not less than twenty ------------------- (20) days' prior notice by Developer, to execute, acknowledge and deliver to Developer a statement in writing certifying (i) that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications); (ii) the dates to which the Ground Rent and other charges have been paid; (iii) stating whether or not to the best knowledge of Landlord, Developer is in default in performance of any covenant, agreement or condition contained in this Lease and, if so, specifying each such default of which Landlord may have knowledge; and (iv) whether or not there are to Landlord's best knowledge any offsets or defenses claimed by and/or available to Developer to the payment or rental, it being intended that any such statement delivered pursuant to this subsection may be relied upon by any prospective assignee or subtenant of the whole or any portion of the Premises, or by any lender extending credit on the security of Developer's Leasehold Estate. 14. QUIET ENJOYMENT: --------------- Landlord covenants that Developer, upon the performance of the covenants and agreements herein contained on Developer's part to be performed, shall and may at all times, for itself and its subtenants, peaceably and quietly have, hold and enjoy the Premises during the term of this Lease. 95 15. TERMINATION AND FURTHER LEASING: ------------------------------- 15.1 Termination. Subject to the provisions of Section 4, this ----------- Lease may be terminated at any time by mutual agreement of the parties. 15.2 Termination by Developer. Developer may terminate this ------------------------ Lease in the event Developer is unable to secure an extended coverage leasehold policy of title insurance, within ninety (90) days following execution of this Lease containing only those exceptions approved be Developer, provided, however, that Developer shall have first given Landlord sixty (60) days notice of its intention to terminate during which time Landlord shall have an opportunity to cure the deficiency. 15.3 Termination by Landlord. Subject to the provision of ----------------------- Section 4 of this Lease, Landlord may terminate this Lease under the following circumstances: 15.3.1 Developer fails to pay rent or any other charge required by this Lease. 15.3.2 Developer assigns this Lease in violation of subsection 5.1. 15.3.3 Failure of Developer to submit drawings or related documents required by this Lease. 15.3.4 Failure of Developer to provide the good faith deposit required by this Lease. 15.3.5 Bankruptcy of Developer. Final adjudication or filing of a voluntary petition for bankruptcy by Developer. Provided, however, that in all cases, Landlord shall give Developer sixty (60) days prior written notice of its 96 intention to terminate, during which time Developer shall have an opportunity to cure the default. However, if the default is of a nature such that it cannot be cured within sixty (60) days, Developer shall not be in default if Developer shall commence such use and diligently prosecute it to completion. 16. BONDS AND SECURITY DEPOSITS: --------------------------- 16.1 Good Faith Deposit. ------------------ 16.1.1 Receipt by Landlord. Developer has, concurrently ------------------- with the execution and delivery of this Lease, delivered to Landlord a good faith deposit in the amount of One Million and No/l00 Dollars ($1,000,000.00) as security for the performance of the obligations of Developer to be performed in accordance with the provisions of this Lease. The receipt of the deposit is hereby acknowledged by Landlord. 16.1.2 Form of Deposit. The good faith deposit, at the --------------- option of Developer, may be in the form of (i) cash; or (ii) cashier's or certified check; or (iii) negotiable certificate or certificates of deposit issued by a federal or state bank or savings and loan association; or (iv) an irrevocable letter of credit in favor of Landlord issued by an established bank or other institution satisfactory to Landlord; or (v) a bond in a form and with a surety reasonably satisfactory to Landlord providing for payment to Landlord of amounts that may become payable to Landlord under this Lease from time to time; or (vi) such other form of 97 security or deposit as may be mutually acceptable. Developer may change the form of the deposit from time to time, at its option, to any other of the permitted forms of deposit. The deposit, if in cash or certified or cashier's check shall be deposited in an interest bearing account of Landlord in a bank, savings and loan association or trust company selected by Developer and approved by Landlord, which approval shall not unreasonably be withheld. Developer shall have the right to specify the type of account in which such funds are, from time to time, to be deposited. Provided that no default has occurred during the term of the Lease which has resulted in a forfeiture by Developer of all or a part of the good faith or security deposit, such deposit, or any portion thereof which has not been forfeited, shall be returned to Developer upon expiration of this Lease. 16.1.3 Interest. Landlord shall be under no obligation to pay -------- or earn interest on the deposit, but if interest shall accrue or be payable thereon such interest, when received by Landlord, shall be promptly paid to Developer. Landlord agrees, but not more often than quarterly, upon receipt of a request from Developer, to cause any such interest so accrued on such deposit to be paid to Developer by the bank, savings and loan association or trust company with which said sums have been deposited. 16.1.4 If Bond is Posted. If a bond is post- ----------------- 98 ed to satisfy the requirements of this Lease with a fixed term and if such bond expires prior to the date Developer is entitled to have the security deposit returned, Developer shall provide Landlord with either (i) evidence of the renewal of such bond for an additional period, or (ii) a new security deposit satisfying the requirements of subsection 16.1 in one of the forms authorized by such subsection, including, without limitation, a new bond, not less than twenty (20) days prior to the expiration of the bond posted to satisfy the requirements in subsection 16.1 above. 16.2 Construction Security Deposits. Developer has, prior to the ------------------------------ execution and delivery of this Lease, delivered to Landlord a construction deposit in the amount of One Million and No/l00 Dollars ($1,000,000.00) as security for the performance of the obligations of Developer to be performed in accordance with the provisions of this Lease. The receipt of the deposit is hereby acknowledged by Landlord. 16.2.1 Form of Construction Deposit. The construction ---------------------------- deposit, at the option of Developer, may be in the form of (i) cash; or (ii) cashier's or certified check; or (iii) negotiable certificates of deposit issued by a federal or state bank or savings and loan association; or (iv) an irrevocable letter of credit in favor of Landlord issued by an established lending institution approved by Landlord; or (v) other form of security or deposit as may be mutually acceptable. Developer may change the form of the deposit from time 99 to time, at its option, to any other of the permitted forms of deposit. The deposit, in cash or certified or cashier's check shall be deposited in an interest bearing account of Landlord in a bank, savings and loan association or trust company selected by Developer and approved by Landlord, which approval shall not unreasonably be withheld. Developer shall have the right to specify the type of account in which such funds are, from time to time, to be deposited. 16.2.2 Interest. Landlord shall be under no obligation to pay or -------- earn interest on the deposit, but if interest shall accrue or be payable thereon such interest, when received by Landlord, shall be promptly paid to Developer. Landlord agrees, but not more often than quarterly, upon receipt of a request from Developer, to cause any such interest so accrued on such deposit to be paid to Landlord by the bank, savings and loan association or trust company with which said sums have been deposited. 16.2.3 Incorporation by Reference. Any bond obtained by Developer -------------------------- shall incorporate by reference this Lease and all of its terms and conditions. For purposes of such bonds, no requirement of this Lease may be deemed waived. Waiver may be accomplished only by Landlord and only in writing by the City Manager or his duly authorized representative. 16.2.4 Return of Deposit. Promptly upon Developer's completion of ----------------- the construction of any build- 100 ing improvements upon the Premises and the issuance of a Certificate of Occupancy for such improvements, Landlord shall release and return to Developer a portion of the deposit described in subsection 16.2 based upon the proportion of the number of square feet of building area (as measured from the exterior of exterior building walls) within such completed building improvements and to 665,500 square feet of building area. If Developer is not in default under this Lease, the balance of such deposit, if any, with accrued interest shall be returned to Developer upon the occurrence of the Completion Date as specified in this Lease. 16.2.5 Retention of Deposit by Landlord. In the event that -------------------------------- this Lease is terminated by Developer, in whole or in part, under subsection 17.5 below, or in the event that Developer elects not to permit Landlord to terminate this Lease by reason of Developer's failure to commence and complete the construction of building improvements upon the Premises as required by this Lease, said deposit, less interest accrued thereon through the date of such termination and also less any portion of such deposit to be returned to Developer under subsection 16.2.4 above, shall be retained by Landlord as provided in subsection 17.5 below. 17. GENERAL PROVISIONS: ------------------ 17.1 Notices, Demands and Communications between the Parties. Written ------------------------------------------------------- notices, demands, and communications be- 101 tween Landlord and Developer shall be in writing and shall be sufficiently given if personally served or if mailed by registered or certified mail, postage prepaid, return receipt requested, to the principal offices of Landlord or Developer, set forth in subsection 1.5 of this Lease. Any such notice, demand or communication so given by mailing to Landlord shall be mailed to the attention of the City Manager. Copies of any such notice, demand or communication to be given to Developer pursuant to this Lease shall be given to Kilroy Long Beach Associates, Attention, President, such other entity, person or persons as he may designate, by personal service or by mailing the same, as required by this subsection, to such party, at the address set forth in subsection 1.5 above or such other address as may be designated. Either Landlord or Developer may from time to time by written notice to the other designate a different address or addresses or party or parties to whom copies of notices, demands and communications are to be delivered or to whose attention notices, demands and communications are to be addressed which shall be substituted for the addresses and/or names above specified. Notices shall be deemed served effective immediately if personally served and effective as of the date received and set forth on the return receipt if served by registered or certified mail. 17.2 Conflict of Interest. No member, official or employee of -------------------- Landlord shall have any personal interest, direct or indirect, in this Lease, nor shall any such member, official or employee participate in any decision relating to this Lease which affects his personal interest or the interest of any corporation, partnership or association in which he is, directly or 102 indirectly, interested. No member, official or employee of Landlord shall be personally liable to Developer, or any successor in interest, in the event of any default or breach by Landlord or for any amount which may become due to Developer or successor or on any obligations under the terms of this Lease. 17.3 Enforced Delay: Extension of Time of Performance. In addition -------------- -------------------------------- to other provisions of this Lease, performance by either party hereunder, shall not be deemed to be in default where delays or defaults are unavoidable or performance is rendered impracticable, due to war; enemy action; insurrection; civil disturbance; strikes; lock-outs; riots; floods; earthquakes; fires; casualties; acts of God; acts of the public enemy; epidemics; quarantine restrictions; freight embargoes; lack of transportation; governmental restrictions or moratoria; failure or inability to secure materials or labor by reason of regulations or order of any governmental entity; litigation including eminent domain proceedings or related legal proceedings; acts or failure to act of the other party; acts or failure to act of any public or governmental agency or entity; and the time for such performance shall be extended for a period equal in length to such delay(s). 17.4 Inspection of Books and Records. Landlord has the right at all ------------------------------- reasonable times during regular business hours to inspect the books and records of the Developer pertaining to the Premises as pertinent to the purposes of this Lease. Developer also has the right at all reasonable times during regular business hours to inspect the books and records of the Landlord pertaining to the Premises as pertinent to the purpose 103 of this Lease. 17.5 Defaults and Remedies. --------------------- 17.5.1 Defaults - General. Subject to the extensions of ------------------ time set forth in subsection 17.3 above, failure by either party to perform any term or provision of this Lease constitutes a default under this Lease, if not cured within thirty (30) days from the date of receipt of a written notice from the other party specifying the claimed default provided that if such default cannot reasonably be cured within such thirty (30) day period, the party receiving such notice of default shall not be in default under this Lease if such party commences the cure of such default within such thirty (30) day period and thereafter diligently prosecutes the steps to cure such default to completion. 17.5.2 Institution of Legal Actions. In addition to any ---------------------------- other rights or remedies, either party may institute legal action to cure, correct, or remedy any default, to recover damages for any default, or to obtain any other remedy consistent with the purpose of this Lease. Such legal actions must be instituted in the South Branch of the Superior Court of the County of Los Angeles, State of California, in an appropriate municipal court in that county, or in the Federal District Court in the Central District of California. The prevailing party in any action commenced pursuant to this Lease shall be entitled to recover reasonable costs, expenses and attorneys' fees. 104 17.5.3 Applicable Law. The laws of the State of California -------------- shall govern the interpretation and enforcement of this Lease. 17.5.4 Service of Process. In the event any legal action is ------------------ commenced by Developer against Landlord, service of process on Landlord shall be made by personal service upon the City Clerk of the Landlord, or in such other manner as may be provided by law. In the event that any legal action is commenced by Landlord against Developer, service of process on Developer shall be made as provided by law and shall be valid whether made within or without the State of California, or in such manner as may be provided by law. 17.5.5 Rights and Remedies Are Cumulative. Except as otherwise ---------------------------------- expressly stated in this Lease, the rights and remedies of the parties are cumulative, and the exercise by either party of one or more of such rights or remedies shall not preclude the exercise by it, at the same or different times, of any other rights or remedies for the same default or any other default by the other party. 17.5.6 Inaction Not a Waiver of Default. Any failures or -------------------------------- delays by either party in asserting any of its rights and remedies as to any default shall not operate as a waiver of any default or of any such rights or remedies or deprive either such party of its right to institute and maintain any actions or proceed- 105 ings which it may deem necessary to protect, assert or enforce any such rights or remedies. 17.5.7 Remedies. In the event of a default by Developer, which -------- is not cured by Developer within the times specified in this Lease, Landlord, without further notice to Developer, may declare this Lease and/or Developer's right of possession at an end and may reenter the Premises by process of law, in which event, Landlord shall have the right to recover from Developer: 17.5.7.1 The worth at the time of award of the unpaid Ground Rent which has been earned at the time of termination, plus interest; 17.5.7.2 The worth at the time of award of the amount by which the unpaid Ground Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Developer proves could have been reasonably avoided, plus interest; 17.5.7.3 The worth at the time of award of the amount by which the unpaid Ground Rent for the balance of the term after the time of award exceeds the amount of such rental loss for the same period that Developer proves could be reasonably avoided, plus interest thereon; and 17.5.7.4 The remedies of Landlord as hereinabove provided are subject to the other provisions of this Lease, including Section 4 hereof. 106 17.5.8 Developer's Rights. Developer shall have the right to ------------------ challenge the correctness of any determination of default made by Landlord, and Landlord shall carefully review and consider Developer's challenge. 17.5.9 Lease Termination. Should governmental action or failure ----------------- to act preventing construction in accordance with this Lease or rendering it impossible, occur prior to the time that Developer has constructed any building upon the Premises, then Developer shall have the right, at its option, with the prior written approval of any lender which has a security interest in the Leasehold Estate, to cancel and terminate this Lease by giving written notice of such termination to Landlord, at any time prior to the construction of a building upon the Premises. Upon any such termination of this Lease, Developer and Landlord shall execute and record a quitclaim deed sufficient to remove the cloud of this Lease and the short form of this Lease from record title to the Premises and the deposits described in subsections 16.1 and 16.2, plus any interest accrued on such deposits, shall be paid to Developer by Landlord. 17.5.l0 Landlord's Exercise of Remedies. In the event of an ------------------------------- uncured default by Developer in the performance of any of its obligations to commence and complete the construction of the initial building within the times required by Section 7 of this Lease and in the further event that Landlord elects to exercise 107 its remedy to terminate this Lease by reason of such default by Developer, Developer may, for a period of thirty (30) days following its receipt of written notice from Landlord of Landlord's election to terminate this Lease by reason of such default, elect to prevent such termination from becoming effective by releasing and paying to Landlord a portion of the good faith deposit held by Landlord under subsection 16.1, which portion shall be equal to the lesser of (i) the amount of such deposit so held by Landlord; or (ii) an amount equal to the product of One and One-half Dollar ($1.50) per square foot times the number of square feet of building area the failure to commence or complete the construction of which has caused the subject default or the adjusted rent per square foot if this provision becomes operative after any rental adjustment. 17.5.11 Payment to Developer. In the event that this Lease is -------------------- terminated as a result of an uncured default by Landlord and in the further event that Developer has constructed streets, utilities and/or other off-site improvements or grading improvements upon or in relation to the Project prior to such termination of this Lease, Landlord shall, pursuant to its responsibilities under State law, use its best efforts to resell or relet the Premises, or any portion thereof, as soon and in such manner as Landlord shall find feasible and consistent with the objectives of such law to a qualified and responsible party or parties (as rea- 108 sonably determined by Landlord) who will assume the obligation of making or completing the improvements required of Developer under this Lease, or such other improvements in their stead as shall be satisfactory to Landlord and in accordance with the uses specified for the Premises in this Lease. Upon such resale or reletting of the Premises, or any portion thereof, the proceeds thereof shall be applied: 17.5.11.1 Reimbursement to Landlord. First, to reimburse ------------------------- Landlord for all costs and expenses incurred, including, but not limited to, salaries to personnel in connection with the recapture, management, and resale or reletting of the Premises, or part thereof (but less any income derived by Landlord from the Premises, or part thereof, in connection with such management); all taxes, assessments and water and sewer charges paid with respect to the Premises, or part thereof; any payments made or which are necessary to be made to discharge any encumbrances or liens existing on the Premises, or part thereof, at the time or revesting of title thereto in Landlord or to discharge or prevent from attaching any subsequent encumbrances or liens due to obligations, defaults or acts of Developer, its successors or transferees; any expenditures made or obligations incurred with respect to the making or completion of the improvements or any part thereof on the Premises, or part 109 thereof; and any amounts otherwise owing Landlord by Developer and its successor or transferee; 17.5.11.2 Reimbursement to Developer. Second, to -------------------------- reimburse Developer, its successors or transferees, a sum up to the amount equal to the sum of (i) the costs incurred for the development of the Project, prorated to the Premises, if the Premises are less than all of the Project, on a square foot basis, and for the improvements existing on the Premises at the time of the re-entry and repossession by Developer, less (ii) any gains or income withdrawn or made by Developer from the Premises or the improvements thereon; provided however, that no payment shall be made to Developer if this Lease is terminated as a result of an uncured default by Developer. 17.5.11.3 Ground Rent. Third, in the case of a reletting, ----------- to pay to Landlord an amount equal to the Ground Rent and other payments payable to Landlord hereunder that Landlord would have received if this Lease had not been terminated; 17.5.11.4 Remaining Balance. Any balance remaining after ----------------- such reimbursement shall be retained by Landlord as its property. In the event that such street, utility and/or other off-site improvements have been constructed by or the costs of such construction were paid or reimbursed by an improvement or special assessments district, the provisions 110 of this subsection shall be applicable to the costs for such improvements if payment of the bonds issued by such district have been guaranteed by Developer or are secured by security, in addition to the Leasehold Estate created hereby, or paid by Developer, but only to the extent of such payment by Developer or of payment from the proceeds of such guarantee or security. 17.5.12 Delivery of Plans. In the event that this Lease is ----------------- terminated, for any reason whatsoever, Developer shall deliver to Landlord one set of all plans and data in its possession concerning the Premises. 17.6 Right to Contest Laws. Developer shall have the right, --------------------- after notice to Landlord to contest or to permit its subtenants to contest by appropriate legal proceedings, without costs or expense to Landlord, the validity of any law, ordinance, order, rule, regulation or requirement to be complied with by Developer under this Lease and to postpone compliance with the same except such laws as may be adopted by Landlord, provided such contest shall be promptly and diligently prosecuted at no expense to Landlord and so long as Landlord shall not thereby suffer any civil penalties, sanction or be subjected to any criminal penalties or sanctions, and Developer shall protect and save harmless Landlord against any liability and claims for any such noncompliance or postponement of compliance. 17.7 Trade Fixtures. All trade fixtures, furnishings, equipment -------------- and signs installed by or under Developer or subtenants shall be and remain the property of the person, firm 111 or corporation installing the same and shall be removable at any time during the term of this Lease. The removal of any such trade fixtures, furnishings, equipment and signs shall be at the expense of the person, firm or corporation removing the same, who shall repair any damage or injury to the Premises and all improvements thereto occasioned by the removal thereof. In the event that any subtenant acquires any furniture, trade fixtures, signs and/or equipment to be used in connection with its subleased premises from an equipment lessor or from an equipment seller under a security agreement, Landlord agrees to execute such documents as may reasonably be required by the equipment lessor or creditor in order to assure such party of its prior rights in and to any such equipment, furniture, signs and/or trade fixtures and of its right to remove any such equipment, furniture, signs and/or trade fixtures from the subleased premises for a period of not to exceed forty-five (45) days from and after notice to such party of the termination or expiration of the sublease of the subject subtenant- lessee or subtenant-debtor. 17.8 Continued Possession of Developer. If Developer shall hold --------------------------------- over the Premises after the expiration of the term hereof with the consent of Landlord, either express or implied, such holding over shall be construed to be only a tenancy from month-to-month, subject to all the covenants, Ground Rent conditions and obligations hereof and terminable by either party as provided by law. 17.9 Utilities. Developer shall pay or cause to be paid all --------- charges for gas, electricity, water and other utilities furnished to the Premises during the term of this Lease and 112 all sewer use charges or similar charges or assessments for utilities levied against the Premises for any period included within the term of this Lease. 17.10 Surrender. Upon the expiration of the term of this Lease, --------- as provided herein, or sooner termination of this Lease, Developer, subject to subsection 17.5.11 shall surrender to Landlord, all and singular, the Premises, including any buildings and all improvements constructed by or under Developer then situated upon the Premises, and Developer shall execute, acknowledge and deliver to Landlord within ten (10) days after written request from Landlord to Developer, a Quitclaim Deed or other document required by any reputable title company to remove the cloud of this Lease from the Premises. Notwithstanding the foregoing provisions of this section to the contrary, Developer shall have the right, at any time not less than six (6) months prior to the expiration of the term of this Lease and for a period of sixty (60) days following the expiration of the term to remove all or any portion of the buildings and other improvements constructed by or under Developer upon the Premises, without obligation to replace the same with new buildings and/or other improvements as required by subsection 6.3 above. 17.11 Partial Invalidity. If any term or provision of this ------------------ Lease or the application thereof to any party or circumstances shall, to any extent, be held invalid or unenforceable, the remainder of this Lease, or the application of such term or provision, to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this 113 Lease shall be valid and enforceable to the fullest extent permitted by law. 17.12 Section Headings. The section and subsection headings of ---------------- this Lease are inserted as a matter of convenience and reference only and in no way define, limit or describe the scope or intent of this Lease or in any way affect the terms and provisions hereof. 17.13 Short Form Lease. Concurrently with the execution and ---------------- delivery of this Lease, Landlord and Developer have executed, acknowledged and caused to be recorded a short form of this Lease in the form attached hereto as Exhibit "M". 17.14 Exhibits Incorporated. Exhibit "A" is hereby incorporated --------------------- in this Lease. No other exhibit is incorporated in the Lease and all exhibits, other than Exhibit "A", may be changed or modified by agreement between Landlord and Developer at any time and from time to time without amending this Lease. 17.15 Entire Agreement, Waivers and Amendments. This Lease is ---------------------------------------- executed in three (3) triplicate originals, each of which is deemed to be an original. It constitutes the entire understanding and agreement of the parties. This Lease integrates all the terms and conditions mentioned herein or incidental hereto, and supersedes all negotiations or previous agreements between the parties with respect to all or any part of the subject matter hereof. 17.16 Waivers. All waivers of the provisions of this Lease must ------- be in writing by the appropriate authorities of Landlord or Developer, and all amendments hereto must be in writing by the appropriate authorities of Landlord and Developer. 114 17.17 Approvals. Except where specific criteria are set forth --------- as a condition to approving or disapproving a matter or course of action, including but not limited to assignment (subsection 5.4), and subletting (subsection 5.7.2), in all circumstances where under this Lease either party is required to approve or disapprove any matter, such approval shall not be unreasonably withheld. 17.18 Successors in Interest. The provisions of this Lease ---------------------- shall be binding upon and shall inure to the benefit of the heirs, executors, assigns and successors in interest of the parties hereto. 17.19 "And/Or". Whenever the words and symbols "and/or" are ------- used in this Lease, it is intended that this Lease be interpreted and the sentence, phrase or other part be considered in both its conjunctive and disjunctive sense, and as having been written twice, once with the word "and" inserted, and once with the word "or" inserted, in the place of said words and symbol "and/or". 17.20 "Including" Defined. The use of the word "including", or ------------------- "include", when followed by any general statement, term or matter, will not be construed to limit such statement, term or matter to the specific items or matters set forth immediately following such work or to similar items, terms or matters, but rather will be deemed to refer to all other items, terms or matters that could reasonably fall within the broadest possible scope of such general statement, term, item or matter. 17.21 Right of First Refusal to Purchase. If Landlord shall ---------------------------------- determine during the term of this Lease that it is 115 lawful and in the public interest to sell the Premises, or any portion thereof, Landlord shall, prior to making the Premises or part thereof available for sale to any other party, provide Developer with the opportunity to purchase said property at its fair market value, as determined by an appraisal obtained by Landlord. If Developer has not entered into an agreement to purchase said property within sixty (60) days of the date it is first offered for sale to Developer at the price theretofore determined by Landlord to be the fair market value, Landlord may offer the property for sale on the open market. Provided, however, that if Landlord should reduce the fair market value of the Premises or part thereof to be sold by seven and one-half percent (7.5%) or more, Developer's first refusal rights shall be reinstated. Developer shall respond to any such re-offer within five (5) business days, and if Developer fails to respond within that time period Developer's first refusal rights shall terminate. The determination whether such property shall be made available for sale is and shall be within the sole and exclusive discretion of Landlord. Landlord shall determine the legality of such action prior to making a determination to sell on the basis of the law then in effect. 17.22 If Developer is a Trustee. If Developer is a Trustee, ------------------------- this Lease is executed by the undersigned Trustee, not personally, but solely as Trustee, and it is expressly understood and agreed by the parties hereto, anything contained herein to the contrary notwithstanding, that each and all of the covenants, undertakings, representations and agreements herein made are intended, not as personal covenants, undertakings, representations 116 and agreements of the Trustee, individually, or for the purpose of binding the Trustee personally, but this Lease is executed and delivered by the Trustee solely in the exercise of the powers conferred upon the Trustee as such Trustee under the trust agreement and no personal liability or personal responsibility is assumed by, nor shall at any time be asserted or enforced against said Trustee on account hereof, or on account of any covenant, undertaking, representation, warranty or agreement herein contained, either expressed or implied, and all such personal liability, if any, being hereby expressly waived and released by the parties hereto, and by all persons claiming by or under said parties. The provisions of this subsection 17.22 shall apply to any Trustee succeeding in whole or in part to the interests of Developer hereunder. 17.23 Limitation of Liability of Partners. From and after the ----------------------------------- completion of the construction of the improvements described in this Lease, if Developer at any such time shall be a partnership or joint venture, Landlord shall look solely to the assets of such partnership or joint venture for the collection or satisfaction of any money judgment which Landlord may recover against Developer, and Landlord shall not look for the collection or satisfaction of any such judgment to the personal assets of any person who shall at any time be a partner, joint venturer or participant in or under any such partnership or joint venture. The provisions of the subsection shall be binding upon Landlord and each and every future owner of Landlord's interest under this Lease and shall insure to the benefit of each and every such partner, joint venturer and participant. 117 17.24 Approvals. Except as otherwise specifically provided in --------- this Lease, all approvals to be done by Landlord may be done by Landlord's City Manager or his designee. IN WITNESS WHEREOF, Landlord and Developer have signed this Lease as of the date opposite their signature. CITY OF LONG BEACH, a municipal corporation July 17, 1985 By: /s/ [SIGNATURE APPEARS HERE] ----------------------------------------- City Manager LANDLORD KILROY LONG BEACH ASSOCIATES, a California limited partnership By: KILROY LONG BEACH DEVELOPMENT CORPORATION, General Partner July 10, 1985 By: /s/ John B. Kilroy, Jr. ------------------------------------ JOHN B. KILROY, JR. President DEVELOPER This Lease Agreement is approved as to form this 17th day of July, 1985. ROBERT W. PARKIN, City Attorney By: [SIGNATURE APPEARS HERE] Deputy 118 17.24 Approvals. Except as otherwise specifically provided in --------- this Lease, all approvals to be done by Landlord may be done by Landlord's City Manager or his designee. IN WITNESS WHEREOF, Landlord and Developer have signed this Lease as of the date opposite my seal. STATE OF CALIFORNIA COUNTY OF LOS ANGELES On July 17, 1985 , before me, the undersigned a Notary Public and for said ----------------- State, personally appeared JOHN E. DEVER personally known to me to be the person who executed this instrument as CITY MANAGER of the City of Long Beach, a municipal corporation, and acknowledged to me that the municipal corporation executed it. WITNESS My hand and official seal. SIGNATURE: /s/ Jo Ann Burns -------------------- [SEAL APPEARS HERE] JO ANN BURNS JULY 10 , 1985 By: /s/ John B. Kilroy, Jr. - --------------- ------------------------ JOHN B. KILROY, JR. President DEVELOPER This Lease Agreement is approved as to form this 17 day of July, 1985. ROBERT W PARKIN, City Attorney By: [SIGNATURE APPEARS HERE] Deputy 118 DEVELOPER'S ACKNOWLEDGMENT --------------------------- STATE OF CALIFORNIA ) ) ss. COUNTY OF LOS ANGELES ) On July 10, 1985, before me, the undersigned, a Notary Public in and for said State, personally appeared John B. Kilroy, Jr., personally known to me or proved to me on the basis of satisfactory evidence to be the person that executed this instrument as President of Kilroy Long Beach Development Corporation, the corporation that executed this instrument as the general partner of Kilroy Long Beach Associates, a California Limited Partnership, the partnership that executed the within instrument, and acknowledged to me that such corporation executed the same as such partner and that said partnership executed the same. WITNESS my hand and official seal. ( SEAL ) /s/ Nadine K. Kirk [SEAL APPEARS HERE] -------------------------- Notary Public in and for said State LEGAL DESCRIPTION ----------------- THAT PORTION OF PARCEL 1, IN THE CITY OF LONG BEACH, IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS SHOWN ON A RECORD OF SURVEY, FILED IN BOOK 85, PAGE 19, OF RECORD OF SURVEYS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY, TOGETHER WITH THOSE PORTIONS OF LOTS 5 AND 9, TRACT NO. 10548, IN SAID CITY, COUNTY OF STATE, AS PER MAP RECORDED IN BOOK 174, PAGES 15 TO 23, INCLUSIVE OF MAPS, IN SAID RECORDER'S OFFICE, AND TOGETHER WITH THAT PORTION OF LAKEWOOD BOULEVARD (FORMERLY KNOWN AS CERRITOS AVENUE, 80 FEET WIDE) AS SHOWN ON SAID MAP OF TRACT NO. 10548, NOW VACATED BY THE STATE OF CALIFORNIA HIGHWAY COMMISSION, A CERTIFIED COPY OF WHICH WAS RECORDED MAY 19, 1959, AS INSTRUMENT NO. 3601, OF OFFICIAL RECORDS, IN THE OFFICE OF SAID COUNTY RECORDER, DESCRIBED AS A WHOLE AS FOLLOWS: BEGINNING AT THE MOST SOUTHERLY CORNER OF SAID PARCEL 1, SAID RECORD OF SURVEY; THENCE NORTH 00 DEGREES 00 MINUTES 46 SECONDS EAST 324.60 FEET, ALONG THE WESTERLY LINE OF SAID PARCEL 1, TO THE NORTHWESTERLY CORNER OF SAID PARCEL 1, SAID NORTHWESTERLY CORNER BEING A POINT IN A NON-TANGENT CURVE CONCAVE NORTHERLY AND HAVING A RADIUS OF 1,050.00 FEET, A RADIAL LINE THAT BEARS SOUTH 2 DEGREES 06 MINUTES 54 SECONDS WEST TO SAID POINT, SAID CURVE ALSO BEING THE NORTHERLY LINE OF SAID PARCEL 1; THENCE EASTERLY ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 27 DEGREES 32 MINUTES 10 SECONDS AN ARC DISTANCE OF 504.63 FEET TO A POINT, SAID LAST MENTIONED POINT BEING A RADIAL LINE THAT BEARS SOUTH 25 DEGREES 25 MINUTES 16 SECONDS EAST, TO SAID LAST MENTIONED POINT; THENCE SOUTH 45 DEGREES 22 MINUTES 59 SECONDS EAST 1,403.34 FEET TO A POINT IN THAT CERTAIN COURSE AS DESCRIBED AS HAVING A BEARING AND LENGTH OF "SOUTH 34 DEGREES 15 MINUTES 50 SECONDS WEST 225.46 FEET" IN THE NORTHWESTERLY BOUNDARY OF THAT PARCEL OF LAND DESCRIBED AS PARCEL 1 IN DEED TO STATE OF CALIFORNIA, RECORDED MARCH 18, 1959, AS INSTRUMENT NO. 1904, OF OFFICIAL RECORDS, OF SAID COUNTY, SAID LAST MENTIONED POINT BEING NORTH 34 DEGREES 16 MINUTES 23 SECONDS EAST 40.81 FEET, ALONG SAID COURSE, FROM THE SOUTHWESTERLY TERMINUS THEREOF; THENCE SOUTH 34 DEGREES 16 MINUTES 23 SECONDS WEST 40.81 FEET, ALONG SAID COURSE, TO THE NORTHEASTERLY TERMINUS OF THAT CERTAIN COURSE IN SAID NORTHWESTERLY BOUNDARY, AS DESCRIBED IN SAID LAST MENTIONED PARCEL 1, AS HAVING A BEARING AND LENGTH OF "SOUTH 62 DEGREES 04 MINUTES 30 SECONDS WEST, 51.05 FEET, MORE OR LESS,"; THENCE SOUTH 62 DEGREES O5 MINUTES 03 SECONDS WEST ALONG SAID LAST MENTIONED CERTAIN COURSE, TO THE NORTHEASTERLY TERMINUS OF THAT CERTAIN COURSE AS DESCRIBED AS HAVING A BEARING AND LENGTH OF "SOUTH 62 EXHIBIT "A" Page 1 of 2 Pages DEGREES 04 MINUTES 30 SECONDS WEST, 113.28 FEET" IN SAID LAKEWOOD BOULEVARD, NOW VACATED BY THE CALIFORNIA HIGHWAY COMMISSION; THENCE SOUTH 62 DEGREES O5 MINUTES 03 SECONDS WEST ALONG SAID LAST MENTIONED CERTAIN COURSE TO THE NORTHEASTERLY TERMINUS OF THAT COURSE AS DESCRIBED AS HAVING A BEARING AND LENGTH OF "SOUTH 62 DEGREES 04 MINUTES 30 SECONDS WEST 704.56 FEET" IN THE NORTHERLY BOUNDARY OF THAT PARCEL OF LAND DESCRIBED AS PARCEL 1 IN DEED TO THE STATE OF CALIFORNIA, RECORDED MAY 11, 1959, AS INSTRUMENT NO. 1870, OF OFFICIAL RECORDS, OF SAID COUNTY; THENCE ALONG SAID LAST MENTIONED NORTHERLY BOUNDARY SOUTH 62 DEGREES O5 MINUTES 03 SECONDS WEST 704.56 FEET, SOUTH 80 DEGREES O5 MINUTES 43 SECONDS WEST 105.00 FEET AND NORTH 80 DEGREES 14 MINUTES 59 SECONDS WEST 676.33 FEET; THENCE NORTH 9 DEGREES 45 MINUTES 01 SECONDS EAST 570.00 FEET; THENCE NORTH 25 DEGREES 20 MINUTES 00 SECONDS EAST 15.00 FEET; THENCE NORTH 8 DEGREES 44 MINUTES 49 SECONDS WEST 248.97 FEET TO THE SOUTHERLY PROLONGATION OF SAID WESTERLY LINE OF PARCEL 1, AS SHOWN ON SAID RECORD OF SURVEY; THENCE NORTH 0 DEGREES 00 MINUTES 46 SECONDS EAST 72.14 FEET ALONG SAID PROLONGATION, TO THE POINT OF BEGINNING. ALSO EXCEPTING THEREFROM ALL OIL, GAS AND OTHER HYDROCARBONS IN AND UNDER, OR WHICH MAY BE PRODUCED OR SAVED FROM SAID LAND; TOGETHER WITH ALL RIGHTS OF EVERY KIND AND DESCRIPTION WHATSOEVER TO DRILL FOR, DEVELOP, TAKE, REMOVE, AND SEVER THE SAME, OR ANY PART THEREOF, FROM SAID LAND, WITHOUT, HOWEVER, THE RIGHT TO THE USE OF THE SURFACE OF SAID LAND IN CONNECTION WITH THE DEVELOPMENT OR REMOVAL OF SAID OIL, GAS OR OTHER HYDROCARBONS, ALL DRILLING AND BORING FOR SAID PURPOSES TO BE DONE BENEATH THE SURFACE OF SAID LAND AT ANY LEVEL, OR LEVELS, 100 FEET, OR MORE, BELOW THE SURFACE THEREOF, THE SURFACE OPENING OF THE WELL HOLE TO BE LOCATED ON LAND OTHER THAN THE LAND ABOVE DESCRIBED, AS RESERVED IN THE DEED FROM BIXBY LAND COMPANY, A CORPORATION, RECORDED AUGUST 25, 1948 IN BOOK 28072 PAGE 204, OFFICIAL RECORDS, AND RECORDED FEBRUARY 10, 1950 IN BOOK 32238 PAGE 67 OFFICIAL RECORDS AND RECORDED DECEMBER 28, 1950 IN BOOK 35179 PAGE 303, OFFICIAL RECORDS AND RECORDED DECEMBER 28, 1950 IN BOOK 35179 PAGE 310, OFFICIAL RECORDS. EXHIBIT "A" Page 2 of 2 Pages [MAP APPEARS HERE] EXHIBIT "B" [MAP APPEARS HERE} EXHIBIT "C" KILROY AIRPORT CENTER LONG BEACH CATEGORIES OF PRE DEVELOPMENT AND INFRASTRUCTURE COSTS (DURING AND RELATED TO INITIAL CONSTRUCTION WHICH MAY BE ACCOMPLISHED IN PHASES) Note: Exhibit "D" consists of a map and the following text. 1. FEES 1.1 Filing Fees 1.2 Inspection Fees 1.3 Plan Check & Permits 1.4 Sewer Area Fees 1.5 Flood Control Fees 1.6 Recording Fees 1.7 Other Fees 2. GENERAL 2.1 Legal & Audit Fees 2.2 Bonds 2.3 Insurance 2.4 Taxes & Assessments During Construction 2.5 Laboratory Testing 2.6 Unusual or Temporary Security 2.7 Utilities During Construction 2.8 Prints and Other Direct Costs 3. SITE INVESTIGATION 3.1 Survey and Parcel Map 3.2 Title Report 3.3 Borings 3.4 Soil Tests 4. ARCHITECTURE AND ENGINEERING 4.1 Site Planning 4.2 Civil Engineering 4.3 Electrical Engineering 4.4 Mechanical Engineering 4.5 Traffic Study 4.6 Signal Engineering 4.7 Landscape Architecture 4.8 Structural Engineering 4.9 Water Department Specifications 5. DEMOLITION 5.1 Utilities 5.2 Temporary Service to Adjacent Sites 5.3 NIKE Bunkers 5.4 Surface Buildings 5.5 Asphalt Paving 5.6 Concrete Slabs 5.7 Fencing 5.8 Allowance for Underground Items EXHIBIT "D" Page 1 of 4 Pages 6. SITE PREPARATION 6.1 Relocate Existing Signs 6.2 Temporary Construction Fences 6.3 Testing for Hazardous Materials 6.4 Allowance for Unforseen Site Conditions 6.5 National Guard Accesses 7. EXCAVATION AND GRADING 7.1 Grub and Rough Grade 7.2 Remove and Recompact 7.3 Scarify and Recompact 7.4 Import Fill, Compact and Grade 7.5 Fine Grade Street Easement 8. SEWERS 8.1 Sewer Mains, Approximate Sizes 8.1.1 l8" Main 8.1.2 8" Main 8.2 Lateral Stub Outs to Interior Edge of Sidewalk Easement 8.3 Manholes 8.4 Join Existing Sewer 9. STORM DRAINS 9.1 Main Storm Drains, Approximate Sizes 9.1.1 33" Main 9.1.2 30" Main 9.1.3 27" Main 9.1.4 24" Main 9.1.5 18" Main 9.2 Catch Basins 9.3 Lateral Stub Outs to Interior Edge of Sidewalk Easement 9.4 Manholes 9.5 Erosion Control on Parcels 10. WATER, APPROXIMATE SIZES 10.1 12" Water Main 10.2 Vaults and Lateral Stubs Outs to Interior Edge of Sidewalk Easement 10.3 Hot Taps 10.4 12" Valves 10.5 Blow off Valve 10.6 Air Evacuation Assembly 10.7 Fire Hydrants 10.8 Irrigation Backflow Preventers 10.9 Service Connections 10.10 Relocate Surge Tank 10.11 Relocate Existing Meters EXHIBIT "D" Page 2 of 4 Pages 11. ELECTRICAL 11.1 Six Main Conduits, Approximately 5" 11.2 Lateral Stub Outs to Interior Edge of Sidewalk Easement 11.3 Irrigation Transformer Vaults 11.4 Manholes 12. GAS 12.1 Gas Main 12.2 Lateral Stub Outs to Interior Edge of Sidewalk Easement 12.3 Valves 12.4 Engineering 13. TELEPHONE 13.1 Ten Main Conduits, Approximately 4" 13.2 Lateral Stub Outs to Interior Edge of Sidewalk Easement 13.3 Manholes 14. PERIMETER WALLS & FENCES 14.1 8' 4" Screen Wall 14.2 Remove Temporary Fences 14.3 Chain Link Security Fence 15. STREET IMPROVEMENTS 15.1 Intersection at Spring and KAC Drive 15.1.1 Curb Demolition 15.1.2 Asphalt Paving Demolition 15.1.3 Excavation 15.1.4 Retaining Wall 15.1.5 Back Fill 15.1.6 Curb and Gutter 15.1.7 Asphalt Paving 15.1.8 Traffic Signal 15.1.9 Restriping 15.2 Intersection at Redondo and KAC Drive 15.2.1 Curb Demolition 15.2.2 Asphalt Paving Demolition 15.2.3 Curb and Gutter 15.2.4 Asphalt Paving 15.2.5 Traffic Signal 15.3 Intersection at Spring and Redondo 15.3.1 Modify Traffic Signal 15.4 Kilroy Airport Center Drive 15.4.1 Curb and Gutter 15.4.2 Asphalt Street Paving 15.4.3 Crosswalk Pavers 15.4.4 Concrete Sidewalks 15.4.5 Curb 15.4.6 Street Lights EXHIBIT "D" Page 3 of 4 Pages 16. SIGNS 16.1 Street Name Signs 16.2 Stop Signs 17. LANDSCAPE IN THE AREAS SHOWN ON THE ATTACHED DRAWING 17.1 Soil Preparation & Fine Grading 17.2 Finish Grading 17.3 Irrigation 17.4 Trees, Approximate Size 17.4.1 72" Box 17.4.2 60" Box 17.4.3 48" Box 17.4.4 36" Box 17.5 Hedges/Shrubs, Approximate Size 17.5.1 15 Gallon 17.5.2 5 Gallon 17.5.3 1 Gallon 17.6 Sodded Turf/Ground Cover 17.7 Landscape Curb or Similar Separation Between Landscaped Areas and Undeveloped Portions of parcels at Perimeter of Site 18. MISCELLANEOUS 18.1 Developer Overhead and Supervision (6%) 18.2 Burden 18.3 Contingency NOTE: Specific sizes referenced above are estimates only as of the date of the Ground Lease and are subject to change based upon final engineering. NOTE: Specialty contractor and subcontractor overhead and supervision shall be included in each individual line item cost. NOTE: Developer's Overhead & Supervision (item 18.1) applies whether Developer is the developer or is the Construction Manager (if the City of Long Beach causes the work to be performed). EXHIBIT "D" Page 4 of 4 Pages [MAP APPEARS HERE] [MAP APPEARS HERE] AGREEMENT OF NON-DISTURBANCE THIS AGREEMENT is made as of the _________ day of ___________, 198___, by and among the CITY OF LONG BEACH, a Municipal Corporation (hereinafter called "Landlord"); KILROY LONG BEACH ASSOCIATES, a California Limited Partnership, (hereinafter called "Developer"); and ________________________________________________ (hereinafter called "Subtenant"). PRELIMINARY A. Landlord and Developer have entered into a Lease Agreement dated ______________________ (hereinafter referred to as the "Ground Lease") pursuant to which Landlord has demised and leased to Developer certain real property located in the City of Long Beach, County of Los Angeles, State of California, including the real property described in Exhibit "A" attached hereto and incorporated herein. A short form of the Ground Lease was recorded _____________, 198__ in the Official Records of said County. B. Developer, as Sublandlord, and Subtenant, as subtenant, have entered into a Sublease dated _______________________, 198__, (hereinafter referred to as the "Sublease") which Sublease demises to Subtenant a portion of the premises demised by the Ground Lease (and grants to Subtenant certain rights with respect EXHIBIT "E" Page 1 of 7 Pages to other portions of the premises demised by the Ground Lease). A short form of the Sublease is being recorded concurrently herewith in the Official Records of said County, which short form of Sublease describes the premises demised thereby (and the other rights and obligations of Subtenant with respect to the real property described in the attached Exhibit "A"). C. The parties hereto now desire to enter into this Agreement so as to clarify their rights, duties and obligations under the Ground Lease and the Sublease and to further provide for various contingencies as hereinafter set forth. NOW THEREFORE, in consideration of the foregoing and of the mutual agreement of the parties hereto to the terms and conditions hereinafter contained, the parties hereto agree as follows: 1. In the event Developer shall default in the payment of any sum or in the performance of any covenant or condition of the Ground Lease, all as provided therein, or in the event of any termination or expiration of the Ground Lease for any reason whatsoever prior to the expiration of the term of the Sublease as provided in the Sublease (other than a termination of the Ground Lease only as to portions of the premises demised thereby not described in the attached Exhibit "A"), then Landlord, Developer and Subtenant do hereby agree that the Sublease, and all terms, provisions, covenants and agreements thereof shall survive any EXHIBIT "E" Page 2 of 7 Pages such default or defaults in, or termination or expiration of the Ground Lease, whether such termination occurs as a result of, or arising out of, any such default or defaults, or otherwise, and the Sublease (subject to the rights of any Leasehold Mortgagee, as defined in the Ground Lease, to enter into a New Lease with Landlord upon the same terms and conditions and having the same priority as the Ground Lease, pursuant to subsection 4.8 of the Ground Lease) shall continue in force and effect in accordance with and subject to all of its terms, provisions, agreements and covenants as a direct lease with Landlord, as landlord, and Subtenant, as lessee. Subtenant agrees, in such event, to attorn to Landlord and to recognize Landlord as the landlord under the Sublease. Landlord shall, in such event, exercise and undertake all of the rights, obligations and duties of Developer in and under said Sublease and thereafter shall be entitled to collect all rents and payments due and payable under said Sublease, including the right to collect any sums being due and payable thereunder prior to the termination or expiration of the Ground Lease which are accrued and unpaid by Subtenant on the date of termination of the Ground Lease. Subtenant agrees not to prepay rentals under the Sublease beyond the amounts provided in the Sublease without the prior written consent of Landlord. 2. Landlord agrees that, prior to terminating the Ground Lease or taking any proceedings to enforce any such termination thereof for any reason other than the expiration of the term of EXHIBIT "E" Page 3 of 7 Pages the Ground Lease as provided therein, Landlord shall give Subtenant thirty (30) days' notice in writing prior to the effective date of such termination, specifying the reason for such termination. Such notice shall be given to Subtenant at the address provided in the Sublease for notices to Subtenant. Subtenant may change such address by written notice to Landlord. 3. Landlord hereby approves of the Sublease and of the rights and privileges granted to Subtenant thereunder and agrees that, for and during the term of the Sublease and any extensions thereof, Landlord shall not take any action, directly or indirectly, to disturb or otherwise affect Subtenant's occupancy of and/or rights and privileges with respect to the premises demised by the Ground Lease and described on the attached Exhibit "A" so long as Subtenant is not in default under the Sublease, nor shall Subtenant's exercise of any such rights or privileges constitute a default under the Ground Lease, notwithstanding any provisions to the contrary contained in the Ground Lease. 4. No provision contained herein shall be deemed an amendment or modification of any provision contained in the Sublease, including, without limiting the generality of the foregoing, any rights given thereunder to Developer to terminate the Sublease. 5. In the event that the Ground Lease is divided, in accordance with its terms, into two (2) or more New Leases or EXHIBIT "E" Page 4 of 7 Pages Separate Leases, the term "Ground Lease", as used herein, shall be deemed to refer to the said New Lease or Separate Lease leasing and demising the subleased premises. 6. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their successors, transferees and assigns. EXHIBIT "E" Page 5 of 7 Pages IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first hereinabove set forth. CITY OF LONG BEACH, A Municipal Corporation By:_______________________________________ Title:____________________________________ KILROY LONG BEACH ASSOCIATES, A California Limited Partnership By: KILROY INDUSTRIES, a California Corporation, General Partner By:__________________________________ Title:_______________________________ By:_______________________________________ By:_______________________________________ "Developer" ------------------------------------------ ------------------------------------------ "Subtenant" EXHIBIT "E" Page 6 of 7 Pages This Agreement is hereby approved as to form this _________ day of_________________, 198___. ROBERT W. PARKIN, City Attorney BY:________________________________ "Deputy" EXHIBIT "E" Page 7 of 7 Pages LEGAL DESCRIPTION THAT PORTION OF PARCEL 1, IN THE CITY OF LONG BEACH, IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS SHOWN ON A RECORD OF SURVEY, FILED IN BOOK 85, PAGE 19, OF RECORD OF SURVEYS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY, TOGETHER WITH THOSE PORTIONS OF LOTS 5 AND 9, TRACT NO. 10548, IN SAID CITY, COUNTY OF STATE, AS PER MAP RECORDED IN BOOK 174, PAGES 15 TO 23, INCLUSIVE OF MAPS, IN SAID RECORDER'S OFFICE, AND TOGETHER WITH THAT PORTION OF LAKEWOOD BOULEVARD (FORMERLY KNOWN AS CERRITOS AVENUE, 80 FEET WIDE) AS SHOWN ON SAID MAP OF TRACT NO. 10548, NOW VACATED BY THE STATE OF CALIFORNIA HIGHWAY COMMISSION, A CERTIFIED COPY OF WHICH WAS RECORDED MAY 19, 1959, AS INSTRUMENT NO. 3601, OF OFFICIAL RECORDS, IN THE OFFICE OF SAID COUNTY RECORDER, DESCRIBED AS A WHOLE AS FOLLOWS: BEGINNING AT THE MOST SOUTHERLY CORNER OF SAID PARCEL 1, SAID RECORD OF SURVEY; THENCE NORTH 00 DEGREES 00 MINUTES 46 SECONDS EAST 324.60 FEET, ALONG THE WESTERLY LINE OF SAID PARCEL 1, TO THE NORTHWESTERLY CORNER OF SAID PARCEL 1, SAID NORTHWESTERLY CORNER BEING A POINT IN A NON-TANGENT CURVE CONCAVE NORTHERLY AND HAVING A RADIUS OF 1,050.00 FEET, A RADIAL LINE THAT BEARS SOUTH 2 DEGREES 06 MINUTES 54 SECONDS WEST TO SAID POINT, SAID CURVE ALSO BEING THE NORTHERLY LINE OF SAID PARCEL 1; THENCE EASTERLY ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 27 DEGREES 32 MINUTES 10 SECONDS AN ARC DISTANCE OF 504.63 FEET TO A POINT, SAID LAST MENTIONED POINT BEING A RADIAL LINE THAT BEARS SOUTH 25 DEGREES 25 MINUTES 16 SECONDS EAST, TO SAID LAST MENTIONED POINT; THENCE SOUTH 45 DEGREES 22 MINUTES 59 SECONDS EAST 1,403.34 FEET TO A POINT IN THAT CERTAIN COURSE AS DESCRIBED AS HAVING A BEARING AND LENGTH OF "SOUTH 34 DEGREES 15 MINUTES 50 SECONDS WEST 225.46 FEET" IN THE NORTHWESTERLY BOUNDARY OF THAT PARCEL OF LAND DESCRIBED AS PARCEL 1 IN DEED TO STATE OF CALIFORNIA, RECORDED MARCH 18, 1959, AS INSTRUMENT NO. 1904, OF OFFICIAL RECORDS, OF SAID COUNTY, SAID LAST MENTIONED POINT BEING NORTH 34 DEGREES 16 MINUTES 23 SECONDS EAST 40.81 FEET, ALONG SAID COURSE, FROM THE SOUTHWESTERLY TERMINUS THEREOF; THENCE SOUTH 34 DEGREES 16 MINUTES 23 SECONDS WEST 40.81 FEET, ALONG SAID COURSE, TO THE NORTHEASTERLY TERMINUS OF THAT CERTAIN COURSE IN SAID NORTHWESTERLY BOUNDARY, AS DESCRIBED IN SAID LAST MENTIONED PARCEL 1, AS HAVING A BEARING AND LENGTH OF "SOUTH 62 DEGREES 04 MINUTES 30 SECONDS WEST, 51.05 FEET, MORE OR LESS,"; THENCE SOUTH 62 DEGREES 05 MINUTES 03 SECONDS WEST ALONG SAID LAST MENTIONED CERTAIN COURSE, TO THE NORTHEASTERLY TERMINUS OF THAT CERTAIN COURSE AS DESCRIBED AS HAVING A BEARING AND LENGTH OF "SOUTH 62 EXHIBIT "A" Page 1 of 2 Pages DEGREES 04 MINUTES 30 SECONDS WEST, 113.28 FEET" IN SAID LAKEWOOD BOULEVARD, NOW VACATED BY THE CALIFORNIA HIGHWAY COMMISSION; THENCE SOUTH 62 DEGREES 05 MINUTES 03 SECONDS WEST ALONG SAID LAST MENTIONED CERTAIN COURSE TO THE NORTHEASTERLY TERMINUS OF THAT COURSE AS DESCRIBED AS HAVING A BEARING AND LENGTH OF "SOUTH 62 DEGREES 04 MINUTES 30 SECONDS WEST 704.56 FEET" IN THE NORTHERLY BOUNDARY OF THAT PARCEL OF LAND DESCRIBED AS PARCEL 1 IN DEED TO THE STATE OF CALIFORNIA, RECORDED MAY 11, 1959, AS INSTRUMENT NO. 1870, OF OFFICIAL RECORDS, OF SAID COUNTY; THENCE ALONG SAID LAST MENTIONED NORTHERLY BOUNDARY SOUTH 62 DEGREES 05 MINUTES 03 SECONDS WEST 704.56 FEET, SOUTH 80 DEGREES 05 MINUTES 43 SECONDS WEST 105.00 FEET AND NORTH 80 DEGREES 14 MINUTES 59 SECONDS WEST 676.33 FEET; THENCE NORTH 9 DEGREES 45 MINUTES 01 SECONDS EAST 570.00 FEET; THENCE NORTH 25 DEGREES 20 MINUTES 00 SECONDS EAST 15.00 FEET; THENCE NORTH 8 DEGREES 44 MINUTES 49 SECONDS WEST 248.97 FEET TO THE SOUTHERLY PROLONGATION OF SAID WESTERLY LINE OF PARCEL 1, AS SHOWN ON SAID RECORD OF SURVEY; THENCE NORTH 0 DEGREES 00 MINUTES 46 SECONDS EAST 72.14 FEET ALONG SAID PROLONGATION, TO THE POINT OF BEGINNING. ALSO EXCEPTING THEREFROM ALL OIL, GAS AND OTHER HYDROCARBONS IN AND UNDER, OR WHICH MAY BE PRODUCED OR SAVED FROM SAID LAND; TOGETHER WITH ALL RIGHTS OF EVERY KIND AND DESCRIPTION WHATSOEVER TO DRILL FOR, DEVELOP, TAKE, REMOVE, AND SEVER THE SAME, OR ANY PART THEREOF, FROM SAID LAND, WITHOUT, HOWEVER, THE RIGHT TO THE USE OF THE SURFACE OF SAID LAND IN CONNECTION WITH THE DEVELOPMENT OR REMOVAL OF SAID OIL, GAS OR OTHER HYDROCARBONS, ALL DRILLING AND BORING FOR SAID PURPOSES TO BE DONE BENEATH THE SURFACE OF SAID LAND AT ANY LEVEL, OR LEVELS, 100 FEET, OR MORE, BELOW THE SURFACE THEREOF, THE SURFACE OPENING OF THE WELL HOLE TO BE LOCATED ON LAND OTHER THAN THE LAND ABOVE DESCRIBED, AS RESERVED IN THE DEED FROM BIXBY LAND COMPANY, A CORPORATION, RECORDED AUGUST 25, 1948 IN BOOK 28072 PAGE 204, OFFICIAL RECORDS, AND RECORDED FEBRUARY 10, 1950 IN BOOK 32238 PAGE 67 OFFICIAL RECORDS AND RECORDED DECEMBER 28, 1950 IN BOOK 35179 PAGE 303, OFFICIAL RECORDS AND RECORDED DECEMBER 28, 1950 IN BOOK 35179 PAGE 310, OFFICIAL RECORDS. EXHIBIT "A" Page 2 of 2 Pages KILROY AIRPORT CENTER LONG BEACH OFF-SITE IMPROVEMENTS Note: Exhibit "F" consists of a map and the following text. The numbers preceding each paragraph in this text refer to numbers on the map which identify the location of the improvement. 1. STREET DEDICATION ----------------- Landlord shall obtain and provide to Developer, for street improvements, utilities, and landscaping, to be constructed by Developer to meet or exceed City of Long Beach standards and subsequent dedication as public streets, the easements necessary to provide access to the entire Premises on property other than Parcel G for construction of the street tentatively identified on the map as Kilroy Airport Center Drive, including: (i) an area south of Spring Street and west of Parcel G approximately 75 feet wide and approximately 420 feet long; and (ii) an area between Parcel G and Redondo Avenue abutting the San Diego Freeway approximately 72 feet wide and approximately 1200 feet long. Developer shall have the right to install a landscaped divider on Kilroy Airport Center Drive near the Spring Street intersection and to relocate existing signs and utilities as necessary. Developer shall dedicate the land and street as necessary on Parcel G to connect the remainder of Kilroy Airport Center Drive. EXHIBIT "F" Page 1 of 7 Pages 2. INTERSECTION OF SPRING STREET AND KILROY AIRPORT CENTER DRIVE ------------------------------------------------------------- Landlord shall obtain and provide to Developer the required approvals and easements for access and installation by Developer the following: 2.1 Widen Spring Street ------------------- Widening of Spring Street to the north approximately 12 feet along a length of approximately 600 feet, including restriping, construction of a retaining wall and landscaping as appropriate to accommodate a second left turn lane. 2.2 Second Left Turn Lane --------------------- Restriping on Spring Street on the westbound approach to provide a second exclusive left turn lane to Kilroy Airport Center Drive. 2.3 Acceleration Lane/Bus Pull Out Lane ----------------------------------- A lane on the south side of South Street east of Kilroy Airport Center Drive, approximately 12 feet wide and approximately 200 feet long. 2.4 Deceleration Lane ----------------- A deceleration lane on the south side of Spring Street west of Kilroy Airport Center Drive, approximately 12 feet wide and approximately 220 feet long. EXHIBIT "F" Page 2 of 7 Pages 2.5 Traffic Signal -------------- A three-phase traffic signal including a left turn phase for westbound Spring Street Traffic turning from the two left turn lanes on Spring Street left onto Kilroy Airport Center Drive. 3. INTERSECTION OF REDONDO AVENUE AND KILROY AIRPORT CENTER DRIVE -------------------------------------------------------------- Landlord shall obtain and provide to Developer the required approvals and easements for access and installation by Developer of the following: 3.1 Deceleration Lane ----------------- A deceleration lane on the east side of Redondo Avenue south of Kilroy Airport Center Drive approximately 12 feet wide and approximately 100 feet long. 3.2 Regrade Embankment ------------------ Regrade the embankment adjoining the abuttment wall on the east side of Redondo Avenue north of the San Diego Freeway overpass or install a retaining wall as necessary to accommodate the deceleration lane. EXHIBIT "F" Page 3 of 7 Pages 3.3 Traffic Signal -------------- A traffic signal, to be contracted for when permits are issued for that building which will result in an aggregate of 350,000 square feet, or more, so that the signal will be operational approximately concurrently with expected traffic demand. 3.4 Monument Sign ------------- A monument sign (at Developer's cost) similar to that depicted in the Basic Concept Documents at the northeast corner of the intersection. 4. INTERSECTION OF SPRING STREET AND REDONDO AVENUE ------------------------------------------------ Landlord shall obtain and provide to Developer the required approvals and easements for access and installation by Developer of the following: 4.1 Second Left Turn Lane --------------------- Restriping of Spring Street on the westbound approach to provide a second exclusive left turn lane, when and if determined necessary by Landlord. EXHIBIT "F" Page 4 of 7 Pages 4.2 Traffic Signal Rephasing ------------------------ Modification of the existing traffic signal to add a left turn phase for westbound Spring Street traffic turning from the two left turn lanes left onto Redondo Avenue, when and if determined necessary by Landlord. 5. SCREEN WALL ----------- Landlord shall obtain and provide to Developer the required easements for access and installation by Developer of approximately 3,060 lineal feet of screen wall starting approximately 160 feet south of the south curb line of Spring Street between the Long Beach Water Department property and the Water Department Lease #40 property; running north replacing the existing fence to approximately 15 feet south of the curb line; then running east approximately 200 feet parallel to and approximately 15 feet south of the curb line; then bending to the south approximately 12 feet; then continuing east parallel to and approximately 15 feet south of the south curb line of the new deceleration lane; then running south replacing the existing fence along the east border of Water Department Lease #40 property and continuing south along the east border of the Water Department Lease #38-#39 property to the north border of the California National Guard property; then running east approximately 110 feet with an opening in the middle at the entrance to the California National Guard property; then running south along the east border of the EXHIBIT "F" Page 5 of 7 Pages California National Guard property replacing the existing fence to approximately 12 feet north of the north curb line of Kilroy Airport Center Drive; then running west parallel to and approximately 12 feet north of the curb line; and terminating approximately 20 feet east of the east curb line of Redondo Avenue. 6. TEMPORARY SECURITY FENCE ------------------------ Landlord shall provide the required access for construction by Developer of a temporary security fence on Airport Property approximately 25 feet east of the east boundary of Parcel G approximately 1400 feet long from Spring Street southeast to the existing security fence at the intersection of the San Diego Freeway and Lakewood Boulevard. 7. LANDSCAPE AREAS --------------- Landlord shall obtain and provide to Developer the required easements for access and installation by Developer of landscaping at the following locations: 7.1 Landscape Spring Street ----------------------- Approximately 20 feet wide and approximately 1100 feet long on the south side of Spring Street from the west tunnel entrance proceeding west to the northwest corner of Water Department Lease #40 property. EXHIBIT "F" Page 6 of 7 Pages 7.2 Landscape Redondo Avenue ------------------------ Approximately 40 feet deep and approximately 100 feet long at the northeast corner of the intersection of Redondo Avenue and Kilroy Airport Center Drive. 7.3 Landscape Redondo Avenue ------------------------ Approximately 250 feet deep and approximately 120 feet long at the southeast corner of the intersection of Redondo Avenue and Kilroy Airport Center Drive between the San Diego Freeway property and Kilroy Airport Center Drive, including the right by Developer to install landscape screening around the existing surge tank and other equipment. 7.4 Landscape California National Guard Entry ----------------------------------------- Two roughly triangular parcels abutting the screen wall at the entry to the California National Guard property, one west of the entry with an area of approximately 2,000 square feet and the other east of the entry between the east border of the California National Guard property and Parcel G including a radius curb border at the north end adjacent to the California National Guard entry with an area of approximately 7,500 square feet. EXHIBIT "F" Page 7 of 7 Pages [MAP APPEARS HERE] [MAP APPEARS HERE] [MAP APPEARS HERE] [MAP APPEARS HERE] [MAP APPEARS HERE] BOND NO.:______ PERFORMANCE BOND PREMIUM :______ ---------------- KNOW ALL MEN BY THESE PRESENTS, That we __________________________ ______________________________, as Principal, and _________________ _______________________________________________, as Surety, are held and firmly bound unto City of Long Beach, a Municipal Corporation (Land Lessor) and Kilroy Long Beach Associates, a California Limited Partnership (Land Lessee), as Obligees, in the penal sum of ____________________________________ _____________________________________ DOLLARS ($ ) lawful money of the United States, for the payment of which sum truly to be made, we bind ourselves, our heirs, executors, administrators, successors and assigns, jointly and severally, firmly by these presents. THE CONDITION OF THE OBLIGATION IS SUCH, That Whereas, the Principal entered into a certain agreement which is hereto attached and made a part hereof, with Kilroy Long Beach Associates, a California Limited Partnership, dated __________________ __________________________________________, for ______________________ which contract and the specifications and general conditions thereof are hereby incorporated herein and shall be deemed a part hereof as fully as if set out herein. NOW, THEREFORE, if the said Principal shall fully indemnify and save harmless the Obligees from all loss, liability, costs, damages, penalty, attorney's fees or expenses which Obligees may incur by reason of failure to well and truly keep and perform each, every and all of the terms and conditions of said agreement on the part of the said Principal to be kept and performed, including but not limited to completion within the time specified of all work covered by said agreement, performance of all obligation and guarantees of Kilroy Long Beach Associates, a California Limited Partnership, relating to such work under the contract with Kilroy Long Beach Associates, a California Limited Partnership; then this obligation shall be of no effect, but otherwise it shall remain in full force and effect. It is a condition hereof that any change, alteration, modification or amendment of any nature whatsoever that may be made in the terms of said agreement, any change in the character or scope of the work to be performed, or the method of performance, under said agreement or modification of said agreement or in the time for completion thereof, any change in the manner, time or amount of payment as provided therein, any change of any nature whatsoever that may be made in the terms of the contract EXHIBIT "I" Page 1 of 6 Pages with Kilroy Long Beach Associates, a California Limited Partnership, or any change that may be made in the performance of the work under said agreement by the Principal, assented to by Kilroy Long Beach Associates, a California Limited Partnership, whether made under express agreement or not, may be made without notice to the Surety and without affecting the obligations of the Surety on this bond and without requiring the consent of the Surety, and no such change or changes shall release the Surety from any of its obligations hereunder, the Surety hereby consenting to and waiving notice of any such change, alteration, modification or amendment. It is a further condition hereof that no one other than the named Obligees and the successors, administrators or assigns of the Obligees shall have any right of action under this bond. IN WITNESS WHEREOF, the said Principal and Surety have hereunto set their hands and seals this _________ day of ______________, 19___. ______________________________________________ (Principal) BY:___________________________________________ ______________________________________________ (Surety) BY:___________________________________________ Note: The name "Kilroy Long Beach Associates, a California Limited Partnership" would change to the name of any successor Land Lessee. EXHIBIT "I"- Page 2 of 6 Pages PAYMENT BOND BOND NO.:_________ ------------ PREMIUM :_________ KNOW ALL MEN BY THESE PRESENTS, That we ________________________ __________________________ as Principal, and ___________________ ________________________________, as Surety, are held and firmly bound unto City of Long Beach, a Municipal Corporation (Land Lessor) and Kilroy Long Beach Associates, a California Limited Partnership (Land Lessee), as Obligees, in the penal sum of _________________________________________________ ____________________________________ DOLLARS ($ ), lawful money of the United States, for the payment of which sum well and truly to be made, we bind ourselves, our heirs, executors, administrators, successors and assigns, jointly and severally, firmly by these presents. THE CONDITION OF THE OBLIGATION IS SUCH, That Whereas, the Principal entered into a certain agreement which is hereto attached and made a part hereof, with Kilroy Long Beach Associates, a California Limited Partnership, dated ___________________________ _____________________________________, for ___________________________________ which contract and the specifications and general conditions thereof are hereby incorporated herein and shall be deemed a part hereof as fully as if set out herein. NOW, THEREFORE, if the said Principal shall pay promptly and in full the claims of all persons, firms or corporations, performing labor or furnishing equipment, materials, or supplies incurred in connection with the contract to be performed under said agreement and shall indemnify and save harmless of Obligees from all loss liability, costs, damages, penalty, attorney's fees or expenses for all taxes, insurance premiums, any and all applicable contributions, allowances or other payments or deductions, however harmed, required by statute or union labor agreement, including voluntary payment thereof by the Obligees necessary to insure orderly prosecution of work or other items or services used in, upon or for or incurred in connection with the contract to be performed under said agreement, then this obligation shall be of no effect, but otherwise it shall remain in full force and effect. It is a condition hereof that any change, alteration, modification or amendment of any nature whatsoever that may be made in the terms of said agreement, any change in the character or scope of the work to be performed, or the method of performance, under said agreement or any change in manner, time EXHIBIT "I" Page 3 of 6 Pages or amount of payment as provided therein, any change of any nature whatsoever that may be made in the terms of the contract between Kilroy Long Beach Associates, a California Limited Partnership, or any change that may be made in the performance of the work under said agreement by the Principal, assented to by Kilroy Long Beach Associates, a California Limited Partnership, whether made under express agreement or not, may be made without notice to the Surety and without affecting the obligations of the Surety on this bond and without requiring the consent of the Surety and no such change or changes shall release the Surety from any of its obligations hereunder, the Surety hereby consenting to and waiving notice of any such change, alteration, modification or amendment. Subject to the priority of the named Obligees with respect to recovery up to the penal sum of this bond, persons who have supplied or furnished labor, material, machinery, equipment or supplies to the Principal for use in the prosecution of the work provided for in said contract shall have a direct right of action against said Principal and Surety under this bond. IN WITNESS WHEREOF, the said Principal and Surety have hereunto set their hands and seals, this __________ day of ____________________________________________, 19___. _______________________________________ (Principal) BY:___________________________________ _______________________________________ (Surety) BY:____________________________________ Note: The name "Kilroy Long Beach Associates, a California. " Limited Partnership would change to the name of any successor Land Lessee. EXHIBIT "I" Page 4 of 6 Pages LENDER'S OBLIGEE RIDER TO PERFORMANCE BOND ------------------------------------------ WHEREAS, heretofore, on or about the ________________ day of ___________, 19___, __________________________________________________________________, as Contractor, entered into a written agreement with Kilroy Long Beach Associates, a California Limited Partnership, as Owner of leasehold improvements, for the construction of ____________________________________ __________________________________________________________________________, and WHEREAS, the Contractor and ____________________________________________ __________, a California corporation, as Surety, executed and delivered to Kilroy Long Beach Associates, a California Limited Partnership, their joint and several Performance Bond, and WHEREAS, Kilroy Long Beach Associates, a California Limited Partnership, has arranged for a loan for the exclusive purpose of payment for the performance of said contract and has requested the Contractor and Surety to join with Kilroy Long Beach Associates, a California Limited Partnership, in the execution and delivery of this Rider, and the Contractor and Surety have agreed so to do upon the condition herein stated. NOW, THEREFORE, in consideration of one dollar and other good and valuable consideration receipt of which is acknowledged, the undersigned agree that the said Performance Bond shall be, and is, amended as follows: 1. The name of _______________________________________________________, as shall be added to said bond as a named Obligee. 2. The rights of the Lender as a named Obligee shall be subject to the condition precedent that Kilroy Long Beach Associates, a California Limited Partnership, obligations to the Contractor be performed. 3. The aggregate liability of the Surety under said bond to Kilroy Long Beach Associates, a California Limited Partnership, and the Lender, as their interests may appear, is limited to the penal sum of the said bond. 4. The Surety may, at its option, make any payment under said bond by check issued jointly to Kilroy Long Beach Associates, a California Limited Partnership, and the Lender. 5. Except as herein modified, said Performance Bond shall be and remain in full force and effect. EXHIBIT "I" Page 5 of 6 Pages Signed, sealed and dated this _________ day of ________________, 19___. KILROY LONG BEACH ASSOCIATES, A California Limited Partnership ATTEST:_______________________ BY: KILROY INDUSTRIES, a California Corporation, General Partner By: ___________________________ Title: ________________________ By: _______________________________ By: _______________________________ (Owner) ATTEST:_______________________ BY:________________________________ (Surety) ATTEST:_______________________ BY:_________________________________ ____________________________________ (Contractor) EXHIBIT "I" Page 6 of 6 Pages KILROY AIRPORT CENTER LONG BEACH CONSTRUCTION SCHEDULE
Estimated Date Estimated of Commencement Substantial Building of Construction Completion Date - -------- --------------- --------------- First Building 9/1/85 7/31/86 Second Building 9/1/86 7/31/87 Third Building 9/1/87 7/31/88 Fourth Building 9/1/88 7/31/89 Fifth Building 9/1/89 2/28/91 Sixth Building 9/1/90 2/28/92
EXHIBIT "J" Page 1 of 1 Page FIXED BASE OPERATIONS --------------------- This Exhibit specifies the standard responsibilities of a Fixed Base Operation (FBO) at the Long Beach Municipal Airport. It is the intention of the parties that the execution of these terms shall be the responsibility of Developer. Nothing herein shall be deemed to prevent Developer from imposing these requirements as a duty on its subtenants so long as Developer shall remain primarily responsible to City therefor in case of failure of Developer and FBO subtenants to fulfill their obligations hereunder. Said requirements shall be subject to the following exceptions: 1. Nothing herein shall be deemed to require Developer to operate any FBO facility except through subtenants. If the FBO premises are not subleased by Developer, Developer's sole obligation shall be to use reasonable efforts to sublet the same upon terms and conditions reasonably satisfactory to Developer. The temporary cessation of business operations by reason of casualty, remodeling, holidays and other business reasons consistent with the continued operation of such business from the FBO premises shall not constitute a violation of such requirements. 2. Developer may franchise the various elements of the FBO operation, however, the performance requirements shall be construed to cause construction of at least, but not more than, one fuel facility and one wash rack on the FBO premises for each complete FBO facility, but in no event less than one such facility or the Premises. Developer may, however, construct more than one fuel facility and one wash rack for each such FBO facility on the Premises. EXHIBIT K -1- 3. City and Developer shall deal directly with each other as to the matters governed by this Exhibit, except as expressly provided to the contrary. 4. As used in this Exhibit, the term "Lessee" or "Tenant" shall mean Developer and the term "Lessor" or "Landlord" shall mean City. 5. The provisions of this Exhibit shall be applicable only to those portions of the Premises from time to time improved and used by or under Developer for FBO uses, which portions are hereinafter referred to as the "FBO Premises". Portions of the Premises initially improved and used for FBO uses may be redeveloped and used for other purposes and portions of the Premises initially improved and used for non-FBO uses may be redeveloped and used for FBO uses, provided that the improved areas for aircraft tie-downs and/or hangar space, usable for such purposes under applicable laws, in the Project are not reduced by reason thereof. Any portion of the Premises used for non-FBO uses or redeveloped for use other than FBO uses shall be physically segregated from the Long Beach Municipal Airport by fencing or other barriers meeting FAA security requirements. 6. References to Developer's subtenants in this Exhibit shall be deemed references to Developer during any period of time that Developer conducts and operates a business on or from the FBO Premises directly, and not through or under a subtenant. 7. Any subtenant of Developer or transferee by sublease by or under such a sublessee shall be deemed to be a subtenant for purposes of this Exhibit "G". Where any such sub- -2- tenant performs any act or obligation required herein, Developer shall be relieved of all obligation therefor. 8. Except as to matters specifically related to the operation of the Airport or of the FBO facilities, the terms of the Lease between Developer and City to which this Exhibit "G" is attached shall prevail in the case of any conflict between such terms and the terms of this Exhibit "G". 9. Nothing in this Exhibit shall be deemed to apply to any portion of the Project other than the FBO uses. 10. Nothing herein shall be deemed to require construction or improvement of the Premises except in the manner authorized by applicable land and airport rules. Metal buildings, such as "Butler Buildings" shall be permitted. 11. City shall endeavor in making airport improvements to minimize interference with the operation of business on or from the Premises and shall give reasonable notice to Developer of any duty thereon except in case of emergency when such duty is necessary to prevent damage or injury to persons or property. 12. Developer shall require its subtenants affected thereby to pay the fuel flowage fee provided for herein for the benefit of City as a third party beneficiary to enable City to directly enforce such requirements against subtenants. Developer shall not be liable for payment of such fuel flowage fees unless Developer shall refuse upon request by City to cooperate in the collection thereof from Developer's subtenant. Such cooperation shall not be construed as obligating Developer to terminate the sublease or the subtenant's right to possession. 13. Sales permitted by the "use" restrictions may be -3- wholesale or retail. 14. Assignments or other transfers of the type described in subparagraphs (i) through (vi) of Section 5.1.3 of this Lease or of the type permitted by Section 1.3.3 of this Lease by subtenants shall be permitted without the approval of City's City Manager of the assignee or transferee. City's City Manager shall, however, be promptly notified of any such assignment or other transfer and provided with the information described in subparagraphs (i) and (ii) of Section 5.1.2 of this Lease. 15. Paragraph E of the "Operation of Business" restrictions shall not be applicable to the rents charged and/or other services provided by or under Developer as a sublessor. 16. The maintenance obligations set forth in the "Maintenance" requirement shall be subject to and shall except reasonable wear and tear. City's Airport Manager may not cure Developer's failures under said "Maintenance" requirement if Developer commences such maintenance within thirty (30) days of its receipt of written notice of such failure and thereafter diligently prosecutes the same to completion. Developer shall have thirty (30) days following its receipt of written request for payments under said "Maintenance" requirement, together with reasonable supportive evidence of the costs incurred, to reimburse City such costs. 17. The last sentence in Paragraph C of the requirement entitled "Aircraft Parking, Storage and Hangars" is hereby deleted and shall not be applicable to the Premises. 18. Paragraph C of the requirement entitled "Storage" -4- is hereby deleted and shall not be applicable to the Premises. City's remedies under this Lease for a default by Developer, however, shall be applicable to breaches of the requirements of the requirement entitled "Storage", not cured within the time provided in Section 17.6.1 following Developer's receipt of notice of such breach. 19. Developer shall conclusively be deemed to have satisfied the "Automobile Parking" requirements if Developer improves the FBO Premises in a manner consistent with all applicable parking code requirements of the City of Long Beach at the time of such construction. 20. Developer may satisfy the requirement in Paragraph B of the requirement entitled "Fuel Flowage Fees" by having its subtenant enter into the supplier agreement, in which event all references to Developer in Paragraph B shall be deemed references to Developer's subtenant. If Developer has required its subtenants to make the reports required by Paragraph D of the requirement entitled "Fuel Flowage Fees", Developer shall not be liable for a failure by its subtenants to make such reports unless Developer shall refuse upon request by City to cooperate in enforcing such reporting requirements, which cooperation shall not be construed as obligating Developer to terminate the sublease. 21. The requirement entitled "Utilities" shall be enforced only insofar as is practical. 22. Notwithstanding the provisions of Paragraph B of the requirement entitled "FAA Security and Safety Regulations" to the contrary, if any sublease includes a covenant by the sublessee to indemnify and hold City harmless for the full amount -5- of any fine, penalty or other financial loss resulting from any violation of Part 107 or Part 139 occurring on the subleased premises, or by or under such sublessee, Developer shall not be liable to indemnify or to reimburse City for the amount of any such fine, penalty or other financial loss covered by such subtenant's indemnify. 23. Whenever the consent, approval, specification or authorization of City, City's City Manager or the Airport Manager is required by this Exhibit, such consent, approval, specification or authorization shall not unreasonably be withheld. 24. Developer shall not be deemed to have failed to perform its obligations under this Exhibit "G" if such failure is the result of a breach by a subtenant under a sublease of the FBO Premises, or any portion thereof, unless Developer fails to take reasonable action to cause such breach to be cured or to terminate such sublease or the subtenant's right to possession within forty-five (45) days of Developer's receipt of written notice from City of the occurrence of such breach. -6- CONSTRUCTION, ALTERATION AND CHANGES LESSEE shall not place upon the Leased Premises any portable buildings, trailers, or other like portable structures without prior written approval of LANDLORD's Airport Manager. -7- USE --- The Leased Premises and any and all improvements located or erected thereupon shall be used solely for the purpose of conducting a fixed base operation and no other purpose. The fixed base operation is limited to the following aeronautical and support uses which are inclusive. A. Sale of new and used aircraft (both retail and wholesale); B. Sale of aircraft parts and accessories (both retail and wholesale); C. Sale of aircraft parts, components and allied equipment; D. Sale of new and used avionics and electronic equipment; E. Sale of new and used aircraft instruments; F. Storage, sale and dispensing of petroleum products on the Leased Premises. G. Sale of pilot supplies and accessories; H. Leasing and rental of aircraft; I. Sale of aircraft insurance; J. Financing of aircraft; K. Operation of air cargo and air freight activities (subject to prior written approval of LANDLORD's Airport Manger; L. Flight operations, including ground school, flight training/proficiency, demonstration of aircraft for sale, charter and air taxi. Charter/Air Taxi operations are subject to prior written approval of LANDLORD'S Airport Manager. The conduct of -8- scheduled commercial service is expressly prohibited; M. Maintenance, repair, overhaul and modification of aircraft, aircraft engines, airframes, flight systems, instruments, avionics, electronics equipment, propellers and related aircraft components; N. Rental of aircraft storage hangars and open tie-down facilities; 0. Operation of a UNICOM radio transmitter and receiver (subject to written approval of LANDLORD's Airport Manager); P. Washing, detailing and waxing of aircraft; Q. Providing upholstery, cabinetry and interior services; R. Parachute, fire extinguisher and oxygen services; 8. Line Services for the purpose of meeting the needs of transient aircraft; T. Operation of food vending equipment and/or a coffee bar for the purpose of serving TENANT's employees and customers; U. Rent-a-car service (subject to a prior written agreement between LANDLORD and rent-a-car company or TENANT in the event of TENANT operated service); V. Maintenance and servicing of TENANT-owned and operated automotive ramp equipment; We Aircraft stripping and painting; X. Any such other aviation related uses as may be approved in writing by LANDLORD's Airport Manager. -9- UNAUTHORIZED USES Only the uses specified in the use clause hereof are authorized uses, and such uses are authorized only when conducted by TENANT or a Subtenant approved in advance by LANDLORD's City Manager All other business activities engaged in on or from the Leasehold premises for involving provision of services or products to parties other than TENANT or an approved Subtenant for financial gain are prohibited. Said prohibition shall be enforced by TENANT. -10- OPERATION OF BUSINESS --------------------- A. TENANT shall continuously use and operate the premises, during all usual business hours and on all such days as comparable business of like nature in the area are open for business in accordance with the provisions of this Lease relating to use. If the premises are destroyed or partially condemned and this Lease remains in full force and effect, TENANT shall continue operation of its business at the premises to the extent reasonably practical as determined by good business judgment during any period of reconstruction. B. TENANT shall appoint in writing an authorized local agent duly empowered to make decisions on behalf of TENANT in all routine administrative and operational matters relating to the Leased Premises who shall be available during normal business hours. TENANT shall notify LANDLORD's Airport Manager in writing of the name, address and telephone number of the said agent and shall supply therewith a copy of the writing appointing the agent. C. All businesses operating on or from the Leased Premises shall maintain a suitable office which is staffed during normal business hours. D. Rotary winged aircraft may not be parked, repaired or operated from the Leased Premises without the prior written approval of the Airport Manager and such approval, if granted, is subject to Airport Rules and Regulations and may be terminated -11- by the Airport Manager on thirty (30) days notice unless otherwise specified in writing at the time of said written approval. E. Aviation services are supplied for the benefit of the aviation public and shall be carried out in a reasonable manner and at appropriate prices. The Airport Manager may investigate reports of unfair prices or service. -12- COMPLIANCE WITH LAW ------------------- No improvements or structures either permanent, temporary or portable, shall be erected, placed upon, operated or maintained on the Leased Premises, nor shall business or any other activity be conducted or carried on, in, onto, or from the Leased Premises in violation of the terms of this Lease or any duly adopted rules, regulations, orders, law, statute, by-law, or ordinance of any governmental agency having jurisdiction thereover. 17. PERFORMANCE ----------- 1. All fixed base operation facilities shall have the capacity to store and dispense fuel. 2. All fixed base operation facilities shall provide an aircraft wash rack. -13- MONTHLY REPORT -------------- Within fifteen (15) days after execution of this Lease, TENANT shall submit a written report to LANDLORD's Airport Manager listing all based aircraft located on the Leased Premises. Said report shall be prepared on a form supplied by LANDLORD, and shall include for each based aircraft located on the Leased Premises: the make, model, registration number, color, space or hangar number, registered owner(s) name(s), address(es) and telephone number(s). Should aircraft be on lease, the same information required for owner shall be provided for any or all lesee(s) of said aircraft. For purposes of this section, a based aircraft is any aircraft which makes arrangements to park at Long Beach Airport for any purpose other than those specified herein, to wit: (a) Visiting or transient aircraft who utilize parking facilities for less than fifteen (15) days in any thirty (30) day period. (b) Aircraft maintaining tiedown or storage space at another airport that are undergoing maintenance, service or repair by a tenant or subtenant. (c) New aircraft awaiting sale and/or delivery by a tenant or subtenant where delivery subsequent to sale occurs within thirty (30) calendar days. (d) Used aircraft for sale by a tenant or subtenant where delivery subsequent to sale occurs within thirty (30) calendar days. -14- RESERVATIONS TO LANDLORD ------------------------ LANDLORD reserves the right to enter and have access to the property in order to make, construct or carry out airport improvements. USE OF AIRPORT FACILITIES ------------------------- TENANT shall have, in conjunction with the general public and other airport users, a non-exclusive right to the use of the public airport facilities provided and developed by LANDLORD for public aviation use on such terms and conditions as such facilities may be made available by LANDLORD either now or in the future and subject to all applicable laws and rules of the United States, the State of California or the City of Long Beach governing aviation air navigation or the use of the airport. -15- MAINTENANCE ----------- TENANT agrees, at TENANT's sole cost and expense, to repair and maintain the Leased Premises and all improvements or landscaping existing or constructed thereon in good order and repair and to keep said premises and facilities in a neat, clean, attractive and orderly condition. Failure of the TENANT to properly maintain and repair the Leased Premises shall constitute a breach of the terms of this Lease. If, in the opinion of LANDLORD's Airport Manager, the Leased Premises are not being properly maintained, LANDLORD's Airport Manager may, after giving thirty (30) days written notice to TENANT to remedy discrepancies, cause such repair and maintenance to be made. The cost of such maintenance or repair shall be added to the rent. If said costs are not paid promptly by TENANT, this Lease shall be deemed to be in default, and LANDLORD shall be entitled to all legal remedies provided hereunder. -16- AIRCRAFT PARKING, STORAGE AND HANGARS ------------------------------------- A. TENANT shall provide open aircraft parking aprons which shall be so designed, marked and maintained, as to provide for safe and functional parking of aircraft, including sufficient distance between all structural elements (including, but not limited to, body, wings and tail) of parked aircraft to permit safe movement of aircraft to and from aircraft parking spaces. Aircraft tiedown equipment or apparatus shall be of a type approved by the Airport Manager for use at the airport and all aircraft designed and equipped to be tied down shall be properly secured to such tiedown apparatus when left unattended. All tiedown spaces shall be clearly marked on the pavement with an identification number in such manner that each individual parking space can be easily identified. B. TENANT will provide and maintain taxi lanes and aircraft parking spaces clear of obstacles, vehicles and improperly parked aircraft in a manner which will permit safe and convenient movement of aircraft throughout all open parking areas. C. TENANT will provide adequate aircraft parking spaces on the Leased Premises to accommodate transient or visiting aircraft or aircraft present at TENANT's facility for the purpose of maintenance or other work. Parking is permitted only in designated spaces on FBO leases and TENANT expressly covenants and agrees to make every reasonable and prudent effort to prevent -17- parking of aircraft or ground vehicles on property contiguous to the Leased Premises, but not a part thereof. The Airport Manager may require creation of additional parking spaces if he finds that aircraft using TENANT'S facilities are parking in areas other than authorized tie downs or hangar spaces. D. Maintenance and repair of aircraft on the based and transient aircraft parking area shall be limited to that permitted by Federal Aviation Regulations Part 43(h) and Appendix A(c), unless otherwise specifically authorized in writing by the Airport Manager. Said parking areas shall be kept free from partially dismantled or derelict aircraft. E. Aircraft storage hangars shall be used for storage of aircraft only and no maintenance shall be done therein, except as specifically authorized by Federal Aviation Regulations Part 43(h) and Appendix A(c) if such maintenance and repair can be done in compliance with such fire, building and safety codes, rules and/or regulations as may be applicable to such hangar or activity from time to time. F. Maintenance, repair and other activities may be conducted in hangars heretofore or hereafter constructed in such manner that such maintenance repair and other activities can be carried out in such hangar in compliance with such fire, building and safety codes, rules and/or regulations, as may be applicable from time to time to such activities, if authorized in writing by the Airport Manager -18- such notice in writing as is possible under the existing circumstances. C. LANDLORD will cause the surface of the Leased Premises to be restored to its original condition upon the completion of any construction done pursuant to this paragraph. E. LANDLORD shall exercise its best effort to avoid unreasonable interference with TENANT's operations or enjoyment of the premises or impairment of the security of any secured creditor in its exercise of rights pursuant to this paragraph. F. Should any exercise of the rights described in this paragraph result in a significant interference with TENANT's use of the Leased Premises, LANDLORD shall provide compensation to TENANT by means of a reduction in rent proportionate to the amount of the interference which shall continue for not more than two months or until TENANT has been adequately compensated, whichever comes first. -19- G. All aircraft service, maintenance, repair, inspection and building activities conducted for financial gain within or from aircraft storage hangars shall be done by fixed based operators, tenants or sub-tenants located on the Long Beach Municipal Airport or their duly authorized personnel. No other persons may perform such work. H. Parking spaces in storage hangars shall be marked, numbered and designed in the manner specified in subparagraph A of this paragraph for tie down spaces. I. The aircraft identification number of each aircraft parked in a hangar shall be affixed to the outside of such hangar in a convenient and plainly visible manner and said information shall be revised from time to time so that it shall be current and visible at all times. J. Aircraft hangars constructed after the date of execution of this Lease shall be so designed and constructed by mean of a method approved by the Airport Manager as to permit verification for identification, safety and security purposes of all aircraft parked therein at all times without compromising the security of such aircraft. -20- AIRCRAFT TIEDOWN AND STORAGE HANGAR AGREEMENTS ---------------------------------------------- TENANT is authorized to enter into sublease agreements to permit aircraft tiedown and storage on the Leased Premises without approval of LANDLORD, provided that TENANT shall enter into and maintain current a written Aircraft Tiedown or Aircraft Storage Hangar Agreement with the owner or lessee or operator of each aircraft renting space on the Leased Premises. Such agreements shall be in writing and shall specify all terms, conditions and restrictions relating to the rental of space for the tiedown or storage of TENANT's aircraft and indicating that said owner, operator or lessee of an aircraft to be tied down or stored is a subtenant of LANDLORD as well as TENANT by virtue of the creation of this sublease. Such agreement shall also require that the information which TENANT must provide to LANDLORD to the terms of Paragraph *_____ of this Lease shall be supplied to TENANT by any parties with whom TENANT has entered such agreements. LANDLORD's Airport Manager or his designated representative may inspect TENANT's file of Aircraft Tiedown and Storage Hangar Rental Agreements at any reasonable time during TENANT's regular business hours. *Page 14 of this Exhibit "G" -21- STORAGE ------- A. TENANT may store aircraft components, equipment, parts, bulk liquids, scrap lumber, metal, machinery or other materials related to the conduct of its business on the Leased Premises, provided, however, that such storage may be one only within a fully enclosed permanent structure. No storage may be done on any apron, ramp or taxiway, without prior written approval of Airport Manager. B. Derelict aircraft, inoperative grounded vehicles, unused ramp equipment, scaffolding, hoists and related items not regularly and routinely in use as part of TENANT's business, may not be kept on the Leased Premises unless such materials are maintained within a fully enclosed permanent structure. C. Violation of the requirements of this Paragraph shall be deemed in default if the condition has not been cured to the satisfaction of the Airport Manager within thirty (30) days of posting of the property or service of TENANT with a notice thereof. -22- AUTOMOBILE PARKING ------------------ TENANT agrees to provide sufficient automobile parking on the Leased Premises to accommodate the parking needs of patrons, visitors and employees, provided, however, that Airport streets and access roadways may not be utilized to comply with this requirement. -23- FUEL FLOWAGE FEES ----------------- A. REQUIREMENT TO PAY ------------------ TENANT agrees to pay such fuel flowage fees at such rates as may be regularly established from time to time by LANDLORD's City Council for aircraft fuels delivered at the airport. Such fees shall be due and payable on the tenth (10th) day of the month succeeding that in which the aircraft fees are received by TENANT. The fees shall be calculated and administered as provided herein. B. SUPPLIER AGREEMENT. ------------------ TENANT shall enter into a written agreement with its fuel supplier which recognizes the existence of the provisions of this agreement. A copy of said agreement shall be delivered to LANDLORD's Airport Manager prior to the commencement of fuel delivery. Said agreement shall provide that either TENANT or TENANT's supplier shall indemnify, hold harmless and provide insurance coverage to the City for all uses arising from the delivery, storage, sale and supplying of such fuel. Such agreement shall further provide that the supplier shall make available to the City at reasonable times, its records of transactions involving delivery of fuel to TENANT for purposes of auditing TENANT's performance under this agreement. C. UNDERGROUND STORAGE AND DELIVERY. -------------------------------- All fuel delivered to TENANT by its supplier or suppliers shall be placed into underground storage facilities, the -24- location and design of which shall have been approved by LANDLORD's Airport Manager and all fuel delivered by any supplier or suppliers shall be placed directly into said approved underground storage facilities. D. REPORTING, PAYMENT AND STATEMENTS. --------------------------------- Deliveries of fuel shall be reported and fees therefor paid by TENANT to LANDLORD each calendar month as provided herein. The fees to be paid shall be computed on the basis of the oil company's meter tickets supplied by the tanker truck holding the delivery from, or from refinery meter tickets provided to the carrier at the time the tanker truck is loaded. The amount shown on such tickets to have been delivered in agreement shall be multiplied by the rate established by the City Council then in effect. The product of that computation shall be the fuel flowage fee due for that month. TENANT will provide a year- end statement showing all deliveries in the previous year. Both monthly reports and year-end statements shall be on forms supplied by the Airport Manager -25- NOISE ABATEMENT --------------- TENANT expressly covenants to make every reasonable and prudent effort to ensure that aircraft based on, or operating from, the Leased Premises adhere to duly adopted present and future Noise Abatement Programs and Rules and Regulations relating thereto. NAVIGATION EASEMENT ------------------- There is hereby excepted and reserved to the City of Long Beach, its successors and assigns, for the use and benefit of the public, a right of flight for the passage of aircraft in the airspace above the surface of the premises herein leased. This public right of flight shall include the right to cause in said airspace any noise inherent in the operation of any aircraft used for navigation or flight through said airspace or landing at, taking off from or operation on the Long Beach Municipal Airport. The easement hereby excepted and reserved shall not limit any improvements and other structures heretofore or hereafter constructed or placed upon the premises in a manner consistent with the applicable PD-2 zoning ordinance of the City of Long Beach and FAR Part 77 -26- BULLETIN BOARD -------------- TENANT will install and continuously maintain a bulletin board in a location on the Leased Premises which will be convenient to and easily seen by patrons, users and visitors and will post and display notices, bulletins and other information supplied by the Airport Manager in a prominent place where such will be easily visible to TENANT's employees, patrons, users and visitors, or will authorize the Airport Manager to post such notices which shall remain continuously on display for such period of time as the same may continue in effect. UTILITIES --------- All utilities added from or after the date of this Lease shall be underground. -27- WASTE DISPOSAL -------------- TENANT shall construct all facilities necessary to prevent any water or industrial waste from the operations of TENANT on the Leased Premises from flowing into adjacent property. TENANT shall dispose of all sewage and industrial waste in accordance with all applicable regulations and laws of those governmental agencies having jurisdiction or authority thereover. TENANT shall insure that all solid waste materials are placed in appropriate covered containers designed for use with the type of waste involved, which shall remain covered, and that said containers are maintained within enclosures located on said Leased Premises and designated to keep said trash containers out of the flow of traffic and obscured from view. -28- FAA SECURITY AND SAFETY REGULATIONS ----------------------------------- A. This Lease is subject to Federal Aviation Regulations Part 107 and Part 139 relating to Safety and Security. LANDLORD shall provide copies thereof to TENANT who shall provide copies thereof to all sub-tenants. B. If any violation of Part 107 or Part 139 occurs on the Leased Premises, TENANT or its sub-tenants shall be strictly liable to reimburse LANDLORD for the full amount of any fine, penalty or other financial loss resulting therefrom. BILLBOARDS AND SIGNS -------------------- TENANT agrees not to construct, install or maintain, nor to allow upon the Leased Premises any billboards, signs, banners or like displays which may be placed in or upon any building or structure in such manner as to be visible from the outside thereof, except those approved in writing by LANDLORD's Airport Manager. -29- AUDIT ----- The LANDLORD, City Auditor and City Manager, or their designated representatives, shall be permitted to examine and review TENANT's records at all reasonable times, with or without prior notification, for the purpose of determining compliance with all terms, covenants and conditions of this Lease. Such examinations and reviews shall be conducted during TENANT's regular business hours in a manner causing as little inconvenience as possible to TENANT. -30- POSSESSORY INTEREST ------------------- TENANT recognizes and understands that this Lease may create a possessory interest subject to property taxation and that TENANT may be subject to the payment of property taxes on such interest. FEDERAL AVIATION ADMINISTRATION ASSURANCES ------------------------------------------ This Lease is subject to certain assurances mandated by the Federal Aviation Administration for inclusion in airport leases. These assurances are set out in full in Exhibit "H" attached hereto and made a part hereof. -31- FAA REQUIRED LEASE PROVISIONS ----------------------------- LEASE PROVISIONS: - ---------------- 1. The Lessee, for himself, his heirs, personal representatives, successors in interest, and assigns, as a part of the consideration hereof, does hereby covenant and agree "as a covenant running with the land") that in the event facilities are constructed, maintained, or otherwise operated on the said property described in this Lease, for a purpose for which a DOT program or activity is (Pounds) extended or for another purpose involving the provision of similar services or benefits, the Lessee shall maintain and operate such facilities and services in compliance with all other requirements imposed pursuant to Title 49, Code of Federal Regulations, DOT, Subtitle A, Office of the Secretary, Part 21, Nondiscrimination in Federally-Assisted Programs of the Department of Transportation-Effectuation of Title VI of the Civil Rights Act of 1964, and as said Regulations may be amended. 2. The Lessee for himself, his personal representatives, successors in interest, and assigns, as a part of the consideration hereof, does hereby covenant and agree "as a covenant running with the land" that: (a) no person on the grounds of race, color or national origin shall be excluded from participation in, denied the benefits of, or be otherwise subjected to discrimination in the use of said facilities; (b) that in the construction of any improvements on, over, or under such land and the furnishing of services thereon, no person on the grounds of race, color or national origin shall be excluded from participation in, denied the benefits of, or otherwise be subject to discrimination; (c) that the Lessee shall use the premises in compliance with all other requirements imposed by or pursuant to Title 49, Code of Federal Regulations, Department of Transportation, Subtitle A, Office of the Secretary, Part 21, Nondiscrimination in Federally-Assisted Programs of the Department of Transportation-Effectuation of Title VI of the Civil Rights Act of 1964, and as said Regulations may be amended. 3. Lessee shall furnish its accommodations and/or services on a fair, equal and not unjustly discriminatory basis to all users thereof and it shall charge fair, reasonable and not unjustly discriminatory prices for each unit or service; PROVIDED, THAT the Lessee may be allowed to make reasonable and nondiscriminatory discounts, rebates or other similar type of price reductions to volume purchasers. 4. Non-compliance with Provision 3 above shall constitute a material breach thereof and in the event of such non-compliance and Lessor shall have the right to terminate this Lease Agreement and the estate hereby created without liability therefore or at the election of -1- EXHIBIT L the Lessor or the United States either or both said Governments shall have the right to judicially enforce Provisions. 5. Lessee agrees that it shall insert the above four Provisions in any Lease Agreement by which said Lessee grants a right or privilege to any person, firm or corporation to render accommodations and/or services to the public on the premises herein leased. 6. The Lessee assures that it will undertake an affirmative action program as required by 14 CFR Part 152, Subpart E, to insure that no person shall on the grounds of race, creed, color, national origin, or sex be excluded from participating in any employment activities covered in 14 CFR Part 152, Subpart E. The Lessee assures that no person shall be excluded on these grounds from participating in or receiving the services or benefits of any program or activity covered by this subpart. The Lessee assures that it will require that its covered suborganizations provide assurances to the Lessee that they similarly will undertake affirmative action programs and that they will require assurances from their suborganizations, as required by 14 CFR Part 152, Subpart E, to the same effect. 7. The Lessor reserves the right to further develop or improve the landing area of the airport as it sees fit, regardless of the desires or view of the Lessee, and without interference or hinderance. 8. The Lessor reserves the right, abut shall not be obligated to the Lessee to maintain and keep in repair the landing area of the airport and all publicly- owned facilities of the airport, together with the right to direct and control all activities of the Lessee in this regard. 9. This Lease shall be subordinate to the provisions and requirements of any existing or future agreement between the Lessor and the United States, relative to the development, operation or maintenance of the airport. 10. Lessee agrees to comply with the notification and review requirements covered in Part 77 of the Federal Aviation Regulations in the event of future construction of a building is planned for the leased premises, or in the event of any planned modification or alteration of any present or future building or structures situated on the leased premises. 11. It is understood and agreed that nothing herein contained shall be construed to grant or authorize the granting of an exclusive right within the meaning of Section 308 of the Federal Aviation Act. 12. The Lessee by accepting this Lease agrees for itself, its successors and assigns that it will not make use of the leased premises in any manner which might interfere with the landing and -2- taking off of aircraft from Long Beach Municipal Airport or otherwise constitute a hazard. In the event the aforesaid covenant is breached, the owner reserves the right to enter upon the premises hereby leased, and cause the abatement of such interference at the expense of the Lessee. 13. This Lease and all the provisions hereof shall be subject to whatever right the United States Government now has or in the future may have or acquire, affecting the control, operation, regulation and taking over of said airport. -3- Recording Requested By: When Recorded Mail To: SHORT FORM GROUND LEASE ----------------------- THIS SHORT FORM GROUND LEASE is made and entered into as of this ______ day of ________________, 198__, by and between the CITY OF LONG BEACH, a municipal corporation ("Landlord"), and KILROY LONG BEACH ASSOCIATES, a California Limited Partnership ("Developer"). R E C I T A L S - - - - - - - - Landlord does hereby lease and demise to Developer that certain real property in the City of Long Beach, County of Los Angeles, State of California, more particularly described in Exhibit "A" attached hereto and all rights, privileges and easements appurtenant thereto ("Premises" herein) pursuant to and upon all of the terms, covenants and provisions set forth in that certain unrecorded Ground Lease dated ____________________________________, ("Ground Lease" herein), the terms, covenants and provisions of which are hereby incorporated herein and made a part hereof by reference. EXHIBIT "M" Page l of 5 Pages LBAC-3A/5.28.6.sr Landlord and Developer do further agree as follows: 1. The commencement date of the Ground Lease term is the date first written above. 2. The term of the Ground Lease shall continue for fifty (50) years following the date of execution of the Ground Lease, subject to earlier termination as provided in the Ground Lease and subject to four (4) successive ten (10) year options and one (1) nine (9) year option to further extend the term of the Ground Lease. 3. Developer shall have the right to subdivide the Ground Lease into one or more separate Ground Leases pursuant to Section 7.6 of the Ground Lease and to recombine one or more separate Ground Lease into a single Ground Lease pursuant to Section 7.7 of the Ground Lease. Developer also shall have the right to encumber its leasehold interest in the Ground Lease (and in each separate Ground Lease into which the Ground Lease may be subdivided) with one or more Leasehold Mortgages (as defined in section 4.3.2 of the Ground Lease) in favor of one or more Leasehold Mortgagees (as defined in section 4.3.3 of the Ground Lease). 4. Developer shall pay the real property taxes and assessments against the Premises during the term hereof, as more specifically provided in the Ground Lease. 5. Notwithstanding that the ownership of Landlord's and Developer's estates in and to the Premises may become vested in EXHIBIT "M" Page 2 of 5 Pages LBAC-3A/5.28.6.sr the same party for any reason, no merger of Developer's leasehold estate into Landlord's fee title shall result or be deemed to result thereby, as provided in Section 4.20 of the Ground Lease, provided that this provision shall not be deemed applicable to a termination of Developer's leasehold estate by reason of Developer's default or a taking under the power of eminent domain. 6. The Ground Lease grants to Developer the right to enter upon the Premises demised thereby for a period of sixty (60) days following the expiration of the term of the Ground Lease in order to remove any or all of the buildings and other improvements constructed upon said Premises by or under Developer. 7. The Ground Lease grants to Developer the right to sell any buildings from time to time constructed upon the Premises, provided that such buildings shall be and remain subject to the terms and conditions of the Lease and shall be used and developed only in accordance with the Ground Lease for so long as such buildings remain upon the Premises. [THIS AREA INTENTIONALLY LEFT BLANK] EXHIBIT "M" Page 3 of 5 Pages LBAC-3A/5.28.6.sr IN WITNESS WHEREOF, the parties have executed this Short Form Ground Lease as of the day and year first above written. CITY OF LONG BEACH, A Municipal Corporation By:__________________________ Title:_______________________ "Landlord" KILROY LONG BEACH ASSOCIATES, a California Limited Partnership, By: KILROY INDUSTRIES, a California Corporation, General Partner By:________________________ Title:___________________ By:________________________ By:________________________ "Developer" EXHIBIT "M" Page 4 of 5 Pages LBAC-3A/5.28.6.sr This Short Form Ground Lease is hereby approved as to form this ______________ day of ______________, 198__. ROBERT W. PARKIN, City Attorney By:____________________________ Deputy EXHIBIT "M" Page 5 of 5 Pages LBAC-3A/5.28.6.sr LANDLORD'S ACKNOWLEDGMENT ------------------------- Corporation ----------- STATE OF CALIFORNIA ) ) ss. COUNTY OF LOS ANGELES ) On June ___, 1985, before me, the undersigned, a Notary Public in and for said State, personally appeared _______________________________ personally known to me or proved to me on the basis of satisfactory evidence to be the person who executed the within instrument as the ________________________ , on behalf of the City of Long Beach, the Municipal corporation that executed the within instrument and acknowledged to me that said Municipal corporation executed the within instrument pursuant to a resolution of its City Council. WITNESS my hand and official seal. ------------------------------------ Notary Public in and for said State SEAL DEVELOPER'S ACKNOWLEDGMENT STATE OF CALIFORNIA ) ) ss. COUNTY OF LOS ANGELES ) On June ____, 1985, before me, the undersigned, a Notary Public in and for said State, personally appeared ________________________________ and _____________________, personally known to me or proved to me on the basis of satisfactory evidence to be the persons who executed this instrument as __________________ and _________________________________, respectively, of Kilroy Industries, the corporation that executed this instrument as one of the general partners of Kilroy Long Beach Associates, a California Limited Partnership, the partnership that executed the within instrument, and acknowledged to me that such corporation executed the same as such partner and that said partnership executed the same. WITNESS my hand and official seal. ------------------------------------ Notary Public in and for said State SEAL LEGAL DESCRIPTION ----------------- THAT PORTION OF PARCEL 1, IN THE CITY OF LONG BEACH, IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS SHOWN ON A RECORD OF SURVEY, FILED IN BOOK 85, PAGE 19, OF RECORD OF SURVEYS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY, TOGETHER WITH THOSE PORTIONS OF LOTS 5 AND 9, TRACT NO. 10548, IN SAID CITY, COUNTY OF STATE, AS PER MAP RECORDED IN BOOK 174, PAGES 15 TO 23, INCLUSIVE OF MAPS, IN SAID RECORDER'S OFFICE, AND TOGETHER WITH THAT PORTION OF LAKEWOOD BOULEVARD (FORMERLY KNOWN AS CERRITOS AVENUE, 80 FEET WIDE) AS SHOWN ON SAID MAP OF TRACT NO. 10548, NOW VACATED BY THE STATE OF CALIFORNIA HIGHWAY COMMISSION, A CERTIFIED COPY OF WHICH WAS RECORDED MAY 19, 1959, AS INSTRUMENT NO. 3601, OF OFFICIAL RECORDS, IN THE OFFICE OF SAID COUNTY RECORDER, DESCRIBED AS A WHOLE AS FOLLOWS: BEGINNING AT THE MOST SOUTHERLY CORNER OF SAID PARCEL 1, SAID RECORD OF SURVEY; THENCE NORTH 00 DEGREES 00 MINUTES 46 SECONDS EAST 324.60 FEET, ALONG THE WESTERLY LINE OF SAID PARCEL 1, TO THE NORTHWESTERLY CORNER OF SAID PARCEL 1, SAID NORTHWESTERLY CORNER BEING A POINT IN A NON-TANGENT CURVE CONCAVE NORTHERLY AND HAVING A RADIUS OF 1,050.00 FEET, A RADIAL LINE THAT BEARS SOUTH 2 DEGREES 06 MINUTES 54 SECONDS WEST TO SAID POINT, SAID CURVE ALSO BEING THE NORTHERLY LINE OF SAID PARCEL 1; THENCE EASTERLY ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 27 DEGREES 32 MINUTES 10 SECONDS AN ARC DISTANCE OF 504.63 FEET TO A POINT, SAID LAST MENTIONED POINT BEING A RADIAL LINE THAT BEARS SOUTH 25 DEGREES 25 MINUTES 16 SECONDS EAST, TO SAID LAST MENTIONED POINT; THENCE SOUTH 45 DEGREES 22 MINUTES 59 SECONDS EAST 1,403.34 FEET TO A POINT IN THAT CERTAIN COURSE AS DESCRIBED AS HAVING A BEARING AND LENGTH OF "SOUTH 34 DEGREES 15 MINUTES 50 SECONDS WEST 225.46 FEET" IN THE NORTHWESTERLY BOUNDARY OF THAT PARCEL OF LAND DESCRIBED AS PARCEL l IN DEED TO STATE OF CALIFORNIA, RECORDED MARCH 18, 1959, AS INSTRUMENT NO. 1904, OF OFFICIAL RECORDS, OF SAID COUNTY, SAID LAST MENTIONED POINT BEING NORTH 34 DEGREES 16 MINUTES 23 SECONDS EAST 40.81 FEET, ALONG SAID COURSE, FROM THE SOUTHWESTERLY TERMINUS THEREOF; THENCE SOUTH 34 DEGREES 16 MINUTES 23 SECONDS WEST 40.81 FEET, ALONG SAID COURSE, TO THE NORTHEASTERLY TERMINUS OF THAT CERTAIN COURSE IN SAID NORTHWESTERLY BOUNDARY, AS DESCRIBED IN SAID LAST MENTIONED PARCEL 1, AS HAVING A BEARING AND LENGTH OF "SOUTH 62 DEGREES 04 MINUTES 30 SECONDS WEST, 51.05 FEET, MORE OR LESS,"; THENCE SOUTH 62 DEGREES 05 MINUTES 03 SECONDS WEST ALONG SAID LAST MENTIONED CERTAIN COURSE, TO THE NORTHEASTERLY TERMINUS OF THAT CERTAIN COURSE AS DESCRIBED AS HAVING A BEARING AND LENGTH OF "SOUTH 62 EXHIBIT "A" Page l of 2 Pages LBAC-3A/5 .24. 7/sr DEGREES 04 MINUTES 30 SECONDS WEST, 113.28 FEET" IN SAID LAKEWOOD BOULEVARD, NOW VACATED BY THE CALIFORNIA HIGHWAY COMMISSION; THENCE SOUTH 62 DEGREES 05 MINUTES 03 SECONDS WEST ALONG SAID LAST MENTIONED CERTAIN COURSE TO THE NORTHEASTERLY TERMINUS OF THAT COURSE AS DESCRIBED AS HAVING A BEARING AND LENGTH OF "SOUTH 62 DEGREES 04 MINUTES 30 SECONDS WEST 704.56 FEET" IN THE NORTHERLY BOUNDARY OF THAT PARCEL OF LAND DESCRIBED AS PARCEL l IN DEED TO THE STATE OF CALIFORNIA, RECORDED MAY 11, 1959, AS INSTRUMENT NO. 1870, OF OFFICIAL RECORDS, OF SAID COUNTY; THENCE ALONG SAID LAST MENTIONED NORTHERLY BOUNDARY SOUTH 62 DEGREES 05 MINUTES 03 SECONDS WEST 704.56 FEET, SOUTH 80 DEGREES 05 MINUTES 43 SECONDS WEST 105.00 FEET AND NORTH 80 DEGREES 14 MINUTES 59 SECONDS WEST 676.33 FEET; THENCE NORTH 9 DEGREES 45 MINUTES 0l SECONDS EAST 570.00 FEET; THENCE NORTH 25 DEGREES 20 MINUTES 00 SECONDS EAST 15.00 FEET; THENCE NORTH 8 DEGREES 44 MINUTES 49 SECONDS WEST 248.97 FEET TO THE SOUTHERLY PROLONGATION OF SAID WESTERLY LINE OF PARCEL 1, AS SHOWN ON SAID RECORD OF SURVEY; THENCE NORTH 0 DEGREES 00 MINUTES 46 SECONDS EAST 72.14 FEET ALONG SAID PROLONGATION, TO THE POINT OF BEGINNING. ALSO EXCEPTING THEREFROM ALL OIL, GAS AND OTHER HYDROCARBONS IN AND UNDER, OR WHICH MAY BE PRODUCED OR SAVED FROM SAID LAND; TOGETHER WITH ALL RIGHTS OF EVERY KIND AND DESCRIPTION WHATSOEVER TO DRILL FOR, DEVELOP, TAKE, REMOVE, AND SEVER THE SAME, OR ANY PART THEREOF, FROM SAID LAND, WITHOUT, HOWEVER, THE RIGHT TO THE USE OF THE SURFACE OF SAID LAND IN CONNECTION WITH THE DEVELOPMENT OR REMOVAL OF SAID OIL, GAS OR OTHER HYDROCARBONS, ALL DRILLING AND BORING FOR SAID PURPOSES TO BE DONE BENEATH THE SURFACE OF SAID LAND AT ANY LEVEL, OR LEVELS, 100 FEET, OR MORE, BELOW THE SURFACE THEREOF, THE SURFACE OPENING OF THE WELL HOLE TO BE LOCATED ON LAND OTHER THAN THE LAND ABOVE DESCRIBED, AS RESERVED IN THE DEED FROM BIXBY LAND COMPANY, A CORPORATION, RECORDED AUGUST 25, 1948 IN BOOK 28072 PAGE 204, OFFICIAL RECORDS, AND RECORDED FEBRUARY 10, 1950 IN BOOK 32238 PAGE 67 OFFICIAL RECORDS AND RECORDED DECEMBER 28, 1950 IN BOOK 35179 PAGE 303, OFFICIAL RECORDS AND RECORDED DECEMBER 28, 1950 IN BOOK 35179 PAGE 310, OFFICIAL RECORDS. EXHIBIT "A" Page 2 of 2 Pages LBAC-3A/5.24.7/sr EX-10.11 6 LEASE AGREEMENT DATED APRIL 21, 1988 EXHIBIT 10.11 LONG BEACH MUNICIPAL AIRPORT LEASE AGREEMENT KILROY LONG BEACH ASSOCIATES a California Limited Partnership "DEVELOPER" BOARD OF WATER COMMISSIONERS CITY OF LONG BEACH "LANDLORD" TABLE OF CONTENTS -----------------
Page ---- 1. SUBJECT OF LEASE........................................................ 1 1.1 Purpose of Lease............................................... 1 1.2 Lease of Premises.............................................. 1 1.3 The Project Area............................................... 2 1.4 The Premises................................................... 2 1.5 Parties to the Lease Agreement................................. 2 1.5.1 Landlord............................................. 2 1.5.2 Developer............................................ 2 1.5.3 Association by Developer............................. 3 1.6 Existing Lease from the City of Long Beach..................... 4 2. TERM.................................................................... 4 2.1 Basic Term..................................................... 4 2.2 Options for Extensions......................................... 4 3. RENT.................................................................... 5 3.1 Minimum Ground Rent............................................ 5 3.1.1 Initial Ground Rent - Parcel A....................... 5 3.1.2 Initial Ground Rent - Parcel B....................... 6 3.1.2.1 Parcel A.......................................... 6 3.1.2.2 Parcel B.......................................... 6 3.1.2.3 CPI Adjustments to Initial Ground Rent..................................... 7 3.1.2.4 Additional Adjustment to Initial Ground Rent for Parcel B........................ 7 3.1.3 Commencement of Initial Ground Rent.................. 9 3.1.4 Phasing of Initial Ground Rent....................... 9 3.1.4.1 Parcel A.......................................... 10 3.1.4.2 Parcel B.......................................... 10 3.1.5 Delays in Commencement of Ground Rent............... 10 3.1.6 Due Dates and Place of Payment...................... 11 3.1.7 Ground Rent Credit for Extraordinary Costs.......... 11 3.1.7.1 Limitations....................................... 12 3.1.7.2 Approval of Costs................................. 12 3.2 Ground Rent Adjustments........................................ 13 3.2.1 Adjustment Dates..................................... 13 3.2.2 Ground Rent Adjustments by Appraisal................. 13 3.2.2.1 Adjustments for Off-Site Costs.................... 14 3.2.3 Appraisal............................................ 15 3.2.3.1 Prevailing Rate of Return......................... 16 3.2.4 Maximum Rent Increase................................ 17 3.2.4.1 Allocation to Parcels............................. 17
i TABLE OF CONTENTS ----------------- (continued)
Page ---- 3.2.4.2 Base Sublease Rental.............................. 17 3.2.4.3 Sublease Rental Percentage Change................. 18 3.2.4.4 Adjusted Ground Rent.............................. 18 3.2.4.5 Sale or Assignment of Leasehold Interest.......... 19 3.3 Ground Rent Adjustments Following Reconstruction............... 19 3.3.1 Ground Rent Adjustments.............................. 20 3.3.1.1 Adjustment Date................................... 20 3.3.1.2 Alternate Adjustment Date......................... 20 3.3.2 No Adjustment At Next Scheduled Adjustment Date.................................... 20 3.3.3 Maximum Ground Rent Adjustment....................... 21 3.4 Adjustments to Ground Rent During Option Term.................. 21 3.5 Maximum Ground Rent Increase................................... 21 3.6 Definition of Offsite Costs.................................... 22 3.7 Approval of Improvement Plans.................................. 22 3.8 Determination of Offsite Costs................................. 22 3.9 Construction by Landlord....................................... 24 3.10 Phasing of Improvements........................................ 24 4. LEASEHOLD MORTGAGES..................................................... 24 4.1 Leasehold Mortgage Authorized.................................. 24 4.2 Notice to Landlord............................................. 24 4.2.1 Leasehold Mortgage Requirements...................... 24 4.2.2 Assignment of Leasehold Mortgage..................... 25 4.2.3 Landlord's Acknowledgment of Notice.................. 25 4.2.4 Developer to Provide Copies.......................... 26 4.3 Definitions.................................................... 26 4.3.1 Institutional Lender................................. 26 4.3.2 Leasehold Mortgage................................... 27 4.3.3 Leasehold Mortgagee.................................. 27 4.4 Consent of Leasehold Mortgagee Required........................ 27 4.5 Default Notice................................................. 27 4.6 Notice to Leasehold Mortgagee.................................. 28 4.6.1 Landlord's Termination Notice........................ 28
ii TABLE OF CONTENTS ----------------- (continued)
Page ---- 4.6.2 Proper Address of Leasehold Mortgagee................ 30 4.7 Procedure on Default........................................... 30 4.7.1 Extension of Termination Notice Period............... 30 4.7.1.1 Payment of Monetary Obligations................... 30 4.7.1.2 Foreclosure of Leasehold Mortgage................. 31 4.7.2 Cure of Default...................................... 31 4.7.3 Compliance of Leasehold Mortgagee.................... 32 4.7.4 Leasehold Mortgage Not an Assignment................. 32 4.7.5 Obligation of Leasehold Mortgagee to Repair or Reconstruct........................... 33 4.7.6 Leasehold to Mortgagee's Right to Transfer........................................... 34 4.7.7 Leasehold Mortgagee Transfer a Permitted Sale..................................... 34 4.8 New Lease...................................................... 34 4.8.1 Terms of New Lease................................... 34 4.8.1.1 Written Request to Landlord....................... 35 4.8.1.2 Payment of Obligations............................ 35 4.8.1.3 Remedy of Developer's Defaults.................... 36 4.8.1.4 New Lease to Have First Priority.................. 36 4.8.1.5 Developer's Obligations Under New Lease....................................... 37 4.9 New Lease Priorities........................................... 37 4.10 Eminent Domain................................................. 37 4.11 Notice of Arbitration.......................................... 38 4.12 Amendment to Facilitate Leasehold Financing.................... 38 4.13 Security Deposit............................................... 38 4.14 Estoppel Certificate........................................... 39 4.15 Notices........................................................ 39 4.16 Erroneous Payments............................................. 40 4.17 Request for Notice for Benefit of Landlord..................... 40 4.18 Release or Forebearance........................................ 41 4.19 Notice......................................................... 41 4.20 No Merger...................................................... 41 4.21 No Payment by Landlord......................................... 41 4.22 Self Liquidating Mortgage...................................... 41 4.23 Leasehold Mortgagee Need Not Cure Specified Defaults........... 42 4.24 Casualty Loss.................................................. 42
iii TABLE OF CONTENTS ----------------- (continued)
Page ---- 5. ASSIGNMENT AND SUBLETTING............................................... 42 5.1 Prohibition Against Change in Ownership, Management and Control......................................... 42 5.1.1 Name and Address for Notices........................... 43 5.1.2 Type of Entity......................................... 43 5.1.3 Other Transfers........................................ 43 5.1.4 Buildings or Land...................................... 44 5.2 Assignments Not Subject to Approval.............................. 44 5.2.1 Death or Incapacity.................................... 44 5.2.2 Family Transfer........................................ 44 5.2.3 Affiliated Corporation................................. 44 5.2.4 IRS Transfer........................................... 45 5.2.5 Public Entity.......................................... 45 5.2.6 Partner................................................ 45 5.2.7 Comprising Entity...................................... 45 5.3 Assignment Invalid............................................... 46 5.4 Approval of Assignments.......................................... 46 5.4.1 Name................................................... 46 5.4.2 Description............................................ 46 5.4.3 Nature of Business..................................... 46 5.4.4 Financial Information.................................. 46 5.4.5 Officers............................................... 47 5.4.6 Additional Information................................. 47 5.4.7 Informational Purposes................................. 47 5.4.8 Confidentiality........................................ 48 5.4.9 Disapproval by Landlord................................ 48 5.5 No Release....................................................... 48 5.6 Unauthorized Change.............................................. 49 5.7 Subletting....................................................... 49 5.7.1 Minor Subleases........................................ 52 5.7.2 Consent to Sublease.................................... 52 5.7.2.1 Description......................................... 52 5.7.2.2 Name................................................ 52 5.7.2.3 Nature of Business.................................. 52 5.7.2.4 Financial Information............................... 52 5.7.2.5 Officers............................................ 53 5.7.2.6 Additional Information.............................. 53 5.7.2.7 Informational Purposes.............................. 53 5.7.3 Confidentiality........................................ 54 5.7.4 Disapproval by Landlord................................ 54 5.8 Sale of Buildings................................................ 55 5.9 Master Lease..................................................... 55 6. INDEMNITY, INSURANCE, CASUALTY DAMAGE................................... 55 6.1 Indemnification and Hold Harmless................................ 55 6.2 Insurance........................................................ 57 6.2.1 Liability Insurance..................................... 57
iv TABLE OF CONTENTS ----------------- (continued)
Page ---- 6.2.2 Fire and Extended Coverage.............................. 58 6.2.3 Miscellaneous........................................... 61 6.2.4 Blanket Policies........................................ 62 6.2.5 Self-Insurance.......................................... 63 6.2.6 Insurance Adjustments................................... 63 6.3 Damage or Destruction............................................ 63 6.3.1 Restoration of Premises................................. 63 6.3.2 Right to Terminate...................................... 64 6.3.3 No Reduction in Rent.................................... 65 7. DEVELOPMENT OF THE PROJECT............................................. 65 7.1 Scope of Development............................................. 65 7.2 Developer's Obligation to Develop Premises....................... 66 7.2.1 Best Efforts to Sublease................................ 66 7.3 Architectural Approval........................................... 67 7.3.1 Restriction............................................. 67 7.3.2 Basic Concept Documents................................. 67 7.3.3 Landscaping............................................. 67 7.3.4 Exterior Elevations..................................... 68 7.3.5 Security and Security Plans............................. 68 7.3.6 Amendments.............................................. 69 7.3.7 Landlord Approval....................................... 69 7.3.8 Communication and Consultation.......................... 71 7.3.9 Requirements of Institutional Lender or Major Occupant.............................. 71 7.3.10 Interior Improvements................................... 72 7.3.11 Modification of Plans................................... 72 7.4 Performance and Payment Bonds.................................... 73 7.4.1 Agreement to Provide.................................... 73 7.4.2 Term of the Bond........................................ 74 7.4.3 Penal Sum............................................... 74 7.4.4 Alternative Performance................................. 75 7.5 Construction..................................................... 75 7.5.1 Costs of Construction................................... 75 7.5.2 Right to Improve........................................ 75 7.5.3 Governmental Permits.................................... 76 7.5.4 Rights of Access........................................ 77 7.5.5 Local, State and Federal Laws........................... 77 7.5.6 Antidiscrimination During Construction.......................................... 77 7.5.7 Responsibilities of Landlord............................ 78 7.5.7.1 Governmental Approvals............................. 78 7.5.7.2 Easements........................................... 78 7.5.7.3 Off-Site Improvements............................... 79 7.5.7.4 Bond Financing...................................... 79 7.5.7.5 Hazardous Materials................................. 80
v TABLE OF CONTENTS ----------------- (continued)
Page ---- 7.5.8 Responsibilities of Developer........................... 80 7.5.9 Maintenance............................................. 80 7.5.10 Acceptance of Premises.................................. 80 7.6 Subdivided Leases................................................ 81 7.6.1 Same Parties............................................ 82 7.6.2 Obligations of Subdivided Leases........................ 82 7.6.3 Terms, Covenants........................................ 82 7.6.3.1 Ground Rent......................................... 83 7.6.3.2 Improvements........................................ 83 7.6.3.3 Easements and CC & R's.............................. 83 7.6.3.4 Description of Property............................ 84 7.6.3.5 Excluded Matters.................................... 84 7.7 Combining Leases................................................. 84 7.7.1 Ground Rent............................................. 85 7.7.2 Easements and CC & R' s................................. 85 8. USE..................................................................... 85 8.1 Permitted Development............................................ 85 8.2 Vehicle Parking.................................................. 85 8.3 Federal Aviation Administration................................. 86 8.4 Inspection....................................................... 86 9. LIENS................................................................... 86 9.1 Developer's Responsibility....................................... 86 9.2 Notice of Work................................................... 86 9.3 Discharge of Liens............................................... 87 9.4 Landlord's Right to Pay.......................................... 87 9.5 Reimbursement of Landlord........................................ 88 10. CONDEMNATION............................................................ 88 10.1 Definition of Terms.............................................. 88 10.1.1 Total Taking........................................... 88 10.1.2 Partial Taking......................................... 89 10.1.3 Voluntary Conveyance................................... 89 10.1.4 Date of Taking......................................... 89 10.1.5 Leased Land............................................ 89 10.2 Effect of Taking................................................ 89 10.3 Allocation of Award............................................. 90 10.4 Reduction of Ground Rent on Partial Taking...................... 90 10.5 Temporary Taking................................................ 91 11. ALTERATIONS BY DEVELOPER................................................ 91 12. TAXES AND ASSESSMENTS................................................... 92 12.1 Payment by Developer............................................ 92
vi TABLE OF CONTENTS ----------------- (continued)
Page ---- 12.2 Installment Payments............................................ 92 12.3 Proration....................................................... 93 12.4 Right to Contest................................................ 93 13. CERTIFICATES BY DEVELOPER AND LANDLORD.................................. 94 13.1 Developer to Provide............................................ 94 13.2 Landlord to Provide............................................. 95 14. QUIET ENJOYMENT......................................................... 95 15. TERMINATION AND FURTHER LEASING......................................... 96 15.1 Termination..................................................... 96 15.2 Termination by Developer........................................ 96 15.3 Termination by Landlord......................................... 96 16. SECURITY DEPOSITS....................................................... 97 16.1 Good Faith Deposit.............................................. 97 16.1.1 Receipt by Landlord................................... 97 16.1.2 Form of Deposit....................................... 97 16.1.3 Interest.............................................. 98 16.1.4 If Bond is Posted..................................... 99 17. GENERAL PROVISIONS...................................................... 99 17.1 Notices, Demands and Communication between the Parties................................................... 99 17.2 Conflict of Interest............................................ 100 17.3 Enforced Delay: Extension of Time of Performance................ 101 17.4 Inspection of Books and Records................................. 101 17.5 Defaults and Remedies........................................... 102 17.5.1 Defaults - General.................................... 102 17.5.2 Institution of Legal Actions.......................... 102 17.5.3 Applicable Law........................................ 103 17.5.4 Service of Process.................................... 103 17.5.5 Rights and Remedies Are Cumulative.................... 103 17.5.6 Inaction Not a Waiver of Default...................... 103 17.5.7 Remedies.............................................. 104 17.5.8 Developer's Rights.................................... 105 17.5.9 Lease Termination..................................... 105 17.5.10 Landlord's Exercise of Remedies....................... 105 17.5.11 Payment to Developer.................................. 106 17.5.11.1 Reimbursement to Landlord........................ 107
vii TABLE OF CONTENTS ----------------- (continued)
Page ---- 17.5.11.2 Reimbursement to Developer....................... 108 17.5.11.3 Ground Rent...................................... 108 17.5.11.4 Remaining Balance................................ 108 17.5.12 Delivery of Plans.................................... 109 17.6 Right to Contest Laws........................................... 109 17.7 Trade Fixtures.................................................. 110 17.8 Continued Possession of Developer............................... 110 17.9 Utilities....................................................... 111 17.10 Surrender....................................................... 111 17.11 Partial Invalidity.............................................. 111 17.12 Section Headings................................................ 112 17.13 Short Form Lease................................................ 112 17.14 Exhibits Incorporated........................................... 112 17.15 Entire Agreement, Waivers and Amendments........................ 112 17.16 Waivers......................................................... 113 17.17 Approvals....................................................... 113 17.18 Successors in Interest.......................................... 113 17.19 "And/Or"........................................................ 113 17.20 "Including" Defined............................................. 113 17.21 Right of First Refusal to Purchase.............................. 114 17.22 If Developer is a Trustee....................................... 115 17.23 Limitation of Liability of Partners............................. 115 17.24 Approvals....................................................... 116
viii LIST OF EXHIBITS
First Appearing At Ltr. Description Paragraph Page - ---- -------------------- --------- ---- A Legal Description of Premises 1.2 1 B Site Map of Project Area 1.4 2 C Form of Nondisturbance 5.7 50 Agreement D Form of Performance Bond and 7.4.1 73 Labor and Material Bond E Form of Assignment 5.9 55 F Form of Short Form Lease 17.13 112
LEASE AGREEMENT --------------- THIS LEASE AGREEMENT (the "Lease") is made this 21st day of April, 1988, by and between KILROY LONG BEACH ASSOCIATES, a California Limited Partnership, hereinafter referred to as "Developer", and the BOARD OF WATER COMMISSIONERS OF THE CITY OF LONG BEACH, acting for and on behalf of the City of Long Beach, a municipal corporation, hereinafter referred to as "Landlord". Landlord and Developer hereby agree as follows: 1. SUBJECT OF LEASE: ---------------- 1.1 Purpose of Lease. The purpose of this Lease is to provide ---------------- for the lease and improvement of certain Premises, hereinafter described, as ("Project"). This Lease is entered into in order to develop the Project and not for speculation in land holding. The development of the Project pursuant to and as contemplated by this Lease is in the best interests of Landlord and in accord with the public purposes and provisions of applicable State and local laws and requirements under which the Project is to be undertaken. 1.2 Lease of Premises. Subject to the terms, covenants and ----------------- conditions of this Lease, Landlord hereby leases to Developer and Developer hereby takes and hires from Landlord that certain real property (the "Premises") legally described on Exhibit "A" attached hereto and made a part hereof, upon the terms and conditions hereinafter set forth. Parcel A and Parcel B described in Exhibit A are hereinafter referred to as "Parcel A" and "Parcel B". 1 1.3 The Project Area. The area within which the Project is ---------------- located in the City of Long Beach is the area generally described as the area bounded by Spring Street on the north, easterly of Redondo Avenue on the west (adjacent to and easterly of certain retained property of Landlord), Kilroy Airport Way on the south, westerly of the California National Guard facility on the southeast, and westerly of Kilroy Airport Way on the northeast. 1.4 The Premises. The Premises include those portions of the ------------ Project area illustrated and designated on the site map attached hereto as Exhibit "B" and forming a part of this Lease and are legally described in the attached Exhibit "A". 1.5 Parties to the Lease Agreement. ------------------------------ 1.5.1 Landlord. Landlord is the Board of Water -------- Commissioners of the City of Long Beach acting for and on behalf of the City of Long Beach, a municipal corporation organized and existing under the laws of the State of California acting in its proprietary capacity. The principal office of Landlord is located at 1800 E. Wardlow Road, Long Beach, California 90807. The term "Landlord" as used in this Lease includes the City of Long Beach, California, and any assignee of or successor to its rights, powers and responsibilities. 1.5.2 Developer. Developer is a California limited --------- partnership having a principal place of business at 2250 East Imperial Highway, Suite 1200, El Segundo, California 90245. A written agreement has been executed creating Developer ("Agreement Establishing Developer") 2 an executed copy of which has been delivered to Landlord. Developer agrees, upon request of Landlord, to provide Landlord with any amendments to the Agreement Establishing Developer, so long as Kilroy Long Beach Associates, a California Limited Partnership, is the party acting as Developer under this Lease. The provisions of the foregoing sentence shall apply to any entity becoming a successor to Developer under this Lease or any other lease which may be established pursuant hereto covering the Premises. 1.5.3 Association by Developer. Notwithstanding any other ------------------------ provisions hereof, Developer reserves the right, at its discretion, to join and associate with other entities in joint ventures, partnerships or otherwise for the purpose of leasing and developing the Premises, and Developer may assign this Lease to any such entity, provided that Developer, or any partner of Developer having a controlling interest in Developer, continues to manage and retain policy control over the development and operation of the Premises, until such time as Developer's interests under this Lease are assigned as permitted under subsection 5.1, below. As used herein, "manage" shall mean to direct or supervise the operation and execution of the development of the Premises and to have authority to act for and bind the entity in all dealings with Landlord under this Lease. This definition shall be deemed to require Developer to retain policymaking authority. 3 1.6 Existing Lease from the City of Long Beach. Developer is the ------------------------------------------ lessee from the City of Long Beach, as Landlord, of certain real property described in the Lease Agreement dated July 17, 1987 ("Existing City of Long Beach Ground Lease"). A short form of the City of Long Beach Ground Lease was recorded on November 15, 1986, as Instrument No. 86-1571363 in official records of the Los Angeles County Recorder's Office. It is the intent of the parties that this Lease Agreement be similar in form to the Existing City of Long Beach Ground Lease and it is anticipated that in the future the two leases will be combined into one lease for administrative convenience and continuity of development by Developer, although neither party is obligated to so combine the two leases. If the leases are combined into a single lease, commencement of construction of improvements upon Parcel A would satisfy the obligation of Developer under Section 3.1.1 of the Existing City of Long Beach Ground Lease for commencement of construction upon at least one parcel each twelve (12) months and the good faith deposit referred to in Section 16.1.1 of this Lease would be returned to Developer. 2. TERM: ---- 2.1 Basic Term. The term of this Lease shall commence on the ---------- date of execution of this Lease and shall continue thereafter for a period of approximately forty-seven (47) years, expiring on July 17, 2035. 2.2 Options for Extensions. Subject to approval by the Board of ---------------------- Water Commissioners of the City of Long Beach and subject to the review by Landlord of Lease provisions pursuant to Section 37380(b)(l) of the Government Code, Developer 4 shall have an option for four (4) Lease extensions of ten (10) years each and a final Lease extension of nine (9) years, so that the total possible duration of this Lease will be ninety-seven (97) years. Developer may request at any time that Landlord formally consider the granting of such Lease extensions, and Landlord shall act upon such request within ninety (90) days after receipt thereof. Any such request is to be made concurrently with a similar request under the Existing City of Long Beach Ground Lease. If authority is not given to exercise options to extend the term of this lease to July 17, 2084, Developer shall have the option to extend the term of this lease to a total of fifty (50) years. This latter option shall be exercised, if at all, in writing, prior to the end of the term of the lease. 3. RENT: ---- 3.1 Minimum Ground Rent. From commencement of the term of this ------------------- Lease, the Ground Rent ("Ground Rent") payments shall be as follows: 3.1.1 Holding Rent. Developer shall pay a Holding Rent for ------------ Parcels A and B in the sum of Seventy-five Thousand and No/100 Dollars ($75,000.00) per year prorated for fractional years and any partial month at the commencement of the term until August 31, 1989. Developer shall pay Holding Rent for Parcels A and B of One Hundred Thousand and No/100 Dollars ($100,000.00) per year for the period 5 commencing September 1, 1989, until commencement of payment of full Initial Ground Rent. At such time as Initial Ground Rent has commenced for portions of Parcels A or B, Holding Rent shall continue to be paid, on a prorated basis, for the balance of Parcels A and B for which Initial Ground Rent has not commenced. 3.1.2 Initial Ground Rent. Initial Ground Rent for Parcels A and ------------------- B shall be as follows: 3.1.2.1 Parcel A. The sum of One Hundred Eighty-Three -------- Thousand Five Hundred Thirty-Eight and 75/100 Dollars ($183,538.75) per annum, which is stated by the parties to be ten percent (10%) of the initial stated value of the land included in Parcel A, which, in turn, is agreed by the parties to be One Million Eight Hundred Thirty-Five Thousand Three Hundred Eighty-Seven and 50/100 Dollars ($1,835,387.50). This amount was calculated by multiplying 146,831 square feet times $12.50 per square foot. 3.1.2.2 Parcel B. The sum of One Hundred Twenty-Nine -------- Thousand Eight Hundred Forty-Five and 00/100 Dollars ($129,845.00) per annum, which is stated by the parties to be ten percent (10%) of the initial stated value of the land included in Parcel B, which, in turn, is agreed by the parties to be One Million Two Hundred Ninety-Eight Thousand, Four Hundred Fifty and 00/100 Dollars ($1,298,450.00). This amount was calculated by multiplying 207,752 square feet times 6 $6.25 per square foot. 3.1.2.3 CPI Adjustments to Initial Ground Rent. The Initial -------------------------------------- Ground Rent for Parcels A and B each shall be adjusted concurrently with the commencement of such Initial Ground Rent in an amount equal to the increase in the Consumer Price Index, Los Angeles - Long Beach area, all commodities, occurring during the period between September 1986 and the month preceding the month in which Initial Ground Rent commences for Parcels A and B, respectively. This CPI adjustment is a one-time adjustment occurring only at the commencement of Initial Ground Rent for Parcels A and/or B, and such adjustment shall not exceed six percent (6%) per annum from September 1, 1986. 3.1.2.4 Additional Adjustment to Initial Ground Rent for ------------------------------------------------ Parcel B. The Initial Ground Rent for Parcel B has been determined on the basis - -------- that the major portion of Parcel B is subject to a "clear zone" restriction imposed by the Federal Aviation Administration. Should this clear zone restriction be removed or modified and should the City of Long Beach permit the development upon Parcel B of additional office or other income-producing buildings compatible with Developer's Basic Concept Documents referred to in Section 7.3.2, and in excess of 1.2 million square feet, then 7 the Initial Ground Rent for Parcel B shall be adjusted to reflect the then fair market value and prevailing rate of return of Parcel B. Fair market value for this purpose shall be determined in the manner provided in sections 3.2.2 and 3.2.3, and in conformity with the following formula: (square footage of ) (additional entitle- ) (ments for Parcel B ) x (H-L) + L = ___________________________ 120,000 fair market value per square foot for Parcel B. H = The greater of $12.50 per square foot value of Parcel A; or the square foot value of Parcel A as adjusted under Section 3.1.2.3. L = The greater of $6.25 per square foot value of Parcel B; or the square foot value of Parcel B as adjusted under Section 3.1.2.3. Provided that (1) no such adjustment to the Initial Ground Rent for Parcel B shall be made under this Section 3.1.2.4 if Parcel B has been and remains committed to surface parking or landscaping or other non-building purposes; and (2) in any event, such Initial Ground Rent for Parcel B shall not exceed a stated value of $12.50 per square foot and a return of 10%, except as may be adjusted pursuant to Section 3.1.2.3. 8 3.1.3 Commencement of Initial Ground Rent. The obligation to pay ----------------------------------- Initial Ground Rent shall commence as to Parcel A on the earlier of (a) the date that construction commences on that parcel, or (b) September 1, 1992, subject to granting of all required governmental approvals. The obligation to pay Initial Ground Rent shall commence as to Parcel B on the earliest of (a) the date that parking facilities are developed on the property, (b) at such time as construction commences on that parcel, or (c) September 1, 1993. The commencement of Initial Ground Rent for Parcel A pursuant to subparagraph (b) above, and the commencement of Initial Ground Rent pursuant to subparagraph (c) above, both shall be extended for so long as the California National Guard remains in occupancy of Parcel 7 of Tentative Parcel Map No. 16960. Construction shall be deemed to have commenced upon the date of issuance of a foundation permit for the first building intended to produce revenue on any given parcel ("Commencement of Construction"). Parcels A and B may be developed in one or more increments prior to the above dates. In such instance, Initial Ground Rent and Holding Rent shall be prorated accordingly. 3.1.4 Phasing of Initial Ground Rent. The Initial Ground Rent ------------------------------ due for each parcel shall be a sum equal to fifty percent (50%) of the Initial Ground Rent attributable to such parcel. Payment 9 of Initial Ground Rent shall continue at that rate until the time set out below, at which time the full Initial Ground Rent attributable to the Parcel shall become payable. For convenience and ease of reference, at such time as Initial Ground Rent has commenced to be paid in full it is hereinafter referred to as Ground Rent. 3.1.4.1 Parcel A. The earliest of (a) six (6) months after -------- issuance of an Initial Temporary Certificate of Occupancy of a building shell; or (b) commencement of subtenant rent; or (c) sixteen (16) months after commencement of Initial Ground Rent for the Parcel. 3.1.4.2 Parcel B. The earliest of (a) if there are no -------- buildings on the Parcel, the date that parking and/or permanent landscaping improvements covering more than twenty-five percent (25%) of the areas on the Parcel are completed or put into use; or (b) six (6) months after issuance of an Initial Temporary Certificate of Occupancy on a building shell; or (c) commencement of subtenant rent; or (d) sixteen (16) months after commencement of Initial Ground Rent for the Parcel. 3.1.5 Delays in Commencement of Ground Rent. Developer shall not ------------------------------------- delay the commencement of payment of Initial Ground Rent for a parcel except to the extent of delays incurred for reasons set out in subsection 17.3 which render impossible or impractical 10 the construction upon said parcel. In such case, a delay in the commencement of payment of Initial Ground Rent for Parcel A shall delay the commencement of payment of Initial Ground Rent for Parcel B, for the same number of days that Initial Ground Rent is delayed for Parcel A, unless the clear zone restriction applicable to Parcel B has theretofore been eliminated. 3.1.6 Due Dates and Place of Payment. All Holding Rents and ------------------------------ Ground Rents described herein shall be payable in installments due the first day of each month. Payment shall be made to the Water Department of the City of Long Beach at the office of the General Manager, 1800 E. Wardlow Road, Long Beach, California 90807. Ground Rent installments will be deemed late on the tenth (10th) day of the month and shall bear interest until the installment is paid at the rate received by the City of Long Beach on its investment portfolio during the preceding quarter, provided said interest rate shall not exceed twenty percent (20%) per year. 3.1.7 Ground Rent Credit for Extraordinary Costs. Extraordinary ------------------------------------------ pre-development costs as specified in this Section may be recovered by Developer by deducting such costs from all ground rent due (not Holding Rent), provided, however, that Ground Rent shall not be reduced by such deductions to an amount less than One Hundred Thousand and No/100 Dollars ($100,000.00) per year, and such recovery of costs 11 pursuant to this Section shall not continue after December 31, 2002. 3.1.7.1 Limitations. Extraordinary costs recoverable ----------- under this Section are limited to: (a) the actual direct cost of purchasing any existing leasehold interests within the area of the Premises; (b) the actual direct costs of demolishing and/or reconstructing any facilities of Landlord, provided that the Landlord shall have the option of demolishing and/or reconstructing such facilities at Landlord's expense; and (c) interest on items (a) and (b) immediately above, calculated at the construction loan rate and associated fees then being paid by Developer with respect to the Project. The total interest to be paid shall not exceed a rate two percent (2%) above the prime rate of Security Pacific National Bank, against such principal amount of extraordinary pre-development costs and for such term as Landlord and Developer shall agree upon. Should Landlord require that any replacement facilities be greater in size or capacity than the facilities removed, then Landlord shall pay the excess cost of the greater size or capacity, except to the extent such additional size or capacity is required to serve the Developer's project. 3.1.7.2 Approval of Costs. At least 90 days prior to making ----------------- any rent adjustments pursuant 12 to this Section, Developer shall submit to Landlord an itemized statement of extraordinary costs incurred, and a schedule showing the proposed amounts of rent credit to be taken. Said statement and schedule shall be subject to audit by Landlord as to conformity with this Lease. 3.2 Ground Rent Adjustments. ----------------------- 3.2.1 Adjustment Dates. The fair market land value and ---------------- prevailing rate of return for each parcel shall be determined in the year 2000, with respect to Ground Rent payable commencing January 1, 2001, and every five (5) years thereafter, in the event construction commences on or before September 1, 1989, or for the first time in the year 2005 with respect to Ground Rent payable commencing January 1, 2006, and every five (5) years thereafter in the event construction commences after September 1, 1989, and the Ground Rent shall be adjusted accordingly on the first (1st) day of each sixth (6th) year thereafter. Said dates of adjustment of Ground Rent shall be referred to for convenience as "adjustment dates". 3.2.2 Ground Rent Adjustments by Appraisal. With respect to each ------------------------------------ Ground Rent adjustment date, the fair market land value and prevailing rate of return shall be determined by agreement between Landlord and Developer, but should they not be able to agree at least two hundred ten (210) days prior to an adjustment 13 date, then such fair market land value and prevailing rate of return shall be determined by appraisal, according to Section 3.2.3, by an analysis of comparable land transactions committed to the same usage and either zoned for or improved with facilities of similar density and height considerations, and/or such other appraisal method(s) recognized by the appraisal profession as are appropriate for fair market land value appraisals and mutually agreed to by the appraisers at time of reevaluation as being appropriate, recognizing market conditions that prevail as of the date of value. 3.2.2.1 Adjustment for 0ff-Site Costs. The fair market land ----------------------------- value (as agreed upon by Landlord and Developer or as determined by appraisal) shall be adjusted (the "Adjusted Fair Market Land Value") in the proportion that the stated value of the land included in Parcels A and B, as set forth in Sections 3.1.2.1 and 3.1.2.2, bears to the sum of the original stated land value of the land included in Parcels A and B, plus the actual cost of off-site costs required by Landlord or the City of Long Beach as a precondition to the development of Parcel A and/or Parcel B as defined in Section 3.6 and subject to Sections 3.6 through 3.10. The Adjusted Fair Market Land Value shall be converted into an annual Ground Rent obligation based on the prevailing rate of return as determined pursuant to subsections 3.2.2 and 3.2.3.1. This adjustment for off-site costs shall only apply 14 during the Basic Term of this Lease. 3.2.3 Appraisal. In the event the parties are unable to agree --------- upon the fair market rental value or the prevailing rate of return or the method of appraisal of the Premises at any adjustment date, the fair rental value of the subject land and/or the prevailing rate of return shall be determined by appraisals prepared by two appraisers, one appointed by the Landlord at its expense and one appointed by the Developer at its expense, both of whom shall be MAI members of the American Institute of Real Estate Appraisers or a successor organization in the event the American Institute of Real Estate Appraisers ceases to exist. Said appraisers shall be appointed not more than six (6) months prior to the commencement of the rental adjustment period but, in any event, within thirty (30) days after either party has given notice in writing of inability to agree. Both appraisals must be completed and submitted to the Landlord and Developer respectively within sixty (60) days after the appointment of the appraisers. The two appraisals shall be averaged unless the higher of the two appraisals exceeds the lesser by ten percent (10%) or more, in which case the two appraisers shall appoint a third appraiser, also an MAI member of the American Institute. In order to select such third appraiser, if the two appraisers do not agree, the appraisers shall obtain a list of five appraisers from the President of the American Institute 15 of Real Estate Appraisers and shall alternately strike names from such list until one remains to become the third appraiser. The third appraiser shall be appointed by the first two appraisers within fourteen (14) days after notice from either of the parties to this Lease that the appointment of a third appraiser is necessary. The cost of such third appraiser shall be shared equally by the parties to this Lease. The third appraiser shall complete and submit the required appraisal to both parties within sixty (60) days after appointment. All appraisals shall be in the form of written reports supported by facts and analysis. The two of the three appraisers arriving at values closest to each other shall attempt to concur on a value. If they are unable to do so within thirty (30) days, the two closest appraisals shall be averaged and that value shall be the fair market value of the land or the prevailing rate of return, as appropriate. The total appraised value of both parcels shall not exceed the appraised value of the Premises. The Adjusted Fair Market Land Value shall be converted into an annual Ground Rent obligation based on the prevailing rate of return on similar ground leases then current in the market. Disagreements between the two appraisers as to the method of appraisal shall be resolved by a third appraiser, appointed in the manner described in this subsection. 3.2.3.1 Prevailing Rate of Return. As used in this Lease, ------------------------- the term "prevailing rate of return" 16 shall mean the percentage of fair market value which is charged to lessee by lessor in lease agreements for similar or comparable uses entered into or renewed in the Los Angeles/Orange County urban area during the preceding twelve months, which lease agreements are reasonably comparable in their terms to this Lease. 3.2.4 Maximum Rent Increase. The increase, if any, in Ground Rent --------------------- at the time of any adjustment date shall for Parcel A and B be limited to no more than the increase in subtenant rents as described in this section: 3.2.4.1 Allocation to Parcels. The amount of Ground Rent --------------------- attributable to each parcel shall remain in effect during the term of the Lease unless parcel areas change. 3.2.4.2. Base Sublease Rental. The base sublease rental for -------------------- each parcel shall be the total annualized rent, stabilized to exclude free rent, reduced rent or excess tenant improvement amortization or other similar concessions or considerations measured in the first year in which more than eighty percent (80%) of the rentable space on a given parcel is rented, prorated to full occupancy. If no improvements have been constructed upon Parcel B, then Parcels A and B shall be considered as one parcel fox the purpose of this Section 3.2.4 and the limitation upon increases in Ground Rent for both Parcels A and B shall be the same percentage rate of rental increase 17 applicable to Parcel A. 3.2.4.3 Sublease Rental Percentage Change The sublease --------------------------------- rental percentage change shall be determined by calculating the percentage changes in sublease rental between the base sublease rental for Parcel A and B, respectively, or for both Parcels A and B combined under the circumstances described in subsection 3.2.4.2 above and the actual sublease rental due to Developer for the same parcel or parcels in the full year preceding a Ground Rent Adjustment date, stabilized to exclude any free rent, reduced rent or excess tenant improvement amortization or other similar concessions or considerations. 3.2.4.4 Adjusted Ground Rent. The "Adjusted Ground Rent" -------------------- for each parcel (or for both Parcel A and B, if applicable) at any given adjustment period shall be the lesser of the Adjusted Fair Market Rental Value for such parcel as determined in subsection 3.2.2 above or the initial Ground Rent for such parcel plus the product of the Sublease Rental Percentage Change determined in subsection 3.2.4.3 above times the Ground Rent for such parcel or both parcels, if Section 3.2.4.2 is applicable. To the extent that the Adjusted Fair Market Rental Value is greater than the Adjusted Ground Rent, the difference may be carried forward into the next five (5) year adjusted rental period but not into any subsequent five (5) year adjusted rental periods, and thereby recovered by 18 Landlord. The amount of Ground Rent during a five (5) year adjusted rental period where there has been such a carry forward shall not exceed one hundred ten percent (110%) of the fair market Ground Rent as determined for that period. 3.2.4.5 Sale or Assignment of Leasehold Interest. Should ---------------------------------------- Developer sell, assign or otherwise transfer its leasehold interest to an owner-user such that sublease rental is not paid to Developer, the fair market sublease rental for such building, using the criteria and methods set out in subsection 3.2.2, shall become the basis for calculating the maximum rental adjustment using the process described in 3.2.4.3 above. 3.3 Ground Rent Adjustments Following Reconstruction. Developer ------------------------------------------------ contemplates, pursuant to Section 11 hereof, that during the term of this Lease, any or all of the buildings or other material improvements developed on the Premises may be demolished and new buildings or other material improvements constructed in their place in order to meet the then current market demand, subject to Landlord approval pursuant to Section 7. In the event of such demolition and new construction on either parcel, the provisions of subsection 3.2 shall be modified with respect to such parcel as set forth below in subsections 3.3.1 and 3.3.2. This subsection 3.3 shall not apply to demolition and new construction which is due to damage or destruction, as described in subsection 6.3, where said new construction is 19 limited to one for one replacement of useable or rentable floor area in the same general building configuration as that which previously existed. 3.3.1 Ground Rent Adjustments. Ground Rent for each parcel ----------------------- (or both parcels together, if subsection 3.2.4.2 is applicable) shall be adjusted according to the process set out in subsections 3.2.2 and 3.2.3 of this Lease. 3.3.1.1 Adjustment Date. The adjustment shall be effective --------------- either six (6) months after issuance of an Initial Temporary Certificate of Occupancy of the building shell or commencement of subtenant rent, whichever occurs earlier; or 3.3.1.2 Alternate Adjustment Date. In the event a regular ------------------------- five (5) year Ground Rent adjustment date for the parcel, as established in subsection 3.2.1, occurs after commencement of demolition of a building on said parcel and prior to completion of construction of a new building in its place, said adjustment shall take place on schedule and shall be based upon the assumption that construction of the planned new building has been completed. 3.3.2 No Adjustment At Next Scheduled Adjustment Date. ----------------------------------------------- There shall be no Ground Rent adjustment for such parcel at the next scheduled adjustment date, but all subsequent Ground Rent adjustments shall occur on the schedule set out in subsection 3.2.1. 20 3.3.3 Maximum Ground Rent Adjustment. For purposes of ------------------------------ determining the maximum Ground Rent increase under subsection 3.2.4 at the time of the next Ground Rent adjustment and thereafter, the base sub-lease rental described in subsection 3.2.4 shall be established with respect to the new building or buildings constructed on the parcel (with Parcel A and B to be considered together if subsection 3.2.4.2 is applicable). 3.4 Adjustments to Ground Rent During Option Term. At the commencement --------------------------------------------- of each option term, and at the end of each five (5) years of each option term, the Ground Rent shall be determined as provided in subsection 3.2.2, but with no adjustment thereto as is provided in said subsection 3.2.2.1. The fair market land value shall be converted into an annual Ground Rent obligation based on the rate of return then current in the market for parcels which are currently and fairly appraised. 3.5 Maximum Ground Rent Increase. However, the increase in Ground ---------------------------- Rent at the end of five (5) years of each option term shall be subject to the provisions of subsection 3.2.4, with the first year of the option term as the base period for determining sublease rental and the fifth (5th) year of the option term being the adjustment year for determining actual rental received, both to be stabilized to exclude any free rent, reduced rent, excess tenant improvement amortization or other similar concessions or considerations. The Ground Rent commencing the sixth (6th) year of any option term cannot increase at a percentage rate greater than the percentage increase in sublease 21 rentals from the base year to the adjustment year. 3.6 Definition of Offsite Costs. For purposes of this Lease, Offsite --------------------------- Costs shall include all costs actually incurred by Developer, which costs are required by Landlord or the City of Long Beach as a precondition to the development of Parcel A and/or Parcel B. Offsite Costs shall not include any costs directly associated with the construction of buildings or parking upon the Premises. 3.7 Approval of Improvement Plans. Prior to commencement of any ----------------------------- construction of items identified in Section 3.6, Developer shall submit to Landlord engineering plans and costs estimates for said items. Specifications for all improvements shall meet the standard specifications of the City of Long Beach for such improvements. Landlord shall review said plans for conformity with the requirements of Landlord and/or the City of Long Beach and approve or disapprove them as to such conformity in accordance with the procedures and criteria set out in subsection 7.3.7. 3.8 Determination of Offsite Costs. Following receipts of bids, and ------------------------------ prior to the award of a contract for construction of items shown on the plans approved pursuant to subsections 3.7 and 7.5.3 ("Approved Plans"), Developer shall submit to Landlord all bids received and a statement indicating which bid Developer intends to accept. The bid shall identify each item of cost in the same manner as the estimate of costs submitted pursuant to subsection 3.7. Landlord shall have the right to assert that any such item of cost is excessive on the basis of Landlord's experience with comparable construction, 22 taking into consideration the total cost of the work, and Developer and Landlord shall attempt to arrive at an agreed cost for said item. In the event Developer and Landlord are unable to arrive at an agreed cost, then Developer and Landlord shall accept the decision of a jointly appointed independent registered civil engineer with experience in similar matters, who shall be directed to consider the positions of both Developer and Landlord and to establish within five (5) days, or such longer time as may be mutually agreed by Developer and Landlord, the agreed cost for any contested items, again taking into consideration the total cost of the work. The actual bid cost, or the agreed cost, where the bid cost is disputed, shall be deemed to be the actual cost of construction for each cost item to the extent that such costs are actually incurred as a result of the installation or construction of items or quantities of materials. Landlord shall have the right to monitor the construction of all items included in the Approved Plans to ensure that such construction is in accordance with the Approved Plans and the approved costs. During the period of construction, Landlord, through the Director of Public Works of the City of Long Beach, or the General Manager of Landlord, and Developer may agree upon modifications to the Approved Plans and to the bid costs or agreed costs as may be required by unforeseen conditions. Upon completion of construction, the aggregate of all costs which have been approved by the operation of this subsection, and which are actually incurred, less any costs paid by Landlord, shall become the amount of "Offsite Costs" referred 23 to in subsection 3.2.2.1. Landlord shall have the right to audit and review all contracts, invoices, payments, and other pertinent materials as may be necessary to confirm the actual costs incurred. 3.9 Construction by Landlord. The City of Long Beach or Landlord ------------------------ shall design and install all traffic signals and modifications thereto if any are included in the plans approved pursuant to subsection 3.7. Such installation shall be paid for by Landlord or Developer, at Landlord's option. All Offsite Costs shall be paid by Developer. 3.10 Phasing of Improvements. Developer shall have the right to ----------------------- design and construct improvements in phases, in accordance with a phasing plan which shall be approved by Landlord. Plans, estimates of costs, and bids for phases of work shall be treated in the same manner as set out in subsections 3.7 through 3.9. 4. LEASEHOLD MORTGAGES: ------------------- 4.1 Leasehold Mortgage Authorized. On one or more occasions ----------------------------- Developer may take back a Purchase Money Leasehold Mortgage upon a sale and assignment of the Leasehold Estate created by this Lease or may mortgage or otherwise encumber Developer's Leasehold Estate to an Institutional Lender (as hereinafter defined), under one or more Leasehold Mortgages and assign this Lease as security for such Mortgage or Mortgages. 4.2 Notice to Landlord. ------------------ 4.2.1 Leasehold Mortgage Requirements. If Developer shall, ------------------------------- on one or more occasions, take back a 24 Purchase Money Leasehold Mortgage upon a sale and assignment of the Leasehold Estate or shall mortgage Developer's Leasehold Estate to an Institutional Lender, and if the Holder of such Leasehold Mortgage shall provide Landlord with notice of such Leasehold Mortgage together with a true copy of such Leasehold Mortgage and the name and address of the Mortgagee, Landlord and Developer agree that, following receipt of such notice by Landlord, the provisions of this Section 4 shall apply in respect to each such Leasehold Mortgage. 4.2.2 Assignment of Leasehold Mortgage. In the event of any -------------------------------- assignment of a Leasehold Mortgage or in the event of a change of address of a Leasehold Mortgagee or of an assignee of such Mortgage, notice of the new name and address shall be provided to Landlord within ten (10) days after completion of such assignment. 4.2.3 Landlord's Acknowledgement of Notice. Landlord shall ------------------------------------ promptly upon receipt of a communication purporting to constitute the notice provided for by subsections 4.2.1 or 4.2.2, above, acknowledge by an instrument in recordable form receipt of such communication as constituting the notice provided for by subsections 4.2.1 or 4.2.2, or, in the alternative, notify Developer and the Leasehold Mortgagee of the rejection of such communication as not conforming with the provisions of subsections 4.2.1 or 4.2.2, and specify the specific basis of such rejection. 25 4.2.4 Developer to Provide Copies. After Landlord has received --------------------------- the notice provided for by subsections 4.2.1 or 4.2.2 above, Developer, upon being requested to do so by Landlord, shall within ten (10) days provide Landlord with copies of the note or other obligation secured by such Leasehold Mortgage and of any other documents pertinent to the Leasehold Mortgage as specified by Landlord. If requested to do so by Landlord, Developer shall thereafter also provide Landlord from time to time with a copy of each amendment or other modification or supplement to such instruments. All recorded documents shall be accompanied by the appropriate certification of the Custodian of the Recording Office as to their authenticity as true and correct copies of the official records and all non-recorded documents shall be accompanied by a certification by Developer that such documents are true and correct copies of the originals. From time to time upon being requested to do so by Landlord, Developer shall also notify Landlord of the date and place of recording and other pertinent recording data with respect to such instruments as have been recorded. 4.3 Definitions. ----------- 4.3.1 Institutional Lender. The term "Institutional Lender" as used -------------------- in this Section 4 shall refer to a savings bank, savings and loan association, commercial bank, trust company, credit union, insurance company, college, university, real estate investment 26 trust or pension fund. The term "Institutional Lender" shall also include other lenders of substance which have assets in excess of Fifty Million and No/l00 Dollars ($50,000,000.00) at the time the Leasehold Mortgage is made. 4.3.2 Leasehold Mortgage. The term "Leasehold Mortgage" as ------------------ used in this Section 4 shall include a mortgage, a deed of trust, a deed to secure debt, or other security instrument by which Developer's Leasehold Estate is mortgaged, conveyed, assigned or otherwise transferred, to secure a debt or other obligation. 4.3.3 Leasehold Mortgagee. The term "Leasehold Mortgagee" ------------------- as used in this Section 4 shall refer to a holder of a Leasehold Mortgage in respect to which the notice provided for by subsection 4.2 has been given and received and as to which the provisions of this Section 4 are applicable. 4.4 Consent of Leasehold Mortgagee Required. No cancellation, --------------------------------------- surrender or modification of this Lease shall be effective as to any Leasehold Mortgagee unless consented to in writing by such Leasehold Mortgagee. 4.5 Default Notice. Landlord upon providing Developer any notice -------------- of: (i) default under this Lease, (ii) a termination of this Lease, or (iii) a matter of which Landlord may predicate or claim a default, shall at the same time provide a copy of such notice to every Leasehold Mortgagee. No such notice by Landlord to Developer shall be deemed to have been duly given unless and until a copy thereof has been so provided to 27 every Leasehold Mortgagee having a lien upon the Premises. From and after the date such notice has been given to a Leasehold Mortgagee, such Leasehold Mortgagee shall have the same period, after giving of such notice upon it, for remedying any default or acts or omissions which are the subject matter of such notice or causing the same to be remedied, as is given Developer after the giving of such notice to Developer, plus in each instance, the additional periods of time specified in subsections 4.6 and 4.7 to remedy, commence remedying or cause to be remedied the defaults or acts or omissions which are the subject matter of such notice specified in any such notice. Landlord shall accept such performance by or at the instigation of such Leasehold Mortgagee as if the same had been done by Developer. Developer authorizes each Leasehold Mortgagee to take any such action at such Leasehold Mortgagee's option and does hereby authorize entry upon the Premises by the Leasehold Mortgagee for such purpose. 4.6 Notice to Leasehold Mortgagee. ----------------------------- 4.6.1 Landlord's Termination Notice. Anything contained in ----------------------------- this Lease to the contrary notwithstanding, if any default shall occur which entitles Landlord to terminate this Lease, Landlord shall have no right to terminate this Lease unless, following the expiration of the period of time given Developer to cure such default or the act or omission which gave rise to such default, Landlord shall notify every Leasehold Mortgagee of Landlord's intent to so terminate ("Termination Notice") at least thirty (30) days in advance of the 28 proposed effective date of such termination if such default is capable of being cured by the payment of money ("Termination Notice Period"), and at least sixty (60) days in advance of the proposed effective date of such termination if such default is not capable of being cured by the payment of money (also a "Termination Notice Period"). The provisions of subsection 4.7, shall apply if, during such thirty (30) or sixty (60) day Termination Notice Period, any Leasehold Mortgagee shall: 4.6.1.1 Notify Landlord of such Leasehold Mortgagee's desire to nullify such notice; and 4.6.1.2 Pay or cause to be paid all Ground Rent, additional rent and other payments then due and in arrears as specified in the Termination Notice to such Leasehold Mortgagee and which may become due during such thirty (30) or sixty (60) day Termination Notice Period; and 4.6.1.3 Comply or in good faith, with reasonable diligence and continuity, commence to comply with all nonmonetary requirements of this Lease then in default and reasonably susceptible of being complied with by such Leasehold Mortgagee; provided however, that such Leasehold Mortgagee shall not be required during such sixty (60) day Termination Notice Period to cure or commence to cure any default consisting of Developer's failure to satisfy and discharge any lien, charge or encum- 29 brance against the Developer's interest in this Lease or the Premises junior in priority to the lien of the mortgage held by such Leasehold Mortgagee. 4.6.2 Proper Address of Leasehold Mortgagee. Any notice to be given ------------------------------------- by Landlord to a Leasehold Mortgagee pursuant to any provision of this Section 4 shall be deemed properly addressed if sent to the Leasehold Mortgagee who served the notice referred to in subsection 4.2.1 unless notice of a change of Mortgage ownership has been given to Landlord pursuant to subsection 4.2.2. 4.7 Procedure on Default. -------------------- 4.7.1 Extension of Termination Notice Period. If Landlord shall elect -------------------------------------- to terminate this Lease by reason of any default of Developer, and a Leasehold Mortgagee shall have proceeded in the manner provided for by subsection 4.6, the specified date for the termination of this Lease as fixed by Landlord in its Termination Notice shall be extended for a period of six (6) months, provided that such Leasehold Mortgagee shall during such six (6) month period: 4.7.1.1 Payment of Monetary Obligations. Pay or cause to be paid ------------------------------- the Ground Rent, additional rent and other monetary obligations of Developer under this Lease as the same become due, and continue its good faith efforts to perform all of Developer's other obligations under this Lease. 30 4.7.1.2 Foreclosure of Leasehold Mortgage. If not enjoined or --------------------------------- stayed, take steps to acquire or sell Developer's interest in this Lease by foreclosure of the Leasehold Mortgage or other appropriate means and prosecute the same to completion with due diligence. 4.7.2 Cure of Default. If at the end of such six (6) month period --------------- such Leasehold Mortgagee is complying with subsections 4.7.1.1 and 4.7.l.2, this Lease shall not then terminate, and the time for completion by Leasehold Mortgagee of its proceedings shall continue so long as such Leasehold Mortgagee is enjoined or stayed and thereafter for so long as such Leasehold Mortgagee proceeds to complete steps to acquire or sell Developer's interest in this Lease by foreclosure of the Leasehold Mortgage or by other appropriate means with reasonable diligence and continuity. Nothing in this subsection 4.7, however, shall be construed to extend this Lease beyond the original term thereof as extended by any options to extend the term of this Lease properly exercised by Developer or a Leasehold Mortgagee in accordance with subsection 2.1, nor to require a Leasehold Mortgagee to continue such foreclosure proceedings after the default has been cured. If the default shall be cured and the Leasehold Mortgagee shall discontinue such foreclosure proceedings, this Lease shall continue in full force and effect as if Developer had not defaulted under this Lease. 31 4.7.3 Compliance of Leasehold Mortgagee. If a Leasehold Mortgagee is --------------------------------- complying with subsection 4.7.1 upon the acquisition of Developer's Leasehold Estate herein by such Leasehold Mortgagee or its designee or any other purchaser at a foreclosure sale or otherwise this Lease shall continue in full force and effect as if Developer had not defaulted under this Lease. 4.7.4 Leasehold Mortgage Not an Assignment. For the purposes of this ------------------------------------ Section 4, the making of a Leasehold Mortgage issued by an institutional lender shall not be deemed to constitute an assignment or transfer of this Lease or of the Leasehold Estate hereby created, nor shall any Leasehold Mortgagee, as such, be deemed to be an assignee or transferee of this Lease or of the Leasehold Estate hereby created so as to require such Leasehold Mortgagee, as such, to assume the performance of any of the terms, covenants or conditions on the part of Developer to be performed hereunder, but the purchaser at any sale of this Lease and of the Leasehold Estate hereby created in any proceedings for the foreclosure of any Leasehold Mortgage, or the assignee or transferee of this Lease and of the Leasehold Estate hereby created under any instrument of assignment or transfer in lieu of the foreclosure of any Leasehold Mortgage shall be deemed to be an assignee or transferee within the meaning of this Section 4, and shall be deemed to have agreed to perform all of the terms, covenants and conditions on the part 32 of Developer to be performed hereunder from and after the date of such purchase and assignment, but only for so long as such purchaser or assignee is the owner of the Leasehold Estate. Provided, however, that Developer shall, as to such Leasehold Mortgagee, provide to Landlord the same information which Developer must supply pursuant to this Lease as assignee. 4.7.5 Obligation of Leasehold Mortgagee to Repair or Reconstruct. If ---------------------------------------------------------- the Leasehold Mortgagee or its designee shall become holder of the Leasehold Estate, and if the buildings and improvements on the Premises shall have been or become materially damaged on, before or after the date of such purchase and assignment, the Leasehold Mortgagee or its designee shall be obligated to repair, replace or reconstruct the building or other improvements only to the extent of the net insurance proceeds received by the Leasehold Mortgagee or its designee by reason of such damage. However, should such net insurance proceeds be insufficient to repair, replace or reconstruct the building or other improvements to the extent required by subsection 6.3, and should the Leasehold Mortgagee or its designee choose not to fully reconstruct the building or other improvements to the extent required by subsection 6.3, such failure shall constitute an event of default under this Lease which shall entitle Landlord to commence proceedings to terminate the Lease. 33 4.7.6 Leasehold Mortgagee's Right to Transfer. Any Leasehold --------------------------------------- Mortgagee or other acquirer of the Leasehold Estate of Developer pursuant to foreclosure, assignment in lieu of foreclosure or other proceedings may, upon acquiring Developer's Leasehold Estate, without further consent of Landlord, assign the Leasehold Estate one time on such terms and to such persons and organizations as are acceptable to such Mortgagee or acquirer and thereafter be relieved of all obligations under this Lease; provided that such assignee has delivered to Landlord its written agreement to be bound by all of the provisions of this Lease. Any further attempts by the Leasehold Mortgagee to assign shall comply with the provisions of this Lease relating to Assignment. 4.7.7 Leasehold Mortgagee Transfer a Permitted Sale. Notwithstanding --------------------------------------------- any other provisions of this Lease, any sale of this Lease and of the Leasehold Estate hereby created in any proceedings for the foreclosure of any Leasehold Mortgage, or the assignment or transfer of this Lease and of the Leasehold Estate hereby created in lieu of the foreclosure of any Leasehold Mortgage shall be deemed to be a permitted sale, transfer or assignment of this Lease and of the Leasehold Estate hereby created. 4.8 New Lease. --------- 4.8.1 Terms of New Lease. In the event of the termination of this ------------------ Lease as a result of Developer's 34 default Landlord shall, in addition to providing the notices of default and termination as required by subsections 4.5 and 4.6, provide each Leasehold Mortgagee with written notice that the Lease has been terminated, together with a statement of all sums which would at that time be due under this Lease but for such termination, and of all other defaults, if any, then known to Landlord. Landlord agrees to enter into a new lease ("New Lease") of the Premises with such Leasehold Mortgagee, or its designee for the remainder of the term of this Lease, effective as of the date of termination, at the Ground Rent and additional rent, and upon the terms, covenants and conditions, including all first rights of refusal and options to renew or purchase, but excluding requirements which are not applicable or which have already been fulfilled of this Lease, provided: 4.8.1.1 Written Request to Landlord. Such Leasehold Mortgagee --------------------------- shall make written request upon Landlord for such New Lease within thirty (30) days after the date such Leasehold Mortgagee receives Landlord's Notice of Termination of this Lease given pursuant to this subsection 4.8. 4.8.1.2 Payment of Obligations. Such Leasehold Mortgagee or its ---------------------- designee shall pay or cause to be paid to Landlord at the time of execution and delivery of such New Lease, any and all sums which would at the time of execution and delivery thereof be due pursuant to this Lease but 35 for such termination and, in addition thereto, all reasonable expenses, including reasonable attorney's fees, which Landlord shall have incurred by reason of such termination and the execution and delivery of the New Lease and which would not otherwise have been received by Landlord from Developer or other party in interest under Developer. In the event of a controversy as to the amount to be paid to Landlord pursuant to this subsection 4.8.1.2, the payment obligation shall be satisfied if Landlord shall be paid the amount not in controversy, and the Leasehold Mortgagee or its designee shall agree to pay any additional sum ultimately determined to be due plus interest at the rate set forth in subsection 3.1.6, and such obligation shall be adequately secured. 4.8.1.3 Remedy of Developer's Defaults. Such Leasehold Mortgagee or ------------------------------ its designee shall agree to remedy any of Developer's defaults of which said Leasehold Mortgagee is or may be notified by Landlord's Notice of Termination and which are reasonably susceptible of being so cured by Leasehold Mortgagee or its designee. 4.8.1.4 New Lease to Have First Priority. Any New Lease made -------------------------------- pursuant to this subsection 4.8 and any Subdivided Lease entered into pursuant to subsection 7.6 and any Single Lease entered into pursuant to subsection 7.7, shall be prior to any 36 mortgage or other lien, charge or encumbrance on the fee of the Premises and the Developer under such New Lease, Single Lease or Subdivided Lease, as the case may be, shall have the same right, title and interest in and to the Premises and the buildings and improvements thereon as Developer had under this Lease. 4.8.1.5 Developer's Obligations Under New Lease. The Developer --------------------------------------- under any such New Lease, Single Lease or Subdivided Lease shall be liable to perform the obligations imposed on the Developer by such New Lease, Single Lease or Subdivided Lease only during the period such person or entity has ownership of such Leasehold Estate. 4.9 New Lease Priorities. If more than one Leasehold Mortgagee -------------------- shall request a New Lease pursuant to subsection 4.8.1, Landlord shall enter into such New Lease with the Leasehold Mortgagee whose mortgage is prior in lien or with the designee of such Leasehold Mortgagee. Landlord, without liability to Developer or any Leasehold Mortgagee with an adverse claim, may rely upon mortgagee title insurance policy issued by a responsible title insurance company doing business within the State of California as the basis for determining the appropriate Leasehold Mortgagee who is entitled to such New Lease. 4.10 Eminent Domain. Developer's share, as provided by subsection -------------- 10.3, of the proceeds arising from an exercise of the power of Eminent Domain shall, subject to the provision of such subsection 10.3, be disposed of as provided for by any 37 Leasehold Mortgagee. 4.11 Notice of Arbitration. Landlord shall give each Leasehold --------------------- Mortgagee prompt notice of any appraisal, arbitration or legal proceedings between Landlord and Developer involving obligations under this Lease. Landlord shall give the Leasehold Mortgagee notice of, and a copy of any award or decision made in any such proceedings, which shall be binding on all Leasehold Mortgagees. 4.12 Amendment to Facilitate Leasehold Financing. Landlord hereby ------------------------------------------- agrees that if any Institutional Lender to whom Developer proposes to make a Leasehold Mortgage on Developer's Leasehold Estate shall require as a condition to making any loan secured by such mortgage that Landlord agree to modifications of this Lease, then Landlord agrees that it will enter into an agreement with Developer in recordable form making the modifications that are requested by such lender, provided that such changes do not adversely affect any right of Landlord under this Lease. 4.13 Security Deposit. If any Leasehold Mortgagee, its designee or ---------------- other purchaser has acquired the Leasehold Estate of Developer pursuant to foreclosure, conveyance in lieu of foreclosure or other proceedings, or has entered into a New Lease with Landlord in accordance with subsection 4.8, such Leasehold Mortgagee, its designee or other purchaser shall succeed to the rights of Developer, if any, in and to the security deposits paid by Developer to Landlord pursuant to subsections 16.1 and 16.2. In such event, Developer shall no longer have any rights to such security deposits, and Landlord shall hold such security deposits 38 for and on behalf of such Leasehold Mortgagee, its designee or other purchaser. 4.14 Estoppel Certificate. Landlord shall at any time and from time -------------------- to time hereafter, but not more frequently than twice in any one-year period (or more frequently if such request is made in connection with any sale or mortgaging of Developer's Leasehold Interest or permitted subletting by Developer), within ten (10) days after written request of Developer to do so, certify by written instrument duly executed and acknowledged to any Mortgagee or purchaser, or proposed Mortgagee or proposed purchaser, or any other person, firm or corporation specified in such request: (i) as to whether this Lease has been supplemented or amended, and if so, the substance and manner of such supplement or amendment; (ii) as to the validity and force and effect of this Lease, in accordance with its tenor; (iii) as to the existence of any default hereunder; (iv) as to the existence of any offsets, counter claims or defenses hereto on the part of Developer; (v) as to the commencement and expiration dates of the term of this Lease; and (vi) as to any other matters as may be reasonably so requested. Any such certificate may be relied upon by Developer and any other person, firm or corporation to whom the same may be exhibited or delivered, and the contents of such certificate shall be binding on Landlord. Any party requesting such estoppel certificate shall reimburse Landlord for its costs and expenses incurred in issuing such certificate. 4.15 Notices. Notices from Landlord to the Leasehold Mortgagee ------- shall be mailed to the address furnished Landlord 39 pursuant to subsection 4.2 , and those from the Leasehold Mortgagee to Landlord shall be mailed to the address designated pursuant to the provisions of subsection 1.5.1 hereof, attention the General Manager. Such notices, demands and requests shall be given in the manner described in subsection 17.1 and shall in all respects be governed by the provisions of that subsection. 4.16 Erroneous Payments. No payment made to Landlord by a Leasehold ------------------ Mortgagee shall constitute agreement that such payment was, in fact, due under the terms of this Lease; and a Leasehold Mortgagee having made any payment to Landlord pursuant to Landlord's wrongful, improper or mistaken notice or demand shall be entitled to the return of any such payment or portion thereof provided such Leasehold Mortgagee shall have made demand therefor not later than ninety (90) days after the date of its payment. 4.17 Request for Notice for Benefit of Landlord. Immediately after ------------------------------------------ recording any Leasehold Mortgage encumbering Developer's Leasehold Estate, Developer, at Developer's expense, shall cause to be recorded in the Office of the Recorder of Los Angeles County, California, a written request of notice under Section 2924(b) of the California Civil Code providing that a copy of any notice of default and a copy of any notice of sale under such Leasehold Mortgage shall be delivered to Landlord as provided for under said Section 2924(b) of the California Civil Code. Such request shall be executed by Landlord. Concurrently, with Developer's forwarding such notice for recordation, Developer shall furnish to Landlord a complete copy of the Leasehold Mortgage and the note secured thereby, together with the name and 40 address of the holder thereof. Said note and mortgage are to be kept by Landlord on a confidential basis to the extent permitted by law. 4.18 Release or Forebearance. If any such lender shall fail or ----------------------- refuse to comply with any and all of the conditions of this section, then and thereupon Landlord shall be released from its covenant of forebearance with such lender herein contained. 4.19 Notice. Landlord's obligation to observe its covenants of ------ forebearance in this section for the benefit of any lender on the security of the Leasehold Estate, except as may be otherwise provided by law, shall be conditioned upon there having been first delivered to the General Manager of the Water Department of the City of Long Beach, a written notice of such encumbrance which shall state the name and address of such lender for the purpose of enabling notices to be given under subsection 4.2 above. 4.20 No Merger. No merger of Developer's Leasehold Estate into --------- Landlord's fee title shall result by reason of the ownership of Landlord's or Developer's estates by the same party or by reason of any other circumstances, without the prior consent of any and all lenders on the security of the Leasehold Estate. 4.21 No Payment by Landlord. Landlord shall not be required to ---------------------- execute any instrument which would obligate Landlord to the payment of any loan or any part thereof. 4.22 Self Liquidating Mortgage. The Leasehold Mortgage shall be a ------------------------- self liquidating mortgage, to be paid over a period not longer than elapses up to three (3) years prior to the 41 end of the term of this Lease, or any option term if such option has been exercised. 4.23 Leasehold Mortgagee Need Not Cure Specified Defaults. Nothing ---------------------------------------------------- herein contained shall require any Leasehold Mortgagee or its designee as a condition to its exercise of right hereunder to cure any default of Developer which cannot be cured by such Leasehold Mortgagee or its designee, in order to comply with the provisions of subsections 4.6 or 4.7 or as a condition of entering into the New Lease provided for by subsection 4.8. 4.24 Casualty Loss. A Standard Mortgagee Clause naming each Lease- ------------- hold Mortgagee may be added to any and all insurance policies required to be carried by Developer hereunder on condition that the insurance proceeds are to be applied in the manner specified in this Lease and the Leasehold Mortgage shall so provide, except that the Leasehold Mortgage may provide a manner for the disposition of such proceeds, if any, otherwise payable directly to Developer. 5. ASSIGNMENT AND SUBLETTING: ------------------------- 5.1 Prohibition Against Change in Ownership, Management and Control. --------------------------------------------------------------- The qualifications and identities of Developer are of particular concern to Landlord. It is because of those qualifications and identities that Landlord has entered into this Lease with Developer. No voluntary or involuntary successor in interest shall acquire any rights or powers under this Lease except as expressly provided for in this Lease. Except as otherwise permitted by this Section 5 and subsection 1.5.3, Developer shall not permit any significant 42 change (voluntary or involuntary) in the ownership, management or control of Developer to occur unless such change is approved by Landlord, subject to the requirements of this section and reasonable conditions imposed by Landlord. Except as otherwise permitted by this Section 5 and subsection 1.5.3, Developer may not assign this Lease or any interest herein without first obtaining the written consent of Landlord, pursuant to subsection 5.4 of this Lease. Any assignee shall assume and agree to perform the obligations of Developer under this Lease. Promptly following any permitted assignment, Developer shall deliver to Landlord a copy of such assignment, together with a statement setting forth the following information: 5.1.1 Name and Address for Notices. The name and address of the ---------------------------- assignee for the purpose of enabling notices to be given. 5.1.2 Type of Entity. Whether the assignee is an individual, a -------------- corporation, a partnership or a joint venture, and if such assignee is a corporation, the names of such corporation's principal officers and of its directors and State of incorporation, and if such assignee is a partnership or joint venture, the names and addresses of the general partners of such partnership or venture. 5.1.3 Other Transfers. In the event that Developer is a partner- --------------- ship, joint venture or corporation, any assignment of twenty-five percent (25%) or more of the partnership or joint venture interest or outstanding capital stock of such an entity shall con- 43 stitute an assignment by Developer of this Lease for the purposes of this Section 5 and shall not be permitted to occur without first obtaining the written consent of Landlord, which consent shall not unreasonably be withheld, delayed or conditioned. 5.1.4 Buildings or Land. In addition to all other assignments, ----------------- which must be approved in advance by Landlord, any assignment of 50,000 square feet of land or office space must be approved in advance by Landlord 5.2 Assignments Not Subject to Approval. The provisions of this ----------------------------------- Section 5 shall not be applicable to the following types of assignments and transfers, which shall be permitted without the prior consent of Landlord. 5.2.1 Death or Incapacity. Assignments resulting from the death or ------------------- mental or physical incapacity of an individual, provided, however, that any person replacing an individual who departs because of physical or mental disability shall have education and experience comparable to that of the person replaced. 5.2.2 Family Transfer. A transfer or assignment for the benefit of a --------------- spouse, children, grandchildren or other family members. 5.2.3 Affiliated Corporation. A transfer to an "Affiliated ---------------------- Corporation" as hereinafter defined. An "Affiliated Corporation" shall be (i) any corporation which owns fifty-one percent (51%) or more of the outstanding capital stock of the assigning corporation; or (ii) any corporation, fifty-one percent (51%) or more 44 of the outstanding capital stock of which is owned by the assigning corporation; or (iii) any corporation, fifty-one percent (51%) or more of the outstanding capital stock of which is owned by a shareholder or group of shareholders who also owns at least fifty-one percent (51%) of the outstanding capital stock of the assigning corporation. 5.2.4 IRS Transfer. A transfer of stock resulting from or in ------------ connection with a reorganization as contemplated by the provisions of the Internal Revenue Code of 1954, as amended, or otherwise, in which the ownership interests of a corporation are assigned directly or by operation of law to a person or persons, firm or corporation which acquires the control of the voting capital stock of such corporation or all or substantially all of the assets of such corporation. 5.2.5 Public Entity. A transfer of stock in a publicly held ------------- corporation or of the beneficial interest in any publicly held partnership or real estate investment trust. 5.2.6 Partner. A transfer by a limited partner or joint venturer to ------- a partnership or joint venture in which the assignor is a partner or venturer. 5.2.7 Comprising Entity. A transfer or assignment from one partner ----------------- or joint venturer comprising Developer to another; or if Developer is a corporation from one shareholder to another. 45 5.3 Assignment Invalid. Any transfer or assignment to which ------------------ Landlord's consent is required by subsection 5.1 shall be void and shall confer no right to occupancy upon the assignee unless and until such consent of Landlord is obtained. Such approval may be conditioned or refused in response to the matters specified herein. 5.4 Approval of Assignments. Landlord agrees that it shall consent to ----------------------- an assignment to a subtenant and to an assignment which, at the time of such assignment, is of such financial standing and responsibility as to give reasonable assurance that the payment of all Ground Rent and other amounts reserved in this Lease will be made in compliance with all the terms, covenants, provisions and conditions of this Lease. In requesting an approval by Landlord of assignment pursuant to subsection 5.1, Developer shall provide the following information to Landlord with respect to proposed assignments of 50,000 square feet of rentable building area or land area, or more, of sublease space, with respect to any Ground Sublease and with respect to assignments of a parcel or an interest in this Ground Lease. 5.4.1 Name. Name and address of the assignee. ---- 5.4.2 Description. Description of the Premises to be assigned. ----------- 5.4.3 Nature of Business. The nature of the business conducted by ------------------ assignee on the Premises to be assigned. 5.4.4 Financial Information. Financial strength of the subtenant or --------------------- assignee (if the subtenant is a publicly held company, a copy of its most recent 46 annual report; if the subtenant or assignee will not disclose financial information, a report from recognized credit rating agency, such as Dun & Bradstreet). 5.4.5 Officers. The identity, background and experience of all -------- officers and directors of assignee, at executive vice president level and above and senior operational officer relating to the Premises, if a corporation or general partners of a partnership or sole proprietor of a proprietorship (Principals). 5.4.6 Additional Information. To the extent known by Developer, the ---------------------- following information: 5.4.6.1 Criminal record of the subtenant assignee or any of the Principals. 5.4.6.2 Nature and extent of litigation to which the subtenant, assignee or any Principal is a party. 5.4.6.3 Any course of conduct which a prudent person would deem materially detrimental to the Project or to the intended use of the Premises by the subtenant or assignee. 5.4.7 Informational Purposes. For informational purposes only: ---------------------- 5.4.7.1 Number of anticipated employees of the assignee. 5.4.7.2 At the time of submission of the request, the terms and conditions of the assignment. 5.4.7.3 With respect to all assignment copy thereof after execution by all parties thereto. 47 5.4.8 Confidentiality. If requested by Developer at the time of --------------- submission of the information described above, Landlord shall keep such information and the identity of the proposed sublessee or assignee confidential and Landlord shall execute a confidentiality statement so providing to the extent Landlord is permitted by law to do so. 5.4.9 Disapproval by Landlord. Landlord reserves the right to ----------------------- reject any proposed assignee where the matters specified in 5.4.3, 5.4.4, 5.4.5 or 5.4.6 above indicate that the presence of assignee would not be in the public interest or would adversely affect the financial viability of the Project. Landlord shall either approve or disapprove any proposed assignee within fifteen (15) days after receipt by Landlord of a request to do so. Failure of Landlord to act within said fifteen (15) days shall constitute approval. If Landlord does not approve any proposed assignee, Landlord shall state in writing the reasons for such disapproval. Developer shall have the right to challenge the validity of such disapproval. No damages shall be payable to Developer in any action arising from such disapproval unless Landlord shall have acted unreasonably or in bad faith or with actual malice. 5.5 No Release. Notwithstanding any assignment by Developer permitted ---------- by subsection 5.1 with Landlord's consent, and notwithstanding any assignment by a partner or joint venturer of Developer permitted by subsection 5.1.3 with Landlord's consent 48 or made without Landlord's consent pursuant to subsection 5.2, the assigning party shall remain fully liable for the performance of all of the covenants to be performed by Developer under this Lease prior to the effective date of such assignment but Developer shall be released from liability with respect to the performance of this Lease after the effective date of such assignment. Landlord's approval of or consent to any such assignment or transfer shall not be a waiver of any right to object to further or future assignments, and Landlord's consent to each such successive assignment must be first obtained in writing from Landlord unless otherwise permitted by this Lease without Landlord's prioritsconsent. 5.6 Unauthorized Change. This Lease may be terminated by the Landlord ------------------- if there is any significant change (voluntary or involuntary) other than those authorized in Section 5 or subsection 1.5.3 hereof, or not requiring Landlord's approval of ownership, management or control of the Developer prior to the completion of the development of the site, unless such changes have been approved by the Landlord. 5.7 Subletting. Developer shall be entitled, with the prior written ---------- consent of Landlord, to sublet the wits hole or any portion of the Premises or the improvements constructed thereon by or under Developer and, without limiting the foregoing, may establish a leasehold condominium regime on the Premises, or portions thereof, in accordance with the provisions of California law, including California Civil Code Sections 783 and 1350-1360. Developer shall, at all times, remain liable for the performance of all of the covenants on its part to be so performed, notwith- 49 standing any subletting. Each sublease shall be subject and subordinate not only to this Lease, but also to any New Lease made by Landlord as provided in Section 4.8 above. If the term of this Lease shall end while any such sublease is in effect, Landlord may, at its option, for a period of ninety (90) days thereafter, either terminate the said sublease or succeed to all of the rights of Developer thereunder. Where any sublease which is consistent with this Lease is approved, Landlord may grant to the subtenant, under such an approved sublease entered into in good faith and for reasonable consideration, a right of quiet enjoyment in recordable from (a "nondisturbance agreement") during the term of the sublease, notwithstanding the expiration, termination or cancellation of this Lease; provided that (i)) the term of the sublease, plus extension or renewal options, does not extend beyond the term of this Lease, plus extension options; (ii) such subtenant agrees that in the event this Lease expires, terminates or is cancelled during the term of the sublease, the sublease shall be deemed a direct lease between Landlord and such subtenant and the subtenant shall attorn to Landlord. In the event that Landlord objects to any proposed nondisturbance agreement or sublease, Landlord agrees to notify Developer in writing of such objection and of its reasons for such objection within twenty (20) days of its receipt of the proposed nondisturbance agreement and sublease. Subject to the foregoing provisions of this subsection 5.7, Landlord hereby approves generally of the form of nondisturbance agreement attached hereto as Exhibit "C". Any approvals or grants of quiet enjoyment given or made by Landlord pursuant to this subsection 5.7 shall be binding upon Land- 50 lord, its successors or assigns, including without limitation any person or entity succeeding to the interest of Landlord by way of judicial foreclosure or trustee sale proceedings pursuant to any mortgage or deed of trust, the lien or charge of which is subject and subordinate to this Lease. Any sublease, with respect to which Landlord agrees to execute a nondisturbance agreement pursuant to this subsection 5.7, may be a sublease pursuant to which the subtenant is responsible for the construction of the building improvements upon the subleased premises (a "Ground Sublease" herein). Any Ground Sublease may contain a hypothecation provision similar to Section 4 of this Lease for the benefit of the holder of any mortgage or deed of trust constituting a lien on the subleasehold estate created by virtue of the Ground Sublease. Any nondisturbance agreement executed and delivered by Landlord for the benefit of the sublessee under a Ground Sublease shall specifically recite that it is for the benefit of any such holder of a deed of trust or mortgage constituting a lien on the subleasehold estate created by such Ground Sublease; that the term "sublease" as used in the nondisturbance agreement shall be deemed to include any new sublease executed and delivered to any such holder of a first deed of trust or first mortgage following a termination of the sublease pursuant to a provision in the sublease similar to subsection 4.8 of this Lease, and that the term " sublessee" under the nondisturbance agreement shall be deemed to include any encumbrancer or other party succeeding to the sublessee under the Ground Sublease by virtue of judicial or private power of sale foreclosure proceedings or by delivery of an assignment in lieu 51 of foreclosure, or otherwise. Where Landlord agrees to execute a nondisturbance agreement for the benefit of the sublessee under any Ground Sublease, such agreement shall be subject to the obligations of the sublessee thereunder being no less than the obligations of the Developer hereunder with respect to the subleased premises. 5.7.1 Minor Subleases. Consent of Landlord shall not be required --------------- to a sublease of any unit of space smaller than 50,000 square feet, not including parking areas; however, notice of any such sublease shall be sent to Landlord's Airport Manager within ten (10) days of the execution of the sublease. 5.7.2 Consent to Sublease. Prior to review of any proposed ------------------- sublease, the following information and assurances shall be provided to Landlord as part of the request for consent to proposed subleases of 50,000 square feet of rentable building area, or more, of sublease space, with respect to any Ground Sublease: 5.7.2.1 Description. Description of the sublease Premises. ----------- 5.7.2.2 Name. The name and address of the sublessee for the ---- purpose of enabling notices to be given under subsection 17.1 hereof. 5.7.2.3 Nature of Business. The nature of the business ------------------ conducted on the sublease Premises. 5.7.2.4 Financial Information. Financial strength of the --------------------- subtenant or assignee (if the subtenant is a publicly held company, a copy of its 52 most recent annual report; if the subtenant or assignee will not disclose financial information, a report from a recognized credit rating agency, such as Dun & Bradstreet). 5.7.2.5 Officers. The identity, background and experience of -------- all officers and directors of sublessee, at executive vice president level and above and senior operational officer relating to the Premises, if sublessee is a corporation, general partners of a partnership or sole proprietor of a proprietorship (Principals). 5.7.2.6 Additional Information. To the extent known by ---------------------- Developer, the following information: 5.7.2.6.1 Criminal record of the subtenant, assignee or any of the Principals. 5.7.2.6.2 Nature and extent of litigation to which the subtenant, assignee or any Principal is a party. 5.7.2.6.3 Any course of conduct which a prudent person would deem materially detrimental to the Project or to the intended use of the Premises by the subtenant or assignee. 5.7.2.7 Informational Purposes. For informational purposes only: ---------------------- 5.7.2.7.1 Number of anticipated employees of the subtenant or assignee. 5.7.2.7.2 At the time of submission of 53 the request, the terms and conditions of the sublease or assignment. 5.7.2.7.3 With respect to all subleases and assignments a copy thereof after execution by all parties thereto. 5.7.2.7.4 Any proposed nondisturbance or attornment agreements. 5.7.3 Confidentiality. If requested by Developer at the time of --------------- submission of the information described above, Landlord shall keep such information and the identity of the proposed sublessee or assignee confidential and Landlord shall execute a confidentiality statement so providing, to the extent Landlord is permitted by law to do so. 5.7.4 Disapproval by Landlord. Landlord reserves the right to ----------------------- reject any proposed sublessee where the matters specified in 5.7.2.3, 5.7.2.4, 5.7.2.5 or 5.7.2.6 above indicate that the presence of sublessee would not be in the public interest or would adversely affect the financial viability of the Project. Landlord shall either approve or disapprove any proposed sublessee within fifteen (15) days after receipt by Landlord of a request to do so. Failure of Landlord to act within said fifteen (15) days shall constitute approval. If Landlord does not approve any proposed sublessee, it shall state in writing the reasons for such disapproval. Developer shall have the right to contest such disapproval. No damages shall be payable 54 to Developer in any action challenging such disapproval unless Landlord shall have acted unreasonably, in bad faith or with actual malice. 5.8 Sale of Buildings. Developer shall have the right to sell ----------------- buildings constructed pursuant to the terms of this Lease, provided, however, that such buildings shall be and remain subject to the terms and conditions of this Lease. No sale of such buildings shall be valid unless this requirement is expressly included in the deed as a covenant running with the land. 5.9 Master Lease. Landlord agrees to assign, and Developer agrees to ------------ accept, all rights and obligations of Landlord with respect to the existing three (3) leaseholds at the Premises, pursuant to the form of assignment attached hereto and marked Exhibit "E". Developer will hold Landlord and the City of Long Beach, and all of their officers and employees, free and harmless from any cost, expense, damage or claim of damage, including costs of defense, arising from the interests or asserted interests of the existing tenants of any such assigned leaseholds arising subsequent to the date of the assignment. Landlord shall hold Developers free and harmless from any cost, expense, damage or claim of damage including costs of defense, arising from acts or events occurring prior to the date of such assignment, unless such damage or claim of damage is caused or alleged to be caused by the assignment or any related transaction. 6. INDEMNITY, INSURANCE, CASUALTY DAMAGE: ------------------------------------- 6.1 Indemnification and Hold Harmless. Developer expressly --------------------------------- agrees to defend, protect, indemnify and hold harmless 55 the Landlord, its officers, agents and employees free and harmless from and against any and all claims, demands, damages, expenses, losses or liability of any kind or nature whatsoever which Landlord, its officers, agents or employees may sustain or incur or which may be imposed upon them or any of them for injury to or death of persons or damage to property arising out of or resulting from the alleged acts or omissions of Developer, its officers, agents or employees or in any manner connected with this Lease or with the occupancy, use or misuse of the Premises by Developer, its officers, agents, employees, subtenants, licensees, patrons or visitors. Developer also agrees to defend at its own cost, expense and risk all claims or legal actions that may be instituted against Developer or Landlord with respect to the Premises, and the design and construction of off-site improvements except traffic signals, and Developer agrees to pay settlements and to satisfy any judgment that may be rendered against either Developer or Landlord as a result of any injuries or damages which are alleged to have resulted from or be connected with this Lease or the occupancy or use of the Premises by Developer or its officers, agents, employees, subtenants, licensees, patrons or visitors. Nothing herein shall be deemed to require Developer to indemnify Landlord for liability determined by a court of law to have arisen from negligence of Landlord, provided, however, that as between the parties to this Lease, in any matter in which the doctrine of joint and several liability applies, Landlord shall not be required to pay any larger share of such judgment than its actual contribution as determined by the Court. 56 6.2 Insurance. --------- 6.2.1 Liability Insurance. At all times during the term of ------------------- this Lease, Developer shall obtain and maintain or cause to be obtained and maintained bodily injury and property damage insurance by a combined single limit policy in an amount of at least Ten Million Dollars and No/100 ($10,000,000.00) naming the Landlord and its officers, agents and employees as coinsureds with Developer and others designated by Developer. Developer shall also maintain workers' compensation insurance in the amount required by statute. Prior to entry upon the Premises, and upon each insurance renewal, Developer shall deliver the policies of insurance required by this subsection 6.2, or certified photostatic copies thereof, to Landlord for approval within 30 days as to sufficiency and for approval as to form by the City Attorney. When said policies of insurance have been so approved, Developer shall substitute a certificate of insurance issued by the insurance company or companies issuing such policies certifying that said insurance coverage is in full force and effect and upon the filing of said certificate, the policies will be returned by Landlord to Developer, if Developer has deposited the original policies with Landlord. Said liability and property damage insurance policy shall contain a provision or endorsement substantially as follows: 57 "The inclusion hereof of any person or entity as an insured shall not affect any right such person or entity would have as a claimant hereunder if not so included. This insurance shall be primary and not contributing with any other insurance maintained by Landlord." Notwithstanding any other provision to the contrary contained in this Lease, Developer shall not have the right to enter upon the Premises for any purpose whatsoever until such certificate has been filed with Landlord. 6.2.2 Fire and Extended Coverage. Developer shall, at no -------------------------- cost or expense to Landlord, keep insured for the benefit of Developer and Landlord, and such other parties, having an insurable interest, as Developer may designate, the improvements constructed by or under Developer upon the Premises against loss or damage by fire and lightning and risks customarily covered by extended coverage endorsement, in amounts not less than one hundred percent (100%) of the actual replacement cost of said improvements, except that Developer, at Developer's option may exclude the cost of excavations, foundations and footings. Landlord shall be named as an insured under any such policy. Such fire and extended coverage shall also be required to be furnished by Developer during the construction of improvements on the Premises as contemplated by Section 7 below. Any loss payable under such insurance shall be payable to 58 Developer, Landlord and such other parties having an insurable interest in the property as Developer may designate and may be endorsed with a standard mortgagee's loss payable endorsement in favor of the holder of any Leasehold Mortgagee holding a Leasehold Mortgage. Landlord will release the entire sum of the proceeds to Developer or to a lender for purposes of reconstruction, replacement or repair of any damaged improvement. The proceeds of such insurance shall be paid to Developer to the extent the amount of the recovery is for damages to interior, non-structural or subtenant improvements, equipment, fixtures, personal property or for rental value insurance to the extent such recoveries are separate identifiable items. If Developer shall within five (5) years after such damage or destruction commence construction of the damaged or destroyed building, or a new building in accordance with Section 7 hereof, the proceeds of any insurance payable by reason of such damage or destruction shall be paid to Developer. If Developer shall fail to commence such construction within such five (5) year period Landlord reserves the right to receive such portion of the insurance proceeds so that Landlord may, if appropriate, carry out such reconstruction of the destroyed building, with all excess amounts to Developer. If at any time during the last five (5) years of the term of the Lease whether the original term or any extension thereof, a building then on the Premises shall be so 59 damaged by fire or other casualty that the cost of restoration shall exceed fifty percent (50%) of the replacement value thereof, exclusive of foundations, immediately prior to such damage, either party hereto may, within sixty (60) days of such damage, give notice of its election to terminate this Lease with respect to the parcel upon which the building is located and, subject to further provisions of this subsection this Lease shall cease and come to an end on the date of the expiration of ten (10) days from the delivery of such notice with the same force and effect as if such date was the date herein fixed for the expiration of the term hereof, and the Ground Rent shall be apportioned and paid to the date of such termination. In such event Developer shall remove all debris and level the land, and Developer shall have no obligation to repair or rebuild or restore. The insurance proceeds its shall then be divided as follows: If five (5) years remain before the end of the Lease or any extension thereof, Developer shall receive seventy-five percent (75%) of the proceeds, and Landlord shall receive twenty-five percent (25%); if four (4) years remain before the end of the Lease, Developer shall receive fifty percent (50%) of the proceeds, and Landlord shall receive fifty percent (50%); if three (3) years remain before the end of the Lease, Developer shall receive twenty- five percent (25%) of the proceeds, and Landlord shall receive seventy-five percent (75%); 60 if two (2) years remain before the end of the Lease, Developer shall receive ten percent (10%) of the proceeds, and Landlord shall receive ninety percent if one (1) year remains before the end of the Lease, Landlord shall receive the entire proceeds. 6.2.3 Miscellaneous. The insurance policies to be secured ------------- by Developer pursuant to this subsection 6.2 shall be obtained from insurers having a rating in Best's Insurance Guide of A-10, or better (or a comparable rating in any similar Guide, if Best's Guide is no longer published or if Best's rating system changes), and shall require that the insurer give Landlord notice of any modification, termination or cancellation of any policy of insurance no less than thirty (30) days prior to the effective date of such modification, termination or cancellation. In addition, Developer shall notify Landlord of any modification, termination or cancellation of any policy of insurance secured by Developer pursuant to this subsection 6.2 as soon as Developer learns of any such modification, termination or cancellation. The policy of public liability and property damage insurance to be obtained under subsection 6.2.1 above shall stipulate that said policy provides primary coverage and is not subordinate to nor contributing with any other insurance coverage held or maintained by Landlord. The procuring of any such policy of insurance shall not be construed to be a limitation upon Developer's liability or its full 61 performance on Developer's part of the indemnification and hold harmless provisions of this Lease; and Developer understands and agrees that notwithstanding any such policy of insurance, Developer's obligation to protect, indemnify and hold harmless Landlord under this Lease is for the full and total amount of any damage, injuries, loss, expense, costs or liabilities caused by or in any manner connected with or attributed to the acts or omission of Developer, its officers, agents, employees, licensees, patrons or visitors, or the operations conducted by Developer, or Developer's use or misuse of the Premises, except to the extent resulting from the negligent or willful acts of Landlord or any such indemnitee. 6.2.4 Blanket Policies. Nothing contained in this section ---------------- shall prevent Developer from requiring its subtenants, or any of them, or any other third party, to provide the insurance required by this Section 6, nor prevent Developer, or any of its subtenants, or any its such third party from taking out insurance of the kind provided for under this section under a blanket insurance policy or policies which cover other personal and real property owned or operated by Developer or any subtenant provided that the protection afforded Landlord and Developer under any policy of blanket insurance hereunder shall be no less than that which would have been afforded under a separate policy or policies relating only to the Premises. 62 6.2.5 Self-Insurance. If a subtenant is self-insured as a -------------- matter of such subtenant's usual and customary business policy and such self-insurance is accepted by institutional lenders, Developer may request Landlord to waive the insurance requirement and to consent and permit such subtenant to self-insure. Such request shall be accompanied by information deemed necessary by Landlord to review the request. Consent to self-insure shall not be unreasonably withheld if the conditions specified in this section have been met. 6.2.6 Insurance Adjustments. The amounts of insurance --------------------- specified in subsections 6.2.1 and 6.2.3 may be adjusted in the year 2000 and not more often then every third year thereafter for the duration of the Lease to take into account circumstances at the time of such adjustments. 6.3 Damage or Destruction. --------------------- 6.3.1 Restoration of Premises. If any building or improve- ----------------------- ment on the Premises is totally or partially destroyed or damaged as a result of any casualty, Developer shall promptly repair, replace or rebuild such building or other improvement at least to the extent of its value immediately prior to such occurrence, subject, however, to delays resulting from force majeure, the cancellation of existing leases due to such casualty, settling with insurers and/or negotiating new financing if necessary. If less than twenty (20) years remain of the term of this Lease or any 63 extension thereof, Developer may remove all damaged or destroyed improvements and place the portions of the Premises from which improvements are removed in a clean and level condition following which all insurance proceeds attributable to such destruction or damage shall be the property of Developer. After the commencement of such repair, replacement or rebuilding Developer shall continue such work with reasonable diligence until completion. Developer may cause any such work to be performed by or under its subtenants. In no event shall Landlord be liable to Developer for any damages resulting to Developer from the happening of any such fire or other casualty or from the repair or reconstruction of the Premises or from the termination of this Lease as provided in subsection 6.3.2 below. 6.3.2 Right to Terminate. Notwithstanding the provisions of ------------------ subsection 6.3.1 above, if the buildings and improvements on the Premises shall be damaged or destroyed as a result of a hazard against which Developer is not required to carry insurance to an extent in excess of fifty percent (50%), or more of their then insurable value, or if such damage or destruction shall occur during the last ten (10) years of the term of this Lease or during the last ten (10) years of any extended term of this Lease, then Developer shall have the right to elect not to repair, replace or rebuild such casualty damage and to cancel this Lease by giving written notice thereof to Landlord 64 within three hundred sixty-five (365) days after the date of any such damage or destruction. Upon such termination, it will be the obligation of Developer to remove all damaged or destroyed improvements and to place the portions of the Premises from which improvements are removed in a clean and level condition. 6.3.3. No Reduction in Rent. In case of destruction, there -------------------- shall be no abatement or reduction of rent. 7. DEVELOPMENT OF THE PROJECT: -------------------------- 7.1 Scope of Development. The Project will be a business, -------------------- office, research and development and industrial park. It is agreed by the parties that the Project will be built to include one (1) or more buildings upon the Premises, no one of which shall exceed the height limits established by Federal Aviation Regulations (FAR). However, it is recognized that the scope of development may be changed, enlarged or redistributed to meet a subtenant's or user's needs or changed conditions. The facade treatment, landscaping and character of the development will be substantially as proposed in the Long Beach Airport Center submittal of December 7, 1983, as supplemented by a spiral bound document entitled "Supplement to Kilroy Industries, December 7, 1983, Proposal", and included therein is a transmittal letter from Kilroy Industries to the City of Long Beach, dated January 12, 1984, ("Developer's Long Beach Airport Center Submittal") on file in the offices of the Director of Community Development of the City of Long Beach, or the equivalent of the 65 submitted proposal if approved by Landlord pursuant to subsection 7.3 hereof. 7.2 Developer's obligation to Develop Premises. Developer ------------------------------------------ agrees to commence the construction of improvements upon the Premises as an orderly development in conjunction with the development of the adjoining property leased from the City of Long Beach. Developer shall undertake as expeditiously and fully as is reasonably possible in the exercise of sound business judgment, the planning and construction of improvements upon Premises and to further the interest thereof to the end that there will be ultimately constructed on the Premises the development contemplated the Basic Concept Documents or its alternative as approved by Landlord pursuant to subsection 7.3.7. In the event Developer has not commenced construction on the Premises by January 1, 1995, then the fair market rental value of the Premises shall be adjusted in the manner set forth in subsection 3.2, as of January, 1995, upon the assumption its that any building or buildings or other material improvements planned for construction upon Premises had, in fact, been completed, unless the provisions of section 3.1.3 shall apply. 7.2.1 Best Efforts to Sublease. Developer shall at all times ------------------------ use its best efforts to expedite to the fullest extent consistent with the exercise of sound business the making and entering into of sub-leases with subtenants upon terms and conditions satisfactory to subtenants and not inconsistent with any of the requirements of this Lease. 66 7.3 Architectural Approval. ---------------------- 7.3.1 Restriction. No buildings or other improvements, ----------- including without limitation, grading street, landscaping and parking area improvements shall be constructed or maintained upon the Premises unless the same conform to and are consistent with the zoning for the site, building code requirements and other adopted construction standards for public improvements of the City of Long Beach and the scope of the Project, as defined in subsection 7.1 above, and are approved by Landlord as provided in subsection 7.3.7 below. 7.3.2 Basic Concept Documents. Landlord and the City of Long ----------------------- Beach have heretofore approved certain documents, including preliminary Parcel Map No. 16960. Said documents, as the same may from time to time be modified and/or supplemented with the approval of Landlord pursuant to subsection 7.3.7 below are herein referred to as the "Basic Concept Documents. 7.3.3 Landscaping. Prior to the construction of any ----------- landscaping upon the Premises, Developer shall prepare and submit to Landlord for Landlord's approval pursuant to subsection 7.3.7 below preliminary landscape plans for such work. Following Landlord's approval of Developer's preliminary landscape plans for such work and prior to the commencement of such work, Developer shall prepare and submit to Landlord for Landlord's approval pursuant to subsection 7.3.7 below final landscape plans for such work. Said landscape plans need 67 not include landscaping between building walls and adjacent curbs and/or parking areas, it being understood that preliminary and final plans for such landscaping may be submitted separately by Developer to Landlord for Landlord's approval under subsection 7.3.7 below when the requirements of building occupants have been ascertained. Said landscape plans shall be consistent with the Basic Concept Documents and/or modifications or amendments thereto from time to time approved by Landlord. In general, Developer shall be permitted freedom of selection of landscaping plants, trees and other materials consistent with the Basic Concept Documents. 7.3.4 Exterior Elevations. Prior to the construction of any ------------------- building improvements upon the Premises, Developer shall prepare and submit to Landlord for Landlord's approval pursuant to subsection 7.3.7 below exterior elevations for such building improvements. Such exterior elevations need not include exterior building signs. The exterior elevations utilized by Developer in the construction of buildings upon the land leased by Developer under the existing City of Long Beach Ground Lease have been approved in concept by Landlord for purposes of this Lease and for no other purposes. 7.3.5 Security and Security Plans. Developer shall submit --------------------------- to the Landlord for approval a site security plan, if required, both for the construction period and for the Project as partially and fully 68 developed which shall comply with applicable Federal Aviation Regulations and the requirements of the Airport Manager of the City of Long Beach. Developer shall comply with FAR Part 107 regarding Airport security and FAR Part 77 regarding height limitations. It is particularly important that Developer notify the Airport Manager and such other persons as he may direct twenty-four (24) hours in advance of erecting cranes on the Premises for any purpose. Developer shall pay any fine or penalty imposed on Landlord as a result of security violations on the Premises. Developer shall have the right to contest such fine or penalty. 7.3.6 Amendments. Developer may from time to time submit to ---------- Landlord for Landlord's approval pursuant to subsection 7.3.7 below modifications and/or amendments to any of the items described in subsections 7.3.3 through 7.3.5 above theretofore approved by Landlord. 7.3.7 Landlord Approval. Developer shall submit all plans ----------------- required by subsections 7.3 and 3.7 to Landlord, attention General Manager, who shall coordinate the review and approval of such plans with appropriate departments of the City of Long Beach. Landlord shall either approve or disapprove of any item submitted for approval to Landlord by Developer pursuant to subsections 7.3.3 through 7.3.6 above and subsection 3.7 within fifteen (15) days of Landlord's receipt thereof by giving written notice of such approval or 69 disapproval to Developer. Any such disapproval shall state in writing the reasons for disapproval. Failure by Landlord to expressly so disapprove of any such item within such fifteen (15) day period shall constitute Landlord's approval of such item. The criteria to be used by Landlord in approving or disapproving any such item shall be (i) compliance with the Basic Concept Documents and PD-2 zoning, ii) exterior aesthetics, (iii) consistency with prior improvement on the Premises or the adjacent premises leased by Developer from the City of Long Beach, (iv) relationship of improvements to adjacent land, including public rights-of-way, (v) the general function of the spaces within the Project between building areas and adjacent public rights-of-way, consistent with overall project design. In general, Developer shall be permitted freedom of design of all exteriors. In the event Landlord disapproves of any such item, Developer may cause such item to be appropriately revised and resubmit the same to Landlord for approval pursuant to this subsection 7.3.7. Landlord and Developer agree to cooperate reasonably each with the other in resolving any objections of the other to such item and/or requested modifications by the other party. The provisions of this section with respect to notice, time for and method of approval shall apply to any such revised item resubmitted to Landlord for approval. Upon the approval of any such item, Landlord 70 shall execute and return a copy of such item to Developer marked approved by Landlord with the date of such approval. Any item to be approved or disapproved by Landlord shall be deemed to have been submitted to and received by Landlord on the date such item is delivered to or received at the office of the Director of Community Development of Landlord. 7.3.8 Communication and Consultation. Landlord and Developer ------------------------------ agree to communicate and consult informally as frequently as is necessary to insure that the formal submittal of any item pursuant to this section can receive prompt and speedy consideration. In addition, during the period that Developer is preparing drawings and specifications for buildings and other improvements to the Premises, Landlord agrees, upon request of Developer, to schedule and hold regular progress meetings in order to coordinate the compliance of such drawings and specifications with the construction requirements of this Lease. 7.3.9 Requirements of Institutional Lender or Major Occupant. ------------------------------------------------------ If any revisions or corrections of drawings and specifications, landscape and grading plans and/or site plans consistent with the items heretofore approved by Landlord or approved by Landlord pursuant to this section are required by any institutional lender providing or proposing to provide financing to Developer or major occupant or proposed major occupant for a 71 building, Developer and Landlord shall cooperate with each other in efforts to obtain the waiver of such requirements or to develop a mutually acceptable alternative. A major occupant shall be deemed a person or entity occupying or proposed to occupy all of a freestanding building or in excess of 50,000 square feet of building floor area upon initial occupancy. If no such waiver is obtained and no such alternative is developed, Landlord shall amend the items so approved by Landlord pursuant to this section as may reasonably be required for consistency with such revisions or corrections. Any amendment of items approved by the Landlord does not constitute a waiver of other legal, governmental approvals. 7.3.10 Interior Improvements. During the term hereof, --------------------- Developer shall have the right to make, at no expense to Landlord, interior improvements to any building, and thereafter to make changes, alterations, further improvements and additions in and to the interior of any building as Developer may desire, subject to all applicable codes, ordinances and statutes. 7.3.11 Modification of Plans. Developer may make changes and --------------------- modifications to plans and specifications for buildings which are not material or to resolve an inconsistency or ambiguity without obtaining Landlord's prior approval. Landlord agrees that Developer may cause the plans for any building to be modified to the extent required to adapt the same to soil or other 72 conditions found on the Premises and to the extent modification thereof is required by any governmental agencies or authorities having jurisdiction to approve such plans, all without resubmitting the same to Landlord for Landlord's reapproval. 7.4 Performance and Payment Bonds. ----------------------------- 7.4.1 Agreement to Provide. On or before the date of -------------------- commencement of construction of any building, structure or other improvements on the Premises having an estimated cost of One Million and No/lOO Dollars ($1,000,000.00) or greater, Developer shall file or cause to be filed with Landlord a performance bond and labor and material payment bond executed by Developer or Developer's contractor or subtenant, as principal, and by a surety authorized to do business in the State of California, as surety, conditioned upon the contractor's performance of its construction contract with Developer and payment to all claimants for labor and materials used or reasonably required for use in the performance of such contract, in a form and with a surety reasonably acceptable to Landlord. Forms of bond which generally are acceptable hereunder are attached hereto and marked Exhibit "D". Said bond shall name or be endorsed to name Landlord as a joint obligee with Developer and/or Developer and Developer's lender. Landlord agrees to either approve or disapprove of any such proposed bond submitted to Landlord for approval within ten (10) days of Landlord's receipt 73 thereof. Any notice of disapproval shall specify the reasons for disapproval and the modifications required to secure Landlord's approval. Landlord's failure to expressly so disapprove of any such bond within said ten (10) day period shall constitute Landlord's approval of the form of such bond and of the surety issuing such bond. 7.4.2 Term of the Bond. The term of both bonds shall ---------------- commence on or before the date of filing with Landlord. The Performance Bond shall remain in effect until the date of completion of the work to the reasonable satisfaction of Landlord and the obtaining of a final Certificate of Occupancy from the City of Long Beach. The Payment Bond shall remain in effect until the expiration of the period of filing a claim of lien as provided in Title 15 of Part 4 of the California Civil Code, and as hereafter amended, or if a claim of lien is filed, the expiration of the period for filing an action to foreclose such lien, or until the Premises are freed from the effect of such claim of lien and any action brought to foreclose such lien pursuant to the provisions of said Title 15 of Part 4 or the lien is otherwise discharged. 7.4.3 Penal Sum. The Performance Bond shall be in the --------- amount and provide a penalty of one hundred percent (100%) of the cost of the improvements to be constructed as such cost shall be determined by the Developer. The Payment Bond shall be in the amount and 74 provide a penalty of one hundred percent (100%) of the valuation of the improvements to be constructed. 7.4.4 Alternative Performance. In lieu of the Performance ----------------------- Bond and Payment Bond required by this subsection 7.4, Developer may furnish cash, assignment of account, or a time certificate of deposit or irrevocable letter of credit conditioned only on the terms of this Lease or such other form of security as may be agreed upon by the patties. 7.5 Construction. ------------ 7.5.1 Costs of Construction. Except as provided in --------------------- subsections 3.8, 3.9, and 7.5.10, the entire cost and expense of constructing any and all improvements on the Premises, including without limitation any and all on and off-site improvements required by applicable governmental authorities under applicable zoning ordinances or as a condition to parcel or final map approvals, shall be borne and paid by Developer, or its subtenants, and Developer shall hold and save Landlord and the Premises harmless from any liability whatsoever on account thereof. 7.5.2 Right to Improve. Developer shall have the right to ---------------- construct buildings and other improvements upon the Premises and shall have the right to change the grade of the Premises and to perform all off-site work included within the scope and intent of the Basic Concept Documents and/or to demolish and remove any and 75 all structures, foliage and trees situated upon the Premises as of the date of this Lease as may reasonably be required for the purpose of improving the same incidental to Developer's or a subtenant's use of the Premises; provided, that such work shall be performed in accordance with the applicable requirements of this Section 7, and such laws of any governmental entity as may be applicable thereto and that arrangements for access to adjacent leaseholds are completed prior to commencement of work on those areas. Any and all improvements, constructed by or for the Developer, except off-site improvements, shall be owned by Developer and its successors or assigns during the term of this Lease and, unless removed by Developer upon the expiration of the term of this Lease as permitted by subsection 17.10 below, shall become a part of the realty and the absolute property of Landlord upon the expiration or earlier termination of the term of this Lease. 7.5.3 Governmental Permits. Before commencement of -------------------- construction or development of any buildings, structures, or other work or improvements upon the Premises or within the Project area, Developer shall, at its own expense with the cooperation of Landlord, secure or cause to be secured any and all permits which may be required by the City of Long Beach or any other governmental agency having authority over such construction, development or work. Developer shall provide a copy of each such permit to the Landlord prior to com- 76 mencing the subject work or activity. 7.5.4 Rights of Access. For the purposes of assuring ---------------- compliance with this Lease, representatives of Landlord in addition to those conducting inspections required by Landlord, shall have the right of access to the Premises without charges or fees, at normal construction hours, during the period of construction for the purposes of this Lease, including but not limited to the inspection of the work being performed in constructing the improvements required by this Lease. Such representatives of Landlord shall be those who are so identified in writing by the General Manager of Landlord except that those employees of the City of Long Beach conducting inspections required by law need not be so identified. 7.5.5 Local, State and Federal Laws. Developer shall carry ----------------------------- out or cause to be carried out the construction of any buildings, structures or other work or improvements upon the Premises in conformity with all applicable laws. Any buildings, structures or other improvements constructed or placed upon the Premises by or under Developer, shall be constructed or placed in accordance with the laws and regulations of the State of California and of the City of Long Beach applicable to the Premises. Any applicable Federal Aviation Regulation (FAR) shall also be complied with. 7.5.6 Antidiscrimination During Construction. Developer for -------------------------------------- itself and its successors and assigns 77 agrees that in the construction of any improvements provided for in this Lease, that Developer will not discriminate against any employee, or applicant for employment because of age, sex, marital status, race, handicaps, color, religion, creed, ancestry or national origin. 7.5.7 Responsibilities of Landlord. ---------------------------- 7.5.7.1 Governmental Approvals. Landlord will assist ---------------------- and cooperate with Developer in connection with requests by Developer for lot line adjustments, tentative or final, parcel, tract or subdivision map approval, condominium plan approval, variances and any other governmental approvals necessary for or which will facilitate the development of the Premises, pursuant to this Lease including, without limitation, the execution of documents required to dedicate or offer for dedication or restrict or otherwise encumber or subdivide by parcel or final maps or condominium plans portions of the Premises as may be required by applicable governmental authorities. 7.5.7.2 Easements. Landlord agrees to join in granting --------- or dedicating such public or private utility company easements as may be required for the development of the Premises, for which no consideration is given. With the exception of landscaping and appurtenant structures as provided in subsection 7.5.9, Developer shall have no re- 78 sponsibility for maintaining public rights-of-way, sewers, storm drains and other facilities after dedication of same to the City of Long Beach by Developer. 7.5.7.3 Off-Site Improvements. Subject to any --------------------- limitation of law, Landlord shall take all such action as is necessary and prudent in order to permit Developer to install and construct the off-site improvements which are necessary to initially make the Premises suitable for development according to Developer's Basic Concept Documents. The costs of certain improvements shall be included in Offsite Costs in the manner set out in subsections 3.6 through 3.10. 7.5.7.4 Bond Financing. Landlord further agrees to -------------- assist with Developer's financing of the development of the Premises by cooperating reasonably with Developer and using reasonable efforts to sell or to cause any appropriate agency of the City of Long Beach to sell industrial development bonds as a source for such financing, if such action is legally permissible; by granting to or for the benefit of the holders of any special assessment or district bonds constituting a first lien on Developer's Leasehold Estate, or their trustee, rights and remedies of a similar nature afforded Leasehold Mortgagees under Section 4 hereof. 79 7.5.7.5 Hazardous Materials. Landlord shall, within a ------------------- reasonable time and at its expense, remove any hazardous material on Parcels A and B. Said removal shall be completed prior to commencement of Initial Ground Rental. 7.5.8 Responsibilities of Developer. Developer, without ----------------------------- expense to Landlord, shall perform all work specified of Developer in this Lease. In addition, Developer shall furnish Landlord with semi- annual progress reports demonstrating good faith compliance with the construction requirements of this Lease on or before each semi-annual period commencing with the sixth month anniversary of the date of this Lease, through the occurrence of the completion date of such construction. 7.5.9 Maintenance. In addition to the responsibilities ----------- mentioned herein, Developer shall have sole and exclusive responsibility for maintaining the Premises and all building structures and improvements which may be constructed upon the Premises in good condition and repair, at no cost or expense to Landlord, reasonable wear and tear excepted. Developer shall also maintain all landscaping and appurtenant structures installed in accordance with plans approved pursuant to Section 7. Landlord will consider a request to maintain landscaping in public rights-of-way. 7.5.10 Acceptance of Premises. Developer accepts the ---------------------- Premises in an "as-is condition, except 80 for subsurface toxic waste, hazardous materials and munitions, which are the responsibility of Landlord to remove at Landlord's expense, and also except for subsurface facilities of Landlord which are to remain and which are to be maintained by Landlord. Developer acknowledges that Developer has not received and Landlord has not made any warranty, express or implied, as to the condition of the Premises. Developer agrees to bear all expenses incurred in the development, operation and maintenance of the Premises, except for improvements and facilities dedicated for public use to the City of Long Beach or to other governmental authority, and except for removal and disposition of subsurface hazardous materials and munitions and subsurface facilities of Landlord which are to be retained by Landlord. 7.6 Subdivided Leases. For the purpose of facilitating the ----------------- development of the Project and obtaining financing and refinancing of improvements to be constructed thereon, at any time and from time to time during the term, within thirty (30) days after notice of demand from Developer, Landlord shall enter into separate new leases ("Subdivided Lease") so that there shall be one lease for each developable parcel in the Premises. The Subdivided Leases described herein shall be for the sole purpose of lease, sale or financing of the development. In all matters affecting the relationship, rights or obligations of the parties hereto, or in the case of any inconsistency between 81 the language of the documents, this Lease as undivided and unmodified shall govern except that as to the individual subdivided lease parcels, rents, security deposits, legal descriptions and requirements governing amount and level of construction may be varied to conform to the specifics of such parcel, as long as the totals in all such categories for all subdivided leases added together correspond to the totals expressed in this document. Developer shall pay to Landlord as a separate charge apart from rents a one time charge, payable in advance to reimburse Landlord's costs and expenses in separating the leases and reviewing and administering all the leases as separated in the sum of Five Thousand Dollars ($5,000.00). Each Subdivided Lease shall: 7.6.1 Same Parties. Have the same parties as the parties to ------------ this Lease. 7.6.2 Obligations of Subdivided Leases. Be released from -------------------------------- the overall obligations expressed in this Lease to pay rent and to carry out specific levels of construction within specific periods, provided, however that each such parcel shall be subject to an appropriate proportionate share of such obligations such that the total of such obligations divided among separated leases is not less than the total of such obligations expressed in this Lease. All other obligations imposed by this Lease shall apply to each such separate parcel as an undivided shared obligation. As to any conflict between the Subdivided Leases or all of them and this Lease, the terms of this Lease shall govern. 7.6.3 Terms, Covenants. Contain the same ---------------- 82 terms, covenants, provisions, conditions and agreements as those contained in this Lease except that: 7.6.3.1 Ground Rent. The Ground Rent and other periodic ----------- payments to be made by Developer as part of Developer's obligation under this Lease and the security deposit under subsection 16.1 shall, under the Subdivided Lease, bear substantially the same proportion to amounts provided in this Lease as the area of the Premises in the Subdivided Lease bears to the area of the Premises in this Lease. Provided, however, that if the fair market value of any land included in a Subdivided Lease is substantially greater or less than the balance of the land included in this Lease, then the Ground Rent may be appropriately varied between the Subdivided Lease and this Lease in order to take into account such variance in the fair market land value. 7.6.3.2 Improvements. Any improvements constructed upon the ------------ Premises demised by a Subdivided Lease shall satisfy Developer's obligations imposed by this Lease. The right of Developer to make improvements shall be apportioned around the Subdivided Leases substantially as is provided in subsection 7.6.3.1. 7.6.3.3 Easements and CC & R's. Each Subdivided Lease shall ---------------------- contain all cross-easements, covenants, conditions, restrictions and agreements requested by Developer, and approved by Landlord, 83 provided they reasonably facilitate separating this Lease into individual Subdivided Leases within the overall intent of this Lease. 7.6.3.4 Description of Property. Each Subdivided Lease ----------------------- shall cover only that portion of the Premises specified by Developer in Developer's notice of demand, provided that Developer shall accompany each notice of demand with an accurate survey and metes and bounds description of the portion of the Premises to be covered by the Subdivided Lease; or if the Premises have been divided into separate parcels, with the appropriate parcel map description of such Premises. 7.6.3.5 Excluded Matters. Obligations under this Lease which ---------------- have been satisfied or which are not applicable shall be excluded from a Subdivided Lease. 7.7 Combining Leases. At any time and from time to time after ---------------- the execution of any such Subdivided Lease, within thirty (30) days after notice of demand from Developer, Landlord shall enter into a single lease ("Single Lease") combining any two or more of the Subdivided Leases, covering all the portions of the Premises covered by the component Subdivided Leases, and containing the same terms, covenants, provisions, conditions and agreements as those contained in the component Subdivided Leases, except that: 84 7.7.1 Ground Rent. The Ground Rent and other periodic ----------- payments to be made by Developer as part of Developer's obligation under the Single Lease shall be the sum of the Ground Rent and other periodic payments payable under the component Subdivided Leases; 7.7.2 Easements and CC & R's. The Single Lease shall ---------------------- contain all cross easements, covenants, conditions, restrictions and agreements requested by Developer and approved by Landlord provided they reasonably facilitate combining the component Subdivided Leases and integrating the operation of the Single Lease with that of any Subdivided Leases still outstanding within the overall intent of this Lease. 8. USE: --- 8.1 Permitted Development. The Project shall be a business, --------------------- office, research and development and industrial park, with offices and facilities and space for sublease to subtenants. Developer may, on an interim basis, continue all businesses and uses now being conducted on the Premises. This shall have no effect on the rent required to be paid under this Lease. 8.2 Vehicle Parking. No vehicle not related to or used in the --------------- business of Developer or its subtenants or their respective employees, agents, guests or invitees shall be parked on the Premises for any period greater than twenty-four (24) hours. 85 8.3 Federal Aviation Administration. Use of the Premises shall ------------------------------- conform to and be limited by applicable zoning regulations, any conditions lawfully imposed by duly empowered governmental authority having jurisdiction over the Premises, the terms, covenants, conditions and restrictions imposed by this Lease and such lawful rules and regulations of the Federal Aviation Administration ("FAA") as may be applicable from time to time to the Premises. Landlord shall cooperate fully with Developer in obtaining all required FAA approvals. 8.4 Inspection. At all times during the term of this Lease, Landlord ---------- shall retain the right of access to and ingress and egress over the Premises to inspect aviation related operations and to enforce codes or ordinances and provisions of this Lease, subject to governmental and reasonable subtenant security requirements. 9. LIENS: ----- 9.1 Developer's Responsibility. Developer shall not permit any -------------------------- liens to be enforced against Landlord's interests in and to the land comprising the Premises, nor against Developer's leasehold interest therein by reason of work, labor, services or materials supplied or claimed to have been supplied to Developer or anyone holding the Premises, or any part thereof, through or under Developer, and Developer agrees to indemnify Landlord against such liens. 9.2 Notice of Work. Before any buildings, structures or other -------------- improvements or additions thereto, having a cost in excess of One Hundred Fifty Thousand and No/l00 Dollars 86 ($l50,000.00) are constructed or reconstructed upon the Premises, Developer shall serve written notice upon the Landlord in the manner specified in this Lease of Developer's intention to perform such work for the purpose of enabling Landlord to post notices on non-responsibility under the provisions of Section 3094 of the Civil Code of the State of California, or any other similar notices which may be required by law. 9.3 Discharge of Liens. If any mechanics liens or other liens shall ------------------ be filed by reason of work, labor, services or materials supplied or claimed to have been supplied to Developer or anyone holding the Premises, or any part thereof, through or under Developer, Developer shall cause the same to be discharged of record within sixty (60) days after notice to Developer of the filing thereof, or otherwise free the Premises from the effect of such claim of lien and any action brought to foreclose such lien within such sixty (60) day period, or Developer, within such sixty (60) day period, shall promptly furnish to Landlord a bond in an amount and issued by a surety company satisfactory to Landlord securing Developer against payment of such lien and against any and all loss or damage whatsoever in any way arising from the failure of Developer to discharge such lien. 9.4 Landlord's Right to Pay. In the event Developer fails to perform ----------------------- its obligations under subsection 9.3 above with respect to any lien within the sixty (60) day period specified in subsection 9.3 above, Landlord may, but shall not be obligated to pay the amount thereof, inclusive of any interest thereon, and any costs assessed against Developer in said litigation, or may discharge such lien by contesting its validity or 87 by any other lawful means. 9.5 Reimbursement of Landlord. Any amount paid by Landlord for any ------------------------- of the expenses described in subsection 9.4 above, and all reasonable legal and other expense of Landlord, including reasonable counsel fees, and costs of suit, in defending any such action or in connection with procuring the discharge of such lien, with all necessary disbursements in connection therewith, together with interest thereon at the rate provided by law from the date of payment shall be repaid by Developer to Landlord on demand. 10. CONDEMNATION: ------------ 10.1 Definition of Terms. The following definitions shall govern ------------------- interpretation of this subsection. 10.1.1 Total Taking. The term "total taking" as used in ------------ this Section 10 means the taking of the entire Premises under the power of eminent domain or the taking of so much thereof as the parties mutually agree will prevent or substantially impair the use of the Premises of the uses and purposes than being made or proposed to be made by Developer of the Premises. If the parties do not agree as to whether prevention or substantial impairment has occurred, that issue may be arbitrated as provided in the rules for arbitration published by the American Arbitration Association. Each party shall pay half of the cost of such arbitration. 88 10.1.2 Partial Taking. The term "partial taking" means the -------------- taking of a portion only of the Premises which does not constitute a total taking as defined above. 10.1.3 Voluntary Conveyance. Neither party to this Lease -------------------- will voluntary convey any interest related to this Lease to any agency, authority or public utility under threat of a taking under the power of eminent domain in lieu of formal proceedings without first providing written notice to the other of any request or intention to do so. 10.1.4 Date of Taking. The term "date of taking" shall be -------------- the date title to the Premises or portion thereof passes and vests in the condemnor or the date of entry of an order for immediate possession with any judicial proceeding in eminent domain or the date physical possession of the Premises is taken or interfered with, whichever first occurs. 10.1.5 Leased Land. The term "leased land" means the real ----------- property demised hereby, but exclusive of any and all improvements situated upon the Premises at the commencement of the Lease term and also exclusive of all improvements constructed or placed thereon by or under Developer and exclusive of any grading and other site work performed by or under Developer. 10.2 Effect of Taking. If during the term hereof there shall be a ---------------- total or partial taking under the power of eminent domain, then the Leasehold Estate of Developer in and to 89 the Premises, in the event of a total taking, or the portion thereof taken, in the event of a partial taking, shall cease and terminate, as of the date of taking thereof. If this Lease is so terminated in whole or in part, all Ground Rent and other charges payable by Developer to Landlord hereunder attributable to the Premises, or portion thereof taken, shall be paid by Developer up to and prorated through the date of taking by the condemnor. Any portion of the security deposit provided for in subsection 16.1.1 fairly attributable to the terminated portion of the Lease-hold Estate shall be repaid to Developer and the parties shall thereupon be released from all further liability in relation thereto. 10.3 Allocation of Award. All compensation and damages awarded ------------------- in connection with any taking, total or partial, of the Premises including any improvements thereon shall be allocated so that Developer shall receive that portion of the award attributable to the value determined for improvements then existing on the Premises, the value of Developer's leasehold interest in the Premises and severance or other damages to buildings or the Leasehold Estate. The remainder of the award, including all portions of the award attributable to the value of the land as affected by the leasehold, and any severance or other damages to the land, shall be payable to Landlord. 10.4 Reduction of Ground Rent on Partial Taking. In the event of a ------------------------------------------ partial taking, the Ground Rent payable by Developer shall be adjusted from the date of taking to the next adjustment date (see subsection 3.2.1). Such Ground Rent adjustment caused by the partial taking shall be made by reducing the 90 Ground Rent payable by Developer based on the ratio between the fair market value of the leased land at the date of taking and the fair market value of the leased land remaining immediately thereafter, valued for the use being made of the leased land by Developer prior to such taking. 10.5 Temporary Taking. If all or any portion of the Premises shall ---------------- be taken by any competent authority for temporary use or occupancy, this Lease, at the option of Developer, shall continue in full force and effect without reduction or abatement of rent, notwithstanding any other provision of this Lease, statute or rule of law to the contrary, and Developer shall, in such event, be entitled to the entire award for such taking to the extent that the same shall be applicable to6 the period of such temporary use or occupancy included in the term of this Lease and Landlord shall be entitled to the remainder thereof. 11. ALTERATIONS BY DEVELOPER: ------------------------ Developer shall have the right at any time and from time to time during the Lease term to make, at its sole cost and expense, such changes and alterations, structural or otherwise, in or to the improvements, other than dedicated public improvements, constructed upon the Premises as Developer shall deem necessary or desirable, including without limitation, the right to remove and/or demolish buildings and other improvements provided that other buildings or improvements are constructed in their place if such demolition occurs when twenty (20) or more years are remaining in the term of this Lease, including any 91 extensions hereof. The rights granted by this section shall be limited to and their exercise shall comply with the terms of Section 7 and subsection 3.3 hereof. 12. TAXES AND ASSESSMENTS: --------------------- 12.1 Payment by Developer. Developer recognizes and understands -------------------- that this Lease may create a possessory interest subject to property taxation and that Landlord may be subject to the payment of property taxes on such interest. Developer shall pay prior to delinquency all real estate taxes and assessments on the Premises and/or Developer's possessory interests therein levied during the term of this Lease. Developer shall not place or allow to be placed on the Premises, or any part thereof, any mortgage, trust deed, encumbrance or lien unauthorized by this Lease. Developer shall remove or have removed any levy or attachment made on any of the Premises, or any part thereof, or assure the satisfaction thereof within a reasonable time, but in any event prior to a sale thereof. Nothing herein contained shall be deemed to prohibit Developer from contesting the validity or amounts of any tax, assessment, encumbrance or lien, nor to limit the remedies available to Developer in respect thereto. 12.2 Installment Payments. If any real estate, special tax or -------------------- assessments are at any time during the term of this Lease, levied or assessed against the Premises or Developer's Leasehold Estate hereunder, which, upon exercise of any option permitted by the assessing authority, may be paid in installments or converted to an installment payment basis (irrespective of whether interest shall accrue on unpaid installments), Developer 92 may elect to pay such taxes or assessments in installments with accrued interest thereon. In the event of such election, Developer shall be liable only for those installments of such taxes or assessments which become payable during the term of this Lease, and Developer shall not be required to pay any such installment which becomes due and payable after the expiration of the term of this Lease. Landlord shall execute whatever documents may be necessary to convert any such taxes or assessments to such an installment payment basis if requested so to do by Developer and if such action is authorized by law then in effect. 12.3 Proration. Any real estate taxes and assessments which are --------- payable by Developer hereunder shall be prorated between Landlord and Developer at the commencement and expiration or earlier termination of the term of this Lease if such real estate taxes and assessments relate to a fiscal period of the levying authority which arose before the term commenced or extends beyond the expiration or earlier termination of the term hereof. 12.4 Right to Contest. Developer and any subtenant, with ---------------- Developer's consent, shall have the right to contest the amount or validity of any real estate taxes and assessments, in whole or in part, by appropriate administrative and legal proceedings, without any cost or expense to Landlord, and Developer may postpone payment of any such contested real estate taxes and assessments pending the prosecution of such proceedings and any appeals so long as such proceedings shall operate to prevent the collection of such real estate taxes and the sale of the Premises to satisfy any lien arising out of the nonpayment of the 93 same, provided, however that if at any time payment of the whole or any part thereof shall become necessary in order to prevent the termination of the right of redemption of any property affected thereby, or if there is to be an eviction of Developer because of nonpayment thereof, Developer shall pay the same in order to prevent such termination of the right of redemption or such eviction. Landlord shall execute and deliver to Developer whatever documents may be within Landlord's legal authority necessary or proper to permit Developer or any subtenants, with Developer's consent, to so contest any real estate taxes or which may be necessary to obtain payment of any refund which may result from any such proceedings. Any such contest shall be at no cost or expense to Landlord. Each refund of any tax or assessment so contested shall be paid to Developer. 13. CERTIFICATES BY DEVELOPER AND LANDLORD: -------------------------------------- 13.1 Developer to Provide. Developer agrees upon not less than -------------------- twenty (20) days' notice by Landlord to execute, acknowledge and deliver to Landlord a statement in writing certifying (i) that this Lease is unmodified and in full force and effect (or if there have been modifications that the same is in full force and effect as modified and stating the modifications);(ii) whether or not to the best knowledge of Developer there are then existing any offsets or defenses against the enforcement of any of the terms, covenants or conditions hereof upon the part of Developer to be performed and, if so, specifying the same; and (iii) the dates to which the Ground Rent and other charges have been paid, it being intended that any such statement delivered 94 pursuant to this subsection may be relied upon by any prospective purchaser of the fee of the real property comprising the Premises. 13.2 Landlord to Provide. Landlord agrees upon not less than twenty ------------------- (20) days' prior notice by Developer, to execute, acknowledge and deliver to Developer a statement in writing certifying (i) that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications); (ii) the dates to which the Ground Rent and other charges have been paid; (iii) stating whether or not to the best knowledge of Landlord, Developer is in default in performance of any covenant, agreement or condition contained in this Lease and, if so, specifying each such default of which Landlord may have knowledge; and (iv) whether or not there are to Landlord's best knowledge any offsets or defenses claimed by and/or available to Developer to the payment or rental, it being intended that any such statement delivered pursuant to this subsection may be relied upon by any prospective assignee or subtenant of the whole or any portion of the Premises, or by any lender extending credit on the security of Developer's Leasehold Estate. 14. QUIET ENJOYMENT: --------------- Landlord covenants that Developer, upon the performance of the covenants and agreements herein contained on Developer's part to be performed, shall and may at all times, for itself and its subtenants, peaceably and quietly have, hold and enjoy the Premises during the term of this Lease. 95 15. TERMINATION AND FURTHER LEASING: ------------------------------- 15.1 Termination. Subject to the provisions of Section 4, this ----------- Lease may be terminated at any time by mutual agreement of the parties. 15.2 Termination by Developer. Developer may terminate this Lease ------------------------ in the event: (A) Developer is unable to secure an extended coverage leasehold policy of title insurance, within ninety (90) days following execution of this Lease containing only those exceptions approved by Developer; (B) during the first twelve (12) months that this Lease is in effect if costs and expenses associated with development of the Premises shall increase in an amount which, in the Developer's good faith judgment, renders such development uneconomic; or (C) during the first seven (7) years that this Lease is in effect if Developer is not able to obtain a Lease of Parcel 7 of Parcel Map 16960, pursuant to the Option to Lease between the City of Long Beach and Developer, dated December 20, 1985. As a condition precedent to termination, Developer shall have first given Landlord sixty (60) days notice of its intention to terminate during which time Landlord shall have an opportunity to cure the deficiency, if possible, within Landlord's exclusive discretion 15.3 Termination by Landlord. Subject to the provision of Section 4 ----------------------- of this Lease, Landlord may terminate this Lease under the following circumstances: 15.3.1 Developer fails to pay rent or any other charge required by this Lease. 15.3.2 Developer assigns this Lease in violation of subsection 5.1. 96 15.3.3 Failure of Developer to submit drawings or related documents required by this Lease. 15.3.4 Failure of Developer to provide the good faith deposit required by this Lease. 15.3.5 Bankruptcy of Developer. Final adjudication or filing of a voluntary petition for bankruptcy by Developer. Provided, however, that in all cases, Landlord shall give Developer sixty (60) days prior written notice of its intention to terminate, during which time Developer shall have an opportunity to cure the default. However, if the default is of a nature such that it cannot be cured within sixty (60) days, Developer shall not be in default if Developer shall commence such use and diligently prosecute it to completion. 16. SECURITY DEPOSIT: ---------------- 16.1 Good Faith Deposit. ------------------ 16.1.1 Receipt by Landlord. Developer has, concurrently ------------------- with the execution and delivery of this Lease, delivered to Landlord a good faith deposit in the amount of One Hundred Thousand and No/100 Dollars ($100,000.00) as security for the performance of the obligations of Developer to be performed in accordance with the provisions of this Lease. The receipt of the deposit is hereby acknowledged by Landlord. 16.1.2 Form of Deposit. The good faith deposit, at the --------------- option of Developer, may be in the form of (i) cash; or (ii) cashier's or certified check; or 97 (iii) negotiable certificate or certificates of deposit issued by a federal or state bank or savings and loan association; or (iv) an irrevocable letter of credit in favor of Landlord issued by an established bank or other institution satisfactory to Landlord; or (v) a bond in a form and with a surety reasonably satisfactory to Landlord providing for payment to Landlord of amounts that may become payable to Landlord under this Lease from time to time; or (vi) such other form of security or deposit as may be mutually acceptable. Developer may change the form of the deposit from time to time, at its option, to any other of the permitted forms of deposit. The deposit, if in cash or certified or cashier's check shall be deposited in an interest bearing account of Landlord in a bank, savings and loan association or trust company selected by Developer and approved by Landlord, which approval shall not unreasonably be withheld. Developer shall have the right to specify the type of account in which such funds are, from time to time, to be deposited. Provided that no default has occurred during the term of the Lease which has resulted in a forfeiture by Developer of all or a part of the good faith or security deposit, such deposit, or any portion thereof which has not been forfeited, shall be returned to Developer upon expiration of this Lease. 16.1.3 Interest. Landlord shall be under no obligation to pay -------- or earn interest on the deposit, but 98 if interest shall accrue or be payable thereon such interest, when received by Landlord, shall be promptly paid to Developer. Landlord agrees, but not more often than quarterly, upon receipt of a request from Developer, to cause any such interest so accrued on such deposit to be paid to Developer by the bank, savings and loan association or trust company with which said sums have been deposited. 16.1.4 If Bond is Posted. If a bond is posted to satisfy ----------------- the requirements of this Lease with a fixed term and if such bond expires prior to the date Developer is entitled to have the security deposit returned, Developer shall provide Landlord with either (i) evidence of the renewal of such bond for an additional period, or (ii) a new security deposit satisfying the requirements of subsection 16.1 in one of the forms authorized by such subsection, including, without limitation, a new bond, not less than twenty (20) days prior to the expiration of the bond posted to satisfy the requirements in subsection 16.1 above. 17. GENERAL PROVISIONS: ------------------ 17.1 Notices, Demands and Communications between the Parties. ------------------------------------------------------- Written notices, demands, and communications between Landlord and Developer shall be in writing and shall be sufficiently given if personally served or if mailed by registered or certified mail, postage prepaid, return receipt requested, to the principal offices of Landlord or Developer, set forth in 99 subsection 1.5 of this Lease. Any such notice, demand or communication so given by mailing to Landlord shall be mailed to the attention of the General Manager of Landlord. Copies of any such notice, demand or communication to be given to Developer pursuant to this Lease shall be given to Kilroy Long Beach Associates, Attention, President, such other entity, person or persons as he may designate, by personal service or by mailing the same, as required by this subsection, to such party, at the address set forth in subsection 1.5 above or such other address as may be designated. Either Landlord or Developer may from time to time by written notice to the other designate a different address or addresses or party or parties to whom copies of notices, demands and communications are to be delivered or to whose attention notices, demands and communications are to be addressed which shall be substituted for the addresses and/or names above specified. Notices shall be deemed served effective immediately if personally served and effective as of the date received and set forth on the return receipt if served by registered or certified mail. 17.2 Conflict of Interest. No member, official or employee of -------------------- Landlord shall have any personal interest, direct or indirect, in this Lease, nor shall any such member, official or employee participate in any decision relating to this Lease which affects his personal interest or the interest of any corporation, partnership or association in which he is, directly or indirectly, interested. No member, official or employee of Landlord shall be personally liable to Developer, or any successor in interest, in the event of any default or breach by Landlord 100 or for any amount which may become due to Developer or successor or on any obligations under the terms of this Lease. 17.3 Enforced Delay: Extension of Time of Performance. In addition -------------- -------------------------------- to other provisions of this Lease, performance by either party hereunder, shall not be deemed to be in default where delays or defaults are unavoidable or performance is rendered impracticable, due to war; enemy action; insurrection; civil disturbance; strikes; lock-outs; riots; floods; earthquakes; fires; casualties; acts of God; acts of the public enemy; epidemics; quarantine restrictions; freight embargoes; lack of transportation; governmental restrictions or moratoria; failure or inability to secure materials or labor by reason of regulations or order of any governmental entity; litigation including eminent domain proceedings or related legal proceedings; acts or failure to act of the other party; acts or failure to act of any public or governmental agency or entity; and the time for such performance shall be extended for a period equal in length to such delay(s). 17.4 Inspection of Books and Records. Landlord has the right at all ------------------------------- reasonable times during regular business hours to inspect the books and records of the Developer pertaining to the Premises as pertinent to the purposes of this Lease. Developer also has the right at all reasonable times during regular business hours to inspect the books and records of the Landlord pertaining to the Premises as pertinent to the purpose of this Lease. 101 17.5 Defaults and Remedies. --------------------- 17.5.1 Defaults - General. Subject to the extensions of ------------------ time set forth in subsection 17.3 above, failure by either party to perform any term or provision of this Lease constitutes a default under this Lease, if not cured within thirty (30) days from the date of receipt of a written notice from the other party specifying the claimed default provided that if such default cannot reasonably be cured within such thirty (30) day period, the party receiving such notice of default shall not be in default under this Lease if such party commences the cure of such default within such thirty (30) day period and thereafter diligently prosecutes the steps to cure such default to completion. 17.5.2 Institution of Legal Actions. In addition to any ---------------------------- other rights or remedies, either party may institute legal action to cure, correct, or remedy any default, to recover damages for any default, or to obtain any other remedy consistent with the purpose of this Lease. Such legal actions must be instituted in the South Branch of the Superior Court of the County of Los Angeles, State of California, in an appropriate municipal court in that county, or in the Federal District Court in the Central District of California. The prevailing party in any action commenced pursuant to this Lease shall be entitled to recover reasonable costs, expenses and attorneys' fees. 102 17.5.3 Applicable Law. The laws of the State of California -------------- shall govern the interpretation and enforcement of this Lease. 17.5.4 Service of Process. In the event any legal action is ------------------ commenced by Developer against Landlord, service of process on Landlord shall be made by personal service upon the General Manager of the Landlord, or in such other manner as may be provided by law. In the event that any legal action is commenced by Landlord against Developer, service of process on Developer shall be made as provided by law and shall be valid whether made within or without the State of California, or in such manner as may be provided by law. 17.5.5 Rights and Remedies Are Cumulative. Except as otherwise ---------------------------------- expressly stated in this Lease, the rights and remedies of the parties are cumulative, and the exercise by either party of one or more of such rights or remedies shall not preclude the exercise by it, at the same or different times, of any other rights or remedies for the same default or any other default by the other party. 17.5.6 Inaction Not a Waiver of Default. Any failures or -------------------------------- delays by either party in asserting any of its rights and remedies as to any default shall not operate as a waiver of any default or of any such rights or remedies or deprive either such party of its 103 right to institute and maintain any actions or proceedings which it may deem necessary to protect, assert or enforce any such rights or remedies. 17.5.7 Remedies. In the event of a default by Developer, which -------- is not cured by Developer within the times specified in this Lease, Landlord, without further notice to Developer, may declare this Lease and/or Developer's right of possession at an end and may reenter the Premises by process of law, in which event, Landlord shall have the right to recover from Developer: 17.5.7.1 The worth at the time of award of the unpaid Ground Rent which has been earned at the time of termination, plus interest; 17.5.7.2 The worth at the time of award of the amount by which the unpaid Ground Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Developer proves could have been reasonably avoided, plus interest; 17.5.7.3 The worth at the time of award of the amount by which the unpaid Ground Rent for the balance of the term after the time of award exceeds the amount of such rental loss for the same period that Developer proves could be reasonably avoided, plus interest thereon; and 104 17.5.7.4 The remedies of Landlord as hereinabove provided are subject to the other provisions of this Lease, including Section 4 hereof. 17.5.8 Developer's Rights. Developer shall have the right to ------------------ challenge the correctness of any determination of default made by Landlord, and Landlord shall carefully review and consider Developer's challenge. 17.5.9 Lease Termination. Should governmental action or ----------------- failure to act preventing construction in accordance with this Lease or rendering it impossible, occur prior to the time that Developer has constructed any building upon the Premises, then Developer shall have the right, at its option, with the prior written approval of any lender which has a security interest in the Leasehold Estate, to cancel and terminate this Lease by giving written notice of such termination to Landlord, at any time prior to the construction of a building upon the Premises. Upon any such termination of this Lease, Developer and Landlord shall execute and record a quitclaim deed sufficient to remove the cloud of this Lease and the short form of this Lease from record title to the Premises and the deposits described in subsections 16.1 and 16.2, plus any interest accrued on such deposits, shall be paid to Developer by Landlord. 17.5.10 Landlord's Exercise of Remedies. In the event of an ------------------------------- uncured default by Developer in the performance of any of its obligations to commence and 105 complete the construction of the initial building within the times required by Section 7 of this Lease and in the further event that Landlord elects to exercise its remedy to terminate this Lease by reason of such default by Developer, Developer may, for a period of thirty (30) days following its receipt of written notice from Landlord of Landlord's election to terminate this Lease by reason of such default, elect to prevent such termination from becoming effective by releasing and paying to Landlord a portion of the good faith deposit held by Landlord under subsection 16.1, which portion shall be equal to the lesser of (i) the amount of such deposit so held by Landlord; or (ii) an amount equal to the product of One and One-half Dollar ($1.50) per square foot times the number of square feet of building area the failure to commence or complete the construction of which has caused the subject default or the adjusted rent per square foot if this provision becomes operative after any rental adjustment. 17.5.11 Payment to Developer. In the event that this Lease is -------------------- terminated as a result of an uncured default by Landlord and in the further event that Developer has constructed streets, utilities and/or other off-site improvements or grading improvements upon or in relation to the Project prior to such termination of this Lease, Landlord shall, pursuant to its responsibilities under State law, use its best efforts to resell or relet the Premises, or any portion thereof, 106 as soon and in such manner as Landlord shall find feasible and consistent with the objectives of such law to a qualified and responsible party or parties (as reasonably determined by Landlord) who will assume the obligation of making or completing the improvements required of Developer under this Lease, or such other improvements in their stead as shall be satisfactory to Landlord and in accordance with the uses specified for the Premises in this Lease. Upon such resale or reletting of the Premises, or any portion thereof, the proceeds thereof shall be applied: 17.5.11.1 Reimbursement to Landlord. First, to reimburse ------------------------- Landlord for all costs and expenses incurred, including, but not limited to, salaries to personnel in connection with the recapture, management, and resale or reletting of the Premises, or part thereof (but less any income derived by Landlord from the Premises, or part thereof, in connection with such management); all taxes, assessments and water and sewer charges paid with respect to the Premises, or part thereof; any payments made or which are necessary to be made to discharge any encumbrances or liens existing on the Premises, or part thereof, at the time or revesting of title thereto in Landlord or to discharge or prevent from attaching any subsequent encumbrances or liens due to obligations, defaults or acts of Developer, its successors or transferees; 107 any expenditures made or obligations incurred with respect to the making or completion of the improvements or any part thereof on the Premises, or part thereof; and any amounts otherwise owing Landlord by Developer and its successor or transferee; 17.5.11.2 Reimbursement to Developer. Second, to reimburse -------------------------- Developer, its successors or transferees, a sum up to the amount equal to the sum of (i) the costs incurred for the development of the Project, prorated to the Premises, if the Premises are less than all of the Project, on a square foot basis, and for the improvements existing on the Premises at the time of the re-entry and repossession by Developer, less (ii) any gains or income withdrawn or made by Developer from the Premises or the improvements thereon; provided however, that no payment shall be made to Developer if this Lease is terminated as a result of an uncured default by Developer. 17.5.11.3 Ground Rent. Third, in the case of a reletting, ----------- to pay to Landlord an amount equal to the Ground Rent and other payments payable to Landlord hereunder that Landlord would have received if this Lease had not been terminated; 17.5.11.4 Remaining Balance. Any balance remaining after such ----------------- reimbursement shall be retained by Landlord as its property. In the event that such street, utility and/or other off-site improve- 108 ments have been constructed by or the costs of such construction were paid or reimbursed by an improvement or special assessments district, the provisions of this subsection shall be applicable to the costs for such improvements if payment of the bonds issued by such district have been guaranteed by Developer or are secured by security, in addition to the Leasehold Estate created hereby, or paid by Developer, but only to the extent of such payment by Developer or of payment from the proceeds of such guarantee or security. 17.5.12 Delivery of Plans. In the event that this Lease is ----------------- terminated, for any reason whatsoever, Developer shall deliver to Landlord one set of all plans and data in its possession concerning the Premises. 17.6 Right to Contest Laws. Developer shall have the right, --------------------- after notice to Landlord to contest or to permit its subtenants to contest by appropriate legal proceedings, without costs or expense to Landlord, the validity of any law, ordinance, order, rule, regulation or requirement to be complied with by Developer under this Lease and to postpone compliance with the same except such laws as may be adopted by Landlord, provided such contest shall be promptly and diligently prosecuted at no expense to Landlord and so long as Landlord shall not thereby suffer any civil penalties, sanction or be subjected to any criminal penalties or sanctions, and Developer shall protect and save harmless Landlord against any liability and claims for any such noncompliance or postponement of compliance. 109 17.7 Trade Fixtures. All trade fixtures, furnishings, -------------- equipment and signs installed by or under Developer or subtenants shall be and remain the property of the person, firm or corporation installing the same and shall be removable at any time during the term of this Lease. The removal of any such trade fixtures, furnishings, equipment and signs shall be at the expense of the person, firm or corporation removing the same, who shall repair any damage or injury to the Premises and all improvements thereto occasioned by the removal thereof. In the event that any subtenant acquires any furniture, trade fixtures, signs and/or equipment to be used in connection with its subleased premises from an equipment lessor or from an equipment seller under a security agreement, Landlord agrees to execute such documents as may reasonably be required by the equipment lessor or creditor in order to assure such party of its prior rights in and to any such equipment, furniture, signs and/or trade fixtures and of its right to remove any such equipment, furniture, signs and/or trade fixtures from the subleased premises for a period of not to exceed forty- five (45) days from and after notice to such party of the termination or expiration of the sublease of the subject subtenant-lessee or subtenant-debtor. 17.8 Continued Possession of Developer. If Developer shall --------------------------------- hold over the Premises after the expiration of the term hereof with the consent of Landlord, either express or implied, such holding over shall be construed to be only a tenancy from month-to-month, subject to all the covenants, Ground Rent conditions and obligations hereof and terminable by either party as provided by law. 110 17.9 Utilities. Developer shall pay or cause to be paid all charges --------- for gas, electricity, water and other utilities furnished to the Premises during the term of this Lease and all sewer use charges or similar charges or assessments for utilities levied against the Premises for any period included within the term of this Lease. 17.10 Surrender. Upon the expiration of the term of this Lease, as --------- provided herein, or sooner termination of this Lease, Developer, subject to subsection 17.5.11 shall surrender to Landlord, all and singular, the Premises, including any buildings and all improvements constructed by or under Developer then situated upon the Premises, and Developer shall execute, acknowledge and deliver to Landlord within ten (10) days after written request from Landlord to Developer, a Quitclaim Deed or other document required by any reputable title company to remove the cloud of this Lease from the Premises. Notwithstanding the foregoing provisions of this section to the contrary, Developer shall have the right, at any time not less than six (6) months prior to the expiration of the term of this Lease and for a period of sixty (60) days following the expiration of the term to remove all or any portion of the buildings and other improvements constructed by or under Developer upon the Premises, without obligation to replace the same with new buildings and/or other improvements as required by subsection 6.3 above. 17.11 Partial Invalidity. If any term or provision of this Lease or ------------------ the application thereof to any party or circumstances shall, to any extent, be held invalid or unenforceable, the remainder of this Lease, or the application of such 111 term or provision, to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. 17.12 Section Headings. The section and subsection headings of this ---------------- Lease are inserted as a matter of convenience and reference only and in no way define, limit or describe the scope or intent of this Lease or in any way affect the terms and provisions hereof. 17.13 Short Form Lease. Concurrently with the execution and ---------------- delivery of this Lease, Landlord and Developer have executed, acknowledged and caused to be recorded a short form of this Lease in the form attached hereto as Exhibit "F". 17.14 Exhibits Incorporated. Exhibit "A" is hereby incorporated --------------------- in this Lease. No other exhibit is incorporated in the Lease and all exhibits, other than Exhibit "A", may be changed or modified by agreement between Landlord and Developer at any time and from time to time without amending this Lease. 17.15 Entire Agreement, Waivers and Amendments. This Lease is ---------------------------------------- executed in three (3) triplicate originals, each of which is deemed to be an original. It constitutes the entire understanding and agreement of the parties. This Lease integrates all the terms and conditions mentioned herein or incidental hereto, and supersedes all negotiations or previous agreements between the parties with respect to all or any part of the subject matter hereof. 112 17.16 Waivers. All waivers of the provisions of this Lease must ------- be in writing by the appropriate authorities of Landlord or Developer, and all amendments hereto must be in writing by the appropriate authorities of Landlord and Developer. 17.17 Approvals. Except where specific criteria are set forth as --------- a condition to approving or disapproving or agreeing upon a matter of course of action, including but not limited to assignment (subsection 5.4), and subletting (subsection 5.7.2), in all circumstances where under this Lease either party is required to approve or disapprove any matter, such approval shall not be unreasonably withheld, and on matters requiring agreement between Landlord and Developer, they shall act in good faith. 17.18 Successors in Interest. The provisions of this Lease shall ---------------------- be binding upon and shall inure to the benefit of the heirs, executors, assigns and successors in interest of the parties hereto. 17.19 "And/Or". Whenever the words and symbols "and/or" are used -------- in this Lease, it is intended that this Lease be interpreted and the sentence, phrase or other part be considered in both its conjunctive and disjunctive sense, and as having been written twice, once with the word "and" inserted, and once with the word "or" inserted, in the place of said words and symbol "and/or". 17.20 "Including" Defined. The use of the word "including" or ------------------- "include", when followed by any general statement, term or matter, will not be construed to limit such statement, term or matter to the specific items or matters set forth im- 113 mediately following such work or to similar items, terms or matters, but rather will be deemed to refer to all other items, terms or matters that could reasonably fall within the broadest possible scope of such general statement, term, item or matter. 17.21 Right of First Refusal to Purchase. If Landlord shall ---------------------------------- determine during the term of this Lease that it is lawful and in the public interest to sell the Premises, or any portion thereof, Landlord shall, prior to making the Premises or part thereof available for sale to any other party, provide Developer with the opportunity to purchase said property at its fair market value, as determined by an appraisal obtained by Landlord. If Developer has not entered into an agreement to purchase said property within sixty (60) days of the date it is first offered for sale to Developer at the price theretofore determined by Landlord to be the fair market value, Landlord may offer the property for sale on the open market. Provided, however, that if Landlord should reduce the fair market value of the Premises or part thereof to be sold by seven and one-half percent (7.5%) or more, Developer's first refusal rights shall be reinstated. Developer shall respond to any such re-offer within five (5) business days, and if Developer fails to respond within that time period Developer's first refusal rights shall terminate. The determination whether such property shall be made available for sale is and shall be within the sole and exclusive discretion of Landlord. Landlord shall determine the legality of such action prior to making a determination to sell on the basis of the law then in effect. 114 17.22 If Developer is a Trustee. If Developer is a Trustee, this ------------------------- Lease is executed by the undersigned Trustee, not personally, but solely as Trustee, and it is expressly understood and agreed by the parties hereto, anything contained herein to the contrary notwithstanding, that each and all of the covenants, undertakings, representations and agreements herein made are intended, not as personal covenants, undertakings, representations and agreements of the Trustee, individually, or for the purpose of binding the Trustee personally, but this Lease is executed and delivered by the Trustee solely in the exercise of the powers conferred upon the Trustee as such Trustee under the trust agreement and no personal liability or personal responsibility is assumed by, nor shall at any time be asserted or enforced against said Trustee on account hereof, or on account of any covenant, undertaking, representation, warranty or agreement herein contained, either expressed or implied, and all such personal liability, if any, being hereby expressly waived and released by the parties hereto, and by all persons claiming by or under said parties. The provisions of this subsection 17.22 shall apply to any Trustee succeeding in whole or in part to the interests of Developer hereunder . 17.23 Limitation of Liability of Partners. From and after the ----------------------------------- completion of the construction of the improvements described in this Lease, if Developer at any such time shall be a partnership or joint venture, Landlord shall look solely to the assets of such partnership or joint venture for the collection or satisfaction of any money judgment which Landlord may recover against Developer, and Landlord shall not look for the collection 115 or satisfaction of any such judgment to the personal assets of any person who shall at any time be a partner, joint venturer or participant in or under any such partnership or joint venture. The provisions of the subsection shall be binding upon Landlord and each and every future owner of Landlord's interest under this Lease and shall insure to the benefit of each and every such partner, joint venturer and participant. 17.24 Approvals. Except as otherwise specifically provided in this --------- Lease, all approvals to be done by Landlord may be done by Landlord's General Manager or his designee. IN WITNESS WHEREOF, Landlord and Developer have signed this Lease as of the date opposite their signature BOARD OF WATER COMMISSIONERS OF THE CITY OF LONG BEACH 4/21, 1988 By: [signature] --------------------------- 4/21, 1988 By: [signature] --------------------------- LANDLORD KILROY LONG BEACH ASSOCIATES, a California limited partnership By: KILROY INDUSTRIES, a California corporation General Partner 4/11, 1988 /s/John B. Kilroy, Jr. ---------------------- JOHN B. KILROY, JR. President DEVELOPER 116 This Lease Agreement is approved as to form this 21ST day of APRIL, 1988. JOHN R. CALHOUN, City Attorney By:/s/Michael Allisso Deputy RPF/md 3/18/88 D-187A&B 117 DEVELOPER'S ACKNOWLEDGMENT -------------------------- STATE OF CALIFORNIA ) ) ss. COUNTY OF LOS ANGELES) On April 11, 1988, before me, the undersigned, a Notary Public in and ------------- for said State, personally appeared John B. Kilroy, Jr. ,personally known to me ------------------- or proved to me on the basis of satisfactory evidence to be the person that executed this instrument as President of Kilroy Industries, the corporation that --------- executed this instrument as the general partner of Kilroy Long Beach Associates, a California Limited Partnership, the partnership that executed the within instrument, and acknowledged to me that such corporation executed the same as such partner and that said partnership executed the same. WITNESS my hand and official seal. [SEAL] ______________________ [SEAL APPEARS HERE] SEAL Nadine K Kirk ------------- Notary Public in and for said County and State DA-KLBA1 PARCEL A THAT PORTION OF LOT 5 OF TRACT NO. 10548 IN THE CITY OF LONG BEACH, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 174 PAGE 15, ET. SEQ., OF MAPS IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY ALONG WITH THAT PORTION OF RANCHO LOS CERRITOS IN SAID CITY, AS PER MAP RECORDED IN BOOK 2, PAGES 202 THROUGH 205 OF PATENTS IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY DESCRIBED AS A WHOLE AS FOLLOWS: BEGINNING AT THE EASTERLY TERMINUS OF THAT CERTAIN COURSE DESCRIBED AS HAVING A BEARING AND LENGTH OF NORTH 89(degrees) 55' 23" WEST 88.37 FEET" IN THE NORTHERLY BOUNDARY OF THE LAND DESCRIBED IN THE DEED TO THE STATE OF CALIFORNIA, RECORDED MAY 11, 1959 AS INSTRUMENT NO. 1870 IN BOOK D-462 PAGE 506, OFFICIAL RECORDS; THENCE ALONG SAID NORTHERLY LINE THE FOLLOWING COURSES: SOUTH 78(degrees) 19' 22" EAST 502.94 FEET TO A ONE INCH IRON PIPE WITH CALTRANS TAG AND SOUTH 78(degrees) 55' 01" EAST 83.09 FEET TO A ONE INCH IRON PIPE WITH CALTRANS TAG; THENCE CONTINUING ALONG SAID NORTHERLY LINE AS MONUMENTED BY ONE INCH IRON PIPES WITH CALTRANS TAGS SOUTH 80(degrees) 14' 32" EAST 523.56 FEET; THENCE LEAVING SAID NORTHERLY LINE NORTH 9(degrees) 45' 28" EAST 570.00 FEET; THENCE NORTH 25 (degrees) 19' 32" WEST 190.76 FEET; THENCE NORTH 89(degrees) 59' 37" WEST 112.16 FEET; THENCE SOUTH 38(degrees)) 20' 44" WEST 49.52 FEET TO THE TRUE POINT OF BEGINNING; THENCE SOUTH 38(degrees) 20' 44" WEST --------------------------- 146.94 FEET; THENCE SOUTH 31(degrees) 10' 37" WEST 483.95 FEET TO THE BEGINNING OF A NON-TANGENT CURVE CONCAVE TO THE NORTH HAVING A RADIUS OF 4954.00 FEET AND TO WHICH BEGINNING A RADIAL LINE BEARS SOUTH l0(degrees) 03' 32" WEST; THENCE WESTERLY 139.93 FEET ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 1(degree) 37' 06"; THENCE NORTH 78(degrees) 19' 22" WEST 181.01 FEET; THENCE NORTH 9(degrees) 45' 28" EAST 232.12 FEET; THENCE SOUTH 89(degrees) 53' 11" EAST 233.60 FEET; THENCE NORTH 53(degrees) 04' 54" EAST 181.74 FEET; THENCE NORTH 0(degree) 16' 54" EAST 129.16 FEET TO THE INTERSECTION WITH A LINE BEARING NORTH 89(degrees) 55' 11" WEST FROM THE TRUE POINT OF BEGINNING; THENCE SOUTH 89(degrees) 55' 11" EAST 237.51 FEET TO THE TRUE POINT OF BEGINNING. CONTAINING 146,831 SQUARE FEET. [SEAL APPEARS HERE] EXHIBIT "A" Page 1 of 2 Pages PARCEL B THAT PORTION OF LOT 5 OF TRACT NO. 10548 IN THE CITY OF LONG BEACH, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 174 PAGE 15, ET. SEQ., OF MAPS IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY ALONG WITH THAT PORTION OF RANCHO LOS CERRITOS IN SAID CITY, AS PER MAP RECORDED IN BOOK 2, PAGES 202 THROUGH 205 OF PATENTS IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY DESCRIBED AS A WHOLE AS FOLLOWS: BEGINNING AT THE EASTERLY TERMINUS OF THAT CERTAIN COURSE DESCRIBED AS HAVING A BEARING AND LENGTH OF NORTH 89(degrees) 55' 23" WEST 88.37 FEET IN THE NORTHERLY BOUNDARY OF THE LAND DESCRIBED IN THE DEED TO THE STATE OF CALIFORNIA, RECORDED MAY 11, 1959 AS INSTRUMENT NO. 1870 IN BOOK D-462 PAGE 506, OFFICIAL RECORDS; THENCE ALONG SAID NORTHERLY LINE THE FOLLOWING COURSES: SOUTH 78(degrees) 19' 22" EAST 502.94 FEET TO A ONE INCH IRON PIPE WITH CALTRANS TAG AND SOUTH 78(degrees)) 55' 01" EAST 83.09 FEET TO A ONE INCH IRON PIPE WITH CALTRANS TAG; THENCE CONTINUING ALONG SAID NORTHERLY LINE AS MONUMENTED BY ONE INCH IRON PIPES WITH CALTRANS TAGS SOUTH 80(degrees)) 14' 32" EAST 523.56 FEET; THENCE LEAVING SAID NORTHERLY LINE NORTH 9(degrees)) 45' 28" EAST 570.00 FEET; THENCE NORTH 25 (degrees)) 19' 32" WEST 190.76 FEET; THENCE NORTH 89(degrees) 59' 37" WEST 112.16 FEET; THENCE SOUTH 38(degrees) 20' 44" WEST 49.52 FEET TO THE TRUE POINT OF BEGINNING; THENCE NORTH 38(degrees) 20' 44" EAST 120.17 FEET TO THE INTERSECTION WITH THE SOUTHERLY PROLONGATION OF THE WESTERLY LINE OF PARCEL 4 AS SHOWN ON A RECORD OF SURVEY IN SAID CITY AS PER MAP FILED IN BOOK 85 PAGE 19 OF RECORD OF SURVEYS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY; THENCE ALONG THE WESTERLY LINE OF SAID PARCEL AND ITS SOUTHERLY PROLONGATION NORTH 0(degree) 01' 44" EAST 368.59 FEET TO A POINT ON SAID WESTERLY LINE DISTANT THEREON SOUTHERLY 26.48 FEET FROM THE NORTHWEST CORNER OF PARCEL 4 OF SAID RECORD OF SURVEY, SAID POINT BEING THE BEGINNING OF A CURVE CONCAVE TO THE SOUTHWEST HAVING A RADIUS OF 23.00 FEET; THENCE NORTHWESTERLY 33.21 FEET ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 82(degrees) 43' 53" TO THE BEGINNING OF A REVERSE CURVE CONCAVE TO THE NORTH HAVING A RADIUS OF 1056.00 FEET, SAID CURVE BEING CONCENTRIC WITH AND DISTANT SOUTHERLY 6.00 FEET FROM THE SOUTHERLY CURVED SIDE LINE OF SPRING STREET 100.00 FEET WIDE AS SHOWN ON SAID RECORD OF SURVEY; THENCE WESTERLY 89.13 FEET ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 4(degrees) 50' 10" TO A POINT NORMAL TO THE WESTERLY END OF SAID SOUTHERLY CURVED PORTION OF THE SIDE LINE OF SAID SPRING STREET; THENCE CONTINUING ON A LINE PARALLEL TO AND DISTANT SOUTHERLY 6.00 FEET AT RIGHT ANGLES FROM SAID SOUTHERLY SIDE LINE NORTH 77(degrees) 51' 59" WEST 74.19 FEET TO THE BEGINNING OF A CURVE CONCAVE TO THE NORTHEAST HAVING A RADIUS OF 212.00 FEET; THENCE LEAVING SAID PARALLEL LINE NORTHWESTERLY 44.57 FEET ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 12(degrees)) 02' 47"; THENCE ON A NON-TANGENT LINE NORTH 66(degrees)) 53' 00" WEST 6.99 FEET TO A POINT ON THE SOUTHERLY SIDE LINE OF SAID SPRING STREET, 100.00 FEET WIDE; THENCE ALONG SAID SIDE LINE NORTH 77(degrees)) 51' 59" WEST 78.06 FEET TO THE BEGINNING OF A CURVE IN SAID SOUTHERLY LINE CONCAVE TO THE SOUTH HAVING A RADIUS OF 950.00 FEET; THENCE WESTERLY 95.65 FEET ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 5(degrees) 46' 06"; THENCE LEAVING SAID SIDE LINE SOUTH 0(degrees) 08' 48" WEST 426.86 FEET; THENCE NORTH 89(degrees) 58' 42" EAST 58.51 FEET; THENCE SOUTH 0(degrees) 16' 54" WEST 176.34 FEET TO THE INTERSECTION WITH A LINE BEARING NORTH 89(degrees) 55' 11" WEST FROM THE TRUE POINT OF BEGINNING; THENCE SOUTH 89(degrees) 55' 11" EAST 237.51 FEET TO THE TRUE POINT OF BEGINNING . CONTAINING 207,752 SQUARE FEET. [SEAL APPEARS HERE] EXHIBIT "A" Page 2 of 2 Pages [MAP APPEARS HERE] EXHIBIT "B" Page 1 of 1 Page AGREEMENT OF NON-DISTURBANCE ---------------------------- THIS AGREEMENT is made as of the day of ------ --------------, 198__, by and among the BOARD OF WATER COMMISSIONERS OF THE CITY OF LONG BEACH, acting for and on behalf of the City of Long Beach, a Municipal Corporation (hereinafter called "Landlord"); KILROY LONG BEACH ASSOCIATES, a California Limited Partnership, (hereinafter called "Developer"); and ------------------------- - -------------------- (hereinafter called "Subtenant"). PRELIMINARY ----------- A. Landlord and Developer have entered into a Lease Agreement dated ----- (hereinafter referred to as the "Ground Lease") pursuant to which Landlord has demised and leased to Developer certain real property located in the City of Long Beach, County of Los Angeles, State of California, including the real property described in Exhibit "A" attached hereto and incorporated herein. A short form of the Ground Lease was recorded , 198 in the Official ------------ -- Records of said County. B. Developer, as Sublandlord, and Subtenant, as subtenant, have entered into a Sublease dated , 198 , (hereinafter referred to as the ------------- -- "Sublease") which Sublease demises to Subtenant a portion of the premises demised by the EXHIBIT "C" Page 1 of 7 Pages Ground Lease (and grants to Subtenant certain rights with respect to other portions of the premises demised by the Ground Lease). A short form of the Sublease is being recorded concurrently herewith in the Official Records of said County, which short form of Sublease describes the premises demised thereby (and the other rights and obligations of Subtenant with respect to the real property described in the attached Exhibit "A"). C. The parties hereto now desire to enter into this Agreement so as to clarify their rights, duties and obligations under the Ground Lease and the Sublease and to further provide for various contingencies as hereinafter set forth. NOW THEREFORE, in consideration of the foregoing and of the mutual agreement of the parties hereto to the terms and conditions hereinafter contained, the parties hereto agree as follows: 1. In the event Developer shall default in the payment of any sum or in the performance of any covenant or condition of the Ground Lease, all as provided therein, or in the event of any termination or expiration of the Ground Lease for any reason whatsoever prior to the expiration of the term of the Sublease as provided in the Sublease (other than a termination of the Ground Lease only as to portions of the premises demised thereby not described in the attached Exhibit "A"), then Landlord, Developer and Subtenant do hereby agree that the Sublease, and all terms, EXHIBIT "C" Page 2 of 7 Pages provisions, covenants and agreements thereof shall survive any such default or defaults in, or termination or expiration of the Ground Lease, whether such termination occurs as a result of, or arising out of, any such default or defaults, or otherwise, and the Sublease (subject to the rights of any Leasehold Mortgagee, as defined in the Ground Lease, to enter into a New Lease with Landlord upon the same terms and conditions and having the same priority as the Ground Lease, pursuant to subsection 4.8 of the Ground Lease) shall continue in force and effect in accordance with and subject to all of its terms, provisions, agreements and covenants as a direct lease with Landlord, as landlord, and Subtenant, as lessee. Subtenant agrees, in such event, to attorn to Landlord and to recognize Landlord as the landlord under the Sublease. Landlord shall, in such event, exercise and undertake all of the rights, obligations and duties of Developer in and under said Sublease and thereafter shall be entitled to collect all rents and payments due and payable under said Sublease, including the right to collect any sums being due and payable thereunder prior to the termination or expiration of the Ground Lease which are accrued and unpaid by Subtenant on the date of termination of the Ground Lease. Subtenant agrees not to prepay rentals under the Sublease beyond the amounts provided in the Sublease without the prior written consent of Landlord. 2. Landlord agrees that, prior to terminating the Ground Lease or taking any proceedings to enforce any such termination EXHIBIT "C" Page 3 of 7 Pages thereof for any reason other than the expiration of the term of the Ground Lease as provided therein, Landlord shall give Subtenant thirty (30) days' notice in writing prior to the effective date of such termination, specifying the reason for such termination. Such notice shall be given to Subtenant at the address provided in the Sublease for notices to Subtenant. Subtenant may change such address by written notice to Landlord. 3. Landlord hereby approves of the Sublease and of the rights and privileges granted to Subtenant thereunder and agrees that, for and during the term of the Sublease and any extensions thereof, Landlord shall not take any action, directly or indirectly, to disturb or otherwise affect Subtenant's occupancy of and/or rights and privileges with respect to the premises demised by the Ground Lease and described on the attached Exhibit "A" so long as Subtenant is not in default under the Sublease, nor shall Subtenant's exercise of any such rights or privileges constitute a default under the Ground Lease, notwithstanding any provisions to the contrary contained in the Ground Lease. 4. No provision contained herein shall be deemed an amendment or modification of any provision contained in the Sublease, including, without limiting the generality of the foregoing, any rights given thereunder to Developer to terminate the Sublease. EXHIBIT "C" Page 4 of 7 Pages 5. In the event that the Ground Lease is divided, in accordance with its terms, into two (2) or more New Leases or Separate Leases, the term "Ground Lease", as used herein, shall be deemed to refer to the said New Lease or Separate Lease leasing and demising the subleased premises. 6. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their successors, transferees and assigns. THIS SPACE INTENTIONALLY LEFT BLANK EXHIBIT "C" Page 5 of 7 Pages IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first hereinabove set forth. BOARD OF WATER COMMISSIONERS OF THE CITY OF LONG BEACH By: _______________________________ Title: ____________________________ KILROY LONG BEACH ASSOCIATES, A California Limited Partnership By: KILROY INDUSTRIES, a California Corporation, General Partner By: ________________________________ Title: _____________________________ "Developer" ____________________________________ ____________________________________ "Subtenant" EXHIBIT "C" Page 6 of 7 Pages This Agreement is hereby approved as to form this day of ________________________, 198__. JOHN R. CALHOUN Deputy City Attorney By:_______________________ "Deputy" EXHIBIT "C" Page 7 of 7 Pages PARCEL A THAT PORTION OF LOT 5 OF TRACT NO. 10548 IN THE CITY OF LONG BEACH, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 174 PAGE 15, ET. SEQ., OF MAPS IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY ALONG WITH THAT PORTION OF RANCHO LOS CERRITOS IN SAID CITY, AS PER MAP RECORDED IN BOOK 2, PAGES 202 THROUGH 205 OF PATENTS IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY DESCRIBED AS A WHOLE AS FOLLOWS: BEGINNING AT THE EASTERLY TERMINUS OF THAT CERTAIN COURSE DESCRIBED AS HAVING A BEARING AND LENGTH OF NORTH 89(degrees) 55' 23" WEST 88.37 FEET" IN THE NORTHERLY BOUNDARY OF THE LAND DESCRIBED IN THE DEED TO THE STATE OF CALIFORNIA, RECORDED MAY 11, 1959 AS INSTRUMENT NO. 1870 IN BOOK D-462 PAGE 506, OFFICIAL RECORDS; THENCE ALONG SAID NORTHERLY LINE THE FOLLOWING COURSES: SOUTH 78(degrees) 19' 22" EAST 502.94 FEET TO A ONE INCH IRON PIPE WITH CALTRANS TAG AND SOUTH 78(degrees) 55' 01" EAST 83.09 FEET TO A ONE INCH IRON PIPE WITH CALTRANS TAG; THENCE CONTINUING ALONG SAID NORTHERLY LINE AS MONUMENTED BY ONE INCH IRON PIPES WITH CALTRANS TAGS SOUTH 80(degrees) 14' 32" EAST 523.56 FEET; THENCE LEAVING SAID NORTHERLY LINE NORTH 9(degrees) 45' 28" EAST 570.00 FEET; THENCE NORTH 25(degrees) 19' 32" WEST 190.76 FEET; THENCE NORTH 89(degrees) 59' 37" WEST 112.16 FEET; THENCE SOUTH 38(degrees) 20' 44" WEST 49.52 FEET TO THE TRUE POINT OF BEGINNING; THENCE SOUTH 38(degrees) 20' 44" WEST 146.94 FEET; - --------------------------- THENCE SOUTH 31(degrees) 10' 37" WEST 483.95 FEET TO THE BEGINNING OF A NON- TANGENT CURVE CONCAVE TO THE NORTH HAVING A RADIUS OF 4954.00 FEET AND TO WHICH BEGINNING A RADIAL LINE BEARS SOUTH 10(degrees) 03' 32" WEST; THENCE WESTERLY 139.93 FEET ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 1(degree) 37' 06"; THENCE NORTH 78(degrees) 19' 22" WEST 181.01 FEET; THENCE NORTH 9(degrees) 45' 28" EAST 232.12 FEET; THENCE SOUTH 89(degrees) 53' 01" EAST 233.60 FEET; THENCE NORTH 53(degrees) 04' 54" EAST 181.74 FEET; THENCE NORTH 0(degrees) 16' 54" EAST 129.16 FEET TO THE INTERSECTION WITH A LINE BEARING NORTH 89(degrees) 55' 11" WEST FROM THE TRUE POINT OF BEGINNING; THENCE SOUTH 89(degrees) 55' 11" EAST 237.51 FEET TO THE TRUE POINT OF BEGINNING. CONTAINING 146,831 SQUARE FEET. [SEAL APPEARS HERE] EXHIBIT A To EXHIBIT C Page 1 of 3 Pages PARCEL B THAT PORTION OF LOT 5 OF TRACT NO. 10548 IN THE CITY OF LONG BEACH, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 174 PAGE 15, ET. SEQ., OF MAPS IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY ALONG WITH THAT PORTION OF RANCHO LOS CERRITOS IN SAID CITY, AS PER MAP RECORDED IN BOOK 2, PAGES 202 THROUGH 205 OF PATENTS IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY DESCRIBED AS A WHOLE AS FOLLOWS: BEGINNING AT THE EASTERLY TERMINUS OF THAT CERTAIN COURSE DESCRIBED AS HAVING A BEARING AND LENGTH OF NORTH 89(degrees) 55' 23" WEST 88.37 FEET IN THE NORTHERLY BOUNDARY OF THE LAND DESCRIBED IN THE DEED TO THE STATE OF CALIFORNIA, RECORDED MAY 11, 1959 AS INSTRUMENT NO. 1870 IN BOOK D-462 PAGE 506, OFFICIAL RECORDS; THENCE ALONG SAID NORTHERLY LINE THE FOLLOWING COURSES: SOUTH 78(degrees) 19' 22" EAST 502.94 FEET TO A ONE INCH IRON PIPE WITH CALTRANS TAG AND SOUTH 78(degrees) 55' 01" EAST 83.09 FEET TO A ONE INCH IRON PIPE WITH CALTRANS TAG; THENCE CONTINUING ALONG SAID NORTHERLY LINE AS MONUMENTED BY ONE INCH IRON PIPES WITH CALTRANS TAGS SOUTH 80(degrees) 14' 32" EAST 523.56 FEET; THENCE LEAVING SAID NORTHERLY LINE NORTH 9(degrees) 45' 28" EAST 570.00 FEET; THENCE NORTH 25(degrees) 19' 32" WEST 190.76 FEET; THENCE NORTH 89(degrees) 59' 37" WEST 112.16 FEET; THENCE SOUTH 38(degrees) 20' 44" WEST 49.52 FEET TO THE TRUE POINT OF BEGINNING; THENCE NORTH 38(degrees) 20' 44" EAST 120.17 FEET TO THE INTERSECTION WITH THE SOUTHERLY PROLONGATION OF THE WESTERLY LINE OF PARCEL 4 AS SHOWN ON A RECORD OF SURVEY IN SAID CITY AS PER MAP FILED IN BOOK 85 PAGE 19 OF RECORD OF SURVEYS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY; THENCE ALONG THE WESTERLY LINE OF SAID PARCEL AND ITS SOUTHERLY PROLONGATION NORTH 0(degrees) 01' 44" EAST 368.59 FEET TO A POINT ON SAID WESTERLY LINE DISTANT THEREON SOUTHERLY 26.48 FEET FROM THE NORTHWEST CORNER OF PARCEL 4 OF SAID RECORD OF SURVEY, SAID POINT BEING THE BEGINNING OF A CURVE CONCAVE TO THE SOUTHWEST HAVING A RADIUS OF 23.00 FEET; THENCE NORTHWESTERLY 33.21 FEET ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 82(degrees) 43' 53" TO THE BEGINNING OF A REVERSE CURVE CONCAVE TO THE NORTH HAVING A RADIUS OF 1056.00 FEET, SAID CURVE BEING CONCENTRIC WITH AND DISTANT SOUTHERLY 6.00 FEET FROM THE SOUTHERLY CURVED SIDE LINE OF SPRING STREET 100.00 FEET WIDE AS SHOWN ON SAID RECORD OF SURVEY; THENCE WESTERLY 89.13 FEET ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 4(degrees) 50' 10" TO A POINT NORMAL TO THE WESTERLY END OF SAID SOUTHERLY CURVED PORTION OF THE SIDE LINE OF SAID SPRING STREET; THENCE CONTINUING ON A LINE PARALLEL TO AND DISTANT SOUTHERLY 6.00 FEET AT RIGHT ANGLES FROM SAID SOUTHERLY SIDE LINE NORTH 77(degrees) 51' 59" WEST 74.19 FEET TO THE BEGINNING OF A CURVE CONCAVE TO THE NORTHEAST HAVING A RADIUS OF 212.00 FEET; THENCE LEAVING SAID PARALLEL LINE NORTHWESTERLY 44.57 FEET ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 12(degrees) 02' 47"; THENCE ON A NON-TANGENT LINE NORTH 66(degrees) 53' 00" WEST 6.99 FEET TO A POINT ON THE SOUTHERLY SIDE LINE OF SAID SPRING STREET, 100.00 FEET WIDE; THENCE ALONG SAID SIDE LINE NORTH 77(degrees) 51' 59" WEST 78.06 FEET TO THE BEGINNING OF A CURVE IN SAID SOUTHERLY LINE CONCAVE TO THE SOUTH HAVING A RADIUS OF 950.00 FEET; THENCE WESTERLY 95.65 FEET ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 5(degrees) 46' 06"; THENCE LEAVING SAID SIDE LINE SOUTH 0(degrees) 08' 48" WEST 426.86 FEET; THENCE NORTH 89(degrees) 58' 42" EAST 58.51 FEET; THENCE SOUTH 0(degrees) 16' 54" WEST 176.34 FEET TO THE INTERSECTION WITH A LINE BEARING NORTH 89(degrees) 55' 11" WEST FROM THE TRUE POINT OF BEGINNING; THENCE SOUTH 89(degrees) 55' 11" EAST 237.51 FEET TO THE TRUE POINT OF BEGINNING. CONTAINING 207,752 SQUARE FEET. [SEAL APPEARS HERE] EXHIBIT A TO EXHIBIT C Page 2 of 3 Pages [MAP APPEARS HERE] EXHIBIT A To EXHIBIT C Page 3 of 3 Pages BOND NO.:________ PERFORMANCE BOND PREMIUM :________ ---------------- KNOW ALL MEN BY THESE PRESENTS, That we ________________________________________ ______________________________, as Principal, and _____________________________ _______________________________________________, as Surety, are held and firmly bound unto the Board of Water Commissioners of the City of Long Beach, acting on behalf of the City of Long Beach, a Municipal Corporation (Land Lessor) and Kilroy Long Beach Associates, a California Limited Partnership (Land Lessee), as Obligees, in the penal sum of __________________________________________________ _________________________________________________DOLLARS ($ ) lawful money of the United States, for the payment of which sum truly to be made, we bind ourselves, our heirs, executors, administrators, successors and assigns, jointly and severally, firmly by these presents. THE CONDITION OF THE OBLIGATION IS SUCH, That Whereas, the Principal entered into a certain agreement which is hereto attached and made a part hereof, with Kilroy Long Beach Associates, a California Limited Partnership, dated __________ _______________, for ___________________________________________________________ which contract and the specifications and general conditions thereof are hereby incorporated herein and shall be deemed a part hereof as fully as if set out herein. NOW, THEREFORE, if the said Principal shall fully indemnify and save harmless the Obligees from all loss, liability, costs, damages, penalty, attorney's fees or expenses which Obligees may incur by reason of failure to well and truly keep and perform each, every and all of the terms and conditions of said agreement on the part of the said Principal to be kept and performed, including but not limited to completion within the time specified of all work covered by said agreement, performance of all obligation and guarantees of Kilroy Long Beach Associates, a California Limited Partnership, relating to such work under the contract with Kilroy Long Beach Associates, a California Limited Partnership; then this obligation shall be of no effect, but otherwise it shall remain in full force and effect. It is a condition hereof that any change, alteration, modification or amendment of any nature whatsoever that may be made in the terms of said agreement, any change in the character or scope of the work to be performed, or the method of performance, under said agreement or modification of said agreement or in the time for completion thereof, any change in the manner, time or amount of payment as provided therein, any change of any nature whatsoever that may be made in the terms of the contract EXHIBIT "D" Page 1 of 6 Pages with Kilroy Long Beach Associates, a California Limited Partnership, or any change that may be made in the performance of the work under said agreement by the Principal, assented to by Kilroy Long Beach Associates, a California Limited Partnership, whether made under express agreement or not, may be made without notice to the Surety and without affecting the obligations of the Surety on this bond and without requiring the consent of the Surety, and no such change or changes shall release the Surety from any of its obligations hereunder, the Surety hereby consenting to and waiving notice of any such change, alteration, modification or amendment. It is a further condition hereof that no one other than the named Obligees and the successors, administrators or assigns of the Obligees shall have any right of action under this bond. IN WITNESS WHEREOF, the said Principal and Surety have hereunto set their hands and seals this _____________ day of ___________________, 19__. __________________________________________________ (Principal) BY:_______________________________________________ __________________________________________________ (Surety) BY:_______________________________________________ Note: The name "Kilroy Long Beach Associates, a California Limited Partnership" would change to the name of any successor Land Lessee. EXHIBIT "D" Page 2 of 6 Pages PAYMENT BOND BOND NO.:________ ------------ PREMIUM :________ KNOW ALL MEN BY THESE PRESENTS, That we ________________________________________ _________________________________ as Principal, and ___________________________ ___________________________________________, as Surety, are held and firmly bound unto the Board of Water Commissioners of the City of Long Beach, acting for and on behalf of the City of Long Beach, a Municipal Corporation (Land Lessor) and Kilroy Long Beach Associates, a California Limited Partnership (Land Lessee), as Obligees, in the penal sum of ________________________________ ______________________________________________________________ DOLLARS ($ ), lawful money of the United States, for the payment of which sum well and truly to be made, we bind ourselves, our heirs, executors, administrators, successors and assigns, jointly and severally, firmly by these presents. THE CONDITION OF THE OBLIGATION IS SUCH, That Whereas, the Principal entered into a certain agreement which is hereto attached and made a part hereof, with Kilroy Long Beach Associates, a California Limited Partnership, dated _________ ________________________________, for _________________________________________ which contract and the specifications and general conditions thereof are hereby incorporated herein and shall be deemed a part hereof as fully as if set out herein. NOW, THEREFORE, if the said Principal shall pay promptly and in full the claims of all persons, firms or corporations, performing labor or furnishing equipment, materials, or supplies incurred in connection with the contract to be performed under said agreement and shall indemnify and save harmless of Obligees from all loss liability, costs, damages, penalty, attorney's fees or expenses for all taxes, insurance premiums, any and all applicable contributions, allowances or other payments or deductions, however harmed, required by statute or union labor agreement, including voluntary payment thereof by the Obligees necessary to insure orderly prosecution of work or other items or services used in, upon or for or incurred in connection with the contract to be performed under said agreement, then this obligation shall be of no effect, but otherwise it shall remain in full force and effect. It is a condition hereof that any change, alteration, modification or amendment of any nature whatsoever that may be made in the terms of said agreement, any change in the character or scope of the work to be performed, or the method of performance, under said agreement or any change in manner, time EXHIBIT "D" Page 3 of 6 Pages or amount of payment as provided therein, any change of any nature whatsoever that may be made in the terms of the contract between Kilroy Long Beach Associates, a California Limited Partnership, or any change that may be made in the performance of the work under said agreement by the Principal, assented to by Kilroy Long Beach Associates, a California Limited Partnership, whether made under express agreement or not, may be made without notice to the Surety and without affecting the obligations of the Surety on this bond and without requiring the consent of the Surety and no such change or changes shall release the Surety from any of its obligations hereunder, the Surety hereby consenting to and waiving notice of any such change, alteration, modification or amendment. Subject to the priority of the named Obligees with respect to recovery up to the penal sum of this bond, persons who have supplied or furnished labor, material, machinery, equipment or supplies to the Principal for use in the prosecution of the work provided for in said contract shall have a direct right of action against said Principal and Surety under this bond. IN WITNESS WHEREOF, the said Principal and Surety have hereunto set their hands and seals, this ____ day of ____________________, 19__. _________________________________________________ (Principal) BY:______________________________________________ _________________________________________________ (Surety) BY:______________________________________________ Note: The name "Kilroy Long Beach Associates, a California Limited Partnership" would change to the name of any successor Land Lessee. EXHIBIT "D" Page 4 of 6 Pages LENDER'S OBLIGEE RIDER TO PERFORMANCE BOND ------------------------------------------ WHEREAS, heretofore, on or about the ______ day of _____________, 19__, ______________________________________________________________, as Contractor, entered into a written agreement with Kilroy Long Beach Associates, a California Limited Partnership, as Owner of leasehold improvements, for the construction of _____________________________ ____________________________________________________________________, and WHEREAS, the Contractor and _____________________________________ _______________, a California corporation, as Surety, executed and delivered to Kilroy Long Beach Associates, a California Limited Partnership, their joint and several Performance Bond, and WHEREAS, Kilroy Long Beach Associates, a California Limited Partnership, has arranged for a loan for the exclusive purpose of payment for the performance of said contract and has requested the Contractor and Surety to join with Kilroy Long Beach Associates, a California Limited Partnership, in the execution and delivery of this Rider, and the Contractor and Surety have agreed so to do upon the condition herein stated. NOW, THEREFORE, in consideration of one dollar and other good and valuable consideration receipt of which is acknowledged, the undersigned agree that the said Performance Bond shall be, and is, amended as follows: 1. The name of __________________________________________________, as shall be added to said bond as a named Obligee. 2. The rights of the Lender as a named Obligee shall be subject to the condition precedent that Kilroy Long Beach Associates, a California Limited Partnership, obligations to the Contractor be performed. 3. The aggregate liability of the Surety under said bond to Kilroy Long Beach Associates, a California Limited Partnership, and the Lender, as their interests may appear, is limited to the penal sum of the said bond. 4. The Surety may, at its option, make any payment under said bond by check issued jointly to Kilroy Long Beach Associates, a California Limited Partnership, and the Lender. 5. Except as herein modified, said Performance Bond shall be and remain in full force and effect. EXHIBIT "D" Page 5 of 6 Pages Signed, sealed and dated this ______ day of _____________________, 19__. KILROY LONG BEACH ASSOCIATES, A California Limited Partnership ATTEST:_____________________________ BY: KILROY INDUSTRIES, a California Corporation, General Partner By: ______________________ Title: ___________________ By: __________________________ By: __________________________ (Owner) ATTEST:_____________________________ BY: __________________________ __________________________ (Surety) ATTEST:_____________________________ BY: __________________________ __________________________ (Contractor) EXHIBIT "D" Page 6 of 6 Pages ASSIGNMENT OF LEASE ------------------- THIS ASSIGNMENT OF LEASE ("Assignment") is made by the BOARD OF WATER COMMISSIONERS of the CITY OF LONG BEACH ("Assignor"), whose address is 1800 East Wardlow Road, Long Beach, California 90807, to KILROY LONG BEACH ASSOCIATES, a California Limited Partnership ("Assignee"), whose address is 2250 East Imperial Highway, Suite 1200, El Segundo, California 90245, and is made with reference to the following facts and objectives: RECITALS -------- A. Assignor, acting in the capacity of and therein referred to as "Lessor", entered into a written lease, dated ____________ ________________, 19___ (the "Lease"), in which Assignor leased to __________________________________________________________________ ________________, a ___________________________________, acting in the capacity of and therein referred to as Lessee ("Lessee"), certain premises located in the City of Long Beach, County of Los Angeles, California, as said premises are more particularly described in Exhibit "A", attached hereto and by this reference incorporated herein (the "Leased Premises"). B. Assignor, acting in the capacity of and therein described as "Landlord", has entered into a Lease Agreement with EXHIBIT "E" Page 1 of 4 Pages Assignee, acting in the capacity of and therein referred to as "Developer", dated April _______, 1988 (the "Master Lease"). The Master Lease includes the Leased Premises and other premises. The Master Lease provides in Section 5.9 that Assignor shall assign to Assignee all previously existing leases of the premises demised by the Master Lease. C. This Assignment is executed to carry out the provisions of Section 5.9 of the Master Lease and to assign to Assignee the Lease. NOW THEREFORE, Assignor assigns and transfers to Assignee all of Assignor's right, title and interest in the Lease, and Assignee accepts the assignment and assumes and agrees to perform, from the date this Assignment becomes effective, all the provisions of the Lease. This Assignment is made on the following additional covenants and conditions. 1. Effective Date of Assignment. This Assignment shall take effect ---------------------------- concurrently with the effective date of the Master Lease on April ____, 1988. 2. Assignee To Hold Assignor Harmless. Assignee shall hold Assignor and ---------------------------------- the City of Long Beach, and all of their officers and employees, free and harmless from any cost, expense, damage or claim of damage, including costs of defense, arising from the interests or asserted interests of Lessee arising subsequent to the Effective Date of this Assignment. EXHIBIT "E" Page 2 of 4 Pages 3. Assignor To Hold Assignee Harmless. Assignor shall hold Assignee free ---------------------------------- and harmless from any cost, expense, damage or claim of damage including costs of defense, arising from acts or events related to the Lease or the Leased Premises and occurring prior to the Effective Date of this Assignment, unless such damage or claim of damage is caused or alleged to be caused by this Assignment or any related transaction. 4. Successors-in-Interest. The provisions of this Assignment shall be ---------------------- binding upon and shall inure to the benefit of the heirs, executors, assigns and successors-in-interest of the parties hereto. INTENTIONALLY LEFT BLANK SIGNATURES ON PAGE 4 EXHIBIT "E" Page 3 of 4 Pages IN WITNESS WHEREOF, Assignor and Assignee have executed this Assignment on the date opposite their signatures and as of the Effective Date set forth herein. BOARD OF WATER COMMISSIONERS OF THE CITY OF LONG BEACH ________________, 1988 By: __________________________________ Title: _______________________________ "ASSIGNOR" KILROY LONG BEACH ASSOCIATES, A California limited partnership By: KILROY INDUSTRIES, A California corporation, General Partner ________________, 1988 By: ______________________________ Title: ___________________________ "ASSIGNEE" EXHIBIT "E" Page 4 of 4 Pages Recording Requested By When Recorded Mail To: MCDANIEL & MCDANIEL 2250 East Imperial Highway Suite 1200 El Segundo, California 90245 SHORT FORM GROUND LEASE ----------------------- THIS SHORT FORM GROUND LEASE is made and entered into as of this ___________ day of __________________, 198___, by and between BOARD OF WATER COMMISSIONERS OF THE CITY OF LONG BEACH, acting for and on behalf of the City of Long Beach, a municipal corporation ("Landlord"), and KILROY LONG BEACH ASSOCIATES, a California Limited Partnership ("Developer"). R E C I T A L S - - - - - - - - Landlord does hereby lease and demise to Developer that certain real property in the City of Long Beach, County of Los Angeles, State of California, more particularly described in Exhibit "A" attached hereto and all rights, privileges and easements appurtenant thereto ("Premises" herein) pursuant to and upon all of the terms, covenants and provisions set forth in that certain unrecorded Ground Lease dated ____________________________________, ("Ground Lease" herein), the terms, covenants and provisions of which are hereby incorporated herein and made a part hereof by reference. EXHIBIT "F" Page 1 of 7 Pages Landlord and Developer do further agree as follows: 1. The commencement date of the Ground Lease term is the date first written above. 2. The term of the Ground Lease shall continue for approximately forty- seven (47) years following the date of execution of the Ground Lease, until July 17, 2035, subject to earlier termination as provided in the Ground Lease and subject to four (4) successive ten (10) year options and one (l) nine (9) year option to further extend the term of the Ground Lease. 3. Developer shall have the right to subdivide the Ground Lease into one or more separate Ground Leases pursuant to Section 7.6 of the Ground Lease and to recombine one or more separate Ground Lease into a single Ground Lease pursuant to Section 7.7 of the Ground Lease. Developer also shall have the right to encumber its leasehold interest in the Ground Lease (and in each separate Ground Lease into which the Ground Lease may be subdivided) with one or more Leasehold Mortgages (as defined in section 4.3.2 of the Ground Lease) in favor of one or more Leasehold Mortgagees (as defined in section 4.3.3 of the Ground Lease). 4. Developer shall pay the real property taxes and assessments against the Premises during the term hereof, as more specifically provided in the Ground Lease. 5. Notwithstanding that the ownership of Landlord's and Developer's estates in and to the Premises may become vested in EXHIBIT "F" Page 2 of 7 Pages the same party for any reason, no merger of Developer's leasehold estate into Landlord's fee title shall result or be deemed to result thereby, as provided in Section 4.20 of the Ground Lease, provided that this provision shall not be deemed applicable to a termination of Developer's leasehold estate by reason of Developer's default or a taking under the power of eminent domain. 6. The Ground Lease grants to Developer the right to enter upon the Premises demised thereby for a period of sixty (60) days following the expiration of the term of the Ground Lease in order to remove any or all of the buildings and other improvements constructed upon said Premises by or under Developer. 7. The Ground Lease grants to Developer the right to sell any buildings from time to time constructed upon the Premises, provided that such buildings shall be and remain subject to the terms and conditions of the Ground Lease and shall be used and developed only in accordance with the Ground Lease for so long as such buildings remain upon the Premises. EXHIBIT "F" Page 3 of 7 Pages IN WITNESS WHEREOF, the parties have executed this Short Form Ground Lease as of the day and year first above written. BOARD OF WATER COMMISSIONER OF THE CITY OF LONG BEACH, By: ____________________________ Title: _________________________ "Landlord" KILROY LONG BEACH ASSOCIATES, a California Limited Partnership, By: KILROY INDUSTRIES, a California Corporation, General Partner By: ________________________ Title: _____________________ "Developer" EXHIBIT "F" Page 4 of 7 Pages This Short Form Ground Lease is hereby approved as to form this ____ day of ________________, 19___. JOHN R. CALHOUN, City Attorney By: __________________________ Deputy EXHIBIT "F" Page 5 of 7 Pages LANDLORD'S ACKNOWLEDGMENT ------------------------- Corporation ----------- STATE OF CALIFORNIA ) ) ss. COUNTY OF LOS ANGELES ) On ________________, 1988, before me, the undersigned, a Notary Public in and for said State, personally appeared _______________________________________ personally known to me or proved to me on the basis of satisfactory evidence to be the person who executed the within instrument as the ______________________, on behalf of the Board of Water Commissioners of the City of Long Beach, the Municipal corporation that executed the within instrument and acknowledged to me that said Municipal corporation executed the within instrument pursuant to a resolution of its City Council. WITNESS my hand and official seal. ______________________________ Notary Public in and for said State SEAL EXHIBIT "F" Page 6 of 7 Pages DEVELOPER'S ACKNOWLEDGEMENT --------------------------- STATE OF CALIFORNIA ) ) ss. COUNTY OF LOS ANGELES ) On June ____, 1985, before me, the undersigned, a Notary Public in and for said State, personally appeared _______________________________________________ personally known to me or proved to me on the basis of satisfactory evidence to be the person who executed this instrument as _________________________________ of Kilroy Industries, the corporation that executed this instrument as the general partner of Kilroy Long Beach Associates, a California Limited Partnership, the partnership that executed the within instrument, and acknowledged to me that such corporation executed the same as such partner and that said partnership executed the same. WITNESS my hand and official seal. ______________________________ Notary Public in and for said State SEAL EXHIBIT "F" Page 7 of 7 Pages PARCEL A THAT PORTION OF LOT 5 OF TRACT NO. 10548 IN THE CITY OF LONG BEACH, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 174 PAGE 15, ET. SEQ., OF MAPS IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY ALONG WITH THAT PORTION OF RANCHO LOS CERRITOS IN SAID CITY, AS PER MAP RECORDED IN BOOK 2, PAGES 202 THROUGH 205 OF PATENTS IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY DESCRIBED AS A WHOLE AS FOLLOWS: BEGINNING AT THE EASTERLY TERMINUS OF THAT CERTAIN COURSE DESCRIBED AS HAVING A BEARING AND LENGTH OF NORTH 89(degrees) 55' 23" WEST 88.37 FEET" IN THE NORTHERLY BOUNDARY OF THE LAND DESCRIBED IN THE DEED TO THE STATE OF CALIFORNIA, RECORDED MAY 11, 1959 AS INSTRUMENT NO. 1870 IN BOOK D-462 PAGE 506, OFFICIAL RECORDS; THENCE ALONG SAID NORTHERLY LINE THE FOLLOWING COURSES: SOUTH 78(degrees) 19' 22" EAST 502.94 FEET TO A ONE INCH IRON PIPE WITH CALTRANS TAG AND SOUTH 78(degrees) 55' 01,' EAST 83.09 FEET TO A ONE INCH IRON PIPE WITH CALTRANS TAG; THENCE CONTINUING ALONG SAID NORTHERLY LINE AS MONUMENTED BY ONE INCH IRON PIPES WITH CALTRANS TAGS SOUTH 80(degrees) 14' 32" EAST 523.56 FEET; THENCE LEAVING SAID NORTHERLY LINE NORTH 9(degrees) 45' 28" EAST 570.00 FEET; THENCE NORTH 25(degrees) 19' 32" WEST 190.76 FEET; THENCE NORTH 89(degrees) 59' 37" WEST 112.16 FEET; THENCE SOUTH 38(degrees) 20' 44" WEST 49.52 FEET TO THE TRUE POINT OF BEGINNING; THENCE SOUTH 38(degrees) 20' 44" WEST 146.94 FEET; - --------------------------- THENCE SOUTH 31(degrees) 10' 37" WEST 483.95 FEET TO THE BEGINNING OF A NON- TANGENT CURVE CONCAVE TO THE NORTH HAVING A RADIUS OF 4954.00 FEET AND TO WHICH BEGINNING A RADIAL LINE BEARS SOUTH l0(degrees) 03' 32" WEST; THENCE WESTERLY 139.93 FEET ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 1(degree) 37' 06"; THENCE NORTH 78(degrees) 19' 22" WEST 181.01 FEET; THENCE NORTH 9(degrees) 45' 28" EAST 232.12 FEET; THENCE SOUTH 89(degrees) 53' 01" EAST 233.60 FEET; THENCE NORTH 53(degrees) 04' 54" EAST 181.74 FEET; THENCE NORTH 0(degree) 16' 54" EAST 129.16 FEET TO THE INTERSECTION WITH A LINE BEARING NORTH 89(degrees) 55' 11" WEST FROM THE TRUE POINT OF BEGINNING; THENCE SOUTH 89(degrees) 55' 11" EAST 237.51 FEET TO THE TRUE POINT OF BEGINNING. CONTAINING 146,831 SQUARE FEET. EXHIBIT A To EXHIBIT F Page 1 of 3 Pages PARCEL B THAT PORTION OF LOT 5 OF TRACT NO. 10548 IN THE CITY OF LONG BEACH, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 174 PAGE 15, ET. SEQ., OF MAPS IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY ALONG WITH THAT PORTION OF RANCHO LOS CERRITOS IN SAID CITY, AS PER MAP RECORDED IN BOOK 2, PAGES 202 THROUGH 205 OF PATENTS IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY DESCRIBED AS A WHOLE AS FOLLOWS: BEGINNING AT THE EASTERLY TERMINUS OF THAT CERTAIN COURSE DESCRIBED AS HAVING A BEARING AND LENGTH OF NORTH 89 DEGREES 55 MINUTES 23 SECONDS WEST 88.37 FEET IN THE NORTHERLY BOUNDARY OF THE LAND DESCRIBED IN THE DEED TO THE STATE OF CALIFORNIA, RECORDED MAY 11, 1959 AS INSTRUMENT NO. 1870 IN BOOK D-462 PAGE 506, OFFICIAL RECORDS; THENCE ALONG SAID NORTHERLY LINE THE FOLLOWING COURSES: SOUTH 78 DEGREES 19 MINUTES 22 SECONDS EAST 502.94 FEET TO A ONE INCH IRON PIPE WITH CALTRANS TAG AND SOUTH 78 DEGREES 55 MINUTES 01 SECONDS EAST 83.09 FEET TO A ONE INCH IRON PIPE WITH CALTRANS TAG; THENCE CONTINUING ALONG SAID NORTHERLY LINE AS MONUMENTED BY ONE INCH IRON PIPES WITH CALTRANS TAGS SOUTH 80 DEGREES 14 MINUTES 32 SECONDS EAST 523.56 FEET; THENCE LEAVING SAID NORTHERLY LINE NORTH 9 DEGREES 45 MINUTES 28 SECONDS EAST 570.00 FEET; THENCE NORTH 25 DEGREES 19 MINUTES 32 SECONDS WEST 190.76 FEET; THENCE NORTH 89 DEGREES 59 MINUTES 37 SECONDS WEST 112.16 FEET; THENCE SOUTH 38 DEGREES 20 MINUTES 44 SECONDS WEST 49.52 FEET TO THE TRUE POINT OF BEGINNING; THENCE NORTH 38 DEGREES 20 MINUTES 44 SECONDS EAST 120.17 FEET TO THE INTERSECTION WITH THE SOUTHERLY PROLONGATION OF THE WESTERLY LINE OF PARCEL 4 AS SHOWN ON A RECORD OF SURVEY IN SAID CITY AS PER MAP FILED IN BOOK 85 PAGE 19 OF RECORD OF SURVEYS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY; THENCE ALONG THE WESTERLY LINE OF SAID PARCEL AND ITS SOUTHERLY PROLONGATION NORTH O DEGREES 01 MINUTES 44 SECONDS EAST 368.59 FEET TO A POINT ON SAID WESTERLY LINE DISTANT THEREON SOUTHERLY 26.48 FEET FROM THE NORTHWEST CORNER OF PARCEL 4 OF SAID RECORD OF SURVEY, SAID POINT BEING THE BEGINNING OF A CURVE CONCAVE TO THE SOUTHWEST HAVING A RADIUS OF 23.00 FEET; THENCE NORTHWESTERLY 33.21 FEET ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 82 DEGREES 43 MINUTES 53 SECONDS TO THE BEGINNING OF A REVERSE CURVE CONCAVE TO THE NORTH HAVING A RADIUS OF 1056.00 FEET, SAID CURVE BEING CONCENTRIC WITH AND DISTANT SOUTHERLY 6.00 FEET FROM THE SOUTHERLY CURVED SIDE LINE OF SPRING STREET 100.00 FEET WIDE AS SHOWN ON SAID RECORD OF SURVEY; THENCE WESTERLY 89.13 FEET ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 4 DEGREES 50 MINUTES 10 SECONDS TO A POINT NORMAL TO THE WESTERLY END OF SAID SOUTHERLY CURVED PORTION OF THE SIDE LINE OF SAID SPRING STREET; THENCE CONTINUING ON A LINE PARALLEL TO AND DISTANT SOUTHERLY 6.00 FEET AT RIGHT ANGLES FROM SAID SOUTHERLY SIDE LINE NORTH 77 DEGREES 51 MINUTES 59 SECONDS WEST 74.19 FEET TO THE BEGINNING OF A CURVE CONCAVE TO THE NORTHEAST HAVING A RADIUS OF 212.00 FEET; THENCE LEAVING SAID PARALLEL LINE NORTHWESTERLY 44.57 FEET ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 12 DEGREES 02 MINUTES 47 SECONDS; THENCE ON A NON-TANGENT LINE NORTH 66 DEGREES 53 MINUTES 00 SECONDS WEST 6.99 FEET TO A POINT ON THE SOUTHERLY SIDE LINE OF SAID SPRING STREET, 100.00 FEET WIDE; THENCE ALONG SAID SIDE LINE NORTH 77 DEGREES 51 MINUTES 59 SECONDS WEST 78.06 FEET TO THE BEGINNING OF A CURVE IN SAID SOUTHERLY LINE CONCAVE TO THE SOUTH HAVING A RADIUS OF 950.00 FEET; THENCE WESTERLY 95.65 FEET ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 5 DEGREES 46 MINUTES 06 SECONDS; THENCE LEAVING SAID SIDE LINE SOUTH 0 DEGREES 08 MINUTES 48 SECONDS WEST 426.86 FEET; THENCE NORTH 89 DEGREES 58 MINUTES 42 SECONDS EAST 58.51 FEET; THENCE SOUTH 0 DEGREES 16 MINUTES 54 SECONDS WEST 176.34 FEET TO THE INTERSECTION WITH A LINE BEARING NORTH 89 DEGREES 55 MINUTES 11 SECONDS WEST FROM THE TRUE POINT OF BEGINNING; THENCE SOUTH 89 DEGREES 55 MINUTES 11 SECONDS EAST 237.51 FEET TO THE TRUE POINT OF BEGINNING. CONTAINING 207,752 SQUARE FEET. [SEAL HERE] EXHIBIT A To EXHIBIT F Page 2 of 3 Pages PARCEL B EX-10.12 7 LEASE AGREEMENT DATED DECEMBER 30, 1988 EXHIBIT 10.12 LONG BEACH MUNICIPAL AIRPORT LEASE AGREEMENT PARCELS 5 & 6 KILROY LONG BEACH ASSOCIATES a California Limited Partnership "DEVELOPER" CITY OF LONG BEACH "LANDLORD" TABLE OF CONTENTS ----------------- Page ---- 1. SUBJECT OF LEASE........................................................ 2 1.1 Purpose of Lease............................................... 2 1.2 Lease of Premises.............................................. 3 1.3 The Project Area............................................... 3 1.4 The Premises................................................... 3 1.4.1 Adjacent Properties................................... 3 1.5 Parties to the Lease Agreement................................. 4 1.5.1 Landlord.............................................. 4 1.5.2 Developer............................................. 4 1.5.3 Association by Developer.............................. 5 2. TERM.................................................................... 5 2.1 Basic Term..................................................... 5 2.2 Options for Extensions......................................... 6 3. RENT.................................................................... 6 3.1 Minimum Ground Rent............................................ 6 3.1.1 Amount of Ground Rent................................. 6 3.1.2 Allocation of Ground Rent............................. 6 3.1.3 Payment of Ground Rent................................ 7 3.1.4 Initial Ground Rent................................... 7 3.1.5 Inapplicable Provision................................ 8 3.1.6 Inapplicable Provision................................ 8 3.1.7 Due Dates and Place of Payment........................ 8 3.2 Ground Rent Adjustments........................................ 8 3.2.1 Adjustment Dates...................................... 8 3.2.2 Ground Rent Adjustments by Appraisal........................................... 9 3.2.2.1 Adjustment for Predevelopment and Infrastructure Costs......................... 10 3.2.3 Appraisal............................................. 10 3.2.4 Maximum Rent Increase................................. 12 3.2.4.1 Allocation to Parcels.............................. 12 3.2.4.2 Base Sublease Rental............................... 13 3.2.4.3 Sublease Rental Percentage Change........................................... 13 3.2.4.4 Adjusted Ground Rent............................... 13 3.2.4.5 Sale or Assignment of Lease- hold Interest.................................... 14 3.3 Ground Rent Adjustments Following Reconstruction............... 14 3.3.1 Ground Rent Adjustments............................... 15 3.3.1.1 Adjustment Date.................................... 15 3.3.1.2 Alternate Adjustment Date.......................... 15 3.3.2 No Adjustment At Next Scheduled Adjustment Date..................................... 16 3.3.3 Maximum Ground Rent Adjustment........................ 16 i TABLE OF CONTENTS ----------------- (continued) Page ---- 3.4 Adjustments to Ground Rent During Option Term......................................................... 16 3.5 Maximum Ground Rent Increase................................... 16 3.6 Definition of Predevelopment and Infra- structure Costs.............................................. 17 3.7 Approval of Improvement Plans.................................. 17 3.8 Determination of Predevelopment and Infrastructure Costs......................................... 18 3.9 Inapplicable Provision......................................... 18 3.10 Inapplicable Provision......................................... 18 3.11 Inapplicable Provision......................................... 18 4. LEASEHOLD MORTGAGES..................................................... 18 4.1 Leasehold Mortgage Authorized.................................. 18 4.2 Notice to Landlord............................................. 19 4.2.1 Leasehold Mortgage Requirements....................... 19 4.2.2 Assignment of Leasehold Mortgage...................... 19 4.2.3 Landlord's Acknowledgment of Notice............................................. 19 4.2.4 Developer to Provide Copies........................... 20 4.3 Definitions.................................................... 20 4.3.1 Institutional Lender.................................. 20 4.3.2 Leasehold Mortgage.................................... 21 4.3.3 Leasehold Mortgagee................................... 21 4.4 Consent of Leasehold Mortgagee Required........................ 21 4.5 Default Notice................................................. 21 4.6 Notice to Leasehold Mortgagee.................................. 22 4.6.1 Landlord's Termination Notice......................... 22 4.6.1.1.................................................... 23 4.6.1.2.................................................... 23 4.6.1.3.................................................... 23 4.6.2 Proper Address of Leasehold Mortgagee.......................................... 24 4.7 Procedure on Default........................................... 24 4.7.1 Extension of Termination Notice Period.............................................. 24 4.7.1.1 Payment of Monetary Obligations..................................... 24 4.7.1.2 Foreclosure of Leasehold Mortgage........................................ 25 4.7.2 Cure of Default....................................... 25 4.7.3 Compliance of Leasehold Mortgagee..................... 26 4.7.4 Leasehold Mortgage Not an Assignment.......................................... 26 4.7.5 Obligation of Leasehold Mortgagee to Repair or Reconstruct............................ 27 4.7.6 Leasehold Mortgagee's Right to Transfer............................................ 28 ii TABLE OF CONTENTS ----------------- (continued) Page ---- 4.7.7 Leasehold Mortgagee Transfer a Permitted Sale...................................... 28 4.8 New Lease...................................................... 29 4.8.1 Terms of New Lease.................................... 29 4.8.1.1 Written Request to Landlord....................... 29 4.8.1.2 Payment of Obligations............................ 29 4.8.1.3 Remedy of Developer's Defaults.................... 30 4.8.1.4 New Lease to Have First Priority........................................ 31 4.8.1.5 Developer's Obligations Under New Lease....................................... 31 4.9 New Lease Priorities........................................... 31 4.10 Eminent Domain................................................. 32 4.11 Notice of Arbitration.......................................... 32 4.12 Amendment to Facilitate Leasehold Financing.................... 32 4.13 Security Deposit............................................... 32 4.14 Estoppel Certificate........................................... 33 4.15 Notices........................................................ 34 4.16 Erroneous Payments............................................. 34 4.17 Request for Notice for Benefit of Landlord..................... 34 4.18 Release or Forebearance........................................ 35 4.19 Notice......................................................... 35 4.20 No Merger...................................................... 35 4.21 No Payment by Landlord......................................... 35 4.22 Self Liquidating Mortgage...................................... 36 4.23 Leasehold Mortgagee Need Not Cure Specified Defaults..................................................... 36 4.24 Casualty Loss.................................................. 36 5. ASSIGNMENT AND SUBLETTING............................................... 36 5.1 Prohibition Against Change in Ownership, Management and Control....................................... 36 5.1.1 Name and Address for Notices.......................... 37 5.1.2 Type of Entity........................................ 37 5.1.3 Other Transfers....................................... 37 5.1.4 Buildings or Land..................................... 38 5.2 Assignments Not Subject to Approval............................ 38 5.2.1 Death or Incapacity................................... 38 5.2.2 Family Transfer....................................... 38 5.2.3 Affiliated Corporation................................ 38 5.2.4 IRS Transfer.......................................... 39 5.2.5 Public Entity......................................... 39 5.2.6 Partner............................................... 39 5.2.7 Comprising Entity..................................... 40 5.3 Assignment Invalid............................................. 40 5.4 Approval of Assignments........................................ 40 5.4.1 Name.................................................. 40 5.4.2 Description........................................... 40 iii TABLE OF CONTENTS ----------------- (continued) Page ---- 5.4.3 Nature of Business.................................... 40 5.4.4 Financial Information................................. 41 5.4.5 Officers.............................................. 41 5.4.6 Additional Information................................ 41 5.4.6.1.................................................... 41 5.4.6.2.................................................... 41 5.4.6.3.................................................... 41 5.4.7 Informational Purposes................................ 41 5.4.7.1.................................................... 41 5.4.7.2.................................................... 42 5.4.7.3.................................................... 42 5.4.8 Confidentiality....................................... 42 5.4.9 Disapproval by Landlord............................... 42 5.5 No Release..................................................... 43 5.6 Unauthorized Change............................................ 43 5.7 Subletting..................................................... 44 5.7.1 Minor Subleases....................................... 46 5.7.2 Consent to Sublease................................... 46 5.7.2.1 Description....................................... 46 5.7.2.2 Name.............................................. 47 5.7.2.3 Nature of Business................................ 47 5.7.2.4 Financial Information............................. 47 5.7.2.5 Officers.......................................... 47 5.7.2.6 Additional Information............................ 47 5.7.2.6.1................................................ 47 5.7.2.6.2................................................ 47 5.7.2.6.3................................................ 48 5.7.2.7 Informational Purposes............................ 48 5.7.2.7.1................................................ 48 5.7.2.7.2................................................ 48 5.7.2.7.3................................................ 48 5.7.2.7.4................................................ 48 5.7.3 Confidentiality....................................... 48 5.7.4 Disapproval by Landlord............................... 48 5.8 Sale of Buildings.............................................. 49 6. INDEMNITY, INSURANCE, CASUALTY DAMAGE................................... 49 6.1 Indemnification and Hold Harmless.............................. 49 6.2 Insurance...................................................... 50 6.2.1 Liability Insurance................................... 50 6.2.2 Fire and Extended Coverage............................ 52 6.2.3 Aviation Facilities................................... 54 6.2.4 Miscellaneous......................................... 55 6.2.5 Blanket Policies...................................... 56 6.2.6 Self-Insurance........................................ 57 6.2.7 Insurance Adjustments................................. 57 6.3 Damage or Destruction.......................................... 57 6.3.1 Restoration of Premises............................... 57 iv TABLE OF CONTENTS ----------------- (continued) Page ---- 6.3.2 Right to Terminate.................................... 58 6.3.3 No Reduction in Rent.................................. 59 7. DEVELOPMENT OF THE PROJECT............................................. 59 7.1 Scope of Development........................................... 59 7.2 Developer's Obligation to Develop Premises..................... 60 7.2.1 Best Efforts to Sublease.............................. 61 7.3 Architectural Approval......................................... 61 7.3.1 Restriction........................................... 61 7.3.2 Basic Concept Documents............................... 61 7.3.3 Landscaping........................................... 62 7.3.4 Exterior Elevations................................... 63 7.3.5 Security and Security Plans........................... 63 7.3.6 Amendments............................................ 64 7.3.7 Landlord Approval..................................... 64 7.3.8 Communication and Consultation........................ 65 7.3.9 Requirements of Institutional Lender or Major Occupant............................ 66 7.3.10 Interior Improvements................................. 67 7.3.11 Modification of Plans................................. 67 7.4 Performance and Payment Bonds.................................. 67 7.4.1 Agreement to Provide.................................. 67 7.4.2 Term of the Bond...................................... 68 7.4.3 Penal Sum............................................. 69 7.4.4 Alternative Performance............................... 69 7.5 Construction................................................... 69 7.5.1 Costs of Construction................................. 69 7.5.2 Right to Improve...................................... 70 7.5.3 Governmental Permits.................................. 71 7.5.4 Rights of Access...................................... 71 7.5.5 Local, State and Federal Laws......................... 72 7.5.6 Antidiscrimination During Construction........................................ 72 7.5.7 Responsibilities of Landlord.......................... 72 7.5.7.1 Governmental Approvals............................ 72 7.5.7.2 Easements......................................... 73 7.5.7.3 Off-Site Improvements............................. 73 7.5.7.4 Bond Financing.................................... 74 7.5.8 Responsibilities of Developer......................... 74 7.5.9 Maintenance........................................... 75 7.5.10 Acceptance of Premises................................ 75 7.6 Subdivided Leases.............................................. 76 7.6.1 Same Parties.......................................... 76 7.6.2 Obligations of Subdivided Leases...................... 77 7.6.3 Terms, Covenants...................................... 77 7.6.3.1 Ground Rent....................................... 77 7.6.3.2 Improvements...................................... 78 7.6.3.3 Easements and CC & R's............................ 78 v TABLE OF CONTENTS ----------------- (continued) Page ---- 7.6.3.4 Description of Property........................... 78 7.6.3.5 Excluded Matters.................................. 78 7.7 Combining Leases.............................................. 79 7.7.1 Ground Rent........................................... 79 7.7.2 Easements and CC & R's................................ 79 8. USE..................................................................... 79 8.1 Permitted Development.......................................... 79 8.2 Aviation Related Uses.......................................... 80 8.3 Inapplicable Provision......................................... 80 8.4 Vehicle Parking................................................ 80 8.5 Federal Aviation Administration................................ 80 8.6 Inspection..................................................... 81 9. LIENS................................................................... 81 9.1 Developer's Responsibility..................................... 81 9.2 Notice of Work................................................. 82 9.3 Discharge of Liens............................................. 82 9.4 Landlord's Right to Pay........................................ 82 9.5 Reimbursement of Landlord...................................... 83 10. CONDEMNATION............................................................ 83 10.1 Definition of Terms............................................ 83 10.1.1 Total Taking...................................... 83 10.1.2 Partial Taking.................................... 84 10.1.3 Voluntary Conveyance............................. 84 10.1.4 Date of Taking................................... 84 10.1.5 Leased Land....................................... 84 10.2 Effect of Taking............................................... 85 10.3 Allocation of Award............................................ 85 10.4 Reduction of Ground Rent on Partial Taking..................... 85 10.5 Temporary Taking............................................... 86 11. ALTERATIONS BY DEVELOPER................................................ 86 12. TAXES AND ASSESSMENTS................................................... 87 12.1 Payment by Developer........................................... 87 12.2 Installment Payments........................................... 87 12.3 Proration...................................................... 88 12.4 Right to Contest............................................... 88 13. CERTIFICATES BY DEVELOPER AND LANDLORD.................................. 89 13.1 Developer to Provide........................................... 89 13.2 Landlord to Provide............................................ 90 14. QUIET ENJOYMENT......................................................... 90 vi TABLE OF CONTENTS ----------------- (continued) Page ---- 15. TERMINATION AND FURTHER LEASING......................................... 91 15.1 Termination.................................................... 91 15.2 Termination by Developer....................................... 91 15.3 Termination by Landlord........................................ 91 15.3.1....................................................... 91 15.3.2....................................................... 91 15.3.3....................................................... 91 15.3.4....................................................... 91 15.3.5....................................................... 91 16. SECURITY DEPOSIT........................................................ 92 16.1 Good Faith Deposit............................................. 92 16.1.1 Receipt by Landlord................................. 92 16.1.2 Form of Deposit..................................... 92 16.1.3 Interest............................................ 93 16.1.4 If Bond is Posted................................... 94 16.2 Construction Security Deposits................................. 94 16.2.1 Form of Construction Deposit........................ 95 16.2.2 Interest............................................ 95 16.2.3 Incorporation by Reference.......................... 96 16.2.4 Return of Deposit................................... 96 16.2.5 Retention of Deposit by Landlord.................... 96 17. GENERAL PROVISIONS...................................................... 97 17.1 Notices, Demands and Communication between the Parties.................................................. 97 17.2 Conflict of Interest........................................... 98 17.3 Enforced Delay: Extension of Time of Performance.................................................. 98 17.4 Inspection of Books and Records................................ 99 17.5 Defaults and Remedies.......................................... 99 17.5.1 Defaults - General.................................... 99 17.5.2 Institution of Legal Actions.......................... 99 17.5.3 Applicable Law........................................ 100 17.5.4 Service of Process.................................... 100 17.5.5 Rights and Remedies Are Cumulative.......................................... 100 17.5.6 Inaction Not a Waiver of Default...................... 101 17.5.7 Remedies.............................................. 101 17.5.7.1................................................... 101 17.5.7.2................................................... 101 17.5.7.3................................................... 102 17.5.7.4................................................... 102 17.5.8 Developer's Rights ................................... 102 17.5.9 Lease Termination..................................... 102 17.5.10 Landlord's Exercise of Remedies...................... 103 vii TABLE OF CONTENTS ----------------- (continued) Page ---- 17.5.11 Payment to Developer.............................. 104 17.5.11.1 Reimbursement to Landlord.................... 104 17.5.11.2 Reimbursement to Developer................... 105 17.5.11.3 Ground Rent.................................. 106 17.5.11.4 Remaining Balance............................ 106 17.5.12 Delivery of Plans................................. 106 17.6 Right to Contest Laws.......................................... 106 17.7 Trade Fixtures................................................. 107 17.8 Continued Possession of Developer.............................. 108 17.9 Utilities...................................................... 108 17.10 Surrender...................................................... 108 17.11 Partial Invalidity............................................. 109 17.12 Section Headings............................................... 109 17.13 Short Form Lease............................................... 109 17.14 Exhibits Incorporated.......................................... 109 17.15 Entire Agreement, Waivers and Amendments....................... 110 17.16 Waivers........................................................ 110 17.17 Approvals...................................................... 110 17.18 Successors in Interest......................................... 110 17.19 "And/Or"....................................................... 110 17.20 "Including" Defined............................................ 111 17.21 Right of First Refusal to Purchase............................. 111 17.22 If Developer is a Trustee...................................... 112 17.23 Limitation of Liability of Partners............................ 112 17.24 Approvals...................................................... 113 viii DEFINED WORDS -------------
Defined Word Paragraph Page - ------------ --------- ---- "Adjacent Properties" 1.4.1 3 "Adjusted Fair Market Land Value" 3.2.2.1 9 "Adjusted Ground Rent" 3.2.4.4 13 "adjustment dates" 3.2.1 8 "Affiliated Corporation" 5.2.3 38 "Agreement Establishing Developer" 1.5.2 4 "and/or" 17.19 110 "Approved Plans" 3.8 18 "as-is" 7.5.10 75 "Basic Concept Documents" 7.3.2 62 "Commencement of Construction" 3.1.3 6 "Completion Date" 5.5 43 "date of taking" 10.1.4 84 "Developer" Intro 1 "Developer's Long Beach Airport 7.1 60 Center Submittal" "FAA" 8.5 81 "Ground Rent" 3.1 6 "Ground Sublease" 5.7 45 "include" 17.20 111 "including" 17.20 111 "Institutional Lender" 4.3.1 20 "Landlord" Intro 1 "Lease" Intro 1 "leased land" 10.1.5 84
x LIST OF EXHIBITS ----------------
First Appearing at Ltr. Description Paragraph Page - ---- ----------- --------- ---- A Legal Description of Premises 1.2 3 B Site Map of Project Area and 1.4 3 Adjacent Properties C Parcel Map 3.1.2 6 D Categories of Predevelopment 3.6 17 and Infrastructure Costs E Form of Nondisturbance 5.7 44 Agreement F Off-Site Improvements 7.5.7.3 73 G Landscaping Plans 7.3.3 62 H Exterior Elevations 7.3.4 63 I Form of Performance Bond and 7.4.1 68 Labor and Material Bond K Master FBO Lease 8.2 80 L FAA Conditions 8.5 81 M Form of Short Form Lease 17.13 109
ix DEFINED WORDS ------------- (continued)
Defined Word Paragraph Page - ------------ --------- ---- "Leasehold Mortgage" 4.3.2 21 "Leasehold Mortgagee" 4.3.3 21 "manage" 1.5.3 5 "Master FBO Lease" 8.2 80 "Net Square Footage" 3.1.1 7 "New Lease" 4.8.1 29 "nondisturbance agreement" 5.7 44 "partial taking" 10.1.2 84 "Predevelopment and Infrastructure 3.2.2.1 10 Costs" "Premises" 1.2 3 "Project" 1.1 2 "Single Lease" 7.7 79 "Subdivided Lease" 7.6 76 "sublease" 5.7 44 "sublessee" 5.7 45 "Supplement to Kilroy Industries 7.1 60 December 7, 1983, Proposal" "Termination Notice" 4.6.1 23 "Termination Notice Period" 4.6.1 23 "total taking" 10.1.1 83
xi LEASE AGREEMENT --------------- THIS LEASE AGREEMENT (the "Lease") is made this 30th day of December, 1988, by and between KILROY LONG BEACH ASSOCIATES, a California Limited Partnership, hereinafter referred to as "Developer", and the CITY OF LONG BEACH, a municipal corporation, hereinafter referred to as "Landlord". This Lease is made with reference to the following facts: A. On or about July 18, 1985, Landlord and Tenant entered into a lease (the "All-Inclusive Lease") of certain real property described in Exhibit "A" to the All-Inclusive Lease (the "All-Inclusive Lease Real Property"). The All-Inclusive Lease Real Property to be developed pursuant to the All Inclusive Lease is therein and herein referred to as the "Project". A short form of the All-Inclusive Lease, dated July 17, 1985, was recorded on November 14, 1986 as Instrument No. 86-1571363 in Official Records in the Office of the County Recorder of Los Angeles County, California (the "Recorded Short Form All Inclusive Lease"). B. A Parcel Map has been filed with the County of Los Angeles on July 22, 1988, as Parcel Map No. 16960 in Book 208, pages 92 through 100, of Parcel Maps in the Office of the County Recorder of said County (the "Parcel Map"). This Parcel Map includes the real property demised by the All-Inclusive Lease, and other real property. C. The All-Inclusive Lease provides in paragraph 7.6 thereof that the said All-Inclusive Lease may be subdivided into 1 separate new leases upon notice from Developer to Landlord. Developer gave written notice to Landlord on August 22, 1988 requesting that the All-Inclusive Lease by subdivided into three separate leases covering the All-Inclusive Lease Real Property as follows: 1. Parcels 5 and 6 of the Parcel Map (the "Parcel 5 and 6 Lease"). 2. Parcels 1 and 2 of the Parcel Map (the "Parcel 1 and 2 Lease"). 3. The All-Inclusive Lease would be reduced in scope and coverage to include all of the remainder of the All-Inclusive Lease Real Property consisting of Parcels 3 and 4, and an additional Parcel 8 of the Parcel Map. D. This Lease is intended to be the subdivided lease hereinabove described as the Parcel 5 and 6 Lease, and it shall hereinafter be referred to as the "Lease". NOW THEREFORE Landlord and Developer hereby agree as follows: 1. SUBJECT OF LEASE: ---------------- 1.1 Purpose of Lease. The purpose of this Lease is to provide for ---------------- the lease and improvement of certain Premises, hereinafter described, as a part of the Project. This Lease is entered into pursuant to the provisions of Section 7.6 of the All-Inclusive Lease and in order to develop Parcels 5 and 6 of the Project and not for speculation in land holding. The development of Parcels 5 and 6 of the Project pursuant to and as 2 contemplated by this Lease is in the best interests of Landlord and in accord with the public purposes and provisions of applicable State and local laws and requirements under which the Project is to be undertaken. 1.2 Lease of Premises. Subject to the terms, covenants and ----------------- conditions of this Lease, Landlord hereby leases to Developer and Developer hereby takes and hires from Landlord that certain real property (the "Premises) legally described on Exhibit "A" attached hereto and made a part hereof, upon the terms and conditions hereinafter set forth. 1.3 The Project Area. The area within which the Project is ---------------- located in the City of Long Beach is the area generally described as the area bounded by Spring Street on the northwest, Taxiway D on the northeast, the San Diego Freeway on the south and southeast, and the National Guard facility on the west. 1.4 The Premises. The Premises are included in the Project area ------------ illustrated and designated on the site map attached hereto as Exhibit "B" and the revised Parcel Map No. 16960 attached hereto as Exhibit "C", and forming a part of this Lease and are legally described in the attached Exhibit "A". 1.4.1 Adjacent Properties. Developer has entered into a ------------------- separate Lease, dated April 21, 1988, with the Board of Water Commissioners of the City of Long Beach (the "Water Department Lease"), for the development of certain adjacent properties ("Adjacent Properties") identified in Exhibit "B", into the Project for creation of an integrated development. The fair market value and fair market Ground Rent and 3 periodic adjustments thereof of said Adjacent Properties shall be as mutually agreed by said Board of Water Commissioners and Developer, and by Landlord, as to that portion under jurisdiction of Landlord. Development of the Adjacent Properties shall be governed by the Water Department Lease (and Landlord, as to its property). 1.5 Parties to the Lease Agreement. ------------------------------ 1.5.1 Landlord. Landlord is a municipal corporation -------- organized and existing under the laws of the State of California acting in its proprietary capacity. The principal office of Landlord is located at City Hall, 333 West Ocean Boulevard, Long Beach, California 90802. The term "Landlord" as used in this Lease includes the City of Long Beach California, and any assignee of or successor to its rights, powers and responsibilities. 1.5.2 Developer. Developer is a California limited --------- partnership having a principal place of business at 2250 East Imperial Highway, Suite 1200, El Segundo, California 90245. A written agreement has been executed creating Developer ("Agreement Establishing Developer") an executed copy of which has been delivered to Landlord. Developer agrees, upon request of Landlord, to provide Landlord with any amendments to the Agreement Establishing Developer, so long as Kilroy Long Beach Associates, a California Limited Partnership, is the party acting as Developer under this Lease. The provisions of the foregoing sentence shall apply to any entity becoming a suc- 4 cessor to Developer under this Lease or any other lease which may be established pursuant hereto covering the Premises. 1.5.3 Association by Developer. Notwithstanding any other ------------------------ provisions hereof, Developer reserves the right, at its discretion, to join and associate with other entities in joint ventures, partnerships or otherwise for the purpose of leasing and developing the Premises and the Adjacent Properties, and Developer may assign this Lease to any such entity, provided that Developer, or any partner of Developer having a controlling interest in Developer, continues to manage and retain policy control over the development and operation of the Premises, until such time as Developer's interests under this Lease are assigned as permitted under subsection 5.1, below. As used herein, "manage" shall mean to direct or supervise the operation and execution of the development of the Premises and to have authority to act for and bind the entity in all dealings with Landlord under this Lease. This definition shall be deemed to require Developer to retain policymaking authority. 2. TERM: ---- 2.1 Basic Term. The term of this Lease shall commence on the ---------- date of execution of this Lease and shall continue thereafter for a period of approximately forty-six (46) years, expiring on July 17, 2035. 5 2.2 Options for Extensions. Subject to approval by the Long ---------------------- Beach City Council and subject to the review by Landlord of Lease provisions pursuant to Section 37380(b)(1) of the Government Code, Developer shall have an option for four (4) Lease extensions of ten (10) years each and a final Lease extension of nine (9) years, so that the total possible duration of this Lease will be ninety-nine (99) years. Developer may request at any time after six (6) months following the effective date of this Lease that Landlord formally consider the granting of such Lease extensions, and Landlord shall act upon such request within ninety (90) days after receipt thereof. 3. RENT: ---- 3.1 Minimum Ground Rent. From commencement of the term of this ------------------- Lease, the Ground Rent ("Ground Rent") payments shall be as follows: 3.1.1 Amount of Ground Rent. Developer shall pay as initial --------------------- Ground Rent, the sum of Two Hundred Ninety Five Thousand, Four Hundred Twenty-Eight and 97/100 ($295,428.97) per year, which is stated by the parties to be pro rata share for this lease of ten percent (10%) of initial stated value of the land included in the Premises, which in turn is agreed by the parties to be Two Million Nine Hundred Fifty- Four Thousand, Two Hundred Eighty-Nine and 70/100 Dollars ($2,954,289.70). 3.1.2 Allocation of Ground Rent. Developer initially ------------------------- intends to develop the Premises as two (2) distinct parcels, which are designated as Parcel 5 and 6 Parcel 6 of Parcel Map No. 16960 attached hereto and marked Exhibit "C" for reference, with one or more buildings per parcel. The initial Ground Rent obligation described in this subsection 3.1.1. shall be allocated between Parcel 5 and Parcel 6 in the proportion that the net square footage of land contained in each parcel bears to the net square footage of the land in the entire Premises. "Net square footage" of land means that portion of the land not subject to dedication for public streets and sidewalks. 3.1.3 Payment of Ground Rent. The obligation to pay Initial ---------------------- Ground Rent is acknowledged to have commenced on Parcel 5 on July 21, 1988 and on Parcel 6 on July 27, 1988, pursuant to the provisions of the All-Inclusive Lease. Such Initial Ground Rent for Parcel 5 and Parcel 6 shall be prorated and paid under the All-Inclusive Lease until the date of this Lease, and thereafter shall be paid pursuant to the provisions of this Lease. 3.1.4 Initial Ground Rent. The initial Ground Rent due for ------------------- each parcel shall be a sum equal to fifty percent (50%) of the Ground Rent attributable to such parcel. Payment of Ground Rent shall continue at that rate until either six (6) months after issuance of an Initial Temporary Certificate of Occupancy on the building shell or commencement of subtenant rent, whichever occurs earlier, at which time the full Ground Rent attributable to that parcel shall become payable. 7 3.1.5 Inapplicable Provision. ---------------------- 3.1.6 Inapplicable Provision. ---------------------- 3.1.7 Due Dates and Place of Payment. Ground Rents ------------------------------ described herein shall be payable in installments due the first day of each month. Payment shall be made to the City of Long Beach at the office of the Airport Manager, 4100 Donald Douglas Drive, Long Beach, California 90808. Ground Rent installments will be deemed late on the tenth (10th) day of the month and shall bear interest until the installment is paid at the rate received by the City of Long Beach on its investment portfolio during the preceding quarter, provided said interest rate shall not exceed twenty percent (20%) per year. 3.2 Ground Rent Adjustments. ----------------------- 3.2.1 Adjustment Dates. In order to adjust the annual ---------------- Ground Rent for each parcel, the fair market 8 land value of each parcel and the prevailing rate of return shall be determined in the tenth (10th) year after commencement of payment of the full Ground Rent for such parcel, and adjusted Ground Rent payments shall take effect on the first (1st) day of the eleventh (11th) year. The fair market land value and prevailing rate of return for each parcel shall be determined in the year 2000, with respect to Ground Rent payable commencing January 1, 2001, and every five (5) years thereafter, and the Ground Rent shall be adjusted accordingly on the first (1st) day of each sixth (6th) year. Said dates of adjustment of Ground Rent shall be referred to for convenience as "adjustment dates". 3.2.2 Ground Rent Adjustments by Appraisal. With ------------------------------------ respect to each Ground Rent adjustment date, the fair market land value and prevailing rate of return shall be determined by agreement between Landlord and Developer, but should they not be able to agree at least two hundred ten (210) days prior to an adjustment date, then such fair market land value and prevailing rate of return shall be determined by appraisal by an analysis of comparable land transactions committed to the same usage and either zoned for or improved with facilities of similar density and height considerations, and/or such other appraisal method(s) recognized by the appraisal profession as are appropriate for fair market land value appraisals and mutually agreed to by the appraisers at time of reevaluation as being appropriate, 9 recognizing market conditions that prevail as of the date of value. 3.2.2.1 Adjustment for Predevelopment and --------------------------------- Infrastructure Costs. The fair market land value of the Premises (as -------------------- agreed upon by Landlord and Developer or as determined by appraisal) shall be adjusted (the "Adjusted Fair Market Land Value") in the proportion that Two Million, Nine Hundred Fifty-Four Thousand, Two Hundred Eighty-Nine and 70/100 Dollars ($2,954,289.70) bears to the original stated land value of the Premises of Two Million, Nine Hundred Fifty-Four Thousand, Two Hundred Eighty-Nine and 70/100 Dollars ($2,954,289.70), plus the pro rata portion of the actual onsite and off-site "Predevelopment and Infrastructure Costs", applicable to the Premises, determined according to subsection 3.8. The Adjusted Fair Market Land Value shall be converted into an annual Ground Rent obligation based on the prevailing rate of return as determined pursuant to subsection 3.2.2. 3.2.3 Appraisal. In the event the parties are unable to agree --------- upon the fair market rental value or the prevailing rate of return or the method of appraisal of the Premises at any adjustment date, the fair rental value of the subject land and/or the prevailing rate of return shall be determined by appraisals prepared by two appraisers, one appointed by the Landlord at its expense and one appointed by the Developer 10 at its expense, both of whom shall be MAI members of the American Institute of Real Estate Appraisers or a successor organization in the event the American Institute of Real Estate Appraisers ceases to exist. Said appraisers shall be appointed not more than six (6) months prior to the commencement of the rental adjustment period but, in any event, within thirty (30) days after either party has given notice in writing of inability to agree. Both appraisals must be completed and submitted to the Landlord and Developer respectively within sixty (60) days after the appointment of the appraisers. The two appraisals shall be averaged unless the higher of the two appraisals exceeds the lesser by ten percent (10%) or more, in which case the two appraisers shall appoint a third appraiser, also an MAI member of the American Institute. In order to select such third appraiser, if the two appraisers do not agree, the appraisers shall obtain a list of five appraisers from the President of the American Institute of Real Estate Appraisers and shall alternately strike names from such list until one remains to become the third appraiser. The third appraiser shall be appointed by the first two appraisers within fourteen (14) days after notice from either of the parties to this Lease that the appointment of a third appraiser is necessary. The cost of such third appraiser shall be shared equally by the parties to this Lease. The third appraiser shall complete and submit the required appraisal to 11 both parties within sixty (60) days after appointment. All appraisals shall be in the form of written reports supported by facts and analysis. The two of the three appraisers arriving at values closest to each other shall attempt to concur on a value. If they are unable to do so within thirty (30) days, the two closest appraisals shall be averaged and that value shall be the fair market value of the land or the prevailing rate of return, as appropriate. The total appraised value of both parcels shall not exceed the appraised value of the Premises. The Adjusted Fair Market Land Value shall be converted into an annual Ground Rent obligation based on the prevailing rate of return on similar ground leases then current in the market. Disagreements between the two appraisers as to the method of appraisal shall be resolved by a third appraiser, appointed in the manner described in this subsection. 3.2.4 Maximum Rent Increase. The increase if any, in Ground Rent --------------------- at the time of any adjustment date shall be limited for parcels upon which one or more buildings have been constructed by the increase in subtenant rents as described in this section: 3.2.4.1 Allocation to Parcels. At the time of execution --------------------- of the Lease, the Ground Rent shall be allocated between the parcels within the Premises in the manner set out in subsection 3.1.2. The percentage of rent attributable to each parcel shall remain in effect during the term of the Lease 12 unless parcel areas change. 3.2.4.2. Base Sublease Rental. The base sublease rental -------------------- for each parcel shall be the total annualized rent, stabilized to exclude free rent, reduced rent or excess tenant improvement amortization or other similar concessions or considerations measured in the first year in which more than eighty percent (80%) of the rentable space on a given parcel is rented, prorated to full occupancy. 3.2.4.3 Sublease Rental Percentage Change. The sublease --------------------------------- rental percentage change shall be determined by calculating the percentage changes in sublease rental between the base sublease rental for a parcel described in subsection 3.2.4.2 above and the actual sublease rental due to Developer for the same parcel in the full year preceding a Ground Rent Adjustment date, stabilized to exclude any free rent, reduced rent or excess tenant improvement amortization or other similar concessions or considerations. 3.2.4.4 Adjusted Ground Rent. The "Adjusted Ground Rent" -------------------- for each parcel at any given adjustment period shall be the lesser of the Adjusted Fair Market Rental Value for such parcel as determined in subsection 3.2.2 above or the initial Ground Rent for such parcel plus the product of the Sublease Rental Percentage Change determined in 3.2.4.3 above times the initial 13 Ground Rent for such parcel. To the extent that the Adjusted Fair Market Rental Value is greater than the Adjusted Ground Rent, the difference may be carried forward into the next five (5) year adjusted rental period but not into any subsequent five (5) year adjusted rental periods, and thereby recovered by Landlord. The amount of Ground Rent during a five (5) year adjusted rental period where there has been such a carry forward shall not exceed one hundred ten percent (110%) of the fair market Ground Rent as determined for that period. 3.2.4.5 Sale or Assignment of Leasehold Interest. ---------------------------------------- Should Developer sell, assign or otherwise transfer its leasehold interest to an owner-user such that sublease rental is not paid to Developer, the fair market sublease rental for such building, using the criteria and methods set out in subsection 3.2.2, shall become the basis for calculating the maximum rental adjustment using the process described in 3.2.4.3 above. 3.3 Ground Rent Adjustments Following Reconstruction. Developer ------------------------------------------------ contemplates, pursuant to Section 11 hereof, that during the term of this Lease, any or all of the buildings developed on the Premises may be demolished and new buildings constructed in their place in order to meet the then current market demand, subject to Landlord approval pursuant to Section 7. In the event of such demolition and new construction on a particular 14 parcel, the provisions of subsection 3.2 shall be modified with respect to such parcel as set forth below in subsections 3.3.1 and 3.3.2. This subsection 3.3 shall not apply to demolition and new construction which is due to damage or destruction, as described in subsection 6.3, where said new construction is limited to one for one replacement of useable or rentable floor area in the same general building configuration as that which previously existed. 3.3.1 Ground Rent Adjustments. Ground Rent for such parcel ----------------------- shall be adjusted according to the process set out in subsections 3.2.2 and 3.2.3 but the limitations in subsection 3.2.4 shall not apply to such adjustment. 3.3.1.1 Adjustment Date. The adjustment shall be --------------- effective either six (6) months after issuance of an Initial Temporary Certificate of Occupancy of the building shell or commencement of subtenant rent, whichever occurs earlier; or 3.3.1.2 Alternate Adjustment Date. In the event a ------------------------- regular five (5) year Ground Rent adjustment date for the parcel, as established in subsection 3.2.1, occurs after commencement of demolition of a building on said parcel and prior to completion of construction of a new building in its place, said adjustment shall take place on schedule and shall be based upon the assumption that construction of the planned new building has been completed. 15 3.3.2 No Adjustment At Next Scheduled Adjustment Date. ----------------------------------------------- There shall be no Ground Rent adjustment for such parcel at the next scheduled adjustment date, but all subsequent Ground Rent adjustments shall occur on the schedule set out in subsection 3.2.1. 3.3.3 Maximum Ground Rent Adjustment. For purposes of ------------------------------ determining the maximum Ground Rent increase under subsection 3.2.4 at the time of the next Ground Rent adjustment and thereafter, the base sublease rental described in subsection 3.2.4 shall be established with respect to the new building or buildings constructed on the parcel. 3.4 Adjustments to Ground Rent During Option Term. At the --------------------------------------------- commencement of each option term, and at the end of each five (5) years of each option term, the Ground Rent shall be determined as provided in subsection 3.2.2, but with no adjustment thereto as is provided in said subsection 3.2.2.1. The fair market land value shall be converted into an annual Ground Rent obligation based on the rate of return then current in the market for parcels which are currently and fairly appraised. 3.5 Maximum Ground Rent Increase. However, the increase in Ground ---------------------------- Rent at the end of five (5) years of each option term shall be subject to the provisions of subsection 3.2.4, with the first year of the option term as the base period for determining sublease rental and the fifth (5th) year of the option term being the adjustment year for determining actual rental received, both to be stabilized to exclude any free rent, reduced rent, excess tenant improvement amortization or other 16 similar concessions or considerations. The Ground Rent commencing the sixth (6th) year of any option term cannot increase at a percentage rate greater than the percentage increase in sublease rentals from the base year to the adjustment year. 3.6 Definition of Predevelopment and Infrastructure Costs. For ----------------------------------------------------- purposes of this Lease, Predevelopment and Infrastructure Costs shall include the pro rata portion applicable to the Premises of all costs actually incurred by Developer for those items identified in Exhibit "D", subject to the limitations of this subsection, which costs are necessary to initially render the Premises suitable for development according to Developer's Basic Concept Documents as described in Section 7. Predevelopment and Infrastructure Costs shall include all off-site and on-site improvements required to create six (6) buildable parcels, but shall not include any costs directly associated with the construction of buildings or parking upon such parcels. It is understood and agreed by Landlord that certain improvements particularly landscaping, may exceed the standards normally used by the City of Long Beach, and that such improvements shall be included in Predevelopment and Infrastructure Costs to the extent they are consistent with Developer's Basic Concept Documents and landscape plans described in Section 7. 3.7 Approval of Improvement Plans. Prior to commencement of any ----------------------------- construction on the Premises, Developer submitted to Landlord engineering plans and costs estimates for those items identified in Exhibit "D" which are included in Predevelopment and Infrastructure Costs. Specifications for all improvements shall meet or, at Developer's election, exceed the standard 17 specifications of the City of Long Beach for such improvements. Landlord reviewed said plans for conformity with the Basic Concept Documents and approved them as to such conformity in accordance with the procedures and criteria set out in subsection 7.3.7. 3.8 Determination of Predevelopment and Infrastructure Costs. -------------------------------------------------------- Predevelopment and Infrastructure Costs for the entire Project shall be determined in the manner described in Sections 3.6 through 3.11, inclusive, of the All-Inclusive Lease as if the All-Inclusive Lease had not been subdivided. At such time as such Predevelopment and Infrastructure Costs have been so determined pursuant to the All-Inclusive Lease, a portion of such Predevelopment and Infrastructure Costs shall be allocated to this Lease in the ratio as the square footage of the area of the Premises included in this Lease bears to the entire square footage of the area of the All-Inclusive Lease prior to the subdivision of the All-Inclusive Lease, excluding for such purposes any of the areas included in Parcel 8 of the Parcel Map, as said Parcel 8 has a different rental calculation procedure from the balance of the real property included within the Project. 3.9 Inapplicable Provision. ---------------------- 3.10 Inapplicable Provision. ---------------------- 3.11 Inapplicable Provision. ---------------------- 4. LEASEHOLD MORTGAGES: ------------------- 4.1 Leasehold Mortgage Authorized. On one or more occasions ----------------------------- Developer may take back a Purchase Money Leasehold Mortgage upon a sale and assignment of the Leasehold Estate created by this Lease or may mortgage or otherwise encumber Developer's Leasehold Estate to an Institutional Lender (as hereinafter de- 18 fined), under one or more Leasehold Mortgages and assign this Lease as security for such Mortgage or Mortgages. 4.2 Notice to Landlord. ------------------ 4.2.1 Leasehold Mortgage Requirements. If Developer shall, on ------------------------------- one or more occasions, take back a Purchase Money Leasehold Mortgage upon a sale and assignment of the Leasehold Estate or shall mortgage Developer's Leasehold Estate to an Institutional Lender, and if the Holder of such Leasehold Mortgage shall provide Landlord with notice of such Leasehold Mortgage together with a true copy of such Leasehold Mortgage and the name and address of the Mortgagee, Landlord and Developer agree that, following receipt of such notice by Landlord, the provisions of this Section 4 shall apply in respect to each such Leasehold Mortgage. 4.2.2 Assignment of Leasehold Mortgage. In the event of any -------------------------------- assignment of a Leasehold Mortgage or in the event of a change of address of a Leasehold Mortgagee or of an assignee of such Mortgage, notice of the new name and address shall be provided to Landlord within ten (10) days after completion of such assignment. 4.2.3 Landlord's Acknowledgment of Notice. Landlord shall ----------------------------------- promptly upon receipt of a communication purporting to constitute the notice provided for by subsections 4.2.1 or 4.2.2, above, acknowledge by an instrument in recordable form receipt of such communication as constituting the notice provided for by subsections 4.2.1 or 4.2.2, or, in the alternative, notify 19 Developer and the Leasehold Mortgagee of the rejection of such communication as not conforming with the provisions of subsections 4.2.1 or 4.2.2, and specify the specific basis of such rejection. 4.2.4 Developer to Provide Copies. After Landlord has received --------------------------- the notice provided for by subsections 4.2.1 or 4.2.2 above, Developer, upon being requested to do so by Landlord, shall within ten (10) days provide Landlord with copies of the note or other obligation secured by such Leasehold Mortgage and of any other documents pertinent to the Leasehold Mortgage as specified by Landlord. If requested to do so by Landlord, Developer shall thereafter also provide Landlord from time to time with a copy of each amendment or other modification or supplement to such instruments. All recorded documents shall be accompanied by the appropriate certification of the Custodian of the Recording Office as to their authenticity as true and correct copies of the official records and all nonrecorded documents shall be accompanied by a certification by Developer that such documents are true and correct copies of the originals. From time to time upon being requested to do so by Landlord, Developer shall also notify Landlord of the date and place of recording and other pertinent recording data with respect to such instruments as have been recorded. 4.3 Definitions. ----------- 4.3.1 Institutional Lender. The term "Insti- -------------------- 20 tutional Lender" as used in this Section 4 shall refer to a savings bank, savings and loan association, commercial bank, trust company, credit union, insurance company, college, university, real estate investment trust or pension fund. The term "Institutional Lender" shall also include other lenders of substance which have assets in excess of Fifty Million and No/l00 Dollars ($50,000,000.00) at the time the Leasehold Mortgage is made. 4.3.2 Leasehold Mortgage. The term "Leasehold Mortgage" as ------------------ used in this Section 4 shall include a mortgage, a deed of trust, a deed to secure debt, or other security instrument by which Developer's Leasehold Estate is mortgaged, conveyed, assigned or otherwise transferred, to secure a debt or other obligation. 4.3.3 Leasehold Mortgagee. The term "Leasehold Mortgagee" ------------------- as used in this Section 4 shall refer to a holder of a Leasehold Mortgage in respect to which the notice provided for by subsection 4.2 has been given and received and as to which the provisions of this Section 4 are applicable. 4.4 Consent of Leasehold Mortgagee Required. No cancellation, --------------------------------------- surrender or modification of this Lease shall be effective as to any Leasehold Mortgagee unless consented to in writing by such Leasehold Mortgagee. 4.5 Default Notice. Landlord upon providing Developer any notice -------------- of: (i) default under this Lease, (ii) a termination of this Lease, or (iii) a matter of which Landlord 21 may predicate or claim a default, shall at the same time provide a copy of such notice to every Leasehold Mortgagee. No such notice by Landlord to Developer shall be deemed to have been duly given unless and until a copy thereof has been so provided to every Leasehold Mortgagee having a lien upon the Premises. From and after the date such notice has been given to a Leasehold Mortgagee, such Leasehold Mortgagee shall have the same period, after giving of such notice upon it, for remedying any default or acts or omissions which are the subject matter of such notice or causing the same to be remedied, as is given Developer after the giving of such notice to Developer, plus in each instance, the additional periods of time specified in subsections 4.6 and 4.7 to remedy, commence remedying or cause to be remedied the defaults or acts or omissions which are the subject matter of such notice specified in any such notice. Landlord shall accept such performance by or at the instigation of such Leasehold Mortgagee as if the same had been done by Developer. Developer authorizes each Leasehold Mortgagee to take any such action at such Leasehold Mortgagee's option and does hereby authorize entry upon the Premises by the Leasehold Mortgagee for such purpose. 4.6 Notice to Leasehold Mortgagee. ----------------------------- 4.6.1 Landlord's Termination Notice. Anything contained in ----------------------------- this Lease to the contrary notwithstanding, if any default shall occur which entitles Landlord to terminate this Lease, Landlord shall have no right to terminate this Lease unless, following the expiration of the period of time given Developer to cure such 22 default or the act or omission which gave rise to such default, Landlord shall notify every Leasehold Mortgagee of Landlord's intent to so terminate ("Termination Notice") at least thirty (30) days in advance of the proposed effective date of such termination if such default is capable of being cured by the payment of money ("Termination Notice Period"), and at least sixty (60) days in advance of the proposed effective date of such termination if such default is not capable of being cured by the payment of money (also a "Termination Notice Period"). The provisions of subsection 4.7, shall apply if, during such thirty (30) or sixty (60) day Termination Notice Period, any Leasehold Mortgagee shall: 4.6.1.1 Notify Landlord of such Leasehold Mortgagee's desire to nullify such notice; and 4.6.1.2 Pay or cause to be paid all Ground Rent, additional rent and other payments then due and in arrears as specified in the Termination Notice to such Leasehold Mortgagee and which may become due during such thirty (30) or sixty (60) day Termination Notice Period; and 4.6.1.3 Comply or in good faith, with reasonable diligence and continuity, commence to comply with all nonmonetary requirements of this Lease then in default and reasonably susceptible of being complied with by such Leasehold Mortgagee; provided however, that such Leasehold Mortgagee 23 shall not be required during such sixty (60) day Termination Notice Period to cure or commence to cure any default consisting of Developer's failure to satisfy and discharge any lien, charge or encumbrance against the Developer's interest in this Lease or the Premises junior in priority to the lien of the mortgage held by such Leasehold Mortgagee. 4.6.2 Proper Address of Leasehold Mortgagee. Any notice to ------------------------------------- be given by Landlord to a Leasehold Mortgagee pursuant to any provision of this Section 4 shall be deemed properly addressed if sent to the Leasehold Mortgagee who served the notice referred to in subsection 4.2.1 unless notice of a change of Mortgage ownership has been given to Landlord pursuant to subsection 4.2.2. 4.7 Procedure on Default. -------------------- 4.7.1 Extension of Termination Notice Period. If Landlord -------------------------------------- shall elect to terminate this Lease by reason of any default of Developer, and a Leasehold Mortgagee shall have proceeded in the manner provided for by subsection 4.6, the specified date for the termination of this Lease as fixed by Landlord in its Termination Notice shall be extended for a period of six (6) months, provided that such Leasehold Mortgagee shall during such six (6) month period: 4.7.1.1 Payment of Monetary Obligations. Pay or cause ------------------------------- to be paid the Ground Rent, additional rent and other monetary obligations of Developer 24 under this Lease as the same become due, and continue its good faith efforts to perform all of Developer's other obligations under this Lease. 4.7.1.2 Foreclosure of Leasehold Mortgage. If not --------------------------------- enjoined or stayed, take steps to acquire or sell Developer's interest in this Lease by foreclosure of the Leasehold Mortgage or other appropriate means and prosecute the same to completion with due diligence. 4.7.2 Cure of Default. If at the end of such six (6) --------------- month period such Leasehold Mortgagee is complying with subsections 4.7.1.1 and 4.7.1.2, this Lease shall not then terminate, and the time for completion by Leasehold Mortgagee of its proceedings shall continue so long as such Leasehold Mortgagee is enjoined or stayed and thereafter for so long as such Leasehold Mortgagee proceeds to complete steps to acquire or sell Developer's interest in this Lease by foreclosure of the Leasehold Mortgage or by other appropriate means with reasonable diligence and continuity. Nothing in this subsection 4.7, however, shall be construed to extend this Lease beyond the original term thereof as extended by any options to extend the term of this Lease properly exercised by Developer or a Leasehold Mortgagee in accordance with subsection 2.1, nor to require a Leasehold Mortgagee to continue such foreclosure proceedings after the default has been cured. If the default shall be cured and the Leasehold Mortga- 25 gee shall discontinue such foreclosure proceedings, this Lease shall continue in full force and effect as if Developer had not defaulted under this Lease. 4.7.3 Compliance of Leasehold Mortgagee. If a Leasehold --------------------------------- Mortgagee is complying with subsection 4.7.1, upon the acquisition of Developer's Leasehold Estate herein by such Leasehold Mortgagee or its designee or any other purchaser at a foreclosure sale or otherwise this Lease shall continue in full force and effect as if Developer had not defaulted under this Lease. 4.7.4 Leasehold Mortgage Not an Assignment. For the ------------------------------------ purposes of this Section 4, the making of a Leasehold Mortgage issued by an institutional lender shall not be deemed to constitute an assignment or transfer of this Lease or of the Leasehold Estate hereby created, nor shall any Leasehold Mortgagee, as such, be deemed to be an assignee or transferee of this Lease or of the Leasehold Estate hereby created so as to require such Leasehold Mortgagee, as such, to assume the performance of any of the terms, covenants or conditions on the part of Developer to be performed hereunder, but the purchaser at any sale of this Lease and of the Leasehold Estate hereby created in any proceedings for the foreclosure of any Leasehold Mortgage, or the assignee or transferee of this Lease and of the Leasehold Estate hereby created under any instrument of assignment or transfer 26 in lieu of the foreclosure of any Leasehold Mortgage shall be deemed to be an assignee or transferee within the meaning of this Section 4, and shall be deemed to have agreed to perform all of the terms, covenants and conditions on the part of Developer to be performed hereunder from and after the date of such purchase and assignment, but only for so long as such purchaser or assignee is the owner of the Leasehold Estate. Provided, however, that Developer shall, as to such Leasehold Mortgagee, provide to Landlord the same information which Developer must supply pursuant to this Lease as assignee. 4.7.5 Obligation of Leasehold Mortgagee to Repair or Reconstruct. ---------------------------------------------------------- If the Leasehold Mortgagee or its designee shall become holder of the Leasehold Estate, and if the buildings and improvements on the Premises shall have been or become materially damaged on, before or after the date of such purchase and assignment, the Leasehold Mortgagee or its designee shall be obligated to repair, replace or reconstruct the building or other improvements only to the extent of the net insurance proceeds received by the Leasehold Mortgagee or its designee by reason of such damage. However, should such net insurance proceeds be insufficient to repair, replace or reconstruct the building or other improvements to the extent required by subsection 6.3, and should the Leasehold Mortgagee or its designee choose not to fully reconstruct the 27 building or other improvements to the extent required by subsection 6.3, such failure shall constitute an event of default under this Lease which shall entitle Landlord to commence proceedings to terminate the Lease. 4.7.6 Leasehold Mortgagee's Right to Transfer. Any Leasehold --------------------------------------- Mortgagee or other acquirer of the Leasehold Estate of Developer pursuant to foreclosure, assignment in lieu of foreclosure or other proceedings may, upon acquiring Developer's Leasehold Estate, without further consent of Landlord, assign the Leasehold Estate one time on such terms and to such persons and organizations as are acceptable to such Mortgagee or acquirer and thereafter be relieved of all obligations under this Lease; provided that such assignee has delivered to Landlord its written agreement to be bound by all of the provisions of this Lease. Any further attempts by the Leasehold Mortgagee to assign shall comply with the provisions of this Lease relating to Assignment. 4.7.7 Leasehold Mortgagee Transfer a Permitted Sale. --------------------------------------------- Notwithstanding any other provisions of this Lease, any sale of this Lease and of the Leasehold Estate hereby created in any proceedings for the foreclosure of any Leasehold Mortgage, or the assignment or transfer of this Lease and of the Leasehold Estate hereby created in lieu of the foreclosure of any Leasehold Mortgage shall be deemed to 28 be a permitted sale, transfer or assignment of this Lease and of the Leasehold Estate hereby created. 4.8 New Lease. --------- 4.8.1 Terms of New Lease. In the event of the termination of ------------------ this Lease as a result of Developer's default Landlord shall, in addition to providing the notices of default and termination as required by subsections 4.5 and 4.6, provide each Leasehold Mortgagee with written notice that the Lease has been terminated, together with a statement of all sums which would at that time be due under this Lease but for such termination, and of all other defaults, if any, then known to Landlord. Landlord agrees to enter into a new lease ("New Lease") of the Premises with such Leasehold Mortgagee, or its designee for the remainder of the term of this Lease, effective as of the date of termination, at the Ground Rent and additional rent, and upon the terms, covenants and conditions, including all first rights of refusal and options to renew or purchase, but excluding requirements which are not applicable or which have already been fulfilled of this Lease, provided: 4.8.1.1 Written Request to Landlord. Such Leasehold --------------------------- Mortgagee shall make written request upon Landlord for such New Lease within thirty (30) days after the date such Leasehold Mortgagee receives Landlord's Notice of Termination of this Lease given pursuant to this subsection 4.8. 4.8.1.2 Payment of Obligations. Such ---------------------- 29 Leasehold Mortgagee or its designee shall pay or cause to be paid to Landlord at the time of execution and delivery of such New Lease, any and all sums which would at the time of execution and delivery thereof be due pursuant to this Lease but for such termination and, in addition thereto, all reasonable expenses, including reasonable attorney's fees, which Landlord shall have incurred by reason of such termination and the execution and delivery of the New Lease and which would not otherwise have been received by Landlord from Developer or other party in interest under Developer. In the event of a controversy as to the amount to be paid to Landlord pursuant to this subsection 4.8.1.2, the payment obligation shall be satisfied if Landlord shall be paid the amount not in controversy, and the Leasehold Mortgagee or its designee shall agree to pay any additional sum ultimately determined to be due plus interest at the rate set forth in subsection 3.1.6, and such obligation shall be adequately secured. 4.8.1.3 Remedy of Developer's Defaults. Such Leasehold ------------------------------ Mortgagee or its designee shall agree to remedy any of Developer's defaults of which said Leasehold Mortgagee is or may be notified by Landlord's Notice of Termination and which are reasonably susceptible of being so cured by Leasehold Mortgagee or its designee. 30 4.8.1.4 New Lease to Have First Priority. Any New Lease -------------------------------- made pursuant to this subsection 4.8 and any Subdivided Lease entered into pursuant to subsection 7.6 and any Single Lease entered into pursuant to subsection 7.7, shall be prior to any mortgage or other lien, charge or encumbrance on the fee of the Premises and the Developer under such New Lease, Single Lease or Subdivided Lease, as the case may be, shall have the same right, title and interest in and to the Premises and the buildings and improvements thereon as Developer had under this Lease. 4.8.1.5 Developer's Obligations Under New Lease. The --------------------------------------- Developer under any such New Lease, Single Lease or Subdivided Lease shall be liable to perform the obligations imposed on the Developer by such New Lease, Single Lease or Subdivided Lease only during the period such person or entity has ownership of such Leasehold Estate. 4.9 New Lease Priorities. If more than one Leasehold Mortgagee -------------------- shall request a New Lease pursuant to subsection 4.8.1, Landlord shall enter into such New Lease with the Leasehold Mortgagee whose mortgage is prior in lien or with the designee of such Leasehold Mortgagee. Landlord, without liability to Developer or any Leasehold Mortgagee with an adverse claim, may rely upon a mortgagee title insurance policy issued by a responsible title insurance company doing business within the State of California as the basis for determining the appropriate Leasehold Mortgagee 31 who is entitled to such New Lease. 4.10 Eminent Domain. Developer's share, as provided by -------------- subsection 10.3, of the proceeds arising from an exercise of the power of Eminent Domain shall, subject to the provisions of such subsection 10.3, be disposed of as provided for by any Leasehold Mortgagee. 4.11 Notice of Arbitration. Landlord shall give each Leasehold --------------------- Mortgagee prompt notice of any appraisal, arbitration or legal proceedings between Landlord and Developer involving obligations under this Lease. Landlord shall give the Leasehold Mortgagee notice of, and a copy of any award or decision made in any such proceedings, which shall be binding on all Leasehold Mortgagees. 4.12 Amendment to Facilitate Leasehold Financing. Landlord hereby ------------------------------------------- agrees that if any Institutional Lender to whom Developer proposes to make a Leasehold Mortgage on Developer's Leasehold Estate shall require as a condition to making any loan secured by such mortgage that Landlord agree to modifications of this Lease, then Landlord agrees that it will enter into an agreement with Developer in recordable form making the modifications that are requested by such lender, provided that such changes do not adversely affect any right of Landlord under this Lease. 4.13 Security Deposit. If any Leasehold Mortgagee, its designee ---------------- or other purchaser has acquired the Leasehold Estate of Developer pursuant to foreclosure, conveyance in lieu of foreclosure or other proceedings, or has entered into a New Lease with Landlord in accordance with subsection 4.8, such Leasehold 32 Mortgagee, its designee or other purchaser shall succeed to the rights of Developer, if any, in and to the security deposits paid by Developer to Landlord pursuant to subsections 16.1 and 16.2. In such event, Developer shall no longer have any rights to such security deposits, and Landlord shall hold such security deposits for and on behalf of such Leasehold Mortgagee, its designee or other purchaser. 4.14 Estoppel Certificate. Landlord shall at any time and from -------------------- time to time hereafter, but not more frequently than twice in any one-year period (or more frequently if such request is made in connection with any sale or mortgaging of Developer's Leasehold Interest or permitted subletting by Developer), within ten (10) days after written request of Developer to do so, certify by written instrument duly executed and acknowledged to any Mortgagee or purchaser, or proposed Mortgagee or proposed purchaser, or any other person, firm or corporation specified in such request: (i) as to whether this Lease has been supplemented or amended, and if so, the substance and manner of such supplement or amendment; (ii) as to the validity and force and effect of this Lease, in accordance with its tenor; (iii) as to the existence of any default hereunder; (iv) as to the existence of any offsets, counter claims or defenses hereto on the part of Developer; (v) as to the commencement and expiration dates of the term of this Lease; and (vi) as to any other matters as may be reasonably so requested. Any such certificate may be relied upon by Developer and any other person, firm or corporation to whom the same may be exhibited or delivered, and the contents of such certificate shall be binding on Landlord. 33 Any party requesting such estoppel certificate shall reimburse Landlord for its costs and expenses incurred in issuing such certificate. 4.15 Notices. Notices from Landlord to the Leasehold Mortgagee shall ------- be mailed to the address furnished Landlord pursuant to subsection 4.2 , and those from the Leasehold Mortgagee to Landlord shall be mailed to the address designated pursuant to the provisions of subsection 1.5.1 hereof, attention the General Manager. Such notices, demands and requests shall be given in the manner described in subsection 17.1 and shall in all respects be governed by the provisions of that subsection. 4.16 Erroneous Payments. No payment made to Landlord by a Leasehold ------------------ Mortgagee shall constitute agreement that such payment was, in fact, due under the terms of this Lease; and a Leasehold Mortgagee having made any payment to Landlord pursuant to Landlord's wrongful, improper or mistaken notice or demand shall be entitled to the return of any such payment or portion thereof provided such Leasehold Mortgagee shall have made demand therefor not later than ninety (90) days after the date of its payment. 4.17 Request for Notice for Benefit of Landlord. Immediately after ------------------------------------------ recording any Leasehold Mortgage encumbering Developer's Leasehold Estate, Developer, at Developer's expense, shall cause to be recorded in the Office of the Recorder of Los Angeles County, California, a written request of notice under Section 2924(b) of the California Civil Code providing that a copy of any notice of default and a copy of any notice of sale under such Leasehold Mortgage shall be delivered to Landlord as 34 provided for under said Section 2924(b) of the California Civil Code. Such request shall be executed by Landlord. Concurrently, with Developer's forwarding such notice for recordation, Developer shall furnish to Landlord a complete copy of the Leasehold Mortgage and the note secured thereby, together with the name and address of the holder thereof. Said note and mortgage are to be kept by Landlord on a confidential basis to the extent permitted by law. 4.18 Release or Forebearance. If any such lender shall fail or ----------------------- refuse to comply with any and all of the conditions of this section, then and thereupon Landlord shall be released from its covenant of forebearance with such lender herein contained. 4.19 Notice. Landlord's obligation to observe its covenants of ------ forebearance in this section for the benefit of any lender on the security of the Leasehold Estate, except as may be otherwise provided by law, shall be conditioned upon there having been first delivered to the Airport Manager of the City of Long Beach, a written notice of such encumbrance which shall state the name and address of such lender for the purpose of enabling notices to be given under subsection 4.2 above. 4.20 No Merger. No merger of Developer's Leasehold Estate into --------- Landlord's fee title shall result by reason of the ownership of Landlord's or Developer's estates by the same party or by reason of any other circumstances, without the prior consent of any and all lenders on the security of the Leasehold Estate. 4.21 No Payment by Landlord. Landlord shall not be required to ---------------------- execute any instrument which would obligate Land- 35 lord to the payment of any loan or any part thereof. 4.22 Self Liquidating Mortgage. The Leasehold Mortgage shall be a ------------------------- self liquidating mortgage, to be paid over a period not longer than elapses up to three (3) years prior to the end of the term of this Lease, or any option term if such option has been exercised. 4.23 Leasehold Mortgagee Need Not Cure Specified Defaults. Nothing ---------------------------------------------------- herein contained shall require any Leasehold Mortgagee or its designee as a condition to its exercise of right hereunder to cure any default of Developer which cannot be cured by such Leasehold Mortgagee or its designee, in order to comply with the provisions of subsections 4.6 or 4.7 or as a condition of entering into the New Lease provided for by subsection 4.8. 4.24 Casualty Loss. A Standard Mortgagee Clause naming each ------------- Leasehold Mortgagee may be added to any and all insurance policies required to be carried by Developer hereunder on condition that the insurance proceeds are to be applied in the manner specified in this Lease and the Leasehold Mortgage shall so provide, except that the Leasehold Mortgage may provide a manner for the disposition of such proceeds, if any, otherwise payable directly to Developer. 5. ASSIGNMENT AND SUBLETTING: ------------------------- 5.1 Prohibition Against Change in Ownership, Management and ------------------------------------------------------- Control. The qualifications and identities of Developer are of particular - ------- concern to Landlord. It is because of those qualifications and identities that Landlord has entered into this Lease with Developer. No voluntary or involuntary 36 successor in interest shall acquire any rights or powers under this Lease except as expressly provided for in this Lease. Except as otherwise permitted by this Section 5 and subsection 1.5.3, Developer shall not permit any significant change (voluntary or involuntary) in the ownership, management or control of Developer to occur unless such change is approved by Landlord, subject to the requirements of this section and reasonable conditions imposed by Landlord. Except as otherwise permitted by this Section 5 and subsection 1.5.3, Developer may not assign this Lease or any interest herein without first obtaining the written consent of Landlord, pursuant to subsection 5.4 of this Lease. Any assignee shall assume and agree to perform the obligations of Developer under this Lease. Promptly following any permitted assignment, Developer shall deliver to Landlord a copy of such assignment, together with a statement setting forth the following information: 5.1.1 Name and Address for Notices. The name and address of ---------------------------- the assignee for the purpose of enabling notices to be given. 5.1.2 Type of Entity. Whether the assignee is an -------------- individual, a corporation, a partnership or a joint venture, and if such assignee is a corporation, the names of such corporation's principal officers and of its directors and State of incorporation, and if such assignee is a partnership or joint venture, the names and addresses of the general partners of such partnership or venture. 5.1.3 Other Transfers. In the event that --------------- 37 Developer is a partnership, joint venture or corporation, any assignment of twenty-five percent (25%) or more of the partnership or joint venture interest or outstanding capital stock of such an entity shall constitute an assignment by Developer of this Lease for the purposes of this Section 5 and shall not be permitted to occur without first obtaining the written consent of Landlord, which consent shall not unreasonably be withheld, delayed or conditioned. 5.1.4 Buildings or Land. In addition to all other ----------------- assignments, which must be approved in advance by Landlord, any assignment of 50,000 square feet of land or office space must be approved in advance by Landlord. 5.2 Assignments Not Subject to Approval. The provisions of this ----------------------------------- Section 5 shall not be applicable to the following types of assignments and transfers, which shall be permitted without the prior consent of Landlord. 5.2.1 Death or Incapacity. Assignments resulting from the ------------------- death or mental or physical incapacity of an individual, provided, however, that any person replacing an individual who departs because of physical or mental disability shall have education and experience comparable to that of the person replaced. 5.2.2 Family Transfer. A transfer or assignment for the --------------- benefit of a spouse, children, grandchildren or other family members. 5.2.3 Affiliated Corporation. A transfer to an "Affiliated ---------------------- Corporation" as hereinafter defined. An 38 "Affiliated Corporation" shall be (i) any corporation which owns fifty-one percent (51%) or more of the outstanding capital stock of the assigning corporation; or (ii) any corporation, fifty-one percent (51%) or more of the outstanding capital stock of which is owned by the assigning corporation; or (iii) any corporation, fifty-one percent (51%) or more of the outstanding capital stock of which is owned by a shareholder or group of shareholders who also owns at least fifty-one percent (51%) of the outstanding capital stock of the assigning corporation. 5.2.4 IRS Transfer. A transfer of stock resulting from ------------ or in connection with a reorganization as contemplated by the provisions of the Internal Revenue Code of 1954, as amended, or otherwise, in which the ownership interests of a corporation are assigned directly or by operation of law to a person or persons, firm or corporation which acquires the control of the voting capital stock of such corporation or all or substantially all of the assets of such corporation. 5.2.5 Public Entity. A transfer of stock in a publicly ------------- held corporation or of the beneficial interest in any publicly held partnership or real estate investment trust. 5.2.6 Partner. A transfer by a limited partner or joint ------- venturer to a partnership or joint venture in which the assignor is a partner or venturer. 39 5.2.7 Comprising Entity. A transfer or assignment from one ----------------- partner or joint venturer comprising Developer to another; or if Developer is a corporation, from one shareholder to another. 5.3 Assignment Invalid. Any transfer or assignment to which ------------------ Landlord's consent is required by subsection 5.1 shall be void and shall confer no right to occupancy upon the assignee unless and until such consent of Landlord is obtained. Such approval may be conditioned or refused in response to the matters specified herein. 5.4 Approval of Assignments. Landlord agrees that it shall ----------------------- consent to an assignment to a subtenant and to an assignee which, at the time of such assignment, is of such financial standing and responsibility as to give reasonable assurance that the payment of all Ground Rent and other amounts reserved in this Lease will be made in compliance with all the terms, covenants, provisions and conditions of this Lease. In requesting an approval by Landlord of assignment pursuant to subsection 5.1, Developer shall provide the following information to Landlord with respect to proposed assignments of 50,000 square feet of rentable building area or land area, or more, of sublease space, with respect to any Ground Sublease and with respect to assignments of a parcel or an interest in this Ground Lease. 5.4.1 Name. Name and address of the assignee. ---- 5.4.2 Description. Description of the Premises to be ----------- assigned. 5.4.3 Nature of Business. The nature of the business ------------------ conducted by assignee on the Premises to be 40 assigned. 5.4.4 Financial Information. Financial strength of the --------------------- subtenant or assignee (if the subtenant is a publicly held company, a copy of its most recent annual report; if the subtenant or assignee will not disclose financial information, a report from recognized credit rating agency, such as Dun & Bradstreet). 5.4.5 Officers. The identity, background and experience of -------- all officers and directors of assignee, at executive vice president level and above and senior operational officer relating to the Premises, if a corporation or general partners of a partnership or sole proprietor of a proprietorship (Principals). 5.4.6 Additional Information. To the extent known by ---------------------- Developer, the following information: 5.4.6.1 Criminal record of the subtenant, assignee or any of the Principals. 5.4.6.2 Nature and extent of litigation to which the subtenant, assignee or any Principal is a party. 5.4.6.3 Any course of conduct which a prudent person would deem materially detrimental to the Project or to the intended use of the Premises by the subtenant or assignee. 5.4.7 Informational Purposes. For informational purposes ---------------------- only: 5.4.7.1 Number of anticipated employees of the assignee. 41 5.4.7.2 At the time of submission of the request, the terms and conditions of the assignment. 5.4.7.3 With respect to all assignments a copy thereof after execution by all parties thereto. 5.4.8 Confidentiality. If requested by Developer at the --------------- time of submission of the information described above, Landlord shall keep such information and the identity of the proposed sublessee or assignee confidential and Landlord shall execute a confidentiality statement so providing to the extent Landlord is permitted by law to do so. 5.4.9 Disapproval by Landlord. Landlord reserves the right ----------------------- to reject any proposed assignee where the matters specified in 5.4.3, 5.4.4, 5.4.5 or 5.4.6 above indicate that the presence of assignee would not be in the public interest or would adversely affect the financial viability of the Project. Landlord shall either approve or disapprove any proposed assignee within fifteen (15) days after receipt by Landlord of a request to do so. Failure of Landlord to act within said fifteen (15) days shall constitute approval. If Landlord does not approve any proposed assignee, Landlord shall state in writing the reasons for such disapproval. Developer shall have the right to challenge the validity of such disapproval. No damages shall be payable to Developer in any action arising from such disapproval unless Landlord shall have acted unreasonably or in bad faith or with actual malice. 42 5.5 No Release. Notwithstanding any assignment by Developer ---------- permitted by subsection 5.1 with Landlord's consent, and notwithstanding any assignment by a partner or joint venturer of Developer permitted by subsection 5.1.3 with Landlord's consent or made without Landlord's consent pursuant to subsection 5.2, the assigning party shall remain fully liable for the performance of all of the covenants to be performed by Developer under this Lease prior to the effective date of such assignment or the "Completion Date", as defined below, whichever last occurs, but shall be released from liability with respect to the performance of such covenants to be performed after the last to occur of such dates, Landlord's approval of or consent to any such assignment or transfer shall not be a waiver of any right to object to further or future assignments, and Landlord's consent to each such successive assignment must be first obtained in writing from Landlord unless otherwise permitted by this Lease without Landlord's prior consent. The term "Completion Date", as used herein, shall mean the date that Developer completes the construction of the initial building described in subsection 7.2 and a certificate of occupancy with respect to such building has been obtained. 5.6 Unauthorized Change. This Lease may be terminated by the ------------------- Landlord if there is any significant change (voluntary or involuntary) other than those authorized in Section 5 or subsection 1.5.3 hereof, or not requiring Landlord's approval of ownership, management or control of the Developer prior to the completion of the development of the site, unless such changes have been approved by the Landlord. 43 5.7 Subletting. Developer shall be entitled, with the prior written ---------- consent of Landlord, to sublet the whole or any portion of the Premises or the improvements constructed thereon by or under Developer and, without limiting the foregoing, may establish a leasehold condominium regime on the Premises, or portions thereof, in accordance with the provisions of California law, including California Civil Code Sections 783 and 1350-1360. Developer shall, at all times, remain liable for the performance of all of the covenants on its part to be so performed, notwithstanding any subletting. Each sublease shall be subject and subordinate not only to this Lease, but also to any New Lease made by Landlord as provided in Section 4.8 above. If the term of this Lease shall end while any such sublease is in effect, Landlord may, at its option, for a period of ninety (90) days thereafter, either terminate the said sublease or succeed to all of the rights of Developer thereunder. Where any sublease which is consistent with this Lease is approved, Landlord may grant to the subtenant, under such an approved sublease entered into in good faith and for reasonable consideration, a right of quiet enjoyment in recordable from (a "nondisturbance agreement") during the term of the sublease, notwithstanding the expiration, termination or cancellation of this Lease; provided that (i) the term of the sublease, plus extension or renewal options, does not extend beyond the term of this Lease, plus extension options; (ii) such subtenant agrees that in the event this Lease expires, terminates or is cancelled during the term of the sublease, the sublease shall be deemed a direct lease between Landlord and such subtenant and the subtenant shall attorn to Landlord. In the 44 event that Landlord objects to any proposed nondisturbance agreement or sublease, Landlord agrees to notify Developer in writing of such objection and of its reasons for such objection within twenty (20) days of its receipt of the proposed nondisturbance agreement and sublease. Subject to the foregoing provisions of this subsection 5.7, Landlord hereby approves generally of the form of nondisturbance agreement attached hereto as Exhibit "E". Any approvals or grants of quiet enjoyment given or made by Landlord pursuant to this subsection 5.7 shall be binding upon Landlord, its successors or assigns, including without limitation any person or entity succeeding to the interest of Landlord by way of judicial foreclosure or trustee sale proceedings pursuant to any mortgage or deed of trust, the lien or charge of which is subject and subordinate to this Lease. Any sublease, with respect to which Landlord agrees to execute a nondisturbance agreement pursuant to this subsection 5.7, may be a sublease pursuant to which the subtenant is responsible for the construction of the building improvements upon the subleased premises (a "Ground Sublease" herein). Any Ground Sublease may contain a hypothecation provision similar to Section 4 of this Lease for the benefit of the holder of any mortgage or deed of trust constituting a lien on the subleasehold estate created by virtue of the Ground Sublease. Any nondisturbance agreement executed and delivered by Landlord for the benefit of the sublessee under a Ground Sublease shall specifically recite that it is for the benefit of any such holder of a deed of trust or mortgage constituting a lien on the subleasehold estate created by such Ground Sublease; that the term "sublease" as used in 45 the nondisturbance agreement shall be deemed to include any new sublease executed and delivered to any such holder of a first deed of trust or first mortgage following a termination of the sublease pursuant to a provision in the sublease similar to subsection 4.8 of this Lease, and that the term "sublessee" under the nondisturbance agreement shall be deemed to include any encumbrancer or other party succeeding to the sublessee under the Ground Sublease by virtue of judicial or private power of sale foreclosure proceedings or by delivery of an assignment in lieu of foreclosure, or otherwise. Where Landlord agrees to execute a nondisturbance agreement for the benefit of the sublessee under any Ground Sublease, such agreement shall be subject to the obligations of the sublessee thereunder being no less than the obligations of the Developer hereunder with respect to the subleased premises. 5.7.1 Minor Subleases. Consent of Landlord shall not be --------------- required to a sublease of any unit of space smaller than 50,000 square feet, not including parking areas; however, notice of any such sublease shall be sent to Landlord's Airport Manager within ten (10) days of the execution of the sublease. 5.7.2 Consent to Sublease. Prior to review of any proposed ------------------- sublease, the following information and assurances shall be provided to Landlord as part of the request for consent to proposed subleases of 50,000 square feet of rentable building area, or more, of sublease space, with respect to any Ground Sublease: 5.7.2.1 Description. Description of ----------- 46 the sublease Premises. 5.7.2.2 Name. The name and address of the sublessee ---- for the purpose of enabling notices to be given under subsection 17.1 hereof. 5.7.2.3 Nature of Business. The nature of the business ------------------ conducted on the sublease Premises. 5.7.2.4 Financial Information. Financial strength of --------------------- the subtenant or assignee (if the subtenant is a publicly held company, a copy of its most recent annual report; if the subtenant or assignee will not disclose financial information a report from a recognized credit rating agency, such as Dun & Bradstreet). 5.7.2.5 Officers. The identity, background and -------- experience of all officers and directors of sublessee, at executive vice president level and above and senior operational office relating to the Premises, if sublessee is a corporation, general partners of a partnership or sole proprietor of a proprietorship (Principals). 5.7.2.6 Additional Information. To the extent known by ---------------------- Developer, the following information: 5.7.2.6.1 Criminal record of the subtenant, assignee or any of the Principals. 5.7.2.6.2 Nature and extent of litigation to which the subtenant, assignee or any Principal is a party. 47 5.7.2.6.3 Any course of conduct which a prudent person would deem materially detrimental to the Project or to the intended use of the Premises by the subtenant or assignee. 5.7.2.7 Information Purposes. For informational -------------------- purposes only: 5.7.2.7.1 Number of anticipated employees of the subtenant or assignee. 5.7.2.7.2 At the time of submission of the request, the terms and conditions of the sublease or assignment. 5.7.2.7.3 With respect to all subleases and assignments a copy thereof after execution by all parties thereto. 5.7.2.7.4 Any proposed nondisturbance or attornment agreements. 5.7.3 Confidentiality. If requested by Developer at --------------- the time of submission of the information described above, Landlord shall keep such information and the identity of the proposed sublessee or assignee confidential and Landlord shall execute a confidentiality statement so providing, to the extent Landlord is permitted by law to do so. 5.7.4 Disapproval by Landlord. Landlord reserves the ----------------------- right to reject any proposed sublessee where the matters specified in 5.7.2.3, 5.7.2.4, 5.7.2.5 or 5.7.2.6 above indicate that the presence of sublessee would not be in the public interest or would adversely 48 affect the financial viability of the Project. Landlord shall either approve or disapprove any proposed sublessee within fifteen (15) days after receipt by Landlord of a request to do so. Failure of Landlord to act within said fifteen (15) days shall constitute approval. If Landlord does not approve any proposed sublessee, it shall state in writing the reasons for such disapproval. Developer shall have the right to contest such disapproval. No damages shall be payable to Developer in any action challenging such disapproval unless Landlord shall have acted unreasonably, in bad faith or with actual malice. 5.8 Sale of Buildings. Developer shall have the right to sell ----------------- buildings constructed pursuant to the terms of this Lease, provided, however, that such buildings shall be and remain subject to the terms and conditions of this Lease. No sale of such buildings shall be valid unless this requirement is expressly included in the deed as a covenant running with the land. 6. INDEMNITY, INSURANCE, CASUALTY DAMAGE: -------------------------------------- 6.1 Indemnification and Hold Harmless. Developer expressly --------------------------------- agrees to defend, protect, indemnify and hold harmless the Landlord, its officers, agents and employees free and harmless from and against any and all claims, demands, damages, expenses, losses or liability of any kind or nature whatsoever which Landlord, its officers, agents or employees may sustain or incur or which may be imposed upon them or any of them for injury to or death of persons or damage to property arising out of or 49 resulting from the alleged acts or omissions of Developer, its officers, agents or employees or in any manner connected with this Lease or with the occupancy, use or misuse of the Premises by Developer, its officers, agents, employees, subtenants, licensees, patrons or visitors. Developer also agrees to defend at its own cost, expense and risk all claims or legal actions that may be instituted against Developer or Landlord with respect to the Premises, and the design and construction of off-site improvements except traffic signals, and Developer agrees to pay settlements and to satisfy any judgment that may be rendered against either Developer or Landlord as a result of any injuries or damages which are alleged to have resulted from or be connected with this Lease or the occupancy or use of the Premises by Developer or its officers, agents, employees, subtenants, licensees, patrons or visitors. Nothing herein shall be deemed to require Developer to indemnify Landlord for liability determined by a court of law to have arisen from negligence of Landlord, provided, however, that as between the parties to this Lease, in any matter in which the doctrine of joint and several liability applies, Landlord shall not be required to pay any larger share of such judgment than its actual contribution as determined by the Court. 6.2 Insurance. ---------- 6.2.1 Liability Insurance. At all times during the term of ------------------- this Lease, Developer shall obtain and maintain or cause to be obtained and maintained bodily injury and property damage insurance by a combined single limit policy in an amount of at least Ten Million Dollars and No/l00 ($10,000,000.00) naming the 50 Landlord and its officers, agents and employees as co-insureds with Developer and others designated by Developer. Developer shall also maintain workers' compensation insurance in the amount required by statute. Prior to entry upon the Premises, and upon each insurance renewal, Developer shall deliver the policies of insurance required by this subsection 6.2, or certified photostatic copies thereof, to the City of Long Beach Airport Manager for approval as to sufficiency and for approval as to form by the City Attorney. When said policies of insurance have been so approved, Developer shall substitute a certificate of insurance issued by the insurance company or companies issuing such policies certifying that said insurance coverage is in full force and effect and upon the filing of said certificate, the policies will be returned by Landlord to Developer, if Developer has deposited the original policies with Landlord. Said liability and property damage insurance policy shall contain a provision or endorsement substantially as follows: "The inclusion hereof of any person or entity as an insured shall not affect any right such person or entity would have as a claimant hereunder if not so included. This insurance shall be primary and not contributing with any other insurance maintained by Landlord." Notwithstanding any other provision to the contrary contained in this Lease, Developer shall not 51 have the right to enter upon the Premises for any purpose whatsoever until such certificate has been filed with Landlord. 6.2.2 Fire and Extended Coverage. Developer shall, at no -------------------------- cost or expense to Landlord, keep insured for the benefit of Developer and Landlord, and such other parties, having an insurable interest, as Developer may designate, the improvements constructed by or under Developer upon the Premises against loss or damage by fire and lightning and risks customarily covered by extended coverage endorsement, in amounts not less than one hundred percent (100%) of the actual replacement cost of said improvements, except that Developer, at Developer's option may exclude the cost of excavations, foundations and footings. Landlord shall be named as an insured under any such policy. Such fire and extended coverages shall also be required to be furnished by Developer during the construction of improvements on the Premises as contemplated by Section 7 below. Any loss payable under such insurance shall be payable to Developer, Landlord and such other parties having an insurable interest in the property as Developer may designate and may be endorsed with a standard mortgagee's loss payable endorsement in favor of the holder of any Leasehold Mortgagee holding a Leasehold Mortgage. Landlord will release the entire sum of the proceeds to Developer or to a lender for purposes of reconstruction, replacement or repair of any damaged improvement. 52 The proceeds of such insurance shall be paid to Developer to the extent the amount of the recovery is for damages to interior, non- structural or subtenant improvements, equipment, fixtures, personal property or for rental value insurance to the extent such recoveries are separate identifiable items. If Developer shall within five (5) years after such damage or destruction commence construction of the damaged or destroyed building, or a new building in accordance with Section 7 hereof, the proceeds of any insurance payable by reason of such damage or destruction shall be paid to Developer. If Developer shall fail to commence such construction within such five (5) year period Landlord reserves the right to receive such portion of the insurance proceeds so that Landlord may, if appropriate, carry out such reconstruction of the destroyed building; with all excess amounts to Developer. If at any time during the last five (5) years of the term of the Lease whether the original term or any extension thereof, a building then on the Premises shall be so damaged by fire or other casualty that the cost of restoration shall exceed fifty percent (50%) of the replacement value thereof, exclusive of foundations, immediately prior to such damage, either party hereto may, within sixty (60) days of such damage, give notice of its election to terminate this Lease with respect to the parcel upon which the building is located and, subject to further provisions of this subsection this 53 Lease shall cease and come to an end on the date of the expiration of ten (10) days from the delivery of such notice with the same force and effect as if such date were the date herein fixed for the expiration of the term hereof, and the Ground Rent shall be apportioned and paid to the date of such termination. In such event Developer shall remove all debris and level the land, and Developer shall have no obligation to repair or rebuild or restore. The insurance proceeds shall then be divided as follows: If five (5) years remain before the end of the Lease or any extension thereof, Developer shall receive seventy-five percent (75%) of the proceeds, and Landlord shall receive twenty-five percent (25%); if four (4) years remain before the end of the Lease, Developer shall receive fifty percent (50%) of the proceeds, and Landlord shall receive fifty percent (50%); if three (3) years remain before the end of the Lease, Developer shall receive twenty-five percent (25%) of the proceeds, and Landlord shall receive seventy-five percent (75%); if two (2) years remain before the end of the Lease, Developer shall receive ten percent (10%) of the proceeds, and Landlord shall receive ninety percent (90%); if one (1) year remains before the end of the Lease, Landlord shall receive the entire proceeds. 6.2.3 Aviation Facilities. Insurance for any aviation ------------------- facility developed pursuant to this Lease shall include all of the types and amounts specified 54 herein to the extent such coverages are applicable to operations performed. Depending upon the nature of the physical improvements made upon and the use of the Premises, aviation insurance coverages shall be maintained, to the extent such coverages are applicable, as follows: Hangar Liability, Hangar Keeper's Legal Liability; Airport Legal Liability, Hangar Material Damage Coverage. To the extent any of the above liability coverages are required, said policies shall be maintained with a combined single limit in the amount of at least Ten Million and No/l00 Dollars ($10,000,000.00). 6.2.4 Miscellaneous. The insurance policies to be secured ------------- by Developer pursuant to this subsection 6.2 shall be obtained from insurers having a rating in Best's Insurance Guide of A-10, or better (or a comparable rating in any similar Guide, if Best's Guide is no longer published or if Best's rating system changes), and shall require that the insurer give Landlord notice of any modification, termination or cancellation of any policy of insurance no less than thirty (30) days prior to the effective date of such modification, termination or cancellation. In addition, Developer shall notify Landlord of any modification, termination or cancellation of any policy of insurance secured by Developer pursuant to this subsection 6.2 as soon as Developer learns of any such modification, termination or cancellation. The policy of public liability and 55 property damage insurance to be obtained under subsection 6.2.1 above shall stipulate that said policy provides primary coverage and is not subordinate to nor contributing with any other insurance coverage held or maintained by Landlord. The procuring of any such policy of insurance shall not be construed to be a limitation upon Developer's liability or its full performance on Developer's part of the indemnification and hold harmless provisions of this Lease; and Developer understands and agrees that notwithstanding any such policy of insurance, Developer's obligation to protect, indemnify and hold harmless Landlord under this Lease is for the full and total amount of any damage, injuries, loss, expense, costs or liabilities caused by or in any manner connected with or attributed to the acts or omission of Developer, its officers, agents, employees, licensees, patrons or visitors, or the operations conducted by Developer, or Developer's use or misuse of the Premises, except to the extent resulting from the negligent or willful acts of Landlord or any such indemnitee. 6.2.5 Blanket Policies. Nothing contained in this section ---------------- shall prevent Developer from requiring its subtenants, or any of them, or any other third party, to provide the insurance required by this Section 6, nor prevent Developer, or any of its subtenants, or any such third party from taking out insurance of the kind provided for under this section under a blanket insur- 56 ance policy or policies which cover other personal and real property owned or operated by Developer or any subtenant provided that the protection afforded Landlord and Developer under any policy of blanket insurance hereunder shall be no less than that which would have been afforded under a separate policy or policies relating only to the Premises. 6.2.6 Self-Insurance. If a subtenant is self-insured as a -------------- matter of such subtenant's usual and customary business policy and such self-insurance is accepted by institutional lenders, Developer may request Landlord to waive the insurance requirement and to consent and permit such subtenant to self-insure. Such request shall be accompanied by information deemed necessary by Landlord to review the request. Consent to self-insure shall not be unreasonably withheld if the conditions specified in this section have been met. 6.2.7 Insurance Adjustments. The amounts of insurance --------------------- specified in subsections 6.2.1 and 6.2.3 may be adjusted in the year 2000 and not more often than every third year thereafter for the duration of the Lease to take into account circumstances at the time of such adjustments. 6.3 Damage or Destruction. --------------------- 6.3.1 Restoration of Premises. If any building or ----------------------- improvement on the Premises is totally or partially destroyed or damaged as a result of any casualty, Developer shall promptly repair, replace or rebuild 57 such building or other improvement at least to the extent of its value immediately prior to such occurrence, subject, however, to delays resulting from force majeure, the cancellation of existing leases due to such casualty, settling with insurers and/or negotiating new financing if necessary. If less than twenty (20) years remain of the term of this Lease or any extension thereof, Developer may remove all damaged or destroyed improvements and place the portions of the Premises from which improvements are removed in a clean and level condition following which all insurance proceeds attributable to such destruction or damage shall be the property of Developer. After the commencement of such repair, replacement or rebuilding, Developer shall continue such work with reasonable diligence until completion. Developer may cause any such work to be performed by or under its subtenants. In no event shall Landlord be liable to Developer for any damages resulting to Developer from the happening of any such fire or other casualty or from the repair or reconstruction of the Premises or from the termination of this Lease as provided in subsection 6.3.2 below. 6.3.2 Right to Terminate. Notwithstanding the provisions ------------------ of subsection 6.3.1 above, if the buildings and improvements on the Premises shall be damaged or destroyed as a result of a hazard against which Developer is not required to carry insurance to an extent in excess of fifty percent (50%), or more, of 58 their then insurable value, or if such damage or destruction shall occur during the last ten (10) years of the term of this Lease or during the last ten (10) years of any extended term of this Lease, then Developer shall have the right to elect not to repair, replace or rebuild such casualty damage and to cancel this Lease by giving written notice thereof to Landlord within three hundred sixty-five (365) days after the date of any such damage or destruction. Upon such termination, it will be the obligation of Developer to remove all damaged or destroyed improvements and to place the portions of the Premises from which improvements are removed in a clean and level condition. 6.3.3. No Reduction in Rent. In case of destruction, there -------------------- shall be no abatement or reduction of rent. 7. DEVELOPMENT OF THE PROJECT: --------------------------- 7.1 Scope of Development. The Project will be a aviation -------------------- oriented business, office, research and development and industrial park. It is agreed by the parties that the Project will be built to include when fully developed, at least 665,500 square feet of building area in one (1) or more buildings per parcel, no one of which shall exceed the height limits established by Federal Aviation Regulations (FAR). However, it is recognized that the scope of development may be changed, enlarged or redistributed to meet a subtenant's or user's needs or changed conditions. The facade treatment, landscaping and character of the 59 development will be substantially as proposed in the Long Beach Airport Center submittal of December 7, 1983, as supplemented by a spiral bound document entitled "Supplement to Kilroy Industries' December 7, 1983, Proposal", and included therein is a transmittal letter from Kilroy Industries to the City of Long Beach, dated January 12, 1984, ("Developer's Long Beach Airport Center Submittal") on file in the offices of Landlord's Director of Community Development, or the equivalent of the submitted proposal if approved by Landlord pursuant to subsection 7.3 hereof. Pursuant to the provisions of Section 7.1 of the All-Inclusive Lease, three (3) acres within the entire Project must be made available for aircraft use if a reasonable demand for same is expressed by the subtenants of the site. The three (3) acre allocation need not be restricted to any designated section of the Project and can change in configuration and location depending on the needs of the remainder of the parcel and changes in subtenant requirements. Also pursuant to the provisions of Section 7.1 of the All-Inclusive Lease, the three (3) acres at any time designated for aircraft use may be used for other purposes consistent with the Lease and the PD-2 zoning, such as motor vehicle parking and trucking, as approved by Landlord's Airport Manager, prior to any actual demand from tenants of the site for aircraft storage. The precise amount up to three (3) acres, configuration and location of improvements shall be based on and consistent with the PD-2 zoning ordinance to be adopted, and any amendment or replacement thereof. 7.2 Developer's Obligation to Develop Premises. Developer has ------------------------------------------ commenced the construction of 60 improvements upon both Parcel 5 and Parcel 6 of the Premises as a part of the development contemplated in the Basic Concept Documents or its alternative as approved by Landlord pursuant to subsection 7.3.7. 7.2.1 Best Efforts to Sublease. Developer shall at all ------------------------ times use its best efforts to expedite to the fullest extent consistent with the exercise of sound business the making and entering into of subleases with subtenants upon terms and conditions satisfactory to subtenants and not inconsistent with any of the requirements of this Lease. 7.3 Architectural Approval. ----------------------- 7.3.1 Restriction. No buildings or other improvements, ----------- including without limitation, grading, street, landscaping and parking area improvements shall be constructed or maintained upon the Premises unless the same conform to and are consistent with the zoning for the site, building code requirements and other adopted construction standards for public improvements of the City of Long Beach and the scope of the Project, as defined in subsection 7.1 above, and are approved by Landlord as provided in subsection 7.3.7 below. 7.3.2 Basic Concept Documents. Landlord has heretofore ----------------------- approved certain documents, including a site development plan, which documents are more particularly described in subsection 7.1. Said documents, as the same may from time to time be modified and/or supplemented with the approval of Landlord pursuant to sub- 61 section 7.3.7 below are herein referred to as the "Basic Concept Documents". To the extent that said documents refer to land included in the Adjacent Properties shown on Exhibit "B", additional approval is required as provided in subsection 1.4.1. 7.3.3 Landscaping. Prior to the construction of any ----------- landscaping upon the Premises, Developer shall prepare and submit to Landlord for Landlord's approval pursuant to subsection 7.3.7 below preliminary landscape plans for such work. Following Landlord's approval of Developer's preliminary landscape plans for such work and prior to the commencement of such work, Developer shall prepare and submit to Landlord for Landlord's approval pursuant to subsection 7.3.7 below final landscape plans for such work. Said landscape plans need not include landscaping between building walls and adjacent curbs and/or parking areas, it being understood that preliminary and final plans for such landscaping may be submitted separately by Developer to Landlord for Landlord's approval under subsection 7.3.7 below when the requirements of building occupants have been ascertained. Said landscape plans shall be consistent with the Basic Concept Documents and/or modifications or amendments thereto from time to time approved by Landlord. The landscaping plans, if any, itemized on the attached Exhibit "G" have been approved in concept by Landlord for purposes of this Lease and for no other purposes. In general, Developer shall be permitted 62 freedom of selection of landscaping plants, trees and other materials consistent with the Basic Concept Documents and the provisions of subsection 3.6. 7.3.4 Exterior Elevations. Prior to the construction of any ------------------- building improvements upon the Premises, Developer shall prepare and submit to Landlord for Landlord's approval pursuant to subsection 7.3.7 below exterior elevations for such building improvements. Such exterior elevations need not include exterior building signs. The exterior elevations, if any, itemized on the attached Exhibit "H" have been approved in concept by Landlord for purposes of this Lease and for no other purposes. 7.3.5 Security and Security Plans. Prior to taking --------------------------- possession of the Premises, Developer shall submit to the Landlord for approval a site security plan, both for the construction period and for the Project as partially and fully developed which shall comply with applicable Federal Aviation Regulations and the requirements of the Airport Manager. During construction, Developer shall maintain in place at all times a site security fence. Developer shall comply with FAR Part 107 regarding Airport security and FAR Part 77 regarding height limitations. It is particularly important that Developer notify the Airport Manager and such other persons as he may direct twenty- four (24) hours in advance of erecting cranes on the Premises for any purpose. Developer shall pay any fine or penalty 63 imposed on Landlord as a result of security violations on the Premises. Developer shall have the right to contest such fine or penalty. 7.3.6 Amendments. Developer may from time to time submit ---------- to Landlord for Landlord's approval pursuant to subsection 7.3.7 below modifications and/or amendments to any of the items described in subsections 7.3.3 through 7.3.5 above theretofore approved by Landlord. 7.3.7 Landlord Approval. Developer shall submit all plans ----------------- required by subsections 7.3 and 3.7 to Landlord, attention Director of Community Development, who shall coordinate the review and approval of such plans with the Airport Manager. Landlord shall either approve or disapprove of any item submitted for approval to Landlord by Developer pursuant to subsections 7.7.3 through 7.3.6 above and subsection 3.7 within fifteen (15) days of Landlord's receipt thereof by giving written notice of such approval or disapproval to Developer. Any such disapproval shall state in writing the reasons for disapproval. Failure by Landlord to expressly so disapprove of any such item within such fifteen (15) day period shall constitute Landlord's approval of such item. The criteria to be used by Landlord in approving or disapproving any such item shall be (i) compliance with the Basic Concept Documents and PD-2 zoning, (ii) exterior aesthetics, (iii) consistency with prior 64 improvement on the Premises, (iv) relationship of improvements to adjacent land, including public rights-of-way, (v) the general function of the spaces within the Project between building areas and adjacent public rights-of-way, consistent with overall project design. In general, Developer shall be permitted freedom of design of all exteriors. In the event Landlord disapproves of any such item, Developer may cause such item to be appropriately revised and resubmit the same to Landlord for approval pursuant to this subsection 7.3.7. Landlord and Developer agree to cooperate reasonably each with the other in resolving any objections of the other to such item and/or requested modifications by the other party. The provisions of this section with respect to notice, time for and method of approval shall apply to any such revised item resubmitted to Landlord for approval. Upon the approval of any such item, Landlord shall execute and return a copy of such item to Developer marked approved by Landlord with the date of such approval. Any item to be approved or disapproved by Landlord shall be deemed to have been submitted to and received by Landlord on the date such item is delivered to or received at the office of the Director of Community Development of Landlord. 7.3.8 Communication and Consultation. Landlord and ------------------------------ Developer agree to communicate and consult 65 informally as frequently as is necessary to insure that the formal submittal of any item pursuant to this section can receive prompt and speedy consideration. In addition, during the period that Developer is preparing drawings and specifications for buildings and other improvements to the Premises, Landlord agrees, upon request of Developer, to schedule and hold regular progress meetings in order to coordinate the compliance of such drawings and specifications with the construction requirements of this Lease. 7.3.9 Requirements of Institutional Lender or Major --------------------------------------------- Occupant. If any revisions or corrections of drawings and -------- specifications, landscape and grading plans and/or site plans consistent with the items heretofore approved by Landlord or approved by Landlord pursuant to this section are required by any institutional lender providing or proposing to provide financing to Developer or major occupant or proposed major occupant for a building, Developer and Landlord shall cooperate with each other in efforts to obtain the waiver of such requirements or to develop a mutually acceptable alternative. A major occupant shall be deemed a person or entity occupying or proposed to occupy all of a freestanding building or in excess of 50,000 square feet of building floor area upon initial occupancy. If no such waiver is obtained and no such alternative is developed, Landlord shall amend the items so approved by Landlord pursuant to this section as may reasonably be required 66 for consistency with such revisions or corrections. Any amendment of items approved by the Landlord does not constitute a waiver of other legal, governmental approvals. 7.3.10 Interior Improvements. During the term hereof, --------------------- Developer shall have the right to make, at no expense to Landlord, interior improvements to any building, and thereafter to make changes, alterations, further improvements and additions in and to the interior of any building as Developer may desire, subject to all applicable codes, ordinances and statutes. 7.3.11 Modification of Plans. Developer may make changes --------------------- and modifications to plans and specifications for buildings which are not material or to resolve an inconsistency or ambiguity without obtaining Landlord's prior approval. Landlord agrees that Developer may cause the plans for any building to be modified to the extent required to adapt the same to soil or other conditions found on the Premises and to the extent modification thereof is required by any governmental agencies or authorities having jurisdiction to approve such plans, all without resubmitting the same to Landlord for Landlord's reapproval. 7.4 Performance and Payment Bonds. ----------------------------- 7.4.1 Agreement to Provide. On or before the date of -------------------- commencement of construction of any building, structure or other improvements on the Premises having an estimated cost of One Million and No/l00 Dollars 67 ($1,000,000.00) or greater, Developer shall file or cause to be filed with Landlord a performance bond and labor and material payment bond executed by Developer or Developer's contractor or subtenant, as principal, and by a surety authorized to do business in the State of California, as surety, conditioned upon the contractor's performance of its construction contract with Developer and payment to all claimants for labor and materials used or reasonably required for use in the performance of such contract, in a form and with a surety reasonably acceptable to Landlord. Forms of bond which generally are acceptable hereunder are attached hereto and marked Exhibit "I". Said bond shall name or be endorsed to name Landlord as a joint obligee with Developer and/or Developer and Developer's lender. Landlord agrees to either approve or disapprove of any such proposed bond submitted to Landlord for approval within ten (10) days of Landlord's receipt thereof. Any notice of disapproval shall specify the reasons for disapproval and the modifications required to secure Landlord's approval. Landlord's failure to expressly so disapprove of any such bond within said ten (10) day period shall constitute Landlord's approval of the form of such bond and of the surety issuing such bond. 7.4.2 Term of the Bond. The term of both bonds shall ---------------- commence on or before the date of filing with Landlord. The Performance Bond shall remain in 68 effect until the date of completion of the work to the reasonable satisfaction of Landlord's City Manager or his designee. The Payment Bond shall remain in effect until the expiration of the period of filing a claim of lien as provided in Title 15 of Part 4 of the California Civil Code, and as hereafter amended, or if a claim of lien is filed, the expiration of the period for filing an action to foreclose such lien, or until the Premises are freed from the effect of such claim of lien and any action brought to foreclose such lien pursuant to the provisions of said Title 15 of Part 4 or the lien is otherwise discharged. 7.4.3 Penal Sum. The Performance Bond shall be in the --------- amount and provide a penalty of one hundred percent (100%) of the cost of the improvements to be constructed as such cost shall be determined by the Developer. The Payment Bond shall be in the amount and provide a penalty of one hundred percent (100%) of the valuation of the improvements to be constructed. 7.4.4 Alternative Performance. In lieu of the Performance ----------------------- Bond and Payment Bond required by this subsection 7.4, Developer may furnish cash, assignment of account, or a time certificate of deposit or irrevocable letter of credit conditioned only on the terms of this Lease or such other form of security as may be agreed upon by the parties. 7.5 Construction. ------------ 7.5.1. Costs of Construction. Except as pro- --------------------- 69 vided in subsections 3.8 and 7.5.10, the entire cost and expense of constructing any and all improvements on the Premises, including without limitation any and all on and off-site improvements required by applicable governmental authorities under applicable zoning ordinances or as a condition to parcel or final map approvals, shall be borne and paid by Developer, or its subtenants, and Developer shall hold and save Landlord and the Premises harmless from any liability whatsoever on account thereof. 7.5.2 Right to Improve. Developer shall have the right to ---------------- construct buildings and other improvements upon the Premises and shall have the right to change the grade of the Premises and to perform all off-site work included within the scope and intent of the Basic Concept Documents and/or to demolish and remove any and all structures, foliage and trees situated upon the Premises as of the date of this Lease as may reasonably be required for the purpose of improving the same incidental to Developer's or a subtenant's use of the Premises; provided, that such work shall be performed in accordance with the applicable requirements of this Section 7, and such laws of any governmental entity as may be applicable thereto and that arrangements for access to adjacent leaseholds are completed prior to commencement of work on those areas. Any and all improvements, constructed by or for the Developer, except off-site improvements, shall be owned by Developer and 70 its successors or assigns during the term of this Lease and, unless removed by Developer upon the expiration of the term of this Lease as permitted by subsection 17.10 below, shall become a part of the realty and the absolute property of Landlord upon the expiration or earlier termination of the term of this Lease. 7.5.3 Governmental Permits. Before commencement of -------------------- construction or development of any buildings, structures, or other work or improvements upon the Premises or within the Project area, Developer shall, at its own expense with the cooperation of Landlord, secure or cause to be secured any and all permits which may be required by the City of Long Beach or any other governmental agency having authority over such construction, development or work. Developer shall provide a copy of each such permit to the Landlord prior to commencing the subject work or activity. 7.5.4 Rights of Access. For the purposes of assuring ---------------- compliance with this Lease, representatives of Landlord in addition to those conducting inspections required by Landlord, shall have the right of access to the Premises without charges or fees, at normal construction hours, during the period of construction for the purposes of this Lease, including but not limited to the inspection of the work being performed in constructing the improvements required by this Lease. Such representatives of Landlord shall be those who are so identified in writing by the Director of Community 71 Development of Landlord, except that those employees of the City of Long Beach conducting inspections required by law need not be so identified. 7.5.5 Local, State and Federal Laws. Developer shall carry ----------------------------- out or cause to be carried out the construction of any buildings, structures or other work or improvements upon the Premises in conformity with all applicable laws. Any buildings, structures or other improvements constructed or placed upon the Premises by or under Developer, shall be constructed or placed in accordance with the laws and regulations of the State of California and of the City of Long Beach applicable to the Premises. Any applicable Federal Aviation Regulation (FAR) shall also be complied with. 7.5.6 Antidiscrimination During Construction. Developer -------------------------------------- for itself and its successors and assigns agrees that in the construction of any improvements provided for in this Lease that Developer will not discriminate against any employee, or applicant for employment because of age, sex, marital status, race, handicaps, color, religion, creed, ancestry or national origin. 7.5.7 Responsibilities of Landlord. ----------------------------- 7.5.7.1 Governmental Approvals. Landlord will assist ---------------------- and cooperate with Developer in connection with requests by Developer for lot line adjustments, tentative or final, parcel, tract or subdivision map approval, condominium plan approval, 72 variances and any other govenmental approvals necessary for or which will facilitate the development of the Premises, pursuant to this Lease including, without limitation, the execution of documents required to dedicate or offer for dedication or restrict or otherwise encumber or subdivide by parcel or final maps or condominium plans portions of the Premises as may be required by applicable governmental authorities. 7.5.7.2 Easements. Landlord agrees to join in granting or --------- dedicating such public or private utility company easements as may be required for the development of the Premises, for which no consideration is given. With the exception of landscaping and appurtenant structures as provided in subsection 7.5.9, Developer shall have no responsibility for maintaining public rights-of-way, sewers, storm drains and other facilities after dedication of same to Landlord by Developer, and Landlord agrees to accept the same for maintenance purposes. 7.5.7.3 Off-Site Improvements. Subject to any limitation --------------------- of law, Landlord shall take all such action as is necessary and prudent in order to permit Developer to install and construct the off-site improvements which are necessary to initially make the Premises suitable for development according to Developer's Basic Concept Documents. 73 The nature of such actions by Landlord and the nature and extent of such off-site improvements are defined in the attached Exhibit "F" ("Off-site Improvements"). The costs of all rights-of-way and improvements described in Exhibit "F" shall be included in Predevelopment and Infrastructure Costs in the manner set out in subsections 3.6 through 3.11. 7.5.7.4 Bond Financing. Landlord further agrees to -------------- assist with Developer's financing of the development of the Premises by cooperating reasonably with Developer and using reasonable efforts to sell or to cause any appropriate agency of the City of Long Beach to sell industrial development bonds as a source for such financing, if such action is legally permissible; by granting to or for the benefit of the holders of any special assessment or district bonds constituting a first lien on Developer's Leasehold Estate, or their trustee, rights and remedies of a similar nature afforded Leasehold Mortgagees under Section 4 hereof. 7.5.8 Responsibilities of Developer. Developer, without ----------------------------- expense to Landlord, shall perform all work specified of Developer in this Lease. In addition, Developer shall furnish Landlord's Director of Community Development with semi-annual progress reports demonstrating good faith compliance with the construction 74 requirements of this Lease on or before each semiannual period commencing with the sixth month anniversary of the date of this Lease, through the occurrence of the completion date of such construction. 7.5.9 Maintenance. In addition to the responsibilities ----------- mentioned herein, Developer shall have sole and exclusive responsibility for maintaining the Premises and all building structures and improvements which may be constructed upon the Premises in good condition and repair, at no cost or expense to Landlord, reasonable wear and tear excepted. Developer shall also maintain all landscaping and appurtenant structures installed in accordance with plans approved pursuant to Section 7. Landlord will consider a request to maintain landscaping in public rights-of-way. 7.5.10 Acceptance of Premises. Developer accepts the ---------------------- Premises in an "as-is" condition, except for subsurface hazardous materials and munitions, which are the responsibility of Landlord to remove at Landlord's expense, and also except for subsurface conditions under existing leased premises demised to Tommie E. Rutherford dba Stripbright Company, and acknowledges that Developer has not received and Landlord has not made any warranty, express or implied, as to the condition of the Premises. Developer agrees to bear all expenses incurred in the development, operation and maintenance of the Premises, except for improvements and facilities dedicated for public use to Landlord or 75 other governmental authority, and except for removal and disposition of subsurface hazardous materials and munitions. 7.6 Subdivided Leases. For the purpose of facilitating the ----------------- development of the Project and obtaining financing and refinancing of improvements to be constructed thereon, at any time and from time to time during the term, within thirty (30) days after notice of demand from Developer, Landlord shall enter into separate new leases ("Subdivided Lease") so that there shall be one lease for each developable parcel in the Premises. The Subdivided Leases described herein shall be for the sole purpose of lease, sale or financing of the development. In all matters affecting the relationship, rights or obligations of the parties hereto, or in the case of any inconsistency between the language of the documents, this Lease as undivided and unmodified shall govern except that as to the individual subdivided lease parcels, rents, security deposits, legal descriptions and requirements governing amount and level of construction may be varied to conform to the specifics of such parcel, as long as the totals in all such categories for all subdivided leases added together correspond to the totals expressed in this document. Developer has heretofore paid to Landlord as a separate charge apart from rents a one time charge to reimburse Landlord's costs and expenses in separating the leases and reviewing and administering all the leases as separated in the sum of Five Thousand Dollars ($5,000.00). Each Subdivided Lease shall: 7.6.1 Same Parties. Have the same parties as the parties ------------ to this Lease. 76 7.6.2 Obligations of Subdivided Leases. Be released from -------------------------------- the overall obligations expressed in this Lease to pay rent and to carry out specific levels of construction within specific periods, provided, however that each such parcel shall be subject to an appropriate proportionate share of such obligations such that the total of such obligations divided among separated leases is not less than the total of such obligations expressed in this Lease. All other obligations imposed by this Lease shall apply to each such separate parcel as an undivided shared obligation. As to any conflict between the Subdivided Leases or all of them and this Lease, the terms of this Lease shall govern. 7.6.3 Terms, Covenants. Contain the same terms, covenants, ---------------- provisions, conditions and agreements as those contained in this Lease except that: 7.6.3.1 Ground Rent. The Ground Rent and other ----------- periodic payments to be made by Developer as part of Developer's obligation under this Lease and the security deposit under subsection 16.1 shall under the Subdivided Lease, bear substantially the same proportion to amounts provided in this Lease as the area of the Premises in the Subdivided Lease bears to the area of the Premises in this Lease. Provided, however, that if the fair market value of any land included in a Subdivided Lease is substantially greater or less than the balance of the land included in this Lease, then the Ground Rent 77 may be appropriately varied between the Subdivided Lease and this Lease in order to take into account such variance in the fair market land value. 7.6.3.2 Improvements. Any improvements constructed ------------ upon the Premises demised by a Subdivided Lease shall satisfy Developer's obligations imposed by this Lease. The right of Developer to make improvements shall be apportioned around the Subdivided Leases substantially as is provided in subsection 7.6.3.1. 7.6.3.3 Easements and CC & R's. Each Subdivided Lease ---------------------- shall contain all cross-easements, covenants, conditions, restrictions and agreements requested by Developer, and approved by Landlord, provided they reasonably facilitate separating this Lease into individual Subdivided Leases within the overall intent of this Lease. 7.6.3.4 Description of Property. Each Subdivided ----------------------- Lease shall cover only that portion of the Premises specified by Developer in Developer's notice of demand, provided that Developer shall accompany each notice of demand with an accurate survey and metes and bounds description of the portion of the Premises to be covered by the Subdivided Lease; or if the Premises have been divided into separate parcels, with the appropriate parcel map description of such Premises. 7.6.3.5 Excluded Matters. Obligations ---------------- 78 under this Lease which have been satisfied or which are not applicable shall be excluded from a Subdivided Lease. 7.7 Combining Leases. At any time and from time to time after the ---------------- execution of any such Subdivided Lease, within thirty (30) days after notice of demand from Developer, Landlord shall enter into a single lease ("Single Lease") combining any two or more of the Subdivided Leases, covering all the portions of the Premises covered by the component Subdivided Leases, and containing the same terms, covenants, provisions, conditions and agreements as those contained in the component Subdivided Leases, except that: 7.7.1 Ground Rent. The Ground Rent and other periodic ----------- payments to be made by Developer as part of Developer's obligation under the Single Lease shall be the sum of the Ground Rent and other periodic payments payable under the component Subdivided Leases; 7.7.2 Easements and CC & R's. The Single Lease shall ---------------------- contain all cross easements, covenants, conditions, restrictions and agreements requested by Developer and approved by Landlord provided they reasonably facilitate combining the component Subdivided Leases and integrating the operation of the Single Lease with that of any Subdivided Leases still outstanding within the overall intent of this Lease. 8. USE: --- 8.1 Permitted Development. The Project shall be --------------------- 79 an aviation oriented business, office, research and development and industrial park, with offices and facilities and space for sublease to subtenants, including tenant-required aviation and other ancillary and related uses. 8.2 Aviation Related Uses. Any aviation and/or aircraft ---------------------- related uses shall be subject to the terms and conditions of this Lease and to the terms and conditions governing Fixed Base Operations on the Long Beach Municipal Airport, "Master FBO Lease", which terms and conditions are incorporated in the Master FBO Lease attached hereto, marked Exhibit "K" and made a part hereof and shall be binding upon Developer, its tenants, subtenants and assigns, provided, however, as to Developer only in case of any conflict between this Lease and the Fixed Base Operation Lease, the business terms of this Lease shall prevail, and the aviation operation requirements of the Fixed Base Operation Lease shall prevail as to aviation uses. Access to the Airport operating areas shall be made available for any aircraft based on the Premises. All non-aviation areas shall be separated from the Airport operating areas by security fencing approved by the Airport Manager. 8.3 Inapplicable Provision. ----------------------- 8.4 Vehicle Parking. No vehicle not related to or used in the --------------- business of Developer or its subtenants or their respective employees, agents, guests or invitees shall be parked on the Premises for any period greater than twenty-four (24) hours 8.5 Federal Aviation Administration. Use of the Premises shall ------------------------------- conform to and be limited by applicable zoning regulations, any conditions lawfully imposed by duly empowered 80 governmental authority having jurisdiction over the Premises, the terms, covenants, conditions and restrictions imposed by this Lease and such lawful rules and regulations of the Federal Aviation Administration ("FAA") as may be applicable from time to time to the Premises. The conditions imposed by the FAA as of the date of this Lease are attached hereto, marked Exhibit "L" and made a part hereof. The conditions set out in Exhibit "L" are applicable only to those portions of the Premises used for aviation or aircraft purposes. Landlord shall cooperate fully with Developer in obtaining all required FAA approvals. Landlord understands that FAA has been made aware of the nature of the development proposed for the Premises and as of the date of this Lease, Landlord has not received communication from FAA indicating that the type of development proposed would not be permitted if it complied with all applicable regulations. 8.6 Inspection. At all times during the term of this Lease, ---------- Landlord shall retain the right of access to and ingress and egress over the Premises to inspect aviation related operations and to enforce codes or ordinances and provisions of this Lease, subject to governmental and reasonable subtenant security requirements. 9. LIENS: ----- 9.1 Developer's Responsibility. Developer shall not permit any -------------------------- liens to be enforced against Landlord's interests in and to the land comprising the Premises, nor against Developer's leasehold interest therein by reason of work, labor, services ox materials supplied or claimed to have been supplied to Developer 81 or anyone holding the Premises, or any part thereof, through or under Developer, and Developer agrees to indemnify Landlord against such liens. 9.2 Notice of Work. Before any buildings, structures or other -------------- improvements or additions thereto, having a cost in excess of One Hundred Fifty Thousand and No/100 Dollars ($150,000.00) are constructed or reconstructed upon the Premises, Developer shall serve written notice upon the Landlord in the manner specified in this Lease of Developer's intention to perform such work for the purpose of enabling Landlord to post notices on non-responsibility under the provisions of Section 3094 of the Civil Code of the State of California, or any other similar notices which may be required by law. 9.3 Discharge of Liens. If any mechanics liens or other liens ------------------ shall be filed by reason of work, labor, services or materials supplied or claimed to have been supplied to Developer or anyone holding the Premises, or any part thereof, through or under Developer, Developer shall cause the same to be discharged of record within sixty (60) days after notice to Developer of the filing thereof, or otherwise free the Premises from the effect of such claim of lien and any action brought to foreclose such lien within such sixty (60) day period, or Developer, within such sixty (60) day period, shall promptly furnish to Landlord a bond in an amount and issued by a surety company satisfactory to Land lord securing Developer against payment of such lien and against any and all loss or damage whatsoever in any way arising from failure of Developer to discharge such lien. 9.4 Landlord's Right to Pay. In the event Devel- ----------------------- 82 oper fails to perform its obligations under subsection 9.3 above with respect to any lien within the sixty (60) day period specified in subsection 9.3 above, Landlord may, but shall not be obligated to pay the amount thereof, inclusive of any interest thereon, and any costs assessed against Developer in said litigation, or may discharge such lien by contesting its validity or by any other lawful means. 9.5 Reimbursement of Landlord. Any amount paid by Landlord for ------------------------- any of the expenses described in subsection 9.4 above, and all reasonable legal and other expense of Landlord, including reasonable counsel fees, and costs of suit, in defending any such action or in connection with procuring the discharge of such lien, with all necessary disbursements in connection therewith, together with interest thereon at the rate provided by law from the date of payment shall be repaid by Developer to Landlord on demand. 10. CONDEMNATION: ------------ 10.1 Definition of Terms. The following definitions shall govern ------------------- interpretation of this subsection. 10.1.1 Total Taking. The term "total taking as used in this ------------ Section 10 means the taking of the entire Premises under the power of eminent domain or the taking of so much thereof as the parties mutually agree will prevent or substantially impair the use of the Premises of the uses and purposes than being made or proposed to be made by Developer of the Premises. If the parties do not agree as to whether prevention 83 or substantial impairment has occurred, that issue may be arbitrated as provided in the rules for arbitration published by the American Arbitration Association. Each party shall pay half of the cost of such arbitration. 10.1.2 Partial Taking. The term "partial taking" means the -------------- taking of a portion only of the Premises which does not constitute a total taking as defined above. 10.1.3 Voluntary Conveyance. Neither party to this Lease will -------------------- voluntary convey any interest related to this Lease to any agency, authority or public utility under threat of a taking under the power of eminent domain in lieu of formal proceedings without first providing written notice to the other of any request or intention to do so. 10.1.4 Date of Taking. The term "date of taking" shall be the -------------- date title to the Premises or portion thereof passes and vests in the condemnor or the date of entry of an order for immediate possession with any judicial proceeding in eminent domain or the date physical possession of the Premises is taken or interfered with, whichever first occurs. 10.1.5 Leased Land. The term "leased land" means the real ----------- property demised hereby, but exclusive of any and all improvements situated upon the Premises at the commencement of the Lease term and also exclusive of all improvements constructed or placed thereon by or under Developer and exclusive of any grading and 84 other site work performed by or under Developer. 10.2 Effect of Taking. If during the term hereof there shall be a ---------------- total or partial taking under the power of eminent domain, then the Leasehold Estate of Developer in and to the Premises, in the event of a total taking, or the portion thereof taken, in the event of a partial taking, shall cease and terminate, as of the date of taking thereof. If this Lease is so terminated in whole or in part, all Ground Rent and other charges payable by Developer to Landlord hereunder attributable to the Premises, or portion thereof taken, shall be paid by Developer up to and prorated through the date of taking by the condemnor. Any portion of the security deposit provided for in subsection 16.1.1 fairly attributable to the terminated portion of the Leasehold Estate shall be repaid to Developer and the parties shall thereupon be released from all further liability in relation thereto. 10.3 Allocation of Award. All compensation and damages awarded in ------------------- connection with any taking, total or partial, of the Premises including any improvements thereon shall be allocated so that Developer shall receive that portion of the award attributable to the value determined for improvements then existing on the Premises, the value of Developer's leasehold interest in the Premises and severance or other damages to buildings or the Leasehold Estate. The remainder of the award, including all portions of the award attributable to the value of the land as affected by the leasehold, and any severance or other damages to the land, shall be payable to Landlord. 10.4 Reduction of Ground Rent on Partial Taking. ------------------------------------------ 85 In the event of a partial taking, the Ground Rent payable by Developer shall be adjusted from the date of taking to the next adjustment date (see subsection 3.2.1). Such Ground Rent adjustment caused by the partial taking shall be made by reducing the Ground Rent payable by Developer based on the ratio between the fair market value of the leased land at the date of taking and the fair market value of the leased land remaining immediately thereafter valued for the use being made of the leased land by Developer prior to such taking. l0.5 Temporary Taking. If all or any portion of the Premises shall ---------------- be taken by any competent authority for temporary use or occupancy, this Lease, at the option of Developer, shall continue in full force and effect without reduction or abatement of rent, notwithstanding any other provision of this Lease, statute or rule of law to the contrary, and Developer shall, in such event, be entitled to the entire award for such taking to the extent that the same shall be applicable to the period of such temporary use or occupancy included in the term of this Lease and Landlord shall be entitled to the remainder thereof. 11. ALTERATIONS BY DEVELOPER: ------------------------ Developer shall have the right at any time and from time to time during the Lease term to make, at its sole cost a expense, such changes and alterations, structural or otherwise, in or to the improvements, other than dedicated public improvements, constructed upon the Premises as Developer shall deem necessary or desirable, including without limitation, the right 86 to remove and/or demolish buildings and other improvements provided that other buildings or improvements are constructed in their place if such demolition occurs when twenty (20) or more years are remaining in the term of this Lease, including any extensions hereof. The rights granted by this section shall be limited to and their exercise shall comply with the terms of Section 7 and subsection 3.3 hereof. 12. TAXES AND ASSESSMENTS: --------------------- 12.1 Payment by Developer. Developer recognizes and understands -------------------- that this Lease may create a possessory interest subject to property taxation and that Landlord may be subject to the payment of property taxes on such interest. Developer shall pay prior to delinquency all real estate taxes and assessments on the Premises and/or Developer's possessory interests therein levied during the term of this Lease. Developer shall not place or allow to be placed on the Premises, or any part thereof, any mortgage, trust deed, encumbrance or lien unauthorized by this Lease. Developer shall remove or have removed any levy or attainment made on any of the Premises, or any part thereof, or assure the satisfaction thereof within a reasonable time, but in any event prior to a sale thereof. Nothing herein contained shall be deemed to prohibit Developer from contesting the validity or amounts of any tax, assessment, encumbrance or lien, nor to limit the remedies available to Developer in respect thereto. 12.2 Installment Payments. If any real estate, special tax or -------------------- assessments are at any time during the term of this Lease, levied or assessed against the Premises or Developer's 87 Leasehold Estate hereunder, which, upon exercise of any option permitted by the assessing authority, may be paid in installments or converted to an installment payment basis (irrespective of whether interest shall accrue on unpaid installments), Developer may elect to pay such taxes or assessments in installments with accrued interest thereon. In the event of such election, Developer shall be liable only for those installments of such taxes or assessments which become payable during the term of this Lease, and Developer shall not be required to pay any such installment which becomes due and payable after the expiration of the term of this Lease. Landlord shall execute whatever documents may be necessary to convert any such taxes or assessments to such an installment payment basis if requested so to do by Developer and if such action is authorized by law then in effect. 12.3 Proration. Any real estate taxes and assessments which are --------- payable by Developer hereunder shall be prorated between Landlord and Developer at the commencement and expiration or earlier termination of the term of this Lease if such real estate taxes and assessments relate to a fiscal period of the levying authority which arose before the term commenced or extends beyond the expiration or earlier termination of the term hereof. 12.4 Right to Contest. Developer and any subtenant, with Developer's ---------------- consent, shall have the right to contest the amount or validity of any real estate taxes and assessments, in whole or in part, by appropriate administrative and legal proceedings, without any cost or expense to Landlord, and Developer may postpone payment of any such contested real estate 88 taxes and assessments pending the prosecution of such proceedings and any appeals so long as such proceedings shall operate to prevent the collection of such real estate taxes and the sale of the Premises to satisfy any lien arising out of the nonpayment of the same, provided, however that if at any time payment of the whole or any part thereof shall become necessary in order to prevent the termination of the right of redemption of any property affected thereby, or if there is to be an eviction of Developer because of nonpayment thereof, Developer shall pay the same in order to prevent such termination of the right of redemption or such eviction. Landlord shall execute and deliver to Developer whatever documents may be within Landlord's legal authority necessary or proper to permit Developer or any subtenants, with Developer's consent, to so contest any real estate taxes or which may be necessary to obtain payment of any refund which may result from any such proceedings. Any such contest shall be at no cost or expense to Landlord. Each refund of any tax or assessment so contested shall be paid to Developer. 13. CERTIFICATES BY DEVELOPER AND LANDLORD: -------------------------------------- 13.1 Developer to Provide. Developer agrees upon not less than -------------------- twenty (20) days' notice by Landlord to execute, acknowledge and deliver to Landlord a statement in writing certifying (i) that this Lease is unmodified and in full force and effect (or if there have been modifications that the same is in full force and effect as modified and stating the modifications); (ii) whether or not to the best knowledge of Developer there are then existing any offsets or defenses against the enforcement of 89 any of the terms, covenants or conditions hereof upon the part of Developer to be performed and, if so, specifying the same; and (iii) the dates to which the Ground Rent and other charges have been paid, it being intended that any such statement delivered pursuant to this subsection may be relied upon by any prospective purchaser of the fee of the real property comprising the Premises. 13.2 Landlord to Provide. Landlord agrees upon not less than ------------------- twenty (20) days' prior notice by Developer, to execute, acknowledge and deliver to Developer a statement in writing certifying (i) that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications); (ii) the dates to which the Ground Rent and other charges have been paid; (iii) stating whether or not to the best knowledge of Landlord, Developer is in default in performance of any covenant, agreement or condition contained in this Lease and, if so, specifying each such default of which Landlord may have knowledge; and (iv) whether or not there are to Landlord's best knowledge any offsets or defenses claimed by and/or available to Developer to the payment or rental, it being intended that any such statement delivered pursuant to this subsection may be relied upon by any prospective assignee or subtenant of the whole or any portion of the Premises, or by any lender extending credit on the security of Developer's Leasehold Estate. 14. QUIET ENJOYMENT: --------------- Landlord covenants that Developer, upon the performance of the covenants and agreements herein contained on Developer's 90 part to be performed, shall and may at all times, for itself and its subtenants, peaceably and quietly have, hold and enjoy the Premises during the term of this Lease. 15. TERMINATION AND FURTHER LEASING: ------------------------------- 15.1 Termination. Subject to the provisions of Section 4, this ----------- Lease may be terminated at any time by mutual agreement of the parties. 15.2 Termination by Developer. Developer may terminate this ------------------------ Lease in the event Developer is unable to secure an extended coverage leasehold policy of title insurance, within ninety (90) days following execution of this Lease containing only those exceptions approved by Developer, provided, however, that Developer shall have first given Landlord sixty (60) days notice of its intention to terminate during which time Landlord shall have an opportunity to cure the deficiency. 15.3 Termination by Landlord. Subject to the provision of ----------------------- Section 4 of this Lease, Landlord may terminate this Lease under the following circumstances: 15.3.1 Developer fails to pay rent or any other charge required by this Lease. 15.3.2 Developer assigns this Lease in violation of subsection 5.1. 15.3.3 Failure of Developer to submit drawings or related documents required by this Lease. 15.3.4 Failure of Developer to provide the good faith deposit required by this Lease. 15.3.5 Bankruptcy of Developer. Final ad- 91 judication or filing of a voluntary petition for bankruptcy by Developer. Provided, however, that in all cases, Landlord shall give Developer sixty (60) days prior written notice of its intention to terminate, during which time Developer shall have an opportunity to cure the default. However, if the default is of a nature such that it cannot be cured within sixty (60) days, Developer shall not be in default if Developer shall commence such use and diligently prosecute it to completion. 16. SECURITY DEPOSIT: ---------------- 16.1 Good Faith Deposit. ------------------ 16.1.1 Receipt by Landlord. Developer has, concurrently ------------------- with the execution and delivery of the All-Inclusive Lease, delivered to Landlord a good faith deposit in the amount of One Million and No/100 Dollars ($1,000,000.00) as security for the performance of the obligations of Developer to be performed in accordance with the provisions of the All-Inclusive Lease. The receipt of the deposit is hereby acknowledged by Landlord. The parties acknowledge that Two Hundred Ninety-Five Thousand Four Hundred Twenty-Eight and 97/100 Dollars ($295,428.97) of such good faith deposit shall be allocated to and be held by Landlord pursuant to this Lease. 16.1.2 Form of Deposit. The good faith deposit, at the --------------- option of Developer, may be in the form of (i) cash; or (ii) cashier's or certified check; or 92 (iii) negotiable certificate or certificates of deposit issued by a federal or state bank or savings and loan association; or (iv) an irrevocable letter of credit in favor of Landlord issued by an established bank or other institution satisfactory to Landlord; or (v) a bond in a form and with a surety reasonably satisfactory to Landlord providing for payment to Landlord of amounts that may become payable to Landlord under this Lease from time to time; or (vi) such other form of security or deposit as may be mutually acceptable. Developer may change the form of the deposit from time to time, at its option, to any other of the permitted forms of deposit. The deposit, if in cash or certified or cashier's check shall be deposited in an interest bearing account of Landlord in a bank, savings and loan association or trust company selected by Developer and approved by Landlord, which approval shall not unreasonably be withheld. Developer shall have the right to specify the type of account in which such funds are, from time to time, to be deposited. Provided that no default has occurred during the term of the Lease which has resulted in a forfeiture by Developer of all or a part of the good faith or security deposit, such deposit, or any portion thereof which has not been forfeited, shall be returned to Developer upon expiration of this Lease. 16.1.3 Interest. Landlord shall be under no obligation to pay or -------- earn interest on the deposit, but 93 if interest shall accrue or be payable thereon such interest, when received by Landlord, shall be promptly paid to Developer. Landlord agrees, but not more often than quarterly, upon receipt of a request from Developer, to cause any such interest so accrued on such deposit to be paid to Developer by the bank, savings and loan association or trust company with which said sums have been deposited. 16.1.4 If Bond is Posted. If a bond is posted to satisfy ----------------- the requirements of this Lease with a fixed term and if such bond expires prior to the date Developer is entitled to have the security deposit returned, Developer shall provide Landlord with either (i) evidence of the renewal of such bond for an additional period, or (ii) a new security deposit satisfying the requirements of subsection 16.1 in one of the forms authorized by such subsection, including, without limitation, a new bond, not less than twenty (20) days prior to the expiration of the bond posted to satisfy the requirements in subsection 16.1 above. 16.2 Construction Security Deposits. Developer has, prior to the ------------------------------ execution and delivery of this Lease, delivered to Landlord a construction deposit in the amount of One Million and No/100 Dollars ($l,000,000.00) as security for the performance of the obligations of Developer to be performed in accordance with the provisions of this Lease. The receipt of the deposit is hereby acknowledged by Landlord. The parties acknowledge that Two Hundred Ninety-Five Thousand Four Hundred Twenty-Eight and 97/100 94 Dollars ($295,428.97) of such construction security deposit shall be allocated to and held by Landlord pursuant to this Lease. 16.2.1 Form of Construction Deposit. The construction ---------------------------- deposit, at the option of Developer, may be in the form of (i) cash; or (ii) cashier's or certified check; or (iii) negotiable certificates of deposit issued by a federal or state bank or savings and loan association; or (iv) an irrevocable letter of credit in favor of Landlord issued by an established lending institution approved by Landlord; or (v) other form of security or deposit as may be mutually acceptable. Developer may change the form of the deposit from time to time, at its option, to any other of the permitted forms of deposit. The deposit, in cash or certified or cashier's check shall be deposited in an interest bearing account of Landlord in a bank, savings and loan association or trust company selected by Developer and approved by Landlord, which approval shall not unreasonably be withheld. Developer shall have the right to specify the type of account in which such funds are, from time to time, to be deposited. 16.2.2 Interest. Landlord shall be under no obligation to -------- pay or earn interest on the deposit, but if interest shall accrue or be payable thereon, such interest, when received by Landlord, shall be promptly paid to Developer. Landlord agrees, but not more often than quarterly upon receipt of a request from Developer to cause any such interest so accrued on such deposit 95 to be paid to Landlord by the bank, savings and loan association or trust company with which said sums have been deposited. 16.2.3 Incorporation by Reference. Any bond obtained by -------------------------- Developer shall incorporate by reference this Lease and all of its terms and conditions. For purposes of such bonds, no requirement of this Lease may be deemed waived. Waiver may be accomplished only by Landlord and only in writing by the City Manager or his duly authorized representative. 16.2.4 Return of Deposit. Promptly upon Developer's ----------------- completion of the construction of any building improvements upon the Premises and the issuance of a Certificate of Occupancy for such improvements, Landlord shall release and return to Developer a portion of the deposit described in subsection 16.2 based upon the proportion of the number of square feet of building area (as measured from the exterior of exterior building walls) within such completed building improvements and to 396~058 square feet of building area. If Developer is not in default under this Lease, the balance of such deposit, if any, with accrued interest shall be returned to Developer upon the occurrence of the Completion Date as specified in this Lease. 16.2.5 Retention of Deposit by Landlord. In the event that -------------------------------- this Lease is terminated by Developer, in whole or in part, under subsection 17.5 below, or in the event that Developer elects not to permit Land- 96 lord to terminate this Lease by reason of Developer's failure to commence and complete the construction of building improvements upon the Premises as required by this Lease, said deposit, less interest accrued thereon through the date of such termination and also less an portion of such deposit to be returned to Developer under subsection 16.2.4 above, shall be retained by Landlord as provided in subsection 17.5 below. 17. GENERAL PROVISIONS: ------------------ 17.1 Notices, Demands and Communications between the Parties. ------------------------------------------------------- Written notices, demands, and communications between Landlord and Developer shall be in writing and shall be sufficiently given if personally served or if mailed by registered or certified mail, postage prepaid, return receipt requested, to the principal offices of Landlord or Developer, set forth in subsection 1.5 of this Lease. Any such notice, demand or communication so given by mailing to Landlord shall be mailed to the attention of the City Manager. Copies of any such notice, demand or communication to be given to Developer pursuant to this Lease shall be given to Kilroy Long Beach Associates, Attention, President such other entity, person or persons as he may designate, by personal service or by mailing the same, as required by this subsection, to such party, at the address set forth in subsection 1.5 above or such other address as may be designated. Either Landlord or Developer may from time to time by written notice to the other designate a different address or addresses or party or parties to whom copies of notices, demands and communications are 97 to be delivered or to whose attention notices, demands and communications are to be addressed which shall be substituted for the addresses and/or names above specified. Notices shall be deemed served effective immediately if personally served and effective as of the date received and set forth on the return receipt if served by registered or certified mail. 17.2 Conflict of Interest. No member, official or employee of -------------------- Landlord shall have any personal interest, direct or indirect, in this Lease, nor shall any such member, official or employee participate in any decision relating to this Lease which affects his personal interest or the interest of any corporation, partnership or association in which he is, directly or indirectly, interested. No member, official or employee of Landlord shall be personally liable to Developer, or any successor in interest, in the event of any default or breach by Landlord or for any amount which may become due to Developer or successor or on any obligations under the terms of this Lease. 17.3 Enforced Delay: Extension of Time of Performance. In addition ------------------------------------------------ to other provisions of this Lease, performance by either party hereunder, shall not be deemed to be in default where delays or defaults are unavoidable or performance is rendered impracticable, due to war; enemy action; insurrection; civil disturbance; strikes; lock-outs; riots; floods; earthquakes; fires; casualties; acts of God; acts of the public enemy; epidemics; quarantine restrictions; freight embargoes; lack of transportation; governmental restrictions or moratoria; failure or inability to secure materials or labor by reason of regulations or order of any governmental entity; litigation in- 98 cluding eminent domain proceedings or related legal proceedings; acts or failure to act of the other party; acts or failure to act of any public or governmental agency or entity; and the time for such performance shall be extended for a period equal in length to such delay(s). 17.4 Inspection of Books and Records. Landlord has the right at all ------------------------------- reasonable times during regular business hours to inspect the books and records of the Developer pertaining to the Premises as pertinent to the purposes of this Lease. Developer also has the right at all reasonable times during regular business hours to inspect the books and records of the Landlord pertaining to the Premises as pertinent to the purpose of this Lease. 17.5 Defaults and Remedies. --------------------- 17.5.1 Defaults - General. Subject to the extensions of ------------------ time set forth in subsection 17.3 above, failure by either party to perform any term or provision of this Lease constitutes a default under this Lease, if not cured within thirty (30) days from the date of receipt of a written notice from the other party specifying the claimed default provided that if such default cannot reasonably be cured within such thirty (30) day period, the party receiving such notice of default shall not be in default under this Lease if such party commences the cure of such default within such thirty (30) day period and thereafter diligently prosecutes the steps to cure such default to completion. 17.5.2 Institution of Legal Actions. In ---------------------------- 99 addition to any other rights or remedies, either party may institute legal action to cure, correct, or remedy any default, to recover damages for any default, or to obtain any other remedy consistent with the purpose of this Lease. Such legal actions must be instituted in the South Branch of the Superior Court of the County of Los Angeles, State of California, in an appropriate municipal court in that county, or in the Federal District Court in the Central District of California. The prevailing party in any action commenced pursuant to this Lease shall be entitled to recover reasonable costs, expenses and attorneys' fees. 17.5.3 Applicable Law. The laws of the State of California shall -------------- govern the interpretation and enforcement of this Lease. 17.5.4 Service of Process. In the event any legal action is ------------------ commenced by Developer, against Landlord, service of process on Landlord shall be made by personal service upon the City Clerk of the Landlord, or in such other manner as may be provided by law. In the event that any legal action is commenced by Landlord against Developer, service of process on Developer shall be made as provided by law and shall be valid whether made within or without the State of California, or in such manner as may be provided by law. 17.5.5 Rights and Remedies Are Cumulative. Except as otherwise ---------------------------------- expressly stated in this Lease, the 100 rights and remedies of the parties are cumulative, and the exercise by either party of one or more of such rights or remedies shall not preclude the exercise by it, at the same or different times, of any other rights or remedies for the same default or any other default by the other party. 17.5.6 Inaction Not a Waiver of Default. Any failures or delays by -------------------------------- either party in asserting any of its rights and remedies as to any default shall not operate as a waiver of any default or of any such rights or remedies or deprive either such party of its right to institute and maintain any actions or proceedings which it may deem necessary to protect, assert or enforce any such rights or remedies. 17.5.7 Remedies. In the event of a default by Developer, which is not -------- cured by Developer within the times specified in this Lease, Landlord, without further notice to Developer, may declare this Lease and/or Developer's right of possession at an end and may reenter the Premises by process of law, in which event, Landlord shall have the right to recover from Developer: 17.5.7.1 The worth at the time of award of the unpaid Ground Rent which has been earned at the time of termination, plus interest; 17.5.7.2 The worth at the time of award of the amount by which the unpaid Ground Rent which would have been earned after termination until the 101 time of award exceeds the amount of such rental loss that Developer proves could have been reasonably avoided, plus interest; 17.5.7.3 The worth at the time of award of the amount by which the unpaid Ground Rent for the balance of the term after the time of award exceeds the amount of such rental loss for the same period that Developer proves could be reasonably avoided, plus interest thereon; and 17.5.7.4 The remedies of Landlord as hereinabove provided are subject to the other provisions of this Lease, including Section 4 hereof. 17.5.8 Developer's Rights. Developer shall have the right to ------------------ challenge the correctness of any determination of default made by Landlord, and Landlord shall carefully review and consider Developer's challenge. 17.5.9 Lease Termination. Should governmental action or failure to ----------------- act preventing construction in accordance with this Lease or rendering it impossible, occur prior to the time that Developer has constructed any building upon the Premises, then Developer shall have the right, at its option, with the prior written approval of any lender which has a security interest in the Leasehold Estate, to cancel and terminate this Lease by giving written notice of such termination to Landlord, at any time prior to the construction of a building upon the Premises. Upon any such termination 102 of this Lease, Developer and Landlord shall execute and record a quitclaim deed sufficient to remove the cloud of this Lease and the short form of this Lease from record title to the Premises and the deposits described in subsections 16.1 and 16.2, plus any interest accrued on such deposits, shall be paid to Developer by Landlord. 17.5.10 Landlord's Exercise of Remedies. In the event of an uncured ------------------------------- default by Developer in the performance of any of its obligations to commence and complete the construction of the initial building within the times required by Section 7 of this Lease and in the further event that Landlord elects to exercise its remedy to terminate this Lease by reason of such default by Developer, Developer may, for a period of thirty (30) days following its receipt of written notice from Landlord of Landlord's election to terminate this Lease by reason of such default, elect to prevent such termination from becoming effective by releasing and paying to Landlord a portion of the good faith deposit held by Landlord under subsection 16.1, which portion shall be equal to the lesser of (i) the amount of such deposit so held by Landlord; or (ii) an amount equal to the product of One and One-half Dollar ($1.50) per square foot times the number of square feet of building area the failure to commence or complete the construction of which has caused the subject default or the adjusted rent per square foot if this provision becomes operative after any rental adjustment. 103 17.5.11 Payment to Developer. In the event that this Lease is -------------------- terminated as a result of an uncured default by Landlord and in the further event that Developer has constructed streets, utilities and/or other off-site improvements or grading improvements upon or in relation to the Project prior to such termination of this Lease, Landlord shall, pursuant to its responsibilities under State law, use its best efforts to resell or relet the Premises, or any portion thereof, as soon and in such manner as Landlord shall find feasible and consistent with the objectives of such law to a qualified and responsible party or parties (as reasonably determined by Landlord) who will assume the obligation of making or completing the improvements required of Developer under this Lease, or such other improvements in their stead as shall be satisfactory to Landlord and in accordance with the uses specified for the Premises in this Lease. Upon such resale or reletting of the Premises, or any portion thereof, the proceeds thereof shall be applied: 17.5.11.1 Reimbursement to Landlord. First, to reimburse Landlord ------------------------- for all costs and expenses incurred, including, but not limited to, salaries to personnel in connection with the recapture, management, and resale or reletting of the Premises, or part thereof (but less any income derived by Landlord from the Premises, or part thereof, in connection with such management); all 104 taxes, assessments and water and sewer charges paid with respect to thePremises, or part thereof; any payments made or which are necessary to be made to discharge any encumbrances or liens existing on the Premises, or part thereof, at the time or revesting of title thereto in Landlord or to discharge or prevent from attaching any subsequent encumbrances or liens due to obligations, defaults or acts of Developer, its successors or transferees; any expenditures made or obligations incurred with respect to the making or completion of the improvements or any part thereof on the Premises, or part thereof; and any amounts otherwise owing Landlord by Developer and its successor or transferee; 17.5.11.2 Reimbursement to Developer. Second, to -------------------------- reimburse Developer, its successors or transferees, a sum up to the amount equal to the sum of (i) the costs incurred for the development of the Project, prorated to the Premises, if the Premises are less than all of the Project, on a square foot basis, and for the improvements existing on the Premises at the time of the re-entry and repossession by Developer, less (ii) any gains or income withdrawn or made by Developer from the Premises or the improvements thereon; provided however, that no payment shall be made to Developer if this Lease is terminated as a result of an uncured default by Developer. 105 17.5.11.3 Ground Rent. Third, in the case of a ----------- reletting, to pay to Landlord an amount equal to the Ground Rent and other payments payable to Landlord hereunder that Landlord would have received if this Lease had not been terminated; 17.5.11.4 Remaining Balance. Any balance remaining ----------------- after such reimbursement shall be retained by Landlord as its property. In the event that such street, utility and/or other off-site improvements have been constructed by or the costs of such construction were paid or reimbursed by an improvement or special assessments district, the provisions of this subsection shall be applicable to the costs for such improvements if payment of the bonds issued by such district have been guaranteed by Developer or are secured by security, in addition to the Leasehold Estate created hereby, or paid by Developer, but only to the extent of such payment by Developer or of payment from the proceeds of such guarantee or security. 17.5.12 Delivery of Plans. In the event that this ----------------- Lease is terminated, for any reason whatsoever, Developer shall deliver to Landlord one set of all plans and data in its possession concerning the Premises. 17.6 Right to Contest Laws. Developer shall have the right, --------------------- after notice to Landlord to contest or to permit its subtenants to contest by appropriate legal proceedings, without 106 costs or expense to Landlord, the validity of any law, ordinance, order, rule, regulation or requirement to be complied with by Developer under this Lease and to postpone compliance with the same except such laws as may be adopted by Landlord, provided such contest shall be promptly and diligently prosecuted at no expense to Landlord and so long as Landlord shall not thereby suffer any civil penalties, sanction or be subjected to any criminal penalties or sanctions, and Developer shall protect and save harmless Landlord against any liability and claims for any such noncompliance or postponement of compliance. 17.7 Trade Fixtures. All trade fixtures, furnishings, equipment -------------- and signs installed by or under Developer or subtenants shall be and remain the property of the person, firm or corporation installing the same and shall be removable at any time during the term of this Lease. The removal of any such trade fixtures, furnishings, equipment and signs shall be at the expense of the person, firm or corporation removing the same, who shall repair any damage or injury to the Premises and all improvements thereto occasioned by the removal thereof. In the event that any subtenant acquires any furniture, trade fixtures, signs and/or equipment to be used in connection with its subleased premises from an equipment lessor or from an equipment seller under a security agreement, Landlord agrees to execute such documents as may reasonably be required by the equipment lessor or creditor in order to assure such party of its prior rights in and to any such equipment, furniture, signs and/or trade fixtures and of its right to remove any such equipment, furniture, signs and/or trade fixtures from the subleased premises for a period of 107 not to exceed forty-five (45) days from and after notice to such party of the termination or expiration of the sublease of the subject subtenant-lessee or subtenant-debtor. 17.8 Continued Possession of Developer. If Developer shall hold over --------------------------------- the Premises after the expiration of the term hereof with the consent of Landlord, either express or implied, such holding over shall be construed to be only a tenancy from month-to-month, subject to all the covenants, Ground Rent conditions and obligations hereof and terminable by either party as provided by law. 17.9 Utilities. Developer shall pay or cause to be paid all charges --------- for gas, electricity, water and other utilities furnished to the Premises during the term of this Lease and all sewer use charges or similar charges or assessments for utilities levied against the Premises for any period included within the term of this Lease. 17.10 Surrender. Upon the expiration of the term of this Lease, as --------- provided herein, or sooner termination of this Lease, Developer, subject to subsection 17.5.11 shall surrender to Landlord, all and singular, the Premises, including any buildings and all improvements constructed by or under Developer then situated upon the Premises, and Developer shall execute, acknowledge and deliver to Landlord within ten (10) days after written request from Landlord to Developer, a Quitclaim Deed or other document required by any reputable title company to remove the cloud of this Lease from the Premises. Notwithstanding the foregoing provisions of this section to the contrary, Developer shall have the right, at any time not less than six (6) months 108 prior to the expiration of the term of this Lease and for a period of sixty (60) days following the expiration of the term to remove all or any portion of the buildings and other improvements constructed by or under Developer upon the Premises, without obligation to replace the same with new buildings and/or other improvements as required by subsection 6.3 above. 17.11 Partial Invalidity. If any term or provision of this Lease or ------------------ the application thereof to any party or circumstances shall, to any extent, be held invalid or unenforceable, the remainder of this Lease, or the application of such term or provision, to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. 17.12 Section Headings. The section and subsection headings of this ---------------- Lease are inserted as a matter of convenience and reference only and in no way define, limit or describe the scope or intent of this Lease or in any way affect the terms and provisions hereof. 17.13 Short Form Lease. Concurrently with the execution and delivery ---------------- of this Lease, Landlord and Developer have executed, acknowledged and caused to be recorded a short form of this Lease in the form attached hereto as Exhibit "M". 17.14 Exhibits Incorporated. Exhibit "A" is hereby incorporated in --------------------- this Lease. No other exhibit is incorporated in the Lease and all exhibits, other than Exhibit "A", may be changed or modified by agreement between Landlord and Developer 109 at any time and from time to time without amending this Lease. 17.15 Entire Agreement, Waivers and Amendments. This Lease is ---------------------------------------- executed in three (3) triplicate originals, each of which is deemed to be an original. It constitutes the entire understanding and agreement of the parties. This Lease integrates all the terms and conditions mentioned herein or incidental hereto, and supersedes all negotiations or previous agreements between the parties with respect to all or any part of the subject matter hereof. 17.16 Waivers. All waivers of the provisions of this Lease must be ------- in writing by the appropriate authorities of Landlord or Developer, and all amendments hereto must be in writing by the appropriate authorities of Landlord and Developer. 17.17 Approvals. Except where specific criteria are set forth as a --------- condition to approving or disapproving or a matter of course of action, including but not limited to assignment (subsection 5.4), and subletting (subsection 5.7.2), in all circumstances where under this Lease either party is required to approve or disapprove any matter, such approval shall not be unreasonably withheld. 17.18 Successors in Interest. The provisions of this Lease shall be ---------------------- binding upon and shall inure to the benefit of the heirs, executors, assigns and successors in interest of the parties hereto. 17.19 "And/Or". Whenever the words and symbols "and/or" are used in -------- this Lease, it is intended that this Lease be interpreted and the sentence, phrase or other part be considered in both its conjunctive and disjunctive sense, and as 110 having been written twice, once with the word "and" inserted, and once with the word "or" inserted, in the place of said words and symbol "and/or". 17.20 "Including" Defined. The use of the word "including", or ------------------- "include", when followed by any general statement, term or matter, will not be construed to limit such statement, term or matter to the specific items or matters set forth immediately following such work or to similar items, terms or matters, but rather will be deemed to refer to all other items, terms or matters that could reasonably fall within the broadest possible scope of such general statement, term, item or matter. 17.21 Right of First Refusal to Purchase. If Landlord shall determine ---------------------------------- during the term of this Lease that it is lawful and in the public interest to sell the Premises, or any portion thereof, Landlord shall, prior to making the Premises or part thereof available for sale to any other party, provide Developer with the opportunity to purchase said property at its fair market value, as determined by an appraisal obtained by Landlord. If Developer has not entered into an agreement to purchase said property within sixty (60) days of the date it is first offered for sale to Developer at the price theretofore determined by Landlord to be the fair market value, Landlord may offer the property for sale on the open market. Provided, however, that if Landlord should reduce the fair market value of the Premises or part thereof to be sold by seven and one-half percent (7.5%) or more,' Developer's first refusal rights shall be reinstated. Developer shall respond to any such re-offer within five (5) business days, and if Developer fails to respond within 111 that time period Developer's first refusal rights shall terminate. The determination whether such property shall be made available for sale is and shall be within the sole and exclusive discretion of Landlord. Landlord shall determine the legality of such action prior to making a determination to sell on the basis of the law then in effect. 17.22 If Developer is a Trustee. If Developer is a Trustee, this ------------------------- Lease is executed by the undersigned Trustee, not personally, but solely as Trustee, and it is expressly understood and agreed by the parties hereto, anything contained herein to the contrary notwithstanding, that each and all of the covenants, undertakings, representations and agreements herein made are intended, not as personal covenants, undertakings, representations and agreements of the Trustee, individually, or for the purpose of binding the Trustee personally, but this Lease is executed and delivered by the Trustee solely in the exercise of the powers conferred upon the Trustee as such Trustee under the trust agreement and no personal liability or personal responsibility is assumed by, nor shall at any time be asserted or enforced against said Trustee on account hereof, or on account of any covenant, undertaking, representation, warranty or agreement herein contained, either expressed or implied, and all such personal liability, if any, being hereby expressly waived and released by the parties hereto, and by all persons claiming by or under said parties. The provisions of this subsection 17.22 shall apply to any Trustee succeeding in whole or in part to the interests of Developer hereunder. 17.23 Limitation of Liability of Partners. From ----------------------------------- 112 and after the completion of the construction of the improvements described in this Lease, if Developer at any such time shall be a partnership or joint venture, Landlord shall look solely to the assets of such partnership or joint venture for the collection or satisfaction of any money judgment which Landlord may recover against Developer, and Landlord shall not look for the collection or satisfaction of any such judgment to the personal assets of any person who shall at any time be a partner, joint venturer or participant in or under any such partnership or joint venture. The provisions of the subsection shall be binding upon Landlord and each and every future owner of Landlord's interest under this Lease and shall insure to the benefit of each and every such partner, joint venturer and participant. 17.24 Approvals. Except as otherwise specifically provided in this --------- Lease, all approvals to be done by Landlord may be done by Landlord's City Manager or his designee. IN WITNESS WHEREOF, Landlord and Developer have signed this Lease as of the date opposite their signature. CITY OF LONG BEACH, a municipal corporation December 30 , 1988 By: [Signature appears here] - ----------------- ------------------------------ City Manager LANDLORD / / / / / / / / 113 KILROY LONG BEACH ASSOCIATES, a California limited partnership By: KILROY INDUSTRIES, General Partner December 21, 1988 By: /s/ Marshall L. McDaniel - ------------ ------------------------------- Marshall L. McDaniel Senior Vice President and Secretary DEVELOPER This Lease Agreement is approved as to form this 22 day of December, 1988. -- -------- JOHN R. CALHOUN, City Attorney By: [SIGNATURE APPEARS HERE] ------------------------ Deputy 114 DEVELOPER'S ACKNOWLEDGMENT -------------------------- STATE OF CALIFORNIA ) ) SS. COUNTY OF LOS ANGELES ) On December 21, 1988, before me, the undersigned, a Notary Public in and for said State, personally appeared Marshall L. McDaniel, personally known to me or proved to me on the basis of satisfactory evidence to be the person that executed this instrument as Senior Vice President of Kilroy Industries, the corporation that executed this instrument as the general partner of Kilroy Long Beach Associates, a California Limited Partnership, the partnership that executed the within instrument, and acknowledged to me that such corporation executed the same as such partner and that said partnership executed the same. WITNESS my hand and official seal. [Seal] /s/ Nadine K. Kirk ------------------------------------ Notary Public in and for said State LEGAL DESCRIPTION ----------------- Parcels 5 and 6 in the City of Long Beach, County of Los Angeles, State of California, as shown on Parcel Map No. 16960, filed in Book 208, pages 92 through 100, of Parcel Maps in the Office of the County Recorder of said County. EXHIBIT "A" Page 1 of 1 Page MAP OF PROJECT AREA ADJACENT PROPERTIES EXHIBIT B [MAP APPEARS HERE] [LOGO OF KILROY AIRPORT CENTER APPEARS HERE] [GRAPHIC SCALE APPEARS HERE] MAP OF PARCELS 1 THROUGH 10 PARCEL MAP NO. 16960 P.M.B. 208 - 92/100 IN THE CITY OF LONG BEACH COUNTY OF LOS ANGELES STATE OF CALIFORNIA FOR LEASE PURPOSES EXHIBIT "C" [MAP OF PARCELS 1 THROUGH 10 APPEARS HERE] KILROY AIRPORT CENTER LONG BEACH CATEGORIES OF PRE DEVELOPMENT AND INFRASTRUCTURE COSTS (DURING AND RELATED TO INITIAL CONSTRUCTION WHICH MAY BE ACCOMPLISHED IN PHASES) Note: Exhibit "D" consists of a map and the following text. 1. FEES 1.1 Filing Fees 1.2 Inspection Fees 1.3 Plan Check & Permits 1.4 Sewer Area Fees 1.5 Flood Control Fees 1.6 Recording Fees 1.7 Other Fees 2. GENERAL 2.1 Legal & Audit Fees 2.2 Bonds 2.3 Insurance 2.4 Taxes & Assessments During Construction 2.5 Laboratory Testing 2.6 Unusual or Temporary Security 2.7 Utilities During Construction 2.8 Prints and Other Direct Costs 3. SITE INVESTIGATION 3.1 Survey and Parcel Map 3.2 Title Report 3.3 Borings 3.4 Soil Tests 4. ARCHITECTURE AND ENGINEERING 4.1 Site Planning 4.2 Civil Engineering 4.3 Electrical Engineering 4.4 Mechanical Engineering 4.5 Traffic Study 4.6 Signal Engineering 4.7 Landscape Architecture 4.8 Structural Engineering 4.9 Water Department Specifications 5. DEMOLITION 5.1 Utilities 5.2 Temporary Service to Adjacent Sites 5.3 NIKE Bunkers 5.4 Surface Buildings 5.5 Asphalt Paving 5.6 Concrete Slabs 5.7 Fencing 5.8 Allowance for Underground Items EXHIBIT "D" Page 1 of 4 Pages 6. SITE PREPARATION 6.1 Relocate Existing Signs 6.2 Temporary Construction Fences 6.3 Testing for Hazardous Materials 6.4 Allowance for Unforseen Site Conditions 6.5 National Guard Accesses 7. EXCAVATION AND GRADING 7.1 Grub and Rough Grade 7.2 Remove and Recompact 7.3 Scarify and Recompact 7.4 Import Fill, Compact and Grade 7.5 Fine Grade Street Easement 8. SEWERS 8.1 Sewer Mains, Approximate Sizes 8.1.1 18" Main 8.1.2 8" Main 8.2 Lateral Stub Outs to Interior Edge of Sidewalk Easement 8.3 Manholes 8.4 Join Existing Sewer 9. STORM DRAINS 9.1 Main Storm Drains, Approximate Sizes 9.1.1 33" Main 9.1.2 30" Main 9.1.3 27" Main 9.1.4 24" Main 9.1.5 18" Main 9.2 Catch Basins 9.3 Lateral Stub Outs to Interior Edge of Sidewalk Easement 9.4 Manholes 9.5 Erosion Control on Parcels 10. WATER, APPROXIMATE SIZES 10.1 12" Water Main 10.2 Vaults and Lateral Stubs Outs to Interior Edge of Sidewalk Easement 10.3 Hot Taps 10.4 12" Valves 10.5 Blow Off Valve 10.6 Air Evacuation Assembly 10.7 Fire Hydrants 10.8 Irrigation Backflow Preventers 10.9 Service Connections 10.10 Relocate Surge Tank 10.11 Relocate Existing Meters EXHIBIT "D" Page 2 of 4 Pages 11. ELECTRICAL 11.1 Six Main Conduits, Approximately 5" 11.2 Lateral Stub Outs to Interior Edge of Sidewalk Easement 11.3 Irrigation Transformer Vaults 11.4 Manholes 12. GAS 12.1 Gas Main 12.2 Lateral Stub Outs to Interior Edge of Sidewalk Easement 12.3 Valves 12.4 Engineering 13. TELEPHONE 13.1 Ten Main Conduits, Approximately 4" 13.2 Lateral Stub Outs to Interior Edge of Sidewalk Easement 13.3. Manholes 14. PERIMETER WALLS & FENCES 14.1 8'4" Screen Wall 14.2 Remove Temporary Fences 14.3 Chain Link Security Fence 15. STREET IMPROVEMENTS 15.1 Intersection at Spring and KAC Drive 15.1.1 Curb Demolition 15.1.2 Asphalt Paving Demolition 15.1.3 Excavation 15.1.4 Retaining Wall 15.1.5 Back Fill 15.1.6 Curb and Gutter 15.1.7 Asphalt Paving 15.1.8 Traffic Signal 15.1.9 Restriping 15.2 Intersection at Redondo and KAC Drive 15.2.1 Curb Demolition 15.2.2 Asphalt Paving Demolition 15.2.3 Curb and Gutter 15.2.4 Asphalt Paving 15.2.5 Traffic Signal 15.3 Intersection at Spring and Redondo 15.3.1 Modify Traffic Signal 15.4 Kilroy Airport Center Drive 15.4.1 Curb and Gutter 15.4.2 Asphalt Street Paving 15.4.3 Crosswalk Pavers 15.4.4 Concrete Sidewalks 15.4.5 Curb 15.4.6 Street Lights EXHIBIT "D" Page 3 of 4 Pages 16. SIGNS 16.1 Street Name Signs 16.2 Stop Signs 17. LANDSCAPE IN THE AREAS SHOWN ON THE ATTACHED DRAWING 17.1 Soil Preparation & Fine Grading 17.2 Finish Grading 17.3 Irrigation 17.4 Trees, Approximate Size 17.4.1 72" Box 17.4.2 60" Box 17.4.3 48" Box 17.4.4 36" Box 17.5 Hedges/Shrubs, Approximate Size 17.5.1 15 Gallon 17.5.2 5 Gallon 17.5.3 1 Gallon 17.6 Sodded Turf/Ground Cover 17.7 Landscape Curb or Similar Separation Between Landscaped Areas and Undeveloped Portions of Parcels at Perimeter of Site 18. MISCELLANEOUS 18.1 Developer Overhead and Supervision (6%) 18.2 Burden 18.3 Contingency NOTE: Specific sizes referenced above are estimates only as of the date of the Ground Lease and are subject to change based upon final engineering. NOTE: Specialty contractor and subcontractor overhead and supervision shall be included in each individual line item cost. NOTE: Developer's Overhead & Supervision (item 18.1) applies whether Developer is the developer or is the Construction Manager (if the City of Long Beach causes the work to be performed). EXHIBIT "D" Page 4 of 4 Pages PRE DEVELOPMENT & ----------------- INFRASTRUCTURE LANDSCAPE AREA ----------------------------- EXHIBIT D --------- [MAP OF LONG BEACH AIRPORT APPEARS HERE] PRE DEVELOPMENT & ----------------- INFRASTRUCTURE LANDSCAPE AREA ----------------------------- EXHIBIT D --------- [MAP OF LONG BEACH AIRPORT APPEARS HERE] AGREEMENT OF NON-DISTURBANCE ---------------------------- THIS AGREEMENT is made as of the ______ day of _________, 198__, by and among the CITY OF LONG BEACH, a Municipal Corporation (hereinafter called "Landlord"); KILROY LONG BEACH ASSOCIATES, a California Limited Partnership, (hereinafter called "Developer"); and ___________________________________ (hereinafter called "Subtenant") PRELIMINARY ----------- A. Landlord and Developer have entered into a Lease Agreement dated ___________ (hereinafter referred to as the "Ground Lease") pursuant to which Landlord has demised and leased to Developer certain real property located in the City of Long Beach, County of Los Angeles, State of California, including the real property described in Exhibit "A" attached hereto and incorporated herein. A short form of the Ground Lease was recorded ___________________, 198__ in the Official Records of said County. B. Developer, as Sublandlord, and Subtenant, as subtenant, have entered into a Sublease dated _________________, 198__, (hereinafter referred to as the "Sublease") which Sublease demises to Subtenant a portion of the premises demised by the Ground Lease (and grants to Subtenant certain rights with respect EXHIBIT "E" Page 1 of 7 Pages to other portions of the premises demised by the Ground Lease). A short form of the Sublease is being recorded concurrently herewith in the Official Records of said County, which short form of Sublease describes the premises demised thereby (and the other rights and obligations of Subtenant with respect to the real property described in the attached Exhibit "A"). C. The parties hereto now desire to enter into this Agreement so as to clarify their rights, duties and obligations under the Ground Lease and the Sublease and to further provide for various contingencies as hereinafter set forth. NOW THEREFORE, in consideration of the foregoing and of the mutual agreement of the parties hereto to the terms and conditions hereinafter contained, the parties hereto agree as follows: 1. In the event Developer shall default in the payment of any sum or in the performance of any covenant or condition of the Ground Lease, all as provided therein, or in the event of any termination or expiration of the Ground Lease for any reason whatsoever prior to the expiration of the term of the Sublease as provided in the Sublease (other than a termination of the Ground Lease only as to portions of the premises demised thereby not described in the attached Exhibit "A"), then Landlord, Developer and Subtenant do hereby agree that the Sublease, and all terms, provisions, covenants and agreements thereof shall survive any EXHIBIT "E" Page 2 of 7 Pages such default or defaults in, or termination or expiration of the Ground Lease, whether such termination occurs as a result of, or arising out of, any such default or defaults, or otherwise, and the Sublease (subject to the rights of any Leasehold Mortgagee, as defined in the Ground Lease, to enter into a New Lease with Landlord upon the same terms and conditions and having the same priority as the Ground Lease, pursuant to subsection 4.8 of the Ground Lease) shall continue in force and effect in accordance with and subject to all of its terms, provisions, agreements and covenants as a direct lease with Landlord, as landlord, and Subtenant, as lessee. Subtenant agrees, in such event, to attorn to Landlord and to recognize Landlord as the landlord under the Sublease. Landlord shall, in such event, exercise and undertake all of the rights, obligations and duties of Developer in and under said Sublease and thereafter shall be entitled to collect all rents and payments due and payable under said Sublease, including the right to collect any sums being due and payable thereunder prior to the termination or expiration of the Ground Lease which are accrued and unpaid by Subtenant on the date of termination of the Ground Lease. Subtenant agrees not to prepay rentals under the Sublease beyond the amounts provided in the Sublease without the prior written consent of Landlord. 2. Landlord agrees that, prior to terminating the Ground Lease or taking any proceedings to enforce any such termination thereof for any reason other than the expiration of the term of EXHIBIT "E" Page 3 of 7 Pages the Ground Lease as provided therein, Landlord shall give Subtenant thirty C30) days' notice in writing prior to the effective date of such termination, specifying the reason for such termination. Such notice shall be given to Subtenant at the address provided in the Sublease for notices to Subtenant. Subtenant may change such address by written notice to Landlord. 3. Landlord hereby approves of the Sublease and of the rights and privileges granted to Subtenant thereunder and agrees that, far and during the term of the Sublease and any extensions thereof, Landlord shall not take any action, directly or indirectly, to disturb or otherwise affect Subtenant's occupancy of and/or rights and privileges with respect to the premises demised by the Ground Lease and described on the attached Exhibit "A" so long as Subtenant is not in default under the Sublease nor shall Subtenant's exercise of any such rights or privileges constitute a default under the Ground Lease, notwithstanding any provisions to the contrary contained in the Ground Lease. 4. No provision contained herein shall be deemed an amendment or modification of any provision contained in the Sublease, including, without limiting the generality of the foregoing, any rights given thereunder to Developer to terminate the Sublease. 5. In the event that the Ground Lease is divided, in accordance with its terms, into two (2) or more New Leases or EXHIBIT "E" Page 4 of 7 Pages Separate Leases, the term "Ground Lease", as used herein, shall be deemed to refer to the said New Lease or Separate Lease leasing and demising the subleased premises. 6. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their successors, transferees and assigns. EXHIBIT "E" Page 5 of 7 Pages IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first hereinabove set forth. CITY OF LONG BEACH, A Municipal Corporation By: ________________________________ Title: _____________________________ KILROY LONG BEACH ASSOCIATES, A California Limited Partnership By: KILROY INDUSTRIES, a California Corporation, General Partner By: __________________________ Title: _______________________ By: _________________________________ By: _________________________________ "Developer" _____________________________________ _____________________________________ "Subtenant" EXHIBIT "E" Page 6 of 7 Pages This Agreement is hereby approved as to form this ________ day of ________, 198__. ROBERT W. PARKIN, City Attorney BY: _____________________________________ "Deputy" EXHIBIT "E" Page 7 of 7 Pages LEGAL DESCRIPTION ----------------- THAT PORTION OF PARCEL 1, IN THE CITY OF LONG BEACH, IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS SHOWN ON A RECORD OF SURVEY, FILED IN BOOK 85, PAGE 19, OF RECORD OF SURVEYS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY, TOGETHER WITH THOSE PORTIONS OF LOTS 5 AND 9, TRACT NO. 10548, IN SAID CITY, COUNTY OF STATE, AS PER MAP RECORDED IN BOOK 174, PAGES 15 TO 23, INCLUSIVE OF MAPS, IN SAID RECORDER'S OFFICE, AND TOGETHER WITH THAT PORTION OF LAKEWOOD BOULEVARD (FORMERLY KNOWN AS CERRITOS AVENUE, 80 FEET WIDE) AS SHOWN ON SAID MAP OF TRACT NO. 10548, NOW VACATED BY THE STATE OF CALIFORNIA HIGHWAY COMMISSION, A CERTIFIED COPY OF WHICH WAS RECORDED MAY 19, 1959, AS INSTRUMENT NO. 3601, OF OFFICIAL RECORDS, IN THE OFFICE OF SAID COUNTY RECORDER, DESCRIBED AS A WHOLE AS FOLLOWS: BEGINNING AT THE MOST SOUTHERLY CORNER OF SAID PARCEL 1, SAID RECORD OF SURVEY; THENCE NORTH 00 DEGREES 00 MINUTES 46 SECONDS EAST 324.60 FEET, ALONG THE WESTERLY LINE OF SAID PARCEL 1, TO THE NORTHWESTERLY CORNER OF SAID PARCEL 1, SAID NORTHWESTERLY CORNER BEING A POINT IN A NON-TANGENT CURVE CONCAVE NORTHERLY AND HAVING A RADIUS OF 1,050.00 FEET, A RADIAL LINE THAT BEARS SOUTH 2 DEGREES 06 MINUTES 54 MINUTES WEST TO SAID POINT, SAID CURVE ALSO BEING THE NORTHERLY LINE OF SAID PARCEL 1; THENCE EASTERLY ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 27 DEGREES 32 MINUTES 10 SECONDS AN ARC DISTANCE OF 504.63 FEET TO A POINT, SAID LAST MENTIONED POINT BEING A RADIAL LINE THAT BEARS SOUTH 25 DEGREES 25 MINUTES 16 SECONDS EAST, TO SAID LAST MENTIONED POINT; THENCE SOUTH 45 DEGREES 22 MINUTES 59 SECONDS EAST 1,403.34 FEET TO A POINT IN THAT CERTAIN COURSE AS DESCRIBED AS HAVING A BEARING AND LENGTH OF "SOUTH 34 DEGREES 15 MINUTES 50 SECONDS WEST 225.46 FEET" IN THE NORTHWESTERLY BOUNDARY OF THAT PARCEL OF LAND DESCRIBED AS PARCEL 1 IN DEED TO STATE OF CALIFORNIA, RECORDED MARCH 18, 1959, AS INSTRUMENT NO. 1904, OF OFFICIAL RECORDS, OF SAID COUNTY, SAID LAST MENTIONED POINT BEING NORTH 34 DEGREES 16 MINUTES 23 SECONDS EAST 40.81 FEET, ALONG SAID COURSE, FROM THE SOUTHWESTERLY TERMINUS THEREOF; THENCE SOUTH 34 DEGREES 16 MINUTES 23 SECONDS WEST 40.81 FEET, ALONG SAID COURSE, TO THE NORTHEASTERLY TERMINUS OF THAT CERTAIN COURSE IN SAID NORTHWESTERLY BOUNDARY, AS DESCRIBED IN SAID LAST MENTIONED PARCEL 1, AS HAVING A BEARING AND LENGTH OF "SOUTH 62 DEGREES 04 MINUTES 30 SECONDS WEST, 51.05 FEET, MORE OR LESS,"; THENCE SOUTH 62 DEGREES 05 MINUTES 03 SECONDS WEST ALONG SAID LAST MENTIONED CERTAIN COURSE, TO THE NORTHEASTERLY TERMINUS OF THAT CERTAIN COURSE AS DESCRIBED AS HAVING A BEARING AND LENGTH OF "SOUTH 62 EXHIBIT "A" Page 1 of 2 Pages PAGE 2 OF EXHIBIT "A" IS UNAVAILABLE KILROY AIRPORT CENTER LONG BEACH OFF-SITE IMPROVEMENTS Note: Exhibit "F" consists of a map and the following text. The numbers preceding each paragraph in this text refer to numbers on the map which identify the location of the improvement. 1. STREET DEDICATION ----------------- Landlord shall obtain and provide to Developer, for street improvements, utilities, and landscaping, to be constructed by Developer to meet or exceed City of Long Beach standards and subsequent dedication as public streets, the easements necessary to provide access to the entire Premises on property other than Parcel G for construction of the street tentatively identified on the map as Kilroy Airport Center Drive, including: (i) an area south of Spring Street and west of Parcel G approximately 75 feet wide and approximately 420 feet long; and (ii) an area between Parcel G and Redondo Avenue abutting the San Diego Freeway approximately 72 feet wide and approximately 1200 feet long. Developer shall have the right to install a landscaped divider on Kilroy Airport Center Drive near the Spring Street intersection and to relocate existing signs and utilities as necessary. Developer shall dedicate the land and street as necessary on Parcel G to connect the remainder of Kilroy Airport Center Drive. EXHIBIT "F" Page 1 of 7 Pages 2. INTERSECTION OF SPRING STREET AND KILROY AIRPORT CENTER DRIVE ------------------------------------------------------------- Landlord shall obtain and provide to Developer the required approvals and easements for access and installation by Developer the following: 2.1 Widen Spring Street ------------------- Widening of Spring Street to the north approximately 12 feet along a length of approximately 600 feet, including restriping, construction of a retaining wall and landscaping as appropriate to accommodate a second left turn lane. 2.2 Second Left Turn Lane --------------------- Restriping on Spring Street on the westbound approach to provide a second exclusive left turn lane to Kilroy Airport Center Drive. 2.3 Acceleration Lane/Bus Pull Out Lane ----------------------------------- A lane on the south side of South Street east of Kilroy Airport Center Drive, approximately 12 feet wide and approximately 200 feet long. 2.4 Deceleration Lane ----------------- A deceleration lane on the south side of Spring Street west of Kilroy Airport Center Drive, approximately 12 feet wide and approximately 220 feet long. EXHIBIT "F" Page 2 of 7 Pages 2.5 Traffic Signal -------------- A three-phase traffic signal including a left turn phase for westbound Spring Street Traffic turning from the two left turn lanes on Spring Street left onto Kilroy Airport Center Drive. 3. INTERSECTION OF REDONDO AVENUE AND KILROY AIRPORT CENTER DRIVE -------------------------------------------------------------- Landlord shall obtain and provide to Developer the required approvals and easements for access and installation by Developer of the following: 3.1 Deceleration Lane ----------------- A deceleration lane on the east side of Redondo Avenue south of Kilroy Airport Center Drive approximately 12 feet wide and approximately 100 feet long. 3.2 Regrade Embankment ------------------ Regrade the embankment adjoining the abuttment wall on the east side of Redondo Avenue north of the San Diego Freeway overpass or install a retaining wall as necessary to accommodate the deceleration lane. EXHIBIT "F" Page 3 of 7 Pages 3.3 Traffic Signal -------------- A traffic signal, to be contracted for when permits are issued for that building which will result in an aggregate of 350,000 square feet, or more, so that the signal will be operational approximately concurrently with expected traffic demand. 3.4 Monument Sign ------------- A monument sign (at Developer's cost) similar to that depicted in the Basic Concept Documents at the northeast corner of the intersection. 4. INTERSECTION OF SPRING STREET AND REDONDO AVENUE ------------------------------------------------ Landlord shall obtain and provide to Developer the required approvals and easements for access and installation by Developer of the following: 4.1 Second Left Turn Lane --------------------- Restriping of Spring Street on the westbound approach to provide a second exclusive left turn lane, when and if determined necessary by Landlord. EXHIBIT "F" Page 4 of 7 Pages 4.2 Traffic Signal Rephasing ------------------------ Modification of the existing traffic signal to add a left turn phase for westbound Spring Street traffic turning from the two left turn lanes left onto Redondo Avenue, when and if determined necessary by Landlord. 5. SCREEN WALL ----------- Landlord shall obtain and provide to Developer the required easements for access and installation by Developer of approximately 3,060 lineal feet of screen wall starting approximately 160 feet south of the south curb line of Spring Street between the Long Beach Water Department property and the Water Department Lease #40 property; running north replacing the existing fence to approximately 15 feet south of the curb line; then running east approximately 200 feet parallel to and approximately 15 feet south of the curb line; then bending to the south approximately 12 feet; then continuing east parallel to and approximately 15 feet south of the south curb line of the new deceleration lane; then running south replacing the existing fence along the east border of Water Department Lease #40 property and continuing south along the east border of the Water Department Lease #38-#39 property to the north border of the California National Guard property; then running east approximately 110 feet with an opening in the middle at the entrance to the California National Guard property; then running south along the east border of the EXHIBIT "F" Page 5 of 7 Pages California National Guard property replacing the existing fence to approximately 12 feet north of the north curb line of Kilroy Airport Center Drive; then running west parallel to and approximately l2 feet north of the curb line; and terminating approximately 20 feet east of the east curb line of Redondo Avenue. 6. TEMPORARY SECURITY FENCE ------------------------ Landlord shall provide the required access for construction by Developer of a temporary security fence on Airport Property approximately 25 feet east of the east boundary of Parcel G approximately 1400 feet long from Spring Street southeast to the existing security fence at the intersection of the San Diego Freeway and Lakewood Boulevard. 7. LANDSCAPE AREAS --------------- Landlord shall obtain and provide to Developer the required easements for access and installation by Developer of landscaping at the following locations: 7.1 Landscape Spring Street ----------------------- Approximately 20 feet wide and approximately 1100 feet long on the south side of Spring Street from the west tunnel entrance proceeding west to the northwest corner of Water Department Lease #40 property. EXHIBIT "F" Page 6 of 7 Pages 7.2 Landscape Redondo Avenue ------------------------ Approximately 40 feet deep and approximately 100 feet long at the northeast corner of the intersection of Redondo Avenue and Kilroy Airport Center Drive. 7.3 Landscape Redondo Avenue ------------------------ Approximately 250 feet deep and approximately 120 feet long at the southeast corner of the intersection of Redondo Avenue and Kilroy Airport Center Drive between the San Diego Freeway property and Kilroy Airport Center Drive, including the right by Developer to install landscape screening around the existing surge tank and other equipment. 7.4 Landscape California National Guard Entry ----------------------------------------- Two roughly triangular parcels abutting the screen wall at the entry to the California National Guard property, one west of the entry with an area of approximately 2,000 square feet and the other east of the entry between the east border of the California National Guard property and Parcel G including a radius curb border at the north end adjacent to the California National Guard entry with an area of approximately 7,500 square feet. EXHIBIT "F" Page 7 of 7 Pages OFF SITE IMPROVEMENTS --------------------- EXHIBIT F [MAP OF KILROY AIRPORT CENTER LONG BEACH APPEARS HERE] OFF SITE IMPROVEMENTS --------------------- EXHIBIT F [MAP OF KILROY AIRPORT CENTER LONG BEACH APPEARS HERE] EXHIBIT G [MAP OF BUILDING LANDSCAPE INDICATING PHASES OF WORK APPEARS HERE] THIS PLAN IS REPRESENTATIVE OF THE QUALITY OF LANDSCAPING TO BE INSTALLED; HOWEVER, THE DESIGN, PLACEMENT AND PLANT SELECTIONS ARE SUBJECT TO CHANGE DEPENDING UPON ULTIMATE DESIGN CRITERIA AND SUBTENANT REQUIREMENTS. EXHIBIT H [ARTWORK INDICATING BUILDING ELEVATIONS APPEARS HERE] THESE ELEVATIONS ARE REPRESENTATIVE OF THE BUILDINGS PRESENTLY PLANNED TO BE CONSTRUCTED; HOWEVER, THE DESIGN, DIMENSIONS AND MATERIALS ARE SUBJECT TO CHANGE DEPENDING EXTERIOR ELEVATIONS ------------------- EXHIBIT H [ARTWORK INDICATING BUILDING ELEVATIONS APPEARS HERE] THESE ELEVATIONS ARE REPRESENTATIVE OF THE BUILDINGS PRESENTLY PLANNED TO BE CONSTRUCTED; HOWEVER, THE DESIGN, DIMENSIONS AND MATERIALS ARE SUBJECT TO CHANGE DEPENDING EXTERIOR ELEVATIONS ------------------- EXHIBIT H [ARTWORK INDICATING BUILDING ELEVATIONS APPEARS HERE] BOND NO.:________ PERFORMANCE BOND PREMIUM :________ ---------------- KNOW ALL MEN BY THESE PRESENTS, That we ________________________________________ ______________________________, as Principal, and _____________________________ _______________________________________________, as Surety, are held and firmly bound unto City of Long Beach, a Municipal Corporation (Land Lessor) and Kilroy Long Beach Associates, a California Limited Partnership (Land Lessee), as Obligees, in the penal sum of __________________________________________________ ______________________________________DOLLARS ($ ) lawful money of the United States, for the payment of which sum truly to be made, we bind ourselves, our heirs, executors, administrators, successors and assigns, jointly and severally, firmly by these presents. THE CONDITION OF THE OBLIGATION IS SUCH, That Whereas, the Principal entered into a certain agreement which is hereto attached and made a part hereof, with Kilroy Long Beach Associates, a California Limited Partnership, dated ________ ________________, for _________________________________________________________ which contract and the specifications and general conditions thereof are hereby incorporated herein and shall be deemed a part hereof as fully as if set out herein. NOW, THEREFORE, if the said Principal shall fully indemnify and save harmless the Obligees from all loss, liability, costs, damages, penalty, attorney's fees or expenses which Obligees may incur by reason of failure to well and truly keep and perform each, every and all of the terms and conditions of said agreement on the part of the said Principal to be kept and performed, including but not limited to completion within the time specified of all work covered by said agreement, performance of all obligation and guarantees of Kilroy Long Beach Associates, a California Limited Partnership, relating to such work under the contract with Kilroy Long Beach Associates, a California Limited partnership; then this obligation shall be of no effect, but otherwise it shall remain in full force and effect. It is a condition hereof that any change, alteration, modification or amendment of any nature whatsoever that may be made in the terms of said agreement, any change in the character or scope of the work to be performed, or the method of performance, under said agreement or modification of said agreement or in the time for completion thereof, any change in the manner, time or amount of payment as provided therein, any change of any nature whatsoever that may be made in the terms of the contract EXHIBIT "I" Page 1 of 6 Pages with Kilroy Long Beach Associates, a California Limited Partnership, or any change that may be made in the performance of the work under said agreement by the Principal, assented to by Kilroy Long Beach Associates, a California Limited Partnership, whether made under express agreement or not, may be made without notice to the Surety and without affecting the obligations of the Surety on this bond and without requiring the consent of the Surety, and no such change or changes shall release the Surety from any of its obligations hereunder, the Surety hereby consenting to and waiving notice of any such change, alteration, modification or amendment. It is a further condition hereof that no one other than the named Obligees and the successors, administrators or assigns of the Obligees shall have any right of action under this bond. IN WITNESS WHEREOF, the said Principal and Surety have hereunto set their hands and seals this ________ day of __________________________, 19__. _____________________________________________ (Principal) BY:__________________________________________ _____________________________________________ (Surety) BY:__________________________________________ Note: The name "Kilroy Long Beach Associates, a California Limited Partnership" would change to the name of any successor Land Lessee. EXHIBIT "I" Page 2 of 6 Pages PAYMENT BOND BOND NO.:________ ------------ PREMIUM :________ KNOW ALL MEN BY THESE PRESENTS, That we ________________________________________ __________________________ as Principal, and __________________________________, as Surety, are held and firmly bound unto City of Long Beach; a Municipal Corporation (Land Lessor) and Kilroy Long Beach Associates, a California Limited Partnership (Land Lessee), as Obligees, in the penal sum of ____________________ __________________________________ DOLLARS ($ ), lawful money of the United States, for the payment of which sum well and truly to be made, we bind ourselves, our heirs, executors, administrators, successors and assigns, jointly and severally, firmly by these presents. THE CONDITION OF THE OBLIGATION IS SUCH, That Whereas, the Principal entered into a certain agreement which is hereto attached and made a part hereof, with Kilroy Long Beach Associates, a California Limited Partnership, dated __________ _____________________, for _____________________________________________________ which contract and the specifications and general conditions thereof are hereby incorporated herein and shall be deemed a part hereof as fully as if set out herein. NOW, THEREFORE, if the said Principal shall pay promptly and in full the claims of all persons, firms or corporations, performing labor or furnishing equipment, materials, or supplies incurred in connection with the contract to be performed under said agreement and shall indemnify and save harmless of Obligees from all loss liability, costs, damages, penalty, attorney's fees or expenses for all taxes, insurance premiums, any and all applicable contributions, allowances or other payments or deductions, however harmed, required by statute or union labor agreement, including voluntary payment thereof by the Obligees necessary to insure orderly prosecution of work or other items or services used in, upon or for or incurred in connection with the contract to be performed under said agreement, then this obligation shall be of no effect, but otherwise it shall remain in full force and effect. It is a condition hereof that any change, alteration, modification or amendment of any nature whatsoever that may be made in the terms of said agreement, any change in the character or scope of the work to be performed, or the method of performance, under said agreement or any change in manner, time EXHIBIT "I" Page 3 of 6 Pages or amount of payment as provided therein, any change of any nature whatsoever that may be made in the terms of the contract between Kilroy Long Beach Associates, a California Limited Partnership, or any change that may be made in the performance of the work under said agreement by the Principal, assented to by Kilroy Long Beach Associates, a California Limited Partnership, whether made under express agreement or not, may be made without notice to the Surety and without affecting the obligations of the Surety on this bond and without requiring the consent of the Surety and no such change or changes shall release the Surety from any of its obligations hereunder, the Surety hereby consenting to and waiving notice of any such change, alteration, modification or amendment. Subject to the priority of the named Obligees with respect to recovery up to the penal sum of this bond, persons who have supplied or furnished labor, material, machinery, equipment or supplies to the Principal for use in the prosecution of the work provided for in said contract shall have a direct right of action against said Principal and Surety under this bond. IN WITNESS WHEREOF, the said Principal and Surety have hereunto set their hands and seals, this _____ day of _______________________________, 19__. __________________________________________________ (Principal) BY:_______________________________________________ __________________________________________________ (Surety) BY:_______________________________________________ Note: The name "Kilroy Long Beach Associates, a California Limited Partnership" would change to the name of any successor Land Lessee. EXHIBIT "I" Page 4 of 6 Pages LENDER'S OBLIGEE RIDER TO PERFORMANCE BOND ------------------------------------------ WHEREAS, heretofore, on or about the _______ day of _________________, 19__, _________________________________________________________________________, as Contractor, entered into a written agreement with Kilroy Long Beach Associates, a California Limited Partnership, as Owner of leasehold improvements, for the construction of __________________________________________ _______________________________________________________________________________, and WHEREAS, the Contractor and ________________________________________________ ________________, a California corporation, as Surety, executed and delivered to Kilroy Long Beach Associates, a California Limited Partnership, their joint and several Performance Bond, and WHEREAS, Kilroy Long Beach Associates, a California Limited Partnership, has arranged for a loan for the exclusive purpose of payment for the performance of said contract and has requested the Contractor and Surety to join with Kilroy Long Beach Associates, a California Limited Partnership, in the execution and delivery of this Rider, and the Contractor and Surety have agreed so to do upon the condition herein stated. NOW, THEREFORE, in consideration of one dollar and other good and valuable consideration receipt of which is acknowledged, the undersigned agree that the said Performance Bond shall be, and is, amended as follows: 1. The name of _________________________________________________________, as shall be added to said bond as a named Obligee. 2. The rights of the Lender as a named Obligee shall be subject to the condition precedent that Kilroy Long Beach Associates, a California Limited Partnership, obligations to the Contractor be performed. 3. The aggregate liability of the Surety under said bond to Kilroy Long Beach Associates, a California Limited Partnership, and the Lender, as their interests may appear, is limited to the penal sum of the said bond. 4. The Surety may, at its option, make any payment under said bond by check issued jointly to Kilroy Long Beach Associates, a California Limited Partnership, and the Lender. 5. Except as herein modified, said Performance Bond shall be and remain in full force and effect. EXHIBIT "I" Page 5 of 6 Pages Signed, sealed and dated this ______ day of ____________________________, 19___. KILROY LONG BEACH ASSOCIATES, A California Limited Partnership ATTEST:__________________________ BY: KILROY INDUSTRIES, a California Corporation, General Partner By: ______________________________ Title: ___________________________ By: __________________________________ By: __________________________________ (Owner) ATTEST:___________________________ BY: __________________________________ __________________________________ (Surety) ATTEST:___________________________ BY: __________________________________ __________________________________ (Contractor) EXHIBIT "I" Page 6 of 6 Pages EXHIBIT "J" INTENTIONALLY OMITTED FIXED BASE OPERATIONS --------------------- This Exhibit specifies the standard responsibilities of a Fixed Base Operation (FBO) at the Long Beach Municipal Airport. It is the intention of the parties that the execution of these terms shall be the responsibility of Developer. Nothing herein shall be deemed to prevent Developer from imposing these requirements as a duty on its subtenants so long as Developer shall remain primarily responsible to City therefor in case of failure of Developer and FBO subtenants to fulfill their obligations hereunder. Said requirements shall be subject to the following exceptions: 1. Nothing herein shall be deemed to require Developer to operate any FBO facility except through subtenants. If the FBO premises are not subleased by Developer, Developer's sole obligation shall be to use reasonable efforts to sublet the same upon terms and conditions reasonably satisfactory to Developer. The temporary cessation of business operations by reason of casualty, remodeling, holidays and other business reasons consistent with the continued operation of such business from the FBO premises shall not constitute a violation of such requirements. 2. Developer may franchise the various elements of the FBO operation, however, the performance requirements shall be construed to cause construction of at least, but not more than, one fuel facility and one wash rack on the FBO premises for each complete FBO facility, but in no event less than one such facility on the Premises. Developer may, however, construct more than one fuel facility and one wash rack for each such FBO facility on the 3. City and Developer shall deal directly with each other as to the matters governed by this Exhibit, except as expressly provided to the contrary. 4. As used in this Exhibit, the term "Lessee" or "Tenant" shall mean Developer and the term "Lessor" or "Landlord" shall mean City. 5. The provisions of this Exhibit shall be applicable only to those portions of the Premises from time to time improved and used by or under Developer for FBO uses, which portions are hereinafter referred to as the "FBO Premises". Portions of the Premises initially improved and used for FBO uses may be redeveloped and used for other purposes and portions of the Premises initially improved and used for non-FBO uses may be redeveloped and used for FBO uses, provided that the improved areas for aircraft tie-downs and/or hangar space, usable for such purposes under applicable laws, in the Project are not reduced by reason thereof. Any portion of the Premises used for non-FBO uses or redeveloped for use other than FBO uses shall be physically segregated from the Long Beach Municipal Airport by fencing or other barriers meeting FAA security requirements. 6. References to Developer's subtenants in this Exhibit shall be deemed references to Developer during any period of time that Developer conducts and operates a business on or from the FBO Premises directly, and not through or under a subtenant. 7. Any subtenant of Developer or transferee by sublease by or under such a sublessee shall be deemed to be a subtenant for purposes of this Exhibit "G". Where any such sub- tenant performs any act or obligation required herein, Developer shall be relieved of all obligation therefor. 8. Except as to matters specifically related to the operation of the Airport or of the FBO facilities, the terms of the Lease between Developer and City to which this Exhibit "G" is attached shall prevail in the case of any conflict between such terms and the terms of this Exhibit "G". 9. Nothing in this Exhibit shall be deemed to apply to any portion of the project other than the FBO uses. 10. Nothing herein shall be deemed to require construction or improvement of the Premises except in the manner authorized by applicable land and airport rules. Metal buildings, such as "Butler Buildings" shall be permitted. 11. City shall endeavor in making airport improvements to minimize interference with the operation of business on or from the Premises and shall give reasonable notice to Developer of any duty thereon except in case of emergency when such duty is necessary to prevent damage or injury to persons or property. 12. Developer shall require its subtenants affected thereby to pay the fuel flowage fee provided for herein for the benefit of City as a third party beneficiary to enable City to directly enforce such requirements against subtenants. Developer shall not be liable for payment of such fuel flowage fees unless Developer shall refuse upon request by City to cooperate in the collection thereof from Developer's subtenant. Such cooperation shall not be construed as obligating Developer to terminate the sublease or the subtenant's right to possession. 13. Sales permitted by the "use" restrictions may be wholesale or retail. 14. Assignments or other transfers of the type described in subparagraphs (i) through (vi) of Section 5.1.3 of this Lease or of the type permitted by Section 1.3.3 of this Lease by subtenants shall be permitted without the approval of City's City Manager of the assignee or transferee. City's City Manager shall, however. be promptly notified of any such assignment or other transfer and provided with the information described in subparagraphs (i) and (ii) of Section 5.1.2 of this Lease. 15. Paragraph E of the "Operation of Business" restrictions shall not be applicable to the rents charged and/or other services provided by or under Developer as a sublessor. 16. The maintenance obligations set forth in the "Maintenance" requirement shall be subject to and shall reasonable wear and tear. City's Airport except Manager may not cure Developer's failures under said "Maintenance" requirement if Developer commences such maintenance within thirty (30) days of its receipt of written notice of such failure and thereafter diligently prosecutes the same to completion. Developer shall have thirty (30) days following its receipt of written request for payments under said "Maintenance" requirement, together with reasonable supportive evidence of the costs incurred, to reimburse City such costs. 17. The last sentence in Paragraph C of the requirement entitled "Aircraft Parking, Storage and Hangers" is hereby deleted and shall not be applicable to the Premises. 18. Paragraph C of the requirement entitled "Storage" is hereby deleted and shall not be applicable to the Premises. City's remedies under this Lease for a default by Developer, however, shall be applicable to breaches of the requirements of the requirement entitled "Storage", not cured within the time provided in Section 17.6.1 following Developer's receipt of notice of such breach. 19. Developer shall conclusively be deemed to have satisfied the "Automobile Parking" requirements if Developer improves the FBO Premises in a manner consistent with all applicable parking code requirements of the City of Long Beach at the time such construction. 20. Developer may satisfy the requirement in Paragraph B of the requirement entitled "Fuel Flowage Fees" by having its subtenant enter into the supplier agreement, in which event all references to Developer in Paragraph B shall be deemed references to Developer's subtenant. If Developer has required its subtenants to make the reports required by Paragraph D of the requirement entitled "Fuel Flowage Fees", Developer shall not be liable for a failure by its subtenants to make such reports unless Developer shall refuse upon request by City to cooperate in enforcing such reporting requirements, which cooperation shall not be construed as obligating Developer to terminate the sublease. 21. The requirement entitled "Utilities" shall be enforced only insofar as is practical. 22. Notwithstanding the provisions of Paragraph B of the requirement entitled "FAA Security and Safety Regulations" to the contrary, if any sublease includes a covenant by the sublessee to indemnify and hold City harmless for the full amount of any fine, penalty or other financial loss resulting from any violation of Part 107 or Part 139 occurring on the subleased premises, or by or under such sublessee, Developer shall not be liable to indemnify or to reimburse City for the amount of any such fine, penalty or other financial loss covered by such subtenant's indemnify. 23. Whenever the consent, approval, specification or authorization of City, City's City Manager or the Airport Manager is required by this Exhibit, such consent, approval, specification or authorization shall not unreasonably be withheld. 24. Developer shall not be deemed to have failed to perform its obligations under this Exhibit "G" if such failure is the result of a breach by a subtenant under a sublease of the FBO Premises, or any portion thereof, unless Developer fails to take reasonable action to cause such breach to be cured or to terminate such sublease or the subtenant's right to possession within forty- five (45) days of Developer's receipt of written notice from City of the occurrence of such breach. CONSTRUCTION, ALTERATION AND CHANGES ------------------------------------ LESSEE shall not place upon the Leased Premises any portable buildings, trailers, or other like portable structures without prior written approval of LANDLORD's Airport Manager. USE --- The Leased Premises and any and all improvements located or erected thereupon shall be used solely for the purpose of conducting a fixed base operation and no other purpose. The fixed base operation is limited to the following aeronautical and support uses which are inclusive. A. Sale of new and used aircraft (both retail and wholesale); B. Sale of aircraft parts and accessories (both retail and wholesale); C. Sale of aircraft parts, components and allied equipment; D. Sale of new and used avionics and electronic equipment; E. Sale of new and used aircraft instruments; F. Storage, sale and dispensing of petroleum products on the Leased Premises. G. Sale of pilot supplies and accessories; H. Leasing and rental of aircraft; I. Sale of aircraft insurance; J. Financing of aircraft; K. Operation of air cargo and air freight activities (subject to prior written approval of LANDLORD's Airport Manager; L. Flight operations, including ground school, flight training/proficiency, demonstration of aircraft for sale, charter and air taxi. Charter/Air Taxi operations are subject to prior written approval of LANDLORD's Airport Manager. The conduct of scheduled commercial service is expressly prohibited; M. Maintenance, repair, overhaul and modification of aircraft, aircraft engines, airframes, flight systems, instruments, avionics, electronics equipment, propellers and related aircraft components; N. Rental of aircraft storage hangars and open tie-down facilities; O. Operation of a UNICOM radio transmitter and receiver (subject to written approval of LANDLORD's Airport Manager); P. Washing, detailing and waxing of aircraft; Q. Providing upholstery, cabinetry and interior services; R. Parachute, fire extinguisher and oxygen services; S. Line Services for the purpose of meeting the needs of transient aircraft; T. Operation of food vending equipment and/or a coffee bar for the purpose of serving TENANT's employees and customers; U. Rent-a-car service (subject to a prior written agreement between LANDLORD and rent-a-car company or TENANT in the event of TENANT operated service); V. Maintenance and servicing of TENANT-owned and operated automotive ramp equipment; W. Aircraft stripping and painting; X. Any such other aviation related uses as may be approved in writing by LANDLORD's Airport Manager. UNAUTHORIZED USES ----------------- Only the uses specified in the use clause hereof are authorized uses, and such uses are authorized only when conducted by TENANT or a Subtenant- approved in advance by LANDLORD's City Manager. All other business activities engaged in on or from the Leasehold premises for involving provision of services or products to parties other than TENANT or an approved Sub-tenant for financial gain are prohibited. Said prohibition shall be enforced by TENANT. OPERATION OF BUSINESS --------------------- A. TENANT shall continuously use and operate the premises, during all usual business hours and on all such days as comparable business of like nature in the area are open for business in accordance with the provisions of this Lease relating to use. If the premises are destroyed or partially condemned and this Lease remains in full force and effect, TENANT shall continue operation of its business at the premises to the extent reasonably practical as determined by good business judgment during any period of reconstruction. B. TENANT shall appoint in writing an authorized local agent duly empowered to make decisions on behalf of TENANT in all routine administrative and operational matters relating to the Leased Premises who shall be available during normal business hours. TENANT shall notify LANDLORD's Airport Manager in writing of the name, address and telephone number of the said agent and shall supply therewith a copy of the writing appointing the agent. C. All businesses operating on or from the Leased Premises shall maintain a suitable office which is staffed during normal business hours. D. Rotary winged aircraft may not be parked, repaired or operated from the Leased Premises without the prior written approval of the Airport Manager and such approval, if granted, is subject to Airport Rules and Regulations and may be terminated by the Airport Manager on thirty (30) days notice unless otherwise specified in writing at the time of said written approval. E. Aviation services are supplied for the benefit of the aviation public and shall be carried out in a reasonable manner and at appropriate prices. The Airport Manager may investigate reports of unfair prices or service. COMPLIANCE WITH LAW ------------------- No improvements or structures either permanent, temporary or portable, shall be erected, placed upon, operated or maintained on the Leased Premises, nor shall business or any other activity be conducted or carried on, in, onto, or from the Leased Premises in violation of the terms of this Lease or any duly adopted rules, regulations, orders, law, statute, by-law, or ordinance of any governmental agency having jurisdiction thereover. 17. PERFORMANCE ----------- 1. All fixed base operation facilities shall have the capacity to store and dispense fuel. 2. All fixed base operation facilities shall provide an aircraft wash rack. MONTHLY REPORT -------------- Within fifteen (15) days after execution of this Lease, TENANT shall submit a written report to LANDLORD's Airport Manager listing all based aircraft located on the Leased Premises. Said report shall be prepared on a form supplied by LANDLORD, and shall include for each based aircraft located on the Leased Premises: the make, model, registration number, color, space or hangar number, registered owner(s) name(s), address(es) and telephone number(s). Should aircraft be on lease, the same information required for owner shall be provided for any or all lessee(s) of said aircraft. For purposes of this section, a based aircraft is any aircraft which makes arrangements to park at Long Beach Airport for any purpose other than those specified herein, to with: (a) Visiting or transient aircraft who utilize parking facilities for less than fifteen (15) days in any thirty (30) day period. (b) Aircraft maintaining tiedown or storage space at another airport that are undergoing maintenance, service or repair by a tenant or subtenant. (c) New aircraft awaiting sale and/or delivery by a tenant or subtenant where delivery subsequent to sale occurs within thirty (30) calendar days. (d) Used aircraft for sale by a tenant or sub-tenant where delivery subsequent to sale occurs within thirty (30) calendar days. RESERVATIONS TO LANDLORD ------------------------ LANDLORD reserves the right to enter and have access to the property in order to make, construct or carry out airport improvements. USE OF AIRPORT FACILITIES ------------------------- TENANT shall have, in conjunction with the general public and other airport users, a non-exclusive right to the use of the public airport facilities provided and developed by LANDLORD for public aviation use on such terms and conditions as such facilities may be made available by LANDLORD either now or in the future and subject to all applicable laws and rules of the United States, the State of California or the City of Long Beach governing aviation air navigation or the use of the airport. MAINTENANCE ----------- TENANT agrees, at TENANT's sole cost and expense, to repair and maintain the Leased Premises and all improvements or landscaping existing or constructed thereon in good order and repair and to keep said premises and facilities in a neat, clean, attractive and orderly condition. Failure of the TENANT to properly maintain and repair the Leased Premises shall constitute a breach of the terms of this Lease. If, in the opinion of LANDLORD's Airport Manager, the Leased Premises are not being properly maintained, LANDLORD's Airport Manager may, after giving thirty (30) days written notice to TENANT to remedy discrepancies, cause such repair and maintenance to be made. The cost of such maintenance or repair shall be added to the rent. If said costs are not paid promptly by TENANT, this Lease shall be deemed to be in default, and LANDLORD shall be entitled to all legal remedies provided hereunder. AIRCRAFT PARKING, STORAGE AND HANGARS ------------------------------------- A. TENANT shall provide open aircraft parking aprons which shall be so designed, marked and maintained, as to provide for safe and functional parking of aircraft, including sufficient distance between all structural elements (including, but not limited to body, wings and tail) of parked aircraft to permit safe movement of aircraft to and from aircraft parking spaces. Aircraft tiedown equipment or apparatus shall be of a type approved by the Airport Manager for use at the airport and all aircraft designed and equipped to be tied down shall be properly secured to such tiedown apparatus when left unattended. All tie-down spaces shall be clearly marked on the pavement with an identification number in such manner that each individual parking space can be easily identified. B. TENANT will provide and maintain taxi lanes and aircraft parking spaces clear of obstacles, vehicles and improperly parked aircraft in a manner which will permit safe and convenient movement of aircraft throughout all open parking areas. C. TENANT will provide adequate aircraft parking spaces on the Leased Premises to accommodate transient or visiting aircraft or aircraft present at TENANT's facility for the purpose of maintenance or other work. Parking is permitted only in designated spaces on FBO leases and TENANT expressly covenants and agrees to make every reasonable and prudent effort to prevent parking of aircraft or ground vehicles on property contigious to the Leased Premises, but not a part thereof. The Airport Manager may require creation of additional parking spaces if he finds that aircraft using TENANT's facilities are parking in areas other than authorized tie downs or hangar spaces. D. Maintenance and repair of aircraft on the based and transient aircraft parking area shall be limited to that permitted by Federal Aviation Regulations Part 43(h) and Appendix A(c), unless otherwise specifically authorized in writing by the Airport Manager. Said parking areas shall be kept free from partially dismantled or derelict aircraft. E. Aircraft storage hangars shall be used for storage of aircraft only and no maintenance shall be done therein, except as specifically authorized by Federal Aviation Regulations Part 43(h) and Appendix A(c) if such maintenance and repair car be done in compliance with such fire, building and safety codes, rules and/or regulations as may be applicable to such hangar or activity from time to time. F. Maintenance, repair and other activities may be conducted in hangars heretofore or hereafter constructed in such manner that such maintenance repair and other activities can be carried out in such hangar in compliance with such fire, building and safety codes, rules and/or regulations, as may be applicable from time to time to such activities, if authorized in writing by the Airport Manager such notice in writing as is possible under the existing circumstances. D. LANDLORD will cause the surface of the Leased Premises to be restored to its original condition upon the completion of any construction done pursuant to this paragraph. E. LANDLORD shall exercise its best efforts to avoid unreasonable interference with TENANT's operations or enjoyment of the premises or impairment of the security of any secured creditor in its exercise of rights pursuant to this paragraph. F. Should any exercise of the rights described in this paragraph result in a significant interference with TENANT's use of the Leased Premises, LANDLORD shall provide compensation to TENANT by means of a reduction in rent proportionate to the amount of the interference which shall continue for not more than two months or until TENANT has been adequately compensated, whichever comes first. G. All aircraft service, maintenance, repair, inspection and building activities conducted for financial gain within or from aircraft storage hangars shall be done by fixed based operators, tenants or sub-tenants located on the Long Beach Municipal Airport or their duly authorized personnel. No other persons may perform such work. H. Parking spaces in storage hangars shall be marked, numbered and designed in the manner specified in subparagraph A of this paragraph for tie down spaces. I. The aircraft identification number of each aircraft parked in a hangar shall be affixed to the outside of such hangar in a convenient and plainly visible manner and said information shall be revised from time to time so that it shall be current and visible at all times. J. Aircraft hangars constructed after the date of execution of this Lease shall be so designed and constructed by means of a method approved by the Airport Manager as to permit verification for identification, safety and security purposes of all aircraft parked therein at all times without compromising the security of such aircraft. AIRCRAFT TIEDOWN AND STORAGE HANGAR AGREEMENTS ---------------------------------------------- TENANT is authorized to enter into sublease agreements to permit aircraft tiedown and storage on the Leased Premises without approval of LANDLORD, provided that TENANT shall enter into and maintain current a written Aircraft Tiedown or Aircraft Storage Hangar Agreement with the owner or lessee or operator of each aircraft renting space on the Leased Premises. Such agreements shall be in writing and shall specify all terms, conditions and restrictions relating to the rental of space for the tiedown or storage of TENANT's aircraft and indicating that said owner, operator or lessee of an aircraft to be tied down or stored is a sub-tenant of LANDLORD as well as TENANT by virtue of the creation of this sublease. Such agreement shall also require that the information which TENANT must provide to LANDLORD to the terms of Paragraph *___ of this Lease shall be supplied to TENANT by any parties with whom TENANT has entered such agreements. LANDLORD'S Airport Manager or his designated representative may inspect TENANT's file of Aircraft Tiedown and Storage Hangar Rental Agreements at any reasonable time during TENANT's regular business hours. *Page 14 of this Exhibit "G" STORAGE ------- A. TENANT may store aircraft components, equipment, parts, bulk liquids, scrap lumber, metal, machinery or other materials related to the conduct of its business on the Leased Premises, provided, however, that such storage may be one only within a fully enclosed permanent structure. No storage may be done on any apron, ramp or taxiway, without prior written approval of Airport Manager. B. Derelict aircraft, inoperative grounded vehicles, unused ramp equipment, scaffolding, hoists and related items not regularly and routinely in use as part of TENANT's business, may not be kept on the Leased Premises unless such materials are maintained within a fully enclosed permanent structure. C. Violation of the requirements of this Paragraph shall be deemed in default if the condition has not been cured to the satisfaction of the Airport Manager within thirty (30) days of posting of the property or service of TENANT with a notice thereof. AUTOMOBILE PARKING ------------------ TENANT agrees to provide sufficient automobile parking on the Leased Premises to accommodate the parking needs of patrons, visitors and employees, provided, however, that Airport streets and access roadways may not be utilized to comply with this requirement. FUEL FLOWAGE FEES ----------------- A. REQUIREMENT TO PAY ------------------ TENANT agrees to pay such fuel flowage fees at such rates as may be regularly established from time to time by LANDLORD's City Council for aircraft fuels delivered at the airport. Such fees shall be due and payable on the tenth (10th) day of this month succeeding that in which the aircraft fees are received by TENANT. The fees shall be calculated and administered as provided herein. B. SUPPLIER AGREEMENT. ------------------ TENANT shall enter into a written agreement with its fuel supplier which recognizes the existence of the provisions of this agreement. A copy of said agreement shall be delivered to LANDLORD 's Airport Manager prior to the commencement of fuel delivery. Said agreement shall provide that either TENANT or TENANT's supplier shall indemnify, hold harmless and provide insurance coverage to the City for all uses arising from the delivery, storage, sale and supplying of such fuel. Such agreement shall further provide that the supplier shall make available to the City at reasonable times, its records of transactions involving delivery of fuel to TENANT for purposes of auditing TENANT's performance under this agreement. C. UNDERGROUND STORAGE AND DELIVERY. -------------------------------- All fuel delivered to TENANT by its supplier or suppliers shall be placed into underground storage facilities, the location and design of which shall have been approved by LANDLORD'S Airport Manager and all fuel delivered by any supplier or suppliers shall be placed directly into said approved underground storage facilities. D. REPORTING, PAYMENT AND STATEMENTS. --------------------------------- Deliveries of fuel shall be reported and fees therefor paid by TENANT to LANDLORD each calendar month as provided herein. The fees to be paid shall be computed on the basis of the oil company's meter tickets supplied by the tanker truck holding the delivery from, or from refinery meter tickets provided to the carrier at the time the tanker truck is loaded. The amount shown on such tickets to have been delivered in agreement shall be multiplied by the rate established by the City Countil then in effect. The product of that computation shall be the fuel flowage fee due for that month. TENANT will provide a year-end statement showing all deliveries in the previous year. Both monthly reports and year-end statements shall be on forms supplied by the Airport Manager -25- NOISE ABATEMENT --------------- TENANT expressly covenants to make every reasonable and prudent effort to ensure that aircraft based on, or operating from, the Leased Premises adhere to duly adopted present and future Noise Abatement Programs and Rules and Regulations relating thereto. AVIGATION EASEMENT ------------------ There is hereby excepted and reserved to the City of Long Beach, its successors and assigns, for the use and benefit of the public, a right of flight for the passage of aircraft in the airspace above the surface of the premises herein leased. This public right of flight shall include the right to cause in said airspace any noise inherent in the operation of any aircraft used for navigation or flight through said airspace or landing at, taking off from or operation on the Long Beach Municipal Airport. The easement hereby excepted and reserved shall not limit any improvements and other structures heretofore or hereafter constructed or placed upon the premises in a manner consistent with the applicable PD-2 zoning ordinance of the City of Long Beach and FAR Part 77 BULLETIN BOARD -------------- TENANT will install and continuously maintain a bulletin board in a location on the Leased Premises which will be convenient to and easily seen by patrons, users and visitors and will post and display notices, bulletins and other information supplied by the Airport Manager in a prominent place where such will be easily visible to TENANT's employees, patrons, users and visitors, or will authorize the Airport Manager to post such notices which shall remain continuously on display for such period of time as the same may continue in effect. UTILITIES --------- All utilities added from or after the date of this Lease shall be underground. WASTE DISPOSAL -------------- TENANT shall construct all facilities necessary to prevent any water or industrial waste from the operations of TENANT on the Leased Premises from flowing into adjacent property. TENANT shall dispose of all sewage and industrial waste in accordance with all applicable regulations and laws of those governmental agencies having jurisdiction or authority thereover. TENANT shall insure that all solid waste materials are placed in appropriate covered containers designed for use with the type of waste involved, which shall remain covered, and that said containers are maintained within enclosures located on said Leased Premises and designated to keep said trash containers out of the flow of traffic and obscured from view. FAA SECURITY AND SAFETY REGULATIONS ----------------------------------- A. This Lease is subject to Federal Aviation Regulations Part 107 and Part 139 relating to Safety and Security. LANDLORD shall provide copies thereof to TENANT who shall provide copies thereof to all sub-tenants. B. If any violation oft Part 107 or Part 139 occurs on the Leased Premises, TENANT or its sub-tenants shall be strictly liable to reimburse LANDLORD for the full amount of any fine, penalty or other financial loss resulting thereform. BILLBOARDS AND SIGNS -------------------- TENANT agrees not to construct, install or maintain, nor to allow upon the Leased Premises any billboards, signs, banners or like displays which may be placed in or upon any building or structure in such manner as to be visible from the outside thereof, except those approved in writing by LANDLORD's Airport Manager. AUDIT ----- The LANDLORD, City Auditor and City Manager, or their designated representatives, shall be permitted to examine and review TENANT's records at all reasonable times, with or without prior notification, for the purpose of determining compliance with all terms, covenants and conditions of this Lease. Such examinations and reviews shall be conducted during TENANT's regular business hours in a manner causing as little inconvenience as possible to TENANT. POSSESSORY INTEREST ------------------- TENANT recognizes and understands that this Lease may create a possessory interest subject to property taxation and that TENANT may be subject to the payment of property taxes on such interest. FEDERAL AVIATION ADMINISTRATION ASSURANCES ------------------------------------------ This Lease is subject to certain assurances mandated by the Federal Aviation Administration for inclusion in airport leases. These assurances are set out in full in Exhibit "H" attached hereto and made a part hereof. FAA REQUIRED LEASE PROVISIONS ----------------------------- LEASE PROVISIONS: ---------------- 1. The Lessee, for himself, his heirs, personal representatives, successors in interest, and assigns, as a part of the consideration hereof, does hereby covenant and agree "as a covenant running with the land") that in the event facilities are constructed, maintained, or otherwise operated on the said property described in this Lease, for a purpose for which a DOT program or activity is extended or for another purpose involving the provision of similar services or benefits, the Lessee shall maintain and operate such facilities and services in compliance with all other requirements imposed pursuant to Title 49, Code of Federal Regulations, DOT, Subtitle A, Office of the Secretary, Part 21, Nondiscrimination in Federally-Assisted Programs of the Department of Transportation-Effectuation of Title VI of the Civil Rights Act of 1964, and as said Regulations may be amended. 2. The Lessee for himself, his personal representatives, successors in interest, and assigns, as a part of the consideration hereof, does hereby covenant and agree as a covenant running with the land" that: (a) no person on the grounds of race, color or national origin shall be excluded from participation in, denied the benefits of, or be otherwise subjected to discrimination in the use of said facilities; (b) that in the construction of any improvements on, over, or under such land and the furnishing of services thereon, no person on the grounds of race, color or national origin shall be excluded from participation in; denied the benefits of, or otherwise be subject to discrimination; (c) that the Lessee shall use the premises in compliance with all other requirements imposed by or pursuant to Title 49, Code of Federal Regulations, Department of Transportation, Subtitle A, Office of the Secretary, Part 21, Nondiscrimination in Federally-Assisted Programs of the Department of Transportation-Effectuation of Title VI of the Civil Rights Act of 1964, and as said Regulations may be amended. 3. Lessee shall furnish its accommodations and/or services on a fair, equal and not unjustly discriminatory basis to all users thereof and it shall charge fair, reasonable and not unjustly discriminatory prices for each unit or service; PROVIDED, THAT the Lessee may be allowed to make reasonable and nondiscriminatory discounts, rebates or other similar type of price reductions to volume purchasers. 4. Non-compliance with Provision 3 above shall constitute a material breach thereof and in the event of such non-compliance and Lessor shall have the right to terminate this Lease Agreement and the estate hereby created without liability therefore or at the election of -1- EXHIBIT L the Lessor or the United States either or both said Governments shall have the right to judicially enforce Provisions. 5. Lessee agrees that it shall insert the above four Provisions in any Lease Agreement by which said Lessee grants a right or privilege to any person, firm or corporation to render accommodations and/or services to the public on the premises herein leased. 6. The Lessee assures that it will undertake an affirmative action program as required by 14 CFR Part 152, Subpart E, to insure that no person shall on the grounds of race, creed, color, national origin, or sex be excluded from participating in any employment activities covered in 14 CFR Part 152, Subpart E. The Lessee assures that no person shall be excluded on these grounds from participating in or receiving the services or benefits of any program or activity covered by this subpart. The Lessee assures that it will require that its covered suborganizations provide assurances to the Lessee that they similarly will undertake affirmative action programs and that they will require assurances from their suborganizations, as required by 14 CFR Part 152, Subpart E, to the same effect. 7. The Lessor reserves the right to further develop or improve the landing area of the airport as it sees fit, regardless of the desires or view of the Lessee, and without interference or hinderance. 8. The Lessor reserves the right, but shall not be obligated to the Lessee to maintain and keep in repair the landing area of the airport and all publicly- owned facilities of the airport, together with the right to direct and control all activities of the Lessee in this regard. 9. This Lease shall be subordinate to the provisions and requirements of any existing or future agreement between the Lessor and the United States, relative to the development, operation or maintenance of the airport. 10. Lessee agrees to comply with the notification and review requirements covered in Part 77 of the Federal Aviation Regulations in the event of future construction of a building is planned for the leased premises, or in the event of any planned modification or alteration of any present or future building or structures situated on the leased premises. 11. It is understood and agreed that nothing herein contained shall be construed to grant or authorize the granting of an exclusive right within the meaning of Section 308 of the Federal Aviation Act. 12. The Lessee by accepting this Lease agrees for itself, its successors and assigns that it will not make use of the leased premises in any manner which might interfere with the landing and -2- taking off of aircraft from Long Beach Municipal Airport or otherwise constitute a hazard. In the event the aforesaid covenant is breached, the owner reserves the right to enter upon the premises hereby leased, and cause the abatement of such interference at the expense of the Lessee. 13. This Lease and all the provisions hereof shall be subject to whatever right the United States Government now has or in the future may have or acquire, affecting the control, operation, regulation and taking over of said airport. -3- Recording Requested By: When Recorded Mail To: SHORT FORM GROUND LEASE ----------------------- THIS SHORT FORM GROUND LEASE is made and entered into as of this _________ day of ___________________, 198_, by and between the CITY OF LONG BEACH, a municipal corporation ("Landlord"), and KILROY LONG BEACH ASSOCIATES, a California Limited Partnership ("Developer"). R E C I T A L S - - - - - - - - Landlord does hereby lease and demise to Developer that certain real property in the City of Long Beach, County of Los Angeles, State of California, more particularly described in Exhibit "A" attached hereto and all rights, privileges and easements appurtenant thereto ("Premises" herein) pursuant to and upon all of the terms, covenants and provisions set forth in that certain unrecorded Ground Lease dated ____________________________, ("Ground Lease" herein), the terms, covenants and provisions of which are hereby incorporated herein and made a part hereof by reference. EXHIBIT "M" Page 1 of 5 Pages Landlord and Developer do further agree as follows: 1. The commencement date of the Ground Lease term is the date first written above. 2. The term of the Ground Lease shall continue for fifty (50) years following the date of execution of the Ground Lease, subject to earlier termination as provided in the Ground Lease and subject to four (4) successive ten (10) year options and one (1) nine (9) year option to further extend the term of the Ground Lease. 3. Developer shall have the right to subdivide the Ground Lease into one or more separate Ground Leases pursuant to Section 7.6 of the Ground Lease and to recombine one or more separate Ground Lease into a single Ground Lease pursuant to Section 7.7 of the Ground Lease. Developer also shall have the right to encumber its leasehold interest in the Ground Lease (and in each separate Ground Lease into which the Ground Lease may be subdivided) with one or more Leasehold Mortgages (as defined in section 4.3.2 of the Ground Lease) in favor of one or more Leasehold Mortgagees (as defined in section 4.3.3 of the Ground Lease). 4. Developer shall pay the real property taxes and assessments against the Premises during the term hereof, as more specifically provided in the Ground Lease. 5. Notwithstanding that the ownership of Landlord's and Developer's estates in and to the Premises may become vested in EXHIBIT "M" Page 2 of 5 Pages the same party for any reason, no merger of Developer's leasehold estate into Landlord's fee title shall result or be deemed to result thereby, as provided in Section 4.20 of the Ground Lease, provided that this provision shall not be deemed applicable to a termination of Developer's leasehold estate by reason of Developer's default or a taking under the power of eminent domain. 6. The Ground Lease grants to Developer the right to enter upon the Premises demised thereby for a period of sixty (60) days following the expiration of the term of the Ground Lease in order to remove any or all of the buildings and other improvements constructed upon said Premises by or under Developer. 7. The Ground Lease grants to Developer the right to sell any buildings from time to time constructed upon the Premises, provided that such buildings shall be and remain subject to the terms and conditions of the Lease and shall be used and developed only in accordance with the Ground Lease for so long as such buildings remain upon the Premises. (THIS AREA INTENTIONALLY LEFT BLANK) EXHIBIT "M" Page 3 of 5 Pages IN WITNESS WHEREOF, the parties have executed this Short Form Ground Lease as of the day and year first above written. CITY OF LONG BEACH, A Municipal Corporation By:__________________________ Title:_______________________ "Landlord" KILROY LONG BEACH ASSOCIATES, a California Limited Partnership, By: KILROY INDUSTRIES, a California Corporation, General Partner By: ____________________ Title: _________________ By: _________________________ By: _________________________ "Developer" EXHIBIT "M" Page 4 of 5 Pages LBAC-3A/5.28.6.sr This Short Form Ground Lease is hereby approved as to form this ___________ day of ________________________, 198_. ROBERT W. PARKIN, City Attorney By:__________________________ Deputy EXHIBIT "M" Page 5 of 5 Pages LBAC-3A/5.28.6sr LANDLORD'S ACKNOWLEDGEMENT -------------------------- Corporation ----------- STATE OF CALIFORNIA ) ) ss. COUNTY OF LOS ANGELES ) On June __, 1985, before me, the undersigned, a Notary Public in and for said State, personally appeared _______________________ personally known to me or proved to me on the basis of satisfactory evidence to be the person who executed the within instrument as the ___________________, on behalf of the City of Long Beach, the Municipal corporation that executed the within instrument and acknowledged to me that said Municipal corporation executed the within instrument pursuant to a resolution of its City Council. WITNESS my hand and official seal. _____________________________ Notary Public in and for said State SEAL DEVELOPER'S ACKNOWLEDGEMENT --------------------------- STATE OF CALIFORNIA ) ) ss. COUNTY OF LOS ANGELES ) On June __, 1985, before me, the undersigned, a Notary Public in and for said State, personally appeared ___________________________________ and _______, personally known to me or proved to me on the basis of satisfactory evidence to be the persons who executed this instrument as ___________________________ and ________________________, respectively, of Kilroy Industries, the corporation that executed this instrument as one of the general partners of Kilroy Long Beach Associates, a California Limited Partnership, the partnership that executed the within instrument, and acknowledged to me that such corporation executed the same as such partner and that said partnership executed the same. WITNESS my hand and official seal. ----------------------------- Notary Public in and for said State SEAL LEGAL DESCRIPTION ----------------- THAT PORTION OF PARCEL 1, IN THE CITY OF LONG BEACH, IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS SHOWN ON A RECORD OF SURVEY, FILED IN BOOK 85, PAGE 19, OF RECORD OF SURVEYS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY, TOGETHER WITH THOSE PORTIONS OF LOTS 5 AND 9, TRACT NO. 10548, IN SAID CITY, COUNTY OF STATE, AS PER MAP RECORDED IN BOOK 174, PAGES 15 TO 23, INCLUSIVE OF MAPS, IN SAID RECORDER'S OFFICE, AND TOGETHER WITH THAT PORTION OF LAKEWOOD BOULEVARD (FORMERLY KNOWN AS CERRITOS AVENUE, 80 FEET WIDE) AS SHOWN ON SAID MAP OF TRACT NO. 10548, NOW VACATED BY THE STATE OF CALIFORNIA HIGHWAY COMMISSION, A CERTIFIED COPY OF WHICH WAS RECORDED MAY 19, 1959, AS INSTRUMENT NO. 3601, OF OFFICIAL RECORDS, IN THE OFFICE OF SAID COUNTY RECORDER, DESCRIBED AS A WHOLE AS FOLLOWS: BEGINNING AT THE MOST SOUTHERLY CORNER OF SAID PARCEL 1, SAID RECORD OF SURVEY; THENCE NORTH 00 DEGREES 00 MINUTES 46 SECONDS EAST 324.60 FEET, ALONG THE WESTERLY LINE OF SAID PARCEL 1, TO THE NORTHWESTERLY CORNER OF SAID PARCEL 1, SAID NORTHWESTERLY CORNER BEING A POINT IN A NON-TANGENT CURVE CONCAVE NORTHERLY AND HAVING A RADIUS OF 1,050.00 FEET, A RADIAL LINE THAT BEARS SOUTH 2 DEGREES 06 MINUTES 54 MINUTES WEST TO SAID POINT, SAID CURVE ALSO BEING THE NORTHERLY LINE OF SAID PARCEL 1; THENCE EASTERLY ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 27 DEGREES 32 MINUTES 10 SECONDS AN ARC DISTANCE OF 504.63 FEET TO A POINT, SAID LAST MENTIONED POINT BEING A RADIAL LINE THAT BEARS SOUTH 25 DEGREES 25 MINUTES 16 SECONDS EAST, TO SAID LAST MENTIONED POINT; THENCE SOUTH 45 DEGREES 22 MINUTES 59 SECONDS EAST 1,403.34 FEET TO A POINT IN THAT CERTAIN COURSE AS DESCRIBED AS HAVING A BEARING AND LENGTH OF "SOUTH 34 DEGREES 15 MINUTES 50 SECONDS WEST 225.46 FEET" IN THE NORTHWESTERLY BOUNDARY OF THAT PARCEL OF LAND DESCRIBED AS PARCEL 1 IN DEED TO STATE OF CALIFORNIA, RECORDED MARCH 18, 1959, AS INSTRUMENT NO. 1904, OF OFFICIAL RECORDS, OF SAID COUNTY, SAID LAST MENTIONED POINT BEING NORTH 34 DEGREES 16 MINUTES 23 SECONDS EAST 40.81 FEET, ALONG SAID COURSE, FROM THE SOUTHWESTERLY TERMINUS THEREOF; THENCE SOUTH 34 DEGREES 16 MINUTES 23 SECONDS WEST 40.81 FEET, ALONG SAID COURSE, TO THE NORTHEASTERLY TERMINUS OF THAT CERTAIN COURSE IN SAID NORTHWESTERLY BOUNDARY, AS DESCRIBED IN SAID LAST MENTIONED PARCEL 1, AS HAVING A BEARING AND LENGTH OF "SOUTH 62 DEGREES 04 MINUTES 30 SECONDS WEST, 51.05 FEET, MORE OR LESS,"; THENCE SOUTH 62 DEGREES 05 MINUTES 03 SECONDS WEST ALONG SAID LAST MENTIONED CERTAIN COURSE, TO THE NORTHEASTERLY TERMINUS OF THAT CERTAIN COURSE AS DESCRIBED AS HAVING A BEARING AND LENGTH OF "SOUTH 62 EXHIBIT "A" Page 1 of 2 Pages DEGREES 04 MINUTES 30 SECONDS WEST, 113.28 FEET" IN SAID LAKEWOOD BOULEVARD, NOW VACATED BY THE CALIFORNIA HIGHWAY COMMISSION; THENCE SOUTH 62 DEGREES 05 MINUTES 03 SECONDS WEST ALONG SAID LAST MENTIONED CERTAIN COURSE TO THE NORTHEASTERLY TERMINUS OF THAT COURSE AS DESCRIBED AS HAVING A BEARING AND LENGTH OF "SOUTH 62 DEGREES 04 MINUTES 30 SECONDS WEST 704.56 FEET" IN THE NORTHERLY BOUNDARY OF THAT PARCEL OF LAND DESCRIBED AS PARCEL 1 IN DEED TO THE STATE OF CALIFORNIA, RECORDED MAY 11, 1959, AS INSTRUMENT NO. 1870, OF OFFICIAL RECORDS, OF SAID COUNTY; THENCE ALONG SAID LAST MENTIONED NORTHERLY BOUNDARY SOUTH 62 DEGREES 05 MINUTES 03 SECONDS WEST 704.56 FEET, SOUTH 80 DEGREES 05 MINUTES 43 SECONDS WEST 105.00 FEET AND NORTH 80 DEGREES 14 MINUTES 59 SECONDS WEST 676.33 FEET; THENCE NORTH 8 DEGREES 14 MINUTES 01 SECONDS EAST 570.00 FEET; THENCE NORTH 25 DEGREES 20 MINUTES 00 SECONDS EAST 15.00 FEET; THENCE NORTH 8 DEGREES 44 MINUTES 49 SECONDS WEST 248.97 FEET TO THE SOUTHERLY PROLONGATION OF SAID WESTERLY LINE OF PARCEL 1, AS SHOWN ON SAID RECORD OF SURVEY; THENCE NORTH 0 DEGREES 00 MINUTES 46 SECONDS EAST 72.14 FEET ALONG SAID PROLONGATION, TO THE POINT OF BEGINNING. ALSO EXCEPTING THEREFROM ALL OIL, GAS AND OTHER HYDROCARBONS IN AND UNDER, OR WHICH MAY BE PRODUCED OR SAVED FROM SAID LAND; TOGETHER WITH ALL RIGHTS OF EVERY KIND AND DESCRIPTION WHATSOEVER TO DRILL FOR, DEVELOP, TAKE, REMOVE, AND SEVER THE SAME, OR ANY PART THEREOF, FROM SAID LAND, WITHOUT, HOWEVER, THE RIGHT TO THE USE OF THE SURFACE OF SAID LAND IN CONNECTION WITH THE DEVELOPMENT OR REMOVAL OF SAID OIL, GAS OR OTHER HYDROCARBONS, ALL DRILLING AND BORING FOR SAID PURPOSES TO BE DONE BENEATH THE SURFACE OF SAID LAND AT ANY LEVEL, OR LEVELS, 100 FEET, OR MORE, BELOW THE SURFACE THEREOF, THE SURFACE OPENING OF THE WELL HOLE TO BE LOCATED ON LAND OTHER THAN THE LAND ABOVE DESCRIBED, AS RESERVED IN THE DEED FROM BIXBY LAND COMPANY, A CORPORATION, RECORDED AUGUST 25, 1948 IN BOOK 28072 PAGE 204, OFFICIAL RECORDS, AND RECORDED FEBRUARY 10, 1950 IN BOOK 32238 PAGE 67 OFFICIAL RECORDS AND RECORDED DEC EXHIBIT "A" Page 2 of 2 Pages EX-10.13 8 FIRST AMENDMENT TO LEASE DATED JANUARY 24, 1989 EXHIBIT 10.13 FIRST AMENDMENT TO LEASE ------------------------ This First Amendment to Lease ("Amendment") is made, in duplicate, on January 24, 1989, pursuant to a minute order adopted by the City Council of the - --------- -- City of Long Beach on August 9, 1988, by and between CITY OF LONG BEACH, a municipal corporation, ("Landlord") and KILROY LONG BEACH ASSOCIATES, a California limited partnership, ("Developer".) WHEREAS, on July 17, 1985, a Lease was entered into between the Landlord and Developer ("Lease"), which Lease demised to Developer to real property described in Exhibit "A" to the Lease. WHEREAS, a Parcel Map has been filed with the County of Los Angeles on July 22, 1988, as Parcel Map No. 16960, in Book 208, pages 92 through 100, of Parcel Maps in the office of the County Recorder of said County ("Parcel Map"). This Parcel Map includes the real property demised by the Lease, and other real property. WHEREAS, pursuant to the provisions of Section 7.6 of the Lease, the Lease is being subdivided, and following such subdivision of the Lease, there will be three (3) leases between Landlord and Developer, as follows: 1. Parcels 5 and 6 of the Parcel Map ("Parcel 5 and 6 Lease"). 2. Parcels 1 and 2 of the Parcel Map ("Parcel 1 and 2 Lease"). 3. This Lease, which shall be reduced in scope and 1 coverage to include Parcels 3 and 4 of the Parcel Map, and to which an additional Parcel 8 of the Parcel Map shall be added. WHEREAS, in connection with the subdivision of the Lease referred to in this Amendment, Landlord acknowledges that it has received the one time charge of Five Thousand and No/100 Dollars ($5,000.00) referred to in the last sentence of Section 7.6 of the Lease. WHEREAS, the parties desire to amend the Lease to accomplish the foregoing objectives. NOW THEREFORE, the Lease between the parties is hereby amended as follows: 1. Exhibits "A" and "B", respectively, referred to in the first paragraph of Section 1.4 of the Lease, are hereby changed in their entirety to Exhibits "A" and "B", respectively, attached to this Amendment and marked Exhibits "A" and "B". 2. Subsection 1.4.1 of the Lease is hereby amended to read in its entirety as follows: 1.4.1 Adjacent Properties. Developer has entered into a separate -------------------- Lease, dated April 21, 1988, with the Board of Water Commissioners of the City of Long Beach ("Water Department Lease"), for the development of certain adjacent properties ("Adjacent Properties") identified in Exhibit "B", into the Project for creation of an integrated development. The fair market value and fair market Ground Rent and periodic adjustments thereof said Adjacent Properties shall be as mutually agreed by said Board of Water 2 Commissioners and Developer, and by Landlord, as to that portion of the Premises under the jurisdiction of Landlord. Development of the Adjacent Properties shall be governed by the Water Department Lease (and Landlord, as to its property.) 3. Subsection 3.1.1 of the Lease is hereby amended to read as follows: 3.1.1 Amount of Ground Rent. Developer shall pay as initial --------------------- Ground Rent for Parcels 3 and 4 of the Parcel Map, the sum of Three Hundred Sixty-Six Thousand Nine Hundred Eighty-Seven and 65/100 Dollars ($366,987.65) per year, which is stated by the parties to be ten percent (10%) of the initial stated value of the land included in the Premises, which, in turn is agreed by the parties to be Three Million Six Hundred Sixty-Nine Thousand Eight Hundred Seventy-Six and 50/100 Dollars ($3,669,876.50). The Ground Rent for Parcel 8 of the Parcel Map is set forth in Subsection 3.1.4.3. 4. Subsection 3.1.2 of the Lease is hereby amended to read in its entirety as follows: 3.1.2 Allocation of Ground Rent. Developer intends to develop ------------------------- Parcels 3 and 4 of the Premises as two (2) distinct parcels, which are tentatively identified on the preliminary Parcel Map attached hereto and marked Exhibit "C" for reference, with one or more buildings per parcel. The initial Ground Rent obligation described in this subsection 3.1.1 shall be allocated among Parcels 3 and 4 in the proportion that the 3 net square footage of land contained in each of said parcels bears to the net square footage of the land in both of said Parcels. "Net square footage" of land means that portion of the land not subject to dedication for public streets and sidewalks. 5. Subsection 3.1.3 of the Lease is hereby amended to read in its entirety as follows: 3.1.3 Payment of Ground Rent. The obligation to pay Ground Rent shall ______________________ commence as to the first of Parcels 3 or 4 on the date that construction commences on that parcel. The obligation to pay Ground Rent shall commence as to the second parcel on the earlier of (a) the date that construction commences on that parcel, or (b) one parcel every twelve (12) months following commencement of construction on the first parcel within the Project. Construction shall be deemed to have commenced upon the date of issuance of a foundation permit for the first building intended to produce revenue on any given parcel ("Commencement of Construction"), which was Parcel 2 upon which Commencement of Construction was May 6, 1986. Commencement of the initial Ground Rent upon all subsequent parcels within the Project shall occur, one parcel at a time, in the sequence of the numbers of the parcels on the Parcel Map, exclusive of Parcel 8. However, if Ground Rent is commenced on a parcel in a sequence other than the order of numbering of parcels as a result of the commencement of construction on such parcel, Developer 4 shall not also be required to commence payment of fifty percent (50%) of Ground Rent on the next numbered parcel. At the next date when payment of initial Ground Rent is to be commenced, such rent shall be commenced as to the lowest numbered remaining parcel. The shift of sequence of required payments resulting from construction on parcels in different order than their numbers may delay, but shall not permanently terminate the obligation to pay rent as to such parcel. 6. Subsection 3.1.4.2 is added to the Lease to read as follows: 3.1.4.2 Parcel 8 Ground Rent. The Ground Rent for Parcel 8 shall be -------------------- eight percent (8%) of the adjusted gross rents received by Developer from subtenants of Developer upon Parcel 8. As used herein, the term adjusted gross rents shall mean all rents received from subtenants of Developer on Parcel 8, less the sum of the following: (i) ten percent (10%) of gross receipts for administrative and management costs; (ii) ten percent (10%) of gross receipts for maintenance, replacement and reserves; (iii) real property taxes and insurance costs for Parcel 8; and (iv) amortization of the costs of construction of improvements made by Developer to Parcel 8, plus interest thereon at twelve percent (12%) per annum, amortized over the then remaining term of the Lease after completion of such improvements to Parcel 8. Section 3.1.7 only of this Lease shall be applicable to Ground Rent for Parcel 8, and the remainder of the 5 provisions of Article 3 (except for new Section 3.12, added to this Amendment, below) shall not be applicable to Parcel 8. 7. Subsection 3.2.2.1 of the Lease is hereby amended to read in its entirety as follows: 3.2.2.1 Adjustment for Predevelopment and Infrastructure Costs. ------------------------------------------------------ The fair market land value of the Premises (as agreed upon by Landlord and Developer or as determined by appraisal) shall be adjusted ("Adjusted Fair Market Land Value") in the proportion that Three Million Six Hundred Sixty-Nine Thousand Eight Hundred Seventy-Six and 50/100 Dollars ($3,669,876.50) bears to the original stated land value of the Premises of Three Million Six Hundred Sixty-Nine Thousand Eight Hundred Seventy-Six and 50/100 Dollars ($3,669,876.50) plus the pro rata portion of the actual on-site and off-site "Predevelopment and Infrastructure Costs" applicable to the Premises, determined according to Subsection 3.8. The Adjusted Fair Market Land Value shall be converted into an annual Ground Rent obligation based on the prevailing rate of return as determined pursuant to Subsection 3.2.2. 8. Section 3.8.1 is added to the Lease to read as follows: 3.8.1 Allocation of Predevelopment and Infrastructure Costs Among ------------------------------------------------------------ Leases. At such time as Predevelopment and Infrastructure Costs have been - ------ determined pursuant to Sections 3.6 through 3.11, inclusive, the amount thereof 6 shall be allocated among this Lease, the Parcel 5 and 6 Lease and the Parcel 1 and 2 Lease in the ratio as the square footage of the area of the Premises included in this Lease, exclusive of Parcel 8, bears to the entire square footage of the areas included in this Lease, exclusive of Parcel 8, the Parcel 5 and 6 Lease and the Parcel 1 and 2 Lease. 9. Section 3.12 is hereby added to the Lease to read as follows: 3.12 Parcel 8 Access and Improvements. Access to Parcel 8 has been -------------------------------- provided by a roadway as previously approved by Landlord's Airport Manager. Expenditures related to the construction of this roadway, including paving, concrete work, utilities, landscaping, and security fences and lights in order to accommodate FAA requirements, will become Predevelopment and Infrastructure Costs as defined in Section 3.6, except that the limitation set forth in the last paragraph of Section 3.8 shall not be applicable to the expenditures specified in this Section 3.12 if those expenditures cause the limitation in Section 3.8 to be exceeded. In no event shall the limit of Section 3.8 be increased by more than the amount by which all other allowed Predevelopment and Infrastructure Costs plus those permitted in this Section 3.12 exceed that limit. Any other improvements to Parcel 8 will not be considered "Predevelopment and Infrastructure Costs." 7 10. Subsection 7.1.1 is added to the Lease to read as follows: 7.1.1 Development of Parcel 8. Parcel 8 shall be utilized for ----------------------- aviation purposes according to the terms of Sections 7.1, 8.2, 8.3 and 8.5, except as provided in this Section 7.1.1, and the Premises, including Parcel 8, shall be capable of accommodating at least fifty (50) aircraft. Construction of the improvements shall begin within forty-eight (48) months from date of execution of this Amendment. Parking loss on contiguous elements of the Premises due to development of access to Parcel 8 may be made up by providing parking on a portion of Parcel 8. Otherwise, Parcel 8 cannot be used to alter development rights and obligations on Parcels 1, 2, 3 and 4. To facilitate more efficient aircraft usage of Parcels 1, 2, 3 and 4, Developer may shift automobile parking onto Parcel 8 so that an equal number of efficiently laid out auto parking spaces and necessary landscaping lost to aircraft utilization on Parcels 1, 2, 3 and 4, can be shifted to an equal number of efficiently laid out auto parking spaces and necessary landscaping on Parcel 8, subject to approval by FAA (where required) and the Airport Manager. In addition, Developer may relocate and construct, at its sole expense, the existing perimeter roadway and other easements that would affect the use of Parcel 8 as described above. If approval to relocate the perimeter roadway is not granted by necessary governmental auth- 8 orities, then Ground Rent for Parcel 8 will abate until such approval is attained, as long as Parcel 8 is not and cannot be utilized as provided herein without relocation of the perimeter road. 11. Section 7.2 of the Lease is hereby amended to read in its entirety as follows: 7.2 Developer's Obligation to Develop Premises. Developer agrees to ------------------------------------------ commence the construction of improvements upon Parcel 3 or Parcel 4 of the Premises on or before May 1, 1990, subject to marketing conditions then existing and the granting of all required governmental approvals and subject to subsection 17.3. After completion of the first building on Parcel 3 or Parcel 4, Developer shall use its best efforts to undertake as expeditiously and fully as is reasonable possible in the exercise of sound business judgment, the planning and construction of improvements upon the other of Parcel 3 or Parcel 4 of the Premises to the end that there will be ultimately constructed as a part of the Project the development contemplated in the Basic Concept Documents or its alternative as approved by Landlord pursuant to subsection 7.3.7. Developer intends to conform to the construction schedule attached as Exhibit "J" entitled "Construction Schedule" but is not required to do so, except as provided in this subsection. In the event Developer has not commenced construction on the last of either Parcel 3 or Parcel 4 by January 1, 1993, then the fair market rental value of said parcel shall be adjusted in the manner set forth in Section 3.2, as of 9 January 1993, upon the assumption that the building or buildings planned for construction upon said parcel had, in fact, been completed. 12. Section 7.8 is added to the Lease to read as follows: 7.8 Subdivision and Combining of Parcel 8. Parcel 8 may be subdivided ------------------------------------- or combined with Parcels 1, 2, 3 and 4 by Developer in a manner approved by the Airport Manager in order to permit an interrelated development of not less than three (3) acres of aviation facilities with appropriate roadway and taxiway access as shown on Exhibit "C-2". This subdivision and combination of Parcel 8 will be conducted in accordance with the requirement of Sections 7.6 and 7.7. Combining portions of Parcel 8 with other portions of the Premises shall not affect or lessen the Ground Rent for Parcel 8, nor affect or increase the Ground Rent for any other portion of the Premises, nor shall the rental adjustments for other portions of the Premises pursuant to Subsection 3.2 of the Lease be affected in any way by reason of the fact that portions of Parcel 8 are combined with any other portions of the Premises. 13. Section 8.7 is added to the Lease to read as follows: 8.7 Use of Parcel 8. Parcel 8 will be used only for aviation uses as --------------- described in Sections 8.2, 8.3, 8.5, Exhibits "K" and "L", except to the extent the uses are integrated into development of Parcels 1, 2, 3 and 4 in which case, corresponding portions of Parcel 8 may be used 10 for automobile parking. However, aircraft tied down in the row closest to Runway 30, and vehicles parked in that row in automobile parking areas (if any) shall not exceed a height of nine (9) feet above ground level. 14. Section 8.8 is added to the Lease to read as follows: 8.8 Security and Maintenance. Developer will be responsible for ------------------------ security and maintenance of Parcel 8 as required by FAA and the Airport Manager and as described in Exhibit "K". 15. Subsection 16.1.1 of the Lease is amended to read as in its entirety as follows: 16.1.1 Receipt by Landlord. Developer has, concurrently with the ------------------- execution and delivery of this Lease, delivered to Landlord a good faith deposit in the amount of One Million and No/100 Dollars ($1,000,000.00) as security for the performance of the obligations of Developer to be performed in accordance with the provisions of this Lease. The receipt of the deposit is hereby acknowledged by Landlord. The good faith deposit of One Million and No/100 Dollars ($1,000,000.00) previously made by Developer pursuant to the provisions of Section 16.1 and Subsection 16.1.1 of the Lease shall be allocated to and held by Landlord in the following amounts with respect to the following leases.
This Lease $ 366,987.65 Parcel 5 & 6 Lease 295,428.97 Parcel 1 & 2 Lease 337,583.38 ------------- Total $1,000,000.00
11 16. Subsection 16.2 of the Lease is hereby amended to read as follows: 16.2 Construction Security Deposits. Developer has, prior to the ------------------------------ execution and delivery of this Lease, delivered to Landlord a construction deposit in the amount of One Million and No/100 Dollars ($1,000,000.00) as security for the performance of the obligations of Developer to be performed in accordance with the provisions of this Lease. The receipt of the deposit is hereby acknowledged by Landlord. The construction security deposit of One Million and No/100 Dollars ($1,000,000.00) previously made by Developer pursuant to the provisions of Section 16.2 of the Lease shall be allocated to and held by Landlord in the following amounts with respect to the following leases: This Lease $ 366,987.65 Parcel 5 & 6 Lease 295,428.97 Parcel 1 & 2 Lease 337,583.38 ------------- Total $1,000,000.00
17. Subsection 16.2.4 of the Lease is hereby amended to read in its entirety as follows: 16.2.4 Return of Deposit. Promptly upon Developer's completion of the ----------------- construction of any building improvements upon the Premises and the issuance of a Certificate of Occupancy for such improvements, Landlord shall release and return to Developer a portion of the deposit described in subsection 16.2 based upon the proportion of the number of square feet of building area (as measured from 12 the exterior of exterior building walls) within such completed building improvements and to 42,218 square feet of building area. If Developer is not in default under this Lease, the balance of such deposit if any, with accrued interest shall be returned to Developer upon the occurrence of the Completion Date as specified in this Lease. 18. Except as stated in this First Amendment, the Lease dated July 17, 1985, will remain in effect. IN WITNESS WHEREOF, the parties hereto have caused these presents to be duly executed in duplicate with all the formalities required by law and the respective dates set forth opposite the signatures. CITY OF LONG BEACH, a municipal corporation January 24, 1989 By: /s/ JAMES C. MANKLA - ---------- -- ---------------------------- City Manager LANDLORD KILROY LONG BEACH ASSOCIATES, a California limited partnership By: KILROY INDUSTRIES, General Partner January 5, 1989 By: /s/ MARSHALL L. McDANIEL - --------- -- ------------------------------ MARSHALL L. McDANIEL Title: Senior Vice President and Secretary --------------------------- DEVELOPER 13 The foregoing Amendment to Lease is hereby approved as to form this 18th day of January, 1989. JOHN R. CALHOUN, City Attorney By: /s/ John R. Calhoun ----------------------------- Deputy 14 DEVELOPER'S ACKNOWLEDGMENT -------------------------- STATE OF CALIFORNIA ) ) ss. COUNTY OF LOS ANGELES ) On January 5, 1989, before me, the undersigned, a Notary Public in and for --------- said State, personally appeared Marshall L. McDaniel, personally known to me or proved to me on the basis of satisfactory evidence to be the person that executed this instrument as Senior Vice President of Kilroy Industries, the corporation that executed this instrument as the general partner of KILROY LONG BEACH ASSOCIATES, a California Limited Partnership, the partnership that executed the within instrument, and acknowledged to me that such corporation executed the same as such partner and that said partnership executed the same. WITNESS my hand and official seal. [SEAL] /s/ Nadine K. Kirk ----------------------------------- Notary Public in and for said State [SEAL APPEARS HERE] FIRST AMENDMENT TO LEASE EXHIBIT "A" LEGAL DESCRIPTION KILROY AIRPORT CENTER, PARCELS 3, 4 & 8 Parcels 3, 4 and 8 of Parcel Map No. 16960, in the City of Long Beach, County of Los Angeles, State of California, as per map recorded in Book 208, Pages 92 through 100 inclusive of Parcel Maps, in the Office of the County Recorder of said County. [MAP APPEARS HERE] MAP OF PARCELS 1 THROUGH 10 PARCEL MAP NO. 16960 P.M.B. 208 - 92/100 IN THE CITY OF LONG BEACH COUNTY OF LOS ANGELES STATE OF CALIFORNIA FOR LEASE PURPOSES EXHIBIT "B" Page 1 of 1 EX-10.14 9 2ND AMENDMENT TO LEASE AGREEMENT 12/28/90 EXHIBIT 10.14 SECOND AMENDMENT TO LEASE AGREEMENT ----------------------------------- FOR "PARCELS 3, 4 AND 8" (July 17, 1985) The following SECOND AMENDMENT TO LEASE AGREEMENT OF JULY 17, 1985 ("the Lease" herein) is made and entered into in duplicate as of the 28th day of ---- December, 1990, pursuant to a minute order adopted by the City Council of the - -------- City of Long Beach on the 21st day of August, 1990, by and between CITY OF LONG BEACH, a municipal corporation, hereinafter referred to as "LANDLORD", and KILROY LONG BEACH ASSOCIATES, a California limited partnership, hereinafter referred to as "DEVELOPER". WHEREAS, on July 17, 1985, the Lease was entered into between the Landlord and Developer; and WHEREAS, on July 22, 1988, a Parcel Map No. 16960, in Book 208, Pgs. 92 through 100 of Parcel Maps was recorded in the Office of the County Recorder of Los Angeles County, State of California. This Parcel Map included the real property demised by the Lease and its amendments; and other real property (Parcel 8); and WHEREAS, on January 24, 1989, the All-Inclusive Lease was amended and subdivided by a First Amendment to Lease in accordance with Section 7.6 of said Lease between Landlord and Developer in order to develop Parcels 5 and 6; and WHEREAS, the parties hereto now desire to further amend the said subdivided Lease for Parcels 3, 4 and 8 in order to -1- recognize and clarify certain issues arising out of a Development Agreement entered into between the Parties in September 1990; NOW, THEREFORE, the Lease between the parties hereto is hereby amended to read in its entirety as follows: 1. Paragraph 3.13 is hereby added to the Lease to read in its entirety as follows: 3.13 Effect of Paragraph 4.01B of Development Agreement on Paragraph 3.11 -------------------------------------------------------------------- of Lease. -------- On December 5, 1990, City and Kilroy Long Beach Associates ("Developer" herein) entered into a Development Agreement relating, among other things, to Leased Parcels 1-6 as shown on Exhibit "A" of this Amendment. As to such parcels, the costs incurred by Developer or any of its successors or assigns pursuant to that Development Agreement, including but not limited to assessments or payments made in connection with implementation of the Long Beach Airport Traffic Mitigation Program as defined in the Development Agreement, may, if and as otherwise eligible under this Lease, be considered or construed to be costs of items in Subsections 3.11.1, 3.11.2 and 3.11.3 of this Lease for the purposes of a credit against future rental increases under its terms, and Developer shall thereupon receive any such credit for benefit assessments levied or payments made as a direct result of the Development Agreement against improvements on Parcels 1-6 under this Lease provided that: (1) No such credit shall be granted except as a -2- result of any assessment levied or payments made which are attributable to improvements which have been actually constructed on or permitted for construction on Parcels 1-6 and, as to such, only on improvements on said Parcels not exceeding a cumulative total of 1,085,023 square feet of gross usable floor area; and (2) Developer shall not be eligible for any credit or interest, and no such credit or interest shall accrue, unless and until Developer has first actually paid a total of TWO MILLION DOLLARS ($2,000,000) in eligible costs under Subsections 3.11.1, 3.11.2 and 3.11.3 of this Lease; and (3) Interest shall only be calculated and credited or accrued as to payments made and assessments levied and paid which are attributable to improvements which have been actually constructed on or permitted for construction on Parcels 1-6 at the time Developer becomes eligible for credit under Subsection 3.13(2) hereinabove and then only to the extent that such amounts are credited against future rental increases within thirty (30) days of their payment by Developer. Such interest shall be paid at the average of the prime interest rates quoted monthly by Security Pacific National Bank or its successor bank during the term that said interest is accrued to the date credited; and (4) Developer shall not be eligible for any credit or interest under the terms of Subsections -3- 3.11.1, 3.11.2 and 3.11.3 of this Lease for assessments against or payments made relating to any other property wherever located other than the above- mentioned Parcels 1-6. (5) As used in this Section 3.13, "gross usable floor area" means gross floor area minus the primary entrance lobby to a building, utility and elevator cores, stairwells and bathrooms. 2. In the event the Development Agreement alluded to in Paragraph 1 of this Amendment has not been executed by the parties on or before January 1, 1991, this Amendment shall be deemed null and void and of no further force and effect. IN WITNESS WHEREOF, the parties hereto have caused these presents to be duly executed in duplicate with all the formalities required by law and the respective dates set forth opposite their signatures. CITY OF LONG BEACH, a municipal corporation December 28, 1990 By: [Signature] --------------------------- City Manager LANDLORD KILROY LONG BEACH ASSOCIATES, a California limited partnership By: KILROY INDUSTRIES, General Partner December 21, 1990 By: /s/ JOHN B. KILROY, JR. ------------------------------ John B. Kilroy, Jr., President DEVELOPER The foregoing SECOND AMENDMENT TO LEASE is hereby approved as to form this 26th day of December, 1990. - ---- -------- JOHN R. CALHOUN, City Attorney By [Signature] --------------------------- Deputy - 5 - DEVELOPER'S ACKNOWLEDGMENT -------------------------- STATE OF CALIFORNIA ) ) ss. COUNTY OF LOS ANGELES ) On December 21, 1990, before me, the undersigned, a Notary Public in and ----------- for said State, personally appeared John B. Kilroy, Jr. personally known to me ------------------ or proved to me on the basis of satisfactory evidence to be the person who executed this instrument as President of Kilroy Industries, the corporation that --------- executed this instrument as the general partner of Kilroy Long Beach Associates, a California Limited Partnership, the partnership that executed the within instrument, and acknowledged to me that such corporation executed the same as such partner and that said partnership executed the same. WITNESS my hand and official seal. [SEAL] [SEAL APPEARS HERE] /s/ Jane Gissi ----------------------------- Notary Public in and for said County and State AMENDMENT TO LEASE EXHIBIT "A" CITY OF LONG BEACH COUNTY OF LOS ANGELES STATE OF CALIFORNIA [MAP APPEARS HERE] 1 of 1 EX-10.15 10 FIRST AMENDMENT TO LEASE AGREEMENT 12/28/90 EXHIBIT 10.15 FIRST AMENDMENT TO LEASE AGREEMENT ---------------------------------- For "Parcels 5 and 6" (December 30, 1988) The following FIRST AMENDMENT TO LEASE OF DECEMBER 30, 1988 ENTITLED "LEASE AGREEMENT, PARCELS 5 AND 6" (the "Subdivided Lease" herein) is made and entered into in duplicate as of the 28th day of December, 1990, pursuant to a minute order adopted by the City Council of the City of Long Beach on the 21st day of August, 1990, by and between CITY OF LONG BEACH, a municipal corporation, hereinafter referred to as "LANDLORD", and KILROY LONG BEACH ASSOCIATES, a California limited partnership, hereinafter referred to as "DEVELOPER". WHEREAS, on July 17, 1985, a Lease (the "All-Inclusive Lease" herein) was entered into between the Landlord and Developer; and WHEREAS, on July 22, 1988, a Parcel Map. No. 16960, in Book 208, Pgs. 92 through 100 of Parcel Maps was recorded in the Office of the County Recorder of Los Angeles County, State of California. This Parcel Map included the real property demised by the All-Inclusive Lease and its amendments; and other real property (Parcel 8); and WHEREAS, on January 24, 1989 the All-Inclusive Lease was amended and subdivided by a First Amendment to Lease in accordance with Section 7.6 of said Lease between Landlord and Developer in order to develop Parcels 5 and 6; and WHEREAS, the parties hereto now desire to amend the -1- Subdivided Lease for Parcels 5 and 6, in order to recognize and clarify certain issues arising out of a Development Agreement entered into between the Parties in September 1990; NOW, THEREFORE, the Subdivided Lease between the parties hereto is hereby amended to read in its entirety as follows: 1. Paragraph 3.12 is hereby added to the Subdivided Lease to read in its entirety as follows: 3.12 Effect of Paragraph 4.01B of Development Agreement on Paragraph 3.8 of ---------------------------------------------------------------------- this Lease. - ----------- On December 5, 1990, City and Kilroy Long Beach Associates ("Developer" herein) entered into a Development Agreement relating, among other things, to Leased Parcels 1-6 as shown on Exhibit "A" of this Amendment. As to such parcels, the costs incurred by Developer or any of its successors or assigns pursuant to that Development Agreement, including but not limited to assessments or payments made in connection with implementation of the Long Beach Airport Traffic Mitigation Program as defined in the Development Agreement, may, if and as otherwise eligible under this Lease, be considered or construed to be costs of items in Subsections 3.11.1, 3.11.2 and 3.11.3 of the All-Inclusive Lease for the purposes of a credit against future rental increases under its terms, and Developer shall thereupon receive any such credit for benefit assessments levied or payments made as a direct result of the Development Agreement against improvements on -2- said Parcels 1-6 under this Lease provided that: (1) No such credit shall be granted except as a result of any assessment levied or payments made which are attributable to improvements which have been actually constructed on or permitted for construction on said Parcels 1-6 and, as to such, only on improvements on said Parcels not exceeding a cumulative total of 1,085,023 square feet of gross usable floor area; and (2) Developer shall not be eligible for any credit or interest, and no such credit or interest shall accrue, unless and until Developer has first actually paid a total of TWO MILLION DOLLARS ($2,000,000) in eligible costs under Subsections 3.11.1, 3.11.2 and 3.11.3 of the All-Inclusive Lease; and (3) Interest shall only be calculated and credited or accrued as to payments made and assessments levied and paid which are attributable to improvements which have been actually constructed on or permitted for construction on Parcels 1-6 at the time Developer becomes eligible for credit under Subsection 3.12(2) hereinabove and then only to the extent that such amounts are not credited against future rental increases within thirty (30) days of their payment by Developer. Such interest shall be paid at the average or the prime interest rates quoted monthly by Security Pacific National Bank or its successor bank during the -3- term that said interest is accrued to the date credited; and (4) Developer shall not be eligible for any credit or interest under the terms of Subsections 3.11.1, 3.11.2 and 3.11.3 of the All-Inclusive Lease for assessments against or payments made relating to any other property wherever located other than the above-mentioned Parcels 1-6. (5) As used in this Section 3.12, "gross usable floor area" means gross floor area minus the primary entrance lobby to a building, utility and elevator cores, stairwells and bathrooms. 2. In the event the Development Agreement alluded to in Paragraph 1 of this Amendment has not been executed by the parties on or before January 1, 1991, this Amendment shall be deemed null and void and of no further force and effect. IN WITNESS WHEREOF, the parties hereto have caused these presents to be duly executed in duplicate with all the formalities required by law and the respective dates set forth -4- opposite their signatures. CITY OF LONG BEACH, a municipal corporation December 28, 1990 By /s/ James C. Mankla ------------------------------ City Manager LANDLORD KILROY LONG BEACH ASSOCIATES, a California limited partnership By: KILROY INDUSTRIES, General Partner December 21, 1990 By /s/ John B. Kilroy, Jr. ------------------------------ John B. Kilroy, Jr., President DEVELOPER The foregoing FIRST AMENDMENT TO LEASE is hereby approved as to form this 26th day of December, 1990. JOHN R. CALHOUN, City Attorney By /s/ Signature ------------------------------ Deputy -5- DEVELOPER'S ACKNOWLEDGMENT -------------------------- STATE OF CALIFORNIA ) ) ss. COUNTY OF LOS ANGELES ) On December 21, 1990, before me, the undersigned, a Notary Public in and for said State, personally appeared John B. Kilroy, Jr. personally known to me or proved to me on the basis of satisfactory evidence to be the person who executed this instrument as President of Kilroy Industries, the corporation that executed this instrument as the general partner of Kilroy Long Beach Associates, a California Limited Partnership, the partnership that executed the within instrument, and acknowledged to me that such corporation executed the same as such partner and that said partnership executed the same. WITNESS my hand and official seal. /s/ Jane Gissi [SEAL APPEARS HERE] ----------------------------- Notary Public in and for said County and State AMENDMENT TO LEASE EXHIBIT "A" CITY OF LONG BEACH COUNTY OF LOS ANGELES STATE OF CALIFORNIA [MAP APPEARS HERE] 1 of 1 EX-10.16 11 3RD AMENDMENT TO LEASE AGREEMENT 10/10/94 EXHIBIT 10.16 THIRD AMENDMENT TO LEASE AGREEMENT ---------------------------------- (PARCELS 3, 4 AND 8) THIS THIRD AMENDMENT TO LEASE AGREEMENT OF JULY 17, 1985 ("Third Amendment") is entered into this 10th day of October, 1994, pursuant to ---- ------- a minute order adopted by the City Council of the City of Long Beach on the 12th day of July, 1994, by and between the CITY OF LONG BEACH, a municipal corporation ("Landlord"), and KILROY LONG BEACH ASSOCIATES, a California Limited Partnership ("Developer"). Recitals: -------- A. On July 17, 1985, a lease was entered into between the Landlord and Developer (the "Lease"); and B. On July 22, 1988, a Parcel Map No. 16960, in Book 208, Pages 92 through 100 of Parcel Maps was recorded in the Office of the County Recorder of Los Angeles County, State of California; and C. On January 24, 1989, the Lease was amended and subdivided by a First Amendment to Lease in accordance with Subsection 7.6 of said Lease between Landlord and Developer in order to establish three (3) separate ground leases between Landlord and Developer, as follows: Parcels 1 and 2 - Phase 1 of the development Parcels 5 and 6 - Phase 2 of the development Parcels 3, 4 and 8 - Phase 3 of the development D. On December 28, 1990, the subdivided Lease for Parcels 3, 4 and 8 was further amended by a Second Amendment to Lease (the Lease plus all amendments are hereafter collectively referred to as the "Lease") in order to recognize and clarify certain issues 1 arising out of a development agreement entered into between the parties in September 1990; and E. The parties now desire to further amend the Lease for Parcels 3, 4 and 8 to provide for payment of past due rental and adjustments to rental payable by Developer thereunder. THE PARTIES AGREE as follows: Section 1. Payment of Past Due Rental. Landlord and Developer -------------------------- acknowledge that the initial Ground Rent payable pursuant to Subsection 3.1.1 of the Lease is past due for the months of August, 1993 through April, 1994 (the "past due rental"). Landlord hereby agrees to accept the amount of $137,620.35 as payment in full of Ground Rent for all amounts due to Landlord through July 1, 1994, and any and all other delinquent amounts are waived and forgiven. Said payment shall be made to Landlord upon the first to occur of: (a) commencement of payment of subtenant rent under the sublease of Parcel 2 to Devry, Inc. or (b) March 1, 1995. In the event that the past due rental is not fully paid prior to November 1, 1994, Developer agrees that any past due rental not paid after that date shall accrue interest at seven percent (7%) per annum until fully paid. Section 2. Adjustment to Initial Ground Rent. Subsection 3.1.1 of the --------------------------------- Lease is hereby amended to read as follows: "3.1.1. Amount of Ground Rent. Developer shall pay as initial --------------------- Ground Rent for Parcels 3, 4 and 8 of the Parcel Map, the following amounts during the following periods from July 1, 1994 through June 30, 1999: 3.1.1.1 for the period from July 1, 1994 through June 30, 1995, the sum of Fifty Thousand 2 Dollars ($50,000.00); 3.1.1.2 For the period from July 1, 1995 through June 30, 1996, the sum of Seventy-five Thousand Dollars ($75,000.00); 3.1.1.3 For the period from July 1, 1996 through June 30, 1997, the sum of Seventy-five Thousand Dollars ($75,000.00); 3.1.1.4 For the period from July 1, 1997 through June 30, 1998, the sum of Seventy-five Thousand Dollars ($75,000.00); and 3.1.1.5 For the period from July 1, 1998 through June 30, 1999, the sum of One Hundred Thousand Dollars ($100,000.00)." Section 3. Reactivation of Lease Ground Rent. Subsection 3.1.3 of the --------------------------------- Lease is hereby amended to read as follows: "3.1.3 Payment of Ground Rent. The obligation to pay Ground Rent ---------------------- shall commence upon July 1, 1999, or upon the commencement of payment of subtenant rent to Developer from either Parcel 3 or Parcel 4, whichever occurs first. In the event that subtenant rent is received from Parcel 3 and not Parcel 4, the Ground Rent shall be reduced by 63.11 percent (63.11%). In the event that subtenant rent is received from Parcel 4 and not Parcel 3, the Ground Rent shall be reduced by 36.89 percent (36.89%)." Section 4. Suspension of Ground Rent for Parcel 8. During such period of -------------------------------------- time that Parcel 8 shall be used for parking purposes, no Ground Rent shall be due or paid for Parcel 8. 3 Section 5. Use of Parcel 8. Section 8.7 of the Lease is hereby amended --------------- to read in its entirety as follows: "8.7. Use of Parcel 8. Parcel 8 will be used only for aviation --------------- uses as described in Sections 8.2, 8.3, 8.5, Exhibits 'K' and 'L,' provided that in the event approval from the Federal Aviation Administration is obtained, Parcel 8 may be used for automobile parking." Section 6. Amendment to Legal Description. The legal description ------------------------------ attached as Exhibit "A" to this Third Amendment shall replace Exhibit "A" to the Lease. Section 7. Amendment to the Site Map. The Site Map attached as Exhibit ------------------------- "B" to this Third Amendment shall replace Exhibit "B" to the Lease. Section 8. Except as stated in this Third Amendment, the Lease shall remain in full force and effect. 4 LANDLORD AND DEVELOPER have executed this Third Amendment as of the date provided above. CITY OF LONG BEACH, a municipal corporation October 10, 1994 By [signature] - ---------- --------------------------------- Assistant City Manager EXECUTED PURSUANT CITY TO SECTION 301 OF THE CITY CHARTER. KILROY LONG BEACH ASSOCIATES, a California Limited Partnership September 26, 1994 By: KILROY INDUSTRIES, A - ------------ California Corporation, General Partner By /s/ Marshall L. McDaniel --------------------------------- Title MARSHALL L. McDANIEL ----------------------------- EXECUTIVE VICE PRESIDENT DEVELOPER AND SECRETARY Approved as to form this 3rd day of October, 1994. --- ------- JOHN R. CALHOUN, City Attorney By [signature] --------------------------------- Principal Deputy 5 CALIFORNIA ALL-PURPOSE ACKNOWLEDGMENT State of California -------------------- County of Los Angeles ------------------- On 9/26/94 before me, Loreena D. Yollin, Notary Public ------- ---------------------------------------------------------, DATE NAME, TITLE OF OFFICER - E.G., "JANE DOE, NOTARY PUBLIC" personally appeared Marshall L. McDaniel -----------------------------------------------------------, NAME(S) OF SIGNER(S) [X] personally known to me - OR - [_] proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the [SEAL APPEARS HERE] instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. /s/ Loreena D. Yollin ----------------------------------------- SIGNATURE OF NOTARY ================================== OPTIONAL ==================================== Though the data below is not required by law, it may prove valuable to persons relying on the document and could prevent fraudulent reattachment of this form.
CAPACITY CLAIMED BY SIGNER DESCRIPTION OF ATTACHED DOCUMENT [_] INDIVIDUAL [_] CORPORATE OFFICER ------------------------------ ---------------------------------- TITLE(S) TITLE OR TYPE OF DOCUMENT [_] PARTNER(S) [_] LIMITED [_] GENERAL ---------------------------------- NUMBER OF PAGES [_] ATTORNEY-IN-FACT [_] TRUSTEE(S) [_] GUARDIAN/CONSERVATOR [_] OTHER: ------------------------ ---------------------------------- DATE OF DOCUMENT ------------------------------ ------------------------------ SIGNER IS REPRESENTING: ---------------------------------- NAME OF PERSON(S) OR ENTITY(IES) SIGNER(S) OTHER THAN NAMED ABOVE - ---------------------------------- - ----------------------------------
LEGAL DESCRIPTION --------------------------- KILROY AIRPORT CENTER LEASE PARCEL 4 Parcel 4 of Parcel Map No. 16960, in the City of Long Beach, County of Los Angeles, State of California, as per map recorded in Book 208, Pages 92 to 100, inclusive, of Parcel Maps, in the office of the County Recorder of said County. Along with that portion of Parcel 8 of said Parcel Map No. 16960, lying southeasterly of the following described line: Beginning at the most northerly corner of said Parcel 4; thence along the northeasterly prolongation of the most northwesterly line of said Parcel 4 North 44 degrees, 37 minutes, 27 seconds East 99.00 feet to a point in the northeasterly line of said Parcel 8. EXCEPT the northeasterly 11.00 feet of said Lot 8. Containing 291,484 square feet or 6.69 acres. LEGAL DESCRIPTION --------------------------- KILROY AIRPORT CENTER LEASE PARCEL 8 That portion of Parcel 8 of Parcel Map No. 16960, in the City of Long Beach, County of Los Angeles, State of California, as per map recorded in Book 208, Pages 92 to 100, inclusive, of Parcel Maps, in the office of the County Recorder of said County, lying northwesterly of the following described line: Beginning at the most northerly corner of said Parcel 4; thence along the northeasterly prolongation of the most northwesterly line of said Parcel 4 North 44 degrees, 37 minutes, 27 seconds East 99.00 feet to a point in the northeasterly line of said Parcel 8. Along with the northeasterly 62.00 feet of Parcel 3 of said Parcel Map No. 16960. EXCEPT the northeasterly 11.00 feet of said Lot 8. Containing 163,979 square feet or 3.76 acres. [SEAL APPEARS HERE] EXHIBIT A PREPARED CHECKED LEASE NO. DRAWING NO. D. OBERT L. MADDOX A-1572 [MAP OF KILROY AIRPORT CENTER LEASE AT LONG BEACH AIRPORT] [SEAL APPEARS HERE] EXHIBIT B PREPARED CHECKED LEASE NO. DRAWING NO. D. OBERT L. MADDOX A-1572 EX-10.17 12 DEVELOPMENT AGREEMENT EXHIBIT 10.17 DEVELOPMENT AGREEMENT AIRPORT TRAFFIC STUDY AREA ************* CITY OF LONG BEACH, CALIFORNIA and KILROY LONG BEACH ASSOCIATES ************* Approved by Planning Commission July 26, 1990 Approved by City Council August 28, 1990 Approved by Mayor September 4, 1990 ORDINANCE NO. C-6788 Effective October 5, 1990 ERRATA No. 1 DEVELOPMENT AGREEMENT: AIRPORT TRAFFIC STUDY AREA KILROY LONG BEACH ASSOCIATES 1. Agreement, p. 1, line 12 - Change "("Developer")" to "("Developer" or "Owner")". 2. Agreement, p. 1, lines 21-22 - Change "is fee owner (long-term lessee, permittee, etc.) of" to "has a legal interest as appears herein in". 3. Agreement, p. 10, line 26 - Change "C-783" to "C-6783". 4. Agreement, p. 12, line 15 - After "be" add "of". 5. Agreement, p. 13, line 5 - After "kind" delete "by". 6. Agreement, p. 32, line 13 - Change "identify" to "indemnify". 7. Exhibit "I", p. 2, lines 21-22 - Delete existing lines and substitute "on said parcels not exceeding a cumulative total of 1,085,023 square feet of gross usable floor area; and".
November 19, 1990 DEVELOPMENT AGREEMENT --------------------- (Airport Traffic Study Area) KILROY LONG BEACH ASSOCIATES ********************* THIS AGREEMENT is entered into and executed this 5th day of December, 1990, --- -------- between the CITY OF LONG BEACH, a municipal corporation of the State of California ("City"), and KILROY LONG BEACH ASSOCIATES, a limited partnership formed under the laws of the State of California ("Developer"). Recitals: -------- R-1. This Agreement concerns all of that real property described in Exhibit "A" hereto, which description is incorporated herein by reference and referred to as the "Property" herein. The Property is situated in an area of the City of Long Beach generally known as the Airport Traffic Study Area and shown on Exhibit "B" hereto (the "Airport Area" or "Area"). Developer is fee owner (long-term lessee, permittee, etc.) of the Property, and desires to develop the Property as set forth in the Application for Development Agreement, Exhibit "H" hereto, consistent with the zoning for the Property shown in Exhibit "E" of this Agreement and all other applicable provisions of law. R-2. The City has received from a number of the owners, lessees and permittees of the land in the Airport Area, - 1 - including Developer, development proposals and, as noted below, has before it analyses of the traffic impacts from those development proposals in order to identify measures necessary to mitigate the traffic impacts from development in the Airport Area. R-3. The City supports development in the Airport Area in order to create private sector economic prosperity and employment opportunities, to increase City income through taxes and property leases,and to enhance the economic vitality of the Area. R-4. The recent traffic studies undertaken for the City by the firm of Barton-Aschman Associates, Inc. indicate that the level of service on existing roads and intersections in the Long Beach Airport Traffic Study Area will deteriorate to an unacceptable level as a result of projected new private growth and development. R-5. Current property owners, lessees and developers in the Airport Area have been meeting regularly with City officials since May 1987 to design a program to mitigate the anticipated traffic impacts of their new development. R-6. A Traffic Mitigation Program ("TMP") has been designed by the City, in cooperation with major current property owners, lessees and developers, to provide for roadway and intersection improvements necessary for the maintenance of adequate levels of transportation service (generally "Level of Service D" or better) throughout the Airport Area as land is developed. The TMP is described generally in Section 2.06 and in detail in Exhibit "G" of this Agreement. - 2 - R-7. Completion of the Project will require a substantial investment of money and planning and design effort, and uncertainty that the Project may be developed in accordance with known zoning regulations might result in a waste of public and private resources, escalate the cost of development and discourage participation in the Traffic Mitigation Program. Because it is possible that zoning regulations might change during preliminary project stages, there is a disincentive for a landowner to invest monies in the early completion of the major infrastructure and other public or private improvements relating to any project, or in early comprehensive planning and design studies. R-8. To overcome this kind of disincentive and to provide the opportunity for an early commitment by cities and counties to a landowner that a proposed project may be completed consistent with defined zoning regulations, the State of California has enacted Government Code Section 65864, et seq., which authorizes the City to enter into binding development agreements with persons having legal or equitable interests in real property for the development of such property in order to, among other things: encourage and provide for the development of public facilities in order to support private development projects; provide certainty in the approval of development projects in order to avoid waste of resources and the escalation in Project costs and to encourage investment in and commitment to comprehensive planning which will make maximum efficient utilization of resources at the least economic cost to the public; provide assurance to the applicants of development - 3 - projects that (1) they may proceed with their projects in accordance with the existing policies, rules and regulations set forth in and subject to the Agreement, subject to the conditions of approval of such projects and provisions of such Development Agreements, and (2) encourage private participation in comprehensive planning and reduce the private and public economic costs of development. R-9. As set forth in the public documents and testimony in support of the approval of this Agreement, the Project and the Developer's participation in the TMP will result in a number of public benefits, including assuring the provision of certain public improvements necessitated by development in the Airport Area, as well as substantial private economic benefit to the Developer. R-10. In order to enhance the likelihood of full implementation of the TMP in a way that will assure the citizens of Long Beach that the traffic impacts of development in the Airport Area will be fully mitigated while, at the same time, assuring Developer that it will be able to plan and complete development under zoning that will justify its cost in an accelerated participation in the TMP, the City is prepared to enter into this Agreement to set forth the rights and obligations of Developer to complete its development up to the limit established in the current Planned Development Ordinance applicable to Developer's Property and require Developer's participation in the TMP. R-11. Prior to approving the Project and entering into this Agreement, the City, as lead agency, has reviewed and - 4 - considered the potential adverse impacts related to the Project and the TMP in compliance with the California Environmental Quality Act, and has further reviewed and considered projected future regional and cumulative infrastructure and utility demands and available capacities for projected development in the Airport Area. R-12. After assessing these and other potential adverse environmental impacts associated with the Project and the TMP, the City has imposed mitigation measures as a part of the Project to the fullest extent the City considers feasible, including, among other things, requiring that, prior to final completion and occupancy of the Project, Developer commit to contributing the Project's full, fairly allocated share of the costs required to maintain an adequate level of service on roadways and intersections. The City has determined that no other or additional adverse impacts will result from entering into this Agreement in addition to those already considered in connection with the Project and the TMP and has issued Negative Declaration 49-89 in connection herewith. R-13. In view of the foregoing, pursuant to the authorizations set forth in California Government Code Section 65864, et seq., City has adopted rules and regulations establishing procedures and requirements for consideration and execution of development agreements by City. A copy of that portion of the Long Beach Municipal Code embodying those rules and regulations is attached and incorporated in this Agreement as Exhibit "D". In accordance with those rules and regulations, and in accordance with the powers and authorization provided in - 5 - Government Code Section 65864, et seq., City has undertaken the necessary proceedings, has found and determined that this Agreement is consistent with City's General Plan, and has adopted Ordinance No. C-6788 approving this Agreement, which ordinance became effective on October 5, 1990. AGREEMENT --------- NOW, THEREFORE, in consideration of the above recitals and of the mutual covenants hereafter contained, and for the purposes stated above, City and Developer hereby agree as follows: I. CONSTRUCTION OF AGREEMENT ------------------------- 1.01 Underlying Law. -------------- A. This Agreement shall be governed by and interpreted in light of the findings and provisions contained in Article 2.5, Chapter 4, Division 1, Title 7 of the California Government Code (Sections 65864, et seq.), Chapter 21.29 of the Long Beach Municipal Code and Ordinance No. C-6788 of the City of Long Beach. The parties hereto each agree that the validity and enforcement of this Agreement may be upheld under authority of the above-referenced source of law as well as that arising out of the Charter of the City of Long Beach. It is their mutual understanding and belief that this Agreement has been authorized in accordance with all applicable procedures and provisions of law, that it is entered into in good faith pursuant to, and constitutes a proper exercise of, statutory and chartered City powers, by the City, and that, under California law as it exists at the time of execution of this Agreement, its terms are fully enforceable against all challenges and attacks - 6 - including those that might be brought by parties and persons not parties to the Agreement. B. In construing the provisions of this Agreement and in resolving inconsistencies among the various documents comprising or incorporated in this Agreement, every reasonable effort shall be made to construe all such documents to be mutually consistent and compatible. Failing this, precedence shall be given in the following order to: (a) This Agreement; (b) The applicable Planned Development Ordinance (Exhibit "E"); (c) Environmental documentation filed in connection with the approval of this Agreement consisting of Negative Declaration 49-89 which incorporates the following by reference: Negative Declaration (ND-62-88) State Farm, Negative Declaration (ND-17-88) Bircher/Elks, Negative Declaration (ND-51-88) Embassy Suites Hotel, Environmental Review Record (ND-84-79) Long Beach/Signal Hill Business Park, Environmental Impact Report (E-10-82) Alamitos Land Company, Environmental Impact Report (E-26-88) Land Use Element of the General Plan, Environmental Impact Report (E-42-86) McDonnell Douglas Plant Expansion, Environmental Impact Report (E-30-85) Douglas Center, Environmental Impact Report (E-45-85) Long Beach - 7 - Airport, and Environmental Impact Report (E-37-84) Kilroy Airport Center. 1.02 Definitions. ----------- A. when used in this Agreement, the following terms shall be defined as follows: 1. "Agreement" means this Development Agreement. 2. "Assessment District" means any assessment district formed under applicable State or Long Beach laws for the purpose of funding construction of improvements listed in the TMP, including, but not limited to, Long Beach Assessment District 90-2. 3. "City" means the City of Long Beach, California. 4. "Circulation Improvements" means those certain improvements included within the Long Beach Airport Area Traffic Mitigation Program. 5. "Development" means the improvement of the Property for the purposes of constructing the structures, improvements and facilities comprising the Project, including, without limitation: grading, the construction of infrastructure and public facilities related to the Project whether located within or outside the Property; the construction of structures and buildings; and the installation of landscaping; but not including the maintenance, repair, reconstruction or redevelopment of any structures, improvements or facilities after the construction and completion thereof. 6. "Development Approval" means any action required to be taken by City in order to approve implementation of the - 8 - Project, including, but not limited to, site plan review, subdivision and parcel maps, variances, conditional use permits, grading permits and building permits. 7. "Effective Date" means the date on which this Agreement as fully executed is recorded in the Office of the Recorder of Los Angeles County. 8. "Long Beach Airport Traffic Mitigation Program" or "TMP" means the cooperative construction and traffic management program through which traffic generated by development and background traffic in the Study Area can be accommodated without causing a decline in the existing transportation level of service, as more fully set forth in Exhibit "G" hereto. 9. "Long Beach Airport Traffic Study Area" or "Study Area" means that Area within which the Property is located as more fully set forth in Exhibit "B" hereto. 10. "Mortgage" means a contract by which specific property, including an estate for years in real property, is hypothecated for the performance of an act, without the necessity of a change of possession. 11. "Mortgagee" means a mortgagee of a mortgage, a beneficiary under a deed of trust, or any other lender holding a security interest in the Property, and their successors and assigns. 12. "Project" means the Development of the Property as permitted by the Planned Development Ordinance applicable to the Property (Exhibit "E"). 13. "Property" means the real property described on Exhibit "A" to this Agreement. -9- 1.03 Exhibits. -------- A. The following documents are attached to and have been or are hereby made a part of this Agreement: 1. Exhibit "A" - Legal description of property subject to the Agreement. 2. Exhibit "B" - Map of the Airport Traffic Study Area. 3. Exhibit "C" - List of roadway and intersection improvements to be installed under Assessment District totalling $12.004 million, the so- called "Phase I Improvements". 4. Exhibit "D" - Chapter 21.29 of the Long Beach Municipal Code. 5. Exhibit "E" - The Planned Development Ordinance applicable to the Property. 6. Exhibit "F" - Negative Declaration. 7. Exhibit "G" - The Full Transportation Mitigation Program. 8. Exhibit "H" - Application for Development Agreement. 9. Exhibit "I" - Form of Amendment to Lease. II. OBLIGATIONS OF THE PARTIES -------------------------- 2.01 Development Plan. ---------------- A. City agrees that the permitted uses of the property, and the intensity and density of such uses, shall be as set forth in the Planned Development Ordinance (the "Ordinance") (Ordinance No. C-6783) applicable to the Property on the Effective Date of this Agreement, which Ordinance is incorporated in this Agreement as Exhibit "E". -10- B. It is understood and agreed that, in accordance with the Planned Development Ordinance as set forth in Exhibit "E", as to Parcel "A", Developer may develop structures on said Parcel "A" of up to 1,490,000 square feet of gross usable floor area for business office use and 220 hotel rooms, or any comparable combination of uses permitted by the ordinance set forth in Exhibit "E" provided that such uses are approved by City in accordance with procedures set forth in that ordinance and that any proposed mixed-use development does not generate more evening peak hour trips, as calculated using Trip Generation, Institute of Traffic Engineers, Fourth Edition, 1987, than would be generated by said office and hotel use, and, as to Parcel "B", may, subject to termination as set forth in this Agreement, develop structures of up to 500,000 square feet of gross usable floor area on said Parcel "B" as permitted by the Planned Development Ordinance as set forth in Exhibit "E". 1. In relation to Parcel "B", City's Water Department ("WD") is undertaking studies of the feasibility of developing certain real property owned by City (herein referred to as the "Water Site") in a way that would combine water treatment uses on the site with compatible commercial uses. That real property is shown in Exhibit "A" as Parcel "B". Should the Water Department determine that such multi-use development of its property is lawful, feasible and desirable, one of many alternatives it might wish to consider would be entry into an agreement with Developer for the development of the Water Site under this Agreement. In this regard, Developer has initiated discussions, on a non- exclusive basis, with "WD" through its Board of Water -11- Commissioners concerning the possibility of Developer's acquiring a long-term leasehold or similar interest in the Water Site for the purpose of development of the Water Site in a manner consistent with the Agreement and compatible with WD's planned use of the Water Site for water storage, treatment and related uses. 2. In the event that Developer and the City of Long Beach, through its Board of Water Commissioners, have entered into a lease or other document for a term of at least twenty (20) years with respect to Parcel "B" prior to January 1, 1992, this Agreement as it relates to Parcel "B" shall continue in full force and effect thereafter. If such a document has not been duly executed and is not in effect prior to January 1, 1992, this Subsection 2.01B shall thereupon be deemed repealed and shall be no further force and effect, and this Agreement shall terminate and be of no further force and effect with respect to Parcel "B" as shown on Exhibit "A". It is understood and agreed by the parties hereto that nothing in this Agreement obligates or requires the City of Long Beach, through its Board of Water Commissioners, either to initiate any studies, to take any action, to negotiate with Developer or to enter into a long-term lease or other document with Developer with respect to Parcel "B". 3. Notwithstanding any other provision of this Agreement, Developer shall have no right to assert and shall not assert or exercise any rights to Parcel "B" arising out of this Agreement, of any kind or nature whatsoever, at any time, unless and until: -12- a. Except as may otherwise be agreed upon in writing by City and Developer, all costs, expenses and assessments of any and every kind relating to Parcel "B" arising out of Developer's obligations under this Agreement shall in no way constitute a claim, charge or offset of any kind by whatsoever by Developer against City; and b. Developer is legally obligated to participate in an assessment district, or has paid a development impact fee, or a combination thereof, to fully mitigate, in accordance with the TMP, all traffic impacts arising out of Developer's exercise of rights under this Agreement relating to Parcel "B". Upon, and only upon, satisfaction of the foregoing Conditions a through b, prior to July 1, 1992, Developer may exercise whatever rights it may have hereunder relating to Parcel "B". If Developer fails to satisfy such conditions prior to July 1, 1992, then on and after July 1, 1992, all such rights it may have on or relating to Parcel "B" shall terminate and be deemed of no further force and effect. Unless and until a long-term lease or other document is entered into between City and Developer, it is understood and agreed that any rights Developer has or may have in and relating to Parcel "B", are not transferable, assignable or in any way attributable to any other lot, parcel or property wherever located and may not be so transferred, assigned or attributed by Developer. Nothing in this Agreement shall be deemed to vest Developer with any increased traffic impact benefits for Parcel "B" unless and until all requirements of the TMP relating to such benefits are satisfied. -13- C. It is understood and agreed that the City's Director of Planning and Building may interpret provisions of the TMP and the Planned Development Ordinance to the extent that such interpretations are necessary to resolve uncertainties in such documents and to the extent that the resolution of such uncertainties are minor in nature, do not result in any increased traffic generation and are found by the Director to be fully consistent with the intent of this Agreement and the Planned Development Ordinance. 2.02 Controlling Land Use Regulations. -------------------------------- The land uses on the Property, including, but not limited to, maximum allowable size and height of all structures shall be as provided in the Planned Development Ordinance No. C-6783 attached hereto as Exhibit "E". 2.03 Development Rights and Future Approvals. --------------------------------------- A. To the extent provided by, and only by, Government Code Sections 65864, et seq., the City agrees that all development rights to develop the Project granted to Developer by this Agreement are to be deemed vested in Developer. B. Before Owner can begin grading or any other developmental work relating to the Project on the Property, Owner must secure several additional Development Approvals. The parties agree that to the extent such Development Approvals implement the Project contained in this Agreement, City shall not, through the enactment or enforcement of any subsequent ordinances, rules, regulations, initiatives, policies, requirements, guidelines or other constraints, withhold or delay Development Approvals beyond the applicable time frame of City's -14- normal administrative processes. City and Owner shall use their best efforts to ensure each other that all applications for and approvals of grading permits, building permits or other Developmental Approvals necessary for Owner to develop the Property are sought and processed in a timely manner within the City's normal administrative processes and consistent with all terms and conditions of this Agreement and applicable law. 2.04 Effect of Change in Zoning and Other City Regulations. ----------------------------------------------------- A. Notwithstanding the provisions of Section 2.03, it is understood and agreed that City zoning regulations of general application adopted or amended after execution of this Agreement will be applicable to subsequent Development Approvals, if any, relating to the Property unless they materially conflict with the regulations set forth in Exhibit "E" of this Agreement or materially impede, restrict or delay development of the Property for the uses and in the manner permitted in said Exhibit "E", not including any normal time of processing relating to such subsequent Development Approvals. B. It is understood and agreed that this Development Agreement shall not prevent the City, during the Term of the Agreement, from applying new rules, regulations and policies other than those referred to in Subsection 2.04A which do not conflict with those rules, regulations and policies applicable to the Property, nor shall this Development Agreement prevent the City from denying or conditionally approving any subsequent development project applications on the basis of such existing or new rules, regulations and policies, unless they materially -15- conflict with the regulations set forth in Exhibit "E" of this Agreement or materially impede, restrict or delay development of the Property for the uses and in the manner permitted in said Exhibit "E", not including any normal time of processing relating to such subsequent Development Approvals. 2.05 Compliance With All Other Laws. ------------------------------ Except as otherwise provided in Sections 2.01, 2.02, 2.03 and 2.04 of this Agreement, Developer shall comply with all provisions of law as they now exist, or may subsequently be amended, as they apply or may apply to the Property subject to this Agreement. In this regard, both City and Owner intend that this Development Agreement is a legally binding contract which will supersede any inconsistent initiative, measure, moratorium, referendum, statute, ordinance or other limitation (whether relating to the rate, timing or sequencing of the Project or construction of all or any part of the Project and whether enacted by initiative or otherwise) affecting parcel or subdivision maps (whether tentative, vesting tentative or final), building permits, occupancy certificates or other entitlements approved, issued or granted within the City, or portions of the City. Should an initiative, measure, moratorium, referendum, statute, ordinance or other limitation inconsistent with this Agreement be enacted by the citizens of City which would preclude or impede, restrict or delay construction of all or any part of the Project, and to the extent such initiative, measure, moratorium, referendum, statute, ordinance or other limitation be determined by a court of competent jurisdiction to invalidate or prevail over all or any part of this Development Agreement, -16- Owner shall have no recourse against City pursuant to this Development Agreement, but shall retain all other rights, claims and causes of action under this Development Agreement not so invalidated and any and all other rights, claims and causes of action at law or in equity which Owner may have independent of this Development Agreement with respect to the Project, provided that in no event shall Developer have any right to attach, set aside, receive reimbursement from or for or in any other way be relieved from any requirements or obligations entered into by it as a part of implementation of the TMP, including, but not limited to, Assessment Districts formed or impact fees imposed as a part of the TMP, provided that nothing in this Agreement shall be construed to preclude Developer from receiving any refund from such Assessment Districts to which he may be lawfully entitled under the terms and conditions of an applicable assessment district procedure, if any. The foregoing shall not be deemed to limit Owner's right to appeal any such determination that such initiative, measure, moratorium, referendum, statute, ordinance or other limitation invalidates or prevails over all or any part of this Development Agreement. City agrees to cooperate with Owner in all reasonable manners in order to keep this Development Agreement in full force and effect, provided Owner shall reimburse City for all of its costs and expenses incurred directly or indirectly in connection with such cooperation and City shall not be obligated to institute a lawsuit or other court proceedings in this connection and, if it does so, Developer shall fully bear City's costs of such suit or proceedings. -17- 2.06 Obligations of Developer. ------------------------ A. Developer shall, at all times during the term of this Agreement, be bound by and fully comply with all parts, terms and conditions of the TMP as set forth in Exhibit "G" of this Agreement. In this regard, Developer shall be obliged to, among, but not necessarily limited to, the following other things, fully support formation of, and participate in: (1) an Assessment District to construct roadway and intersection improvements valued at TWELVE MILLION, FOUR THOUSAND DOLLARS ($12,004,000), provided that Developer's assessment shall not exceed the value of the benefits received, as determined by the Assessment Engineer's cost allocation as provided by law under such a district; (2) another Assessment District, a development fee and/or other funding mechanisms as may be necessary to construct the remaining roadway and intersection improvements in the TMP, now valued at ELEVEN MILLION, TWO HUNDRED SIXTY-FIVE THOUSAND DOLLARS ($11,265,000); and, a demand management program on an area-wide or subarea basis, designed to reduce peak hour automobile trips by at least twenty percent (20%). City may from time to time modify the list of improvements described in the TMP, provided that the modification accomplishes essentially the same beneficial effect on traffic mitigation as the original list and does not substantially increase developer's costs arising out of this Section. B. In the event that Developer and the Water Department enter into an agreement for the long-term (at least twenty years) use of the Water Site, then Developer shall mitigate the trips to be generated by the additional 500,000 -18- square feet of gross usable floor area in accordance with the provisions of the Planned Development Ordinance. This obligation shall be met either by payment in full of the development impact fee, or by posting security to guarantee payment of the fee as building permits are sought and received for individual buildings, or through amendment of the Assessment District to spread a lien across Developer's long-term interest in the WD site, whichever alternative shall be selected by City. At the time of execution of this Agreement, it is contemplated by City and Developer that this obligation will be met by amendment of Assessment District 90-2 to include Developer's interest in Parcel "B" in those proceedings. If Developer has not, prior to January 1, 1992, entered into such a long-term agreement and, prior to July 1, 1992, fully met its obligation to mitigate in accordance with the TMP, then on and after July 1, 1992, this Agreement, as it relates to Parcel "B", shall terminate and be deemed of no further force and effect, and Developer shall have no recourse against City or Water Department. 2.07 Result of Failure of Developer to Meet All Obligations; ------------------------------------------------------- Procedure to Cure. ----------------- A. Except as provided in Subsection 2.07B, in the event that Developer fails to initiate and fulfill all of its obligations under Section 2.06 of this Agreement, or should Developer, at any time during the term of this Agreement, fail to comply with all such obligations, then the provisions of Sections 2.01, 2.02, 2.03 and 2.04 shall be of no further force and effect to preclude City from revising any or all zoning regulations affecting the Property or fully enforcing such - 19 - revised regulations as they may affect the Property. B. Prior to implementation of any action by City pursuant to Subsection 2.07A, City shall give Developer notice of its intention to take such action. Such notice shall be given to Developer in writing and shall set forth and specify the nature of the failure or failures of Developer under this Agreement and shall also describe the action City intends to take as a result of such failure. Within fifteen (15) days of the receipt of such notice, Developer shall notify City of its response to such notice including, as appropriate, a detailed outline, with time schedule, of Developer's plan to cure the failure or failures. Developer shall have thirty (30) days following such notice to cure such failure or failures. If Developer's failure or failures cannot reasonably be cured in thirty (30) days, Developer shall not be in default if Developer begins to cure within the thirty-day period and diligently proceeds to cure to completion. In the event of failure of Developer to cure, or diligently proceed toward cure within thirty (30) days, City may thereupon notify Developer of its default and hereafter take such action under Subsection 2.07A or 2.07C as it deems appropriate. C. Upon a default by Developer and following notice and opportunity to cure pursuant to Subsection 2.07B, the City may, upon recommendation of its Director of Planning and Building, proceed to terminate or modify the Development Agreement. Said recommendation shall be forwarded to the Planning Commission and the City Council, each of whom shall hold a public hearing after giving notice as provided in - 20 - Government Code Sections 65090 and 65091, and if the City Council, following such hearing, finds that Developer is in default, termination or modification may be undertaken unilaterally by the City Council. 2.08 Obligations of City. ------------------- In addition to any other specific duties or responsibilities assigned it under this Agreement, City shall: A. Cooperate reasonably with Developer in Developer's efforts to meet its obligations under this Agreement. B. At the time of consideration of any City-wide development fee ordinance a purpose of which is alleviation of traffic impacts arising from new development, prepare language providing for a credit against such a City-wide development fee. The language shall be incorporated into that ordinance and shall provide that a credit shall be given against the City-wide fee for the principal amount of any assessment that has been paid by Developer, or which Developer is legally obligated to pay under applicable assessment district provisions, as well as for any Airport Area development fee which Developer has paid under the Airport Traffic Mitigation Program. The credit shall be applied only for buildings for which building permits are applied for and received after the enactment of such a City-wide development fee and shall be established and apportioned by City's Director of Planning and Building on a building-by-building basis as building permits are applied for and received in an amount equal to the amount paid by the Developer for an Airport Area Traffic Impact Fee and/or the principal amount of an Airport Area Traffic Mitigation Assessment District for which the Developer - 21 - is legally obligated. In no event shall the amount of the credit exceed the amount of the City-wide fee applicable to the building in question. 2.09 Reserved Authority of City. -------------------------- A. In the event that the State or Federal laws or regulations enacted after this Development Agreement has been entered into, prevent or preclude compliance with one or more provisions of the Development Agreement, such provisions of the Development Agreement shall be modified or suspended as may be necessary to comply with such State or Federal laws or regulations; provided, however, that this Development Agreement shall remain in full force and effect to the extent it is not inconsistent with such laws or regulations and to the extent such laws or regulations do not render such remaining provisions unenforceable, provided that, prior to City's adopting or undertaking any rule, regulation or policy the purpose of which is to conform to State or Federal laws or regulations under this Subsection 2.09A which is inconsistent with this Development Agreement, City shall make a finding that such rule, regulation or policy is reasonably necessary to comply with such State or Federal laws or regulations. B. This Development Agreement shall not prevent City from applying new rules, regulations and policies contained in uniform codes, including, but not limited to, the Uniform Building Code, Uniform Electrical Code, Uniform Mechanical Code or Uniform Fire Code, which are based on recommendations of a multi-state professional organization and become applicable throughout City. - 22 - C. This Development Agreement shall not prevent City from adopting other new rules, regulations and policies, consistent or inconsistent with this Development Agreement which directly result from findings by City that failure to adopt such rules, regulations or policies would result in a condition injurious or detrimental to the public health and safety. Notwithstanding the foregoing, City shall not adopt any such rules, regulations or policies which prevent or preclude compliance with one or more provisions of this Development Agreement until City makes a finding that such rules, regulations or policies are reasonably necessary to correct or avoid such injurious or detrimental condition. D. The Development Agreement shall not prevent City from freely exercising any of its powers, including the adoption and amendment of rules, regulations and policies not restricted by one or more sections of this Development Agreement. E. Notwithstanding any other provisions of this Agreement, all fees and charges intended to cover City costs associated with processing development of the Property, including, but not limited to, fees and charges for applications, processing, inspections, plan review, plan processing and/or environmental review, which are existing or may be revised or adopted during the term of this Agreement, shall apply to the development of the Property. III. ENVIRONMENTAL REVIEW -------------------- 3.01 Supplemental or Subsequent Environmental Review. ----------------------------------------------- A. In approving the Project and entering into this - 23 - Agreement, the City as lead agency has reviewed and considered the potential adverse environmental impacts related to the Project, and has further reviewed and considered projected future regional and cumulative infrastructure and utility demands that will compete with the Project for available capacities and cumulatively add to potential adverse impacts. Consequently, the City has prepared and certified Negative Declaration No. 49-89 ("ND"), and that document is attached hereto as Exhibit "F". Developer agrees that it shall be legally bound by all parts and provisions of the ND applicable to the Property, including, but not limited to, all terms, conditions and mitigation measures of that ND and all discretionary approvals relating thereto. B. City agrees that, to the extent permitted by law, no subsequent or supplemental environmental review shall be required by the City for subsequent discretionary approvals provided that such approvals do not involve any changes or modifications to the Planned Development Ordinance or the TMP as set forth in the Negative Declaration. 3.02 Treatment of Nearby Projects. ---------------------------- City agrees to cooperate with Developer in sharing, on request of Developer, public information which City may have relating to projects and proposed projects of or subject to review and approval by any agency or department of the United States or the State of California, or any local agency or entity, which are to be undertaken within five (5) miles of the Property. - 24 - IV. GENERAL PROVISIONS ------------------ 4.01 Effectiveness of Agreement. -------------------------- A. This Agreement shall be effective upon its execution by a duly authorized representative of both parties and the recording of this Agreement pursuant to Government Code Section 65868.5. B. On July 17, 1985, City and Developer entered into a Lease Agreement (the "Underlying Lease" herein) for the lease of certain real property owned by City for the purpose of developing that property. That document has been subsequently both amended and trifurcated. Under Section 3.11 of the Underlying Lease, the Lessee (Developer) is entitled to a credit against future increases in Ground Rent should certain defined costs paid by Developer exceed a certain defined level. In order to set forth the methodology of treatment of Developer costs under this Agreement to the extent they may be eligible for credit against future rental increases under the terms of the Underlying Lease, it is necessary that City and Developer enter into amendment/amendments to the applicable lease/leases. Thus, and notwithstanding any other provision of this Agreement, this Agreement shall not become effective until an amendment to the applicable lease/leases has been executed by City and Developer expressing their mutual intent and understanding as to a methodology for treatment of eligible costs under the lease/leases, provided that execution by City and Developer of an amendment to the lease/leases in substantially the form of Exhibit "I" of this Agreement shall be deemed to satisfy the requirements of this Subsection and it shall thereupon be of no - 25 - further force and effect. 4.02 Duration (Term) of Agreement. ---------------------------- This Agreement shall remain in effect for a term of twenty (20) years, subject to earlier termination for cause as set forth in Section 2.07 or Section 4.05, or upon release of Developer by City. 4.03 Damages and Default Enforcement. ------------------------------- A. In no event, and notwithstanding any other provision of this Agreement, shall Developer be entitled to any damages against the City upon lawful termination of this Agreement or a finding of invalidity of this Agreement. B. All remedies at law or in equity or in the City's regulations governing development agreements which are not inconsistent with the provisions of this Agreement are available to the parties to pursue in the event there is a breach, except that City shall be entitled to assert all legal or equitable defenses or immunities that, except for this Agreement, would be available to City by operation of law. 4.04 Periodic Review. --------------- A. City shall, at least every twelve (12) months during the term of this Agreement, review the extent of good faith compliance by Developer with the terms of this Agreement. Pursuant to Government Code Section 65865.1, as amended, and Long Beach Municipal Code Section 21.29.070, Developer shall have the duty to demonstrate its good faith compliance with the terms of the Agreement at the periodic review. B. If Developer is found to be in compliance with the Agreement after annual review, City shall, upon written request - 26 - by Developer, issue a Review Letter to Developer stating that based upon information known or made known to the City Council, the City Planning Commission and/or the City Planning Director, the Agreement remains in effect and Owner is not in default. C. City's failure to review at least annually Developer's compliance with the terms and conditions of this Agreement shall not constitute or be asserted by any party as a breach of the Agreement by Developer or City. D. If, as a result of such periodic review, the City finds and determines, on the basis of substantial evidence, that Developer or its successor-in-interest has not complied in good faith with the terms and conditions of the Agreement, the City may, subject to the provisions of Section 2.07B, modify this Development Agreement or terminate the Development Agreement for cause. E. As a part of the periodic review prescribed in Subsection 4.04A, City's Director of Public Works will evaluate progress in implementation of the TMP and will prepare a report thereon for submission to the City Council. A copy of the report will be forwarded to each member of any Assessment District formed pursuant to the TMP, together with the date on which the report will be presented to the Council. 4.05 Assignment. ---------- A. The rights and obligations of Developer under this Agreement may be transferred or assigned in whole or in part as provided in this Section 4.05, provided that in no event, and notwithstanding any other provision of this Section 4.05, shall this Agreement be transferred or assigned in whole or in part as - 27 - to Parcel "A" until the provisions of Division 5 ("Assignment and Subletting" of that certain Lease of July 17, 1985 between City and Developer are fully complied with, and the transfer or assignment of this Agreement, in whole or in part, is to and only to the same party to whom transfer or assignment is authorized under that Lease, and, as to Parcel "B", shall not be transferred or assigned unless and until this Agreement is fully operative as to said Parcel "B" and, thereafter, shall only be transferred or assigned as a part of, and in the same manner as, provided in the long-term agreement relating to development of Parcel "B" between Developer and City through its Board of Water Commissioners. B. It is understood and agreed by the parties that the Property may be sold or subdivided after the execution of this Agreement. One or more of such subdivided parcels may be sold, mortgaged, hypothecated, assigned or transferred to persons for development by them in accordance with the provisions of this Agreement. Developer shall have the right to sell, mortgage, hypothecate, assign or transfer this Agreement, and any and all of its rights, duties and obligations hereunder, to any person, partnership, joint venture, firm or corporation at any time during the term of this Agreement, provided that any such sale, mortgage, hypothecation, assignment or transfer must be pursuant to a sale, assignment or other transfer of the interest of Developer in the Property, or a portion thereof. In the event of any such sale, mortgage, hypothecation, assignment or transfer, (a) Developer shall notify City of such event and the name of the transferee, together with the corresponding - 28 - entitlements being transferred to such transferee, and (b) the Agreement between Developer and such transferee shall provide that the transferee shall be liable for the performance of all obligations of Developer pursuant to this Agreement for any and all such portions of the Property sold or subdivided. Such transferee shall notify City in writing that it shall be liable for the performance of such obligations, and upon the express written assumption of any or all of the obligations of Developer under this Agreement by such assignee, transferee shall, without any act of or concurrence by City, relieve Developer of its legal duty to perform said obligations under this Agreement with respect to the Site or portion thereof so transferred. C. Non-compliance by such transferee with the terms and conditions of this Agreement shall be deemed a default hereunder. 4.06 Relationship of Parties. ----------------------- It is understood that the contractual relationship between the parties created hereunder is that Developer is an independent contractor and is not an agent of the City. Neither party is acting as agent for the other. None of the terms or provisions herein shall create a partnership, joint venture or joint enterprise. This Agreement shall not be construed to create or limit any third party beneficiary rights unless expressly otherwise provided. 4.07 Mortgage Protection. ------------------- A. Entering into or a breach of this Agreement shall not defeat, render invalid, diminish, or impair the lien of Mortgagees having a mortgage on any portion of the Property made -29- in good faith and for value, unless otherwise required by law or as set forth in this Section 4.07. No Mortgagee shall have an obligation or duty under this Agreement to perform Developer's obligations, or to guarantee such performance, prior to any foreclosure or deed in lieu thereof. B. If the City receives timely notice from a Mortgagee requesting a copy of any notice of a default given to Developer under the terms of this Agreement, City shall provide a copy of that notice to the Mortgagee within ten (10) days of sending the notice of default to Developer. The Mortgagee shall have the right, but not the obligation, for a period up to sixty (60) days after the receipt of such notice from City to cure or remedy, or to commence to cure or remedy the default unless a further extension of time to cure is granted in writing by City. If the default is of a nature which can only be remedied or cured by such Mortgagee upon obtaining possession, such Mortgagee shall seek to obtain possession with diligence through foreclosure, a receiver or otherwise, and shall thereafter remedy or cure the default or non-compliance within thirty (30) days after obtaining possession. If any such default or non-compliance cannot, with diligence, be remedied or cured within such thirty- (30-) day period, then such Mortgagee shall have such additional time as may be reasonably necessary to remedy or cure such default or non-compliance if such Mortgagee commences to cure during such thirty- (30-) day period, and thereafter diligently pursues and completes such cure. C. Notwithstanding the foregoing provisions of Section 4.06 of this Agreement, if any Mortgagee is prohibited -30- from commencing or prosecuting foreclosure or other appropriate proceedings in the nature thereof by any process or injunction issued by any court or by reason of any action by any court having jurisdiction of any bankruptcy or insolvency proceeding, the times specified in this Section for commencing or prosecuting foreclosure or other proceedings shall be extended for the period of the prohibition. D. Notwithstanding any provision of this Section 4.07, the burdens of this Agreement shall be binding upon, and the benefits of the Agreement shall inure to, all successors-in-interest to the parties to this Agreement, and nothing herein shall be construed to the contrary. 4.08 Indemnification and Hold Harmless. --------------------------------- A. Developer agrees to and shall protect, indemnify, defend and hold City, its offices, agents, employees, consultants, special counsel and representatives harmless from liability: (1) for damages, just compensation, restitution, judicial or equitable relief arising out of claims for personal injury, including health, and claims for property damage which may arise from the direct or indirect operations of the Developer or its contractors, subconstructors, agents, employees or other persons acting on its behalf which relates to the Project; and (2) from any claim that damages,just compensation, restitution, judicial or equitable relief is due by reason of the terms of or effects arising from this Agreement, except for any claim arising out of a negligent or willful act or omission of City. Developer agrees to pay all costs for the defense of the City and its officers, agents, employees, consultants, - 31 - special counsel and representatives regarding any action for damages, just compensation, restitution, judicial or equitable relief caused or alleged to have been caused by reason of Developer's actions in connection with the Project or any claims arising out of this Agreement, except for any claim arising out of a negligent or willful act or omission of City. City may make all reasonable decisions with respect to its representation in any legal proceeding. B. In the event any person not a party to this Agreement shall institute any type of action against City with respect to this Agreement, City may, at its sole option, elect to tender the defense of such action to Developer, and Developer shall accept such a tender and shall protect, identify, defend and hold harmless the City from all damages, costs and expenses incurred in the defense of such matter. In the event of such a tender and acceptance, City agrees that it shall fully cooperate with Developer in the defense of such matter. 4.09 Notices. ------- All notices under this Agreement shall be deemed received upon personal delivery to, or two days after deposit, first class postage prepaid in, the U.S. Mail, addressed to, the following representatives of the party at the addresses indicated below: If to City: City of Long Beach 333 West Ocean Boulevard Long Beach, California 90802 Attention: Director of Planning and Building - 32 - If to Developer: Kilroy Long Beach Associates 2250 Imperial Highway El Segundo, California 90245 Attention: Campbell Hugh Greenup Either party may change its address by giving notice in writing to the other party. 4.10 Time of Essence. --------------- Time is of the essence for each provision of this Agreement of which time is an element. 4.11 Entire Agreement. ---------------- This written Agreement, including all exhibits as set forth in Section 1.03,constitutes and embodies the entire understanding between the parties. It supersedes all other agreements, representations or undertakings, whether oral or written, that either party might allege to have existed prior to execution of this Agreement. City and Developer specifically represent that they have, respectively, executed and entered into this Agreement solely on the basis of the terms and conditions set forth herein and they have relied on no other representations, provisions, inducements or understandings of any kind in doing so, nor did any such representations, promises, inducements or understandings made by or on behalf of City or Developer exist at the time of execution of this Agreement. 4.12 Modification. ------------ No modification, amendment or other change in this Agreement or any provision hereof shall be effective for any purpose unless specifically set forth in writing executed by duly authorized representatives of both parties and referring - 33 - expressly to this Section and in accordance with all applicable provisions of law. 4.13 Force Majeure. ------------- Neither party shall be deemed to be in default where failure or delay in performance of any of its obligations under this Agreement is caused by floods, earthquakes, other Acts of God, fires, wars, riots or similar hostilities, strikes and other labor difficulties beyond such party's control, government regulations other than those of City, court actions (such as restraining orders or injunctions) or any other cause beyond such party's control. If any such events shall occur,the term of this Agreement and the time for performance by either party of any of its obligations hereunder shall be extended by the period of time that such events prevented such performance provided that the term of this Agreement shall not be extended under any circumstances for more than five (5) years. 4.14 Estoppel Certificate. -------------------- Either party may, at any time, and from time to time, deliver written notice to the other party requesting such party to certify in writing that, to the knowledge of the certifying party, (1) this Agreement is in full force and effect and a binding obligation of the parties, (2) this Agreement has not been amended or modified either orally or in writing and, if so amended, identifying the amendments and (3) the requesting party is not in default of the performance of its obligations under this Agreement or, if in default, describing the nature and amount of any such defaults. A party receiving a request hereunder shall execute and return such Certificate within - 34 - thirty (30) days following the receipt thereof. City acknowledges that an Estoppel Certificate may be relied upon by transferees and mortgagees; provided, however, that whether or not the Estoppel Certificate is relied upon by assignees or other transferees or Developer, City shall not be bound by a Certificate if a default existed at the time of the annual review, but was concealed from or otherwise not known to the City. 4.15 Attorney's Fees. --------------- In any action to enforce the provisions of this Agreement, the prevailing party shall be entitled to recover its Attorney's fees from the other party. 4.16. Waiver. ------ No waiver of any provision of this Agreement shall be effective unless it is in writing, executed by a duly authorized representative of the party against whom enforcement of a waiver is sought and refers expressly to this Section. No waiver of any right or remedy in respect of any occurrence or event shall be deemed a waiver of any right or remedy in respect of any other occurrence or event. 4.17 Successors and Assigns. ---------------------- The provisions of this Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. Any successor-in-interest to City shall be subject to the provisions set forth in Government Code Sections 65865.4 and 65868.5. 4.18 Governing Law and Consent to Jurisdiction. ----------------------------------------- A. This Agreement shall be interpreted, governed and - 35 - construed under the laws of the State of California as if executed and performed wholly within the State of California. B. Developer furthermore irrevocably consents and submits to the jurisdiction of the state and federal courts in the State of California as the exclusive jurisdiction and courts in which any action, suit or proceeding of any kind or nature may be brought against it or by it which is related to any matter contained in this Agreement, and Developer hereby waives and agrees not to assert by way of motion, defense or otherwise, in any such action, suit, or proceedings, that it is not personally subject to the jurisdiction of any such court, that any such court is an inconvenient forum or that venue in any such court is improper. C. Developer furthermore agrees to accept service of process in any matter relating to this Agreement in any place within the State of California where it or any of its officers, agents or attorneys may be found. 4.19 Recordation. ----------- This Agreement shall be recorded immediately following its execution in the Office of the Recorder of the County of Los Angeles, California. IN WITNESS WHEREOF, the parties have executed this - 36 - DEVELOPER'S ACKNOWLEDGEMENT STATE OF CALIFORNIA ) ) ss. COUNTY OF LOS ANGELES ) On October 11, 1990, before me, the undersigned, a Notary Public in ---------- and for said State, personally appeared John B. Kilroy, Jr. personally known to ------------------- me or proved to me on the basis of satisfactory evidence to be the person who executed this instrument as President of Kilroy Industries, the corporation --------- that executed this instrument as the general partner of Kilroy Long Beach Associates, a California Limited Partnership, the partnership that executed the within instrument, and acknowledged to me that such corporation executed the same as such partner and that said partnership executed the same. [Seal] WITNESS my hand and official seal. [Seal of Nadine K. Kirk] /s/ NADINE K. KIRK ---------------------------------- Notary Public in and for said County and State CITY OF LONG BEACH, a municipal corporation of the State of California By: [Signature] ------------------------------- Assistant City Manager EXECUTED PURSUANT TO SECTION 301 OF THE CITY CHARTER. The foregoing Agreement is hereby approved as to form this 4th day of --- December, 1990. - -------- JOHN R. CALHOUN, City Attorney By: [Signature] --------------------------------- Deputy -37- WHK/am 04/16/90 04/18/90 05/11/90 05/14/90 06/04/90 06/29/90 07/02/90 07/19/90 07/20/90 VERSION #2: 07/30/90 08/09/80 08/13/90 08/21/90 09/12/90 AG\53(E).DOC - 38 - EXHIBIT A LEGAL DESCRIPTION OF PROPERTY SUBJECT TO THE AGREEMENT PARCEL "A" (KILROY LONG BEACH ASSOCIATES) PARCELS 1 THROUGH 10, INCLUSIVE, OF PARCEL MAP NO. 16960, IN THE CITY OF LONG BEACH, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 208, PAGES 92 THROUGH 100 INCLUSIVE OF PARCEL MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY. LEGAL DESCRIPTION OF PROPERTY SUBJECT TO THE AGREEMENT PARCEL "B" (KILROY LONG BEACH ASSOCIATES) THAT PORTION OF RANCHO LOS CERRITOS IN THE CITY OF LONG BEACH, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 2, PAGES 202 THROUGH 205 OF PATENTS IN THE OFFICE OF SAID COUNTY RECORDER, DESCRIBED AS FOLLOWS: BEGINNING AT THE MOST SOUTHWESTERLY CORNER OF PARCEL 9 OF PARCEL MAP NO. 16960, IN SAID CITY, AS PER MAP RECORDED IN BOOK 208, PAGES 92 THROUGH 100, INCLUSIVE, OF SAID PARCEL MAP; THENCE FOLLOWING THE BOUNDARY LINE OF PARCELS 9 AND 10 OF SAID PARCEL MAP BY THE FOLLOWING SIX COURSES: NORTH 9 (DEGREES) 45' 28" EAST 232.12 FEET; THENCE SOUTH 89 (DEGREES) 53' 01" EAST 233.60 FEET; THENCE NORTH 53 (DEGREES) 04' 54" EAST 181.74 FEET; THENCE NORTH 0 (DEGREES) 16' 54" EAST 305.50 FEET; THENCE SOUTH 89 (DEGREES) 58' 42" WEST 58.81 FEET; THENCE NORTH 0 (DEGREES) 08' 48" EAST 426.88 FEET TO AN INTERSECTION WITH THE SOUTHERLY LINE OF SPRING STREET, 100 FEET WIDE, AS SHOWN ON RECORD OF SURVEY MAP FILED IN BOOK 85, PAGE 19, RECORDS OF SAID COUNTY; SAID INTERSECTION BEING ON A CURVE CONCAVE SOUTHERLY HAVING A RADIUS OF 950.00 FEET AND THROUGH WHICH A RADIAL LINE TO SAID CURVE BEARS SOUTH 6 (DEGREES) 22' 25" WEST; THENCE WESTERLY 103.88 FEET ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 6 (DEGREES) 15' 54"; THENCE WESTERLY ALONG SAID SOUTHERLY LINE NORTH 89 (DEGREES) 52' 59" WEST 620.52 FEET TO A POINT DISTANT EASTERLY THEREON 20.00 FEET FROM THE INTERSECTION OF SAID SOUTHERLY LINE OF SPRING STREET WITH THE EASTERLY LINE OF REDONDO AVENUE, 90 FEET WIDE, AS SHOWN ON TRACT NO. 27805, AS PER MAP RECORDED IN BOOK 712 PAGES 95 THROUGH 97, INCLUSIVE, OF MAPS, RECORDS OF SAID COUNTY; THENCE SOUTH 45 (DEGREES) 06' 46" WEST IN A DIRECT LINE, 28.28 FEET TO A POINT IN THE EASTERLY LINE OF SAID REDONDO AVENUE, DISTANT SOUTHERLY THEREON 20.00 FEET FROM SAID INTERSECTION; THENCE SOUTHERLY ALONG SAID EASTERLY LINE SOUTH 0 (DEGREES) 06' 32" WEST 958.27 FEET TO A POINT DISTANT NORTHERLY THEREON 7.94 FEET FROM THE INTERSECTION OF SAID EASTERLY LINE OF REDONDO AVENUE WITH THE NORTHERLY LINE OF KILROY AIRPORT WAY, VARIES IN WIDTH, AS SHOWN ON SAID PARCEL MAP NO. 16960; THENCE SOUTH 44 (DEGREES) 53' 28" EAST IN A DIRECT LINE 11.24 FEET TO A POINT IN THE NORTHERLY LINE OF SAID KILROY AIRPORT WAY, DISTANT EASTERLY 7.94 FEET FROM LAST MENTIONED INTERSECTION; THENCE FOLLOWING THE NORTHERLY LINE OF SAID KILROY AIRPORT WAY BY THE FOLLOWING FIVE COURSES; SOUTH 89 (DEGREES) 53' 28" EAST 62.06 FEET TO A TANGENT CURVE CONCAVE SOUTHERLY HAVING A RADIUS OF 296.00 FEET; THENCE SOUTH- EASTERLY 129.15 FEET ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 25 (DEGREES) 00' 00"; THENCE SOUTH 64 (DEGREES) 53' 28" EAST 57.87 FEET TO A TANGENT CURVE CONCAVE NORTHEASTERLY HAVING A RADIUS OF 354.00 FEET; THENCE SOUTHEASTERLY 82.99 FEET ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 13 (DEGREES) 25' 54"; THENCE SOUTH 78 (DEGREES) 19' 22" EAST 59.24 FEET TO THE POINT OF BEGINNING. Parcel "B" Legal Description [MAP OF A PORTION OF RANCHO LOS CERRITOS, IN THE CITY OF LONG BEACH, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA] EXHIBIT B [MAP OF BOUNDARY LONG BEACH AIRPORT TRAFFIC STUDY AREA CITY OF LONG BEACH, STATE OF CALIFORNIA] LIST OF ROADWAY AND INTERSECTION IMPROVEMENTS (PHASE "I") ASSESSMENT DISTRICT NO. 90-2
Project Description - ------- ----------- 1 Cherry Avenue and Carson Street 2 Cherry Avenue and 36th Street 3 Cherry Avenue and Wardlow Road 4 Cherry Avenue and Spring Street 5 Temple Street and Spring Street 6 Redondo Street and Spring Street 6A Traffic Signals 7 Willow Avenue and Redondo Street 7A Northeast Corner 8 Lakewood Boulevard and Carson Street 8A Southeast Corner 9 Lakewood Boulevard and Wardlow Road 10 Lakewood Boulevard and Conant Street 11 Lakewood/Spring 12 Lakewood Boulevard and Willow Street 13 Clark Avenue and Carson Street 14 Clark Avenue and Conant Street 15 Clark Avenue and Wardlow Avenue 16 Clark Avenue and Spring Street 17 Clark Avenue and Willow Avenue 18 Carson Street and Paramount Boulevard 19 Cherry Avenue and Bixby Avenue
Exhibit "C" Exhibits D - I omitted. EX-10.18 13 1ST AMENDMENT TO DEVELOPMENT AGREEMENT EXHIBIT 10.18 RECORDING REQUESTED BY: ) ) THE CITY OF LONG BEACH ) 333 WEST OCEAN BOULEVARD ) LONG BEACH, CA 90802 ) ) AND ) ) WHEN RECORDED MAIL TO: ) ) THE CITY OF LONG BEACH ) CITY ATTORNEY'S OFFICE ) 333 WEST OCEAN BOULEVARD ) LONG BEACH, CA 90802 ) - -------------------------------------------------------------------------------- (Space above for Recorder's Use) AMENDMENT NO. 1 TO ------------------ DEVELOPMENT AGREEMENT --------------------- (Airport Traffic Study Area) KILROY LONG BEACH ASSOCIATES The following AMENDMENT TO DEVELOPMENT AGREEMENT is made and entered into as of this 17th day of April, 1992, pursuant to Ordinance No. C-6985 adopted by the City Council of the City of Long Beach on the 24th day of March, 1992, by and between the CITY OF LONG BEACH, a municipal corporation of the State of California ("City"), and KILROY LONG BEACH ASSOCIATES, a California limited partnership ("Developer"). WHEREAS, on October 5, 1990, a Development Agreement was entered into between City and Developer pursuant to City Ordinance No. C-6788; and WHEREAS, the Development Agreement provided that it would terminate as to parcel "B" in the event that certain conditions were not satisfied within the time set forth therein; and WHEREAS, the parties hereto now desire to amend the Development Agreement to extend the time for satisfaction of the conditions and to clarify certain other provisions; and WHEREAS, notice has been given and a public hearing held on March 17, 1992 in accordance with Section 65868 of the Government Code, and Ordinance No. C-6985 was thereafter adopted approving this Amendment; NOW, THEREFORE, the Development Agreement between the parties hereto is hereby amended as follows: 1. All references to the year "1992" in Subsections 2.01B. and 2.06B. are hereby changed to read "1994." 2. The phrase "at least twenty (20) years" in Subsections 1 of 2 2.01.B.2 and 2.06B. is hereby deleted and in its place is inserted the phrase "at least equal to the remaining term of this Agreement on the date of execution." 3. The parties agree that this amendment does not affect, amend or change the Effective Date of the Development Agreement as set forth therein. IN WITNESS WHEREOF, the parties hereto have caused these presents to be duly executed in duplicate with all the formalities required by law on the respective dates set forth opposit their signatures. "CITY" CITY OF LONG BEACH, a municipal corporation 4/17 , 1992 By [Signature] EXECUTED PURSUANT - ----- ---------------------------------- ASSISTANT City Manager TO SECTION 301 OF THE CITY CHARTER. "DEVELOPER" KILROY LONG BEACH ASSOCIATES, a California limited partnership By: KILROY INDUSTRIES, a California Corporation, General Partner April 14, 1992 By /s/ Marshall L. McDaniel - -------- ---------------------------------- MARSHALL L. McDANIEL Executive Vice President & Secretary The foregoing AMENDMENT TO DEVELOPMENT AGREEMENT is hereby approved as to form the 16th day of April, 1992. JOHN C. CALHOUN, City Attorney By [Signature] ---------------------------------- Assistant 2 of 2 DEVELOPER'S ACKNOWLEDGMENT -------------------------- STATE OF CALIFORNIA ) ) ss. COUNTY OF LOS ANGELES ) On April 13, 1992, before me, the undersigned, a Notary Public in and for said State, personally appeared MARSHALL L. McDANIEL, personally known to me or proved to me on the basis of satisfactory evidence to be the person who executed this instrument as Executive Vice President and Secretary of KILROY INDUSTRIES, the corporation that executed this instrument as the general partner of KILROY LONG BEACH ASSOCIATES, a California Limited Partnership, the partnership that executed the within instrument, and acknowledged to me that such corporation executed the same as such partner and that said partnership executed the same. WITNESS my hand and official seal. [Seal] [Seal appears here] /s/ Bonnie Dietz ------------------------------ Notary Public in and for said County and State EX-10.21 14 PURCHASE AND SALE AGREEMENT EXHIBIT 10.21 PURCHASE AND SALE AGREEMENT AND JOINT ESCROW INSTRUCTIONS WESTLAKE PLAZA PARTNERS, A CALIFORNIA LIMITED PARTNERSHIP as "Seller" KILROY INDUSTRIES, A CALIFORNIA CORPORATION as "Buyer" INDEX -----
(S) CAPTION PAGE - --- ------- ---- 1. SALE OF THE PROPERTY............................................. 1 2. ESCROW........................................................... 2 3. DEPOSITS AND PURCHASE PRICE...................................... 2 4. CONDITIONS TO CLOSING............................................ 3 5. CLOSING OF ESCROW................................................ 6 6. DEFAULTS AND REMEDIES............................................ 11 7. REPRESENTATIONS AND WARRANTIES................................... 12 8. OPERATION OF THE PROPERTY BEFORE CLOSING......................... 16 9. POST-CLOSING MATTERS............................................. 17 10. BROKERS.......................................................... 17 11. MISCELLANEOUS PROVISIONS......................................... 18
EXHIBITS -------- A Legal description of Land B Map or depiction of Land C Escrow General Provisions D Grant Deed and D.T.T. Statement E Assignment of Leases F General Assignment G Bill of Sale H Rent Roll I Tenant Estoppel Certificate J Landlord Estoppel Certificate K Seller's Notice to Tenants i PURCHASE AND SALE AGREEMENT --------------------------- AND JOINT ESCROW INSTRUCTIONS ----------------------------- To: Continental Lawyers Title Insurance Escrow No. 21723 SL Company ("Escrow") 200 East Carrillo, Suite 100 Attn: Susan Lowe Santa Barbara, CA 93101 Phone (805) 965-7091 Fax (805) 568-3880 This Purchase and Sale Agreement and Joint Escrow Instructions ("Agreement") is entered into effective as of June 6, 1996 between WESTLAKE PLAZA PARTNERS, a California limited partnership ("Seller"), and KILROY INDUSTRIES, a California corporation ("Buyer"), as follows: 1. SALE OF THE PROPERTY -------------------- Buyer agrees to purchase from Seller, and Seller agrees to sell to Buyer, the following described real and personal property (collectively, the "Property"): 1.1 LAND. That real property located in the City of Thousand Oaks, ---- County of Los Angeles, State of California, consisting of approximately 1.194 acres as legally described on Exhibit "A" and as depicted on Exhibit "B" hereto ----------- ----------- and the Survey described in Section 4.1 below, but including all rights, privileges, easements, rights of way and other appurtenances inuring to the benefit of the land (collectively, the "Land"). 1.2 IMPROVEMENTS. All buildings, improvements and fixtures located on ------------ the Land, and all personal property owned by Seller located on the Land and used in connection therewith including but not limited to approximately 83,272 square feet of office building facilities and all of Seller's interest in any apparatus, equipment, machinery, articles, appliances, heating and air conditioning, sprinkler, plumbing, electric power or lighting, ventilating and cooling systems and facilities used to provide any utility services, refrigeration, ventilation, trash or garbage collection or disposal, recreation or other services on the Land with each of their respective appurtenant furnaces, boilers, radiators, pipes, wiring and other apparatus, equipment and fixtures, partitions, fire preventive and extinguishing systems and equipment; and surface parking for at least 325 automobiles (collectively, the "Improvements"). The Land and Improvements are herein called the Project; 1.3 PLANS AND PERMITS. To the extent reasonably available to Seller, ----------------- any blueprints, plans and specifications (including final and complete "as builts"), maps, surveys, drawings, guaranties, warranties, utility and other entitlements, licenses, permits, certificates of occupancy, rights or approvals from any private or public parties needed for access or utilities to the Project or any other rights, interests or privileges owned by Seller in any way related to the Land (collectively, the "Plans and Permits"); 1.4 LEASES. All of Seller's interest as lessor in all leases and ------ licenses, and all rental, occupancy and concession agreements (collectively, the "Leases") respecting all tenants, licensees, concessionaires, subtenants, occupants and other users of all or any portion of the Project (collectively, the "Tenants"), as listed, or to be listed pursuant to Section 4.4, on the form of rent roll attached as Exhibit "H" hereto ("Rent Roll") and containing the ----------- amenities and amount of square footage shown thereon; 1.5 TANGIBLE PERSONAL PROPERTY. All items of equipment, furnishings, -------------------------- fixtures, supplies and other tangible personal property, if any (the "Tangible Personal Property"); and 1.6 INTANGIBLE PROPERTY: All of Seller's interest in any intangible ------------------- personal property now or in the future owned by Seller and used in connection with the Project and not otherwise described above, including but not limited to any warranties, guaranties, service agreements or other contract rights to the extent approved by Buyer under this Agreement, and the right to use the name "WESTLAKE PLAZA CENTER" or any other trade name now used by Seller in connection with the Project (collectively, the "Intangible Property"). 2. ESCROW ------ 2.1 GENERAL INSTRUCTIONS. Continental Lawyers Title Insurance Company -------------------- is hereby designated as escrow holder (the "Escrow Holder"). Escrow Holder's general conditions or provisions are attached hereto as Exhibit "C". If there ----------- is any inconsistency between Exhibit "C" and any of the provisions of this ----------- Agreement, the provisions of this Agreement shall control. Buyer and Seller shall each execute and deliver such further escrow instructions or other instruments as may be reasonably requested by the other party or by Escrow Holder from time to time, so long as the same are consistent with this Agreement. Escrow Holder shall not be concerned, liable or responsible for any representations, warranties or indemnities as between Buyer and Seller or for compliance with any of the following subsections: 1.2 through 1.6, 4.2 through 4.6 (except only as to applicable time periods), 7 (except 7.3.7), 8 and 9.] 2.2 TAX REPORTING PERSON. For purposes of complying with Internal -------------------- Revenue Code Section 6045(e), as amended effective January 1, 1991, Escrow Holder is hereby designated as the "person responsible" and the "reporting person" for purposes of filing any information returns with the Internal Revenue Service concerning this transaction, as required by law. 2.3 OPENING OF ESCROW. Escrow shall be deemed open when the Deposit ----------------- (defined below) and this Agreement, fully signed by all parties either together or in counterparts, are delivered to Escrow Holder ("Opening of Escrow"), which shall occur not later than three (3) business days after mutual execution of this Agreement. Escrow Holder shall immediately notify Buyer, Seller and their respective attorneys of the official date of Opening of Escrow. 3. DEPOSITS AND PURCHASE PRICE --------------------------- 3.1 PURCHASE PRICE. The purchase price for the Property shall be -------------- Thirteen Million Fifty Thousand Dollars ($13,050,000) (the "Purchase Price") to be paid as follows: 2 3.1.1 DEPOSIT. Concurrently with delivery to Escrow Holder of a ------- copy of this Agreement signed by Buyer and Seller, Buyer shall deliver to Escrow Holder the sum of Two Hundred Fifty Thousand Dollars ($250,000) (the "Deposit"). The Deposit shall be returned to Buyer (i) if this Escrow is terminated by Buyer prior to the expiration of the Contingency Period (defined below), as permitted herein; or (ii) if this Escrow does not close for any reason other than Buyer's default. 3.1.2 [INTENTIONALLY OMITTED.] 3.1.3 DISPOSITION OF DEPOSIT. Escrow Holder shall hold the ---------------------- Deposit in one or more interest-bearing accounts as required in order to be fully insured by the Federal Deposit Insurance Corporation, as selected by Buyer and reasonably satisfactory to Seller pursuant to a funds investment form provided by Escrow Holder. All interest earned on any such Deposit shall not constitute part of the Deposit and shall accrue to Buyer's benefit in each of the events set forth in this section. Such Deposit retained by Escrow Holder shall be (i) applied against the Purchase Price if Escrow closes under this Agreement, or (ii) returned and paid to Buyer in full if Escrow does not close for any reason other than Buyer's default, or (iii) be paid to Seller as Liquidated Damages under Section 6.3 below if this Escrow fails to close under the provisions of this Agreement as a result of Buyer's default. 3.1.4 EXISTING DEBT. The Property is currently encumbered by a ------------- deed of trust securing repayment of a note (the "Note"), the current unpaid balance of which is approximately Seven Million Five Hundred Ninety-Three Thousand Dollars ($7,593,000)). Buyer, in its sole and absolute discretion, may elect during the Contingency Period to either pay off the Note through the Escrow or assume the Note. Buyer shall submit an application for assumption of the Note not later than June 12,1996. If Buyer elects to assume the Note, such assumption shall be subject to Buyer's approval of the terms of the Note and any conditions of assumption imposed by the holder of the Note. In either event, the amount paid off or assumed by Buyer shall be credited against the Purchase Price and shall reduce the amount of the proceeds of the Escrow payable to Seller. Buyer shall be responsible for paying any prepayment penalty. 3.1.5 CLOSING FUNDS. At least one (1) business day before Close ------------- of Escrow, Escrow Holder shall calculate and Buyer shall deposit into Escrow an amount of funds (the "Closing Funds") which, when added to the Deposit and accrued interest, shall equal the Purchase Price plus any other sums payable by Buyer hereunder. If Buyer elects to pay off the Note, Buyer shall also pay into the Escrow the amounts necessary to pay off the Note. 4. CONDITIONS TO CLOSING --------------------- Buyer's obligation to purchase the Property is subject to each of the following conditions (the "Conditions Precedent"), which Buyer in each case may approve, disapprove or waive in a writing delivered to Seller and Escrow Holder at any time up to and including June 7, 1996, except to the limited extent set forth in the following subsections of this Section 4 (the "Contingency Period"). Buyer's failure to disapprove in writing any such item within the Contingency Period therefor shall be deemed to constitute approval thereof; provided, that 3 Buyer's failure to give notice to Seller and/or Escrow Holder within the Contingency Period (as it may be extended to the limited extent set forth herein), affirmatively approving this transaction as a whole and electing to go forward towards Closing, shall be deemed to constitute automatic notice of Buyer's disapproval and termination of this Agreement as provided in Section 4.10 below. Buyer shall use its reasonable efforts to complete its reviews, and in no event shall the Contingency Period be extended beyond July 3, 1996, pursuant to the following subsections which provide for extensions. 4.1 TITLE AND SURVEY. Seller has provided to Buyer for Buyer's approval ---------------- copies of the following ("Title Documents"): (i) a current preliminary title report or commitment covering the Project (the "Title Report") prepared by Continental Lawyers Title Insurance Company (the "Title Company"), (ii) a depiction on the Survey (described below), or on a separate plat or site plan prepared by Title Company, showing all easements then existing against the Property and all other exceptions of record, (iii) legible copies from Title Company of all documents referred to in the Title Report, and (iv) all UCC filings against Seller and the Land or any portion thereof. Seller has delivered to Buyer a survey of the Project dated [June 2, 1994] (the "Survey"). Buyer may order at its expense an updated survey (the "Updated Survey") at any time prior to June 12, 1996, and Buyer will have five (5) business days following receipt of the Updated Survey within which to approve or disapprove any variance from the Survey which may be disclosed by the Updated Survey. Seller shall cause all monetary liens and encumbrances secured by the Property to be fully discharged and reconveyed at or before the Closing except to the extent Buyer elects to assume the Note. 4.2 PROPERTY DOCUMENTS. Seller has provided Buyer outside of Escrow, ------------------ for Buyer's approval, with copies of all Plans and Permits and all of the following documents relating to the Property which are reasonably available to Seller (collectively, the "Property Documents"): (i) any soils or toxic materials reports, architectural reports, seismic reports, engineering tests, environmental or geological studies and similar data pertaining to any portion of the Property; (ii) the most recent property tax bills, notices of assessments and any petitions, appeals or related documents; (iii) any other notices, claims, complaints, litigation, actions or other legal proceedings involving any governmental authority or private party; (iv) any contracts, licenses or other agreements affecting the ownership, operation, maintenance, repair, improvement and/or development of the Property; (v) all Leases and any related assignments or amendments; (vi) copies of the past three (3) years detailed operating and financial statements for the Property, whether audited or unaudited, prepared by or for Seller and certified by Seller; and (vii) copies of any financial statements in the possession of Seller showing the financial condition and operations of each Tenant. 4.3 INSPECTION AND INDEMNITY. Upon executing this Agreement, Buyer and ------------------------ its representatives (including any architects, engineers and consultants), at Buyer's sole cost and expense, shall have the right to inspect the Property and all internal reports, studies or other documents in Seller's files which were not provided to Buyer as part of Property Documents, and to make such surveys and conduct such soils, engineering, environmental, hazardous substance, noise, pollution, seismic or other physical test, study or investigation as Buyer may require. Buyer shall obtain Seller's oral consent, which shall not be unreasonably withheld or delayed, at least twenty-four hours prior to any entry upon the Project. Any delays in Buyer's 4 diligence resulting from Seller's withholding or delaying Seller's consent shall extend the Contingency Period for a period equal to the aggregate number of days of such delay. Any such tests, studies or investigations shall be ordered by Buyer not later than June 12, 1996, and Buyer shall have five (5) business days following receipt of the reports of such tests, studies or investigations within which to approve or disapprove such reports. Upon completion of any such work, Buyer shall promptly restore the Land to at least as good condition as existed immediately prior to the work. Buyer hereby agrees to indemnify and hold Seller harmless against any claim, liability, loss, cost, action, damage, suit, legal or administrative proceeding, expense or fees, including but not limited to reasonable attorneys' fees (herein collectively, "Liabilities"), which Seller may sustain or incur by reason of any such inspection or test. 4.4 FINALIZATION OF RENT ROLL AND EXHIBITS. Seller has provided Buyer -------------------------------------- with a complete and current Rent Roll, using the form of Exhibit "H" hereto or ----------- containing at least that information requested therein, such Rent Roll to be updated to Buyer's reasonable satisfaction as a condition to Closing pursuant to Section 5.2.6. Within the Contingency Period, Seller shall furnish Buyer with all information necessary to prepare or finalize all other schedules and exhibits attached hereto or otherwise agreeable to the parties. 4.5 FEASIBILITY; GOVERNMENTAL PERMITS. Buyer may satisfy itself with --------------------------------- all applicable governmental authorities or otherwise as to the feasibility of owning, developing, operating, leasing and marketing the Property and that the Property complies, and Buyer's intended use, development and operation will comply, with all applicable zoning, land use, building and other state, local and federal laws, ordinances, regulations, licenses, permits or authorizations (collectively, "Laws"), and that Buyer can obtain all necessary governmental permits or approvals for such use, development or operation. Buyer may also apply for and seek to obtain any additional governmental permits or approvals respecting the Property for its anticipated use and development. Prior to the Closing, Buyer shall submit to Seller, for its files and information only, copies of any applications, proposals, plans, requests or other documents to any governmental agency respecting any further permits or approvals applied for or obtained by Buyer hereunder prior to the Closing. 4.6 EXTENSION OF CONTINGENCY PERIOD. If, prior to expiration of the ------------------------------- Contingency Period, Buyer discovers a matter which could, in Buyer's reasonable judgment, materially and adversely affect the Property, Buyer may extend the Contingency Period as to such matter for a period of not more than five (5) business days by giving written notice of such extension to Seller in the manner set forth in Section 11.3 hereof. 4.7 Condition of Improvements. As of the Closing Date, the Improvements ------------------------- shall be in good operating condition (subject to normal wear and tear) and their use and operation shall be in full compliance with all applicable environmental and other Laws. 4.8 SELLER'S CURE RIGHTS. If Buyer disapproves any Condition Precedent -------------------- or item to be received or satisfied thereunder during the Contingency Period, Buyer may indicate in writing to Seller which of the objectionable items, if any, Buyer in its sole and absolute discretion considers to be reasonably curable. Seller shall have ten (10) days following receipt 5 of any such notice from Buyer in which to investigate each disapproved but curable item and to notify Buyer and Escrow Holder in writing that Seller either: 4.8.1 has cured or will cure the disapproved but curable item prior to the Closing Date; or 4.8.2 is unable to cure the same. 4.9 BUYER'S ELECTION. If Seller notifies Buyer and Escrow Holder of ---------------- Seller's inability to cure a disapproved but curable item, Buyer shall have ten (10) days after receipt of Seller's notice to notify Seller and Escrow Holder in writing of either: 4.9.1 Buyer's waiver of its prior objection to the item and decision to proceed to purchase the Property; or 4.9.2 Buyer's election to terminate Escrow and this Agreement. 4.10 RIGHTS UPON TERMINATION. If Buyer terminates Escrow and this ----------------------- Agreement before the end of the Contingency Period, either because (A) Buyer does not notify Seller and Escrow Holder by the end of the Contingency Period that Buyer has approved going forward with the sale transaction as a whole, (B) Buyer in its sole discretion deems an objectionable Condition Precedent not to be curable, or (C) Seller does not elect to cure the same as provided in Section 4.8 above, then (i) the Deposit and any interest accrued thereon shall be returned and paid to Buyer, (ii) all instruments shall be returned to the party depositing the same, (iii) Buyer and Seller each shall pay one-half of all Escrow and title cancellation charges, and (iv) thereafter neither party shall have any further rights, obligations or liabilities whatsoever to the other party concerning the Property or under this Agreement except as provided in Sections 4.3 and 10. 4.11 SELLER'S FAILURE. If Seller has elected to cure but fails or is ---------------- unable to cure any disapproved matters on or before the last business day before Close of Escrow, then Buyer may elect either: (i) to waive the disapproved matters Seller has failed to cure and proceed to close Escrow, (ii) to terminate this Agreement as provided below and to reserve rights against Seller if Seller failed to use reasonable efforts in good faith to accomplish such cure, or (iii) to extend the Closing Date by up to 30 days if the uncured matter is reasonably curable within such period and Seller has elected to cure as provided in Section 4.8; or (iv) to exercise Buyer's rights and remedies under Section 6.4. 5. CLOSING OF ESCROW ----------------- 5.1 CLOSING DATE. Escrow shall close on or before the earlier of July ------------ 31, 1996 or such earlier date as may be mutually agreed upon by Seller and Buyer. Once determined, Escrow Holder shall confirm to Buyer and Seller, in writing, the exact Closing Date. The terms "Close of Escrow", "Closing Date" and/or "Closing" are used in this Agreement to mean the time and date the Grant Deed is recorded in the Office of the Recorder of the County in which the Land is located. 6 5.2 DEPOSITS BY SELLER. On or before the last business day before the ------------------ Close of Escrow, Seller shall deliver to Escrow Holder the items described below; provided, that Escrow need not be concerned with the form or content but -------- only with the manual delivery of all of the following (other than items 5.2.1 and 5.2.2): 5.2.1 GRANT DEED. A duly executed and acknowledged grant deed ---------- conveying to Buyer good and marketable title to the Land and Improvements, in the form of attached Exhibit "D" (the "Grant Deed"), free and clear of all ----------- encumbrances or other items except as shown on the Title Policy described below. 5.2.2 ASSIGNMENT OF LEASES. A recordable assignment of the -------------------- Leases to Buyer, properly executed and acknowledged by Seller, in the form attached hereto as Exhibit "E" (the "Assignment of Leases"; ----------- 5.2.3 GENERAL ASSIGNMENT. A general assignment, properly signed ------------------ by Seller and in the form of attached Exhibit "F", conveying to Buyer Seller's ----------- interest in any contract or other Intangible Property described in Section 1.6 (the "General Assignment"); 5.2.4 BILL OF SALE. A Bill of Sale in the form of attached ------------ Exhibit "G" signed by Seller and conveying to Buyer the Tangible Personal - ----------- Property described in Section 1.5; 5.2.5 ORIGINAL DOCUMENTS. To the extent not previously delivered ------------------ to Buyer, originals of the Leases and other contracts to be assumed by Buyer affecting the Property, the Plans and Permits, and any claims or notices of any kind from any governmental authority in Seller's possession relating to the Property, one complete set of as-built plans and specifications for the Improvements, and one final and complete set of working drawings covering all tenant improvements not part of the "as-builts" so provided; 5.2.6 RENT ROLL. The Rent Roll attached hereto as Exhibit "H", --------- ----------- to be updated and certified to Buyer and Escrow Holder by Seller within not more than five (5) business days before Closing as true and correct through and as of the Closing Date; 5.2.7 ESTOPPEL CERTIFICATES. Original signed copies of estoppel --------------------- certificates obtained by Seller from all Tenants, to be substantially in the form of the sample attached hereto as Exhibit "I" (the "Estoppel Certificates") ----------- and dated to the extent reasonably possible not less than twenty (20) days prior to the Closing Date, unless waived by Buyer as to any particular Tenant. Seller shall use reasonable efforts to obtain for Buyer's benefit Estoppel Certificates from all Tenants prior to Close of Escrow, and shall certify the correctness of all Estoppel Certificates as of the Closing Date. As to each Tenant which fails to provide an Estoppel Certificate containing all information set forth on Exhibit "I", however, Seller shall execute and deliver its Seller's Estoppel - ----------- Certificate using the form attached hereto as Exhibit "J" containing Seller's ----------- representations and warranties as landlord and which shall survive as to each such Tenant until a Tenant Estoppel Certificate is obtained from that Tenant. If Seller despite reasonable efforts is unable to deliver to Buyer, prior to the Closing, Estoppel Certificates from all Tenants occupying the leased building space, then Buyer may terminate this Agreement and Escrow Holder shall act according to the procedures set forth in Section 4.10. If a Tenant 7 refuses to provide an estoppel certificate, Buyer, in its reasonable discretion, following consultation with Seller, may elect to waive receipt of such estoppel certificate if Buyer determines that the reasons such Tenant refused to deliver such estoppel certificate are not material. The content of each such Estoppel Certificate must be consistent with the Rent Roll and other representations and warranties of Seller hereunder; 5.2.8 KEYS. Keys and combinations to all locks located on the ---- Improvements, but delivered outside of Escrow and without involving Escrow Holder; 5.2.9 NO UCC FILINGS. Certificates from the California Secretary -------------- of State indicating that as of the Closing Date, or as close thereto as practicable, there are no filings against Seller in said office under the California Uniform Commercial Code which would be a lien on any of the Tangible Personal Property (other than filings, if any, as are being released at the time of the closing); 5.2.10 [INTENTIONALLY OMITTED.] 5.2.11 EVIDENCE OF AUTHORITY. If Seller is a corporation, a --------------------- certified copy of a corporate resolution adopted by Seller authorizing sale of the Property. If Seller is a partnership, then copies (certified by Seller to be true and complete) of Seller's partnership agreement, certificate of limited partnership as filed with the California Secretary of State, any statement of partnership recorded by the County recorder, and such corporate authorizing resolutions by each acting corporate general partner, if any. In any event, such other certificates or documents as may be reasonably required by Title Company or Escrow Holder in order to cause the Title Policy to be issued and Escrow to be closed; 5.2.12 FIRPTA OR CALFIRPTA INSTRUMENTS. Proper certificates ------------------------------- satisfactory to Buyer confirming Seller's status as represented in Section 7.3.7 below; and 5.2.13 ADDITIONAL ITEMS. Any additional funds and/or instruments, ---------------- signed and properly acknowledged and delivered by Seller, if appropriate, as may be necessary to comply with Seller's obligations under this Agreement. 5.3 DEPOSITS BY BUYER. Before the last business day prior to the Closing ----------------- Date, Buyer shall deliver to Escrow Holder: 5.3.1 FUNDS. On or before the Closing Date, immediately available ----- funds in an amount equal to the Closing Funds as described in Section 3.1.3. 5.3.2 ASSIGNMENT(S). By the time Seller is obligated to deliver the ------------- same, duly executed counterparts of the Assignment of Leases (duly acknowledged by Buyer) and the General Assignment described above; 5.3.3 [INTENTIONALLY OMITTED] 8 5.3.4 CHANGE OF OWNERSHIP REPORT. A Preliminary Change of Ownership -------------------------- Report pursuant to California Revenue and Taxation Code Section 480.3; provided, that if Buyer does not complete and deliver into escrow its executed report prior to the closing, then Escrow Holder is authorized and instructed to charge Buyer the applicable sum and to pay that sum to the County Recorder as a penalty; and 5.3.5 ADDITIONAL ITEMS. Any additional funds and/or instruments, ---------------- signed, properly acknowledged and delivered by Buyer, if appropriate, as may be necessary to comply with this Agreement. 5.4 ISSUANCE OF TITLE POLICY. At the Close of Escrow, and as a condition ------------------------ to Closing, Title Company shall be in a position to issue to Buyer, its ALTA Extended Coverage Owner's Policy of Title Insurance (1970) (the "Title Policy"), with liability in the amount of the Purchase Price, covering the Property and insuring fee title vested in Buyer, free of all encumbrances, except: 5.4.1 All non-delinquent general real property taxes; 5.4.2 Matters approved by Buyer with written notice to Escrow Holder during the Contingency Period; and 5.4.3 Any other matters approved by Buyer with written notice to Escrow Holder. As a further condition to Closing, Buyer may obtain from the Title Company such additional endorsements as Buyer may require, at Buyer's sole expense. 5.5 PRORATIONS. ---------- 5.5.1 TAXES AND ASSESSMENTS. All property taxes and approved --------------------- assessments on the Property and any service and maintenance charges for the Property, whether paid in installments or not, shall be prorated between Buyer and Seller as of the Closing Date based on the most current statements and information available to Escrow Holder or otherwise provided by Seller, but without regard to any supplemental or subsequent reassessments. If the Property is part of a larger tax assessor's parcel, then the taxes allocable to the Property shall be determined pro rata on the basis of relative acreage. Buyer and Seller shall also prorate as of the Closing Date, but outside of Escrow, any supplemental taxes levied by reason of events occurring prior to the Closing, promptly upon receipt thereof. 5.5.2 RENTS. All collected rents payable by Tenants shall be ----- prorated through Escrow as of the Closing Date based on the updated Rent Roll. Rents earned and attributable to the period beginning on the Closing Date and continuing thereafter will belong and be credited or paid to Buyer. Buyer shall not be obligated to make any payment or give any credit to Seller for any rents which are still unpaid as of the Closing Date, but Seller shall be entitled to its share of such rents if, as and when they are received by either Buyer or Seller, but only after all rents are brought current and paid to Buyer as provided above. 9 5.5.3 LEASE OPERATING COST PASS-THROUGHS. All operating cost pass- ---------------------------------- throughs for taxes, utilities, common area maintenance charges or other current operating costs and cost of living escalation amounts paid by Tenants under the Leases shall be estimated to the extent feasible based upon Seller's records and shall, in accordance with such estimations, be prorated through Escrow between Buyer and Seller as of the Closing Date. All amounts received by Seller prior to Closing as estimated pass-throughs for any such matters in excess of the amounts prorated to Seller shall be delivered or credited to Buyer. [5.5.4 [INTENTIONALLY OMITTED]. 5.5.5 SECURITY DEPOSITS. Buyer shall be credited and Seller shall ----------------- be charged through Escrow with any security deposits under the Leases as reflected in the updated Rent Roll. 5.5.6 OTHER OPERATING EXPENSES. Utilities and other operating ------------------------ expenses shall be prorated outside of Escrow as of the Closing Date. If actual meter readings are not obtainable, then Escrow Holder shall prorate such charges using the per diem rate and average meter units used as calculated from the latest available billings or other operating history of the Property over the past year provided by Seller. After the Closing, outside of Escrow, the parties shall make any readjustments necessary based upon a final billing obtained by Buyer or actual subsequent readings of utility meters respecting that billing period in which the Closing occurred. All utility security deposits of Seller, if any, shall either be retained by Seller or at Buyer's option shall be delivered to Buyer and credited to Seller. 5.5.7 ADJUSTMENTS. Any item to be prorated that is not determined ----------- or determinable at the Closing shall be promptly adjusted by Buyer and Seller by appropriate cash payments outside of Escrow when the amount due is determined. Either party shall be entitled to request such an adjustment, by written demand on the other party, at any time within six (6) months after the Closing Date. 5.6 CLOSING COSTS. Seller shall pay for the cost of a CLTA Owner's ------------- Policy of title insurance, all documentary transfer taxes, one-half (1/2) of all Escrow costs and fees, and the cost of recording reconveyances of existing monetary encumbrances on the Land. Buyer shall pay for recording the Grant Deed, one-half (1/2) of all Escrow costs and fees, the additional cost of issuing an ALTA Extended Coverage Owner's Policy of title insurance, any additional Title Policy endorsements and any other costs or expenses relating to Buyer's obtaining financing to acquire the Property. Buyer and Seller shall each bear their own legal and accounting costs and fees. 5.7 DISBURSEMENTS BY ESCROW HOLDER. Upon the Close of Escrow, Escrow ------------------------------ Holder shall disburse all funds deposited with Escrow Holder by Buyer in payment of the Purchase Price, as follows: 5.7.1 Pay therefrom all closing costs, prorations, deposits and other items chargeable to the account of Seller as provided above; 10 5.7.2 If Buyer elects to pay off the lender holding a deed of Trust on the Property, pay the demand of the secured lender of record based on information provided in advance by Seller and confirmed in writing by such lender; and 5.7.3 The remaining balance of the Closing Funds shall be disbursed to or at the direction of Seller promptly upon the Close of Escrow. 5.8 COMPLETION AND DISTRIBUTION OF DOCUMENTS. Escrow Holder shall also ---------------------------------------- undertake the following at or promptly after the Close of Escrow: 5.8.1 If necessary, Escrow Holder is authorized and instructed to insert the date on which Escrow closes as the date of any documents conveying interests herein or to become operative as of the Closing Date; 5.8.2 Cause the Grant Deed and any other recordable instruments, in the sequence which the parties so direct, to be recorded in the Official Records of the Recorder of the County in which the Land is located and thereupon to be delivered to the grantee or assignee thereunder. Escrow Holder is hereby instructed not to affix the amount of the documentary transfer tax on the face of the Deed, but to pay on the basis of a separate affidavit of Seller not made a part of the public record, in accordance with Section 11932 of the California Revenue and Taxation Code; and 5.8.3 Cause each non-recorded document to be delivered to the person acquiring rights thereunder, or for whose benefit such document was obtained. 6. DEFAULTS AND REMEDIES --------------------- 6.1 DEFAULT BY EITHER PARTY. If Escrow fails to close when and as ----------------------- provided in Section 5 above due to the failure or breach of either party to perform any obligation under this Agreement, or if either party's representations and warranties are not true and correct, then the nondefaulting party may elect, by written notice to the defaulting party and to Escrow Holder, to terminate Escrow and this Agreement. That termination shall be effective three (3) days after delivery of such notice; provided, that (i) the -------- nondefaulting party has performed or is in a position to perform all conditions on its part to be performed as of the termination date; and (ii) the defaulting party has not cured the default and the nondefaulting party has not waived such default by the effective termination date. Except as otherwise provided in this Section 6, Escrow Holder and the parties shall, upon such termination, return all funds (including interest thereon) and documents then held by them to the party depositing or delivering the same. Thereafter, each of the parties shall be discharged and released from all obligations and liabilities except as otherwise provided in Section 6.4. 6.2 CANCELLATION CHARGES. A defaulting party shall be liable for all -------------------- escrow, title cancellation and similar charges, in addition to any other damages or remedies due the nondefaulting party (except as limited by Sections 6.1 or 6.3). If Close of Escrow fails to occur for any reason other than a party's default, Buyer and Seller shall each pay one-half (1/2) of any escrow title cancellation and similar charges. 11 6.3 LIQUIDATED DAMAGES. IF BUYER FAILS TO COMPLETE THE PURCHASE OF THE ------------------ PROPERTY AND SUCH FAILURE CONSTITUTES A MATERIAL BREACH OF THIS AGREEMENT, BUYER, BY ITS INITIALS FOLLOWING THIS PARAGRAPH, AGREES THAT THE DEPOSIT, PLUS ALL INTEREST ACCRUED THEREON, SHALL CONSTITUTE LIQUIDATED DAMAGES TO SELLER FOR SUCH BREACH BY BUYER. THE PAYMENT OF SUCH AMOUNT IS NOT INTENDED AS A FORFEITURE OR A PENALTY WITHIN THE MEANING OF CALIFORNIA CIVIL CODE SECTIONS 3275 OR 3369 OR SIMILAR AUTHORITIES, BUT IS INTENDED TO CONSTITUTE LIQUIDATED DAMAGES TO SELLER PURSUANT TO THE REQUIREMENTS OF CALIFORNIA CIVIL CODE SECTIONS 1671, 1676 AND 1677. IN CONSIDERATION FOR BUYER'S AGREEMENT TO PAY SUCH LIQUIDATED DAMAGES, SELLER HEREBY WAIVES ALL OTHER CLAIMS FOR DAMAGES AND FOR SPECIFIC PERFORMANCE AGAINST BUYER, INCLUDING WITHOUT LIMITATION ANY RIGHTS THAT SELLER MAY HAVE UNDER CALIFORNIA CIVIL CODE SECTIONS 1680 AND 3389. BUYER AND SELLER EACH AGREES THAT THE AFORESAID SUM IS A FAIR AND REASONABLE AMOUNT FOR LIQUIDATED DAMAGES FOR SUCH A BREACH UNDER THE CIRCUMSTANCES EXISTING AT THE TIME THIS AGREEMENT IS ENTERED INTO. ______________________ ______________________________ Buyer's Initials Seller's Initials 6.4 SPECIFIC PERFORMANCE BY SELLER. If Seller defaults under any ------------------------------ obligation in this Agreement, then in lieu of termination as provided in Section 6.1 and in addition to any other rights and remedies at law or in equity, Buyer may compel specific performance by Seller of Seller's obligation to convey the Property in the condition required in Sections 4.1 and 5.2. 7. REPRESENTATIONS AND WARRANTIES ------------------------------ 7.1 IN GENERAL. In addition to any express agreements of either party ---------- contained herein, the following constitute representations and warranties by each party of either or both of the parties to the other, which shall be true and correct in each case as of the date hereof. The representations and warranties shall continue to be true and correct at the end of the Contingency Period and the Close of Escrow, and the truth and accuracy shall constitute a condition to the Close of Escrow for the benefit of the party to whom such representations and warranties were made. Notwithstanding anything to the contrary herein, the effect of any representations, warranties, covenants and agreements made by Seller in this Agreement shall not be diminished or deemed to be waived by any inspections, tests or investigations made by Buyer or its agents. 7.2 BY EACH PARTY. Each party hereto covenants, represents and warrants ------------- to the other as follows: 12 7.2.1 AUTHORITY. Such party has full power and authority to enter --------- into and comply with the terms of this Agreement, and the individuals executing this Agreement on behalf of such party have actual right and authority to bind that party to the terms of this Agreement, without requiring any further consent to the execution, delivery and performance of that party hereunder by any person or entity. 7.2.2 BINDING EFFECT. No action or consent which has not been -------------- obtained is necessary to make this Agreement, and this Agreement and all documents to be executed hereunder are the valid and legally binding obligations of such party, enforceable in accordance with their respective terms; and 7.2.3 COMPLIANCE. To the best knowledge of such party, this ---------- Agreement and that party's performance of the obligations herein contained do not and will not contravene any provision of any present judgment, order, decree, writ or injunction, or any provision of any Laws currently applicable to such party, or any evidence of indebtedness or security therefor or other agreement, covenant or restriction by which such party or any of such party's properties may be bound. 7.3 BY SELLER ONLY. Seller covenants, represents and warrants to Buyer, -------------- as follows: 7.3.1 HAZARDOUS SUBSTANCES. Consistent with Seller's disclosure -------------------- obligations contained in California Health & Safety Code Section 25359.7, Seller has no knowledge that (except for cleaning agents, photocopying chemicals and other substances used in the ordinary course of normal building and maintenance operations on the Property) there has been used, installed, generated, produced, stored, or released on, under or about the Land, or transported to or from the Property, or into any groundwater (other than sanitary sewer systems established for such purpose), any underground storage tanks, asbestos, PCBs, urea formaldehyde, oils, petroleum or by-products thereof or any other toxic or hazardous waste, material or substance, as those or any similar terms are now or in the future used or defined in any Laws (herein "Hazardous Substance"). Seller has not released any other person or entity from any liability for any such environmental matters and no liens have been or are imposed on the Property under any environmental Laws. 7.3.2 NO VIOLATIONS; PENDING ACTIONS. To Seller's knowledge, ------------------------------ (i) Seller has received no notice or claim from any government authority or any other private party relating to a breach or violation of any Laws or any permits or private covenants or restrictions relating to any Hazardous Substance or other adverse environmental or other defective condition respecting the Project or any ground water related thereto, (ii) there are no pending or threatened legal or administrative proceedings regarding the Property (including but not limited to any property damage, public or personal liability claims, condemnation proceedings, future public assessment or similar proceedings or charges, except as shown in the Title Documents). 7.3.3 NO OPTIONS, ETC. Seller has not obligated itself to sell or --------------- offer for sale any portion of the Property to any party other than Buyer. Seller has not hypothecated or 13 assigned any rents or income from the Property except pursuant to any secured financing which has been disclosed in writing by Seller to Buyer. 7.3.4 POSSESSION AND LIENS. Subject to the rights of Tenants under -------------------- the Leases, and matters shown on the Title Report approved by Buyer, complete and unconditional possession of the Property shall be delivered to Buyer at Close of Escrow, free from any liens, bonded indebtedness or other assessments for any water, sewer, traffic or other improvement district imposed by any private or governmental entity, or otherwise. 7.3.5 TRUTHFULNESS. All information and items regarding the ------------ Property provided by Seller to Buyer are true, accurate and complete in all respects and are fairly presented in a manner that is not misleading. 7.3.6 DOCUMENTS. Seller has no knowledge of the existence of any --------- Property Documents of the type described in Section 4.2 above that were not delivered to Buyer as provided therein. Seller is not in default under any documents referred to in the Title Documents or under any contracts comprising part of the Intangible Property. 7.3.7 NON-FOREIGN STATUS. In accordance with (a) Section 1445 of ------------------ the Internal Revenue Code, Seller is not now, and at the Closing will not be, a "foreign person" (as defined therein), and (b) California Revenue and Taxation Code Section 18805 and 26131, Seller is neither (i) a non-California resident ------- with its principal address outside the state of California, or is causing the -- sales proceeds to be paid to a financial intermediary, nor is (ii) a --- partnership, a bank acting as a trustee (other than as a trustee under a deed of trust) or a corporation acting as a beneficiary under a deed of trust in order -- to acquire the real property hereunder by foreclosure or by deed in lieu of foreclosure. Accordingly, Buyer need not withhold any state or federal tax at the Closing as a result of this transfer. Seller shall sign and deliver prior to the Closing a separate affidavit in form and substance satisfactory to Buyer and Escrow Holder confirming the foregoing information and providing Seller's tax identification number. 7.3.8 LEASES. In respect of each of the Leases, except as provided ------ in the Rent Roll approved by Buyer and provided in Section 4.4 above, the following information is true and correct: (i) each of the Leases is in full force and effect according to the terms set forth therein and in the Rent Roll and has not been further modified, amended, extended or assigned by Seller, in writing or otherwise, and each Tenant under the Leases is legally required to pay all sums and perform all obligations set forth in the Leases, without further concessions, abatements, offsets, defenses or other basis for relief or adjustment; (ii) all obligations of the Seller, as landlord, under the Leases which have accrued prior to Closing will be performed by Closing; (iii) except as disclosed in the Estoppel Certificates delivered by Seller or any Tenant as provided in (S) 5.2.7 above, to Seller's best knowledge no Tenant has asserted or has any defense to, or any offsets or claims against, any rent payable by it after the date hereof, or the performance of any other obligations under such Tenant's respective Lease; (iv) to Seller's best knowledge, no Tenant is in default under or in arrears in the payment of any sum payable or in the performance of any obligation required of it under its Lease and no Tenant has prepaid any rent or other charges; (v) Seller has received no notice that any Tenant is unable or unwilling to perform any or all of its obligations under its Lease; (vi) Seller has not applied and shall not 14 apply any security deposit from a Tenant to rent or any other obligation due from any Tenant without Buyer's prior written consent; (vii) all work required to be done by Seller, as landlord under each such Lease, has been or by the Closing will be done or furnished unless otherwise agreed by the parties, and no Tenant is entitled to any additional work during the term of its Lease; (viii) each Tenant is current in the payment of all rents, amounts and reimbursements due to Seller under its respective Lease, including but not limited to all taxes, assessments, repairs and maintenance charges, insurance premiums, utilities or other charges or expenses; (ix) neither the Leases nor the rents or any other amounts payable thereunder have been assigned, pledged or encumbered by Seller except for such mortgages, pledges or other encumbrances agreed to become or remain in effect at Closing; (xi) Seller has not received from any Tenant written notice of any presently pending dispute regarding the calculation or payment of rent, the terms of any Lease or any alleged default by Seller, as lessor, under such Lease, or of any bankruptcy, receivership, custodianship, reorganization, insolvency, assignment for benefit of creditors or other proceeding of a similar nature respecting any Tenant, any Lease or the Property; and (xii) Seller shall pay and retain full responsibility for all expenses connected with or arising out of the negotiation, execution and delivery of the Leases, including but not limited to brokers' commissions and leasing fees remaining unpaid at the Closing. 7.3.9 LEASING FEES. Upon consummation of the purchase and sale ------------ herein, in addition to matters covered by Section 10 below, there will be no brokerage or leasing fees or commissions or other compensation due or payable to any person, firm, corporation, or other entity, with respect to or on account of any of the Leases and no such fees, commissions or other compensation shall, by reason of any existing agreement, become due during the terms of any of the Leases or with respect to any renewal or extension thereof or the leasing of additional space by any Tenant which are not subject to an arrangement for full payment and satisfaction by Seller as described in Section 7.3.8 (xii) above. 7.3.10 NO EMPLOYEES. Seller does not employ any employees at the ------------ Project. 7.3.11 NO MECHANICS LIENS. Seller shall have paid for all work, ------------------ labor and materials furnished to it in connection with the Property prior to Closing; and will indemnify and hold Buyer harmless from any mechanic's or materialmen's liens, filed or otherwise claimed, in connection with any such work, labor and materials performed on or furnished in connection with the Property prior to Closing, and any and all legal and related expenses incurred by Buyer by reason thereof. 7.3.12 PARKING REQUIREMENTS. All vehicle parking space requirements -------------------- imposed by applicable Laws relating to the Property are satisfied solely by on- site parking, without the necessity of any off-site parking arrangements. 7.3.13 MEANING OF KNOWLEDGE. Wherever in this Section 7 Seller's -------------------- representations and warranties are limited to Seller's knowledge, the term, "knowledge" shall mean those matters which are known by David A. Brown or Jack Stafford. Seller represents and warrants that no other person employed by Seller or related to Seller is or has been in a position to have knowledge not possessed by David A. Brown or Jack Stafford. 15 7.3.14 ACCURACY OF REPRESENTATIONS AND WARRANTIES. No representation ------------------------------------------ or warranty or any statement furnished by Seller to Buyer contains any untrue statement of material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading. 8. OPERATION OF THE PROPERTY BEFORE CLOSING ---------------------------------------- 8.1 MAINTENANCE. At all times prior to the Closing, Seller shall continue ----------- to cause the Property to be maintained in full compliance with all Laws and in the ordinary and usual course of business, and shall pay when due all of Seller's obligations under all Leases, service contracts and other agreements affecting the Property. In particular, Seller shall pay and fully discharge all mechanic's or similar liens against the Property. 8.2 INSURANCE. Seller will keep in full force and effect all existing --------- insurance policies affecting the Property or any portion thereof through the Close of Escrow. 8.3 PERMITS. To the extent practicable, Seller will keep in effect, and ------- will renew when necessary at Buyer's expense, all existing licenses and permits affecting the Property. 8.4 RISK OF LOSS. All risks of loss concerning the Property shall be ------------ borne solely by Seller until the Closing Date. Seller shall immediately give Buyer notice of any damage or destruction of the Property or any portion thereof (including any soils subsidence), the cost of restoration and repair of which would exceed $50,000. Seller may elect to repair or restore any such damage or destruction and to extend the Closing Date up to 90 additional days by giving Buyer and Escrow Holder written notice of that election within 10 days after the occurrence of any such damage or destruction. If Seller does not make such election, then Buyer shall proceed to purchase the Property and consummate this Agreement in accordance with its terms unless, within five (5) business days after Seller's delivery of its notice, Buyer elects in writing to terminate this Agreement, in which event Buyer and Seller shall share equally all escrow and title cancellation costs. If Buyer proceeds to Closing, Seller at the Closing shall assign to Buyer all of Seller's right, if any, to receive with the Grant Deed an assignment of Seller's rights to any insurance proceeds to which Seller is entitled in connection with such damage or destruction. 8.5 CONDEMNATION. If any portion of the Property, or any interest ------------ therein, is proposed to be taken before the Closing Date as a result of any street widening or other condemnation (including the filing of any notice of intended condemnation or proceedings in the nature of eminent domain), Seller shall immediately give Buyer notice of such threat. Buyer shall nonetheless proceed with the purchase of the Property and consummate this Agreement in accordance with its terms unless, within ten (10) days after Seller delivers its notice, Buyer elects in writing to terminate this Agreement, in which event Buyer and Seller shall share equally in all Escrow and title cancellation costs. If Buyer proceeds to Closing, Seller at the Closing shall assign to Buyer all of Seller's right to receive condemnation award, except for any award to Seller for a temporary taking of any portion of the Property for a period up to but not beyond the Closing. 16 8.6 APPROVAL OF LEASES AND CONTRACTS. Seller shall diligently pursue -------------------------------- the leasing of all remaining unleased space within the Improvements at the best feasible rents and provisions and at reasonable leasing fees and commissions to be payable by Buyer. In addition, Buyer acknowledges that Seller may need to enter into further leases and contracts required in the ordinary course of business to occupy, operate and maintain the Property which will survive the Close of Escrow. Seller shall obtain the prior written approval of Buyer, which approval shall not be unreasonably withheld or delayed, before entering into any new leases or lease modifications that provide for any one or more of the following: a. For more than 2,000 square feet; b. At a full service gross rental rate of less than $1.85 per square foot per month; and/or c. For a period in excess of thirty-six months. Except as otherwise may be specifically agreed between Seller and Buyer, Seller shall pay and be fully responsible for all expenses relating to the Leases or any future leases or contracts executed prior to the Closing, including but not limited to brokerage or leasing fees or commissions respecting any renewal or extension term, any tenant improvement costs and the like. 9. POST-CLOSING MATTERS -------------------- 9.1 NOTICES TO TENANTS. As soon as practicable after the Closing, ------------------ Seller shall cause a notice in the form of Exhibit "K" to be delivered to Buyer ----------- for delivery to all Tenants shown on the Rent Roll, updated as of the Closing. 9.2 CONFIDENTIALITY. Each party shall hold in strict confidence all --------------- information received from the other party concerning this transaction and shall not release any such information to third parties (other than attorneys, accountants, lenders or prospective partners or associates) without the prior written consent of the other party unless otherwise required by law. Buyer and Seller will jointly prepare and issue any and all releases of information to the public relating to the sale of the Property. Each party will undertake to consult with the other prior to responding to any inquiries made by any person respecting the transactions contemplated by this Agreement. 10. BROKERS ------- Seller and Buyer each represents and warrants to the other that no broker or finder or other real estate agent is entitled to any commission, finder's fee or other compensation resulting from any action on its part other than The Seeley Companies, which will be paid solely by Seller pursuant to a separate commission agreement between Seller and such broker(s). If payment is to be made through Escrow, the party responsible for such commission shall advise Escrow Holder of the address of the broker and other pertinent information reasonably required by Escrow Holder. Each party agrees to indemnify, defend and hold the other harmless against any 17 claim, loss, damage, cost or liability for any broker's commission or finder's fee for which it is responsible or which is asserted as a result of its own act or omission in connection with this transaction. 11. MISCELLANEOUS PROVISIONS ------------------------ 11.1 ASSIGNMENT; BINDING ON SUCCESSORS. This Agreement shall be binding --------------------------------- upon and shall inure to the benefit of Buyer and Seller and their respective representatives, successors and assigns. Before Close of Escrow, Buyer shall have the right to assign all or any portion of its interest in this Agreement and the Escrow to any person or entity. 11.2 FEES AND OTHER EXPENSES. Except as otherwise provided herein, each ----------------------- of the parties hereto shall pay its own fees and expenses in connection with this Agreement. In any dispute or action between the parties arising out of this Agreement or the Escrow, or in connection with the Property, the prevailing party shall be entitled to have and recover from the other party all losses, damages, costs and expenses (including without limitation court costs and reasonable attorneys' fees) related thereto, whether by final judgment or by out of court settlement. 11.3 APPROVAL AND NOTICES. Any approval, disapproval, demand, document -------------------- or other notice or communication ("Notice") required or permitted to be given hereunder shall be in writing and may be served personally, by commercial delivery or private courier service, or by registered or certified mail (return receipt requested, postage prepaid), or by telecopy or fax transmission to the respective numbers shown below, which Notice shall be effective (i) upon personal delivery, (ii) when received as indicated by the date on the return invoice or receipt showing delivery, or (iii) when sent by telecopy or fax, with receipt and legibility telephonically confirmed and with written proof of transmittal to and receipt by the other party being established mechanically by the sender at the time of transmittal. The parties' addresses for Notices are as follows: IF TO SELLER: David A. Brown Pacifica Real Estate Group 1035 Anacapa Street Santa Barbara, CA 93101 Telephone: (805) 899-2400 Facsimile: (805) 899-2424 18 COPY TO: Thomas J. Gamble 1035 Anacapa Street Santa Barbara, CA 93101 Telephone: (805) 899-2400 Facsimile: (805) 899-2424 IF TO BUYER: Kilroy Industries 2250 East Imperial Highway El Segundo, CA 90245 Attn: Jeffrey C. Hawken Telephone: (213) 772-1193 Facsimile: (310) 640-3148 COPY TO: LATHAM & WATKINS 650 Town Center Drive, Twentieth Floor Costa Mesa, California 92626 Attn: Bruce Tester Telephone: (714) 540-1235 Facsimile: (714) 755-8290 Notice of change of any address, telephone or fax numbers shall be given by written notice in the manner detailed in this paragraph. Rejection or other refusal to accept or the inability to deliver because of changed address of which no Notice was given shall be deemed to constitute receipt of the Notice. 11.4 JURISDICTION. This Agreement shall be construed under the laws of ------------ the State of California. The parties hereby consent to any venue and jurisdiction of any state or federal court sitting in the judicial district in which the Land is located. 11.5 INTERPRETATION. All provisions herein shall be construed in all -------------- cases as a whole according to its fair meaning, neither strictly for nor against either Buyer or Seller and without regard for the identity of the party initially preparing the same. Titles and captions are inserted for convenience only and shall not define, limit or construe in any way the scope or intent of this Agreement. References to sections are to sections as numbered in this Agreement unless expressly stated otherwise. 11.6 GENDER. As used in this Agreement, the masculine, feminine or ------ neuter gender and the singular or plural number shall each be deemed to include the others where and when the context so dictates. 19 11.7 NO WAIVER. A waiver by either party of a breach of any of the --------- covenants, conditions or agreements to be performed by the other party shall not be construed as a waiver of any succeeding breach of the same or other covenants, conditions or agreements. 11.8 MODIFICATIONS. Any alteration, change or modification of or to this ------------- Agreement, in order to become effective, must be made in writing and in each instance signed on behalf of each party to be charged. 11.9 SEVERABILITY. If any term, provision, condition or covenant of this ------------ Agreement or its application to any party or circumstances shall be held, to any extent, invalid or unenforceable, the remainder of this Agreement, or the application of the term, provision, condition or covenant to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected, and shall be valid and enforceable to the fullest extent permitted by law. 11.10 SURVIVAL. All representations, warranties, indemnities, covenants -------- or agreements by either Buyer or Seller contained in this Agreement shall survive the Closing for a period of one year, except that any representation or warranty which is fraudulent when made shall survive for the period of the applicable statute of limitations., The representations, warranties, indemnities, covenants and agreements shall not be merged into any conveyance or instrument delivered at the Closing. 11.11 MERGER OF PRIOR AGREEMENTS. This Agreement contains the entire -------------------------- understanding between the parties relating to the transaction contemplated by this Agreement. All prior or contemporaneous agreements, understandings, representations and statements, whether direct or indirect, oral or written, are merged into and superseded by this Agreement, and shall be of no further force or effect. 11.12 TIME OF ESSENCE. Time is of the essence of this Agreement. --------------- 11.13 COUNTERPARTS. This Agreement may be signed in multiple counterparts ------------ which, when duly delivered and taken together, shall constitute a binding Agreement between all parties. 11.14 EXHIBITS. All exhibits attached to this Agreement are incorporated -------- herein by reference. 11.15 COOPERATION OF PARTIES. Each party agrees to cooperate in good ---------------------- faith with the other party in all aspects of accomplishing the intent of this Agreement, including but not limited to signing documents and taking other actions as may be reasonably necessary or proper for such purpose. 11.16 NO THIRD PARTY BENEFICIARIES. Except as otherwise expressly ---------------------------- provided herein, the provisions of this Agreement are intended to be solely for the benefit of the parties hereto, and the execution and delivery of this Agreement shall not be deemed to confer any rights upon, nor obligate any of the parties hereunder, to any person or entity other than the parties hereto. 20 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. "SELLER": WESTLAKE PLAZA PARTNERS, a California limited partnership By: Pacifica Real Estate Group, a California corporation, a General Partner By: ---------------------------------------- Name: ---------------------------------- Title: ---------------------------------- "BUYER": KILROY INDUSTRIES, a California corporation By: ---------------------------------------- Name: ---------------------------------- Title: ---------------------------------- "ESCROW HOLDER:" The undersigned acknowledges receipt of this Agreement and agrees to act in accordance with all applicable provisions contained herein. CONTINENTAL LAWYERS TITLE INSURANCE COMPANY By: ------------------------------ Name: -------------------------- Title: -------------------------- 21 TABLE OF EXHIBITS -----------------
Page No. Description References - --- ----------- ---------- A Legal description of Land 1 B Map or depiction of Land 1 C Escrow General Provisions 2 D Grant Deed and D.T.T. Statement 7 E Assignment of Leases 2, 7 F General Assignment 7 G Bill of Sale 7 H Rent Roll 2, 5, 7 I Tenant Estoppel Certificate 7 J Landlord Estoppel Certificate 7 K Seller's Notice to Tenants 18
Table of Exhibits ----------------- LEGAL DESCRIPTION OF LAND ------------------------- [To be provided] Exhibit "A" ----------- MAP OR DEPICTION OF LAND ------------------------ [To be provided] Exhibit "B" ----------- EXHIBIT "C" GENERAL ESCROW PROVISIONS ------------------------- 1. All funds received in this escrow shall be deposited in a separate escrow fund account or accounts of _______________ TITLE COMPANY (for the benefit of the parties hereto) with one or more state or national banks duly qualified to do business in the State of California, so that each such account shall be fully insured at all times by the Federal Deposit Insurance Corporation, to the maximum extent permitted by law. All disbursements shall be made by check of ______________ TITLE COMPANY. 2. You are authorized to prepare, obtain, record and deliver the necessary instruments to carry out the terms and conditions of this escrow and to order to be issued at close of escrow the policy of title insurance as called for in these instructions. Close of escrow shall mean the date instruments are recorded. 3. All adjustments and prorations shall be made on the basis of a 30-day month. 4. If applicable, you are instructed to assign any fire and casualty insurance policy delivered to you and to secure any endorsements required in the performance of these instructions. You may assume that said policy is in full force and effect and that all premiums due have been paid. 5. Subject to the provisions of Section 15 below, you are not to be held accountable or liable for the sufficiency or correctness as to form, manner of execution, or validity of any instrument deposited in this escrow, nor as to the identity, authority or rights of any person executing the same. Your duties hereunder shall be limited to the proper handling of such money and the proper safekeeping of such instruments, or other documents received by you as escrow holder, and for the disposition of same in accordance with the written instructions accepted by you in this escrow. 6. You shall have no responsibility of notifying me or any of the parties to this escrow of any sale, resale, loan, exchange or other transaction involving any property herein described or of any profit realized by any person, firm or corporation in connection therewith, regardless of the fact that such transaction(s) may be handled by you in this escrow or in another escrow. 7. No notice, demand or change of instruction shall be of any effect in this escrow unless given in writing by all parties affected thereby and except as otherwise specifically provided in the Agreement to which these General Provisions are attached. In the event a demand for the funds on deposit in this escrow is made, not concurred in by all parties hereto, the escrow holder, regardless of who made demand therefor, may elect to do any of the following: Exhibit "C" ----------- i. After three (3) business days from the date escrow holder was first notified that the escrow is to be cancelled and/or demand for funds was made, absent mutually concurring instructions providing for payment of funds and the disposition to be made of this escrow, the escrow holder may return all funds and documents to the parties depositing same, and without liability therefor. ii. Withhold and stop all further proceeding in, and performance of, this escrow pending a resolution of any conflict by and between the parties hereto. iii. File a suit in interpleader and obtain an order from the court allowing escrow holder to deposit all funds and documents in court and have no further liability hereunder, except for its own negligent or willful misconduct or any breach by escrow holder of any obligations in this Agreement. 8. If the conditions of this escrow have not been complied with at the time herein provided, you are nevertheless to complete the same as soon as the conditions (except as to time) have been complied with, unless Buyer has made written demand upon you for the return of money and instruments deposited by Buyer. 9. All parties hereto agree, jointly and severally, to pay on demand, as well as to indemnify and hold you harmless form and against all costs, damages, judgments, attorney's fees, expenses, obligations and liabilities of any kind or nature which, in good faith, you may incur or sustain in connection with this escrow, whether arising before or subsequent to the close of this escrow, except to the extent caused by the negligence or willful misconduct of the escrow holder. 10. Unless the Agreement otherwise provides or unless otherwise instructed by either Buyer or Seller, you are authorized to furnish copies of these instructions, any supplements or amendments thereto, notices of cancellation and closing statements to the attorneys, real estate broker(s) and lender(s), if any, named in this escrow. 11. These instructions may be executed in counterparts, each of which so executed, shall irrespective of the date of its execution and delivery be deemed an original, and said counterparts together shall constitute one and the same instrument. 12. These instructions shall become effective as an escrow only upon the delivery thereof to the escrow holder signed by all parties thereto. 13. Any funds abandoned or remaining unclaimed, after good faith efforts have been made by the escrow holder to return same to the party(ies) entitled thereto, shall be assessed a holding fee of $50.00 annually. After seven (7) years the amount thereafter remaining unclaimed may escheat to the State of California. 2 14. All documents, closing statements, and balances due the parties to this escrow are to be mailed by ordinary mail to said parties at the addresses shown opposite their signatures, unless otherwise instructed. 15. Notwithstanding the foregoing, if escrow holder is also acting as Title Company under this Agreement, nothing set forth in these General Escrow Provisions shall limit any liability set forth in the Title Policy provided in the Agreement. 16. For purposes of complying with Internal Revenue Code Section 6045(e), as amended effective January 1, 1991, escrow holder is hereby designated as the "person responsible for closing the transaction" and also as the "reporting person," for purposes of filing any information returns with the Internal Revenue Service concerning this transaction, as required by law. 3 RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: ___________________________ ___________________________ ___________________________ MAIL TAX STATEMENTS TO: ___________________________ ___________________________ ___________________________ GRANT DEED ---------- FOR VALUE RECEIVED, _____________________________, a ____________________________________, hereby grants to ______________________________, a __________________________ ("Grantee") that certain real property and all improvements located thereon ("Property") situated in the City of _____________________________, _____________________ County, described on Exhibit "A" attached hereto and by this reference incorporated herein. SUBJECT TO: (a) A lien not yet delinquent for real property taxes against the Property. (b) The following liens, encumbrances, easements, rights of way, covenants, conditions and restrictions of record: [List all items as shown on the final approved Title Report.] IN WITNESS WHEREOF, the undersigned has executed this Grant Deed as of ___________________, 199_. ______________________________, a ____________________________ By: ___________________________ Name:__________________________ Its: __________________________ Escrow No:_____ Exhibit "D" Title No.:_____ to Purchase Agreement --------------------- STATE OF CALIFORNIA ) ) ss. COUNTY OF ____________ ) On ____________________, 199_, before me, ________________________, Notary Public, personally appeared ____________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacities, and that by his/her/their authorized signature(s) on the instrument the person(s), or the entity on behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. ____________________________ Notary Public Escrow No:_____ Exhibit "D" Title No.:_____ to Purchase Agreement --------------------- SEPARATE STATEMENT OF DOCUMENTARY TRANSFER TAX ------------------------ County Recorder _____________ County Dear Sir: In accordance with California Revenue and Taxation Code Section 11932, it is requested that this Statement of Documentary Transfer Tax due not be recorded with the attached deed, but be affixed to the deed after recordation and before return as directed on the deed. The deed names ___________________________________, a __________________________ corporation, as Grantor, and __________________________________, a ______________________, as Grantee. The improvements being transferred are located in the County of ___________________, State of California. The amount of the documentary transfer tax due on the attached deed is _______________________________________ Dollars ($______________), computed on the full value of the improvements less encumbrances of record. Very truly yours, ______________________________, a ____________________________ By: __________________________ Name: ________________________ Its: _____________________ Escrow No:_____ Exhibit "D" Title No.:_____ to Purchase Agreement --------------------- WHEN RECORDED RETURN TO: Latham & Watkins 650 Town Center Drive Twentieth Floor Costa Mesa, California 92626-1918 Attention: Bruce Tester - ----------------------------------------- (Space above this line for County Recorder's use only) ASSIGNMENT OF LEASES -------------------- THIS ASSIGNMENT OF LEASES ("Assignment") is dated as of ________________________, 19___, and is entered into by and between ______________________________________________, a __________________________ corporation ("Assignor"), and _______________________________ ___________________________, a ______________________________ ("Assignee"), with reference to the following: R E C I T A L S: - - - - - - - - A. Assignor and Assignee have entered into that certain Agreement of Purchase and Sale and Joint Escrow Instructions ("Agreement") dated _____________, 19__, providing for the purchase by Assignee from Assignor of certain real property and improvements and personal property located thereon (collectively, the "Property") described in the Agreement. All capitalized terms not otherwise defined herein shall have the same meanings given to them in the Agreement. B. Assignor is the landlord under certain leases [described on Schedule "1" hereto] (herein, the "Leases") which Assignor has agreed to assign - ------------ to Assignee upon its purchase of the Property. C. This Assignment is executed in order to effectuate as of the Closing Date the transfer to Assignee of all of Assignor's rights, title and interest in and to the Leases pursuant to the provisions of the Agreement. NOW, THEREFORE, in consideration of the foregoing recitals and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Assignment. As of the Closing Date, Assignor hereby assigns, ---------- conveys, transfers and sets over unto Assignee, its successors and assigns, free and clear any and all right, title and interest of Assignor, as landlord or otherwise, in and to the Leases for the remaining Exhibit "E" to Purchase Agreement --------------------- term and all extensions thereof and to the rents set forth in the Leases, together with any and all rights and appurtenances thereto in any way belonging to Assignor, its successors and assigns. Assignor hereby warrants and defends unto Assignee, its successors and assigns, all such rights, title and interest in the foregoing documents against every person whosoever lawfully claiming all or any part thereof, subject to Assignee's covenants contained herein and all conditions contained in the foregoing documents to be performed and observed by Assignee. 2. Acceptance and Assumption. Assignee hereby accepts and agrees to ------------------------- perform all of the terms, covenants and conditions of the Leases on the part of the landlord therein required to be performed from and after the Close of Escrow, as defined in the Agreement (but not prior thereto, which shall remain the obligation and responsibility of Assignor), including, but not limited to, the obligation to repay in accordance with the terms of each Lease to the tenant thereunder any security or other deposits. 3. Indemnification by Assignee. Assignee shall indemnify, defend and --------------------------- hold Assignor harmless from and against any and all claims, costs, demands, losses, damages, liabilities, lawsuits, actions and other proceedings in law or in equity or otherwise, judgments, awards and expenses of every kind and nature whatsoever, including, without limitation, attorneys' fees (collectively "Liabilities"), arising out of or relating to, directly or indirectly, in whole or in part, the Leases, occurring from and after the Close of Escrow. 4. Indemnification by Assignor. Assignor shall indemnify, defend and --------------------------- hold Assignee harmless from and against any and all Liabilities arising out of or relating to, directly or indirectly, in whole or in part, the Leases, occurring prior to the Close of Escrow. 5. Pre-Closing Rent and Operating Expenses. Any rents or operating --------------------------------------- expenses received by Assignor or Assignee after the Close of Escrow with respect to the Leases shall belong to and be paid over to Assignee, unless all current rents attributable to any period commencing on or after the Closing Date have been paid to Assignee, in which case all amounts attributable to periods preceding the Close of Escrow shall belong and be paid to Assignor. 6. Miscellaneous. Assignor and Assignee each agrees to execute such ------------- other documents and perform such other acts as may be necessary or desirable to effectuate this Assignment. If either party brings any action or suit against the other arising from or interpreting this Agreement, the prevailing party in such action or suit shall, in addition to such other relief as may be granted, be entitled to recover its costs of suit and actual attorneys' fees, whether or not the same proceeds to final judgment. This Assignment shall be governed by and construed in accordance with the laws of the State of California, and shall be binding upon and inure to the benefit of Assignor and Assignee and their respective successors and assigns. This Assignment may be executed in multiple counterparts, all of which shall be but one and the same instrument, binding on all parties when all separately executed copies have been fully delivered. Exhibit "E" to Purchase Agreement --------------------- IN WITNESS WHEREOF, the undersigned have executed this Assignment as of the date and year first above written. "ASSIGNOR": _______________________________________, a _____________________________________ By: ----------------------------------- Name: --------------------------------- Title: --------------------------------- By: ----------------------------------- Name: --------------------------------- Title: --------------------------------- "ASSIGNEE": _______________________________________, a _____________________________________ By: ----------------------------------- Name: --------------------------------- Title: --------------------------------- By: ----------------------------------- Name: --------------------------------- Title: --------------------------------- 3 [SCHEDULE OF LEASES ------------------ [To be provided by Seller] Schedule "1" To Assignment of Leases] ----------------------- GENERAL ASSIGNMENT ------------------ THIS GENERAL ASSIGNMENT ("Assignment") is executed as of ___________________________, 19___, by and between __________________________, a _________________ corporation ("Assignor"), and ______________________________ ___________________________________________________________, a _______________________________________ ("Assignee"), with reference to the following: R E C I T A L S: - - - - - - - - A. Assignor as of even date herewith conveyed to Assignee the real property, improvements and personal property located thereon (herein, "Property") more particularly described in and pursuant to that certain Agreement of Purchase and Sale and Joint Escrow Instructions (the "Agreement") dated _______________, 19___, by and between Assignor as "Seller," and Assignee, as "Buyer." All capitalized terms not otherwise defined herein shall have the same meaning given to them in the Agreement. B. In connection with the conveyance of the Property, Assignor and Assignee intend that all of Assignor's right, title and interest in and under any and all plans, specifications, maps, licenses, permits, guaranties, warranties, certificates, contracts, agreements and other instruments listed on Schedule "1" or otherwise pertaining in any way to the Property or stated - ------------ herein, including but not limited to such of the foregoing as are listed on Schedule "1" hereto and such contracts and agreements as are set forth on - ------------ Schedule "2" hereto (collectively, the "Plans, Permits and Contracts") shall be - ------------ conveyed to Assignee as of the Closing. NOW, THEREFORE, in consideration of the foregoing recitals and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Warranties and Guaranties. Effective as of the Closing Date, ------------------------- Assignor hereby assigns, sets over, conveys and transfers to Assignee, free and clear, any and all of Assignor's right, title and interest in and to all guaranties, warranties, certificates, contracts and agreements from any contractors, subcontractors, vendors or suppliers regarding their performance, quality of workmanship and quality of materials supplied in connection with the construction, manufacture, development, installation and operation of any and all personal property, fixtures and improvements located on the Property. 2. Governmental Approvals and Certificates. To the extent --------------------------------------- permissible by law, Assignor hereby assigns, sets over, conveys and transfers to Assignee, free and clear, any and all of Assignor's right, title and interest in and under any zoning, use, occupancy and operating permits, and all other permits, licenses, approvals and certificates obtained in connection with the Property, including but not limited to such of the foregoing as are specifically set forth on Schedule "2" hereto. ------------ Exhibit "F" to Purchase Agreement --------------------- 3. Plans and Specifications. Assignor hereby assigns, sets over, ------------------------ conveys and transfers to Assignee, free and clear, any and all of Assignor's right, title and interest in and to all maps, plans, specifications and related documents prepared in connection with the development, construction and operation of any and all improvements located on the Property. 4. Contracts. Assignor hereby assigns, sets over, conveys and --------- transfers to Assignee, free and clear, all of Assignee's right, title and interest, if any, in and to all contracts pertaining to the use, maintenance, servicing or repair of the Property, including but not limited to such of the foregoing as are set forth specifically on Schedule "2" hereto. ------------ 5. Acceptance. Assignee hereby accepts the foregoing assignments and ---------- agrees to assume and keep, perform and fulfill all of the terms, covenants, conditions, duties and obligations which are required to be kept, performed and fulfilled by the Assignor under the Plans, Permits and Contracts. 6. Indemnification by Assignor. Assignor shall indemnify, defend and --------------------------- hold Assignee harmless from and against any and all claims, costs, demands, losses, damages, liabilities, lawsuits, actions and other proceedings in law or in equity or otherwise, judgments, awards and expenses of every kind and nature whatsoever, including, without limitation, attorneys' fees (collectively, "Liabilities") arising out of or relating to, directly or indirectly, in whole or in part, the Plans, Permits and Contracts occurring prior to the Close of Escrow, as defined in the Agreement. 7. Indemnification by Assignee. Assignee shall indemnify, defend --------------------------- and hold Assignor harmless from and against any and all Liabilities arising out of or relating to, directly or indirectly, in whole or in part, the Plans, Permits and Contracts occurring from and after the Close of Escrow. 8. Miscellaneous. Assignor and Assignee each agrees to execute such ------------- other documents and perform such other acts as may be necessary or desirable to effectuate this Assignment. In the event of any action or suit by either party hereto against the other arising from or interpreting this Agreement, the prevailing party in such action or suit shall, in addition to such other relief as may be granted, be entitled to recover its costs of suit and actual attorneys' fees, whether or not the same proceeds to final judgment. This Assignment shall be governed by and construed in accordance with the laws of the State of California, and shall be binding upon and inure to the benefit of Assignor and Assignee and their respective successors and assigns. This Assignment may be executed in multiple counterparts, all of which when duly delivered taken together, shall be binding on all parties. 2 IN WITNESS WHEREOF, the undersigned have executed this Assignment as of the date first above written. "ASSIGNOR": _______________________________________, a _____________________________________ By: ----------------------------------- Name: --------------------------------- Title: --------------------------------- By: ----------------------------------- Name: --------------------------------- Title: --------------------------------- "ASSIGNEE": _______________________________________, a _____________________________________ By: ----------------------------------- Name: --------------------------------- Title: --------------------------------- By: ----------------------------------- Name: --------------------------------- Title: --------------------------------- 3 LIST OF APPLICABLE PLANS AND PERMITS ------------------------------------ [To be provided by Seller] Schedule "1" To General Assignment --------------------- SCHEDULE OF CONTRACTS ---------------------
Name of Type of Contract Amendment Date of Monthly How/When Vendor Service Date Date(s) Expiration Charges Cancelled - ------- ------- -------- --------- ---------- ------- ---------
Schedule "2" To General Assignment --------------------- BILL OF SALE ------------ (Personal Property) FOR GOOD AND VALUABLE CONSIDERATION, the receipt of which is hereby acknowledged, ____________________________, a California _____________ ("Seller"), does hereby sell, transfer, and convey to _________________________, a ___________________ ("Buyer"), all right, title and interest in and to the following personal property which Seller warrants to be free and clear of all other claims, rights, interests or encumbrances, to-wit: The personal property being conveyed hereby is itemized on Schedule 1 ---------- attached hereto and incorporated herein by this reference. Seller does hereby covenant with and warrant to Buyer that the Seller is the lawful owner of such personal property, and that the Seller has good title and right to sell the same as provided for herein, and will warrant and defend the title thereto unto Buyer, its successors and assigns, against the claims and demands of all persons whosoever. DATED as of _______________, 199_. , ---------------------------------------- a California --------------------------- By: ------------------------------------ Name: , ---------------------------------- its general partner By: ------------------------------------ Name: , ---------------------------------- Title: ---------------------------------- Exhibit "G" to Purchase Agreement --------------------- INVENTORY OF PERSONAL PROPERTY Schedule 1 ---------- Schedule "1" to Bill of Sale --------------- RENT ROLL: LEASES FOR WESTLAKE PLAZA CENTER
Current Rent Tenant Lease Term Term Monthly CAM Paid Security Prepaid Rent Other Suite # Name Date Starts Expires Rent Charges Thru Deposit Rent Arrearage Defaults - ------- ------ ---- ------ ------- ---- ------- ---- ------- ---- --------- -------- 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
RENT ROLL EXHIBIT "H" TENANT'S ESTOPPEL CERTIFICATE ----------------------------- TO: ___________________________________ ("Buyer") ___________________________________ ___________________________________ FROM: _____________________________________ "Lessee") _____________________________________ _____________________________________ RE: Space Lease dated ____________________, 19__ (the "Lease") between Lessee and ________________________________ (the "Lessor"), covering the following space (the "Premises") within _____________________ located at ______________________, _________, CA (the "Property"): Suite # __________________. Lessee understands that Buyer is presently negotiating to purchase the Property, subject to the Lease, from Lessor. Lessee hereby certifies the following information with respect to the Lease, and agrees that Buyer, and its successors and assigns, may rely upon the same in purchasing the Property. [Note: Please write "NONE" or "NA" in any blanks below which do not apply.] - ----- 1. The Lease is in full force and effect, has not been modified, amended, extended or assigned except as specifically set forth on Schedule "1" ------------ hereto, and constitutes the entire agreement between Lessor and Lessee. There are no other oral or side agreements or understandings between Lessor and Lessee respecting the Lease or the Property. 2. The Lease termination date is ______________, ____. There is no oral or written agreement or understanding between Lessor and Lessee which would permit termination of the Lease prior to said termination date, except as provided in the Lease. 3. Lessee is not in default, and Lessee knows of no default of Lessor, under the Lease or any circumstances which will, with the passage of time or the giving of notice, or both, become an event of default, as to either Lessor or Lessee. Specifically, Lessee has neither sent nor received written notice of any default by Lessor or Lessee under the Lease, which default remains uncured. Lessee is not asserting any claim of default, offset or defense against the payment or calculation of rent or other charges or expenses payable under the Lease by the Exhibit "I" to Purchase Agreement --------------------- Lessee, or any other claim against the Lessor under the Lease or regarding the Property. 4. The current annual basic rental is $_________________. All basic rental has been paid to the end of the current month, which is ________________, 199_. The next regular agreed rental adjustment date is _____________, 199_. 5. The most recent payment of percentage rent, if any, was $______________ made on _______________, 199_ covering the rental period of _______________, 199_ through ________________, 199_. No such percentage rents are based upon the calculation of net profits, net income or the like under any ground sublease or space lease between Lessee and any sublessee, except as follows:____. 6. Lessee is current in the payment of all other rents, assessments, taxes, repairs, maintenance (including common area maintenance) charges, insurance premiums, utilities or other charges or expenses or reimbursements to Lessor, as required under the Lease, except as follows: _______________________. 7. To Lessee's knowledge, except as shown on Schedule "1" hereto, Lessor ------------ has completed and paid for all work required of Lessor under the Lease and all leasing commission in connection with the lease, except as follows: ____________________________________________________________ _____________________________________________________________________. 8. Lessee has not prepaid any future rent in advance of its due date, except the amount of $_______________ for the rental period of __________________, 199_ through ______________, 199_. 9. Lessor is holding Lessee's security deposit in the amount of $___________________, no portion of which has been applied to any obligation except as follows: _______________________________________ _____________________________________________________________________. 10. Lessee has no option to renew or extend the term of the Lease, or any right to purchase or otherwise acquire all or any part of the Property or any interest therein, and has not attempted to exercise any such option or right, except as follows: _________________________________ _____________________________________________________________________. Exhibit "I" to Purchase Agreement --------------------- 11. Lessee has not in any manner, as security or otherwise, assigned, pledged, encumbered or hypothecated its interest in the Lease. There is no sublease relating to the Premises or the Lease, except as follows: ____________________________________________________________ _____________________________________________________________________. 12. No action or proceeding has been instituted against Lessor by Lessee or is presently pending in any court or governmental agency. Lessee is not the subject of any bankruptcy, receivership, custodianship, reorganization, insolvency or other proceeding of a similar nature in any way related to the Land, and has not made an assignment for the benefit of its creditors. 13. No guarantor of the Lease (or, to Lessee's best knowledge, any prior assignor of the Lease, except as shown on Schedule "1" hereto) has ------------ been released or discharged voluntarily from any obligation under or in connection with the Lease. 14. Lessee has no knowledge, and no reasonable cause to believe, that (except for usual and customary cleaning agents, photocopy materials or similar substances used in the ordinary course) there has been any use, generation, discharge, release, storage or production on, under or about the Property or any groundwater thereunder of any of the following: any underground storage tanks, asbestos, PCBs, used formaldehyde, oils, petroleum or byproducts thereof or any other toxic waste, material or substance, as those or any similar terms are now or in the future used or defined in any state, local or federal laws, ordinances, regulations, orders or authorizations. 15. The undersigned is duly authorized to execute and deliver this certificate, which is valid and binding on Lessee. Dated: ___________________, 1992 Very truly yours, ---------------------------------------- By: ------------------------------------- Name: ----------------------------------- Title: ----------------------------------- Exhibit "I" to Purchase Agreement --------------------- [NAME OF PROJECT]
All Assignor Name of Lease Amendment All Prior Assignments Released? Lessee Address Date Dates Date Assignee Assignor (Yes/No) - ------ ------- ----- --------- ---- -------- ----------- ---------
Schedule "1" to Tenant's Estoppel Certificate ----------------------------- SELLER'S ESTOPPEL CERTIFICATE ----------------------------- TO: _________________________________ ("Buyer") _________________________________ _________________________________ Attention:_______________________ FROM: _________________________________ ("Seller") _________________________________ _________________________________ Attention:_______________________ RE: Space Lease dated ____________________, 19__, as amended (collectively, the "Lease") between ____________________________ as "Lessee" and Seller as "Lessor" or "Landlord" covering the following space (the "Premises") within the _____________________ located at ____________________, ______, CA (the "Property"): Suite # __________. This Certificate is delivered in connection with Section 5.2.7 of that certain Purchase Agreement and Escrow Instructions (the "Agreement"), dated as of August __, 1992, between __________________, a California ____________ as "Seller," and _______________________, a ______________________, as "Buyer," relating to the Property as therein described. All words and terms which are not otherwise defined herein shall have the same meanings given to them under said Purchases Agreement. With respect to the Lease described above as to which the Lessee thereunder has failed to provide an Estoppel Certificate containing all information in the form set forth on Exhibit "I" attached to the Purchase ----------- Agreement, and except as otherwise set forth in the Rent Roll, Seller hereby represents and warrants to Buyer that as of the date last set forth below: 1. The Lease is in full force and effect, has not been modified, amended, extended or to Seller's knowledge assigned except as specifically set forth on Schedule "1" hereto, and constitutes the entire agreement ------------ between Seller and Lessee. There are no other oral or side agreements or understandings between Seller and Lessee respecting the Lease or the Property. 2. The Lease termination date is _________________, ____. There is no oral or written agreement or understanding between Seller and Lessee which would permit termination of the Lease prior to such termination date, except as may be otherwise provided in the Lease. Exhibit "J" to Purchase Agreement --------------------- 3. Seller is not in default, and Seller knows of no default by Lessee, under the Lease, and does not know of any existing circumstances which will, with the passage of time or the giving of notice, or both, become an event of default under the Lease as to either Seller or Lessee. Specifically, Seller has neither sent nor received written notice of any default by Seller or Lessee under the Lease, which default remains uncured. Lessee has not delivered written notice to Seller of any claim of default, offset, concession, abatement, defense or other basis for relief or adjustment against the payment or calculation of rent or other charges or expenses payable under the Lease by the Lessee, or the performance of any other obligations under the Lease. 4. The current annual basic rental is $_________________. All basic rental has been paid to the end of the current month, which is ________________, 199_, and no other future basic rental has been prepaid in advance of its due date, except the amount of $_______________ for the rental period of _____________, 199_ through _____________, 199_. The next regular agreed rental adjustment date is _____________, 199_. 5. The most recent payment of percentage rent, if any, was $______________ made on _______________, 199_ with respect to the rental period of _______________, 199_ through ________________, 199_. No such percentage rents are based upon the calculation of net profits, net income or the like under any ground sublease or space lease between Lessee and any sublessee, except as follows: __________________________________________ ________________________________________________________________________. 6. To Seller's knowledge, Lessee is current in the payment of all other rents, assessments, taxes, repairs, maintenance (including common area maintenance) charges, insurance premiums, utilities or other charges or expenses or reimbursements to Seller, as required under the Lease, except as follows: _______________________. 7. Except as shown on Schedule "1" hereto, Lessor has completed and paid ------------ for all tenant improvement work required of Seller under the Lease and all leasing commissions in connection with the Lease, except as follows: ________________________________________________________________________. 8. Lessee has no option to renew or extend the term of the Lease, or any right to purchase or otherwise acquire all or any part of the Property or any interest therein, and has not attempted to exercise any such option or right, except as follows: ___________________________________________ ________________________________________________________________________. Exhibit "J" to Purchase Agreement --------------------- 9. No action or proceeding has been instituted against Seller by Lessee and is presently pending in any court or governmental agency. To Seller's best knowledge, Lessee is not the subject of any bankruptcy, receivership, custodianship, reorganization, insolvency or other proceeding of a similar nature in any way related to the Premises, and has not made an assignment for the benefit of its creditors. 10. There is no security deposit under the Lease other than as set forth on the Rent Roll, and none has been applied to any obligation of Lessee. 11. Neither the Lease nor any rents or other payments thereunder have been assigned, pledged, encumbered or hypothecated by Seller, as security or otherwise, except for such assignment, pledge or encumbrance as will be satisfied and released at the Closing. 12. No guarantor of the Lease (or, to Seller's best knowledge, any prior assignee of the Lease, except as shown on Schedule "1" hereto) has been ------------ released or discharged voluntarily from any obligation under or in connection with the Lease. 13. Seller has no knowledge, and no reasonable cause to believe, that (except for usual and customary cleaning agents, photocopy materials or similar substances used in the ordinary course) there has been any unlawful use, generation, discharge, release, storage or production on, under or about the Property or any groundwater thereunder of any of the following: any underground storage tanks, asbestos, PCBs, used formaldehyde, oils, petroleum or byproducts thereof or any other toxic waste, material or substance, as those or any similar terms are now or in the future used or defined in any state, local or federal laws, ordinances, regulations, orders or authorizations (herein, "Laws"). No liens have been or are imposed upon the Property under any such Laws, and Lessee has not released any other person or entity from any liability for any such environmental matters. 14. The Lease is fully assignable by Lessor without the necessity of obtaining consent from any Lessee or other third party. Exhibit "J" to Purchase Agreement --------------------- 15. The undersigned is duly authorized to execute and deliver this certificate, which is valid and binding on Seller. Dated: ___________________, 1992 Very truly yours, ______________________________, a California _________________ By: ------------------------ Name: ------------------------ Title: ------------------------ By: ------------------------ Name: ------------------------ Title: ------------------------ Exhibit "J" to Purchase Agreement --------------------- Exhibit "K" (Intentionally Omitted) EX-10.22 15 1ST AMENDMENT TO PURCHASE/SALE AGREEMENT EXHIBIT 10.22 FIRST AMENDMENT TO PURCHASE AND SALE AGREEMENT AND JOINT ESCROW INSTRUCTIONS This First Amendment to Purchase and Sale Agreement and Joint Escrow Instructions ("Amendment") is entered into effective as of October 2, 1996 by Westlake Plaza Partners, a California limited partnership ("Seller") and Kilroy Industries, a California corporation ("Buyer"). RECITALS A. Effective as of June 6, 1996 Seller and Buyer entered into a Purchase and Sale Agreement and Joint Escrow Instructions (the "Agreement"). B. By letter agreement dated July 17, 1996 (the "Letter Agreement") the parties extended the Contingency Period to July 24, 1996 and reduced the Deposit from Two Hundred Fifty Thousand Dollars ($250,000) to Fifty Thousand Dollars ($50,000). C. By this Amendment the parties desire to extend the Contingency Period and amend the Agreement as hereinafter described. D. All initially capitalized terms shall have the meaning set forth in the Agreement. E. Notwithstanding the fact that the Agreement and Letter Agreement, taken together, provide for automatic termination on July 24, 1996, the parties elected to forego the automatic termination provision as it applied to the July 24, 1996 date only. Said provision shall remain in full force and effect as to the date set forth in this Amendment. AGREEMENT 1. Extension of Contingency Period. The Contingency Period, which was July ------------------------------- 3, 1996 under the Agreement, and was extended to July 24, 1996 by the Letter Agreement, is hereby extended to October 11, 1996. In no event shall there be any further extensions of the Contingency Period. 2. Deposit Increase. Upon execution of this Amendment, Buyer shall deliver ---------------- to Escrow Holder Fifty Thousand Dollars ($50,000), which will increase the Deposit from Fifty Thousand Dollars ($50,000) to One Hundred Thousand Dollars ($100,000). 3. Additional Deposit. If Buyer elects to go forward towards Closing, on ------------------ October 11, 1996, Buyer shall deliver to Escrow Holder written notice affirmatively approving the transaction as a whole and One Hundred Fifty Thousand Dollars ($150,000) which will increase the Deposit to Two Hundred Fifty Thousand Dollars ($250,000). The Deposit shall thereafter be non-refundable and shall belong to Seller if Escrow does not close for any reason other than (a) Seller's default, or (b) the failure to occur of a Closing condition for Buyer's benefit as set forth in Sections 4.7, 5.2.7, 5.4, Sections 7.1 through 7.3.14, Section 8.4 and Section 8.5, subject 1 to the amendment of Section 4.7 and the substitute representations and warranties of Section 7.3.8, both as set forth below. If, on October 11, 1996, Buyer fails to deliver the written notice affirmatively approving the transaction as a whole or fails to increase the Deposit by One Hundred Fifty Thousand Dollars ($150,000), the Escrow and the Agreement shall be automatically terminated without the need of any further action by either party hereto and, all funds deposited by Buyer shall be refunded to Buyer. Buyer shall have no further rights or interest with respect to the Agreement, the Letter Agreement or the Property. 4. Closing. The Closing shall be extended to December 13, 1996. ------- 5. Early Closing. Notwithstanding any other provision of the Agreement ------------- or this Amendment, Buyer may elect at any time to close the acquisition of the Property by giving ten (10) business days' prior written notice to Seller. 6. Credit. At Closing, Seller shall credit Buyer $70,000 towards the ------ Purchase Price. If Buyer is able to negotiate a written reduction in the brokerage commission, the aforementioned credit shall be increased accordingly. 7. Escrow Holdback Assignment. At Closing, Seller will assign to Buyer -------------------------- all of its right, title and interest in and to that certain Escrow Holdback Agreement dated November 3, 1994 by and between Seller, Westlake Village Associates, and First American Title Insurance Company, as modified by that certain letter dated May 5, 1995 from Seller to First American Title Insurance Company and Resolution Trust Corporation. Seller makes no representations or warranties to Buyer regarding Buyer's ability to have the holdback funds disbursed as provided for in the Escrow Holdback Agreement and Buyer's ability to have the holdback funds so disbursed shall not be a condition to Closing. 8. Amendment of Section 4.7. Section 4.7 of the Agreement is deleted in ------------------------ its entirety and replaced with the following: "Condition of Improvements. As of the Closing Date, the Improvements ------------------------- shall be in good operating condition (subject to normal wear and tear) and Seller shall not have received written notice from any governmental entity that the use and operation of the Improvements is not in full compliance with all applicable environmental and other Laws." 9. Substitute Representations and Warranties of Section 7.3.8 as a --------------------------------------------------------------- condition to Close of Escrow. The representation and warranty in Section 7.3.8 - ---------------------------- shall continue to survive as a representation and warranty made by Seller upon the execution and delivery of the Agreement, but the continued truth and accuracy of Section 7.3.8 shall not constitute a condition to the Close of Escrow for the benefit of the Buyer. However, the truth and accuracy of the following substitute representation and warranty shall constitute a condition to the Close of Escrow for the benefit of Buyer: "Leases. In respect of each of the Leases, except as provided in the ------ Rent Roll approved by Buyer and provided in Section 4.4 above, the following 2 information is true and correct: (i) each of the Leases is in full force and effect according to the terms set forth therein and in the Rent Roll and has not been further modified, amended, extended or assigned by Seller, in writing or otherwise, and each Tenant under the Leases is legally required to pay all sums and perform all obligations set forth in the Leases; (ii) all obligations of the Seller, as landlord, under the Leases which have accrued prior to Closing will be performed by Closing; and (iii) Seller has not applied and shall not apply any security deposit from a Tenant to rent or any other obligation due from any Tenant without Buyer's prior written consent." 10. Effect on Agreement. Except to the extent modified by this Amendment ------------------- and the Letter Agreement, the Agreement shall remain in full force and effect. This Amendment also constitutes an amendment to the instructions to Escrow Holder. In the event that any provision of this Amendment contradicts or is inconsistent with any provision of the Agreement or the Letter Agreement, then the provisions of this Amendment shall prevail. IN WITNESS WHEREOF, the undersigned have executed this Amendment effective as of the date set forth above. SELLER: WESTLAKE PLAZA PARTNERS, a California limited partnership By: Pacifica Real Estate Group, a California corporation, a General Partner By: /s/ David A. Brown ------------------------------ Name David A. Brown -------------------------- Title Executive Vice President ------------------------ BUYER: KILROY INDUSTRIES, a California corporation By: /s/ Jeffrey C. Hawken ---------------------------- Name Jeffrey C. Hawken ------------------------ Title Senior Vice President, Asset Management ----------------------- 3 EX-10.23 16 DEVELOPMENT MANAGEMENT AGREEMENT EXHIBIT 10.23 DEVELOPMENT MANAGEMENT AGREEMENT THIS DEVELOPMENT MANAGEMENT AGREEMENT ("Agreement") is made and entered into as of November 1, 1995, by and between the REDEVELOPMENT AGENCY OF THE CITY OF RIVERSIDE ("Agency") and KILROY TECHNOLOGY COMPANY, a California Corporation ("Development Manager"). RECITALS A. Agency, Development Manager and the County of Riverside ("County") entered into that certain Exclusive Right to Negotiate and Reimbursement Agreement dated January 11, 1994, as amended by that certain First Amendment to Exclusive Right to Negotiate and Reimbursement Agreement dated February 14, 1995, that certain Second Amendment dated June 20, 1995 and that certain Third Amendment dated August 15, 1995 (which Agreement and Amendments are hereinafter, collectively the "ERN") with respect to the planning, development and leasing of a United States Bankruptcy Court (Central District of California) (the "Project") to the United States General Services Administration (the "GSA") as part of the planned Justice Center of the Inland Empire. B. The Redevelopment Plan for the Project Area was approved and adopted by the Riverside City Council by Ordinance No. 3872 on November 16, 1971, and amended by Ordinance No. 3980, Ordinance No. 4108, Ordinance No. 4246 and Ordinance 5238. C. The land on which the Project is to be developed is owned by the County and has been, or shall be leased to Agency pursuant to the terms of that certain Ground Lease (the "Ground Lease") which has been, or as a condition to the effect of this Agreement shall be, entered into between the County and Agency. D. In furtherance of the Project, Agency has entered into that certain United States General Services Administration Lease GS-09B-93834, as amended (the "GSA Lease"). E. Under the provisions of the ERN, Development Manager has caused the premises which are to be the subject of the GSA Lease (the "Facility") to be designed on a schematic basis as described in the GSA Lease and as further developed and described in those drawings and specifications listed in Exhibit A --------- (the "Design Documents") which have been prepared by Langdon Wilson (the "Architect"). F. In order to continue the efforts necessary to complete the preparation of drawings, specifications, invitations to bidders and contracts for construction of the Facility (collectively, "Construction Documents") and to arrange for financing in order to meet the terms of the GSA Lease, Agency desires that Development Manager continue its 1 efforts under the ERN, but under the terms of, as more fully set forth in, this Agreement. NOW, THEREFORE, in consideration of the foregoing recitals and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: AGREEMENT --------- Article 1 DEVELOPMENT MANAGER'S SERVICES ------------------------------ 1.1 GSA Lease. The parties acknowledge that under the terms of the ERN, --------- Development Manager has prepared a comprehensive Project development proposal for the GSA and assisted Agency in negotiating with the GSA leading to the award and execution of the GSA Lease. Development Manager shall continue to assist Agency in negotiations with the GSA regarding amendment of the GSA Lease as necessary in order to secure financing for the Project, including the preparation and negotiation on behalf of Agency of Supplemental Lease Amendments. 1.2 Architecture and Engineering. The parties acknowledge that Development ---------------------------- Manager has retained Langdon Wilson as the Architect with Agency's consent and has proceeded to direct the preparation of the Design Documents by the Architect and to coordinate the efforts of the Architect with the requirements of the GSA and Agency and construction cost information provided by Development Manager's construction manager. Dinwiddie Construction Company (the "Construction Manager"). Development Manager shall continue to provide such services with respect to the preparation of the Construction Documents. Development Manager shall schedule and coordinate periodic meetings as required to accomplish the foregoing and shall expedite requests for information and responses thereto. Development Manager shall coordinate the application for and issuance of all requisite building permits. 1.3 Budgeting and Cost Estimating. Development Manager shall prepare and ----------------------------- periodically update estimates of total development costs to complete construction of the Project suitable for occupancy under the GSA Lease. The goal of Development Manager shall be to coordinate the actions of the Architect, the Construction Manager and Agency so that the total development costs will be paid from the proceeds of financing obtained by Agency which is repaid by the revenues from the GSA Lease. 1.4 Progress Schedule. Development Manager shall prepare and periodically ----------------- (at least monthly) update a schedule reflecting the progress of construction and showing the major tasks to be accomplished in order to complete construction of the Project, financing and occupancy under the GSA Lease. The progress schedule shall utilize information provided by Agency, the Construction Manager and the 2 Architect. The progress schedule shall be updated periodically to reflect the actual progress of the Project. 1.5 Long-Lead Time Items. Under the terms of the ERN Development Manager -------------------- has engaged Construction Manager to provide construction management services and to place orders with the trade contractors listed below (selected as the lowest cost responsible providers) for the design and fabrication of the long-lead time items listed below in order that Project completion will occur within the time required under the GSA Lease: Gayle Manufacturing Structural Steel Montgomery Elevators SASCo Electrical Graycon HVAC Carco Plumbing Garvin Fire Protection Development Manager has authorized Construction Manager to enter into agreements ("Trade Contracts") with such Trade Contractors either directly or in the name of Development Manager. As a result of the change in the role of Development Manager from that of turn-key design/builder as contemplated in the ERN, Development Manager shall assign all such Trade Contracts to Agency, and Agency shall accept such assignments, pursuant to separate Assignments of Long Lead-Time Obligations for Construction Materials and Work pursuant to which Development Manager shall be released by the applicable Trade Contractors. 1.6 Construction Phase Services. Construction phase services commence with --------------------------- the award of the Trade Contracts and, together with Development Manager's obligations to provide basic services under this Agreement, shall end 30 days following substantial completion of the work under all of the Trade Contracts, but not later than December 31, 1996. During the construction phase, Development Manager shall provide the following services: (a) All labor, materials, supplies and equipment necessary for construction of the Facility shall be provided under agreements (the "Trade Contracts") between Agency and the lowest responsive, responsible bidders (the "Trade Contractors"). Development Manager shall coordinate with Construction Manager to advertise for competitive bids for all construction work pursuant to the Public Contract Code and all applicable Agency procedures. Development Manager shall coordinate the efforts of the Architect and the Construction Manager in the creation of bid documents and the forms of contracts to be used with Trade Contractors, using forms provided by Agency or by Development Manager and subject to Agency's approval. (b) In accordance with a schedule established by Development Manager, Agency shall open bids and with Development Manager's assistance, shall review the apparent low bid for conformance 3 with the Construction Documents and legal requirements, including the forms of payments and performance bonds and evidence of insurance provided by the apparent low bidder. As soon as possible (with a goal of five to ten business days) following Construction Manager's report to Agency of the apparent lowest responsible, responsive bidder, Agency shall award and enter into the individual Trade Contracts. At Development Manager's request, Agency shall consider rejecting all bids for a portion of the construction work if the apparent low bid is significantly in excess of the amount which Development Manager has budgeted for such portion. (c) Development Manager shall arrange for its Construction Manager to provide administration of Trade Contracts as required to coordinate the work for Trade Contractors with each other and with the activities of the Architect. Development Manager shall establish and implement coordination and communication procedures among Development Manager, Agency, the Architect and the Trade Contractors. (d) Development Manager shall coordinate, schedule and attend weekly Project site meetings with Construction Manager, Trade Contractors, the Architect and Agency and shall cause preparation and distribution of minutes of such meetings. (e) Development Manager shall establish and implement procedures for reviewing and processing requests for clarifications and interpretations of the Construction Documents, shop drawings, samples and other submittals, construction schedule adjustment requests, change order proposals, proposals for substitutions, payment applications and the maintenance of logs documenting Project site activities, production of documents, distribution for review and response and the status of such reviews. As Agency's representative at the Project site, Development Manager shall be the party to which all such information shall be submitted. (f) Development Manager shall coordinate review by the Architect and the Construction Manager of Trade Contractors' requests for information, shop drawings, samples and other submittals to determine compliance with the requirements of the Construction Documents. Notwithstanding the foregoing, Development Manager shall not be responsible for any actions, errors or omissions of the Architect, the Construction Manager or any failure of the labor or materials provided by the Trade Contractors to comply with the requirements of the Construction Documents, for other breaches of the Construction Documents by the Trade Contractors, for other defective work of the Trade Contractors, or for any loss, cost, damage or claims arising out of the actions or omissions of the Trade Contractors, or any of them. (g) Development Manager shall coordinate with the Construction Manager to establish and implement a change order control system. All changes to a Trade Contract shall only be by change orders executed by Agency. Development Manager shall cause all changes 4 initiated by Agency first to be described in documents prepared by the Architect and issued to the applicable Trade Contractor(s). Development Manager shall review all Trade Contractors' proposals with applicable Trade Contractors, the Architect, the Construction Manager and Agency and endeavor to determine and evaluate for Agency the Trade Contractors' basis for the price and time extensions requested to perform the work involved with a change. At Agency's request, and in coordination with the Architect and the Construction Manager, Development Manager shall coordinate issuance to the applicable Trade Contractor of appropriate change order documents or change directives. 1.7 Construction Quality. -------------------- (a) Development Manager shall monitor and coordinate the activities of the Architect and the Construction Manager in determining in general that the work of each Trade Contractor is being performed in accordance with the requirements of the Construction Documents in order to determine in general if the construction work is being performed in a manner indicating that, upon completion, the Facility will be in accordance with the Construction Documents. (b) Development Manager shall not have control over or charge of, and shall not be responsible for construction means, methods, techniques, sequences or procedures, or for safety precautions and programs in connection with the work of the Trade Contractors as such responsibilities shall be those of the Trade Contractors. Development Manager shall not have control over or charge of acts or omissions of the Architect, the Construction Manager, the Trade Contractors or their agents or employees. No action taken by Development Manager shall relieve a Trade Contractor from its obligations to perform its work in strict conformance with the requirements of the Construction Documents and all applicable laws, regulations, rules and interpretation of governmental authorities. 1.8 Substantial and Final Completion. Development Manager shall -------------------------------- coordinate the efforts of the Architect and the Construction Manager in determining when the Facility and each Trade Contractor's work has reached substantial completion and shall coordinate the preparation of a list of incomplete work and work which does not conform to the requirements of the Construction Documents. Following the Architect's issuance of a certificate of substantial completion for the Project, Development Manager shall evaluate the status of completion of the work of each Trade Contractor and make recommendations to Agency concerning readiness for final inspections. Development Manager shall assist Construction Manager in obtaining and delivering to Agency or the GSA, if Agency so directs, required guarantees, releases, bonds and waivers, together with all keys, manuals, record drawings and maintenance stocks of materials. 5 1.9 Cost Management: --------------- (a) Development Manager shall, with the participation of Construction Manger and each Trade Contractor, determine a schedule of values for each Trade Contract. The schedule of values shall be the basis for evaluating a Trade Contractor's applications for payment against the progress of construction of such Trade Contractor. (b) Agency shall require that copies of all claims of Trade Contractors for additional compensation or extensions of time for their performance be given to Development Manager. Development Manger shall advise Agency concerning Development Manager's opinion of the merit of Trade Contractor's claims for additional time or compensation made during the Construction Phase as well as the effect on the Project budget of all proposed and approved change orders. (c) In instances where a lump sum or unit price is not determined prior to Agency's authorization to a Trade Contractor to perform change work, Development Manager shall assist Construction Manager in reviewing records of each Trade Contractor of the costs of materials and equipment and payrolls and the amount of payments to each subcontractor, incurred by such Trade Contractor in performing the work related to such change. (d) Development Manager shall coordinate with the Architect and the Construction Manager in reviewing progress payment applications submitted by each Trade Contractor, review the progress of construction and making a good faith determination whether the amount requested reflects the progress of the Trade Contractor's work. Development Manager shall make appropriate adjustments to each payment application and shall prepare and forward to Agency a progress payment report which shall state the total of all Trade Contract sums, payments to date, current payments requested, retainage and actual amounts owed for the current period. 1.10 Project Closeout. ---------------- (a) Development Manager and the Construction Manager shall coordinate and expedite submittal of information from the Trade Contractors to the Architect for preparation of any required record drawings and specifications. (b) Prior to final completion of the Project, Development Manager and the Construction Manager shall arrange for the assembly of all manufacturers' operations and maintenance manuals, warranties and certificates, and shall deliver such documents to Agency. (c) Development Manager shall arrange to coordinate with the Construction Manager and with the GSA's maintenance personnel to observe the Trade Contractors' startup, testing and operation of Project systems as required under the Construction Documents. 6 (d) Development Manager shall coordinate with the Construction Manager to arrange for training of Agency's operating engineers in the proper operation and maintenance of Project systems. Training sessions shall be scheduled following consultation with Agency, but it shall be Agency's responsibility to select personnel to be trained and to assure such personnel attend scheduled training. (e) Development Manager shall coordinate the activities of the Architect and the Construction Manager in creating a substantial completion punch list and shall advise Agency concerning the completion of punch list items. 1.11 Additional Services. Any services which may be required to be ------------------- provided by Development Manager in addition to the basic services described above, including, for example, assisting Agency in the prosecution of claims against insurers, Trade Contractors or others, or assisting Agency in the defense of any such claims, shall be considered additional services and shall only be provided by Development Manager upon mutual agreement with Agency. Article 2 AGENCY'S RESPONSIBILITIES ------------------------- 2.1 Delivery of Information and Approvals. ------------------------------------- (a) To the extent not otherwise set forth in the GSA Lease, Agency shall provide Development Manager with full information regarding the requirements of the Project, including any Redevelopment Project area requirements. (b) Agency shall arrange for and obtain all land use entitlements and similar permits and shall obtain all easements and other property rights which may be required for development of the Project. (c) Agency shall respond to all requests for information or approval by Development Manager within three business days of Development Manager's request. Such time period shall also apply to all requests for approval which do not require action by Agency's Board. Agency shall otherwise arrange to provide property rights, land use entitlements, approvals of other governmental entities and funds as necessary for completion of the Project, all in accordance with the Project schedule prepared by Development Manager, unless disapproved by Agency within five business days following delivery to Agency. 2.2 Agency's Representative. Agency has designated its Executive Director ----------------------- as its representative with authority to bind Agency in all matters except those would entail an amendment of this Agreement. 7 2.3 Form of Trade Contracts. Agency shall use its best efforts to enter ----------------------- into any Trade Contracts with respect to the Project on forms previously approved by Development Manager with respect to insurance and indemnification provisions. Article 3 COMPENSATION OF DEVELOPMENT MANAGER ----------------------------------- 3.1 Compensation for Basic Services ------------------------------- (a) As compensation for its services under this Agreement, Agency shall pay to Development Manager a fee of $716,978.46, less certain amounts paid under the ERN through October 31, 1995, payable in equal monthly installments of $14,428.10 until paid in full. (b) If completion of the Project, as evidenced by the issuance of a certificate of completion by the Architect, occurs on or before four hundred and thirty (430) days following Agency Board award of the first publicly bided Trade Contracts for this Agreement, as such date may be extended by delays not under Development Manager's control, then Development Manager shall be paid an early completion bonus of $3,333 per day, but not to exceed $100,000, for each day that such completion so precedes the end of such construction period, as such date may be so extended. At Development Manager's request Agency shall pay for acceleration of Project construction to the extent Agency reasonably determines that amounts so expended for acceleration are likely to result in commensurate savings in the costs of the Project to Agency or a commensurate increase in the revenues to Agency generated by the Project. 3.2 Reimbursements Payable to Development Manager. --------------------------------------------- (a) On a monthly basis Agency shall reimburse Development Manager or, at Development Manager's request or Agency's option, pay directly to third parties on behalf of Development Manager, costs and expenses incurred by Development Manager in connection with the project for the services and items listed in Exhibit B. The total amount payable by Agency for such services and --------- items shall not exceed the total amount shown in Exhibit B without Agency's --------- prior consent, except to the extent any increase in the cost to Development Manager of any such services or items which does not result from any cause under Development Manager's reasonable control. Causes not under the Development Manager's reasonable control shall include, without limitation, the actions or omissions of Architect and/or Construction Manager. (b) Agency shall reimburse Development Manager for the costs of the reimbursable items listed below as incurred by Development Manager in connection with its services in assisting the Agency to obtain the award of the GSA Lease. Such reimbursement, less a 20% retention, shall be paid to Development Manager 30 days after Agency 8 receives the proceeds from revenue bonds sold intended to be repaid from the GSA Lease rents and such payment shall be conditioned upon Agency's receipt and verification of contracts or other evidence of obligation and evidence of payment by Development Manager. The amount of the reimbursement to Development Manager previously retained shall be paid to Development Manager within 45 days following substantial completion of the Project.
Reimbursable Item Amount ----------------- ------ architects/engineers $ 23,521.92 master planning 10,000.00 entitlements 14,595.00 financing plan 7,382.76 legal 4,505.00 deposit to Agency 5,000.00 project management 88,550.00 ----------- Total $153,554.68 ===========
(c) Agency shall use its best efforts to maximize the amount of proceeds available from the sale of bonds secured by the Project. (d) Reimbursements otherwise due to Development Manager but not including amounts due from Development Manager to Architect or Construction Manager, may be withheld by Agency to the extent necessary for Agency to recover damages finally adjudicated to be due to Agency as a result of a material default by Development Manager under this Agreement. Any of such reimbursements which are determined wrongfully to have been withheld shall bear interest at the highest rate permitted by law, but not to exceed 12% per annum, from the date due until paid in full. 3.3 Progress Payments. All amounts payable hereunder on a monthly basis ----------------- shall be payable on the first day of each month, commencing November 1, 1995, provided that Development Manager shall have delivered its application for payment of such amounts to Agency on or before five business days preceding such date. 3.4 Compensation for Additional Services. Development Manager shall be ------------------------------------ entitled to an increase in its fee as compensation for additional services requested by Agency or required if Development Manager has not been able to complete its services under this Agreement by December 31, 1996 due to delays resulting from events not under Development Manager's reasonable control on the basis of reimbursing Development Manager for additional costs incurred in connection with such additional services. Included in the costs of additional services for which Development Manager shall be entitled to reimbursement shall be the following: 9 .1 costs of reimbursable items as listed in Exhibit B; --------- .2 the product of (a) 2.4 multiplied by (b) costs of labor, including insurance and benefits, whether field or home office, and including direct employees and consultants; .3 costs of materials, supplies and equipment, including transportation, rental costs of machinery and equipment; and .4 premiums for bonds and insurance, permits, fees, sales, use or similar taxes, related to the additional services. 3.5 Development Manager's Accounting. -------------------------------- (a) Records of costs payable on a reimbursable basis and costs for additional services payable on a reimbursable basis shall be kept on the basis of generally accepted accounting principles and shall be available to Agency or Agency's authorized representative at mutually convenient times. (b) Development Manager shall keep such full and detailed accounts and records of contracts, work or purchase orders, fees and expenses payable directly by Agency to Trade Contractors or to Development Manager on a reimbursable basis as may be necessary for proper financial management under this Agreement, and the system shall be satisfactory to Agency. Agency shall be afforded access to and the right to copy and audit all Development Manager's records, books, correspondence, data relating to such fees and expenses and Development Manager shall preserve all such records for a period of three (3) years or for such longer period as may be required by law after final payment hereunder. Article 4 STANDARD TERMS -------------- 4.1 Damages. ------- (a) If Development Manager or Agency defaults with regard to any of the provisions of this Agreement, the non-defaulting party shall serve written notice of such default upon the defaulting party. As of the date of this Agreement, neither party is in default under this Agreement. (b) Notwithstanding anything in this Agreement to the contrary, Development Manager shall not be liable to Agency, and Agency hereby waives all claims, suits and demands against and releases Development Manager from damages, losses, expenses and claims for injury, death and property damage arising out of or in connection with the acts or omissions of the Architect, the Construction Manager and the Trade Contractors, and its and their employees, consultants and subcontractors. The foregoing waiver and release is given in recognition that Agency will be in direct contract with Trade 10 Contractors, and that the Architect and the Construction Manager are aware that Agency is the intended third-party beneficiary of their services. Nothing in the foregoing shall be deemed to release Development Manager from claims, suits or demands by Agency arising out of Development Manager's negligence or misconduct. 4.2 Indemnity. --------- (a) Development Manager is skilled in the professional calling necessary to perform the services and duties agreed to be performed under this Agreement, and Agency, not being skilled in such matters, relies upon the skill and knowledge of Development Manager to perform said services and duties in the most professional manner. Therefore, Development Manager agrees to indemnify, hold harmless and defend Agency, City Council and each member thereof, and every officer and employee of Agency, from any and all liability or financial loss resulting from any suits, claims, losses or actions brought by any entity, person or persons and from all costs and expenses of litigation brought against Agency, Agency Board, and each member hereof, or any officer, employee, or agent of Agency, by reason of injury to any person or persons, including, but not limited to officers and employees of Agency and City, or damage, destruction, or loss of tangible property of any kind whatsoever, including, but not limited to, that of Development Manager, resulting directly or indirectly from any or all wrongful or negligent activities and operations of Development Manager or any of its employees in the performance of this Agreement. (b) Agency agrees to indemnify, hold harmless and defend Development Manager and every officer and employee of Development Manager, from any and all liability or financial loss resulting from any suits, claims, losses, or actions brought by any entity, person or persons and from all costs and expenses of litigation brought against Development Manager and each or any officer, employee, or agent of Development Manager, or damage, destruction, or loss of property of any kind whatsoever, including but not limited to that of Development Manager, resulting directly or indirectly from any or all wrongful or negligent activities and operations of Agency or any person or entity employed by Agency in the performance of this Agreement or in the provision of labor, materials, supplies and equipment for construction of Facility. 4.3 Insurance. --------- (a) Prior to the commencement of construction on the Property, Development Manager shall furnish or cause to be furnished to Agency duplicate originals or appropriate certificates of (1) bodily injury and property damage insurance policies with limits of $1,000,000 per occurrence, $2,000,000 in the aggregate, business auto liability insurance with limits of $1,000,000 each occurrence and excess or umbrella liability insurance with limits of $10,000,000; together with workers' compensation and employers' liability insurance as required by 11 law and otherwise with a $1,000,000 policy limit and errors and omissions insurance with a limit of $1,000,000, naming the County, Agency and the City as additional insureds. Development Manager shall also furnish or caused to be furnished to Agency evidence satisfactory to Agency that any contractor with whom it has contracted for the performance of work on the Project carries workers' compensation insurance as required by law. The obligations set forth in this Section shall remain in effect until a Certificate of Completion has been issued by Agency, and said policies shall provide that they shall not be canceled or reduced in coverage or amounts without giving Agency at least thirty (30) days prior written notice. The policy amounts set forth above shall not limit or define the extent of Development Manager's indemnity liability pursuant to (i) this Section 4.3, (ii) any other provision of this Agreement, or (iii) arising as a matter of law or at equity. (b) Development Manager shall furnish Agency with certificates of insurance evidencing all such coverages and certificates evidencing renewal thereof before expiration of the coverage of the policy in question. Such certificate shall be provided on a form approved by Agency. Agency may also request Development Manager to provide it with copies of the actual policies for its review. In the event Development Manager fails to provide any certificate when due evidencing coverage required to be maintained by Development Manager, Agency may, but shall not be required to, obtain such coverage and deduct any costs in connection therewith from any sums due Development Manager from Agency or seek reimbursement for same from Development Manager, which sum shall be due and payable immediately on receipt by Development Manager of notice from Agency. In the event Agency has to initiate legal action for recovery of same, Development Manager shall pay all costs and reasonable attorneys' fees in connection therewith provided however, such judgment is in favor of Agency. (c) The following statement shall appear in each certificate of insurance provided Agency by Development Manager hereunder: "It is agreed that in the event of any material change in or cancellation of this policy, thirty (30) days prior written notice will be given to: Redevelopment Agency of the City of Riverside 3737 Main Street, Suite 800 Riverside, California 92501 Attn: Executive Director Re: U.S. Bankruptcy Court" (d) Development Manager and Agency shall give prompt written notice to the other party of all losses, damages, or injuries to any person or to property of Agency, Development Manager or of third persons of which that party becomes aware and which may be in any way related to the Project or for which a claim might be made against either 12 party. Development Manager and Agency shall promptly report to the other party all such claims of which either party has noticed, whether related to matters insured or uninsured. No settlement or payment for any claim for loss, injury or damage or other matter as to which any party may be charged shall be made without the prior written approval of such party. (e) The insurance provided by Development Manager shall be primary to any coverage available to Agency, except for claims which involve Contractors that are directly contracted with Agency. In those instances, the Contractor's insurance shall be primary. The insurance policies shall name Agency as an additional insured and shall include provisions for waiver of subrogation. 4.4 No Discrimination. ----------------- (a) Development Manager for itself and its successors and assigns agrees that in the performance of its services related to the Project; Development Manager will not discriminate against any employee or applicant for employment because of sex, marital status, race, color, religion, creed, national origin, or ancestry, and that Development Manager will comply with all applicable local, state and federal fair employment laws and regulations. (b) All contracts relative to the improvements constructed as part of the Project shall contain or be subject to substantially the following nondiscrimination or non-segregation clauses, pursuant to Section 33436 of the California Health and Safety Code: In deeds: "The grantee herein covenants by and for himself, his -------- heirs, executors, administrators, and assigns, and all persons claiming under or through them, that there shall be no discrimination against or segregation of, any person or group of persons on account of race, color, creed, religion, sex, marital status, national origin or ancestry in the sale, lease, sublease, transfer, use, occupancy, tenure or enjoyment of the land herein conveyed, nor shall the grantee himself or any person claiming under or through him, establish or permit any such practice or practices of discrimination or segregation with reference to the selection, location, number, use or occupancy of tenants, lessees, subtenants, sublessees or vendees in the land herein conveyed. The foregoing covenants shall run with the land in perpetuity." In leases: "The lessee herein covenants by and for himself, his --------- heirs, executors, administrators and assigns, and all persons claiming under or through him, and this lease is made and accepted upon the subject to the following conditions: That there shall be no discrimination against or segregation of any person or group of persons, on account of race, color, creed, religion, sex, marital status, national origin or ancestry, in the leasing, subleasing, 13 transferring, use, occupancy, tenure or enjoyment of the land herein leased, nor shall the lessee himself, or any person claiming under or through him, establish or permit any such practice or practices of discrimination or segregation with reference to the selection, location, number, use or occupancy of tenants, lessees, subtenants, sublessees or vendees of the land herein leased." In contracts: "There shall be no discrimination against or segregation of, ------------ any person or group of persons on account of race, color, creed, religion, sex, marital status, national origin, or ancestry in the sale, lease, sublease, transfer, use, occupancy, tenure or enjoyment of the land, nor shall the transferee himself or any person claiming under or through him establish or permit any such practice or practices of discrimination or segregation with reference to the selection, location, number, use, or occupancy of tenants, lessees, subtenants, sublessees or vendees of the land." 4.5 Notices and Demands. All notices or other communications required or ------------------- permitted hereunder shall be in writing, and may be personally delivered or sent by United States registered or certified mail, postage prepaid, return receipt requested, addressed to parties at the addresses provided below, subject to the right of either party to designate a different address for itself by notice similarly given. Any notice so given by registered or certified United States mail shall be deemed to have been given on the second business day after the same is deposited in the United States mail. Any notice not so given by registered or certified mail shall be deemed given upon receipt of the same by the party to whom the notice is given. To Agency: Redevelopment Agency of the City of Riverside 3737 Main Street, Ste. 800 Riverside, CA 92501 Attention: Executive Director Phone: (909) 715-3500 Fax: (909) 715-3503 With a copy to: City Attorney City of Riverside 3900 Main Street Riverside, CA 92501 Phone: (909) 782-5567 Fax: (909) 782-5540 To Development Manager: Kilroy Technology Company 2250 E. Imperial Highway El Segundo, CA 90245 Attention: C. Hugh Greenup Phone: (213) 772-1193 Fax: (310) 322-5781 14 With a copy to: Kilroy Technology Company 24150 Parkway Calabasas Calabasas, CA 91302 Attention: Allan J. O'Connor Phone: (818) 591-9441 Fax: (818) 591-9070 4.6 Non-liability of Agency or City Officials and Employees. No member, ------------------------------------------------------- official or employee of the City of Riverside or Agency shall be personally liable to Development Manager, or any successor in interest in the event of any default or breach by Agency or for any amount which may become due to Development Manager or to its successor, or on any obligations arising under this Agreement. 4.7 Extension of Times of Performance and Delays. In addition to specific -------------------------------------------- provisions of this Agreement, neither party hereunder shall be deemed to be in default where delays or defaults are due to war; insurrection; strikes; lock-outs; riots; floods; earthquakes; fires; casualties; acts of God; acts of the public enemy; epidemics; quarantine restrictions; and freight embargoes. 4.8 Project Suspension or Abandonment. Agency shall not terminate this --------------------------------- Agreement except for cause as provided in this Agreement or except in connection with Agency's good faith determination permanently to abandon the Project. If the Project is suspended or abandoned in whole or in part through no fault of Development Manager, Development Manager shall be compensated for all services performed up through receipt of written notice from Agency of such suspension or abandonment, together with reimbursable costs accrued through such date, termination, cancellation and demobilization costs, together with (i) a termination fee in the amount of the lessor of the amount of Development Manager's fee remaining unpaid through the end of the period for basic services or three monthly installments of Development Manager's fee, and (ii) payment in full of any portion of the $153,554.68 reimbursement then unpaid under paragraph 3.2(b). If the Project is resumed within two years following suspension or termination after being suspended for more than three months, Development Manager's compensation shall be adjusted by agreement of the parties but shall in no event be less than the amount of Development Manager's total fee than remaining unpaid, and in any event upon the resumption of the Project within such two year period, Agency shall use the services of Development Manager as contemplated in this Agreement. Notwithstanding the foregoing, if the Project is permanently abandoned by Agency due to its inability following its best efforts to sell bonds or otherwise raise money in order to provide the funds to cover Project costs, or if the Project is abandoned permanently due to the cancellation of the GSA Lease by the GSA prior to Project completion, then no termination fee shall be payable, and in the event of termination due to an inability to sell bonds, no payments for reimbursable expenditures incurred by Development Manager following Agency's notice to Development Manager that it is abandoning the Project shall be payable. 15 4.9 Legal Action. ------------ (a) If either party brings any action or proceeding against the other arising out of this Agreement, then as between Development Manager and Agency, the prevailing party shall be entitled to recover as an element of its costs of suit, and not as damages, its reasonable attorney's fees as fixed by the court in such action or proceeding or in a separate action or proceeding brought to recover such attorney's fees. (b) In addition to any other rights or remedies, either party may institute legal action to cure, correct, or remedy any default, to recover damages for any default, or to obtain any other remedy consistent with the purpose of this Agreement. Such legal actions must be instituted and maintained in the Superior Court of the County of Riverside, State of California, in any other appropriate court in that County, or in the Federal District Court in the Central District of California. (c) The laws of the State of California shall govern the interpretation and enforcement of this Agreement. (d) Except with respect to rights and remedies expressly declared to be exclusive in this Agreement, the rights and remedies of the parties are cumulative and the exercise by either party of one or more of such rights or remedies shall not preclude the exercise by it, at the same or different times of any other rights or remedies for the same default or any other default by the other party. 4.10 Real Estate Commissions. Agency shall not be liable for any real ----------------------- estate commission, brokerage fees or finders fees which may arise from this Agreement. Agency and Development Manager each represent and warrant to the other that it has engaged no broker, agent, or finder in connection with this transaction. 4.11 Time Deadlines Critical. Time is of the essence of this Agreement. ----------------------- 4.12 Submission of Documents and Other Actions for Approval. ------------------------------------------------------ (a) Except where such approval is expressly reserved to the sole discretion of the approving party, all approvals required hereunder by either party shall be not be unreasonably withheld. (b) Any requests for approval of documents submitted to Agency shall contain the following heading in bold type on the first page of the request: 16 ATTENTION EXECUTIVE DIRECTOR THIS IS A REQUEST FOR AGENCY OR CITY APPROVAL OF THE ATTACHED DOCUMENT. PLEASE REVIEW THE MATERIAL AND APPROVE OR DISAPPROVE IT IN WRITING WITHIN THE TIME ESTABLISHED FOR SUCH ACTION THEREFOR IN THE DEVELOPMENT MANAGEMENT AGREEMENT OR SCHEDULE OF PERFORMANCE. 4.13 Amendments to This Agreement. Development Manager and Agency agree to ---------------------------- mutually consider reasonable requests for amendments to this Agreement which may be made by any of the parties hereto, lending institutions, bond counsel or financial consultants. Any amendments to the Agreement must be in writing and signed by the appropriate authorities of both Agency and Development Manager. 4.14 Non-Material Amendments. The Executive Director is authorized to ----------------------- approve and execute amendments to this Agreement which are not of a material nature, including, but not limited to, the granting of extensions of time to Development Manager. 4.15 Counterpart Originals: Integration. ---------------------------------- (a) This Agreement may be executed in duplicate originals, each of which is deemed to be an original. This Agreement and its Exhibits represent the entire understanding of the parties and supersedes all negotiations or previous agreements between the parties with respect to all or any part of the subject matter hereof. (b) All waivers of the provisions of this Agreement must be in writing and signed by the appropriate authorities of both Agency and Development Manager. 4.16 No Waiver. Failure to insist on any one occasion upon strict --------- compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant or condition, nor shall any waiver or relinquishment of any rights or powers hereunder at any one time or more times be deemed a waiver or relinquishment of such other right or power at any other time or times. 4.17 Termination of Agreement. ------------------------ (a) If either party should fail to comply with any material provision of this Agreement, the other party may inform the defaulting party by written notice of its intent to terminate the Agreement unless the defaulting party cures the default within thirty (30) calendar days or such longer period as reasonably may be necessary, provided that within such 30-day period the defaulting party commences and thereafter diligently proceeds to prosecute such cure. Upon the failure of the defaulting party to cure the default within said period the Agreement may be immediately terminated. 17 (b) This Agreement may be terminated by Agency, pursuant to paragraph 4.8 above, upon at least thirty (30) days written notice to Development Manager. In such event, compensation shall be payable to Development Manager in accordance with Section 4.8. 4.18 Successors and Assigns. Agency and Development Manager, ---------------------- respectively, bind themselves, their partners, successors, assigns and legal representatives to the other party to this agreement, and to the partners, successors, assigns and legal representatives of such other party with respect to all covenants to this Agreement. Neither Agency nor Development Manager shall assign or transfer any interest in this Agreement without the written consent of the other; provided that Development Manager may assign its interest in the Agreement to any entity which is established to succeed to the property ownership, development or management activities of Kilroy Industries and/or its affiliates ("Kilroy"); or any other entity controlled by or under common control with Kilroy. 4.19 Extent of Agreement. ------------------- (a) This Agreement represents the entire and integrated agreement between Agency and Development Manager and supersede all prior negotiations, representations or agreements between the parties, either written or oral. This Agreement may be amended only by written instrument signed by both Agency and Development Manager. (b) Nothing contained herein shall be construed as creating the relationship of employer and employees between the parties hereto, and Development Manager shall be deemed at all times to be an independent contractor with respect to its performance hereunder. 18 "DEVELOPMENT MANAGER" Dated: November 20, 1995 KILROY TECHNOLOGY COMPANY, a California ------------- corporation By: /s/ C. Hugh Greenup -------------------------- C. Hugh Greenup President "AGENCY" Dated: November 21, 1995 REDEVELOPMENT AGENCY OF THE CITY OF ------------- RIVERSIDE By: /s/ Robert C. Wales -------------------------- Robert C. Wales, P.E. Executive Director APPROVED AS TO FORM: Agency Special Counsel By: /s/ Charles S. Vose ------------------- Charles S. Vose, Esq. Oliver, Barr & Vose 19 EXHIBIT A --------- Design Documents
October 23, 1995 ARCHITECTURAL-CORE & SHELL ISSUE DATE - -------------------------- ---------- A-00 Cover Sheet A-01 Title Sheet, Sheet Index, etc. 10-09-95 A-1.10 Site Plan 10-09-95 A-1.11 Enlarged Site Plan / Details 10-09-95 A-2.10 First Floor Plan 10-09-95 A-2.11 First Floor Plan (Partial) / Roof Plan 10-09-95 A-2.12 Second Floor Plan 10-09-95 A-2.13 Third Floor Plan 10-09-95 A-2.14 Roof Plan 10-09-95 A-3.10 Exterior Elevations 10-09-95 A-3.11 Exterior Elevations 10-09-95 A-3.12 Partial and Enlarged Exterior Elevations 10-09-95 A-3.20 Building Sections 10-09-95 A-3.21 Building Sections 10-09-95 A-3.22 Wall Sections 10-09-95 A-3.23 Wall Sections 10-09-95 A-3.24 Enlarged Partial Bldg. Sections 10-09-95 A-3.30 Exterior Wall Details 10-09-95 A-3.31 Exterior Wall Details 10-09-95 A-3.32 Exterior Wall Details 10-09-95 A-3.33 Exterior Wall Details 10-09-95 A-3.40 Roof Details 10-09-95
1 A-4.10 Enlarged Core Plans (North) 10-09-95 A-4.11 Enlarged Core Plan (South) 10-09-95 A-4.12 Enlarged Core Plans (South) 10-09-95 A-5.10 Stair Sections / Elevator Sections 10-09-95 A-5.11 Stairs Sections / Elevator Sections 10-09-95 A-5.12 Miscellaneous Stair / Elevator Details 10-09-95 A-6.10 Interior Elevations 10-09-95 A-6.11 Interior Elevations 10-09-95 A-7.10 Material and Finish Schedules 10-09-95 A-7.11 Door Schedule and Details 10-09-95 A-7.12 Wall Types Schedule and Details 10-09-95 A-7.13 Interior Details 10-09-95 A-8.10 Enlarged Reflected Ceiling Plan 10-09-95 A-8.11 Enlarged Reflected Ceiling Plan 10-09-95 A-8.12 Enlarged Reflected Ceiling Plan 10-09-95 ARCHITECTURAL - TENANT IMPROVEMENT - --------------------------------- TI-2.11 Ground Floor T.I. Plan 10-09-95 TI-2.12 Second Floor T.I. Plan 10-09-95 TI-2.13 Third Floor T.I. Plan 10-09-95 TI-4.11 Enlarged Plans - Ground Floor 10-09-95 TI-4.12 Enlarged Plans - Second Floor 10-09-95 TI-4.13 Enlarged Plans - Third Floor 10-09-95 TI-6.10 Interior Elevations - Ground Floor 10-09-95 TI-6.11 Interior Elevations - Second Floor 10-09-95 TI-6.12 Interior Elevations - Third Floor 10-09-95 TI-6.13 Interior Elevations - Third Floor 10-09-95 TI-8.11 Ground Floor Reflected Ceiling Plan 10-09-95 TI-8.12 Second Floor Reflected Ceiling Plan 10-09-95 TI-8.13 Third Floor Reflected Ceiling Plan 10-09-95
2 STRUCTURAL - ---------- S-1.1 General Notes 08-18-95 S-2.10 Foundation Plan 09-22-95 S-2.11 Foundation (Partial) Roof Plan (Partial) 09-22-95 S-2.12 Second Floor Framing Plan 09-22-95 S-2.13 Third Floor Framing Plan 09-22-95 S-2.14 Roof Framing Plan 09-22-95 S-3.1 Frame Elevations 09-22-95 S-4.1 Typ. Foundation Details 07-10-95 S-4.2 Concrete Details 09-22-95 S-5.1 Steel Details 09-22-95 S-5.2 Steel Details 09-22-95 S-5.3 Steel Details 09-22-95 S-6.1 Deck Details 09-22-95 LANDSCAPE DWGS - -------------- L.1 Irrigation Plan 08-21-95 L.2 Planting Plan 09-29-95 L.3 Details / Notes Irrigation and Planting 09-29-95 CIVIL DWGS - ---------- 1 Title Sheet 10-06-95 2 Grading Plan 10-06-95 3 Demolition Plan 10-06-95 4 County of Riverside 10-06-95 1 Water / Sewer Plan 10-06-95
3 *ARCHITECTURAL SPECIFICATIONS (SEPT. 1995) - ------------------------------------------ D.B. Drawing is furnished by current design build subcontractors ELECTRICAL DWGS. (9-19-95) - -------------------------- E-0.1 Symbols and Abbreviations. Title 24 09-19-95 E-1.1 Site Plan 09-19-95 E-2.11 First Floor Power Plan 09-19-95 E-2.12 Second Floor Power Plan 09-19-95 E-2.13 Third Floor Power Plan 09-19-95 E-2.14 Roof Plan 09-19-95 E-2.15 Mezzanine Plan/Roof Plan (Partial) 09-19-95 E-3.11 First Floor Communication Plan 09-19-95 E-3.12 Second Floor Communication Plan 09-19-95 E-3.13 Third Floor Communication Plan 09-19-95 E-4.11 First Floor Reflected Ceiling Plan 09-19-95 E-4.12 Second Floor Reflected Ceiling Plan 09-19-95 E-4.13 Third Floor Reflected Ceiling Plan 09-19-95 E-5.10 Lighting Fixture Schedule, Details 09-19-95 E-5.20 Details 09-19-95 E-6.10 One Line Diagram, Loan Calculations 09-19-95
MECHANICAL DWGS (9-19-95) - ------------------------- M-1 HVAC Legend and General Notes 09-19-95 M-2 First Floor Plan 09-19-95 M-3 Second Floor Plan 09-19-95 M-4 Third Floor Plan 09-19-95 M-5 Roof Plan 09-19-95
4 M-6 Title 24 Forms 09-19-95 M-7 Title 24 Forms 09-19-95 PLUMBING DWGS (9-22-95) - ----------------------- P-01 Plumbing Notes Sched. & Calcs. 09-22-95 P-1.10 Plumbing Site Plan 09-22-95 P-2.11 First Floor Plumbing Plan 09-22-95 P-2.12 Second Floor Plumbing Plan 09-22-95 P-2.13 Third Floor Plumbing Plan 09-22-95 P-2.14 Plumbing Roof Plan 09-22-95 P-3.11 Gas, Hot & Cold Water Riser Diagram 09-22-95 P-3.12 Waste & Vent Riser Diagram 09-22-95 P-4.11 Enlarged Ground Core Plumbing Plan (South) 09-22-95 P-4.12 Enlarged 2nd/3rd Core Plumbing Plan (South) 09-22-95 FIRE PROTECTION DWGS (8-22-95) - ------------------------------ 1 Site Plan / General Notes 08-22-95 2 First Floor Reflected Ceiling Plan 08-22-95 3 Second Floor Reflected Ceiling Plan 08-22-95 4 Third Floor Reflected Ceiling Plan 08-22-95 5 First Floor Sprinkler Piping Plan 08-22-95 6 Second Floor Sprinkler Piping Plan 08-22-95 7 Third Floor Sprinkler Piping Plan 08-22-95 8 Pump Mezzanine Plan / Sections 08-22-95
Note: These are current construction documents furnished to date. These documents are subject to change upon completion of drawings and specifications. 5 EXHIBIT B RIVERSIDE BANKRUPTCY COURT REIMBURSABLE ITEMS 11/1/95 1 Legal - Leasing, Contracts, Negotiations $100,000 2 Gnrl Liab/Seismic/Floor (COC & DIC) Insurance $128,160 3 E & O Insurance $125,000 4 Architects, Engineers, Consultants $1,085,271 5 Renderings & Models $15,000 6 Environmental Assessments $40,000 7 A-E-C Reimbursable (0.05%) $49,168 8 Reproduction $103,475 9 Geotechnic Engineering $25,000 10 Testing & Inspection $109,770 11 Survey - ALTA, Parcel Subdivision $15,960 12 Fees, Permits, Bus. Tax - Lic. $300,000 13 Photos, Pub. Relations, Event, Site Sign $35,000 14 Estimating/Construction Management Services $1,374,347 Total Reimbursable items $3,506,151 EX-23.3 17 REPORT AND CONSENT OF DELOITTE & TOUCHE LLP REPORT AND CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.3 We consent to the use in this Registration Statement of Kilroy Realty Corporation on Form S-11 of our reports on Kilroy Realty Corporation, dated October 25, 1996, Kilroy Group ("Predecessor Affiliates"), dated September 20, 1996, and the Acquisition Properties dated June 7, 1996, appearing in this Registration Statement, and to the references to us under the captions "Selected Combined Financial Data" and "Experts." Our audits of the financial statements referred to in our aforementioned report also included the combined financial statement schedule of Kilroy Group listed in Item 35. This combined financial statement schedule is the responsibility of the management of Kilroy Group. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Los Angeles, California November 1, 1996 EX-23.4 18 CONSENT OF ROBERT CHARLES LESSER & CO. EXHIBIT 23.4 CONSENT OF ROBERT CHARLES LESSER & CO. To Kilroy Realty Corporation: As experts in real estate consulting and urban economics, we hereby consent to the use of our Regional Economic Overview and Market Analysis dated June 28, 1996 and to all references to our firm included in or made a part of this Registration Statement. ROBERT CHARLES LESSER & CO. /s/ Robert Charles Lesser & Co. Los Angeles, California November 5, 1996 EX-27.1 19 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED FINANCIAL STATEMENTS OF THE KILROY GROUP AS OF JUNE 30, 1996 (UNAUDITED) AND DECEMBER 31 1995. 1,000 6-MOS 12-MOS DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1995 JUN-30-1996 DEC-31-1995 0 0 0 0 3,892 3,642 2,158 1,793 0 0 0 0 193,110 191,744 82,790 79,251 121,825 121,171 12,507 17,443 204,601 206,858 0 0 0 0 0 0 (95,283) (103,130) 121,825 121,171 0 0 17,811 38,485 0 0 18,301 39,619 0 0 365 958 9,422 21,529 (490) (1,134) 0 0 (490) (1,134) 0 0 12,887 15,267 0 0 12,397 14,133 0 0 0 0
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