-----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, DO4ccgaCQhb6cP252hO1ZQ5+fMGI5oaydnSY5q210KomTNXEKdzfFJeIm3DnePud 4riVFu4zu7yJIThnVxTCEg== 0000898430-99-004266.txt : 19991117 0000898430-99-004266.hdr.sgml : 19991117 ACCESSION NUMBER: 0000898430-99-004266 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KILROY REALTY CORP CENTRAL INDEX KEY: 0001025996 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 954598246 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12675 FILM NUMBER: 99752524 BUSINESS ADDRESS: STREET 1: 2250 E IMPERIAL HWY STREET 2: C/O KILROY INDUSTRIES CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3105635500 MAIL ADDRESS: STREET 1: C/O KILROY INDUSTRIES STREET 2: 2250 E IMPERIAL HIGHWAY #1200 CITY: EL SEGUNDO STATE: CA ZIP: 90245 10-Q 1 FORM 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-12675 KILROY REALTY CORPORATION (Exact name of registrant as specified in its charter) Maryland 95-4598246 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 2250 East Imperial Highway, Suite 1200, El Segundo, California 90245 (Address of principal executive offices) (310) 563-5500 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] As of November 12, 1999, 27,894,210 shares of common stock, par value $.01 per share, were outstanding. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- KILROY REALTY CORPORATION QUARTERLY REPORT FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 TABLE OF CONTENTS
Page ---- PART I--FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS (unaudited) Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998.............................................. 3 Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1999 and 1998..................................... 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998..................................... 5 Notes to the Consolidated Financial Statements.................. 6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................... 13 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...... 27 PART II--OTHER INFORMATION Item 1. LEGAL PROCEEDINGS............................................... 30 Item 2. CHANGES IN SECURITIES........................................... 30 Item 3. DEFAULTS UPON SENIOR SECURITIES................................. 30 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 30 Item 5. OTHER INFORMATION............................................... 30 Item 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 30 SIGNATURES...................................................... 31
2 PART I--FINANCIAL INFORMATION ITEM 1. Financial Statements KILROY REALTY CORPORATION CONSOLIDATED BALANCE SHEETS (unaudited, in thousands, except share data)
September 30, December 31, 1999 1998 ------------- ------------ ASSETS ------ INVESTMENT IN REAL ESTATE (Note 2): Land and improvements.............................. $ 279,499 $ 253,500 Buildings and improvements......................... 935,152 828,425 Undeveloped land and construction in progress, net. 139,392 112,359 ---------- ---------- Total investment in real estate................... 1,354,043 1,194,284 Accumulated depreciation and amortization.......... (165,000) (145,437) ---------- ---------- Investment in real estate, net.................... 1,189,043 1,048,847 CASH AND CASH EQUIVALENTS............................ 6,857 6,443 RESTRICTED CASH...................................... 7,451 6,896 TENANT RECEIVABLES, NET.............................. 17,006 15,630 NOTES RECEIVABLE FROM RELATED PARTIES................ 8,798 DEFERRED FINANCING AND LEASING COSTS, NET............ 22,160 16,168 PREPAID EXPENSES AND OTHER ASSETS.................... 2,403 3,146 ---------- ---------- TOTAL ASSETS...................................... $1,244,920 $1,105,928 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ LIABILITIES: Mortgage debt (Note 3)............................. $ 236,667 $ 133,383 Unsecured line of credit (Note 3).................. 290,000 272,000 Accounts payable and accrued expenses.............. 16,334 16,791 Accrued distributions (Note 8)..................... 13,567 12,895 Rents received in advance and tenant security deposits.......................................... 16,222 14,460 ---------- ---------- Total liabilities................................. 572,790 449,529 ---------- ---------- COMMITMENTS AND CONTINGENCIES MINORITY INTERESTS (Note 4): 8.075% Series A Cumulative Redeemable Preferred unitholders....................................... 73,716 73,718 9.375% Series C Cumulative Redeemable Preferred unitholders....................................... 34,464 34,410 Common unitholders................................. 75,646 72,372 Development LLCs................................... 9,766 ---------- ---------- Total minority interests.......................... 193,592 180,500 ---------- ---------- STOCKHOLDERS' EQUITY (Note 5): Preferred stock, $.01 par value, 27,200,000 shares authorized, none issued and outstanding ...................... 8.075% Series A Cumulative Redeemable Preferred stock, $.01 par value, 1,700,000 shares authorized, none issued and outstanding....................... Series B Junior Participating Preferred stock, $.01 par value, 400,000 shares authorized, none issued and outstanding....................................... 9.375% Series C Cumulative Redeemable Preferred stock, $.01 par value, 700,000 shares authorized, none issued and outstanding....................................... Common stock, $.01 par value, 150,000,000 shares authorized, 27,894,210 and 27,639,210 shares issued and outstanding, respectively.............. 279 276 Additional paid-in capital......................... 493,409 487,467 Distributions in excess of earnings................ (15,150) (11,844) ---------- ---------- Total stockholders' equity........................ 478,538 475,899 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $1,244,920 $1,105,928 ========== ==========
See accompanying notes to consolidated financial statements. 3 KILROY REALTY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands, except share and per share data)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 1999 1998 1999 1998 ----------- ----------- ----------- ----------- REVENUES (Note 6): Rental income...................... $ 34,959 $ 30,369 $ 101,941 $ 84,817 Tenant reimbursements.............. 4,214 3,768 12,530 10,845 Interest income.................... 239 308 860 1,191 Other income....................... 790 74 1,722 941 ----------- ----------- ----------- ----------- Total revenues................... 40,202 34,519 117,053 97,794 ----------- ----------- ----------- ----------- EXPENSES: Property expenses.................. 5,054 4,732 15,517 13,769 Real estate taxes.................. 3,108 2,800 8,969 7,358 General and administrative expenses.......................... 2,266 1,797 6,781 5,499 Ground leases...................... 331 302 1,002 897 Interest expense................... 6,501 5,263 18,420 14,642 Depreciation and amortization...... 7,900 6,740 22,577 19,159 ----------- ----------- ----------- ----------- Total expenses................... 25,160 21,634 73,266 61,324 ----------- ----------- ----------- ----------- INCOME FROM OPERATIONS BEFORE GAIN ON SALE OF OPERATING PROPERTIES, EQUITY IN (LOSS) INCOME OF UNCONSOLIDATED SUBSIDIARY AND MINORITY INTERESTS... 15,042 12,885 43,787 36,470 GAIN ON SALE OF OPERATING PROPERTIES. 75 75 EQUITY IN (LOSS) INCOME OF UNCONSOLIDATED SUBSIDIARY........... (8) 1 (22) (24) ----------- ----------- ----------- ----------- INCOME BEFORE MINORITY INTERESTS..... 15,109 12,886 43,840 36,446 ----------- ----------- ----------- ----------- MINORITY INTERESTS: Distributions on Cumulative Redeemable Preferred units........ (2,334) (1,450) (7,003) (3,704) Minority interest in earnings of Operating Partnership............. (1,830) (1,451) (5,186) (4,093) Minority interest in earnings of Development LLCs.................. (34) (34) ----------- ----------- ----------- ----------- Total minority interests......... (4,198) (2,901) (12,223) (7,797) ----------- ----------- ----------- ----------- NET INCOME........................... $ 10,911 $ 9,985 $ 31,617 $ 28,649 =========== =========== =========== =========== Net income per common share-basic (Note 7)............................ $ 0.39 $ 0.36 $ 1.14 $ 1.07 =========== =========== =========== =========== Net income per common share-diluted (Note 7)............................ $ 0.39 $ 0.36 $ 1.14 $ 1.07 =========== =========== =========== =========== Weighted average shares outstanding- basic (Note 7)...................... 27,658,014 27,647,688 27,640,016 26,770,445 =========== =========== =========== =========== Weighted average shares outstanding- diluted (Note 7).................... 27,676,512 27,647,688 27,674,515 26,865,274 =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 4 KILROY REALTY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands)
Nine Months Ended September 30, -------------------- 1999 1998 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................................................... $ 31,617 $ 28,649 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................................................. 22,577 19,159 Provision for uncollectable tenant receivables and deferred rent.............................. 1,744 1,059 Minority interest in earnings of Operating Partnership........................................ 5,186 4,093 Minority interest in earnings of Development LLCs............................................. 34 Restricted stock compensation................................................................. 381 405 Gain on sale of operating properties.......................................................... (75) Gain on sale of undeveloped land.............................................................. (539) Other......................................................................................... (213) (262) Changes in assets and liabilities: Tenant receivables........................................................................... (3,120) (6,494) Deferred leasing costs....................................................................... (2,127) (401) Prepaid expenses and other assets............................................................ 505 561 Accounts payable and accrued expenses........................................................ 466 4,596 Rents received in advance and tenant security deposits....................................... 1,762 2,395 Accrued distributions to Cumulative Redeemable Preferred unitholders......................... 52 757 --------- --------- Net cash provided by operating activities................................................... 58,250 54,517 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for operating properties......................................................... (37,428) (216,168) Expenditures for undeveloped land and construction in progress................................ (115,601) (65,353) Proceeds from sale of operating properties.................................................... 11,000 Proceeds from sale of undeveloped land........................................................ 5,051 Cash paid for note receivable to related party................................................ (6,655) Decrease in escrow deposits................................................................... 295 4,713 Net advances to unconsolidated subsidiary..................................................... (935) (382) --------- --------- Net cash used in investing activities....................................................... (137,618) (283,845) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuances of common stock................................................... 82,146 Net proceeds from issuances of Cumulative Redeemable Preferred units.......................... 72,961 Net borrowings on unsecured line of credit.................................................... 18,000 128,000 Proceeds from issuance of mortgage debt....................................................... 125,000 5,000 Principal payments on mortgage debt........................................................... (21,716) (2,443) Financing costs............................................................................... (918) (1,335) Increase in restricted cash................................................................... (555) (616) Distributions paid to common stockholders and common unitholders.............................. (40,029) (36,003) --------- --------- Net cash provided by financing activities................................................... 79,782 247,710 --------- --------- Net increase in cash and cash equivalents...................................................... 414 18,382 Cash and cash equivalents, beginning of period................................................. 6,443 8,929 --------- --------- Cash and cash equivalents, end of period ...................................................... $ 6,857 $ 27,311 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest, net of capitalized interest........................................... $ 17,287 $ 13,580 ========= ========= Distributions paid to Cumulative Redeemable Preferred unitholders............................. $ 6,930 $ 2,947 ========= ========= NON-CASH TRANSACTIONS: Accrual of distributions payable (Note 8)..................................................... $ 13,567 $ 12,811 ========= ========= Issuance of common limited partnership units of the Operating Partnership to acquire operating properties and undeveloped land (Note 2)..................................................... $ 9,915 $ 16,031 ========= ========= Minority interest recorded in connection with Development LLC undeveloped land acquisitions (Notes 2 and 4).............................................................................. $ 9,733 ========= Note receivable from related party satisfied in connection with Development LLC undeveloped land acquisition (Note 2).................................................................... $ 2,267 =========
See accompanying notes to consolidated financial statements. 5 KILROY REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Nine Months Ended September 30, 1999 and 1998 (Unaudited) 1. Organization and Basis of Presentation Organization Kilroy Realty Corporation (the "Company") develops, owns, and operates office and industrial real estate, primarily in Southern California. The Company, which operates as a self-administered real estate investment trust ("REIT"), commenced operations upon the completion of its initial public offering in January 1997. As of September 30, 1999, the Company's stabilized portfolio consisted of 88 office properties and 88 industrial properties, which encompassed approximately 6.2 million and 6.4 million rentable square feet, respectively, and was 95.5% occupied. The Company's stabilized portfolio consists of all of the Company's office and industrial properties excluding properties recently developed by the Company that have not yet reached 95.0% occupancy ("lease-up" properties) and projects currently under construction or in pre-development. As of September 30, 1999, the Company had seven office properties under construction which when completed are expected to encompass an aggregate of 810,900 rentable square feet. In addition, the Company had recently completed construction on two industrial properties encompassing an aggregate of 558,100 rentable square feet, which were in lease-up at September 30, 1999. Lease-up properties are included in land and improvements and building and improvements on the consolidated balance sheets upon building shell completion. The Company owns its interests in all of its properties through Kilroy Realty, L.P. (the "Operating Partnership") and Kilroy Realty Finance Partnership, L.P. and conducts substantially all of its operations through the Operating Partnership. The Company owned an 86.4% general partnership interest in the Operating Partnership as of September 30, 1999. The majority of the Company's 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. Basis of Presentation The accompanying interim financial statements have been prepared by the Company's management in accordance with generally accepted accounting principles and in conjunction with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the interim financial statements presented herein reflect all adjustments of a normal and recurring nature which are considered necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim period are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. These financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Amendment 1 to Form 10-K on Form 10K-A for the year ended December 31, 1998. Certain prior year amounts have been reclassified to conform to the current period's presentation. 6 KILROY REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Nine Months Ended September 30, 1999 and 1998 (Unaudited) 2. Acquisitions and Dispositions Acquisitions In February 1999, the Company acquired three acres of undeveloped land in San Diego, California for $0.4 million in cash and 119,460 common limited partnership units of the Operating Partnership valued at $2.5 million based upon the closing share price of the Company's common stock as reported on the New York Stock Exchange ("NYSE") at the time the property was acquired. The undeveloped land was acquired from The Allen Group, a group of affiliated real estate development companies based in Visalia, California. A former Executive Vice President of the Company received 76,896 of the total 119,460 common units issued in connection with the acquisition. The acquisition was based upon terms that the Company believes were comparable to terms obtainable from third-parties based on arm's-length negotiations and was funded primarily from existing working capital. In March 1999, the Company acquired one office property containing 126,000 aggregate rentable square feet in San Diego, California for $17.5 million in cash and 168,402 common limited partnership units of the Operating Partnership valued at $3.6 million based upon the closing share price of the Company's common stock as reported on the NYSE at the time the property was acquired. The office property, which is 100% leased through February 2014, was acquired pursuant to an existing agreement executed by the Company and The Allen Group in October 1997. In connection with this anticipated transaction, the Company entered into an agreement in May 1998 to loan up to $2.3 million to a limited liability company controlled by Richard S. Allen, a former member of the Company's Board of Directors, to finance tenant improvements to this property. The $2.3 million balance of the note and the related interest, which accrued at a rate of Prime plus 1.00%, were repaid to the Company in connection with the acquisition. A former Executive Vice President of the Company received 98,476 of the total 168,402 common units issued in connection with the acquisition. The acquisition was based upon terms that the Company believes were comparable to terms obtainable from third-parties based on arm's-length negotiations and was funded primarily from existing working capital and borrowings on the Company's revolving credit facility. During the first quarter of 1999, the Company acquired a 50% interest in 55 acres of undeveloped land in San Diego, California for $16.1 million and 184,172 common limited partnership units of the Operating Partnership valued at $3.8 million based upon the closing share price of the Company's common stock as reported on the NYSE at the time the property was acquired. The undeveloped land was acquired pursuant to an existing agreement executed by the Company and The Allen Group in October 1997 that provided for the joint development of two office projects with approximately 1.1 million aggregate rentable square feet over the next five years. Both the Company and The Allen Group contributed their respective 50% interests in the undeveloped land to two limited liability companies (the "Development LLCs"). In connection with this anticipated transaction, the Company entered into an agreement in May 1998 to loan up to $8.5 million to a limited partnership controlled by Richard S. Allen to finance infrastructure improvements on the undeveloped land. The $8.5 million balance of the note was assumed by one of the Development LLCs. The related interest, which accrued at a rate of LIBOR plus 1.85%, was paid to the Company by the limited partnership. A former Executive Vice President of the Company received 69,694 of the total 184,172 common units issued in connection with the acquisition. The acquisition was based upon terms that the Company believes were comparable to terms obtainable from third-parties based on arm's-length negotiations and was funded primarily from existing working capital and borrowings on the Company's revolving credit facility. In March 1999, the Company acquired construction materials for its Kilroy Airport Center, Long Beach development project from a partnership controlled by John B. Kilroy, Sr., the Chairman of the Company's Board 7 KILROY REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Nine Months Ended September 30, 1999 and 1998 (Unaudited) of Directors, and John B. Kilroy, Jr., the Company's President and Chief Executive Officer, for approximately $4.3 million. The acquisition of the construction materials was based upon terms that the Company believes were comparable to terms obtainable from third-parties based upon arm's-length negotiations and was funded primarily with existing working capital and borrowings on the Company's revolving credit facility. In April 1999, the Company acquired nine acres of undeveloped land in San Diego, California from an unaffiliated third party for $4.3 million in cash. The Company acquired the undeveloped land by exercising an option obtained in connection with the acquisition of the adjacent office property in April 1998. Prior to the acquisition, the Company had leased the undeveloped land from the seller under a ground lease. The acquisition of the undeveloped land was funded primarily from existing working capital and borrowings on the Company's revolving credit facility. In May 1999, the Company acquired the 12.5% minority interest in a three- building office complex in Diamond Bar, California from an unaffiliated third party for $1.2 million in cash. The Company had originally purchased its 87.5% interest in the office complex in September 1997. The acquisition of the minority interest was funded primarily from existing working capital and borrowings on the Company's revolving credit facility. In July 1999, the Company acquired one office property containing approximately 50,900 aggregate rentable square feet in San Diego, California for $9.5 million in cash. The office property, which is 100% leased through July 2004, was acquired from an unaffiliated third party. The acquisition was funded primarily from existing working capital and borrowings on the Company's revolving credit facility. Dispositions In February 1999, the Company sold eight acres of its 18-acre undeveloped land parcel in Calabasas, California to the City of Calabasas for a total sales price of $1.4 million. The land is part of a 66-acre development site which is presently entitled for over 1.0 million rentable square feet of office, retail and hotel development. The Company presently plans to develop 213,000 rentable square feet of office space on the remaining ten acres it currently owns. The infrastructure improvements on the land were financed with public facility bonds which were refinanced in February 1999. In connection with the refinancing, the portion of the original obligation that related to the eight acres the Company sold to the City of Calabasas was defeased. The refinanced bonds, which were sponsored by the City of Calabasas, currently have a principal balance of $12.5 million. The bonds do not contain cross- collateralization provisions and therefore if one property owner defaulted on their special tax payments, the other property owners would not be obligated to repay the defaulted taxes. Based on the planned development of the total site, the Company's maximum obligation for its portion of the development site is currently estimated at $5.5 million, but may decrease depending on the actual size and number of buildings built. Because the assessment on each individual property owner is dependent upon the rate of development of the entire development site and therefore is not fixed and determinable, the Company did not record the obligation. The periodic assessments are currently capitalized as development costs and will be charged to operations upon the completion of construction. The gain on sale of $0.1 million from the sale of the eight acres of undeveloped land is included in other income in the consolidated statements of operations. The Company used the proceeds to fund development expenditures. In May 1999, the Company sold five acres of undeveloped land in San Diego, California to an unaffiliated third party for a total sales price of $3.7 million in cash. The gain on sale of $0.4 million is included in other income in the consolidated statements of operations. The Company used the sale proceeds to repay outstanding borrowings under its revolving credit facility and to fund development expenditures. 8 KILROY REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Nine Months Ended September 30, 1999 and 1998 (Unaudited) In August 1999, the Company sold, in two separate transactions with unaffiliated third parties, two industrial properties totaling approximately 279,100 aggregate rentable square feet for an aggregate sales price of $11.0 million. The properties are located in Ontario and Ventura, California. The total gain on sale of $0.1 million from these two dispositions is reported after income from operations on the consolidated statements of operations. The Company used the sale proceeds to repay outstanding borrowings under its revolving credit facility and to fund development expenditures. 3. Unsecured Line of Credit and Mortgage Debt As of September 30, 1999, the Company had borrowings of $290 million outstanding under its revolving unsecured line of credit (the "Credit Facility") and availability of approximately $41.1 million. In November 1999, the Company increased its borrowing capacity and obtained a new $400 million unsecured revolving credit facility (the "$400 million Credit Facility") to replace the existing $350 million Credit Facility which was scheduled to mature in February 2000. The $400 million Credit Facility, which will bear interest at a rate between LIBOR plus 1.13% and LIBOR plus 1.75% depending upon the Company's leverage ratio at the time of borrowing and will mature in November 2002, was syndicated to a group of 15 banks led by Morgan Guaranty Trust Company of New York and The Chase Manhattan Bank. The Company expects to use the $400 million Credit Facility to finance development expenditures, to fund acquisitions and for general corporate uses. In March 1999, the Company borrowed $95.0 million under a mortgage loan that is secured by nine office and industrial properties, requires monthly principal and interest payments based on a fixed annual interest rate of 7.20%, amortizes over 25 years and matures in April 2009. The Company used the proceeds from the mortgage loan to repay outstanding borrowings under the Credit Facility and to fund development expenditures. In April 1999, the Company borrowed $30.0 million under a mortgage loan that is secured by one office property and the related ground leases, requires monthly principal and interest payments based on a fixed annual interest rate of 7.15% and matures in May 2017. The Company used the proceeds from the loan to repay an existing variable rate mortgage loan with an outstanding balance of $19.0 million, to repay outstanding borrowings under the Credit Facility and to fund development expenditures. In October 1999, the Company borrowed $90.0 million under a debt facility that is secured by 13 office properties, requires monthly interest-only payments based on a floating interest rate of LIBOR plus 1.75% and matures in October 2003. The Company used the proceeds from the secured debt facility to repay outstanding borrowings under the Credit Facility and to fund development expenditures. Total interest capitalized for the three months ended September 30, 1999 and 1998 was $3.2 million and $2.2 million, respectively. Total interest capitalized for the nine months ended September 30, 1999 and 1998 was $8.1 million and $6.2 million, respectively. 4. Minority Interests Minority interests represent the preferred and common limited partnership interests in the Operating Partnership and interests held by The Allen Group in the Development LLCs. During the nine months ended September 30, 1999, the Operating Partnership issued 472,034 common limited partnership units of the Operating Partnership in connection with operating property and undeveloped 9 KILROY REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Nine Months Ended September 30, 1999 and 1998 (Unaudited) land acquisitions (see Note 2). In addition, 265,000 common limited partnership units of the Operating Partnership were exchanged in September 1999 into shares of the Company's common stock on a one-for-one basis (see Note 5). The Company owned an 86.4% general partnership interest in the Operating Partnership as of September 30, 1999. During the first quarter of 1999, the Company became a 50% managing member in each of the Development LLCs as a result of the acquisition of certain undeveloped land and the contribution of such land to the Development LLCs (see Note 2). The Development LLCs are consolidated for financial reporting purposes because the Company holds a 50% ownership interest combined with the ability to control all significant development decisions. 5. Stockholders Equity During 1999, the Company filed two registration statements on Form S-3 with the SEC which registered the potential issuance and resale of up to a total of 3,867,850 shares of the Company's common stock in exchange for 3,867,850 common limited partnership units of the Operating Partnership previously issued in connection with certain 1997 and 1998 property acquisitions. The SEC declared the registration statements effective in September and October 1999. The common limited partnership units may be exchanged at the Company's option into shares of the Company's common stock on a one-for-one basis. Neither the Company nor the Operating Partnership will receive any of the proceeds from the issuance of the common stock to the identified common unitholders. In September 1999, 265,000 common limited partnership units of the Operating Partnership owned by John B. Kilroy, Sr., the Chairman of the Company's Board of Directors, and Kilroy Industries, an entity owned by John B. Kilroy, Sr. and John B. Kilroy, Jr., the Company's President and Chief Executive Officer, were exchanged into shares of the Company's common stock. In September 1999, the SEC declared effective the Company's registration statement on Form S-3 with respect to 1,000,000 shares of the Company's common stock to be issued under the Company's Dividend Reinvestment and Direct Purchase Plan (the "Plan"). The Plan, which is designed to provide the Company's stockholders and other investors with a convenient and economical method to purchase shares of the Company's common stock, consists of three programs: the Dividend Reinvestment Program (the "DRIP"), the Cash Option Purchase Plan (the "COPP") and the Waiver Discount Plan (the "WDP"). The DRIP provides existing common stockholders with the opportunity to purchase additional shares of the Company's common stock by automatically reinvesting all or a portion of their cash dividends. The COPP provides existing common stockholders and other investors with the opportunity to purchase additional shares of the Company's common stock by making optional cash purchases, at no discount to market, between $100 to $5,000 and $750 to $5,000, respectively, in any calendar month. The WDP provides existing common stockholders and other investors with the opportunity to purchase additional shares of the Company's common stock by making optional cash purchases, at a discount to market of up to 2.00% of the average per share price reported on the NYSE, of greater than $5,000 in any calendar month. The Plan will acquire shares of the Company's common stock from either new issuances directly from the Company or from the open market or from privately negotiated transactions, except for transactions executed under the WDP which will be purchased only from previously unissued shares of common stock. Participation in the Plan is entirely voluntary, and can be terminated at any time. As of September 30, 1999, there have been no shares issued under the Plan. In May 1999, the Company filed a registration statement on Form S-8 with the SEC that registered the potential issuance and resale of up to 1,500,000 shares of the Company's common stock issuable to the Company's employees and directors under the 1997 Stock Option and Incentive Plan. 10 KILROY REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Nine Months Ended September 30, 1999 and 1998 (Unaudited) 6. Segment Disclosure The Company evaluates the performance of its segments based upon net operating income. Net operating income is defined as operating revenues (rental income, tenant reimbursements and other property income) less property and related expenses (property expenses, real estate taxes and ground leases) and does not include interest income and expense, depreciation and amortization and corporate general and administrative expenses. All operating revenues are comprised of amounts received from external tenants.
Three Months Ended Nine Months Ended September 30, September 30, -------------------- ----------------- 1999 1998 1999 1998 --------- --------- -------- ------- (in thousands) Revenues and Expenses: Office Properties: Operating revenues.................. $ 27,270 $ 24,205 $ 80,039 $68,386 Property and related expenses....... 6,798 6,132 19,995 17,627 --------- --------- -------- ------- Net operating income, as defined.... 20,472 18,073 60,044 50,759 --------- --------- -------- ------- Industrial Properties: Operating revenues.................. 12,693 10,006 36,154 28,217 Property and related expenses....... 1,695 1,702 5,493 4,397 --------- --------- -------- ------- Net operating income, as defined.... 10,998 8,304 30,661 23,820 --------- --------- -------- ------- Total Reportable Segments: Operating revenues.................. 39,963 34,211 116,193 96,603 Property and related expenses....... 8,493 7,834 25,488 22,024 --------- --------- -------- ------- Net operating income, as defined.... 31,470 26,377 90,705 74,579 --------- --------- -------- ------- Reconciliation to Consolidated Net Income: Total net operating income, as defined, for reportable segments... 31,470 26,377 90,705 74,579 Other unallocated revenues: Interest income................... 239 308 860 1,191 Other unallocated expenses: General and administrative expenses......................... 2,266 1,797 6,781 5,499 Interest expense.................. 6,501 5,263 18,420 14,642 Depreciation and amortization..... 7,900 6,740 22,577 19,159 --------- --------- -------- ------- Net income from operations before gain on sale of operating properties, equity in (loss) income of unconsolidated subsidiary and minority interests................. 15,042 12,885 43,787 36,470 Gain on sale of industrial operating properties......................... 75 75 Equity in (loss) income of unconsolidated subsidiary.......... (8) 1 (22) (24) Minority interests.................. (4,198) (2,901) (12,223) (7,797) --------- --------- -------- ------- Net income.......................... $ 10,911 $ 9,985 $ 31,617 $28,649 ========= ========= ======== =======
11 KILROY REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Nine Months Ended September 30, 1999 and 1998 (Unaudited) 7. Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted- average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the sum of the weighted- average number of common shares outstanding for the period plus the number of common shares issuable assuming the exercise of all dilutive securities. The Company does not consider common units of the Operating Partnership to be dilutive since the exchange of common units into common stock is on a one-for- one basis and would not have any effect on diluted earnings per share. The following table reconciles the numerator and denominator of the basic and diluted per-share computations for net income.
Three Months Ended Three Months Ended September 30, 1999 September 30, 1998 ------------------------------------ ----------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- --------- ----------- ------------- --------- (in thousands, except share and per share amounts) Basic................... $10,911 27,658,014 $0.39 $ 9,985 27,647,688 $0.36 Effect of dilutive securities: Stock options granted. 18,498 ------- ---------- ----- ------- ---------- ----- Diluted................. $10,911 27,676,512 $0.39 $ 9,985 27,647,688 $0.36 ======= ========== ===== ======= ========== ===== Nine Months Ended Nine Months Ended September 30, 1999 September 30, 1998 ------------------------------------ ----------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- --------- ----------- ------------- --------- (in thousands, except share and per share amounts) Basic................... $31,617 27,640,016 $1.14 $28,649 26,770,445 $1.07 Effect of dilutive securities: Stock options granted. 34,499 94,829 ------- ---------- ----- ------- ---------- ----- Diluted................. $31,617 27,674,515 $1.14 $28,649 26,865,274 $1.07 ======= ========== ===== ======= ========== =====
At September 30, 1999, Company employees and directors held options to purchase 1,343,000 shares of the Company's common stock that were antidilutive to the diluted earnings per share computation. These options could become dilutive in future periods if the average market price of the Company's common stock exceeds the exercise price of the outstanding options. 8. Subsequent Events On October 15, 1999, aggregate distributions of $13.6 million were paid to common stockholders and common unitholders of record on September 30, 1999. On October 22, 1999, the Company executed a $90.0 million secured debt facility (see Note 3). On November 8, 1999, the Company increased its borrowing capacity and obtained a new $400 million unsecured revolving credit facility to replace the existing $350 million Credit Facility which was scheduled to mature in February 2000. (see Note 3). 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion relates to the consolidated financial statements of the Company and should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. Statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" that are not historical facts may be forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected. You are cautioned not to place undue reliance on these forward-looking statements. Overview and Background Kilroy Realty Corporation (the "Company") develops, owns, and operates office and industrial real estate, primarily in Southern California. The Company, which operates as a self-administered real estate investment trust ("REIT"), commenced operations upon the completion of its initial public offering in January 1997. The Company owns its interests in all of its properties through Kilroy Realty, L.P. (the "Operating Partnership") and Kilroy Realty Finance Partnership, L.P. and conducts substantially all of its operations through the Operating Partnership. The Company owned an 86.4% general partnership interest in the Operating Partnership as of September 30, 1999. Results of Operations During the nine months ended September 30, 1999, the Company acquired three office buildings encompassing 176,900 rentable square feet, for a total purchase price of $30.6 million. During 1998, the Company acquired 25 office and 16 industrial buildings totaling 1.4 million and 674,000 aggregate rentable square feet, respectively, for an aggregate acquisition cost of approximately $254 million. Operating results for acquired properties are included in the consolidated financial statements of the Company subsequent to their respective acquisition dates. During the nine months ended September 30, 1999, the Company completed the development of four office and two industrial projects encompassing an aggregate of 419,800 rentable square feet and 390,300 rentable square feet, respectively. During the fourth quarter of 1998, the Company completed the development of three industrial projects encompassing an aggregate of 723,800 rentable square feet. Of these development projects completed subsequent to September 30, 1998, all but five industrial buildings encompassing an aggregate of 558,100 rentable square feet were included in the Company's portfolio of stabilized operating properties at September 30, 1999. The Company's stabilized portfolio of operating properties consists of all of the Company's office and industrial properties excluding properties recently developed by the Company that have not yet reached 95% occupancy ("lease-up properties") and projects currently under construction or in pre-development. The five industrial buildings encompassing an aggregate of 558,100 rentable square feet were in lease-up as of September 30, 1999. As a result of the properties acquired and the projects developed by the Company subsequent to September 30, 1998, rentable square footage in the Company's portfolio of stabilized operating properties increased 1.5 million rentable square feet, or 13.5% to 12.6 million rentable square feet at September 30, 1999 compared to 11.1 million rentable square feet at September 30, 1998. As of September 30, 1999, the Company's stabilized portfolio was comprised of 88 office properties (the "Office Properties") encompassing 6.2 million rentable square feet and 88 industrial properties (the "Industrial Properties" and together with the Office Properties, the "Properties") encompassing 6.4 million rentable square feet. The stabilized portfolio occupancy rate at September 30, 1999 was 95.5%, with the Office and Industrial Properties 93.2% and 97.6% occupied, respectively. 13 Three Months Ended September 30, 1999 Compared to Three Months Ended September 30, 1998
Three Months Ended September 30, --------------- Dollar Percentage 1999 1998 Change Change ------- ------- ------ ---------- (dollars in thousands) Revenues: Rental income............................. $34,959 $30,369 $4,590 15.1% Tenant reimbursements..................... 4,214 3,768 446 11.8 Interest income........................... 239 308 (69) (22.4) Other income.............................. 790 74 716 967.6 ------- ------- ------ Total revenues.......................... 40,202 34,519 5,683 16.5 ------- ------- ------ Expenses: Property expenses......................... 5,054 4,732 322 6.8 Real estate taxes......................... 3,108 2,800 308 11.0 General and administrative expenses....... 2,266 1,797 469 26.1 Ground leases............................. 331 302 29 9.6 Interest expense.......................... 6,501 5,263 1,238 23.5 Depreciation and amortization............. 7,900 6,740 1,160 17.2 ------- ------- ------ Total expenses.......................... 25,160 21,634 3,526 16.3 ------- ------- ------ Income from operations before gain on sale of operating properties, equity in (loss) income of unconsolidated subsidiary and minority interests......................... $15,042 $12,885 $2,157 16.7% ======= ======= ======
Rental Operations Management evaluates the operations of its portfolio based on operating property type. The following tables compare the net operating income, defined as operating revenues less property and related expenses (property expenses, real estate taxes and ground leases) before depreciation, for the Office and Industrial Properties for the three months ended September 30, 1999 and 1998. Office Properties
Three Months Ended September 30, --------------- Dollar Percentage 1999 1998 Change Change ------- ------- ------ ---------- (dollars in thousands) Operating revenues: Rental income.............................. $23,829 $21,316 $2,513 11.8% Tenant reimbursements...................... 2,729 2,827 (98) (3.5) Other income............................... 712 62 650 1048.4 ------- ------- ------ Total.................................... 27,270 24,205 3,065 12.7 ------- ------- ------ Property and related expenses: Property expenses.......................... 4,502 4,097 405 9.9 Real estate taxes.......................... 1,965 1,733 232 13.4 Ground leases.............................. 331 302 29 9.6 ------- ------- ------ Total.................................... 6,798 6,132 666 10.9 ------- ------- ------ Net operating income, as defined............. $20,472 $18,073 $2,399 13.3% ======= ======= ======
14 Total revenues from Office Properties increased $3.1 million, or 12.7% to $27.3 million for the three months ended September 30, 1999 compared to $24.2 million for the three months ended September 30, 1998. Rental income from office properties increased $2.5 million, or 11.8% to $23.8 million for the three months ended September 30, 1999 compared to $21.3 million for the three months ended September 30, 1998. Of this increase, $1.5 million was generated by the office properties acquired during 1999 and 1998 (the "Office Acquisitions") and $1.0 million was generated by the office properties developed by the Company in 1999 and in 1998 (the "Office Development Properties"). Rental income generated by the stabilized office properties owned at January 1, 1998 and still owned at September 30, 1999 (the "Core Office Portfolio") remained consistent for the three months ended September 30, 1999 as compared to the same period in 1998. Average occupancy in the Core Office Portfolio decreased 2.3% to 91.8% for the three months ended September 30, 1999 compared to 94.1% for the same period in 1998. The decrease in rental income resulting from the decrease in occupancy was offset by an increase in rental rates. Tenant reimbursements from Office Properties decreased $0.1 million, or 3.5% from $2.7 million for the three months ended September 30, 1999 compared to $2.8 million for the three months ended September 30, 1998. An increase of $0.1 million in tenant reimbursements generated by the Office Acquisitions and the Office Development Properties was offset by a decrease of $0.2 million in tenant reimbursements generated by the Core Office Portfolio. The decrease was attributable to the decrease in occupancy in this portfolio. Other income from Office Properties increased $0.6 million or 1048.4% to $0.7 million for the three months ended September 30, 1999 compared to $0.1 million for the three months ended September 30, 1998. For the three months ended September 30, 1999, other income from Office Properties included a $0.5 million lease termination fee from one tenant at Kilroy Airport Center Long Beach, a Core Office Portfolio property. The termination of this lease was initiated by the Company in order to provide an additional 27,000 square feet of space to a tenant that leased 100% of the recently completed 136,000 square foot office project at Kilroy Airport Center, Long Beach. Both leases expire on October 31, 2009. The remaining amounts in other income from Office Properties for the three months ended September 30, 1999 and total other income from Office Properties for the three months ended September 30, 1998 consisted primarily of additional lease termination fees, management fees and tenant late charges. Total expenses from Office Properties increased $0.7 million, or 10.9% to $6.8 million for the three months ended September 30, 1999 compared to $6.1 million for the three months ended September 30, 1998. Property expenses increased $0.4 million, or 9.9% to $4.5 million for the three months ended September 30, 1999 compared to $4.1 million for the same period in 1998. The total increase of $0.4 million in property expenses from Office Properties was attributable to the Office Acquisitions and the Office Development Properties. Property expenses for the Core Office Portfolio remained consistent for the three months ended September 30, 1999 compared to the comparable period in 1998 due to management's implementation of cost saving measures. Real estate taxes increased $0.2 million, or 13.4% to $1.9 million for the three months ended September 30, 1999 as compared to $1.7 million for the comparable period in 1998. This increase was primarily attributable to real estate taxes on the Office Acquisitions and Office Development Properties. Property taxes for the Core Office Portfolio remained consistent for the three months ended September 30, 1999 as compared to the same period in 1998. Ground lease expense from Office Properties remained consistent for the three months ended September 30, 1999 compared to the same period in 1998. Net operating income, as defined, from Office Properties increased $2.4 million, or 13.3% to $20.5 million for the three months ended September 30, 1999 compared to $18.1 million for the three months ended September 30, 1998. Of this increase, $2.1 million was generated by the Office Acquisitions and the Office Development Properties. The remaining increase of $0.3 million was generated by the Core Office Portfolio and represented a 2.4% increase in net operating income for the Core Office Portfolio. 15 Industrial Properties
Three Months Ended September 30, ------------------- Dollar Percentage 1999 1998 Change Change --------- --------- ------ ---------- (dollars in thousands) Operating revenues: Rental income.......................... $ 11,130 $ 9,053 $2,077 22.9% Tenant reimbursements.................. 1,485 941 544 57.8 Other income........................... 78 12 66 550.0 --------- --------- ------ Total................................ 12,693 10,006 2,687 26.9 --------- --------- ------ Property and related expenses: Property expenses...................... 552 635 (83) (13.1) Real estate taxes...................... 1,143 1,067 76 7.1 --------- --------- ------ Total................................ 1,695 1,702 (7) (0.4) --------- --------- ------ Net operating income, as defined......... $ 10,998 $ 8,304 $2,694 32.4% ========= ========= ======
Total revenues from Industrial Properties increased $2.7 million, or 26.9% to $12.7 million for the three months ended September 30, 1999 compared to $10.0 million for the three months ended September 30, 1998. Rental income from Industrial Properties increased $2.1 million, or 22.9% to $11.1 million for the three months ended September 30, 1999 compared to $9.0 million for the three months ended September 30, 1998. Of this increase, $0.7 million was generated by the industrial properties acquired during 1999 and 1998 and two industrial properties disposed of by the Company in August 1999 (the "Industrial Acquisitions and Dispositions") and $1.1 million was generated by the industrial properties developed by the Company in 1999 and 1998 (the "Industrial Development Properties"). The remaining $0.3 million of the increase was generated by the stabilized industrial properties owned at January 1, 1998 and still owned at September 30, 1999 (the "Core Industrial Portfolio") and represented a 3.4% increase in rental income for the Core Industrial Portfolio. Average occupancy in the Core Industrial Portfolio increased 1.9% to 98.4% for the three months ended September 30, 1999 as compared to 96.5% for the same period in 1998 which contributed to the increase in rental income. The remaining increase in rental income generated by the Core Industrial Portfolio was attributable to increases in rental rates. Tenant reimbursements from Industrial Properties increased $0.5 million, or 57.8% to $1.5 million for the three months ended September 30, 1999 compared to $1.0 million for three months ended September 30, 1998. Of this increase, $0.3 million was attributable to the Industrial Acquisitions, net of Industrial Dispositions, and the Industrial Development Properties. The remaining $0.2 million was generated by the Core Industrial Portfolio and was attributable to the increase in occupancy for this portfolio. Other income from Industrial Properties increased by $0.1 million for the three months ended September 30, 1999 compared to the same period in 1998 primarily due to a $0.1 million lease termination fee from a Core Industrial Portfolio tenant. Total expenses from Industrial Properties remained consistent for the three months ended September 30, 1999 compared to the same period in 1998. Property expenses from Industrial Properties decreased by $0.1 million, or 13.1% to $0.5 million for the three months ended September 30, 1999 compared to $0.6 million for the three months ended September 30, 1998. The decrease in property expenses from Industrial Properties was attributable to management's implementation of cost saving measures portfolio wide. Real estate taxes from Industrial properties increased by $0.1 million, or 7.1% to $1.2 million for the three months ended September 30, 1999 compared to $1.1 million for the same period in 1998. The increase was primarily due to real estate taxes at the Industrial Development Properties. Real estate taxes for the Core Industrial Portfolio remained consistent for the three months ended September 30, 1999 compared to the same period in 1998. Net operating income, as defined, from Industrial Properties increased $2.7 million, or 32.4% to $11.0 million for the three months ended September 30, 1999 compared to $8.3 million for the three months 16 ended September 30, 1998. Of this increase, $2.2 million was generated by the Industrial Acquisitions and Dispositions and the Industrial Development Properties. The remaining $0.5 million was generated by the Core Industrial Portfolio and represented an 8.0% increase in net operating income for the Core Industrial Portfolio. Non-Property Related Income and Expenses Interest income decreased $0.1 million, or 22.4% to $0.2 million for the three months ended September 30, 1999 compared to $0.3 million for the three months ended September 30, 1998. The decrease was due primarily to the receipt of interest income on notes receivable from related parties during the three months ended September 30, 1998. General and administrative expenses increased $0.5 million, or 26.1% to $2.3 million for the three months ended September 30, 1999 compared to $1.8 million for the three months ended September 30, 1998 due to increased management, administrative and personnel costs associated with the Company's increased portfolio size. Interest expense increased $1.2 million, or 23.5% to $6.5 million for the three months ended September 30, 1999 compared to $5.3 million for the comparable period in 1998, primarily due to a net increase in aggregate indebtedness. The Company's weighted average interest rate decreased 0.16% to 7.15% at September 30, 1999 as compared to 7.31% at September 30, 1998. Depreciation and amortization increased $1.2 million, or 17.2% to $7.9 million for the three months ended September 30, 1999 compared to $6.7 million for the comparable period in 1998. The increase was due primarily to a full quarter of depreciation on properties acquired and developed by the Company during 1998 and depreciation on properties acquired and developed by the Company during 1999. Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30, 1998
Nine Months Ended September 30, ---------------- Dollar Percentage 1999 1998 Change Change -------- ------- ------- ---------- (dollars in thousands) Revenues: Rental income........................... $101,941 $84,817 $17,124 20.2% Tenant reimbursements................... 12,530 10,845 1,685 15.5 Interest income......................... 860 1,191 (331) (27.8) Other income............................ 1,722 941 781 83.0 -------- ------- ------- Total revenues........................ 117,053 97,794 19,259 19.7 -------- ------- ------- Expenses: Property expenses....................... 15,517 13,769 1,748 12.7 Real estate taxes....................... 8,969 7,358 1,611 21.9 General and administrative expenses..... 6,781 5,499 1,282 23.3 Ground leases........................... 1,002 897 105 11.7 Interest expense........................ 18,420 14,642 3,778 25.8 Depreciation and amortization........... 22,577 19,159 3,418 17.8 -------- ------- ------- Total expenses........................ 73,266 61,324 11,942 19.5 -------- ------- ------- Income from operations before gain on sale of operating properties, equity in (loss) income of unconsolidated subsidiary and minority interests....................... $ 43,787 $36,470 $ 7,317 20.1% ======== ======= =======
17 Rental Operations Management evaluates the operations of its portfolio based on operating property type. The following tables compare the net operating income, defined as operating revenues less property and related expenses (property expenses, real estate taxes and ground leases) before depreciation, for the Office and Industrial Properties for the nine months ended September 30, 1999 and 1998. Office Properties
Nine Months Ended September 30, ----------------- Dollar Percentage 1999 1998 Change Change -------- -------- ------- ---------- (dollars in thousands) Operating revenues: Rental income............................ $ 69,931 $ 59,412 $10,519 17.7% Tenant reimbursements.................... 8,513 8,137 376 4.6 Other income............................. 1,595 837 758 90.6 -------- -------- ------- Total.................................. 80,039 68,386 11,653 17.0 -------- -------- ------- Property and related expenses: Property expenses........................ 13,538 12,027 1,511 12.6 Real estate taxes........................ 5,455 4,703 752 16.0 Ground leases............................ 1,002 897 105 11.7 -------- -------- ------- Total.................................. 19,995 17,627 2,368 13.4 -------- -------- ------- Net operating income, as defined........... $ 60,044 $ 50,759 $ 9,285 18.3% ======== ======== =======
Total revenues from Office Properties increased $11.6 million, or 17.0% to $80.0 million for the nine months ended September 30, 1999 compared to $68.4 million for the nine months ended September 30, 1998. Rental income from Office Properties increased $10.5 million, or 17.7% to $69.9 million for the nine months ended September 30, 1999 compared to $59.4 million for the nine months ended September 30, 1998. Of this increase, $6.2 million was generated by the office properties acquired during 1999 and 1998 (the "Office Acquisitions") and $2.7 million was generated by the office properties developed by the Company in 1999 and 1998 (the "Office Development Properties"). The remaining $1.6 million of the increase was generated by the stabilized office properties owned at January 1, 1998 and still owned at September 30, 1999 (the "Core Office Portfolio"), and represented a 3.2% increase in rental income for the Core Office Portfolio. Average occupancy in the Core Office Portfolio decreased 0.8% to 93.3% for the nine months ended September 30, 1999 compared to 94.1% for the same period in 1998. The increase in rental income generated by the Core Office Portfolio was attributable to increases in rental rates. Tenant reimbursements from Office Properties increased $0.4 million, or 4.6% to $8.5 million for the nine months ended September 30, 1999 compared to $8.1 million for the nine months ended September 30, 1998. An increase of $0.6 million in tenant reimbursements generated by the Office Acquisitions and the Office Development Properties was offset by a decrease of $0.2 million in tenant reimbursements generated by the Core Office Portfolio. This decrease in tenant reimbursements for the Core Office Portfolio correlates with a decrease in property expenses for this portfolio of properties. Other income from Office Properties increased $0.8 million, or 90.6% to $1.6 million for the nine months ended September 30, 1999 compared to $0.8 million for the same period in 1998. For the nine months ended September 30, 1999, other income from Office Properties included $0.5 million in gains from the sale of 13 acres of undeveloped land in Calabassas and San Diego, California and $0.8 million in lease termination fees at Core Office Portfolio properties. Other income from Office Properties for the nine months ended September 30, 1998 included a $0.5 million consulting fee for assisting an existing tenant with potential expansion plans. The remaining amounts in other income from Office Properties for both periods consisted primarily of management fees and tenant late charges. 18 Total expenses from Office Properties increased $2.4 million, or 13.4% to $20.0 million for the nine months ended September 30, 1999 compared to $17.6 million for the nine months ended September 30, 1998. Property expenses from Office Properties increased $1.5 million, or 12.6% to $13.5 million for the nine months ended September 30, 1999 compared to $12.0 million for the nine months ended September 30, 1998. Of this increase, $1.6 million was attributable to the Office Acquisitions and the Office Development Properties. This increase was offset by a $0.1 million decrease in property expenses for the Core Office Portfolio, which was due primarily to management's implementation of cost saving measures. Real estate taxes from Office Properties increased $0.8 million, or 16.0% to $5.5 million for the nine months ended September 30, 1999 compared to $4.7 million for the nine months ended September 30, 1998. This increase was solely attributable to real estate taxes at the Office Acquisitions and Office Development Properties. Real estate taxes for the Core Office Portfolio remained consistent for the nine months ended September 30, 1999 compared to the comparable period in 1998. Ground lease expense from Office Properties increased $0.1 million, or 11.7% for the nine months ended September 30, 1999 compared to the same period in 1998 primarily due to a full nine months of ground lease expense at one of the 1998 Office Acquisitions. Net operating income, as defined, from Office Properties increased $9.3 million, or 18.3% to $60.0 million for the nine months ended September 30, 1999 compared to $50.7 million for the nine months ended September 30, 1998. Of this increase, $7.2 million was generated by the Office Acquisitions and the Office Development Properties. The remaining increase of $2.1 million was generated by the Core Office Portfolio and represented a 4.9% increase in net operating income for the Core Office Portfolio. Industrial Properties
Nine Months Ended September 30, ---------------- Dollar Percentage 1999 1998 Change Change -------- ------- ------ ---------- (dollars in thousands) Operating Revenues: Rental income............................... $32,010 $25,405 $6,605 26.0% Tenant reimbursements....................... 4,017 2,708 1,309 48.3 Other income................................ 127 104 23 22.1 ------- ------- ------ Total..................................... 36,154 28,217 7,937 28.1 ------- ------- ------ Property and related expenses: Property expenses........................... 1,979 1,742 237 13.6 Real estate taxes........................... 3,514 2,655 859 32.4 ------- ------- ------ Total..................................... 5,493 4,397 1,096 24.9 ------- ------- ------ Net operating income, as defined.............. $30,661 $23,820 $6,841 28.7% ======= ======= ======
Total revenues from Industrial Properties increased $7.9 million, or 28.1% to $36.1 million for the nine months ended September 30, 1999 compared to $28.2 million for the nine months ended September 30, 1998. Rental income from Industrial Properties increased $6.6 million, or 26.0% to $32.0 million for the nine months ended September 30, 1999 compared to $25.4 million for the nine months ended September 30, 1998. Of this increase, $2.8 million was generated by the industrial properties acquired during 1999 and 1998 and the two industrial properties disposed of by the Company in August 1999 (the "Industrial Acquisitions and Dispositions") and $3.4 million was generated by the industrial properties developed by the Company in 1999 and 1998 (the "Industrial Development Properties"). The remaining $0.4 million increase was generated by the stabilized industrial properties owned at January 1, 1998 and still owned at September 30, 1999 (the "Core Industrial Portfolio") and represented a 1.9% increase in rental income for the Core Industrial Portfolio. Average occupancy in the Core Industrial Portfolio remained consistent for the nine months ended September 30, 1999 compared to the same period in 1998. The increase in rental income from the Core Industrial Portfolio was primarily attributable to increases in rental rates. 19 Tenant reimbursements from Industrial Properties increased $1.3 million, or 48.3% to $4.0 million for the nine months ended September 30, 1999 compared to $2.7 million for the nine months ended September 30, 1998. Of this increase, $0.9 million was attributable to the Industrial Acquisitions and the Industrial Development Properties. The remaining $0.4 million was generated by to the Core Industrial Portfolio and was primarily due to an increase in real estate taxes reimbursable by tenants. Other income from Industrial Properties remained consistent for the nine months ended September 30, 1999 compared to the nine months ended September 30, 1998. Total expenses from Industrial Properties increased $1.1 million, or 24.9% to $5.5 million for the nine months ended September 30, 1999 compared to $4.4 million for the nine months ended September 30, 1998. Property expenses from Industrial Properties increased $0.2 million, or 13.6% to $2.0 million for the nine months ended September 30, 1999 compared to $1.8 million for the nine months ended September 30, 1998. This increase was attributable solely to the Industrial Acquisitions and Dispositions and the Industrial Development Properties. Property expenses for the Core Industrial Portfolio remained consistent for the nine months ended September 30, 1999 compared to the same period in 1998. Real estate taxes from Industrial Properties increased $0.9 million, or 32.4% to $3.5 million for the nine months ended September 30, 1999 compared to $2.6 million for the nine months ended September 30, 1998. Of this increase, $0.5 million was attributable to the Industrial Acquisitions and Dispositions and the Industrial Development Properties. The remaining $0.4 million increase was generated by the Core Industrial Portfolio and was primarily due to acquisition-related assessments on properties acquired by the Company in 1997. Net operating income, as defined, from Industrial Properties increased $6.8 million, or 28.7% to $30.6 million for the nine months ended September 30, 1999 compared to $23.8 million for the nine months ended September 30, 1998. Of this increase, $6.4 million was generated by the Industrial Acquisitions and Dispositions and the Industrial Development Properties. The remaining $0.4 million was generated by the Core Industrial Portfolio and represented a 2.3% increase in net operating income for the Core Industrial Portfolio. Non-Property Related Income and Expenses Interest income decreased $0.3 million, or 27.8% to $0.9 million for the nine months ended September 30, 1999 compared to $1.2 million for the nine months ended September 30, 1998. The Company had higher outstanding cash balances during 1998 due to proceeds received from equity offerings and preferred unit transactions. General and administrative expenses increased $1.3 million, or 23.3% to $6.8 million for the nine months ended September 30, 1999 compared to $5.5 million for the nine months ended September 30, 1998 due to increased management, administrative and personnel costs associated with the Company's increased portfolio size. Interest expense increased $3.8 million, or 25.8% to $18.4 million for the nine months ended September 30, 1999 compared to $14.6 million for the comparable period in 1998, primarily due to a net increase in aggregate indebtedness. The Company's weighted average interest rate decreased 0.16% to 7.15% at September 30, 1999 as compared to 7.31% at September 30, 1998. Depreciation and amortization increased $3.4 million, or 17.8% to $22.6 million for the nine months ended September 30, 1999 compared to $19.2 million for the comparable period in 1998. The increase was due primarily to a full nine months of depreciation on properties acquired during 1998, and depreciation on properties developed by the Company during 1998 and 1999. Liquidity and Capital Resources As of September 30, 1999, the Company had borrowings of $290 million outstanding under its revolving unsecured line of credit (the "Credit Facility") and availability of approximately $41.1 million. In November 1999, the Company increased its borrowing capacity and obtained a new $400 million unsecured revolving credit 20 facility (the "$400 million Credit Facility") to replace the existing $350 million Credit Facility which was scheduled to mature in February 2000. The $400 million Credit Facility, which will bear interest at a rate between LIBOR plus 1.13% and LIBOR plus 1.75% depending upon the Company's leverage ratio at the time of borrowing, will mature in November 2002. The Company expects to use the $400 million Credit Facility to finance development expenditures, to fund acquisitions and for general corporate uses. In March 1999, the Company borrowed $95.0 million under a mortgage loan that is secured by nine office and industrial properties, requires monthly principal and interest payments based on a fixed annual interest rate of 7.20%, amortizes over 25 years and matures in April 2009. The Company used the proceeds from the mortgage loan to repay borrowings under the Credit Facility and to fund development expenditures. In April 1999, the Company borrowed $30.0 million under a mortgage loan that is secured by one office property and the related ground leases, requires monthly principal and interest payments based on a fixed annual interest rate of 7.15% and matures in May 2017. The Company used the proceeds from the loan to repay an existing variable rate mortgage loan with an outstanding balance of $19.0 million, to repay outstanding borrowings under the Credit Facility and to fund development expenditures. In October 1999, the Company borrowed $90.0 million under a debt facility that is secured by 13 office properties, requires monthly interest-only payments based on a floating interest rate of LIBOR plus 1.75% and matures in October 2003. The Company used the proceeds from the secured debt facility to repay outstanding borrowings under the Credit Facility and to fund development expenditures. In September 1999, the SEC declared effective the Company's registration statement on Form S-3 with respect to 1,000,000 shares of the Company's common stock to be issued under the Company's Dividend Reinvestment and Direct Purchase Plan (the "Plan"). The Plan, which is designed to provide the Company's stockholders and other investors with a convenient and economical method to purchase shares of the Company's common stock, consists of three programs: the DRIP, the COPP and the WDP. The DRIP provides existing common stockholders with the opportunity to purchase additional shares of the Company's common stock by automatically reinvesting all or a portion of their cash dividends. The COPP provides existing common stockholders and other investors with the opportunity to purchase additional shares of the Company's common stock by making optional cash purchases, at no discount to market, between $100 to $5,000 and $750 to $5,000, respectively, in any calendar month. The WDP provides existing common stockholders and other investors with the opportunity to purchase additional shares of the Company's common stock by making optional cash purchases, at a discount to market of up to 2.00% of the average per share price reported on the NYSE, of greater than $5,000 in any calendar month. The Plan will acquire shares of the Company's common stock from either new issuances directly from the Company, from the open market or from privately negotiated transactions, except for transactions executed under the WDP which will be purchased only from previously unissued shares of common stock. Participation in the Plan is entirely voluntary, and can be terminated at any time. The Company intends to use the proceeds received from the Plan, less transaction costs, for development and investment activities, repayment of outstanding indebtedness and general corporate uses. As of September 30, 1999, there have been no shares issued under the Plan. In February 1998, the SEC declared effective the Company's "shelf" registration statement on Form S-3 with respect to $400 million of the Company's equity securities. As of November 12, 1999, an aggregate of $313 million of equity securities were available for issuance under the registration statement. Capital Expenditures As of September 30, 1999, the Company had approximately 1.1 million rentable square feet of office space that was either under construction or committed for construction at a total budgeted cost of approximately $219 million. The Company has spent an aggregate of $78.9 million on these projects as of September 30, 1999. The Company intends to finance the presently budgeted $140 million of remaining development costs with construction loan financing, borrowings under the Credit Facility and working capital. 21 In connection with an agreement signed with The Allen Group in October 1997, the Company has agreed to purchase one office property encompassing 128,000 rentable square feet, subject to the property meeting certain occupancy thresholds. The purchase price for this property will be determined at the time of acquisition based on the property's net operating income at that time. If the acquisition is completed, it would be financed with borrowings under the Credit Facility and the issuance of common limited partnership units of the Operating Partnership. The agreement with The Allen Group also provides for the development of two office projects in San Diego, California with approximately 1.1 million aggregate rentable square feet for an estimated aggregate development cost of approximately $150 million. During the first quarter of 1999, the Company purchased a 50% managing interest in both of the development projects. The Company has the option to purchase The Allen Group's remaining interest in both projects for a purchase price to be determined upon completion of the projects. Construction of phase I of the first office project was completed during the second quarter of 1999. With respect to construction of the second office project, phase I is scheduled to be completed during the fourth quarter of 1999, phases II and III commenced during the second and third quarters of 1999, respectively, and phase IV is scheduled to begin during the second quarter of 2000. The total presently budgeted investment of $87.0 million for these four phases of the second office project is included in the total budgeted cost of $219 million discussed above. The Company has spent an aggregate of $32.3 million on these four phases as of September 30, 1999 which is included in the total $78.9 million of expenditures discussed above. The Company intends to finance the remaining development costs for these four phases with construction loan financing and borrowing under the Credit Facility. The Company believes that it will have sufficient capital resources to satisfy its obligations and planned capital expenditures for the next twelve months. The Company expects to meet its long-term liquidity requirements including possible future development and property acquisitions, through retained cash flow, long-term secured and unsecured borrowings, the issuance of debt or equity securities or the issuance of common or preferred units of the Operating Partnership. Building and Lease Information The following tables set forth certain information regarding the Company's Office and Industrial Properties at September 30, 1999: Occupancy by Segment Type
Square Feet Number of ------------------------------- Region Buildings Total Leased Available Occupancy - ------ --------- ---------- ---------- --------- --------- Office Properties: Los Angeles................. 28 2,554,365 2,362,882 191,483 92.5% Orange County............... 27 1,021,882 823,990 197,892 80.6 San Diego................... 27 1,923,395 1,905,174 18,221 99.1 Other....................... 6 709,614 696,310 13,304 98.1 --- ---------- ---------- ------- 88 6,209,256 5,788,356 420,900 93.2 --- ---------- ---------- ------- Industrial Properties: Los Angeles................. 7 554,225 539,723 14,502 97.4 Orange County............... 66 4,423,353 4,307,719 115,634 97.4 San Diego................... 3 199,351 199,351 -- 100.0 Other....................... 12 1,173,925 1,153,986 19,939 98.3 --- ---------- ---------- ------- 88 6,350,854 6,200,779 150,075 97.6 --- ---------- ---------- ------- Total Portfolio............. 176 12,560,110 11,989,135 570,975 95.5% === ========== ========== =======
22 Lease Expirations by Segment Type
Percentage of Total Leased Annual Base Total Square Square Feet Rent Under Number of Footage of Represented Expiring Expiring Expiring by Expiring Leases Year of Lease Expiration Leases(1) Leases Leases(2) (in 000's)(3) - ------------------------ --------- ------------ ----------- ------------- Office Properties: Remaining 1999.................. 18 101,507 1.8% $ 1,647 2000............................ 104 433,901 7.7 7,644 2001............................ 98 1,079,395 19.1 15,221 2002............................ 66 608,176 10.7 9,063 2003............................ 36 219,551 3.9 3,827 2004............................ 41 736,421 13.0 16,448 --- --------- ---- ------- 363 3,178,951 56.2 53,850 --- --------- ------- Industrial Properties: Remaining 1999.................. 21 198,101 3.3 1,064 2000............................ 79 933,681 15.7 6,981 2001............................ 67 661,567 11.1 4,752 2002............................ 32 205,735 3.5 1,844 2003............................ 30 782,275 13.1 5,624 2004............................ 14 660,432 11.1 4,779 --- --------- ---- ------- 243 3,441,791 57.8 25,044 --- --------- ------- Total Portfolio................. 606 6,620,742 57.0% $78,894 === ========= =======
- -------- (1) Represents the total number of tenants. Some tenants have multiple leases. Excludes leases for amenity, retail, parking and month to month tenants. (2) Based on total leased square footage for the respective portfolios as of September 30, 1999. (3) Determined based upon aggregate base rent to be received over the term, divided by the term in months, multiplied by 12, including all leases executed on or before October 1, 1999. Leasing Activity by Segment Type
Number of Weighted Leases Square Feet Average ----------- --------------- Retention Lease Term New Renewal New(1) Renewal Rate (in months) --- ------- ------- ------- --------- ---------- For the Three Months Ended September 30, 1999: Office Properties........... 26 17 157,842 56,833 34.3% 59 Industrial Properties....... 15 9 54,596 68,542 79.0 54 --- --- ------- ------- ---- --- Total Portfolio............. 41 26 212,438 125,375 49.7% 57 === === ======= ======= ==== === For the Nine Months Ended September 30, 1999: Office Properties........... 64 55 492,917 375,287 43.0% 68 Industrial Properties....... 58 38 442,787 305,774 55.5 53 --- --- ------- ------- ---- --- Total Portfolio............. 122 93 935,704 681,061 47.8% 61 === === ======= ======= ==== ===
- -------- (1) The lease-up of 212,438 and 935,704 square feet to new tenants for the three and nine months ended September 30, 1999, respectively, includes re- leasing of 169,519 and 608,895 square feet, respectively, and first generation leasing of 42,919 and 326,809 square feet, respectively. 23 Historical Cash Flows The Company's net cash provided by operating activities increased $3.8 million, or 6.8% to $58.3 million for the nine months ended September 30, 1999 compared to $54.5 million for the nine months ended September 30, 1998. The increase was primarily due to the increase in net income resulting from the 1998 Office and Industrial Acquisitions and the Office and Industrial Development Properties and an increase in net operating income, as defined, generated by the Core Office and Industrial Portfolios. The increase was partially offset by increased interest expense and general and administrative expenses and a decrease in interest income. Cash used in investing activities decreased $146 million, or 51.5% to $138 million for the nine months ended September 30, 1999 compared to $284 million for the nine months ended September 30, 1998. Cash used in investing activities for the nine months ended September 30, 1999 consisted primarily of the purchase of two office properties for $24.7 million (net of $3.6 million of contributed value in exchange for which the Company issued common limited partnership units of the Operating Partnership and the satisfaction of an existing $2.3 million note receivable), the purchase of the minority interest in one office complex for $1.2 million, the purchase of 12 acres of undeveloped land for $4.7 million (net of $2.5 million of contributed value in exchange for which the Company issued common units of the Operating Partnership), the acquisition of a 50% interest in 55 acres of undeveloped land for $16.1 million (net of $3.8 million of contributed value in exchange for which the Company issued common limited partnership units of the Operating Partnership), expenditures for construction in progress of $94.8 million and $11.4 million in additional tenant improvements and capital expenditures, net of the sale of two industrial properties for $11.0 million and the sale of 13 acres of undeveloped land in two separate transactions for $5.1 million. Cash used in investing activities for the nine months ended September 30, 1998 consisted primarily of the purchase of 38 office and industrial properties for $208 million (net of $13.5 million of contributed value in exchange for which the Company issued common units of the Operating Partnership), the purchase of 51 acres of undeveloped land for $21.9 million (net of $2.5 million of contributed value in exchange for which the Company issued common units of the Operating Partnership), disbursements for notes receivable from related parties of $2.2 million, expenditures for construction in progress of $43.4 million and $8.2 million in additional tenant improvements and capital expenditures. Cash provided by financing activities decreased $168 million, or 67.8% to $79.8 million for the nine months ended September 30, 1999 compared to $248 million for the nine months ended September 30, 1998. Cash provided by financing activities for the nine months ended September 30, 1999 consisted primarily of $121 million in net proceeds from the issuance of mortgage debt and net borrowings under the Credit Facility partially offset by $40.0 million in distributions paid to common stockholders and common unitholders. Cash provided by financing activities for the nine months ended September 30, 1998 consisted of net proceeds of $82.1 million from common stock offerings, net proceeds of $73.0 million from the issuance of 8.075% Series A Cumulative Redeemable Preferred units, and $130 million in net proceeds from the issuance of mortgage debt and borrowings under the Credit Facility, partially offset by $36.0 million in distributions paid to common stockholders and common unitholders. Funds from Operations Industry analysts generally consider Funds From Operations, as defined by NAREIT, an alternative measure of performance for an equity REIT. Funds From Operations is defined by NAREIT to mean net income (loss) before minority interests of common unitholders (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of property, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships and joint ventures. The Company considers Funds From Operations an appropriate measure of performance of an equity REIT because it is predicated on cash flow analyses. The Company believes that in order to facilitate a clear understanding of the historical operating results of the Company, Funds From Operations should be examined in conjunction with net income as presented in the financial statements included elsewhere in this report. The Company computes Funds From Operations in 24 accordance with standards established by the Board of Governors of NAREIT in its March 1995 White Paper, which may differ from the methodologies used by other equity REITs and, accordingly, may not be comparable to Funds From Operations published by such other REITs. Funds From Operations should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of the properties' financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of the properties' liquidity, nor is it indicative of funds available to fund the properties' cash needs, including the Company's ability to pay dividends or make distributions. The following table presents the Company's Funds From Operations for the three and nine months ended September 30, 1999 and 1998.
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1999 1998 1999 1998 ------- ------- ------- ------ (in thousands) Net income................................... $10,911 $ 9,985 $31,617 $28,649 Adjustments: Minority interest in earnings of Operating Partnership................... 1,830 1,451 5,186 4,093 Depreciation and amortization............ 7,900 6,740 22,577 19,159 Gain on sale of operating properties..... (75) (75) Other.................................... 127 175 381 405 ------- ------- ------- ------- Funds From Operations........................ $20,693 $18,351 $59,686 $52,306 ======= ======= ======= =======
Inflation The majority of the Company's tenant leases require tenants to pay most operating expenses, including real estate taxes and insurance, and increases in common area maintenance expenses, which reduce the Company's exposure to increases in costs and operating expenses resulting from inflation. Year 2000 The Year 2000 issue ("Y2K") refers to the inability of certain computer systems, as well as certain hardware and equipment containing date sensitive data, to recognize accurate dates commencing on or after January 1, 2000. This has the potential to affect those systems adversely. In 1997, the Company's Information Technology Committee, which is comprised of representatives from senior management and various departments including accounting, property management and information systems, identified three phases in the Company's Y2K efforts: discovery and assessment, remediation and implementation, and testing and verification. Although many of the phases were completed simultaneously, the following sections describe the activities that the Company has performed to meet its Y2K objectives, as well as management's assessment of the Company's risk of non-compliance. The Company's State of Readiness The initial phase of discovery and assessment consists of evaluating and identifying all of the Company's information technology and non-information technology systems that contain date sensitive data. The following summary describes the classifications of systems that were identified and the Company's current state of readiness for each classification. Information Technology Systems The Company's information technology systems fall into three general categories: accounting and property management systems, network operating systems, and desktop software. The Company replaced its accounting and property management system, acquired all new network hardware and software, and updated all of its 25 desktop systems and software after its IPO in early 1997. The new accounting and property management system, which was tested upon its implementation in 1997, and all the Company's network hardware and software, desktop systems and software packages are Y2K compliant as asserted by the software vendors. In addition, management performed additional testing during 1999 by setting the dates in the operating system and the accounting and property management system ahead to the year 2000. Management believes there is no material Y2K exposure with respect to its information technology systems. Building Management Systems The Company has identified five categories of building management systems that could have potential Y2K exposure: building automation (e.g., HVAC), security card access, fire and life safety, elevator, and office equipment. During 1998, property management executives and personnel gathered data to identify all of the Company's Y2K sensitive building management systems and to assess whether such systems were Y2K compliant or would need to be modified or replaced. Management completed the discovery and assessment phase and determined the Company's state of readiness as to building management systems in early 1999. During this process, management identified which building systems needed system upgrades. In two cases, management determined that due to the age of certain building automation systems, system replacement, regardless of Y2K compliance, would be more appropriate. Management completed the remediation and implementation phase and the testing and verification phase in October 1999, except for the replacement and testing of the energy management system at the Company's Kilroy Airport Center, El Segundo property, where the Company's corporate headquarters are located. Management expects to complete the replacement and testing of this building management system by the end of November 1999. Costs to Address the Company's Y2K Efforts The replacement of the accounting and property management system, the acquisition of new network hardware and software and the installation of updated desktop systems and software was performed as a result of the Company becoming a publicly traded REIT and not in response to Y2K compliance issues. Phase 1 of the building management systems efforts were performed by 13 salaried Company employees who are not paid for overtime and who management estimates spent approximately 10% of their annual working hours over a 2 to 3 year period focusing on Y2K compliance issues. Consequently, the Company's Y2K costs incurred have been minimal to date and have not been material to the Company's financial position or results of operations. In addition, management believes that future Y2K expenses will also be minimal and will not have a material effect on the Company's financial position or results of operations. Further, management believes that a significant portion of the costs to complete phases 2 and 3 for the building management systems will be treated as operating expenses and reimbursed to the Company under most tenant leases. Efforts to Identify the Y2K Issues of Significant Third Parties Due to the Company's diverse tenant base, the success of the Company's business is not closely tied to the success of any one particular tenant. Accordingly, management believes that there would not be a material adverse effect on the Company's financial condition and results of operations if any one of its tenants ceased to conduct business and pay rent due to Y2K related problems. This would not necessarily be the case, however, if Y2K problems affected the financial condition of a number of the Company's tenants. Consequently, the Company distributed surveys to all of its tenants to investigate whether any of them had identified Y2K system exposure that would result in the interruption of the Company's operations. Based on the responses received, including those from the Company's ten largest office tenants and ten largest industrial tenants, which covered approximately 28.8% of the Company's aggregate annual base rental revenue, management is not aware of any material Y2K issues with respect to its tenants. As part of its efforts to keep its tenants advised as to the steps the Company is taking to address Y2K problems, the Company has requested that tenants advise management of any significant Y2K readiness issues as they become apparent. To date, no tenants have advised the Company of any such problems. 26 The success of the Company's business is not closely tied to the success of any one particular vendor, supplier or manufacturer. Accordingly, if any of the Company's vendors, suppliers or manufacturers ceased to conduct business as a result of Y2K related issues, the Company expects it would be able to contract with alternative providers without experiencing any material adverse effect on the Company's financial condition and results of operations. The Risks of Y2K Non-Compliance Management does not believe that the impact of the Y2K issue will have a material adverse effect on the Company's financial condition or results of operations. This belief is based upon both the analysis of the Company's Y2K issues and the Company's assessment of the Y2K exposure related to tenants, vendors, and other significant third parties as discussed above. No assurance can be given about facts and resultant effects of Y2K issues unknown to the Company at this time. The Company's worst case Y2K scenario would be that the Company's information and building management systems fail. In the event that the Company's information systems fail, the Company would be forced to manually perform its accounting and property management record-keeping functions until the information systems could be restored. In the event that the Company's building management systems fail, the Company's tenants would not have access to or be able to conduct their normal business activities at the Company's properties until the building management systems could be restored or manually overridden. These events could have a material adverse effect on the Company's financial position and results of operations. Developing Contingency Plans The Company's contingency plan, which focuses on the potential failure of building management systems, consists primarily of the strategic deployment of teams consisting of property managers and facility engineers to monitor the Company's properties. In the event of a Y2K building management systems failure, these teams would be available to manually by-pass or override the building management systems until such systems could be adequately repaired or replaced. In addition, the Company has contacted each of its significant building management systems vendors and security services vendors and has been assured that they will commit additional support in the event it is necessary. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Changes in Primary Risk Exposures In March 1999, the Company entered into a fixed rate mortgage loan with a principal balance of $95.0 million, monthly principal and interest payments based upon a fixed interest rate of 7.20% and a 25-year amortization schedule, and a maturity date of April 2009. The Company used a portion of the proceeds from this fixed rate mortgage loan to repay borrowings under its existing variable rate Credit Facility. In April 1999, the Company entered into a second fixed rate mortgage loan with a principal balance of $30.0 million, monthly principal and interest payments based upon a fixed annual interest rate of 7.15% and a maturity date of May 2017. The Company used the proceeds from this $30.0 million fixed rate mortgage loan to pay off an existing $19.0 million variable rate mortgage loan and to repay borrowings under its existing variable rate Credit Facility. As a result of the execution of the two new mortgage loans totaling $125 million and the simultaneous repayment of a portion of borrowings outstanding under the Credit Facility and a $19.0 million variable rate mortgage loan, the Company's ratio of fixed rate debt to total debt (excluding Cumulative Redeemable Preferred units) increased 16.7% from 28.2% at December 31, 1998 to 44.9% at September 30, 1999. In October 1999, the Company executed a floating rate secured debt facility with a principal balance of $90.0 million, monthly interest-only payments based upon a floating rate of LIBOR plus 1.75%, and a maturity date of October 2003. The Company used the proceeds from the new $90.0 million secured debt facility to repay borrowings under its existing variable rate Credit Facility and to fund development expenditures. In November 1999, the Company increased its borrowing capacity and obtained a new $400 million variable rate unsecured 27 revolving Credit Facility to replace the existing $350 million variable rate Credit Facility which was scheduled to mature in February 2000. While the new $400 million Credit Facility is also a LIBOR based variable rate facility and therefore does not change the Company's interest rate risk profile, the maturity date of the $400 million Credit Facility extends to November 2002. As a result of the execution of the new $90.0 million secured debt facility, the Company's ratio of fixed rate debt to total debt (excluding Cumulative Redeemable Preferred units) decreased 2.0% from 44.9% at September 30, 1999 to 42.9% at October 31, 1999. The tabular presentation below provides information about the Company's interest rate sensitive financial and derivative instruments as of September 30, 1999. All of the Company's interest rate sensitive financial and derivative instruments are designated as held for purposes other than trading. For the Credit Facility, the table presents the assumption that the outstanding principal balance at September 30, 1999 will be paid in November 2002, the maturity date under the Company's new $400 million Credit Facility. The table also presents the related expected maximum interest rate index for outstanding Credit Facility borrowings under the new $400 million Credit Facility in 1999 through 2002. For fixed rate mortgage debt, the table presents the assumption that the outstanding principal balance at September 30, 1999 will be paid according to scheduled contractual principal payments and that the Company will not prepay any of the outstanding principal balance. The table also presents the related weighted-average interest rate for outstanding fixed rate mortgage debt borrowings from 1999 through 2003 and thereafter. The Company had no outstanding variable rate mortgage debt at September 30, 1999. For the Series A and Series C Cumulative Redeemable Preferred units (the "Preferred units"), the table presents reflects the assumption that the Company is not contractually obligated to repay the outstanding balance of the Preferred units since the Preferred units will either remain outstanding or be converted into shares of the Company's 8.075% Series A and 9.375% Series C Cumulative Redeemable Preferred stock, respectively, in 2008 when the Preferred units become exchangeable at the option of the majority of the holders. The table also presents the related weighted-average interest rate for outstanding Preferred units from 1999 through 2003 and thereafter. 28 For interest rate caps, the table presents notional amounts, average cap rates and the related interest rate index upon which cap rates are based, by contractual maturity date. Notional amounts are used solely to calculate the contractual cash flow to be received under the contract and do not reflect outstanding principal balances at September 30, 1999. Interest Rate Risk Analysis-Tabular Presentation Financial Assets and Liabilities Outstanding Principal by Expected Maturity Date (dollars in millions)
Maturity Date ------------------------------------------------------ Fair Value There- at Sept. 30, 1999 2000 2001 2002 2003 after Total 1999 ------ ------ ------ ------ ------ ------ ------ ------------ Liabilities: Line of credit: Variable rate............... $290.0 $290.0 $290.0 Average interest rate index. LIBOR LIBOR LIBOR LIBOR +1.50% +1.50% +1.50% +1.50% Mortgage debt: Fixed rate.................. $ 1.0 $ 4.8 $ 5.1 $ 5.6 $ 6.1 $214.1 $236.7 $232.4 Average interest rate....... 7.75% 7.75% 7.75% 7.75% 7.75% 7.75% Series A and C Preferred units: Fixed rate.................. Average interest rate....... 8.49% 8.49% 8.49% 8.49% 8.49% 8.49% $ 98.3
Interest Rate Risk Analysis-Tabular Presentation Financial Derivative Instruments Notional Amounts by Contractual Maturity (dollars in millions)
Maturity Date ----------------------------------------- Fair Value at There- Sept. 30, 1999 2000 2001 2002 2003 after Total 1999 ----- ------ ---- ---- ---- ------ ------ ------------- Interest Rate Derivatives Used to Hedge the Line of Cred- it: Interest rate cap agreements: Notional amount....... $150.0 $150.0 $0.1 Cap rate.............. 6.50% 6.50% Forward rate index.... LIBOR LIBOR
29 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS During the three and nine months ended September 30, 1999, no legal proceedings were initiated against or on behalf of the Company, which if determined unfavorably to the Company, would have a material adverse effect upon the financial condition, results of operations and cash flows of the Company. ITEM 2. CHANGES IN SECURITIES During the third quarter of 1999, common limited partnership unitholders of the Operating Partnership exchanged 25,000 common limited partnership units into shares of the Company's common stock on a one-for-one basis. The 25,000 shares of common stock issued in exchange for the common limited partnership units were issued in reliance upon an exemption from registration provided by Regulation D under the Securities Act as a transaction by an issuer not involving a public offering. ITEM 3. DEFAULTS UPON SENIOR SECURITIES--None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--None ITEM 5. OTHER INFORMATION--None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
Exhibit Number Description ------- ----------- *10.1 Second Amended and Restated Revolving Credit Agreement and Form of Notes Aggregating $400 million. *10.2 Second Amended and Restated Guaranty of Payment. *10.3 Credit Agreement and Form of Promissory Notes Aggregating $90.0 million. *10.4 Variable Interest Rate Deed of Trust, Leasehold Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing. *10.5 Guaranty of Recourse Obligations of Borrowing. *27.1 Financial Data Schedule.
- -------- * Filed herewith. (b) Reports on Form 8-K--None 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 12, 1999. Kilroy Realty Corporation /s/ John B. Kilroy, Jr By: _________________________________ John B. Kilroy, Jr. President and Chief Executive Officer (Principal Executive Officer) /s/ Richard E. Moran Jr. By: _________________________________ Richard E. Moran Jr. Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Ann Marie Whitney By: _________________________________ Ann Marie Whitney Vice President and Controller (Principal Accounting Officer) 31 EX-10.1 2 2ND AMEND. AND RESTATED REVOLVING CREDIT AGMT. EXHIBIT 10.1 _________________________________________________________ _________________________________________________________ SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT dated as of November 8, 1999 among KILROY REALTY, L.P. MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Bank and as Administrative Agent for the Banks, THE CHASE MANHATTAN BANK, as Bank and as Documentation Agent, J.P. MORGAN SECURITIES INC., as Syndication Agent, Lead Arranger and Joint Bookmanager CHASE SECURITIES INC., as Lead Arranger and Joint Bookmanager, BANK ONE, N.A., PNC BANK, NATIONAL ASSOCIATION, FIRST UNION BANK AND COMMERZBANK AKTIENGESELLSCHAFT, NEW YORK AND GRAND CAYMAN BRANCHES, each, as Managing Agent, DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES THE BANK OF NOVA SCOTIA, KEYBANK NATIONAL ASSOCIATION and UNION BANK OF CALIFORNIA, each, as Co-Agent, and THE BANKS LISTED HEREIN _________________________________________________________ _________________________________________________________ TABLE OF CONTENTS -----------------
Page ARTICLE I DEFINITIONS.......................................................... 3 Section 1.1. Definitions............................................................. 3 Section 1.2. Accounting Terms and Determinations.....................................32 Section 1.3. Types of Borrowings.....................................................32 ARTICLE II THE CREDITS.........................................................33 Section 2.1. Commitments to Lend.....................................................33 Section 2.2. Notice of Committed Borrowing...........................................33 Section 2.3. Money Market Borrowings.................................................36 Section 2.4. Notice to Banks; Funding of Loans.......................................41 Section 2.5. Notes...................................................................43 Section 2.6. Maturity of Loans.......................................................44 Section 2.7. Interest Rates..........................................................44 Section 2.8. Fees....................................................................46 Section 2.9. Mandatory Termination...................................................48 Section 2.10. Mandatory Prepayment....................................................48 Section 2.11. Optional Prepayments....................................................50 Section 2.12. General Provisions as to Payments.......................................52 Section 2.13. Funding Losses..........................................................53 Section 2.14. Computation of Interest and Fees........................................53 Section 2.15. Method of Electing Interest Rates.......................................54 Section 2.16. Letters of Credit.......................................................55 Section 2.17. Letter of Credit Usage Absolute.........................................59 ARTICLE III CONDITIONS.........................................................61 Section 3.1. Closing.................................................................61 Section 3.2. Borrowings..............................................................63 Section 3.3. New Acquisitions and Additional Real Property Assets....................64 ARTICLE IV REPRESENTATIONS AND WARRANTIES......................................66 Section 4.1. Existence and Power.....................................................66 Section 4.2. Power and Authority.....................................................66 Section 4.3. No Violation............................................................67 Section 4.4. Financial Information...................................................67 Section 4.5. Litigation..............................................................68
i Section 4.6. Compliance with ERISA...................................................68 Section 4.7. Environmental Compliance................................................69 Section 4.8. Taxes...................................................................71 Section 4.9. Full Disclosure.........................................................71 Section 4.10. Solvency................................................................71 Section 4.11. Use of Proceeds; Margin Regulations.....................................71 Section 4.12. Governmental Approvals..................................................72 Section 4.13. Investment Company Act; Public Utility Holding Company Act..............72 Section 4.14. Closing Date Transactions...............................................72 Section 4.15. Representations and Warranties in Loan Documents........................72 Section 4.16. Patents, Trademarks, etc................................................72 Section 4.17. No Default..............................................................73 Section 4.18. Licenses, etc...........................................................73 Section 4.19. Compliance With Law.....................................................73 Section 4.20. No Burdensome Restrictions..............................................73 Section 4.21. Brokers' Fees...........................................................74 Section 4.22. Labor Matters...........................................................74 Section 4.23. Organizational Documents................................................74 Section 4.24. Principal Offices.......................................................74 Section 4.25. REIT Status.............................................................74 Section 4.26. Ownership of Property...................................................75 Section 4.27. Insurance...............................................................75 ARTICLE V AFFIRMATIVE AND NEGATIVE COVENANTS...................................75 Section 5.1. Information.............................................................75 Section 5.2. Payment of Obligations..................................................79 Section 5.3. Maintenance of Property; Insurance......................................79 Section 5.4. Conduct of Business.....................................................80 Section 5.5. Compliance with Laws....................................................80 Section 5.6. Inspection of Property, Books and Records...............................80 Section 5.7. Existence...............................................................81 Section 5.8. Financial Covenants.....................................................81 Section 5.9. Restriction on Fundamental Changes; Operation and Control..........................................83 Section 5.10. Changes in Business.....................................................83 Section 5.11. Sale of Unencumbered Asset Pool Properties.........................................................83 Section 5.12. Fiscal Year; Fiscal Quarter.............................................84
ii Section 5.13. Margin Stock...........................................................84 Section 5.14. Development Activities.................................................84 Section 5.15. Interest Rate Protection...............................................84 Section 5.16. Joint Ventures.........................................................85 Section 5.17. Investments in Unimproved Real Property................................85 Section 5.18. Use of Proceeds........................................................85 Section 5.19. General Partner Status.................................................85 Section 5.20. Certain Requirements for the Unencumbered Asset Pool...................85 ARTICLE VI DEFAULTS...........................................................86 Section 6.1. Events of Default......................................................86 Section 6.2. Rights and Remedies....................................................90 Section 6.3. Notice of Default......................................................91 Section 6.4. Actions in Respect of Letters of Credit................................91 ARTICLE VII THE LEAD AGENT....................................................94 Section 7.1. Appointment and Authorization..........................................94 Section 7.2. Lead Agent and Affiliates..............................................94 Section 7.3. Action by Lead Agent...................................................94 Section 7.4. Consultation with Experts..............................................95 Section 7.5. Liability of Lead Agent................................................95 Section 7.6. Indemnification........................................................95 Section 7.7. Credit Decision........................................................96 Section 7.8. Successor Lead Agent...................................................96 Section 7.9. Lead Agent's Fee.......................................................97 Section 7.10. Copies of Notices......................................................97 ARTICLE VIII CHANGE IN CIRCUMSTANCES..........................................97 Section 8.1. Basis for Determining Interest Rate Inadequate or Unfair...............97 Section 8.2. Illegality.............................................................98 Section 8.3. Increased Cost and Reduced Return......................................99 Section 8.4. Taxes.................................................................101 Section 8.5. Base Rate Loans Substituted for Affected Euro-Dollar Loans............104 ARTICLE IX MISCELLANEOUS.....................................................104 Section 9.1. Notices................................................................104 Section 9.2. No Waivers.............................................................105
iii Section 9.3. Expenses; Indemnification..............................................105 Section 9.4. Sharing of Set-Offs....................................................107 Section 9.5. Amendments and Waivers.................................................108 Section 9.6. Successors and Assigns.................................................109 Section 9.7. Governing Law; Submission to Jurisdiction..............................112 Section 9.8. Marshaling; Recapture..................................................113 Section 9.9. Counterparts; Integration; Effectiveness...............................113 Section 9.10. WAIVER OF JURY TRIAL...................................................114 Section 9.11. Survival...............................................................114 Section 9.12. Domicile of Loans......................................................114 Section 9.13. Limitation of Liability................................................114 Section 9.14. No Bankruptcy Proceedings..............................................114
iv Exhibit A - Form of Note Exhibit A-1 - Form of Note Exhibit B - Unencumbered Asset Pool Properties (Fee Interests) Exhibit C - Unencumbered Asset Pool Properties (Leasehold Interests) Exhibit D - Form of Assignment and Assumption Agreement Exhibit E - Form of Money Market Quote Request Exhibit F - Form of Invitation for Money Market Quotes Exhibit G - Form of Money Market Quote Exhibit H - Form of Designation Agreement Schedule 4.22 - Labor Matters v SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT dated as of November 8, 1999, among KILROY REALTY, L.P. (the "Borrower"), MORGAN GUARANTY -------- TRUST COMPANY OF NEW YORK, as Bank and as Administrative Agent for the Banks ("Lead Agent"), THE CHASE MANHATTAN BANK, as Bank and as Documentation Agent, ----------- J.P. MORGAN SECURITIES INC., as Syndication Agent, Lead Arranger and Joint Bookmanager, CHASE SECURITIES INC., as Lead Arranger and Joint Bookmanager, BANK ONE, N.A., PNC BANK, NATIONAL ASSOCIATION, FIRST UNION BANK and COMMERZBANK AKTIENGESELL-SCHAFT, NEW YORK AND GRAND CAYMAN BRANCHES, each, as Managing Agent, DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES, THE BANK OF NOVA SCOTIA, KEYBANK NATIONAL ASSOCIATION and UNION BANK OF CALIFORNIA, each, as Co- Agent and the BANKS listed on the signature pages hereof (the "Banks"). ----- W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Borrower, the Lead Agent and the Banks entered into a Revolving Credit Agreement, dated as of February 24, 1998, which was amended and restated in its entirety by that certain Amended and Restated Revolving Credit Agreement, dated as of October 9, 1998 (the "Existing Credit Agreement"); and ------------------------- WHEREAS, the parties hereto have agreed to amend and restate the terms and conditions contained in the Existing Credit Agreement in their entirety as hereinafter set forth. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: I. The Existing Credit Agreement is hereby modified so that all of the terms and conditions of the aforesaid Existing Credit Agreement shall be restated in their entirety as set forth herein, and the Borrower agrees to comply with and be subject to all of the terms, covenants and conditions of this Agreement. II. This Agreement shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and assigns, and shall be deemed to be effective as of the date hereof. III. Any reference in the Notes, any other Loan Document or any other document executed in connection with this Agreement to the Existing Credit Agreement shall be deemed to refer to this Agreement. The parties hereto agree as follows: ARTICLE I DEFINITIONS Section I.1. Definitions. The following terms, as used herein, have ----------- the following meanings: "Absolute Rate Auction" means a solicitation of Money Market Quotes --------------------- setting forth Money Market Absolute Rates pursuant to Section 2.3. "Adjusted London Interbank Offered Rate" has the meaning set forth in -------------------------------------- Section 2.7(b). "Adjustment Date" shall mean the date that the Borrower receives an --------------- Investment Grade Rating for its unsecured senior long term indebtedness from at least two (2) Rating Agencies, at least one (1) of which shall be either S&P or Moody's. 2 "Administrative Questionnaire" means, with respect to each Bank, an ---------------------------- administrative questionnaire in the form prepared by the Lead Agent and submitted to the Lead Agent (with a copy to the Borrower) duly completed by such Bank. "Agreement" means this Second Amended and Restated Revolving Credit --------- Agreement as the same may from time to time hereafter be modified, supplemented or amended. "Annual EBITDA" means, measured as of the last day of each calendar ------------- quarter, an amount derived from (i) total revenues relating to all Real Property Assets of the Borrower, the General Partner and their Consolidated Subsidiaries or to the Borrower's or the General Partner's interest in Minority Holdings for the previous four consecutive calendar quarters including the quarter then ended, on an accrual basis with adjustments for the straight-lining of rents, plus (ii) interest and other income of the Borrower, the General Partner and - ---- their Consolidated Subsidiaries, including, without limitation, real estate service revenues, for such period, less (iii) total operating expenses and other ---- expenses relating to such Real Property Assets and to the Borrower's and the General Partner's interest in Minority Holdings for such period (other than interest, taxes, depreciation, amortization, and other non-cash items), less ---- (iv) total corporate operating expenses (including general overhead expenses) and other expenses of the Borrower, the General Partner, their Consolidated Subsidiaries and the Borrower's and the General Partner's interest in Minority Holdings (other than interest, taxes, depreciation, amortization and other non- cash items), for such period. "Applicable Interest Rate" means the lesser of (x) the rate at which ------------------------ the interest rate applicable to any floating rate Debt could be fixed, at the time of calcu- 3 lation, by the Borrower entering into an unsecured interest rate swap agreement (or, if such rate is incapable of being fixed by entering into an unsecured interest rate swap agreement at the time of calculation, a reasonably determined fixed rate equivalent), and (y) the rate at which the interest rate applicable to such floating rate Debt is actually capped, at the time of calculation, if the Borrower has entered into an interest rate cap agreement with respect thereto or if the documentation for such Debt contains a cap. "Applicable Lending Office" means, with respect to any Bank, (i) in ------------------------- the case of its Base Rate Loans, its Domestic Lending Office, (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office, and (iii) in the case of its Money Market Loans, its Money Market Lending Office. "Applicable Margin" means, prior to the Adjustment Date, with respect ----------------- to each Euro-Dollar Loan, the respective percentages per annum determined, at any time, based on the range into which the Total Debt Ratio then falls, in accordance with the table set forth below:
- ----------------------------------------------------------------------------- Total Debt Ratio Applicable Margin for Euro- Dollar Loans (% per annum) - ----------------------------------------------------------------------------- less than 25% 1.125% - ----------------------------------------------------------------------------- equal to or greater than 25% 1.25% but less than 35% - ----------------------------------------------------------------------------- equal to or greater than 35% 1.375% but less than 45% - ----------------------------------------------------------------------------- equal to or greater than 45% 1.50% but less than 50% - ----------------------------------------------------------------------------- equal to or greater than 50% 1.75% but less than 55% - -----------------------------------------------------------------------------
4 From and after the Adjustment Date, the Applicable Margin with respect to each Euro-Dollar Loan shall mean the respective percentages per annum determined, at any time, based on the range into which the Borrower's Credit Rating (if any) then falls, in accordance with the table set forth below. Any change in the Borrower's Credit Rating shall be effective immediately as of the date on which any of the Rating Agencies announces a change in the Borrower's Credit Rating or the date on which the Borrower (or, as applicable, the General Partner) has no credit rating, whichever is applicable. In the event that the Borrower (or, as applicable, the General Partner) receives two (2) credit ratings that are not equivalent, the Applicable Margin shall be determined by the lower of such two (2) credit ratings. In the event that Borrower (or, as applicable, the General Partner) receives more than two (2) credit ratings and such credit ratings are not equivalent, the Applicable Margin shall be determined by the lower of the two (2) highest ratings, provided that each of said two (2) highest ratings shall be Investment Grade Ratings and at least one of which shall be an Investment Grade Rating from S&P or Moody's. 5
- ----------------------------------------------------------------------------- Borrower's Credit Rating Applicable Margin for Euro-Dollar (S&P/Moody's Ratings) Loans (% per annum) - ----------------------------------------------------------------------------- BBB+/Baa1 1.00% - ----------------------------------------------------------------------------- BBB/Baa2 (or better) 1.10% - ----------------------------------------------------------------------------- BBB-/Baa3 1.20% - ----------------------------------------------------------------------------- Less than Investment Grade Rating 1.675% - -----------------------------------------------------------------------------
"Assignee" has the meaning set forth in Section 9.6(c). -------- "Bank" means each bank listed on the signature pages hereof, each ---- Assignee which becomes a Bank pursuant to Section 9.6(c), and their respective successors and each Designated Lender; provided, however, that the term "Bank" ---- shall exclude each Designated Lender when used in reference to a Committed Loan, the Commitments or terms relating to the Committed Loans and the Commitments and shall further exclude each Designated Lender for all other purposes hereunder except that any Designated Lender which funds a Money Market Loan shall, subject to Section 9.6(d), have the rights (including the rights given to a Bank contained in Section 9.3 and otherwise in Article 9) and obligations of a Bank associated with holding such Money Market Loan. "Bank Due Diligence Package" has the meaning provided in Section 3.3. -------------------------- "Bankruptcy Code" means Title 11 of the United States Code, entitled --------------- "Bankruptcy", as amended from time to time, and any successor statute or statutes. 6 "Base Rate" means, for any day, a rate per annum equal to the higher --------- of (i) the Prime Rate for such day and (ii) the sum of the Federal Funds Rate plus .50%. "Base Rate Borrowing" means a Borrowing comprised of Base Rate Loans. ------------------- "Base Rate Loan" means a Committed Loan to be made by a Bank as a Base -------------- Rate Loan in accordance with the applicable Notice of Borrowing or pursuant to Article VIII. "Benefit Arrangement" means at any time an employee benefit plan ------------------- within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "Borrower" means Kilroy Realty, L.P. and its successors. -------- "Borrower's Credit Rating" means the rating assigned by the Rating ------------------------ Agencies to the General Partner's or the Borrower's senior unsecured long term indebtedness. "Borrowing" has the meaning set forth in Section 1.3. --------- "Capital Expenditures" means, for any period, the sum of all -------------------- expenditures (whether paid in cash or accrued as a liability) by the Borrower which are capitalized on the consolidated balance sheet of the Borrower in conformity with GAAP, but less (i) all expenditures made with respect to the acquisition by the Borrower and its Consolidated Subsidiaries of any interest in real property within nine months after the date such interest in real property is acquired and (ii) capital expenditures made from the proceeds of insurance or condemnation 7 awards (or payments in lieu thereof) or indemnity payments received during such period by Borrower or any of its Consolidated Subsidiaries from third parties. "Cash or Cash Equivalents" means (i) cash, (ii) direct obligations of ------------------------ the United States Government, including, without limitation, treasury bills, notes and bonds, (iii) interest bearing or discounted obligations of Federal agencies and Government sponsored entities or pools of such instruments offered by banks rated AA or better by S&P or Aa2 by Moody's and dealers, including, without limitation, Federal Home Loan Mortgage Corporation participation sale certificates, Government National Mortgage Association modified pass-through certificates, Federal National Mortgage Association bonds and notes, Federal Farm Credit System securities, (iv) time deposits, domestic and Eurodollar certificates of deposit, bankers acceptances, commercial paper rated at least A- 1 by S&P and P-1 by Moody's, and/or guaranteed by an Aa rating by Moody's, an AA rating by S&P, or better rated credit, floating rate notes, other money market instruments and letters of credit each issued by banks which have a long-term debt rating of at least AA by S&P or Aa2 by Moody's, (v) obligations of domestic corporations, including, without limitation, commercial paper, bonds, debentures, and loan participations, each of which is rated at least AA by S&P, and/or Aa2 by Moody's, and/or unconditionally guaranteed by an AA rating by S&P, an Aa2 rating by Moody's, or better rated credit, (vi) obligations issued by states and local governments or their agencies, rated at least MIG-1 by Moody's and/or SP-1 by S&P and/or guaranteed by an irrevocable letter of credit of a bank with a long-term debt rating of at least AA by S&P or Aa2 by Moody's, (vii) repurchase agreements with major banks and primary government securities dealers fully secured by U.S. Government or agency collateral equal to or exceeding the principal amount on a daily basis and held in safekeeping, (viii) real estate loan pool participations, guaranteed by an entity with an AA 8 rating given by S&P or an Aa2 rating given by Moody's, or better rated credit, and (ix) shares of any mutual fund that has its assets primarily invested in the types of investments referred to in clauses (i) through (v). "Closing Date" means the date on which the Lead Agent shall have ------------ received the documents specified in or pursuant to Section 3.1. "Commitment" means, with respect to each Bank, the amount committed by ---------- such Bank pursuant to this Agreement with respect to any Loans, as such amount may be reduced from time to time pursuant to Sections 2.9 and 2.10. "Committed Loan" means a Loan made by a Bank pursuant to Section 2.1; -------------- provided that, if any such Loan or loans (or portions thereof) are combined or - -------- subdivided pursuant to a Notice of Interest Rate Election, the term "Committed Loan" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "Completion of Construction" means the issuance of a temporary or -------------------------- permanent certificate of occupancy for the improvements under construction, permitting the use and occupancy thereof for their regular intended uses. "Consolidated Subsidiary" means at any date any Subsidiary or other ----------------------- entity which is consolidated with the Borrower in accordance with GAAP. "Consolidated Tangible Net Worth" means at any date the consolidated ------------------------------- stockholders' equity of the Borrower (determined on a book basis), less its consolidated Intangible Assets, all determined as of such date. For purposes of this definition "Intangible Assets" means with respect to any such intangible ----------------- assets, the amount (to the extent reflected in determining such consolidated stockholders' equity) of (i) all write-ups subsequent to December 31, 1997 in the book value of any asset owned by the Borrower or a Consolidated Subsidiary and (ii) goodwill, patents, trademarks, service marks, trade names, 9 anticipated future benefit of tax loss carry forwards, copyrights, organization or developmental expenses and other intangible assets. "Contingent Obligation" as to any Person means, without duplication, --------------------- (i) any contingent obligation of such Person required to be shown on such Person's balance sheet in accordance with GAAP, and (ii) any obligation required to be disclosed in the footnotes to such Person's financial statements, guaranteeing partially or in whole any non-recourse Debt, lease, dividend or other obligation, exclusive of contractual indemnities (including, without limitation, any indemnity or price-adjustment provision relating to the purchase or sale of securities or other assets) and guarantees of non-monetary obligations (other than guarantees of completion) which have not yet been called on or quantified, of such Person or of any other Person. The amount of any Contingent Obligation described in clause (ii) shall be deemed to be (a) with respect to a guaranty of interest or interest and principal, or operating income guaranty, the sum of all payments required to be made thereunder (which in the case of an operating income guaranty shall be deemed to be equal to the debt service for the note secured thereby), calculated at the Applicable Interest Rate, through (i) in the case of an interest or interest and principal guaranty, the stated date of maturity of the obligation (and commencing on the date interest could first be payable thereunder), or (ii) in the case of an operating income guaranty, the date through which such guaranty will remain in effect, and (b) with respect to all guarantees not covered by the preceding clause (a), an amount equal to the stated or determinable amount of the primary obligation in respect of which such guaranty is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as recorded on the balance sheet and on the footnotes to the most recent financial statements of the Borrower required to be delivered pursuant to Section 4.4 hereof. Notwithstanding anything contained herein to the contrary, guarantees of completion shall not be deemed to be Contingent Obligations unless and until a claim for payment or performance has been made thereunder, at which 10 time any such guaranty of completion shall be deemed to be a Contingent Obligation in an amount equal to any such claim. Subject to the preceding sentence, (i) in the case of a joint and several guaranty given by such Person and another Person (but only to the extent such guaranty is recourse, directly or indirectly to the Borrower), the amount of the guaranty shall be deemed to be 100% thereof unless and only to the extent that such other Person has delivered Cash or Cash Equivalents to secure all or any part of such Person's guaranteed obligations, (ii) in the case of joint and several guarantees given by a Person in whom the Borrower owns an interest (which guarantees are non-recourse to the Borrower), to the extent the guarantees, in the aggregate, exceed 15% of total real estate investments, the amount in excess of 15% shall be deemed to be a Contingent Obligation of the Borrower, and (iii) in the case of a guaranty (whether or not joint and several) of an obligation otherwise constituting Debt of such Person, the amount of such guaranty shall be deemed to be only that amount in excess of the amount of the obligation constituting Debt of such Person. Notwithstanding anything contained herein to the contrary, "Contingent Obligations" shall not be deemed to include guarantees of Unused Commitments or of construction loans to the extent the same have not been drawn. "Debt" of any Person (including Minority Holdings) means, without ---- duplication, (A) as shown on such Person's consolidated balance sheet (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or any asset and, (ii) all indebtedness of such Person evidenced by a note, bond, debenture or similar instrument (whether or not disbursed in full in the case of a construction loan), (B) the face amount of all letters of credit issued for the account of such Person and, without duplication, all unreimbursed amounts drawn thereunder, (C) all Contingent Obligations of such Person, (D) all payment obligations of such Person under any interest rate protection agreement 11 (including, without limitation, any interest rate swaps, caps, floors, collars and similar agreements) or other hedging agreements and currency swaps and foreign exchange contracts or similar agreements which were not entered into specifically in connection with Debt set forth in clauses (A), (B) or (C) hereof. For purposes of this Agreement, Debt (other than Contingent Obligations) of the Borrower shall be deemed to include only the Borrower's pro rata share (such share being based upon the Borrower's percentage ownership interest as shown on the Borrower's annual audited financial statements) of the Debt of any Person in which the Borrower, directly or indirectly, owns an interest, provided that such Debt is nonrecourse, both directly and indirectly, to the Borrower. "Default" means any condition or event which constitutes an Event of ------- Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Designated Lender" means a special purpose corporation that (i) shall ----------------- have become a party to this Agreement pursuant to Section 9.6(d), and (ii) is not otherwise a Bank. "Designated Lender Notes" means promissory notes of the Borrower, ----------------------- substantially in the form of Exhibit A-1 hereto, evidencing the obligation of the Borrower to repay Money Market Loans made by Designated Lenders, and "Designated Lender Note" means any one of such promissory notes issued under Section 9.6(d) hereof. "Designating Lender" shall have the meaning set forth in Section ------------------ 9.6(d) hereof. "Designation Agreement" means a designation agreement in substantially --------------------- the form of Exhibit H attached 12 hereto, entered into by a Bank and a Designated Lender and accepted by the Lead Agent. "Domestic Business Day" means any day except a Saturday, Sunday or --------------------- other day on which commercial banks in New York City and Los Angeles are authorized by law to close. "Domestic Lending Office" means, as to each Bank, its office located ----------------------- within the United States at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office within the United States as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Lead Agent; provided that no Bank shall be permitted to change its Domestic Lending Office if as a result of such change either (i) pursuant to the provisions of Section 8.1 or Section 8.2, Borrower would be unable to maintain any Loans as Euro-Dollar Loans; or (ii) Borrower would be required to make any payment to such Bank pursuant to the provisions of Section 8.3 or Section 8.4. "Due Diligence Package" has the meaning provided in Section 3.3. --------------------- "Duff & Phelps" means Duff & Phelps Credit Rating Co. or any ------------- successor thereto. "Environmental Affiliate" means any partnership, or joint venture, ----------------------- trust or corporation in which an equity interest is owned by the Borrower, either directly or indirectly. "Environmental Approvals" means any permit, license, approval, ruling, ----------------------- variance, exemption or other authorization required under applicable Environmental Laws. 13 "Environmental Claim" means, with respect to any Person, any notice, ------------------- claim, demand or similar communication (written or oral) by any other Person alleging potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damage, property damage, personal injuries, fines or penalties arising out of, based on or resulting from (i) the presence, or release into the environment, of any Material of Environmental Concern at any location, whether or not owned by such Person or (ii) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law, in each case as to which could reasonably be expected to have a Material Adverse Effect. "Environmental Laws" means any and all federal, state, local and ------------------ foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to the environment, the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Material of Environmental Concern or hazardous wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Material of Environmental Concern or hazardous wastes or the clean-up or other remediation thereof. "Environmental Report" has the meaning set forth in Section 4.7. -------------------- "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended, or any successor statute. 14 "ERISA Group" means the Borrower, any Subsidiary and all members of a ----------- controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "Euro-Dollar Borrowing" has the meaning set forth in Section 1.3. --------------------- "Euro-Dollar Business Day" means any Domestic Business Day on which ------------------------ commercial banks are open for international business (including dealings in dollar deposits) in London. "Euro-Dollar Lending Office" means, as to each Bank, its office, -------------------------- branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro- Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Lead Agent; provided that no Bank shall be permitted to change its Euro-Dollar Lending Office if as a result of such change either (i) pursuant to the provisions of Section 8.1 or Section 8.2, Borrower would be unable to maintain any Loans as Euro-Dollar Loans; or (ii) Borrower would be required make any payment to such Bank pursuant to the provisions of Sections 8.3 or Section 8.4. "Euro-Dollar Loan" means a Committed Loan to be made by a Bank as a ---------------- Loan bearing interest at the Adjusted London Interbank Offered Rate in accordance with the applicable Notice of Committed Borrowing or Notice of Interest Rate Election. "Euro-Dollar Reserve Percentage" has the meaning set forth in Section ------------------------------ 2.7(b). 15 "Event of Default" has the meaning set forth in Section 6.1. ---------------- "Federal Funds Rate" means, for any day, the rate per annum (rounded ------------------ upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day; provided that (i) if such day is not a Domestic -------- Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Morgan on such day on such transactions as determined by the Lead Agent. "Federal Reserve Board" means the Board of Governors of the Federal --------------------- Reserve System as constituted from time to time. "Financeable Ground Lease" means either (x) a ground lease reasonably ------------------------ satisfactory to the Required Banks, or (y) a ground lease which provides (i) for a remaining term of not less than 25 years (including options and renewals) from the date that such Real Property Asset shall become an Unencumbered Asset Pool Property, (ii) that the ground lease will not be terminated until any leasehold mortgagee shall have received notice of a default and has had a reasonable opportunity to cure the same or complete foreclosure, and has failed to do so, (iii) for a new lease on substantially the same terms to any leasehold mortgagee recognized under such ground lease as tenant if the ground lease is terminated for any reason, (iv) for non-merger of the fee and leasehold estates, 16 and (v) transferability of the tenant's interest under the ground lease, subject only to the landlord's reasonable approval. Notwithstanding the foregoing, it is hereby agreed that the ground lease with respect to the Real Property Asset commonly known as "Kilroy Airport Center, Long Beach, California", shall be deemed to be a "Financeable Ground Lease". "FFO" means "funds from operations," defined to mean net income (or --- loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructurings and sales of properties, plus depreciation and amortization, after adjustments for Minority Holdings. Adjustments for Minority Holdings will be calculated to reflect FFO on the same basis as above. "Fitch" means Fitch Investors Services, L.P. or any successor ----- thereto. "FMV Cap Rate" means 9%. ------------ "Fronting Bank" shall mean Morgan or such other Bank which Borrower is ------------- notified by the Lead Agent may be a Fronting Bank and which is designated by Borrower in its Notice of Borrowing as the Bank which shall issue a Letter of Credit with respect to such Notice of Borrowing. "GAAP" means generally accepted accounting principles recognized as ---- such in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination. "General Partner" means Kilroy Realty Corporation, a Maryland --------------- corporation. 17 "Governmental Authority" means any Federal, state or local government ---------------------- or any other political subdivision thereof or agency exercising executive, legislative, judicial, regulatory or administrative functions having jurisdiction over the Borrower or any Mortgaged Property. "Group of Loans" means, at any time, a group of Loans consisting -------------- of (i) all Committed Loans which are Base Rate Loans at such time, or (ii) all Committed Loans which are Euro-Dollar Loans having the same Interest Period at such time; provided that, if a Loan of any particular Bank is converted to or -------- made as a Base Rate Loan pursuant to Section 8.2 or 8.4, such Loan shall be included in the same Group or Groups of Loans from time to time as it would have been in if it had not been so converted or made. "Guaranty" means the Second Amended and Restated Guaranty of Payment, -------- dated as of even date herewith, made by the General Partner. "Indemnitee" has the meaning set forth in Section 9.3(b). ---------- "Interest Period" means: (i) with respect to each Euro-Dollar --------------- Borrowing, the period commencing on the date of such Committed Borrowing or of any Notice of Interest Election with respect to such Committed Borrowing and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable Notice of Committed Borrowing or Notice of Interest Election; provided that: - -------- (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; 18 (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Euro-Dollar Business Day of a calendar month. (ii) with respect to each Base Rate Borrowing, the period commencing on the date of such Committed Borrowing or Notice of Interest Rate Election and ending 30 days thereafter; provided that any Interest Period which would -------- otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day. (iii) with respect to each Money Market LIBOR Loan, the period commencing on the date of borrowing specified in the applicable Notice of Borrowing and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable Notice of Money Market Borrowing in accordance with Section 2.3; provided that: -------- (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro- Dollar Business Day of a calendar month; 19 (c) if any Interest Period includes a date on which a payment of principal of Loans is required to be made under Section 2.10 but does not end on such date, then (i) the principal amount (if any) of each Money Market LIBOR Loan required to be repaid on such date and (ii) the remainder (if any) of each such Money Market LIBOR Loan shall have an Interest Period determined as set forth above; and (d) any Interest Period which would otherwise end after the Maturity Date shall end on the Maturity Date. (iv) with respect to each Money Market Absolute Rate Loan, the period commencing on the date of borrowing specified in the applicable Notice of Borrowing and ending such number of days thereafter (but not less than 14 days) as the Borrower may elect in accordance with Section 2.3; provided that: -------- (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) if any Interest Period includes a date on which a payment of principal of Loans is required to be made under Section 2.10 but does not end on such date, then (i) the principal amount (if any) of each Money Market Absolute Rate Loan required to be repaid on such date and (ii) the remainder (if any) of each such Money Market Absolute Rate Loan shall have an Interest Period determined as set forth above; and (c) any Interest Period which would otherwise end after the Maturity Date shall end on the Maturity Date. 20 "Internal Revenue Code" means the Internal Revenue Code of 1986, --------------------- as amended, or any successor statute. "Investment Grade Rating" means a rating for a Person's senior long- ----------------------- term unsecured debt, or if no such rating has been issued, a "shadow" rating, of BBB- or better from S&P, and a rating or "shadow" rating of Baa3 or better from Moody's or a rating or "shadow" rating equivalent to the foregoing from either Duff & Phelps or Fitch. Any such "shadow" rating shall be evidenced by a letter from the applicable Rating Agency or by such other evidence as may be reasonably acceptable to the Lead Agent (as to any such other evidence, the Lead Agent shall present the same to, and discuss the same with, the Banks). "Lead Agent" means Morgan Guaranty Trust Company of New York in its ---------- capacity as Lead Agent for the Banks hereunder, and its successors in such capacity. "Letter(s) of Credit" has the meaning provided in Section 2.2(b). ------------------- "Letter of Credit Collateral" has the meaning provided in Section --------------------------- 6.4. "Letter of Credit Collateral Account" has the meaning provided in ----------------------------------- Section 6.4. "Letter of Credit Documents" has the meaning provided in Section -------------------------- 2.17. "Letter of Credit Usage" means at any time the sum of (i) the ---------------------- aggregate maximum amount available to be drawn under the Letters of Credit then outstanding, assuming compliance with all requirements for drawing referred to therein, and (ii) the aggregate amount of 21 the Borrower's unpaid obligations under this Agreement in respect of the Letters of Credit. "LIBOR Auction" means a solicitation of Money Market Quotes setting ------------- forth Money Market Margins based on the London Interbank Offered Rate pursuant to Section 2.3. "Lien" means, with respect to any asset, any mortgage, lien, pledge, ---- charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset. For the purposes of this Agreement, each of the Borrower and any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan" means a Base Rate Loan, a Euro-Dollar Loan or a Money Market ---- Loan and "Loans" means Base Rate Loans, Euro-Dollar Loans or Money Market Loans ----- or any combination of the foregoing. "Loan Amount" has the meaning set forth in Section 2.1(a). ----------- "Loan Documents" means this Agreement, the Notes, the Guaranty, the -------------- Letter(s) of Credit, the Letter of Credit Documents and any related documents. "London Interbank Offered Rate" has the meaning set forth in ----------------------------- Section 2.8(b). "Margin Stock" shall have the meaning provided such term in ------------ Regulation U and Regulation G of the Federal Reserve Board. 22 "Material Adverse Effect" means a material adverse effect upon (i) ----------------------- the business, operations, properties or assets of the Borrower or (ii) the ability of the Borrower to perform its obligations hereunder in all material respects, including to pay interest and principal. "Material Lease" means, with respect to any Real Property Asset, any -------------- lease, underletting, concession agreement or license affecting such Real Property Asset, which represents more than 15% of the gross leasable area of such Real Property Asset. "Material of Environmental Concern" means and includes pollutants, --------------------------------- contaminants, hazardous wastes, and toxic, radioactive, caustic or otherwise hazardous substances, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics. "Material Plan" means at any time a Plan having aggregate ------------- Unfunded Liabilities in excess of $5,000,000. "Maturity Date" has the meaning set forth in Section 2.9. ------------- "Minority Holdings" means partnerships, limited liability companies ----------------- and corporations held or owned by the Borrower which are not consolidated with the Borrower on its financial statements. "Money Market Absolute Rate" has the meaning set forth in Section -------------------------- 2.3(d)(ii)(4). "Money Market Absolute Rate Loan" means a loan to be made by a ------------------------------- Bank pursuant to an Absolute Rate Auction. 23 "Money Market Lending Office" means, as to each Bank, its Domestic --------------------------- Lending Office or such other office, branch or affiliate of such Bank as it may hereafter designate as its Money Market Lending Office by notice to the Borrower and the Lead Agent; provided that any Bank may from time to time by notice to -------- the Borrower and the Lead Agent designate separate Money Market Lending Offices for its Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate Loans, on the other hand, in which case all references herein to the Money Market Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Money Market LIBOR Loan" means a loan to be made by a Bank pursuant ----------------------- to a LIBOR Auction (including such a loan bearing interest at the Base Rate pursuant to Section 2.3). "Money Market Loan" means a Money Market LIBOR Loan or a Money ----------------- Market Absolute Rate Loan. "Money Market Margin" has the meaning set forth in Section ------------------- 2.3(d)(ii)(3). "Money Market Quote" means an offer by a Bank to make a Money Market ------------------ Loan in accordance with Section 2.3. "Moody's" means Moody's Investors Service, Inc. or any successor ------- thereto. "Morgan" means Morgan Guaranty Trust Company of New York, in its ------ individual capacity. "Multiemployer Plan" means at any time an employee pension benefit ------------------ plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to 24 make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "Net Offering Proceeds" means all cash received by the Borrower or the --------------------- General Partner as a result of the sale of common shares of beneficial interest, preferred shares of beneficial interest (including perpetual preferred), partnership interests, limited liability company interests, or other ownership or equity interests in the Borrower or the General Partner (or evidence of indebtedness of the Borrower or the General Partner convertible into any of the foregoing) less customary costs and discounts of issuance paid by the Borrower ---- or the General Partner, as the case may be. "Net Operating Cash Flow" means, with respect to any Real Property ----------------------- Asset, the Property Income, calculated on an annualized basis, for the period during which such Real Property Asset shall have been owned by the Borrower, the General Partner or any of their Subsidiaries, less Property Expenses, calculated on an estimated, pro forma (i.e., the results for the period during which such Real Property Asset shall have been owned shall be annualized, with appropriate adjustments for items of income and expense which are not earned or incurred in equal monthly amounts) basis. "New Acquisitions" shall mean any Real Property Asset acquired ---------------- after the date hereof. "Non-Recourse Debt" means Debt of the Borrower or the General Partner ----------------- on a consolidated basis for which the right of recovery of the obligee thereof is limited to recourse against the Real Property Assets securing such Debt (subject to such limited exceptions to the non-recourse nature of such Debt such as fraud, misappropriation, misapplication and environmental indemni- 25 ties, as are usual and customary in like transactions at the time of the incurrence of such Debt). "Notes" means, collectively, the promissory notes of the Borrower, ----- each substantially in the form of Exhibit A hereto, evidencing the obligation of --------- the Borrower to repay the Loans, together with any Designated Lender Notes, and "Note" means any one of such promissory notes issued hereunder. ---- "Notice of Borrowing" means a Notice of Committed Borrowing or a ------------------- Notice of Money Market Borrowing. "Notice of Committed Borrowing" has the meaning set forth in ----------------------------- Section 2.2. "Notice of Interest Election" has the meaning set forth in --------------------------- Section 2.15(a). "Notice of Money Market Borrowing" has the meaning set forth in -------------------------------- Section 2.3(f). "Obligations" means all obligations, liabilities and indebtedness of ----------- every nature of the Borrower from time to time owing to any Bank under or in connection with this Agreement or any other Loan Document, including, without limitation, (i) the outstanding principal amount of the Committed Loans at such time, plus (ii) the Letter of Credit Usage at such time, plus (iii) the outstanding principal amount of any Money Market Loans at such time. "Outstanding Balance" means the sum of (i) the aggregate outstanding ------------------- and unpaid principal balance of all Loans and (ii) the Letter of Credit Usage. "Parent" means, with respect to any Bank, any Person controlling ------ such Bank. 26 "Participant" has the meaning set forth in Section 9.6(b). ----------- "PBGC" means the Pension Benefit Guaranty Corporation or any entity ---- succeeding to any or all of its functions under ERISA. "Permitted Liens" means (a) Liens in favor of the Borrower or the --------------- General Partner on all or any part of the assets of Subsidiaries of the Borrower or the General Partner, as applicable, provided that (i) the Debt to which such Lien relates is held by the Borrower, (ii) such Debt is not otherwise pledged or encumbered, and (iii) no more than 5% of the Unencumbered Asset Pool Properties Value may be subject to any such Liens; (b) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds, completion bonds, government contracts or other obligations of a like nature, including Liens in connection with workers' compensation, unemployment insurance and other types of statutory obligations or to secure the performance of tenders, bids, leases, contracts (other than for the repayment of Debt) and other similar obligations incurred in the ordinary course of business; (c) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded; provided, that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (d) Liens on property of the Borrower, the General Partner or any Subsidiary thereof in favor of the Federal or any state government to secure certain payments pursuant to any contract, statute or regulation; (e) easements (including, without limitation, reciprocal easement agreements and utility agreements), rights of way, covenants, consents, reservations, encroachments, variations and zoning and other restrictions, charges or encumbrances (whether or not re- 27 corded), which do not interfere materially with the ordinary conduct of the business of the Borrower, the General Partner or any Subsidiary thereof and which do not materially detract from the value of the property to which they attach or materially impair the use thereof by the Borrower, the General Partner or any Subsidiary thereof; (f) statutory Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other Liens imposed by law and arising in the ordinary course of business, for sums due and payable which are not then past due (or which, if past due, are being contested in good faith and with respect to which adequate reserves are being maintained to the extent required by GAAP); (g) Liens not otherwise permitted by this definition and incurred in the ordinary course of business of any or all of the Borrower, the General Partner or any Subsidiary thereof with respect to obligations which do not exceed $500,000 in principal amount in the aggregate at any one time outstanding; and (h) the interests of lessees and lessors under leases of real or personal property made in the ordinary course of business which would not have a Material Adverse Effect. "Person" means an individual, a corporation, a partnership, a limited ------ liability company, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan (other than ---- a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a 28 member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "Prime Rate" means the rate of interest publicly announced by ---------- Morgan in New York City from time to time as its Prime Rate. "Pro-Forma Debt Service" means, for any calendar quarter, the greater ---------------------- of (x) the interest actually payable on the Loans, and (y) the amount of debt service payments determined by applying a 30-year mortgage style amortization schedule to the Loans outstanding as of the last day of such calendar quarter, using an interest rate equal to the Treasury Rate plus 1.75%. "Property Expenses" means, when used with respect to any Real Property ----------------- Asset, the costs of operating and maintaining such Real Property Asset which are the responsibility of the owner thereof and that are not paid directly by the tenant thereof, including, without limitation, taxes, insurance, repairs and maintenance, but provided that if such tenant is more than 60 days in arrears in the payment of base or fixed rent, then such costs will also constitute "Property Expenses", but excluding depreciation, amortization and interest costs. "Property Income" means, when used with respect to any Real Property --------------- Asset, cash rents and other cash revenues received in the ordinary course therefrom, including, without limitation, revenues from any parking leases and lease termination fees amortized over the remaining term of the lease for which such termination fee was received (other than pre-paid rents and revenues and security deposits except to the extent applied in satisfaction of tenants' obligations for rent). "Qualified Development Properties" means any Real Property Assets -------------------------------- which are 100% owned in fee (or leasehold pursuant to a Financeable Ground Lease) by the 29 Borrower, the General Partner or any of their Consolidated Subsidiaries and which are not subject to any Lien (other than Permitted Liens), and which are under construction and which, in accordance with GAAP, have not yet been placed into service, provided, however, that if 66.67% or more of the net rentable area of any Qualified Development Property has not been leased to tenants other than tenants that are affiliates of the Borrower on or before the earlier to occur of (x) the date which is six (6) months after the Completion of Construction thereof, and (y) the eighteen month anniversary of the commencement of construction thereof, then the same will cease to be a Qualified Development Property. "Qualified Leased Development Properties" means any Real Property --------------------------------------- Assets which are 100% owned in fee (or leasehold pursuant to a Financeable Ground Lease) by the Borrower, the General Partner or any of their Consolidated Subsidiaries and which are not subject to any Lien (other than Permitted Liens), and which are under construction and, in accordance with GAAP, have not yet been placed into service, and of which, as of any date of determination, 66.67% or more of the net rentable area of such Real Property Asset has been leased to tenants other than tenants that are affiliates of the Borrower. "Rating Agencies" means, collectively, S&P, Moody's, Duff & --------------- Phelps and Fitch. "Real Property Assets" means as of any time, the real property assets -------------------- owned directly or indirectly by the Borrower at such time. "Recourse Debt" shall mean Debt of the Borrower, the General Partner ------------- or any Consolidated Subsidiary that is not Non-Recourse Debt. 30 "Reference Bank" means the principal London offices of Morgan. -------------- "Regulation U" means Regulation U of the Board of Governors of the ------------ Federal Reserve System, as in effect from time to time. "Release" means any release, spill, emission, leaking, pumping, ------- pouring, dumping, emptying, deposit, discharge, leaching or migration. "Required Banks" means, at any time, Banks having at least two-thirds -------------- of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, holding Notes evidencing at least two-thirds of the aggregate unpaid principal amount of the Loans. "Requirements" means all present and future laws, statutes, codes, ------------ ordinances, orders, judgments, decrees, injunctions, rules, regulations and requirements of every Governmental Authority having jurisdiction over any Mortgaged Property and all restrictive covenants applicable to any Mortgaged Property. "Secured Debt" means all Debt secured by a Lien on real property. ------------ "Separate Parcel" means a Real Estate Asset that is a single, legally --------------- subdivided, separately zoned parcel that can be legally transferred or conveyed separate and distinct from any other Real Estate Asset without benefit of any other Real Estate Asset. "Solvent" means, with respect to any Person, that the fair saleable ------- value of such Person's assets exceeds the Debts of such Person. "Subsidiary" means any corporation or other entity of which securities ---------- or other ownership interests 31 representing either (i) ordinary voting power to elect a majority of the board of directors or other persons performing similar functions or (ii) a majority of the economic interest therein, are at the time directly or indirectly owned by the Borrower. "Term" has the meaning set forth in Section 2.9. ---- "Total Asset Value" means, the sum of (w) with respect to those Real ----------------- Property Assets owned for at least the two previous consecutive quarters, the quotient of (i) Annual EBITDA with respect thereto for the previous four (4) consecutive quarters (or, if owned for only two or three quarters, the Annual EBITDA for such period, annualized), including the quarter then ended, but less reserves for Capital Expenditures of (A) $0.30 per square foot per annum for each Real Property Asset that is an office property, and (B) $0.15 per square foot per annum for each Real Property Asset that is an industrial property, divided by (ii) the FMV Cap Rate, (x) with respect to those Real Property Assets owned for less than the two previous consecutive quarters, the lesser of (i) the quotient of Net Operating Cash Flow applicable to each such Real Property Asset, calculated on an annualized basis, based upon (A) the actual amount of Net Operating Cash Flow for the period of the Borrower's, the General Partner's or their Subsidiary's ownership of such Real Property Asset, less replacement reserves of (1) $.30 per square foot per annum for each such Unencumbered Asset Pool Property which is an office building and (2) $.15 per square foot per annum for each such Unencumbered Asset Pool Property which is an industrial building, divided by (B) the FMV Cap Rate, and (ii) the purchase price actually paid by the Borrower, the General Partner or any of their Subsidiaries (as applicable) for such Real Property, (y) with respect to Qualified Development Properties, 40% of the book value thereof, and (z) Cash or Cash Equivalents of the Bor- 32 rower, the General Partner and their Subsidiaries as of the date of determination. "Total Debt Ratio" means the ratio, as of the date of determination, ---------------- of (i) the sum of (x) the Total Liabilities of the Borrower, the General Partner and their Consolidated Subsidiaries and (y) the Borrower's and the General Partner's pro rata share of the Total Liabilities of any Minority Holdings of the Borrower or the General Partner to (ii) Total Asset Value. "Total Debt Service" means, as of the last day of each calendar ------------------ quarter, an amount equal to the sum of (i) interest (whether accrued, paid or capitalized) payable by Borrower on its Debt for the previous four consecutive quarters including the quarter then ended, plus (ii) scheduled payments of principal on such Debt, whether or not paid by the Borrower (excluding balloon payments) for the previous four consecutive quarters including the quarter then ended. "Total Liabilities" means the sum of the balance sheet amount of all ----------------- Debt of the Borrower, the General Partner and their Consolidated Subsidiaries and all accounts payable and all other liabilities of such Person, all as determined in accordance with GAAP. "Treasury Rate" means, as of any date, a rate equal to the annual ------------- yield to maturity on the U.S. Treasury Constant Maturity Series with a ten-year maturity, as such yield is reported in Federal Reserve Statistical Release H.15 - -- Selected Interest Rates, published most recently prior to the date the applicable Treasury Rate is being determined. Such yield shall be determined by straight line linear interpolation between the yields reported in Release H.15, if necessary. In the event Release H.15 is no longer published, the Lead Agent shall select, in its reasonable discretion, an alternate basis for the determination of Treasury yield for U.S. 33 Treasury Constant Maturity Series with ten-year maturities. "Unencumbered Asset Pool Net Operating Cash Flow" means, as of any ----------------------------------------------- date of determination with respect to the Unencumbered Asset Pool Properties, Property Income with respect to the Unencumbered Asset Pool Properties for the previous four (4) consecutive quarters (except as provided below), including the quarter then ended, but less (x) Property Expenses with respect to the Unencumbered Asset Pool Properties for the previous four (4) consecutive quarters (except as provided below), including the quarter then ended, and (y) the greater of (i) Capital Expenditures which are not related to new construction for the previous four (4) consecutive quarters, including the quarter then ended, and (ii) reserves for Capital Expenditures of $.70 per square foot per annum for each Unencumbered Asset Pool Property that is an office property, and $.40 per square foot per annum for each Unencumbered Asset Pool Property that is an industrial property. Notwithstanding the foregoing, with respect to any Unencumbered Asset Pool Property owned by the Borrower, the General Partner or any of their Consolidated Subsidiaries for a period of less four (4) fiscal quarters, but more than one (1) fiscal quarter, Unencumbered Asset Pool Net Operating Cash Flow shall be determined in a manner consistent with the foregoing calculation utilizing annualized Property Income, Property Expenses and Capital Expenditures (or, if greater, reserves for Capital Expenditures) for the relevant period of the Borrower's, the General Partner's or any of their Consolidated Subsidiaries' ownership of such Unencumbered Asset Pool Property, provided such period shall be at least one fiscal quarter. "Unencumbered Asset Pool Properties" means, as of any date, the Real ---------------------------------- Property Assets listed in Exhibit B attached hereto and made a part hereof, each --------- of which 34 is 100% owned in fee (or leasehold pursuant to a Financeable Ground Lease in the case of assets listed on Exhibit C as leaseholds) by the Borrower, the General --------- Partner or any of their Consolidated Subsidiaries and each of which is not subject to any Lien (other than Permitted Liens), subject to adjustment as set forth herein, together with all Real Property Assets which have become part of the Unencumbered Asset Pool Properties as of such date in accordance with Section 3.3. "Unencumbered Asset Pool Properties Value" means the sum of: ---------------------------------------- (i) with respect to the Unencumbered Asset Pool Properties owned by the Borrower, the General Partner or any of their Consolidated Subsidiaries for a period of at least six (6) calendar months, the quotient of (x) the Unencumbered Asset Pool Net Operating Cash Flow less replacement reserves of $.30 per square foot per annum for each such Unencumbered Asset Pool Property which is an office building and $.15 per square foot per annum for each such Unencumbered Asset Pool Property which is an industrial building, divided by (y) the FMV Cap Rate, and (ii) with respect to Unencumbered Asset Pool Properties owned by the Borrower, the General Partner or any of their Consolidated Subsidiaries for a period of less than six (6) calendar months, the lesser of (A) the quotient of (x) the Unencumbered Asset Pool Net Operating Cash Flow on an annualized basis based upon the Unencumbered Asset Pool Net Operating Cash Flow for the period of such Person's ownership of the Unencumbered Asset Pool Property in question less replacement reserves of $.30 per square foot per annum for each such Unencumbered Asset Pool Property which is an office building and $.15 per square foot per annum for each such Unencumbered Asset Pool Property which is an industrial building, divided by (y) the FMV Cap Rate and (B) 35 the purchase price actually paid by the Borrower, the General Partner or any of their Consolidated Subsidiaries (as applicable) for such Unencumbered Asset Pool Property (provided, however, that if any such Unencumbered Asset Pool Property shall have been purchased as part of a portfolio of properties and no purchase price shall have been specifically allocated thereto, then the purchase price therefore shall be deemed to be equal to that percentage of the total purchase price for such portfolio as is equal to the percentage of the total Net Operating Cash Flow with respect to such portfolio that the Net Operating Cash Flow attributable to the applicable Unencumbered Asset Pool Property bears, and (iii) with respect to Qualified Leased Development Properties, forty percent (40%) of the book value thereof, provided that availability under the Commitments attributable to such Qualified Leased Development Properties shall not in any event exceed 10% of Unencumbered Asset Pool Properties Value. "Unfunded Liabilities" means, with respect to any Plan at any time, -------------------- the amount (if any) by which (i) the value of all benefit liabilities under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "United States" means the United States of America, including the ------------- States and the District of Columbia, but excluding its territories and possessions. 36 "Unsecured Debt" means Debt not secured by a Lien on real -------------- property. "Unsecured Debt Ratio" means, as of any date of determination, the -------------------- ratio of the Unencumbered Asset Pool Properties Value as of the date of determination to the aggregate amount of Unsecured Debt of the Borrower, the General Partner and their Consolidated Subsidiaries outstanding as of such date of determination. "Unused Commitments" means an amount equal to all unadvanced funds ------------------ (other than unadvanced funds in connection with any construction loan) which any third party is obligated to advance to the Borrower or otherwise, pursuant to any Loan Document, written instrument or otherwise. Section I.2. Accounting Terms and Determinations. Unless otherwise ----------------------------------- specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the most recent audited consolidated financial statements of the Borrower delivered to the Lead Agent and the Banks; provided that, if the Borrower notifies the Lead Agent and the Banks that the - -------- Borrower wishes to amend any covenant in Article V to eliminate the effect of any change in GAAP on the operation of such covenant (or if the Lead Agent notifies the Borrower that the Required Banks wish to amend Article V for such purpose), then the Borrower's compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Required Banks. 37 Section I.3. Types of Borrowings. The term "Borrowing" denotes the ------------------- --------- aggregation of Loans of one or more Banks to be made to the Borrower pursuant to Article II on the same date, all of which Loans are of the same type (subject to Article VIII) and, except in the case of Base Rate Loans, have the same Interest Period. Borrowings are classified for purposes of this Agreement either by reference to the pricing of Loans comprising such Borrowing (e.g., a "Euro- ---- Dollar Borrowing" is a Borrowing comprised of Euro-Dollar Loans) or by reference to the provisions of Article II under which participation therein is determined (i.e., a "Committed Borrowing" is a Borrowing under Section 2.1 in which all ---- Banks participate in proportion to their Commitments, while a "Money Market Borrowing" is a Borrowing under Section 2.3). ARTICLE II THE CREDITS Section II.1. Commitments to Lend. ------------------- (a) Each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make Committed Loans to the Borrower and participate in Letters of Credit issued by the Fronting Bank on behalf of the Borrower pursuant to this Section from time to time during the Term in amounts such that the aggregate principal amount of Committed Loans by such Bank at any one time outstanding together with such Bank's pro rata share of the Letter of Credit --- ---- Usage shall not exceed the amount of its Commitment. The aggregate amount of Committed Loans to be made hereunder together with the Letter of Credit Usage and outstanding Money Market Loans shall not exceed Four Hundred Million Dollars ($400,000,000) (the "Loan Amount"). Each Borrowing ----------- 38 under this subsection (a) shall be in an aggregate principal amount of at least $2,500,000, or an integral multiple of $500,000 in excess thereof and shall be made from the several Banks ratably in proportion to their respective Commitments. Subject to the limitations set forth herein, any amounts repaid may be reborrowed. Notwithstanding anything to the contrary, the number of new Borrowings shall be limited to ten (10) Borrowings per month. (b) Notwithstanding anything in the preceding subparagraph (a) to the contrary, the Loan Amount shall in no event exceed (and no Bank shall be deemed to have committed to fund its pro rata share of an amount which exceeds) an --- ---- amount that would cause (A) the ratio of (i) Unencumbered Asset Pool Net Operating Cash Flow to (ii) Pro-Forma Debt Service to be less than 2.0:1.0 or (B) the Unsecured Debt Ratio to be less than 2.0:1.0 or (C) an amount which would result in the violation of any provision of Section 5.8. Section II.2. Notice of Committed Borrowing. (a) The Borrower shall ----------------------------- give the Lead Agent notice (a "Notice of Committed Borrowing") not later than ----------------------------- 2:00 p.m. (New York City time) (x) one Domestic Business Day before each Base Rate Borrowing or (y) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying: (1) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (2) the aggregate amount of such Borrowing, 39 (3) whether the Loans comprising such Borrowing are to be Base Rate Loans or Euro-Dollar Loans, (4) in the case of a Euro-Dollar Borrowing, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, (5) the intended use for the proceeds of such Borrowing, and (6) that no Default or Event of Default has occurred or is continuing. Notwithstanding the time frame set forth in clause (a)(x) above, in the event that the Money Market Quotes submitted by the Banks pursuant to Section 2.3(c) below are, in the aggregate, in an amount less than the principal amount requested by the Borrower in the related Money Market Quote Request, then the Borrower shall be permitted to give the Lead Agent notice of its intent to make a Base Rate Borrowing, in the amount of the difference between accepted Money Market Quotes and the principal amount requested by Borrower in the related Money Market Quote Request, no later than 2:30 p.m. (New York City time) on the date of such Borrowing. (b) Borrower shall give the Lead Agent, and the designated Fronting Bank, written notice in the event that it desires to have Letters of Credit (each, a "Letter of Credit") issued hereunder no later than 2:00 p.m., New York ---------------- City time, at least four (4) Domestic Business Days prior to the date of such issuance. Each such notice shall specify (i) the designated Fronting Bank, (ii) the aggregate amount of the requested Letters of Credit, (iii) the individual amount of each requested Letter of Credit and the number of Letters of Credit to 40 be issued, (iv) the date of such issuance (which shall be a Domestic Business Day), (v) the name and address of the beneficiary, (vi) the expiration date of the Letter of Credit (which in no event shall be later than twelve (12) months after the issuance of such Letter of Credit or the Maturity Date, whichever is earlier), (vii) the purpose and circumstances for which such Letter of Credit is being issued and (viii) the terms upon which each such Letter of Credit may be drawn down (which terms shall not leave any discretion to Fronting Bank). Each such notice may be revoked telephonically by the Borrower to the applicable Fronting Bank and the Lead Agent any time prior to the date of issuance of the Letter of Credit by the applicable Fronting Bank, provided such revocation is confirmed in writing by the Borrower to the Fronting Bank and the Lead Agent within one (1) Domestic Business Day by facsimile. No later than 2:00 p.m., New York City time, on the date that is four (4) Domestic Business Days prior to the date of issuance, the Borrower shall specify a precise description of the documents and the verbatim text of any certificate to be presented by the beneficiary of such Letter of Credit, which if presented by such beneficiary prior to the expiration date of the Letter of Credit would require the Fronting Bank to make a payment under the Letter of Credit; provided, that Fronting Bank -------- may, in its reasonable judgment, require changes in any such documents and certificates only in conformity with changes in customary and commercially reasonable practice or law and, provided further, that no Letter of Credit shall -------- ------- require payment against a conforming draft to be made thereunder on the following Domestic Business Day that such draft is presented if such presentation is made later than 10:00 A.M. New York City time (except that if the beneficiary of any Letter of Credit requests at the time of the issuance of its Letter of Credit that payment be made on the same Domestic Business Day against a conforming draft, such beneficiary shall be entitled to such a same day draw, provided such draft is 41 presented to the applicable Fronting Bank no later than 10:00 A.M. New York City time and provided further the Borrower shall have requested to the Fronting Bank and the Lead Agent that such beneficiary shall be entitled to a same day draw). In determining whether to pay on such Letter of Credit, the Fronting Bank shall be responsible only to determine that the documents and certificates required to be delivered under the Letter of Credit have been delivered and that they comply on their face with the requirements of that Letter of Credit. Section II.3. Money Market Borrowings. ----------------------- (a) The Money Market Option. In addition to Committed Borrowings ----------------------- pursuant to Section 2.1, at such time as the Borrower's Credit Rating is an Investment Grade Rating from at least two Rating Agencies, one of which shall be S&P or Moody's, the Borrower may, as set forth in this Section 2.3, request the Banks during the Term to make offers to make Money Market Loans to the Borrower, not to exceed, at such time, the lesser of (i) the Committed Loans and (ii) $150,000,000. The Banks may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section. (b) Money Market Quote Request. When the Borrower wishes to request -------------------------- offers to make Money Market Loans under this Section, it shall transmit to the Lead Agent by telex or facsimile transmission a Money Market Quote Request substantially in the form of Exhibit D hereto so as to be received not later --------- than 2:00 p.m. (New York City time) on (x) the fourth Euro-Dollar Business Day prior to the date of Borrowing proposed therein, in the case of a LIBOR Auction, or (y) the Domestic Business Day next preceding the date of Borrowing proposed therein, in the case of an Absolute Rate Auction (or, in either case, such other time or date as 42 the Borrower and the Lead Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective) specifying: (i) the proposed date of Borrowing, which shall be a Euro- Dollar Business Day in the case of a LIBOR Auction or a Domestic Business Day in the case of an Absolute Rate Auction, (ii) the aggregate amount of such Borrowing, which shall be $10,000,000 or a larger multiple of $500,000, (iii) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and (iv) whether the Money Market Quotes requested are to set forth a Money Market Margin or a Money Market Absolute Rate. The Borrower may request offers to make Money Market Loans for more than one Interest Period in a single Money Market Quote Request. No Money Market Quote Request shall be given within thirty days (or such other number of days as the Borrower and the Lead Agent may agree) of any other Money Market Quote Request. (c) Invitation for Money Market Quotes. Promptly upon receipt of a ---------------------------------- Money Market Quote Request, the Lead Agent shall send to the Banks by telex or facsimile transmission an Invitation for Money Market Quotes substantially in the form of Exhibit F hereto, which shall constitute an invitation by the --------- Borrower to each Bank to submit Money Market Quotes offering to make the Money Market Loans to which such Money Market Quote Request relates in accordance with this Section 2.3. 43 (d) Submission and Contents of Money Market Quotes. (i) Each Bank ---------------------------------------------- may submit a Money Market Quote containing an offer or offers to make Money Market Loans in response to any Invitation for Money Market Quotes. Each Money Market Quote must comply with the requirements of this subsection (d) and must be submitted to the Lead Agent by telex or facsimile transmission at its offices specified in or pursuant to Section 9.1 not later than (x) 10:00 a.m. (New York City time) on the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction, or (y) 10:00 a.m. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Lead Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective); provided that -------- Money Market Quotes submitted by the Lead Agent (or any affiliate of the Lead Agent) in the capacity of a Bank may be submitted, and may only be submitted, if the Lead Agent or such affiliate notifies the Borrower of the terms of the offer or offers contained therein not later than thirty (30) minutes prior to the applicable deadline for the other Banks. Subject to Articles III and VI, any Money Market Quote so made shall be irrevocable except with the written consent of the Lead Agent given on the instructions of the Borrower. Such Money Market Loans may be funded by such Bank's Designated Lender (if any) as provided in Section 9.6(d); however such Bank shall not be required to specify in its Money Market Quote whether such Money Market Loans will be funded by such Designated Lender. (ii) Each Money Market Quote shall be in substantially the form of Exhibit E hereto and shall in any case specify: --------- 44 (1) the proposed date of Borrowing, (2) the principal amount of the Money Market Loan for which each such offer is being made, which principal amount (w) may be greater than or less than the Commitment of the quoting Bank, (x) must be $10,000,000 or a larger multiple of $500,000, (y) may not exceed the principal amount of Money Market Loans for which offers were requested and (z) may be subject to an aggregate limitation as to the principal amount of Money Market Loans for which offers being made by such quoting Bank may be accepted, (3) in the case of a LIBOR Auction, the margin above or below the applicable London Interbank Offered Rate (the "Money Market Margin") offered for each such Money Market Loan, expressed as a percentage (specified to the nearest 1/10,000th of 1%) to be added to or subtracted from such base rate, (4) in the case of an Absolute Rate Auction, the rate of interest per annum (specified to the nearest 1/10,000th of 1%) (the "Money Market Absolute Rate") offered for each such Money Market Loan, and (5) the identity of the quoting Bank. A Money Market Quote may set forth up to five separate offers by the quoting Bank with respect to each Interest Period specified in the related Invitation for Money Market Quotes. (iii) Any Money Market Quote shall be disregarded if it: 45 (1) is not substantially in conformity with Exhibit F hereto or --------- does not specify all of the information required by subsection (d)(ii) above; (2) contains qualifying, conditional or similar language; (3) proposes terms other than or in addition to those set forth in the applicable Invitation for Money Market Quotes; or (4) arrives after the time set forth in subsection (d)(i). (e) Notice to Borrower. The Lead Agent shall promptly notify the ------------------ Borrower (x) with respect to each Money Market Quote submitted in accordance with subsection (d), of the terms of such Money Market Quote and the identity of the Bank submitting such Money Market Quote and (y) of any Money Market Quote that amends, modifies or is otherwise inconsistent with a previous Money Market Quote submitted by such Bank with respect to the same Money Market Quote Request. Any such subsequent Money Market Quote shall be disregarded by the Lead Agent unless such subsequent Money Market Quote is submitted solely to correct a manifest error in such former Money Market Quote. The Lead Agent's notice to the Borrower shall specify (A) the aggregate principal amount of Money Market Loans for which offers have been received for each Interest Period specified in the related Money Market Quote Request, (B) the respective principal amounts and Money Market Margins or Money Market Absolute Rates, as the case may be, so offered and (C) if applicable, limitations on the aggregate principal amount of Money Market Loans for which offers in any single Money Market Quote may be accepted. 46 (f) Acceptance and Notice by Borrower. Not later than 1:00 p.m. (New --------------------------------- York City time) on (x) the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction, or (y) the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Lead Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective), the Borrower shall notify the Lead Agent of its acceptance or non-acceptance of the offers so notified to it pursuant to subsection (e). In the case of acceptance, such notice (a "Notice of Money --------------- Market Borrowing") shall specify the aggregate principal amount of offers for - ---------------- each Interest Period that are accepted. The Borrower may accept any Money Market Quote in whole or in part; provided that: -------- (i) the aggregate principal amount of each Money Market Borrowing may not exceed the applicable amount set forth in the related Money Market Quote Request; (ii) the principal amount of each Money Market Borrowing must be $10,000,000 or a larger multiple of $500,000; (iii) acceptance of offers may only be made on the basis of ascending Money Market Margins or Money Market Absolute Rates, as the case may be; and (iv) the Borrower may not accept any offer that is described in subsection (d)(iii) or that otherwise fails to comply with the requirements of this Agreement. 47 (g) Allocation by Lead Agent. If offers are made by two or more Banks ------------------------ with the same Money Market Margins or Money Market Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which such offers are accepted for the related Interest Period, the principal amount of Money Market Loans in respect of which such offers are accepted shall be allocated by the Lead Agent among such Banks as nearly as possible (in multiples of $500,000, as the Lead Agent may deem appropriate) in proportion to the aggregate principal amounts of such offers. Determinations by the Lead Agent of the amounts of Money Market Loans shall be conclusive in the absence of manifest error. (h) Notification by Lead Agent. Upon receipt of the Borrower's Notice -------------------------- of Money Market Borrowing in accordance with Section 2.3(f) hereof, the Lead Agent shall, on the date such Notice of Money Market Borrowing is received by the Lead Agent, notify each Bank of the principal amount of the Money Market Borrowing accepted by the Borrower and of such Bank's share (if any) of such Money Market Borrowing and such Notice of Money Market Borrowing shall not thereafter be revocable by the Borrower. A Bank who is notified that it has been selected to make a Money Market Loan may designate its Designated Lender (if any) to fund such Money Market Loan on its behalf, as described in Section 9.6(d). Any Designated Lender which funds a Money Market Loan shall on and after the time of such funding become the obligee under such Money Market Loan and be entitled to receive payment thereof when due. No Bank shall be relieved of its obligation to fund a Money Market Loan, and no Designated Lender shall assume such obligation, prior to the time the applicable Money Market Loan is funded. Section II.4. Notice to Banks; Funding of Loans. --------------------------------- 48 (a) Upon receipt of a Notice of Committed Borrowing, the Lead Agent shall notify each Bank on the same day as it receives the Notice of Committed Borrowing of the contents thereof and of such Bank's share of such Borrowing and such Notice of Committed Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than 2:00 P.M. (New York City time) on the date of each Committed Borrowing, each Bank shall make available its share of such Committed Borrowing, in Federal or other funds immediately available in New York City, to the Lead Agent at its address referred to in Section 9.1. The Lead Agent will make the funds so received from the Banks available to the Borrower at the Lead Agent's aforesaid address. If the Borrower has requested the issuance of a Letter of Credit, no later than 12:00 Noon (New York City time) on the date of such issuance as indicated in the notice delivered pursuant to Section 2.2(b), the Fronting Bank shall issue such Letter of Credit in the amount so requested and deliver the same to the Borrower with a copy thereof to the Lead Agent. At the request of any Bank, the Lead Agent promptly shall deliver copies thereof to such Bank. Immediately upon the issuance of each Letter of Credit by the Fronting Bank, such Fronting Bank shall be deemed to have sold and transferred to each other Bank, and each such other Bank shall be deemed, and hereby agrees, to have irrevocably and unconditionally purchased and received from the Fronting Bank, without recourse or warranty, an undivided interest and a participation in such Letter of Credit, any drawing thereunder, and the obligations of the Borrower hereunder with respect thereto, and any security therefor or guaranty pertaining thereto, in an amount equal to such Bank's ratable share thereof (based upon the ratio its Commitment bears to the aggregate of all Commitments). Upon any change in any of the Commitments in accordance herewith, there shall be an automatic adjustment to such participations to reflect such changed shares. The Fronting Bank shall 49 have the primary obligation to fund any and all draws made with respect to such Letter of Credit notwithstanding any failure of a participating Bank to fund its ratable share of any such draw. The Lead Agent will instruct the Fronting Bank to make such Letter of Credit available to the Borrower and the Fronting Bank shall make such Letter of Credit available to the Borrower at the Borrower's aforesaid address or at such address in the United States as Borrower shall request on the date of the Borrowing. (c) Unless the Lead Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Lead Agent such Bank's share of such Borrowing, the Lead Agent may assume that such Bank has made such share available to the Lead Agent on the date of such Borrowing in accordance with subsection (b) of this Section 2.4 and the Lead Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Lead Agent, such Bank and the Borrower severally agree to repay to the Lead Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Lead Agent, at (i) in the case of the Borrower, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate applicable thereto pursuant to Section 2.7 and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Lead Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. Section II.5. Notes. ----- 50 (a) The Loans shall be evidenced by the Notes, each of which shall be payable to the order of each Bank for the account of its Applicable Lending Office in an amount equal to each such Bank's Commitment. (b) Each Bank may, by notice to the Borrower and the Lead Agent, request that its Loans of a particular type be evidenced by a separate Note in an amount equal to the aggregate unpaid principal amount of such Loans. Each such Note shall be in substantially the form of Exhibit A hereto, with --------- appropriate modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to the "Note" of such Bank ---- shall be deemed to refer to and include any or all of such Notes, as the context may require. (c) Upon receipt of each Bank's Note, the Lead Agent shall forward such Note to such Bank. Each Bank shall record the date, amount, type and maturity of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and may, if such Bank so elects in connection with any transfer or enforcement of its Note, endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided -------- that the failure of any Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Notes. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. (d) There shall be no more than ten (10) Euro-Dollar Borrowings outstanding at any one time pursuant to this Agreement. 51 Section II.6. Maturity of Loans. The Loans shall mature, and the ----------------- principal amount thereof shall be due and payable, on the Maturity Date. Section II.7. Interest Rates. -------------- (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the sum of twenty-five (25) basis points plus the Base Rate for such day. Such interest shall be payable for each Interest Period on the last day thereof. (b) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during the Interest Period applicable thereto, at a rate per annum equal to the sum of the Applicable Margin plus the Adjusted London Interbank Offered Rate for such day. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. "Adjusted London Interbank Offered Rate" applicable to any Interest -------------------------------------- Period means a rate per annum equal to the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (i) the applicable London Interbank Offered Rate by (ii) 1.00 minus the Euro-Dollar Reserve Percentage. "Euro-Dollar Reserve Percentage" means for any day that percentage ------------------------------ (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a 52 member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non- United States office of any Bank to United States residents). The Adjusted London Interbank Offered Rate shall be adjusted automatically on and as of the effective date of any change in the Euro-Dollar Reserve Percentage. "London Interbank Offered Rate" applicable to any Interest Period ----------------------------- means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to the Reference Bank in the London interbank market at approximately 11:00 a.m. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. (c Subject to Section 8.1, each Money Market LIBOR Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the London Interbank Offered Rate for such Interest Period (determined in accordance with Section 2.7(b) as if the related Money Market LIBOR Borrowing were a Committed Euro-Dollar Borrowing) plus (or minus) the Money Market Margin quoted by the Bank making such Loan in accordance with Section 2.3. Each Money Market Absolute Rate Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the Money Market Absolute Rate 53 quoted by the Bank making such Loan in accordance with Section 2.3. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than ninety days, at intervals of ninety days after the first day thereof. (d In the event that, and for so long as, any Event of Default shall have occurred and be continuing, the outstanding principal amount of the Loans, and, to the extent permitted by law, overdue interest in respect of all Loans, shall bear interest at the annual rate of the sum of the Base Rate and four percent (4%). (e The Lead Agent shall determine each interest rate applicable to the Loans hereunder. The Lead Agent shall give prompt notice to the Borrower and the Banks of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (f The Reference Bank agrees to use its best efforts to furnish quotations to the Lead Agent as contemplated by this Section. If the Reference Bank does not furnish a timely quotation, the provisions of Section 8.1 shall apply. Section II.8. Fees. ---- (a Commitment/Facility Fee. During the Term, the Borrower ----------------------- shall pay to the Lead Agent for the account of the Banks ratably in proportion to their respective Commitments, a commitment fee on the daily average undrawn and uncancelled Commitments in any given quarter determined as follows: (i prior to the Adjustment Date, the Borrower shall pay to the Lead Agent for the account of the Banks ratably in proportion to their respective Commitments, a commitment fee on the daily average 54 undrawn and uncancelled Commitments in any given quarter at the respective percentages per annum based upon the range into which the Total Debt Ratio then falls in accordance with the following table:
---------------------------------------------------------------------------- Total Debt Ratio Applicable Commitment Fee (% per annum) ---------------------------------------------------------------------------- less than 35% 0.20% ---------------------------------------------------------------------------- equal to or greater than 35% but less 0.25% than 45% ---------------------------------------------------------------------------- equal to or greater than 45% but less 0.30% than 50% ---------------------------------------------------------------------------- equal to or greater than 50% but less 0.35% than 55% ----------------------------------------------------------------------------
(i from and after the Adjustment Date, the Borrower shall pay to the Lead Agent for the account of the Banks ratably in proportion to their respective Commitments, a facility fee on the daily average Commitments in any given quarter at the respective percentages per annum based upon the Borrower's Credit Rating in accordance with the following table:
------------------------------------------------------------------------- Borrower's Credit Rating Applicable Facility Fee (% per annum) ------------------------------------------------------------------------- BBB+/Baa1 0.20% ------------------------------------------------------------------------- BBB/Baa2 0.20% ------------------------------------------------------------------------- BBB-/Baa3 0.25% ------------------------------------------------------------------------- Below Investment Grade 0.325% Rating or no rating -------------------------------------------------------------------------
55 The commitment/facility fee shall be payable quarterly, in arrears, on each January 1, April 1, July 1, and October 1 during the Term and any extensions thereof. Any change in the Borrower's Credit Rating causing it to move into a different range on the table shall effect an immediate change in the applicable percentage per annum. In the event that the Borrower's (or the General Partner's) Credit Rating is such that the Rating Agencies' ratings are split between a higher and a lower rating, the applicable percentage per annum shall be based upon the lower of such two (2) Credit Ratings. In the event that Borrower (or, as applicable, the General Partner) receives more than two (2) credit ratings and such credit ratings are not equivalent, the applicable fee shall be determined by the lower of the two (2) highest ratings, provided that each of said two (2) highest ratings shall be Investment Grade Ratings and at least one of which shall be an Investment Grade Rating from S&P or Moody's. (b Letter of Credit Fee. During the Term, the Borrower shall -------------------- pay to the Lead Agent, for the account of the Banks in proportion to their interests in respect of undrawn issued Letters of Credit, a fee (a "Letter of --------- Credit Fee") in an amount, provided that no Event of Default shall have occurred - ---------- and be continuing, equal to a rate per annum equal to the Applicable Margin with respect to Euro-Dollar Loans on the daily average of such issued and undrawn Letters of Credit, which fee shall be payable, in arrears, on each January 1, April 1, July 1 and October 1 during the Term. From the occurrence, and during the continuance, of an Event of Default, such fee shall be increased to be equal to four percent (4%) per annum on the daily average of such issued and undrawn Letters of Credit. (c Fronting Bank Fee. The Borrower shall pay any Fronting ----------------- Bank, for its own account, a fee (a "Fronting Bank Fee") at a rate per annum ----------------- equal to .15% 56 of the issued and undrawn amount of such Letter of Credit, which fee shall be in addition to and not in lieu of, the Letter of Credit Fee. The Fronting Bank Fee shall be payable in arrears on each January 1, April 1, July 1 and October 1 during the Term. (d Intentionally omitted. --------------------- (e Fees Non-Refundable. All fees set forth in this Section 2.8 ------------------- shall be deemed to have been earned on the date payment is due in accordance with the provisions hereof and shall be non-refundable. The obligation of the Borrower to pay such fees in accordance with the provisions hereof shall be binding upon the Borrower and shall inure to the benefit of the Lead Agent and the Banks regardless of whether any Loans are actually made. Section II.9. Mandatory Termination. The term (the "Term") of the --------------------- ---- Commitments shall terminate and expire, and the Borrower shall return or cause to be returned all Letters of Credit to the Fronting Bank, on November 8, 2002 (the "Maturity Date"). ------------- Section II.10. Mandatory Prepayment. -------------------- (a In the event that an Unencumbered Asset Pool Property (or any Separate Parcel that originally formed a part of an Unencumbered Asset Pool Property) is sold, transferred or released from the restrictions of Section 5.16 hereof, the Borrower shall, simultaneously with such sale, transfer or release, prepay the Loans in an amount equal to 100% of the net proceeds of such sale or transfer, in the event of a sale or transfer, or such lesser amount as shall be required for the Borrower to remain in compliance with this Agreement, in the event of such a sale, transfer or release. Notwithstanding the foregoing, a simultaneous like-kind exchange under Section 1031 of the Internal Revenue Code will not be subject to the provisions of this Section 2.10(a), pro- 57 vided that the exchanged property has qualified as a New Acquisition and any cash "boot" associated therewith shall be applied to prepayment of the Loans or such lesser amount of such cash "boot" as shall be required for the Borrower to remain in compliance with this Agreement. Sale of an Unencumbered Asset Pool Property (or any Separate Parcel that originally formed a part of a Unencumbered Asset Pool Property) in violation of this Section 2.10 shall constitute an Event of Default. (b Simultaneously with the closing of any sale of common shares of beneficial interest, preferred shares of beneficial interest, partnership interests, limited liability company interests, or other ownership or equity interests in the Borrower or the General Partner, the Borrower shall, simultaneously with such sale, prepay the Loans in an amount equal to 100% of the Net Offering Proceeds. Notwithstanding the foregoing, however, in the event that (i) the Net Offering Proceeds in connection with any individual offering shall be less than $20,000,000, and the Borrower anticipates reinvesting the same in Real Property Assets within fifteen (15) days after receipt thereof or (ii) any Loans expire within thirty (30) days of the date thereof, the Borrower may retain such funds, provided, however, that if the Borrower shall not in fact so reinvest such funds in Real Property Assets within such fifteen (15) day period or repay such Loans within such thirty (30) day period, as the case may be, the Borrower shall immediately apply the same in repayment of the Loans. (c in the event that the Unsecured Debt Ratio is not maintained as of the last day of a calendar quarter, either (i) the Borrower will add a Real Property Asset to the Unencumbered Asset Pool Properties in accordance with this Agreement which, on a pro forma basis (i.e. the Unsecured Debt Ratio shall --------- --- be recalculated to include such Real Property Asset as though the same had been an Unencumbered Asset Pool Property for 58 the entire applicable period) would result in compliance with the Unsecured Debt Ratio, or (ii) the Borrower shall prepay to the Lead Agent, for the account of the Banks, an amount necessary to cause the Unsecured Debt Ratio to be in compliance within ninety (90) days of the date on which the Unsecured Debt Ratio failed to be maintained. Failure by the Borrower to comply with the Unsecured Debt Ratio within ninety (90) days of the date of such non-compliance shall be an Event of Default. Section II.11. Optional Prepayments. -------------------- (a The Borrower may, upon at least one Domestic Business Day's notice to the Lead Agent, prepay to the Lead Agent, for the account of the Banks, any Base Rate Borrowing in whole at any time, or from time to time in part in amounts aggregating One Million Dollars ($1,000,000), or an integral multiple of One Million Dollars ($1,000,000) in excess thereof or, if less, the outstanding principal balance, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Banks included in such Borrowing. (b Except as provided in Section 8.2, the Borrower may not prepay all or any portion of the principal amount of any Euro-Dollar Loan prior to the maturity thereof unless the Borrower shall also pay any applicable expenses pursuant to Section 2.13. Any such prepayment shall be upon at least three (3) Euro-Dollar Business Days' notice to the Lead Agent. Any notice of prepayment delivered pursuant to this Section 2.11(b) shall set forth the amount of such prepayment which is applicable to any Loan made for working capital purposes. Each such optional prepayment shall be in the amounts set forth in Section 2.11(a) above and shall be applied to prepay ratably the Loans of the Banks included. 59 (c The Borrower may not prepay any Money Market Loan. (d The Borrower may, upon at least one (1) Domestic Business Day's notice to the Lead Agent (by 2:00 p.m New York time on such Domestic Business Day), reimburse the Lead Agent for the benefit of the Fronting Bank for the amount of any drawing under a Letter of Credit in whole or in part in any amount. (e The Borrower may at any time return any undrawn Letter of Credit to the Fronting Bank in whole, but not in part, and the Fronting Bank shall give the Lead Agent and each of the Banks notice of such return. (f The Borrower may at any time and from time to time cancel all or any part of the Commitments in amounts aggregating One Million Dollars ($1,000,000), or an integral multiple of One Million Dollars ($1,000,000) in excess thereof, by the delivery to the Lead Agent and the Banks of a notice of cancellation upon at least three (3) Domestic Business Days' notice to Lead Agent and the Banks, whereupon, all or such portion of the Commitments shall terminate as to the Banks, pro rata on the date set forth in such notice of -------- cancellation, and, if there are any Loans then outstanding in an aggregate amount which exceeds the aggregate Commitments (after giving effect to any such reduction), the Borrower shall prepay to the Lead Agent, for the account of the Banks, all or such portion of Loans outstanding on such date in accordance with the requirements of Sections 2.11(a) and (b). In no event shall the Borrower be permitted to cancel Commitments for which a Letter of Credit has been issued and is outstanding unless the Borrower returns (or causes to be returned) such Letter of Credit to the Fronting Bank. The Borrower shall be permitted to designate in its 60 notice of cancellation which Loans, if any, are to be prepaid. (g Upon receipt of a notice of prepayment or cancellation or a return of a Letter of Credit pursuant to this Section, the Lead Agent shall promptly, and in any event within one (1) Domestic Business Day, notify each Bank of the contents thereof and of such Bank's ratable share (if any) of such prepayment or cancellation and such notice shall not thereafter be revocable by the Borrower. (h Any amounts so prepaid pursuant to this Section 2.11 may be reborrowed subject to the other terms of this Agreement. In the event that the Borrower elects to cancel all or any portion of the Commitments pursuant to Section 2.11(c) hereof, such amounts may not be reborrowed. Section II.12. General Provisions as to Payments. --------------------------------- (a The Borrower shall make each payment of principal of, and interest on, the Loans and of fees hereunder, not later than 3:00 p.m. (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Lead Agent at its address referred to in Section 9.1. The Lead Agent will distribute to each Bank its ratable share of each such payment received by the Lead Agent for the account of the Banks on the same day as received by the Lead Agent if received by the Lead Agent by 3:00 p.m. (New York City time), or, if received by the Lead Agent after 3:00 p.m. (New York City time), on the immediately following Domestic Business Day. If the Lead Agent shall fail to distribute to a Bank its ratable share of a payment on the same day it is received or the immediately following Domestic Business Day, as applicable in accordance with the immediately preceding sentence, the 61 Lead Agent shall pay to such Bank the interest accrued on such payment at the Federal Funds Rate, commencing on the day the Lead Agent should have made the payment to such Bank and ending on the day prior to the date payment is actually made. Whenever any payment of principal of, or interest on, the Base Rate Loans or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b Unless the Lead Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Lead Agent may assume that the Borrower has made such payment in full to the Lead Agent on such date and the Lead Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Lead Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Lead Agent, at the Federal Funds Rate. Section II.13. Funding Losses. If the Borrower makes any payment of -------------- principal with respect to any 62 Euro-Dollar Loan (pursuant to Article II, VI or VIII or otherwise, and specifically including any payments made pursuant to Sections 2.10 or 2.11) on any day other than the last day of the Interest Period applicable thereto, or if the Borrower fails to borrow any Euro-Dollar Loans, after notice has been given to any Bank in accordance with Section 2.4(a), the Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing Participant in the related Loan; provided that no Participant shall be entitled to receive more than the Bank with respect to which such Participant is a Participant would be entitled to receive under this Section 2.13), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment or failure to borrow, provided that -------- such Bank shall have delivered to the Borrower a certificate as to the amount of such loss or expense and the calculation thereof, which certificate shall be conclusive in the absence of manifest error. Section II.14. Computation of Interest and Fees. Interest based on -------------------------------- the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). Section II.15. Method of Electing Interest Rates. --------------------------------- (a The Loans included in each Borrowing shall bear interest initially at the type of rate specified by the Borrower in the applicable Notice of Committed Borrowing. Thereafter, the Borrower may from time 63 to time elect to change or continue the type of interest rate borne by each Group of Loans (subject in each case to the provisions of Article VIII), as follows: (i) if such Loans are Base Rate Loans, the Borrower may elect to convert such Loans to Euro-Dollar Loans as of any Euro-Dollar Business Day; (ii) if such Loans are Euro-Dollar Loans, the Borrower may elect to convert such Loans to Base Rate Loans or elect to continue such Loans as Euro-Dollar Loans for an additional Interest Period, in each case effective on the last day of the then current Interest Period applicable to such Loans. Each such election shall be made by delivering a notice (a "Notice of Interest ------------------ Rate Election") to the Lead Agent at least three (3) Euro-Dollar Business Days - ------------- before the conversion or continuation selected in such notice is to be effective (unless the relevant Loans are to be continued as Base Rate Loans, in which case such notice shall be delivered to the Lead Agent no later than 2:00 p.m. (New York City time) at least one (1) Domestic Business Day before such continuation is to be effective). A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans; provided that (i) such portion is allocated ratably among the Loans -------- comprising such Group, (ii) the portion to which such notice applies, and the remaining portion to which it does not apply, are each $1,000,000 or any larger multiple of $1,000,000, (iii) there shall be no more than ten (10) Borrowings comprised of Euro-Dollar Loans outstanding at any time under this Agreement, (iv) no Loan may be continued as, or converted into, a Euro-Dollar Loan when any Event of Default has occurred and 64 is continuing, and (v) no Interest Period shall extend beyond the Maturity Date. (b Each Notice of Interest Rate Election shall specify: (i the Group of Loans (or portion thereof) to which such notice applies; (ii the date on which the conversion or continuation selected in such notice is to be effective, which shall comply with the applicable clause of subsection (a) above; (iii if the Loans comprising such Group are to be converted, the new type of Loans and, if such new Loans are Euro-Dollar Loans, the duration of the initial Interest Period applicable thereto; and (iv if such Loans are to be continued as Euro-Dollar Loans for an additional Interest Period, the duration of such additional Interest Period. Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of Interest Period. (c Upon receipt of a Notice of Interest Rate Election from the Borrower pursuant to subsection (a) above, the Lead Agent shall notify each Bank on the same day as it receives such Notice of Interest Rate Election of the contents thereof and such notice shall not thereafter be revocable by the Borrower. If the Borrower fails to deliver a timely Notice of Interest Rate Election to the Lead Agent for any Group of Euro-Dollar Loans, such Loans shall be converted into Base Rate Loans on the last day of the then current Interest Period applicable thereto. 65 Section II.16. Letters of Credit. (a) Subject to the terms ----------------- contained in this Agreement and the other Loan Documents, upon the receipt of a notice in accordance with Section 2.2(b) requesting the issuance of a Letter of Credit, the Fronting Bank shall issue a Letter of Credit or Letters of Credit in such form as is reasonably acceptable to the Borrower in an amount or amounts equal to the amount or amounts requested by the Borrower. (b Each Letter of Credit shall be issued in the minimum amount of One Million Dollars ($1,000,000). (c The Letter of Credit Usage shall be no more than Twenty-Five Million Dollars ($25,000,000) at any one time. (d There shall be no more than three (3) Letters of Credit outstanding at any one time. (e In the event of any request for a drawing under any Letter of Credit by the beneficiary thereunder, the Fronting Bank shall endeavor to notify the Borrower and the Lead Agent (and the Lead Agent shall endeavor to notify each Bank thereof) on or before the date on which the Fronting Bank intends to honor such drawing, and, except as provided in this subsection (e), the Borrower shall reimburse the Fronting Bank, in immediately available funds, on the same day on which such drawing is honored in an amount equal to the amount of such drawing. Notwithstanding anything contained herein to the contrary, however, unless the Borrower shall have notified the Lead Agent and the Fronting Bank prior to 2:00 p.m. (New York time) on the Domestic Business Day immediately prior to the date of such drawing that the Borrower intends to reimburse the Fronting Bank for the amount of such drawing with funds other than the proceeds of the Loans, the Borrower shall be deemed to have timely given a Notice of Committed Borrowing pursuant to 66 Section 2.2 to the Lead Agent, requesting a Borrowing of Base Rate Loans on the date on which such drawing is honored and in an amount equal to the amount of such drawing. Each Bank (other than the Fronting Bank) shall, in accordance with Section 2.4(b), make available its share of such Borrowing to the Lead Agent, the proceeds of which shall be applied directly by the Lead Agent to reimburse the Fronting Bank for the amount of such draw. In the event that any such Bank fails to make available to the Fronting Bank the amount of such Bank's participation on the date of a drawing, the Fronting Bank shall be entitled to recover such amount on demand from such Bank together with interest at the Federal Funds Rate commencing on the date such drawing is honored. (f If, at the time a beneficiary under any Letter of Credit requests a drawing thereunder, an Event of Default as described in Section 6.1(f) or Section 6.1(g) shall have occurred and is continuing, then on the date on which the Fronting Bank shall have honored such drawing, the Borrower shall have an unreimbursed obligation (the "Unreimbursed Obligation") to the Fronting ----------------------- Bank in an amount equal to the amount of such drawing, which amount shall bear interest at the annual rate of the sum of the Base Rate plus four percent (4%). Each Bank shall purchase an undivided participating interest in the Unreimbursed Obligation in an amount equal to its pro rata share of the Commitments, and upon receipt thereof the Fronting Bank shall deliver to such Bank an Unreimbursed Obligation participation certificate dated the date of the Fronting Bank's receipt of such funds and in the amount of such Bank's pro rata share. (g If, after the date hereof, any change in any law or regulation or in the interpretation thereof by any court or administrative or governmental authority charged with the administration thereof shall either (i) 67 impose, modify or deem applicable any reserve, special deposit or similar requirement against letters of credit issued by, or assets held by, or deposits in or for the account of, or participations in any letter of credit, upon any Bank (including the Fronting Bank) or (ii) impose on any Bank any other condition regarding this Agreement or such Bank (including the Fronting Bank) as it pertains to the Letters of Credit or any participation therein and the result of any event referred to in the preceding clause (i) or (ii) shall be to increase, by an amount deemed by the Fronting Bank or such Bank to be material, the cost to the Fronting Bank or any Bank of issuing or maintaining any Letter of Credit or participating therein then the Borrower shall pay to the Fronting Bank or such Bank, within 15 days after written demand by such Bank (with a copy to the Lead Agent), which demand shall be accompanied by a certificate showing, in reasonable detail, the calculation of such amount or amounts, such additional amounts as shall be required to compensate the Fronting Bank or such Bank for such increased costs or reduction in amounts received or receivable hereunder. (h The Borrower hereby agrees to protect, indemnify, pay and save the Fronting Bank harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees and disbursements) which the Fronting Bank may incur or be subject to as a result of (i) the issuance of the Letters of Credit, other than as a result of the gross negligence or wilful misconduct of the Fronting Bank or (ii) the failure of the Fronting Bank to honor a drawing under any Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or Governmental Authority -- ---- -- ----- (collectively, "Governmental Acts"), other than as a result of the gross ----------------- negligence or wilful misconduct of the Fronting 68 Bank. As between the Borrower and the Fronting Bank, the Borrower assumes all risks of the acts and omissions of, or misuses of, the Letters of Credit issued by the Fronting Bank, by the beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, the Fronting Bank shall not be responsible (i) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of such Letters of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) for the validity or insufficiency of any instrument transferring or assigning or purporting to transfer or assign any such Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) for failure of the beneficiary of any such Letter of Credit to comply fully with conditions required in order to draw upon such Letter of Credit; (iv) for errors, omissions, interruptions or delays in transmission or delivery of any message, by mail, cable, telegraph, telex, facsimile transmission, or otherwise; (v) for errors in interpretation of any technical terms; (vi) for any loss or delay in the transmission or otherwise of any documents required in order to make a drawing under any such Letter of Credit or of the proceeds thereof; (vii) for the misapplication by the beneficiary of any such Letter of Credit of the proceeds of such Letter of Credit; and (viii) for any consequence arising from causes beyond the control of the Fronting Bank, including any Government Acts, in each case other than as a result of the gross negligence or willful misconduct of the Fronting Bank. None of the above shall affect, impair or prevent the vesting of the Fronting Bank's rights and powers hereunder. In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by the Fronting Bank under or in connection with the 69 Letters of Credit issued by it or the related certificates, if taken or omitted in good faith, shall not put the Fronting Bank under any resulting liability to the Borrower. (i If the Fronting Bank or the Lead Agent is required at any time, pursuant to any bankruptcy, insolvency, liquidation or reorganization law or otherwise, to return to the Borrower any reimbursement by the Borrower of any drawing under any Letter of Credit, each Bank shall pay to the Fronting Bank or the Lead Agent, as the case may be, its share of such payment, but without interest thereon unless the Fronting Bank or the Lead Agent is required to pay interest on such amounts to the person recovering such payment, in which case with interest thereon, computed at the same rate, and on the same basis, as the interest that the Fronting Bank or the Lead Agent is required to pay. Section II.17. Letter of Credit Usage Absolute. The obligations of ------------------------------- the Borrower under this Agreement in respect of any Letter of Credit shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement (as the same may be amended from time to time) and any Letter of Credit Documents (as hereinafter defined) under all circumstances, including, without limitation, to the extent permitted by law, the following circumstances: (a any lack of validity or enforceability of any Letter of Credit or any other agreement or instrument relating thereto (collectively, the "Letter of --------- Credit Documents") or any Loan Document; --------------- (b any change in the time, manner or place of payment of, or in any other term of, all or any of the obligations of the Borrower in respect of the Letters of Credit or any other amendment or waiver of or any consent by the Borrower to departure from all or any 70 of the Letter of Credit Documents or any Loan Document; provided, that the -------- Fronting Bank shall not consent to any such change or amendment unless previously consented to in writing by the Borrower; (c any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any guaranty, for all or any of the obligations of the Borrower in respect of the Letters of Credit; (d the existence of any claim, set-off, defense or other right that the Borrower may have at any time against any beneficiary or any transferee of a Letter of Credit (or any Persons for whom any such beneficiary or any such transferee may be acting), the Lead Agent, the Fronting Bank or any Bank (other than a defense based on the gross negligence or wilful misconduct of the Lead Agent, the Fronting Bank or such Bank) or any other Person, whether in connection with the Loan Documents, the transactions contemplated hereby or by the Letters of Credit Documents or any unrelated transaction; (e any draft or any other document presented under or in connection with any Letter of Credit or other Loan Document proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; provided, that payment by the -------- Fronting Bank under such Letter of Credit against presentation of such draft or document shall not have constituted gross negligence or wilful misconduct of the Fronting Bank; (f payment by the Fronting Bank against presentation of a draft or certificate that does not comply with the terms of the Letter of Credit; provided, that such payment shall not have constituted gross negligence or - -------- wilful misconduct of the Fronting Bank; and 71 (g any other circumstance or happening whatsoever other than the payment in full of all obligations hereunder in respect of any Letter of Credit or any agreement or instrument relating to any Letter of Credit, whether or not similar to any of the foregoing, that might otherwise constitute a defense available to, or a discharge of, the Borrower; provided, that such other -------- circumstance or happening shall not have been the result of gross negligence or wilful misconduct of the Fronting Bank. ARTICLE III CONDITIONS Section III.1. Closing. The closing hereunder shall occur on the ------- date (the "Closing Date") when each of the following conditions is satisfied (or ------------ waived by the Lead Agent, such waiver to be evidenced by the continuation or funding after the date hereof of Loans and notice of such waiver to be given to the Banks by the Lead Agent), each document to be dated the Closing Date unless otherwise indicated: (a the Borrower shall have executed and delivered to the Lead Agent a Note for the account of each Bank dated on or before the Closing Date complying with the provisions of Section 2.5; (b the Borrower shall have executed and delivered to the Lead Agent a duly executed original of this Agreement; (c the General Partner shall have executed and delivered to the Lead Agent a duly executed original of the Guaranty; 72 (d the Lead Agent shall have received an opinion of Latham & Watkins, counsel for the Borrower and the General Partner, acceptable to the Lead Agent, the Banks and their counsel; (e the Lead Agent shall have received all documents the Lead Agent may reasonably request relating to the existence of the Borrower, the General Partner, the authority for and the validity of this Agreement and the other Loan Documents, and any other matters relevant hereto, all in form and substance reasonably satisfactory to the Lead Agent. Such documentation shall include, without limitation, the articles of incorporation and by-laws or the partnership agreement and limited partnership certificate, as applicable, of the Borrower and the General Partner, as amended, modified or supplemented to the Closing Date, each certified to be true, correct and complete by a senior officer of the Borrower or the General Partner, as the case may be, as of the Closing Date, together with a good standing certificate from the Secretary of State (or the equivalent thereof) of the State of Delaware with respect to the Borrower and of the State of Maryland with respect to the General Partner, and a good standing certificate from the Secretary of State (or the equivalent thereof) of each other State in which the Borrower and the General Partner is required to be qualified to transact business, each to be dated not more than forty-five (45) days prior to the Closing Date; (f the Lead Agent shall have received all certificates, agreements and other documents and papers referred to in this Section 3.1 and Section 3.2, unless otherwise specified, in sufficient counterparts, satisfactory in form and substance to the Lead Agent in its sole discretion; (g the Borrower and the General Partner shall have taken all actions required to authorize the 73 execution and delivery of this Agreement and the other Loan Documents and the performance thereof by the Borrower and the General Partner; (h the Lead Agent and the Banks shall have received an unaudited consolidated balance sheet and income statement of the Borrower for the fiscal quarter ended June 30, 1999; (i the Lead Agent shall be satisfied that neither the Borrower nor the General Partner is subject to any present or contingent environmental liability which could reasonably be expected to have a Material Adverse Effect; (j the Lead Agent shall have received wire transfer instructions in connection with the Loans to be made on the Closing Date; (k the Lead Agent shall have received, for its and any other Bank's account, all fees due and payable pursuant to Section 2.8 hereof on or before the Closing Date, and the reasonable fees and expenses accrued through the Closing Date of Skadden, Arps, Slate, Meagher & Flom LLP; (l the Lead Agent shall have received copies of all consents, licenses and approvals, if any, required in connection with the execution, delivery and performance by the Borrower, and the validity and enforceability against the Borrower, of the Loan Documents, or in connection with any of the transactions contemplated thereby to occur on or prior to the Closing Date, and such consents, licenses and approvals shall be in full force and effect; (m the representations and warranties of the Borrower contained in this Agreement shall be true and correct in all material respects on and as of the Clos- 74 ing Date both before and after giving effect to the making of any Loans; (n receipt by the Lead Agent and the Banks of a certificate of the chief financial officer or the chief accounting officer of the Borrower certifying that the Borrower is in compliance with all covenants of the Borrower contained in this Agreement, including, without limitation, the requirements of Section 5.8, as of the Closing Date; and (o the General Partner shall intend to continue to qualify as a real estate investment trust under the Internal Revenue Code. The Lead Agent shall promptly notify the Borrower and the Banks of the Closing Date, and such notice shall be conclusive and binding on all parties hereto. Section III.2. Borrowings. The obligation of any Bank to make a Loan ---------- on the occasion of any Borrowing or to participate in any Letter of Credit issued by the Fronting Bank and the obligation of the Fronting Bank to issue a Letter of Credit on the occasion of any Borrowing is subject to the satisfaction of the following conditions: (a the Closing Date shall have occurred on or prior to November 15, 1999; (b receipt by the Lead Agent of a Notice of Borrowing as required by Section 2.2 or 2.3; (c immediately after such Borrowing, the Outstanding Balance will not exceed the aggregate amount of the Commitments and with respect to each Bank, such Bank's pro rata portion of the Committed Loans and Letter of Credit -------- Usage will not exceed such Bank's Commitment; 75 (d immediately before and after such Borrowing, no Default or Event of Default shall have occurred and be continuing both before and after giving effect to the making of such Loans; (e the representations and warranties of the Borrower contained in this Agreement (other than representations and warranties which speak as of a specific date) shall be true and correct in all material respects on and as of the date of such Borrowing both before and after giving effect to the making of such Loans; (f no law or regulation shall have been adopted, no order, judgment or decree of any governmental authority shall have been issued, and no litigation shall be pending or threatened, which does or, with respect to any threatened litigation, seeks to enjoin, prohibit or restrain, the making or repayment of the Loans, the issuance of any Letter of Credit or any participations therein or the consummation of the transactions contemplated hereby; and (g no event, act or condition shall have occurred after the Closing Date which, in the reasonable judgment of the Lead Agent or the Required Banks, as the case may be, has had or is likely to have a Material Adverse Effect. Each Borrowing hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing as to the facts specified in clauses (c) through (g) of this Section (except that with respect to clause (f), such representation and warranty shall be deemed to be limited to laws, regulations, orders, judgments, decrees and litigation affecting the Borrower and not solely the Banks). 76 Section III.3. New Acquisitions and Additional Real Property Assets. ---------------------------------------------------- (a Any New Acquisition or Real Property Asset desired by the Borrower to be included as a Unencumbered Asset Pool Property after the date hereof and prior to the date on which Borrower has received an Investment Grade Rating from either S&P or Moody's, will require the approval of the Required Banks. The Borrower shall submit to the Lead Agent the materials set forth below (the "Due Diligence Package") relating to each New Acquisition or Real --------------------- Property Asset that the Borrower desires to be added to the Unencumbered Asset Pool Properties. The Due Diligence Package shall include (i) a description of the Real Property Asset, (ii) two years of historical cash flow operating statements, if available, (iii) five years of cash flow projections (including capital expenditures), (iv) the credit history of each existing tenant which occupies more than 15% of such Real Property Asset, (v) a map and site plan, (vi) copies of all lease agreements and abstracts thereof with each existing tenant which occupies more than 15% of such Real Property Asset, (vii) a satisfactory environmental report indicating that (A) the Real Property Asset complies with all Environmental Laws in all material respects, (B) is free of all Material of Environmental Concern in all material respects and (C) is not subject to any Environmental Claim, (viii) an engineer's inspection report satisfactory to the Lead Agent (provided, however, the Lead Agent shall not deem an engineer's inspection report satisfactory unless the Required Banks shall find such engineer's inspection report satisfactory), (ix) a title report and an existing survey of the property dated not more than twelve (12) months prior to such submission, (x) tenant delinquency reports, if available, (xi) a rent roll certified to be true, correct and complete by an authorized officer of Borrower, (xii) a final investment memorandum prepared by the Borrower in connection with the Real 77 Property Asset, and (xiii) a statement with respect to the purchase price of such Real Property Asset or, if such Real Property Asset was purchased as part of a portfolio and there was no allocation of purchase price, of the purchase price of the portfolio of Real Property Assets of which it formed a part. The Borrower shall permit the Lead Agent at all reasonable times and upon reasonable prior notice to make an inspection of such New Acquisition or Real Property Asset. (b The Borrower shall distribute a copy of the items listed in clauses (i), (ii), (iii), (v) and (xii) of the Section 3.3(a) by overnight mail to each of the Banks for their review and approval (the "Bank Due Diligence ------------------ Package"). In the event that a Bank desires additional materials which are - ------- included in the Due Diligence Package delivered to the Lead Agent, such Bank(s) shall notify the Borrower within two (2) Business Days of receipt of the Bank Due Diligence Package and the Borrower shall deliver such requested materials to the requesting Bank within one (1) Business Day of request therefor. To the extent approval is required pursuant to Section 3.3(a) hereof, failure to respond to the Lead Agent in writing by any Bank within ten (10) Domestic Business Days after receipt of the Bank Due Diligence Package shall be deemed to be an approval by such Bank of such New Acquisition or Real Property Asset for inclusion as an Unencumbered Asset Pool Property. ARTICLE IV REPRESENTATIONS AND WARRANTIES In order to induce the Lead Agent and each of the other Banks which may become a party to this Agreement to make the Loans, the Borrower makes the following representations and warranties as of the date hereof. Such representations and warranties shall survive the 78 effectiveness of this Agreement, the execution and delivery of the other Loan Documents and the making of the Loans. Section IV.1. Existence and Power. The Borrower is duly organized, ------------------- validly existing and in good standing as a limited partnership under the laws of the State of Delaware and has all powers and all material governmental licenses, authorizations, consents and approvals required to own its property and assets and carry on its business as now conducted or as it presently proposes to conduct and has been duly qualified and is in good standing in every jurisdiction in which the failure to be so qualified and/or in good standing is likely to have a Material Adverse Effect. Section IV.2. Power and Authority. The Borrower has the ------------------- organizational power and authority to execute, deliver and carry out the terms and provisions of each of the Loan Documents to which it is a party and has taken all necessary action to authorize the execution and delivery on behalf of the Borrower and the performance by the Borrower of such Loan Documents. The Borrower has duly executed and delivered each Loan Document to which it is a party, and each such Loan Document constitutes the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms, except as enforceability may be limited by applicable insolvency, bankruptcy or other laws affecting creditors rights generally, or general principles of equity, whether such enforceability is considered in a proceeding in equity or at law. Section IV.3. No Violation. Neither the execution, delivery or ------------ performance by or on behalf of the Borrower of the Loan Documents, nor compliance by the Borrower with the terms and provisions thereof nor the consummation of the transactions contemplated by the Loan Documents, (i) will contravene any applicable pro- 79 vision of any law, statute, rule, regulation, order, writ, injunction or decree of any court or governmental instrumentality applicable to Borrower or (ii) will conflict with or result in any breach of, any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of the Borrower pursuant to the terms of any material indenture, mortgage, deed of trust, or other agreement or other instrument to which the Borrower (or of any partnership of which the Borrower is a partner) is a party or by which it or any of its property or assets is bound or to which it is subject or (iii) will cause a default by the Borrower under any organizational document of any Subsidiary, or cause a default under the General Partner's articles of incorporation or by-laws. Section IV.4. Financial Information. --------------------- (a) The unaudited consolidated balance sheets of the Borrower and the General Partner as of June 30, 1999, when delivered to Lead Agent and to the Banks shall fairly present, in conformity with GAAP, the consolidated financial position of the Borrower and the General Partner as of such date and their consolidated results of operations for such fiscal year. (b) Since June 30, 1999, (i) there has been no material adverse change in the business, financial position or results of operations of the Borrower or the General Partner and (ii) except as previously disclosed to the Lead Agent and to the Banks, neither the Borrower nor the General Partner has incurred any material indebtedness or guaranty. Section IV.5. Litigation. ---------- 80 (a) There is no action, suit or proceeding pending against, or to the knowledge of the Borrower, threatened against or affecting, (i) the Borrower, the General Partner or any of their Subsidiaries, (ii) the Loan Documents or any of the transactions contemplated by the Loan Documents or (iii) any of their assets, in any case before any court or arbitrator or any governmental body, agency or official which could reasonably be expected to have a Material Adverse Effect or which in any manner draws into question the validity of this Agreement or the other Loan Documents. (b) There are no final nonappealable judgments or decrees in an aggregate amount of One Million Dollars ($1,000,000) or more entered by a court or courts of competent jurisdiction against the Borrower or the General Partner (other than any judgment as to which, and only to the extent, a reputable insurance company has acknowledged coverage of such claim in writing). Section IV.6. Compliance with ERISA. --------------------- (a) Except as previously disclosed to the Lead Agent in writing, each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code 81 or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. (b) Except for each "employee benefit plan" (as such term is defined in Section 3(3) of ERISA) that is maintained, or contributed to, by one or more members of the ERISA Group, no member of the ERISA Group is a "party in interest" (as such term is defined in Section 3(14) of ERISA or a "disqualified person" (as such term is defined in Section 4975(e)(2) of the Code) with respect to any funded employee benefit plan and none of the assets of any such plans have been invested in a manner that would cause the transactions contemplated by the Loan Documents to constitute a nonexempt prohibited transaction (as such term is defined in Section 4975 of the Code or Section 406 of ERISA). Section IV.7. Environmental Compliance. To the best of Borrower's ------------------------ knowledge, except as set forth in the Phase I environmental report(s) delivered to and accepted by the Lead Agent with respect to each of the Unencumbered Asset Pool Properties (as supplemented or amended, the "Environmental Reports"), (i) --------------------- there are in effect all Environmental Approvals which are required to be obtained under all Environmental Laws with respect to the Property, except for such Environmental Approvals the absence of which would not have a Material Adverse Effect, (ii) the Borrower is in compliance in all material respects with the terms and conditions of all such Environmental Approvals, and is also in compliance in all material respects with all other Environmental Laws or any plan, order, decree, judgment, injunction, notice or demand letter issued, entered or approved thereunder, except to the extent failure to comply would not have a Material Adverse Effect. 82 Except as set forth in the Environmental Reports or otherwise disclosed to the Lead Agent as of the Closing Date, to Borrower's actual knowledge: (i) There are no Environmental Claims or investigations pending or threatened by any Governmental Authority with respect to any alleged failure by the Borrower to have any Environmental Approval required in connection with the conduct of the business of the Borrower on any of the Unencumbered Asset Pool Properties, or with respect to any generation, treatment, storage, recycling, transportation, Release or disposal of any Material of Environmental Concern generated by the Borrower or any lessee on any of the Unencumbered Asset Pool Properties; (ii) No Material of Environmental Concern has been Released at the Property to an extent that it may reasonably be expected to have a Material Adverse Effect; (iii) No PCB (in amounts or concentrations which exceed those set by applicable Environmental Laws) is present at any of the Unencumbered Asset Pool Properties; (iv) No friable asbestos is present at any of the Unencumbered Asset Pool Properties; (v) There are no underground storage tanks for Material of Environmental Concern, active or abandoned, at any of the Unencumbered Asset Pool Properties; (vi) No Environmental Claims have been filed with a Governmental Authority with respect to any of the Unencumbered Asset Pool Properties, and none of the Unencumbered Asset Pool Properties is 83 listed or proposed for listing on the National Priority List promulgated pursuant to CERCLA, on CERCLIS or on any similar state list of sites requiring investigation or clean-up; (vii) There are no Liens arising under or pursuant to any Environmental Laws on any of the Unencumbered Asset Pool Properties, and no government actions have been taken or are in process which could subject any of the Unencumbered Asset Pool Properties to such Liens; and (viii) There have been no environmental investigations, studies, audits, tests, reviews or other analyses conducted by, or which are in the possession of, the Borrower in relation to any of the Unencumbered Asset Pool Properties which have not been made available to the Lead Agent. Section IV.8. Taxes. The initial tax year of the Borrower for ----- federal income tax purposes was 1996. The federal income tax returns of the Borrower and its Consolidated Subsidiaries for the fiscal year ended December 31, 1996 have been filed. The Borrower and its Subsidiaries have filed all United States Federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Borrower or any Subsidiary except those being contested in good faith. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Borrower, adequate. Section IV.9. Full Disclosure. All information heretofore furnished --------------- by the Borrower to the Lead Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is true and accurate in all material respects on the date 84 as of which such information is stated or certified. The Borrower has disclosed to the Banks in writing any and all facts known to the Borrower which materially and adversely affect or are likely to materially and adversely affect (to the extent the Borrower can now reasonably foresee), the business, operations or financial condition of the Borrower considered as one enterprise or the ability of the Borrower to perform its obligations under this Agreement or the other Loan Documents. Section IV.10. Solvency. On the Closing Date and after giving effect -------- to the transactions contemplated by the Loan Documents occurring on the Closing Date, the Borrower is Solvent. Section IV.11. Use of Proceeds; Margin Regulations. All proceeds of ----------------------------------- the Loans will be used by the Borrower only in accordance with the provisions hereof. No part of the proceeds of any Loan will be used by the Borrower to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock. Neither the making of any Loan nor the use of the proceeds thereof will violate or be inconsistent with the provisions of Regulations T, U or X of the Federal Reserve Board. Section IV.12. Governmental Approvals. No order, consent, approval, ---------------------- license, authorization, or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required in connection with the execution, delivery and performance of any Loan Document or the consummation of any of the transactions contemplated thereby other than those that have already been duly made or obtained and remain in full force and effect. Section IV.13. Investment Company Act; Public Utility Holding Company ------------------------------------------------------ Act. The Borrower is not (x) an - --- 85 "investment company" or a company "controlled" by an "investment company", ------------------ ---------- ------------------ within the meaning of the Investment Company Act of 1940, as amended, (y) a "holding company" or a "subsidiary company" of a "holding company" or an --------------- ------------------ --------------- "affiliate" of either a "holding company" or a "subsidiary company" within the --------- --------------- ------------------ meaning of the Public Utility Holding Company Act of 1935, as amended, or (z) subject to any other federal or state law or regulation which purports to restrict or regulate its ability to borrow money. Section IV.14. Closing Date Transactions. On the Closing Date and ------------------------- immediately prior to or concurrently with the making of the Loans, the transactions (other than the making of the Loans) intended to be consummated on the Closing Date will have been consummated in accordance with all applicable laws. On or prior to the Closing Date, all consents and approvals of, and filings and registrations with, and all other actions by, any Person required in order to make or consummate such transactions have been obtained, given, filed or taken and are in full force and effect. Section IV.15. Representations and Warranties in Loan Documents. All ------------------------------------------------ representations and warranties made by the Borrower in the Loan Documents are true and correct in all material respects. Section IV.16. Patents, Trademarks, etc. The Borrower has obtained ------------------------- and holds in full force and effect all patents, trademarks, service marks, trade names, copyrights and other such rights, free from burdensome restrictions, which are necessary for the operation of its business as presently conducted, the impairment of which is likely to have a Material Adverse Effect. To the Borrower's knowledge, no material product, process, method, substance, part or other material presently sold by or employed by the Borrower in connection with such business infringes any patent, trademark, service mark, 86 trade name, copyright, license or other such right owned by any other Person. There is not pending or, to the Borrower's knowledge, threatened any claim or litigation against or affecting the Borrower contesting its right to sell or use any such product, process, method, substance, part or other material. Section IV.17. No Default. No Default or Event of Default exists ---------- under or with respect to any Loan Document. The Borrower is not in default in any material respect beyond any applicable grace period under or with respect to any other material agreement, instrument or undertaking to which it is a party or by which it or any of its property is bound in any respect, the existence of which default is likely (to the extent that the Borrower can now reasonably foresee) to result in a Material Adverse Effect. Section IV.18. Licenses, etc. The Borrower has obtained and holds in -------------- full force and effect, all franchises, licenses, permits, certificates, authorizations, qualifications, accreditations, easements, rights of way and other consents and approvals which are necessary for the operation of its businesses as presently conducted, the absence of which is likely (to the extent that the Borrower can now reasonably foresee) to have a Material Adverse Effect. Section IV.19. Compliance With Law. The Borrower is in compliance ------------------- with all laws, rules, regulations, orders, judgments, writs and decrees, including, without limitation, all building and zoning ordinances and codes, the failure to comply with which is likely (to the extent that the Borrower can now reasonably foresee) to have a Material Adverse Effect. Section IV.20. No Burdensome Restrictions. The Borrower is not a -------------------------- party to any agreement or instrument or subject to any other obligation or any charter 87 or corporate or partnership restriction, as the case may be, which, individually or in the aggregate, is likely (to the extent that the Borrower can now reasonably foresee) to have a Material Adverse Effect. Section IV.21. Brokers' Fees. The Borrower has not dealt with any ------------- broker or finder with respect to the transactions contemplated by the Loan Documents (except with respect to the acquisition or disposition of Real Property Assets) or otherwise in connection with this Agreement, and the Borrower has not done any acts, had any negotiations or conversation, or made any agreements or promises which will in any way create or give rise to any obligation or liability for the payment by the Borrower of any brokerage fee, charge, commission or other compensation to any party with respect to the transactions contemplated by the Loan Documents (except with respect to the acquisition or disposition of Real Property Assets), other than the fees payable hereunder. Section IV.22. Labor Matters. Except as set forth on Schedule 4.22 ------------- ------------- attached hereto and made a part hereof, there are no collective bargaining agreements or Multiemployer Plans covering the employees of the Borrower and the Borrower has not suffered any strikes, walkouts, work stoppages or other material labor difficulty within the last five (5) years. Section IV.23. Organizational Documents. The documents delivered ------------------------ pursuant to Section 3.1(e) constitute, as of the Closing Date, all of the organizational documents (together with all amendments and modifications thereof) of the Borrower. The Borrower represents that it has delivered to the Lead Agent true, correct and complete copies of each of the documents set forth in this Section 4.23. Section IV.24. Principal Offices. The principal office, chief ----------------- executive office and principal 88 place of business of the Borrower is 2250 East Imperial Highway, Suite 1200, El Segundo, California 90245. Section IV.25. REIT Status. For the fiscal year ended December 31, ----------- 1999, the General Partner will qualify, and the General Partner intends to continue to qualify as a real estate investment trust under the Code. Section IV.26. Ownership of Property. The Borrower owns fee simple --------------------- title to or a ground leasehold interest in each of the Unencumbered Asset Pool Properties. Section IV.27. Insurance. The Borrower currently maintains insurance --------- at 100% replacement cost insurance coverage in respect of each of the Real Property Assets, as well as comprehensive general liability insurance (including "builders' risk") against claims for personal, and bodily injury and/or death, to one or more persons, or property damage, as well as workers' compensation insurance, in each case with respect to the Real Property Assets with insurers having an A.M. Best policyholders' rating of not less than A-VIII in amounts that prudent owner of assets such as the Real Property Assets would maintain. Section IV.28. Year 2000 Compliance. The Borrower has conducted a -------------------- comprehensive review and assessment of its computer applications and has made such inquiry as it determined to be advisable of its key suppliers, vendors and customers or prospects with respect to the "year 2000 problem" (i.e., the risk ---- that computer applications may not be able to properly perform date-sensitive functions after December 31, 1999) and, based on that review and inquiry, Borrower believes that the year 2000 problem will not result in a Material Adverse Effect. 89 ARTICLE V AFFIRMATIVE AND NEGATIVE COVENANTS The Borrower covenants and agrees that, so long as any Bank has any Commitment hereunder or any Obligations remain unpaid: Section V.1. Information. The Borrower will deliver to the Lead ----------- Agent and to each of the Banks: (a) as soon as available and in any event within 105 days after the end of each fiscal year of the Borrower, an audited consolidated balance sheet of the Borrower as of the end of such fiscal year and the related consolidated statements of cash flow and operations for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, audited by Delloite & Touche or other independent public accountants of similar standing; (b) as soon as available and in any event within sixty (60) days after the end of each quarter of each fiscal year (other than the last quarter in any fiscal year) of the Borrower, a statement of the Borrower, prepared in accordance with GAAP, setting forth the operating income and operating expenses of the Borrower, in sufficient detail so as to calculate Unencumbered Asset Pool Net Operating Cash Flow of the Borrower for the immediately preceding quarter; (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of the chief financial officer or the chief accounting officer of the Borrower (i) setting forth in reasonable detail the calculations required to establish whether the Borrower was in compliance with the requirements of Section 5.8 on the date 90 of such financial statements;(ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; and (iii) certifying (x) that such financial statements fairly present the financial condition and the results of operations of the Borrower as of the dates and for the periods indicated, in accordance with GAAP, subject, in the case of interim financial statements, to normal year-end adjustments, and (y) that such officer has reviewed the terms of the Loan Documents and has made, or caused to be made under his or her supervision, a review in reasonable detail of the business and condition of the Borrower during the period beginning on the date through which the last such review was made pursuant to this Section 5.1(c) and ending on a date not more than ten (10) Domestic Business Days prior to the date of such delivery and that on the basis of such review of the Loan Documents and the business and condition of the Borrower, to the best knowledge of such officer, no Default or Event of Default under any other provision of Section 6.1 occurred or, if any such Default or Event of Default has occurred, specifying the nature and extent thereof and, if continuing, the action the Borrower proposes to take in respect thereof; (d) simultaneously with the delivery of each set of financial statements referred to in clause (a) above, a statement of a firm of independent public accountants confirming the calculations set forth in the officer's certificate delivered simultaneously therewith pursuant to clause (c) above; (e) (i) within five (5) days after the president, chief financial officer, treasurer, controller or other executive officer of the Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer or the 91 president of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (ii) promptly and in any event within ten (10) days after the Borrower obtains knowledge thereof, notice of (x) any litigation or governmental proceeding pending or threatened against the Borrower which is likely to individually or in the aggregate, result in a Material Adverse Effect, and (y) any other event, act or condition which is likely to result in a Material Adverse Effect; (f) if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or could re- 92 sult in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth details as to such occurrence and action, if any, which the Borrower or applicable member of the ERISA Group is required or proposes to take; (g) promptly and in any event within five (5) Domestic Business Days after the Borrower obtains actual knowledge of any of the following events, a certificate of the Borrower executed by an officer of the Borrower specifying the nature of such condition and the Borrower's, and if the Borrower has actual knowledge thereof, the Environmental Affiliate's proposed initial response thereto: (i) the receipt by the Borrower, or, if the Borrower has actual knowledge thereof, any of the Environmental Affiliates, of any communication (written or oral), whether from a governmental authority, citizens group, employee or otherwise, that alleges that the Borrower, or, if the Borrower has actual knowledge thereof, any of the Environmental Affiliates, is not in compliance with applicable Environmental Laws, and such noncompliance is likely to have a Material Adverse Effect, (ii) the Borrower shall obtain actual knowledge that there exists any Environmental Claim which is likely to have a Material Adverse Effect pending or threatened against the Borrower or any Environmental Affiliate or (iii) the Borrower obtains actual knowledge of any release, emission, discharge or disposal of any Material of Environmental Concern that is likely to form the basis of any Environmental Claim against the Borrower or any Environmental Affiliate; (h) promptly and in any event within five (5) Domestic Business Days after receipt of any material notices or correspondence from any company or agent for any company providing insurance coverage to the Borrower relating to any material loss or loss of the Borrower 93 with respect to any of the Unencumbered Asset Pool Properties, copies of such notices and correspondence; and (i) promptly upon the mailing thereof to the shareholders or partners of the Borrower, copies of all financial statements, reports and proxy statement so mailed; (j) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Borrower shall have filed with the Securities and Exchange Commission; (k) simultaneously with delivery of the information required by Sections 5.1(a) and (b), a statement of Unencumbered Asset Pool Net Operating Cash Flow with respect to each Mortgaged Property and a list of all Unencumbered Asset Pool Properties; and (l) from time to time such additional information regarding the financial position or business of the Borrower as the Lead Agent, at the request of any Bank, may reasonably request. Section V.2. Payment of Obligations. The Borrower will pay and ---------------------- discharge, at or before maturity, all its material obligations and liabilities including, without limitation, any obligation pursuant to any agreement by which it or any of its properties is bound and any tax liabilities, in any case, where failure to do so will likely result in a Material Adverse Effect except (i) such tax liabilities may be contested in good faith by appropriate proceedings, and will maintain in accordance with GAAP, appropriate reserves for the accrual of any of the same; or (ii) such obligation or liability as may be contested in good faith by appropriate proceedings. 94 Section V.3. Maintenance of Property; Insurance. ---------------------------------- (a) The Borrower will keep each of the Unencumbered Asset Pool Properties in good repair, working order and condition, subject to ordinary wear and tear. (b) The Borrower shall (a) maintain insurance as specified in Section 4.27 hereof with insurers meeting the qualifications described therein, which insurance shall in any event not provide for materially less coverage than the insurance in effect on the Closing Date, and (b) furnish to each Bank from time to time, upon written request, copies of the policies under which such insurance is issued, certificates of insurance and such other information relating to such insurance as such Bank may reasonably request. The Borrower will deliver to the Banks (i) upon request of any Bank through the Lead Agent from time to time, full information as to the insurance carried, (ii) within five (5) days of receipt of notice from any insurer, a copy of any notice of cancellation or material change in coverage from that existing on the date of this Agreement and (iii) forthwith, notice of any cancellation or nonrenewal of coverage by the Borrower. Section V.4. Conduct of Business. The Borrower's primary business ------------------- will continue to be acquiring, owning, operating, managing, developing (to the extent permitted in this Agreement), and leasing office and industrial properties. Section V.5. Compliance with Laws. The Borrower will comply in all -------------------- material respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, Environmental Laws, all zoning and building codes and ERISA and the rules and regulations thereunder) except where the necessity of compliance 95 therewith is contested in good faith by appropriate proceedings. Section V.6. Inspection of Property, Books and Records. The Borrower ----------------------------------------- will keep proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities; and will permit representatives of any Bank at such Bank's expense to visit and inspect any of its properties to examine and make abstracts from any of its books and records and to discuss its affairs, finances and accounts with its officers and employees, all at such reasonable times, upon reasonable notice, and as often as may reasonably be desired. Section V.7. Existence. --------- (a) The Borrower shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence or its partnership existence, as applicable. (b) The Borrower shall do or cause to be done all things necessary to preserve and keep in full force and effect its patents, trademarks, servicemarks, tradenames, copyrights, franchises, licenses, permits, certificates, authorizations, qualifications, accreditations, easements, rights of way and other rights, consents and approvals the nonexistence of which is likely to have a Material Adverse Effect. Section V.8. Financial Covenants. ------------------- (a) Total Liabilities to Total Asset Value. As of the last day of -------------------------------------- each calendar quarter, the Total Debt Ratio will not be greater than 55%. 96 (b) EBITDA Debt Service Coverage. As of the last day of each calendar ---------------------------- quarter, the ratio of (i) Annual EBITDA to (ii) Total Debt Service, will not be less than 2.0:1.0. (c) Fixed Charge Coverage. As of the last day of each calendar --------------------- quarter, the ratio of (x) Annual EBITDA, less reserves for Capital Expenditures of $.70 per square foot per annum for each Real Property Asset that is an office property and $.40 per square foot per annum for each Real Property Asset that is an industrial property to (y) the sum of (i) Total Debt Service, and (ii) dividends or other payments payable by the General Partner with respect to any preferred stock issued by the General Partner and distributions or other payments payable by the Borrower with respect to any preferred partnership units of the Borrower, will not be less than 1.5:1.0. (d) Limitation on Secured Debt. Secured Debt of the Borrower, the -------------------------- General Partner and their Consolidated Subsidiaries shall at no time exceed thirty-five percent (35%) of Total Asset Value. (e) Unsecured Debt Ratio. As of each of (x) the last day of each -------------------- calendar quarter, and (y) any Borrowing, the Unsecured Debt Ratio shall exceed 2.0:1.0. (f) Unencumbered Asset Pool Debt Service Coverage. As of the last day --------------------------------------------- of each calendar quarter and as of the date of any sale or secured financing of any Unencumbered Asset Pool Property, the ratio of (i) Unencumbered Asset Pool Net Operating Cash Flow to (ii) Pro-Forma Debt Service will not be less than 2.0:1.0. (g) Dividends. The Borrower will not, as determined on an aggregate --------- annual basis, pay any partnership distributions in excess of the greater of (i) 95% of its consolidated FFO for such year, and (ii) an 97 amount which results in distributions to the General Partner in an amount sufficient to permit the General Partner to pay dividends to its shareholders which it reasonably believes are necessary for it to (A) maintain its qualification as a real estate investment trust for federal and state income tax purposes, and (B) avoid the payment of federal or state income or excise tax. During the continuance of an Event of Default under Section 6.1(a), the Borrower shall make only those partnership distributions necessary to make distributions to the General Partner to pay dividends to its shareholders which it reasonably believes are necessary to maintain its status as a real estate investment trust for federal and state income tax purposes. (h) Minimum Consolidated Tangible Net Worth. The Consolidated --------------------------------------- Tangible Net Worth will at no time be less than the sum of (i) $575,000,000 plus (ii) 90% of all Net Offering Proceeds. (i) Debt. Prior to the date on which the Borrower receives an ---- Investment Grade Rating from either S&P or Moody's, neither the Borrower nor the General Partner shall, at any time, create, incur, assume, guaranty, suffer to exist or otherwise become or remain directly or indirectly liable with respect to any Debt other than Non-Recourse Debt. Notwithstanding the provisions of the sentence immediately foregoing, the Borrower shall have the right to incur Recourse Debt (A) up to an aggregate maximum of $5,000,000 which is either (i) unsecured or (ii) incurred with respect to assets which are not Unencumbered Asset Pool Properties and is subject to a purchase money security interest or security interest under a conditional sale agreement, and (B) up to an aggregate maximum of $50,000,000, which is secured and which is incurred in connection with the financing of construction costs. 98 Section V.9. Restriction on Fundamental Changes; Operation and ------------------------------------------------- Control. (a) The Borrower shall not enter into any merger or consolidation, - ------- unless the Borrower is the surviving entity, or liquidate, wind-up or dissolve (or suffer any liquidation or dissolution), discontinue its business or convey, lease, sell, transfer or otherwise dispose of, in one transaction or series of transactions, any substantial part of its business or property, whether now or hereafter acquired, hold an interest in any subsidiary which is not controlled by the Borrower or the General Partner or enter into other business lines, without the prior written consent of the Lead Agent, which consent shall not be given unless the Required Banks so consent. (b) The Borrower shall not amend its articles of incorporation, by- laws or agreement of limited partnership, as applicable, in any material respect which is reasonably likely to have an adverse effect on the Banks, without the Lead Agent's consent, which shall not be unreasonably withheld or delayed. Section V.10. Changes in Business. The Borrower shall not enter into ------------------- any business which is substantially different from that conducted by the Borrower on the Closing Date after giving effect to the transactions contemplated by the Loan Documents. Section V.11. Sale of Unencumbered Asset Pool Properties. Prior to ------------------------------------------ the sale or transfer of any Unencumbered Asset Pool Property, the Borrower shall (i) deliver prior written notice to the Lead Agent, (ii) deliver to the Lead Agent a certificate from its chief financial officer or chief accounting officer certifying that at the time of such sale or other disposal (based on pro-forma calculations for the previous period assuming that such Unencumbered Asset Pool Property was not a Unencumbered Asset Pool Property for the relevant period) all of the covenants contained in Sections 5.8, 99 5.14, 5.16, 5.17 and 5.20 are and after giving effect to the transaction shall continue to be true and accurate in all respects, and (iii) pay to the Lead Agent an amount equal to that required pursuant to Section 2.10(a). In the event that a Separate Parcel that originally formed a part of a Unencumbered Asset Pool Property is to be sold or transferred, the value of the remaining portion of the Unencumbered Asset Pool Property will be determined by Lead Agent at the time of sale or transfer in its sole discretion. Section V.12. Fiscal Year; Fiscal Quarter. The Borrower shall not --------------------------- change its fiscal year or any of its fiscal quarters without the Lead Agent's consent, which shall not be unreasonably withheld or delayed. Section V.13. Margin Stock. None of the proceeds of the Loan will be ------------ used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any Margin Stock. Section V.14. Development Activities. The Borrower shall not engage ---------------------- in any development activities except for development in connection with the expansion and/or repositioning or restoration following a casualty or condemnation of existing improvements on Real Property Assets. Notwithstanding the foregoing, the Borrower may engage in all other development activities where there is construction completion risk provided that in no event shall the value (determined in accordance with the book value thereof, in accordance with GAAP) of the Real Property Assets under such other type of development exceed twenty percent (20%) of the Borrower's Total Asset Value. Section V.15. Interest Rate Protection. On or before the date that ------------------------ is the six (6) month anniversary of the date hereof, the Borrower and the General Partner shall maintain Interest Rate Hedges on a notional amount 100 of the Debt under clause (A) of the definition of Debt of the Borrower, the General Partner and their Subsidiaries which, when added to the aggregate principal amount of the Debt under clause (A) of the definition of Debt of the Borrower, the General Partner and their Subsidiaries which bears interest at a fixed rate, equals or exceeds 50% of the aggregate principal amount of all Debt under clause (A) of the definition of Debt of the Borrower, the General Partner and their Subsidiaries. "Interest Rate Hedges" shall mean interest rate -------------------- exchange, collar, cap, swap, adjustable strike cap, adjustable strike corridor or similar agreements having terms, conditions and tenors reasonably acceptable to the Lead Agent entered into by the Borrower, the General Partner and/or their Subsidiaries in order to provide protection to, or minimize the impact upon, the Borrower, the General Partner and/or their Subsidiaries of increasing floating rates of interest applicable to Debt under clause (A) of the definition of Debt. Section V.16. Joint Ventures. The value of the Borrower's and the -------------- General Partner's interest in any joint venture, whether consolidated or unconsolidated, shall at no time exceed 15% of Total Asset Value. Section V.17. Investments in Unimproved Real Property. The aggregate --------------------------------------- amount of the investments of the Borrower, the General Partner and their Consolidated Subsidiaries in unimproved real property will at no time exceed 7.5% of Total Asset Value. Section V.18. Use of Proceeds. The Borrower shall use the proceeds --------------- of the Loans solely to finance the acquisition of additional Unencumbered Asset Pool Properties or other Real Property Assets which are industrial or office properties and for its general business purposes. 101 Section V.19. General Partner Status. The General Partner shall at ---------------------- all times (i) maintain its status as a self-directed and self-administered real estate investment trust under the Internal Revenue Code, and (ii) remain a publicly traded company listed on the New York Stock Exchange. Section V.20. Certain Requirements for the Unencumbered Asset Pool. ---------------------------------------------------- (a) At all times, (i) the Real Property Assets in the Unencumbered Asset Pool shall be on average during any consecutive twelve-month period (tested quarterly) at least 85% leased to tenants and (ii) any Real Property Asset that is a part of the Unencumbered Asset Pool less than 85% leased to tenants for more than twelve months shall not account for more than ten percent (10%) of the Unencumbered Asset Pool Properties Value. (b) Any Subsidiary which owns any of the Real Property Assets in the Unencumbered Asset Pool shall not at any time incur any Debt, nor shall the Borrower pledge its interest in such Subsidiary nor shall the Borrower or such Subsidiary enter into any negative pledge with respect thereto. ARTICLE VI DEFAULTS Section VI.1. Events of Default. Each of the following shall ----------------- constitute an event of default under this Agreement (an "Event of Default"): ---------------- (a) the Borrower shall fail to pay when due any principal of any Loan, or the Borrower shall fail to pay when due any interest on any Loan; provided, -------- however, that the Borrower shall be entitled to a three (3) Domestic Business - ------- Day grace period with respect thereto 102 but only as to two (2) payments of interest during the Term, or the Borrower shall fail to pay within three (3) Domestic Business Days after the same is due any fees or other amounts payable hereunder; (b) the Borrower shall fail to observe or perform any covenant contained in Sections 5.8 to 5.20, inclusive, subject to any applicable grace periods set forth therein; (c) the Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a) or (b) above) for 30 days after written notice thereof has been given to the Borrower by the Lead Agent; (d) any representation, warranty, certification or statement made by the Borrower in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); (e) the Borrower or the General Partner shall default in the payment when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) of any amount owing in respect of any Recourse Debt or Debt guaranteed by the Borrower or the General Partner (other than the Obligations) in an aggregate principal amount of more than $1,000,000 and such default shall continue beyond the giving of any required notice and the expiration of any applicable grace period (as the same may be extended by the applicable lender) and such default shall not be waived by the applicable lender (which waiver shall serve to reinstate the applicable loan), or the Borrower or the General Partner shall default in the performance or observance of any obligation or condition with respect to any such Debt or any other event shall occur or condition 103 exist beyond the giving of any required notice and the expiration of any applicable grace period (as the same may be extended by the applicable lender), if in any such case as a result of such default, event or condition, the lender thereof shall accelerate the maturity of any such Debt or to permit (without any further requirement of notice or lapse of time) the holder or holders thereof, or any trustee or agent for such holders, to accelerate the maturity of any such Debt and such default shall not be waived by the applicable lender (which waiver shall serve to reinstate the applicable loan), or any such Debt shall become or be declared to be due and payable prior to its stated maturity other than as a result of a regularly scheduled payment; (f) the Borrower or the General Partner shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (g) an involuntary case or other proceeding shall be commenced against the Borrower or the General Partner seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official 104 of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or the General Partner under the federal bankruptcy laws as now or hereafter in effect; (h) the Borrower shall default in its obligations under any Loan Document other than this Agreement beyond any applicable notice and grace periods; (i) the General Partner shall default in its obligations under the Guaranty beyond any applicable notice and grace periods; (j) any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $1,000,000 which it shall have become liable to pay under Title IV of ERISA, or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing, or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Material Plan, or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated, or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation in excess of $1,000,000; (k) one or more final nonappealable judgments or decrees in an aggregate amount of $10,000,000 as of such date shall be entered by a court or courts of com- 105 petent jurisdiction against the Borrower or the General Partner (other than any judgment as to which, and only to the extent, a reputable insurance company has acknowledged coverage of such claim in writing) and (i) any such judgments or decrees shall not be stayed, discharged, paid, bonded or vacated within thirty (30) days (or bonded, vacated or satisfied within thirty (30) after any stay is lifted) or (ii) enforcement proceedings shall be commenced by any creditor on any such judgments or decrees; (l) (i) any Environmental Claim shall have been asserted against the Borrower or any Environmental Affiliate, (ii) any release, emission, discharge or disposal of any Material of Environmental Concern shall have occurred, and such event is reasonably likely to form the basis of an Environmental Claim against the Borrower or any Environmental Affiliate, or (iii) the Borrower or the Environmental Affiliates shall have failed to obtain any Environmental Approval necessary for the ownership, or operation of its business, property or assets or any such Environmental Approval shall be revoked, terminated, or otherwise cease to be in full force and effect, in the case of clauses (i), (ii) or (iii) above, if the existence of such condition has had or is reasonably likely to have a Material Adverse Effect; (m) during any consecutive two year period commencing on or after the date hereof, individuals who at the beginning of such period constituted the Board of Directors of the General Partner of the Borrower (together with any new directors whose election by the Board of Directors or whose nomination for election by the General Partner stockholders was approved by a vote of at least a majority of the members of the Board of Directors then in the office who either were members of the Board of Directors at the beginning of such period or whose election or nomination for election was previ- 106 ously so approved) cease for any reason to constitute a majority of the members of the Board of Directors then in office; (n) the General Partner shall cease at any time to qualify as a real estate investment trust under the Internal Revenue Code; and (o) at any time, for any reason, the Borrower or the General Partner seeks to repudiate its obligations under any Loan Document. Section VI.2. Rights and Remedies. (a) Upon the occurrence of any ------------------- Event of Default described in Sections 6.1(f) or (g), the unpaid principal amount of, and any and all accrued interest on, the Loans and any and all accrued fees and other Obligations hereunder shall automatically become immediately due and payable, with all additional interest from time to time accrued thereon and without presentation, demand, or protest or other requirements of any kind (including, without limitation, valuation and appraisement, diligence, presentment, notice of intent to demand or accelerate and notice of acceleration), all of which are hereby expressly waived by the Borrower; and upon the occurrence and during the continuance of any other Event of Default, the Lead Agent may exercise any of its rights and remedies hereunder and by written notice to the Borrower, declare the unpaid principal amount of and any and all accrued and unpaid interest on the Loans and any and all accrued fees and other Obligations hereunder to be, and the same shall thereupon be, immediately due and payable with all additional interest from time to time accrued thereon and without presentation, demand, or protest or other requirements of any kind other than as provided in the Loan Documents (including, without limitation, valuation and appraisement, diligence, presentment, and notice of intent to demand or accelerate), all of which are hereby expressly waived by the Borrower. 107 (b) Notwithstanding the foregoing, upon the occurrence and during the continuance of any Event of Default other than any Event of Default described in Sections 6.1(f) or (g), the Lead Agent shall not exercise any of its rights and remedies hereunder nor declare the unpaid principal amount of and any and all accrued and unpaid interest on the Loans and any and all accrued fees and other Obligations hereunder to be immediately due and payable, until such time as the Lead Agent shall have delivered a notice to the Banks specifying the Event of Default which has occurred and whether Lead Agent recommends the acceleration of the Obligations due hereunder or the exercise of other remedies hereunder. The Banks shall notify the Lead Agent if they approve or disapprove of the acceleration of the Obligations due hereunder or the exercise of such other remedy recommended by Lead Agent within five (5) Domestic Business Days after receipt of such notice. If any Bank shall not respond within such five (5) Domestic Business Day period, then such Bank shall be deemed to have accepted Lead Agent's recommendation for acceleration of the Obligations due hereunder or the exercise of such other remedy. If the Required Banks shall approve the acceleration of the Obligations due hereunder or the exercise of such other remedy, then Lead Agent shall declare the unpaid principal amount of and any and all accrued and unpaid interest on the Loans and any and all accrued fees and other Obligations hereunder to be immediately due and payable or exercise such other remedy approved by the Required Banks. If the Required Banks shall neither approve nor disapprove the acceleration of the Obligations due hereunder or such other remedy recommended by Lead Agent, then Lead Agent may accelerate the Obligations due hereunder or exercise any of its rights and remedies hereunder in its sole discretion. If the Required Banks shall disapprove the acceleration of the Obligations due hereunder or the exercise of such other remedy recommended by Lead Agent, but approve of another remedy, then to the extent permitted hereunder, 108 Lead Agent shall exercise such remedy. In the event the Lead Agent exercises any remedy provided in any of the Loan Documents, the Lead Agent shall act as a collateral agent for the Banks. Section VI.3. Notice of Default. If the Lead Agent shall not already ----------------- have given any notice to the Borrower under Section 6.1, the Lead Agent shall give notice to the Borrower under Section 6.1 promptly upon being requested to do so by the Required Banks and shall thereupon notify all the Banks thereof. Section VI.4. Actions in Respect of Letters of Credit. (a) If, at --------------------------------------- any time and from time to time, any Letter of Credit shall have been issued hereunder and an Event of Default shall have occurred and be continuing, then, upon the occurrence and during the continuation thereof, the Lead Agent may, whether in addition to the taking by the Lead Agent of any of the actions described in this Article or otherwise, make a demand upon the Borrower to, and forthwith upon such demand (but in any event within ten (10) days after such demand) the Borrower shall, pay to the Lead Agent, on behalf of the Banks, in same day funds at the Lead Agent's office designated in such demand, for deposit in a special cash collateral account (the "Letter of Credit Collateral Account") ----------------------------------- to be maintained in the name of the Lead Agent (on behalf of the Banks) and under its sole dominion and control at such place as shall be designated by the Lead Agent, an amount equal to the amount of the Letter of Credit Usage under the Letters of Credit. Interest shall accrue on the Letter of Credit Collateral Account at a rate equal to the rate on overnight funds. (b) The Borrower hereby pledges, assigns and grants to the Lead Agent, as administrative agent for its benefit and the ratable benefit of the Banks a lien 109 on and a security interest in, the following collateral (the "Letter of --------- Credit Collateral"): - ----------------- (i) the Letter of Credit Collateral Account, all cash deposited therein and all certificates and instruments, if any, from time to time representing or evidencing the Letter of Credit Collateral Account; (ii) all notes, certificates of deposit and other instruments from time to time hereafter delivered to or otherwise possessed by the Lead Agent for or on behalf of the Borrower in substitution for or in respect of any or all of the then existing Letter of Credit Collateral; (iii) all interest, dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the then existing Letter of Credit Collateral; and (iv) to the extent not covered by the above clauses, all proceeds of any or all of the foregoing Letter of Credit Collateral. The lien and security interest granted hereby secures the payment of all obligations of the Borrower now or hereafter existing hereunder and under any other Loan Document. (c) The Borrower hereby authorizes the Lead Agent for the ratable benefit of the Banks to apply, from time to time after funds are deposited in the Letter of Credit Collateral Account, funds then held in the Letter of Credit Collateral Account to the payment of any amounts, in such order as the Lead Agent may elect, as shall have become due and payable by the Borrower to the Banks in respect of the Letters of Credit. 110 (d) Neither the Borrower nor any Person claiming or acting on behalf of or through the Borrower shall have any right to withdraw any of the funds held in the Letter of Credit Collateral Account, except as provided in Section 6.4(h) hereof. (e) The Borrower agrees that it will not (i) sell or otherwise dispose of any interest in the Letter of Credit Collateral or (ii) create or permit to exist any lien, security interest or other charge or encumbrance upon or with respect to any of the Letter of Credit Collateral, except for the security interest created by this Section 6.4. (f) If any Event of Default shall have occurred and be continuing: (i) The Lead Agent may, in its sole discretion, without notice to the Borrower except as required by law and at any time from time to time, charge, set off or otherwise apply all or any part of first, (x) ----- amounts previously drawn on any Letter of Credit that have not been reimbursed by the Borrower and (y) any Letter of Credit Usage described in clause (ii) of the definition thereof that are then due and payable and second, any other unpaid Obligations then due and payable against the ------ Letter of Credit Collateral Account or any part thereof, in such order as the Lead Agent shall elect. The rights of the Lead Agent under this Section 6.4 are in addition to any rights and remedies which any Bank may have. (ii) The Lead Agent may also exercise, in its sole discretion, in respect of the Letter of Credit Collateral Account, in addition to the other rights and remedies provided herein or otherwise available to it, all the rights and remedies of a 111 secured party upon default under the Uniform Commercial Code in effect in the State of New York at that time. (g) The Lead Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Letter of Credit Collateral if the Letter of Credit Collateral is accorded treatment substantially equal to that which the Lead Agent accords its own property, it being understood that, assuming such treatment, the Lead Agent shall not have any responsibility or liability with respect thereto. (h) At such time as all Events of Default have been cured or waived in writing, all amounts remaining in the Letter of Credit Collateral Account shall be promptly returned to the Borrower. Absent such cure or written waiver, any surplus of the funds held in the Letter of Credit Collateral Account and remaining after payment in full of all of the Obligations of the Borrower hereunder and under any other Loan Document after the Maturity Date shall be paid to the Borrower or to whomsoever may be lawfully entitled to receive such surplus. ARTICLE VII THE LEAD AGENT Section VII.1. Appointment and Authorization. Each Bank irrevocably ----------------------------- appoints and authorizes the Lead Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Loan Documents as are delegated to the Lead Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. 112 Section VII.2. Lead Agent and Affiliates. Morgan shall have the same ------------------------- rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Lead Agent, and Morgan and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any subsidiary or affiliate of the Borrower as if it were not the Lead Agent hereunder, and the term "Bank" and "Banks" shall include Morgan in its individual capacity. Section VII.3. Action by Lead Agent. The obligations of the Lead -------------------- Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Lead Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article VI. Section VII.4. Consultation with Experts. The Lead Agent may consult ------------------------- with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. Section VII.5. Liability of Lead Agent. Neither the Lead Agent nor ----------------------- any of its affiliates nor any of their respective directors, officers, agents or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or, where required by the terms of this Agreement, all of the Banks, or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Lead Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any 113 borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of the Borrower; (iii) the satisfaction of any condition specified in Article III, except receipt of items required to be delivered to the Lead Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, the other Loan Documents or any other instrument or writing furnished in connection herewith. The Lead Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex or similar writing) believed by it in good faith to be genuine or to be signed by the proper party or parties. Section VII.6. Indemnification. Each Bank shall, ratably in --------------- accordance with its Commitment, indemnify the Lead Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct) that such indemnitees may suffer or incur as a result of, or in connection with, the Lead Agent's capacity as Lead Agent in connection with this Agreement, the other Loan Documents or any action taken or omitted by such indemnitees in accordance with this Agreement. Section VII.7. Credit Decision. Each Bank acknowledges that it has, --------------- independently and without reliance upon the Lead Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Lead Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. 114 Section VII.8. Successor Lead Agent. The Lead Agent may resign at -------------------- any time by giving notice thereof to the Banks and the Borrower. In addition, if the Lead Agent at any time shall have been finally determined to have committed gross negligence or willful misconduct in connection with its performance of its duties as Lead Agent hereunder, then, upon notice from the Required Banks, the Lead Agent shall resign. Upon any such resignation, the Required Banks shall have the right to appoint a successor Lead Agent with the consent of the Borrower provided that no Event of Default shall have occurred and be continuing. If no successor Lead Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 days after the retiring Lead Agent gives notice of resignation, then the retiring Lead Agent may, on behalf of the Banks, appoint a successor Lead Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $50,000,000. Upon the acceptance of its appointment as the Lead Agent hereunder by a successor Lead Agent, such successor Lead Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Lead Agent, and the retiring Lead Agent shall be discharged from its duties and obligations hereunder first accruing or arising after the effective date of such retirement. After any retiring Lead Agent's resignation hereunder as Lead Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Lead Agent. If, at any time during the Term, the Lead Agent shall no longer have any Commitment under this Agreement, the Lead Agent shall give notice of its offer to resign to the Banks and the Borrower. Upon any such offer of resignation, the Required Banks shall have the 115 right to appoint a successor Lead Agent or to retain the Lead Agent with the consent of the Borrower, provided that no Event of Default shall be outstanding. Section VII.9. Lead Agent's Fee. The Borrower shall pay to the Lead ---------------- Agent for its own account fees in the amounts and at the times previously agreed upon between the Borrower and the Lead Agent. Section VII.10. Copies of Notices. Lead Agent shall deliver to each ----------------- Bank a copy of any notice sent to the Borrower by Lead Agent in connection with the performance of its duties as Lead Agent hereunder; and Lead Agent shall deliver to each Bank a copy of any notice sent to the Lead Agent by the Borrower in connection with any Default or Event of Default hereunder. ARTICLE VIII CHANGE IN CIRCUMSTANCES Section VIII.1. Basis for Determining Interest Rate Inadequate or ------------------------------------------------- Unfair. If on or prior to the first day of any Interest Period for any Euro- - ------ Dollar Borrowing or Money Market Borrowing: (a) the Lead Agent is advised by the Reference Bank that deposits in dollars (in the applicable amounts) are not being offered to the Reference Bank in the relevant market for such Interest Period, or (b) Banks having 50% or more of the aggregate amount of the affected Loans advise the Lead Agent that the Adjusted London Interbank Offered Rate as determined by the Lead Agent will not adequately and fairly reflect the cost to such Banks of funding their Euro-Dollar Loans for such Interest Period, the Lead Agent shall 116 forthwith give notice thereof to the Borrower and the Banks, whereupon until the Lead Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, the obligations of the Banks to make Euro-Dollar Loans, or to continue or convert outstanding Loans as or into Euro-Dollar Loans, as the case may be, shall be suspended, and each outstanding Euro-Dollar Loan shall be converted into a Base Rate Loan on the last day of the then current Interest Period applicable thereto. Unless the Borrower notifies the Lead Agent at least two Domestic Business Days before the date of any Euro-Dollar Borrowing or Money Market LIBOR Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, (i) if such Borrowing is a Committed Borrowing, such Borrowing shall instead be made as a Base Rate Borrowing, and (ii) if such Borrowing is a Money Market LIBOR Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear interest for each day from and including the first day to but excluding the last day of the Interest Period applicable thereto at the Base Rate for such day. Section VIII.2. Illegality. If, after the date of this Agreement, ---------- the adoption of any applicable law, rule or regulation, or any change in any existing applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro- Dollar Loans or Money Market Loans or to participate in any Letter of Credit issued by the Fronting Bank, or, with respect to the Fronting Bank, to issue any Letter of Credit, and 117 such Bank shall so notify the Lead Agent, the Lead Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Lead Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make or convert Euro-Dollar Loans or Money Market Loans, or to participate in any Letter of Credit issued by the Fronting Bank or, with respect to the Fronting Bank, to issue any Letter of Credit, shall be suspended. Before giving any notice to the Lead Agent pursuant to this Section, such Bank shall designate a different Euro- Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such Bank shall determine that it may not lawfully continue to maintain and fund any of its outstanding Euro-Dollar Loans or Money Market Loans (as the case may be) to maturity and shall so specify in such notice, the Borrower shall immediately prepay in full the then outstanding principal amount of each such Euro-Dollar Loan or Money Market Loan, together with accrued interest thereon. Concurrently with prepaying each such Euro-Dollar Loan, the Borrower shall borrow a Base Rate Loan in an equal principal amount from such Bank (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans or Money Market Loans of the other Banks), and such Bank shall make such a Base Rate Loan. Section VIII.3. Increased Cost and Reduced Return. --------------------------------- (a) If, after (x) the date hereof, in the case of any Committed Loan or any obligation to make Committed Loans or (y) the date of the related Money Market Quote, in the case of any Money Market Loan, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or 118 any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System (but excluding with respect to any Euro-Dollar Loan any such requirement reflected in an applicable Euro-Dollar Reserve Percentage)), special deposit, insurance assessment or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the London interbank market any other condition affecting its Euro-Dollar Loans or Money Market LIBOR Loans, its Note, or its obligation to make Euro-Dollar Loans, and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Euro-Dollar Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Lead Agent), which demand shall be accompanied by a certificate showing, in reasonable detail, the calculation of such amount or amounts, the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any 119 change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Lead Agent), which demand shall be accompanied by a certificate showing, in reasonable detail, the calculation of such amount or amounts, the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction. (c) Each Bank will promptly notify the Borrower and the Lead Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. Section VIII.4. Taxes. ----- 120 (a) Any and all payments by the Borrower to or for the account of any Bank or the Lead Agent hereunder or under any other Loan Document shall be made free and clear of and without deduction for any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Bank and the --------- Lead Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Bank or the Lead Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Bank, taxes imposed on its income, and franchise or similar taxes imposed on it, by the jurisdiction of such Bank's Applicable Lending Office or any political subdivision thereof (and, if different from the jurisdiction of such Bank's Applicable Lending Office, the jurisdiction of the domicile of its Loans either established by the Bank pursuant to Section 9.12 or determined by the applicable taxing authorities)(all such non-excluded taxes, duties, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any ----- Taxes from or in respect of any sum payable hereunder or under any Note or Letter of Credit or participation therein to any Bank or the Lead Agent, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.4) such Bank, the Fronting Bank or the Lead Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Borrower shall furnish to the Lead Agent, at its address referred to in Section 9.1, the original or a certified copy of a receipt evidencing payment thereof. 121 (b) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes and any other excise or property taxes, or charges or similar levies which arise from any payment made hereunder or under any Note or Letter of Credit or participation therein or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note or Letter of Credit or participation therein (hereinafter referred to as "Other Taxes"). ----------- (c) The Borrower agrees to indemnify each Bank, the Fronting Bank and the Lead Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 8.4) paid by such Bank, the Fronting Bank or the Lead Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. Any payment required under this indemnification shall be made within 15 days from the date such Bank, the Fronting Bank or the Lead Agent (as the case may be) makes demand therefor. (d) Each Bank organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Bank listed on the signature pages hereof and on or prior to the date on which it becomes a Bank in the case of each other Bank, and from time to time thereafter if requested in writing by the Borrower (but only so long as such Bank remains lawfully able to do so), shall provide the Borrower with Internal Revenue Service form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which reduces the rate of withholding tax on payments of interest or certifying that the income receiv- 122 able pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States. If the form provided by a Bank at the time such Bank first became a party to this Agreement or at any time thereafter (other than solely by reason of a change in United States law or a change in the terms of any treaty to which the United States is a party after the date hereof) indicates a United States interest withholding tax rate in excess of zero (or would have indicated such a withholding tax rate if such form had been submitted and completed accurately and completely and either was not submitted or was not completed accurately and completely), or if a Bank otherwise is subject to United States interest withholding tax at a rate in excess of zero at any time for any reason (other than solely by reason of a change in United States law or regulation or a change in any treaty to which the United States is a party after the date hereof), withholding tax at such rate shall be considered excluded from "Taxes" as defined in Section 8.4(a). In addition, any amount that otherwise would be considered "Taxes" or "Other Taxes" for purposes of this Section 8.4 shall be excluded therefrom if the Bank either has transferred the domicile of its Loans pursuant to Section 9.12 or changed the Applicable Lending Office with respect to such Loans and such amount would not have been incurred had such transfer or change not been made. (e) For any period with respect to which a Bank has failed to provide the Borrower with the appropriate form pursuant to Section 8.4(d) (unless such failure is due to a change in treaty, law or regulation occurring subsequent to the date on which a form originally was required to be provided), such Bank shall not be entitled to indemnification under Section 8.4(a) with respect to Taxes imposed by the United States; provided, however, that should a Bank, which -------- ------- is otherwise exempt from or subject to a reduced rate of withholding tax, become subject to Taxes because of its failure to de- 123 liver a form required hereunder, the Borrower shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes. (f) If the Borrower is required to pay additional amounts to or for the account of any Bank pursuant to this Section 8.4, then such Bank will change the jurisdiction of its Applicable Lending Office so as to eliminate or reduce any such additional payment which may thereafter accrue if such change, in the judgment of such Bank, is not otherwise disadvantageous to such Bank. Section VIII.5. Base Rate Loans Substituted for Affected Euro-Dollar ---------------------------------------------------- Loans. If (i) the obligation of any Bank to make, or convert outstanding Loans - ----- to, Euro-Dollar Loans has been suspended pursuant to Sections 8.1 or 8.2 or (ii) any Bank has demanded compensation under Section 8.3 or 8.4 with respect to its Euro-Dollar Loans and the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to such Bank through the Lead Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist: (a) all Loans which would otherwise be made by such Bank as Euro- Dollar Loans shall be made instead as Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Banks), and (b) after each of its Euro-Dollar Loans has been repaid, all payments of principal which would otherwise be applied to repay such Euro-Dollar Loans shall be applied to repay its Base Rate Loans instead. 124 ARTICLE IX MISCELLANEOUS Section IX.1. Notices. All notices, requests and other ------- communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower or the Lead Agent, at its address or telecopy number set forth on the signature pages hereof, together with copies thereof, in the case of the Borrower, to Latham & Watkins, 633 West Fifth Street, Suite 4000, Los Angeles, CA 90071, Attention: Glen B. Collyer, Esq., Telephone: (213) 485-1234, Telecopy: (213) 891-8763, and in the case of the Lead Agent, if before January 15, 2000, to Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New York 10022, Attention: Martha Feltenstein, Esq., Telephone: (212) 735-2272, Telecopy: (212) 735-2000, and, if after January 15, 2000, to Skadden, Arps, Slate, Meagher & Flom LLP, 4 Times Square, New York, New York, Attention: Martha Feltenstein, Esq., (y) in the case of any Bank, at its address or telecopy number set forth on the signature pages hereof or in its Administrative Questionnaire or (z) in the case of any party, such other address or telecopy number as such party may hereafter specify for the purpose by notice to the Lead Agent, the Banks and the Borrower. Each such notice, request or other communication shall be effective (i) if given by telecopy, when such telecopy is transmitted to the telecopy number specified in this Section, (ii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when delivered at the address specified in this Section; provided that notices to the Lead Agent under Article II or Article VIII shall - -------- not be effective until received. 125 Section IX.2. No Waivers. No failure or delay by the Lead Agent or ---------- any Bank in exercising any right, power or privilege hereunder or under any Note shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. Section IX.3. Expenses; Indemnification. ------------------------- (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses of the Lead Agent (including, without limitation, reasonable fees and disbursements of special counsel Skadden, Arps, Slate, Meagher & Flom LLP, local counsel for the Lead Agent, and travel, site visits, third party reports (including Appraisals), mortgage recording taxes, environmental and engineering expenses), in connection with the preparation and administration of this Agreement, the Loan Documents and the documents and instruments referred to therein, the syndication of the Loans, any waiver or consent hereunder or any amendment or modification hereof or any Default or alleged Default hereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the Lead Agent and each Bank, including, without limitation, reasonable fees and disbursements of counsel for the Lead Agent, in connection with the enforcement of the Loan Documents and the instruments referred to therein and such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. (b) The Borrower agrees to indemnify the Lead Agent and each Bank, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "Indemnitee") and hold each Indemnitee ---------- harmless from and against any and all liabil- 126 ities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel and settlements and settlement costs, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) that may at any time (including, without limitation, at any time following the payment of the Obligations) be imposed on, asserted against or incurred by any Indemnitee as a result of, or arising out of, or in any way related to or by reason of, (i) any of the transactions contemplated by the Loan Documents or the execution, delivery or performance of any Loan Document (including, without limitation, the Borrower's actual or proposed use of proceeds of the Loans, whether or not in compliance with the provisions hereof), (ii) any violation by the Borrower or the Environmental Affiliates of any applicable Environmental Law, (iii) any Environmental Claim arising out of the management, use, control, ownership or operation of property or assets by the Borrower or any of the Environmental Affiliates, including, without limitation, all on-site and off-site activities involving Material of Environmental Concern, (iv) the breach of any environmental representation or warranty set forth herein, (v) the grant to the Lead Agent and the Banks of any Lien in any property or assets of the Borrower or any stock or other equity interest in the Borrower, and (vi) the exercise by the Lead Agent and the Banks of their rights and remedies (including, without limitation, foreclosure) under any agreements creating any such Lien (but excluding in each case, as to any Indemnitee, any such losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements incurred solely by reason of (i) the gross negligence or willful misconduct of such Indemnitee as finally determined by a court of competent jurisdiction or (ii) any investigative, administrative or judicial proceeding imposed or asserted against any Indemnitee by 127 any bank regulatory agency or by any equity holder of such Indemnitee). The Borrower's obligations under this Section shall survive the termination of this Agreement and the payment of the Obligations. (c) The Borrower shall pay, and hold the Lead Agent and each of the Banks harmless from and against, any and all present and future U.S. stamp, recording, transfer and other similar foreclosure related taxes with respect to the foregoing matters and hold the Lead Agent and each Bank harmless from and against any and all liabilities with respect to or resulting from any delay or omission (other than to the extent attributable to such Bank) to pay such taxes. Section IX.4. Sharing of Set-Offs. In addition to any rights now or ------------------- hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence and during the continuance of any Event of Default, each Bank is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to the Borrower or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (general or special, time or demand, provisional or final), other than deposits held for the benefit of third parties, and any other indebtedness at any time held or owing by such Bank (including, without limitation, by branches and agencies of such Bank wherever located) to or for the credit or the account of the Borrower against and on account of the Obligations of the Borrower then due and payable to such Bank under this Agreement or under any of the other Loan Documents, including, without limitation, all interests in Obligations purchased by such Bank. Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to any Note held 128 by it or Letter of Credit participated in by it, or, in the case of the Fronting Bank, Letter of Credit issued by it, which is greater than the proportion received by any other Bank or Letter of Credit issued or participated in by such other Bank, in respect of the aggregate amount of principal and interest due with respect to any Note held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Notes held by the other Banks or Letter of Credit issued or participated in by such other Bank, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Notes held by the Banks or Letter of Credit issued or participated in by such other Banks shall be shared by the Banks pro rata; provided that nothing in this Section -------- shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its indebtedness under the Notes or the Letters of Credit. The Borrower agrees, to the fullest extent that it may effectively do so under applicable law, that any holder of a participation in a Note, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Borrower in the amount of such participation. Section IX.5. Amendments and Waivers. Any provision of this ---------------------- Agreement (including any of the financial covenants given by the Borrower pursuant to Section 5.8), the Notes, the Letters of Credit or other Loan Documents may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Banks (and, if the rights or duties of the Lead Agent are affected thereby, by the Lead Agent); provided that no such amendment or waiver - -------- 129 shall, unless signed by all the Banks, (i) increase or decrease the Commitment of any Bank (except for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or rate of interest on any Loan or any fees specified herein, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or any fees hereunder or for any reduction or termination of any Commitment, (iv) release the Guaranty or otherwise release any other collateral, (v) subordinate the Loans to any other Debt, or (vi) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement. Notwithstanding the foregoing, no amendment, waiver or consent shall, unless in writing and signed by the Designating Lender on behalf of its Designated Lender affected thereby, (a) subject such Designated Lender to any additional obligations, (b) reduce the principal of, interest on, or other amounts due with respect to, the Designated Lender Note made payable to such Designated Lender, or (c) postpone any date fixed for any payment of principal of, or interest on, or other amounts due with respect to the Designated Lender Note made payable to the Designated Lender. Section IX.6. Successors and Assigns. ---------------------- (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights under this Agreement or the other Loan Documents without the prior written consent of all Banks. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "Participant") ----------- 130 participating interests in its Commitment or any or all of its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower and the Lead Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Lead Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such -------- Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii), (iii) or (iv) of Section 9.5 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article VIII with respect to its participating interest. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Bank may at any time assign to one or more banks or other institutions (each an "Assignee") all, or a proportionate part of all, of its -------- rights and obligations under this Agreement, the Notes and the other Loan Documents, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit D --------- attached hereto executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Lead Agent, which consent shall not be unreasonably withheld, and, provided no Event of 131 Default shall have occurred and be continuing, the Borrower, which consent shall not be unreasonably withheld or delayed. Upon execution and delivery of such instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Lead Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note or Notes are issued to the Assignee. In connection with any such assignment (except for an assignment by a Bank to its Affiliate), the transferor Bank shall pay to the Lead Agent an administrative fee for processing such assignment in the amount of $2,500. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall deliver to the Borrower and the Lead Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 8.4. (d) Any Bank (each, a "Designating Lender") may at any time designate ------------------ one Designated Lender to fund Money Market Loans on behalf of such Designating Lender subject to the terms of this Section 9.6(d) and the provisions in Section 9.6(b) and (c) shall not apply to such designation. No Bank may designate more than one (1) Designated Lender. The parties to each such designation shall execute and deliver to the Lead Agent for its acceptance a Designation Agreement. Upon such receipt of an appropriately completed Designation Agreement executed by a Designating Lender and a designee representing that it is a Designated Lender, the Lead 132 Agent will accept such Designation Agreement and will give prompt notice thereof to the Borrower, whereupon, (i) the Borrower shall execute and deliver to the Designating Bank a Designated Lender Note payable to the order of the Designated Lender, (ii) from and after the effective date specified in the Designation Agreement, the Designated Lender shall become a party to this Agreement with a right (subject to the provisions of Section 2.3(b)) to make Money Market Loans on behalf of its Designating Lender pursuant to Section 2.3 after the Borrower has accepted a Money Market Loan (or portion thereof) of the Designating Lender, and (iii) the Designated Lender shall not be required to make payments with respect to any obligations in this Agreement except to the extent of excess cash flow of such Designated Lender which is not otherwise required to repay obligations of such Designated Lender which are then due and payable; provided, however, that regardless of such designation and assumption by the Designated Lender, the Designating Lender shall be and remain obligated to the Borrower and the Banks for each and every of the obligations of the Designating Lender and its related Designated Lender with respect to this Agreement, including, without limitation, any indemnification obligations under Section 7.6 hereof and any sums otherwise payable to the Borrower by the Designated Lender. Each Designating Lender shall serve as the administrative agent of the Designated Lender and shall on behalf of, and to the exclusion of, the Designated Lender: (i) receive any and all payments made for the benefit of the Designated Lender and (ii) give and receive all communications and notices and take all actions hereunder, including, without limitation, votes, approvals, waivers, consents and amendments under or relating to this Agreement and the other Loan Documents. Any such notice, communication, vote, approval, waiver, consent or amendment shall be signed by the Designating Lender as administrative agent for the Designated Lender and shall not be signed by the Designated Lender on its own behalf and shall be binding 133 upon the Designated Lender to the same extent as if signed by the Designated Lender on its own behalf. The Borrower, the Lead Agent, and the Banks may rely thereon without any requirement that the Designated Lender sign or acknowledge the same. No Designated Lender may assign or transfer all or any portion of its interest hereunder or under any other Loan Document, other than assignments to the Designating Lender which originally designated such Designated Lender or otherwise in accordance with the provisions of Section 9.6(b) and (c). (e) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note and the Letter(s) of Credit participated in by such Bank or, in the case of the Fronting Bank, issued by it, to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (f) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 8.3 or 8.4 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.2, 8.3 or 8.4 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. Section IX.7. Governing Law; Submission to Jurisdiction. ----------------------------------------- (a) THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE STATE OF 134 NEW YORK (WITHOUT GIVING EFFECT TO THE PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW). (b) Any legal action or proceeding with respect to this Agreement or any other Loan Document and any action for enforcement of any judgment in respect thereof may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York, and, by execution and delivery of this Agreement, the Borrower hereby accepts for itself and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts and appellate courts from any thereof. The Borrower irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the hand delivery, or mailing of copies thereof by registered or certified mail, postage prepaid, to the Borrower at its address set forth below. The Borrower hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement or any other Loan Document brought in the courts referred to above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. Nothing herein shall affect the right of the Lead Agent, any Bank or any holder of a Note to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Borrower in any other jurisdiction. Section IX.8. Marshaling; Recapture. Neither the Lead Agent nor any --------------------- Bank shall be under any obligation to marshal any assets in favor of the Borrower or any other party or against or in payment of any or all of the Obligations. To the extent any Bank receives any payment by or on behalf of the Borrower, 135 which payment or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to the Borrower or its estate, trustee, receiver, custodian or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such payment or repayment, the Obligation or part thereof which has been paid, reduced or satisfied by the amount so repaid shall be reinstated by the amount so repaid and shall be included within the liabilities of the Borrower to such Bank as of the date such initial payment, reduction or satisfaction occurred. Section IX.9. Counterparts; Integration; Effectiveness. This ---------------------------------------- Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. This Agreement shall become effective upon receipt by the Lead Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Lead Agent in form satisfactory to it of telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party). Section IX.10. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE LEAD -------------------- AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. Section IX.11. Survival. All indemnities set forth herein shall -------- survive the execution and delivery of 136 this Agreement and the other Loan Documents and the making and repayment of the Loans hereunder. Section IX.12. Domicile of Loans. Subject to the provisions of ----------------- Article VIII, each Bank may transfer and carry its Loans at, to or for the account of any domestic or foreign branch office, subsidiary or affiliate of such Bank. Section IX.13. Limitation of Liability. No claim may be made by the ----------------------- Borrower or any other Person against the Lead Agent or any Bank or the affiliates, directors, officers, employees, attorneys or agent of any of them for any consequential or punitive damages in respect of any claim for breach of contract or any other theory of liability arising out of or related to the transactions contemplated by this Agreement or by the other Loan Documents, or any act, omission or event occurring in connection therewith; and the Borrower hereby waives, releases and agrees not to sue upon any claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor. Section IX.14. No Bankruptcy Proceedings. Each of the Borrower, the ------------------------- Banks, and the Lead Agent hereby agrees that it will not institute against any Designated Lender or join any other Person in instituting against any Designated Lender any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding under any federal or state bankruptcy or similar law, until the later to occur of (i) one year and one day after the payment in full of the latest maturing commercial paper note issued by such Designated Lender and (ii) the Maturity Date. 137 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. BORROWER: KILROY REALTY, L.P., a Delaware -------- limited partnership By: Kilroy Realty Corporation, a Maryland corporation, its general partner By: /s/ Tyler H. Rose --------------------------------------- Name: Tyler H. Rose Title: Senior Vice President and Treasurer 138 LEAD AGENT AND BANK: MORGAN GUARANTY TRUST COMPANY - ------------------- OF NEW YORK By: /s/ R. David Stone ------------------------------------- Name: R. David Stone Title: Associate 60 Wall Street New York, New York 10260-0060 Attention: Telephone number: Telecopy number: Domestic and Euro-Currency Lending Office: Nassau, Bahamas Office c/o J.P. Morgan Services Inc. 500 Stanton Christiana Road Newark, Delaware 19173-2107 Attention: Bill Lamb Telecopy number: (302) 634-4222 Commitment: $35,000,000 DOCUMENTATION AGENT - ------------------- AND BANK: THE CHASE MANHATTAN BANK - -------- By: /s/ Alan Briendell ------------------------------------- Name: Alan Briendell Title: Managing Director Commitment: $35,000,000 139 MANAGING AGENT - -------------- AND BANK: COMMERZBANK AKTIENGESELLSCHAFT, - -------- NEW YORK AND GRAND CAYMAN BRANCHES By: /s/ Lisa C. Miller ----------------------------------- Name: Lisa C. Miller Title: Assistant Vice President By: /s/ David M. Schwartz ----------------------------------- Name: David M. Schwartz Title: Vice President Commitment: $32,000,000 MANAGING AGENT - -------------- AND BANK: BANK ONE, N.A. - -------- By: /s/ Dell K. McCoy ----------------------------------- Name: Dell K. McCoy Title: Vice President Commitment: $32,000,000 MANAGING AGENT - -------------- AND BANK: PNC BANK, NATIONAL ASSOCIATION - -------- By: /s/ Paul Jamiol Kowski ----------------------------------- Name: Paul Jamiol Kowski Title: Asst. Vice President Commitment: $32,000,000 MANAGING AGENT - -------------- 140 AND BANK: FIRST UNION BANK - -------- By: /s/ Cynthia A. Bean ----------------------------------- Name: Cynthia A. Bean Title: Vice President Commitment: $32,000,000 CO-AGENT AND BANK: DRESDNER BANK AG, NEW YORK - ----------------- BRANCH AND GRAND CAYMAN BRANCH By: /s/ John R. Morrison ----------------------------------- Name: John R. Morrison Title: Vice President By: /s/ Beverly G. Cason ----------------------------------- Name: Beverly G. Cason Title: Vice President Commitment: $28,000,000 CO-AGENT AND BANK: UNION BANK OF CALIFORNIA - ----------------- By: /s/ Kandice K. Chappell ----------------------------------- Name: Kandice K. Chappel Title: Vice President Commitment: $28,000,000 CO-AGENT AND BANK: KEYBANK NATIONAL ASSOCIATION - ----------------- By: /s/ Vital Wiacek ----------------------------------- Name: Vital Wiacek Title: Vice President 141 Commitment: $28,000,000 CO-AGENT AND BANK: THE BANK OF NOVA SCOTIA, ACTING - ----------------- THROUGH ITS SAN FRANCISCO AGENCY By: /s/ B. Lorne Agmundson ----------------------------------- Name: B. Lorne Agmundson Title: Office Head, Real Estate Banking Commitment: $28,000,000 BANK: MELLON BANK, N.A. - ---- By: /s/ Michael P. Gage ----------------------------------- Name: Michael P. Gage Title: Vice President Commitment: $23,000,000 BANK: SUMMIT BANK - ---- By: /s/ Amy L. Brown ----------------------------------- Name: Amy L. Brown Title: Regional Vice President Commitment: $23,000,000 BANK: CITIZENS BANK OF RHODE ISLAND - ---- 142 By: /s/ Craig E. Schermerhorn ----------------------------------- Name: Craig E. Schermerhorn Title: Vice President Commitment: $19,000,000 BANK: KBC BANK N.V. - ---- By: /s/ Robert Snauffer ----------------------------------- Name: Robert Snauffer Title: First Vice President By: /s/ Raymond F. Murray ----------------------------------- Name: Raymond F. Murray Title: First Vice President Commitment: $15,000,000 143 BANK: CHANG HWA COMMERCIAL BANK,LTD., - ---- LOS ANGELES BRANCH By: /s/ James Lin ----------------------------------- Name: James Lin Title: Vice President and General Manager Commitment: $10,000,000 144 EXHIBIT A --------- FORM OF NOTE ______________ New York, New York __________ __, 1999 For value received, KILROY REALTY, L.P., a Delaware limited partnership (the "Borrower") promises to pay to the order of _______________ -------- (the "Bank"), for the account of its Applicable Lending Office, the unpaid ---- principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the Maturity Date. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Lead Agent under the Credit Agreement (as defined below). All Loans made by the Bank, the respective types and maturities thereof and all repayments of the principal thereof shall be recorded by the Bank and, if the Bank so elects in connection with any transfer or enforcement hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding may be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Bank to make any such recordation -------- or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This Note is one of the Notes referred to in the Second Amended and Restated Revolving Credit Agreement, dated as of ________ __, 1999, among the Borrower, the Banks party thereto, Morgan Guaranty Trust Company of New York, as Bank and as Lead Agent for the Banks, The Chase Manhattan Bank, as Bank and as Documentation Agent, J.P. Morgan Securities Inc., as Syndication Agent, Lead Arranger and Joint Bookmanager, Chase Securities Inc., as Lead Arranger and Joint Bookmanager, Bank One, N.A., PNC Bank, National Association, First Union Bank and Commerzbank Aktiengesellschaft, New York and Grand Cayman A-1 Branches, each, as Managing Agent, and Dresdner Bank AG, New York and Grand Cayman Branches, The Bank of Nova Scotia, Keybank National Association and Union Bank of California, each, as Co-Agent (as the same may be amended from time to time, the "Credit Agreement"). ---------------- A-2 Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. KILROY REALTY, L.P., a Delaware limited partnership By: Kilroy Realty Corporation, a Maryland corporation, its general partner By: _____________________ Name: Title: A-3 Note (cont'd) LOANS AND PAYMENTS OF PRINCIPAL ______________________________________________________________________________ Amount of Amount of Type of Principal Maturity Notation Date Loan Loan Repaid Date Made By ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ A-4 EXHIBIT A-1 ----------- FORM OF NOTE $______________ New York, New York ________ __, 1999 For value received, KILROY REALTY, L.P., a Delaware limited partnership (the "Borrower") promises to pay to the order of _______________ -------- (the "Bank"), for the account of its Applicable Lending Office, the unpaid ---- principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the Maturity Date. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Lead Agent under the Credit Agreement (as defined below). All Loans made by the Bank, the respective types and maturities thereof and all repayments of the principal thereof shall be recorded by the Bank and, if the Bank so elects in connection with any transfer or enforcement hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding may be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Bank to make any such recordation -------- or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This Note is one of the Designated Lender Notes referred to in the Second Amended and Restated Revolving Credit Agreement, dated as of ________ __, 1999, among the Borrower, the Banks party thereto, Morgan Guaranty Trust Company of New York, as Bank and as Lead Agent for the Banks, The Chase Manhattan Bank, as Bank and as Documentation Agent, J.P. Morgan Securities Inc., as Syndication Agent, Lead Arranger and Joint Bookmanager, Chase Securities Inc., as Lead Arranger and Joint Bookmanager, Bank One, N.A., PNC Bank, National Association, First Union Bank and Commerzbank Aktiengesellschaft, New York and Grand Cayman Branches, each, as Managing Agent, and Dresdner Bank AG, New York and Grand Cayman Branches, The Bank of Nova Scotia, Keybank National Association and Union Bank of California, each, as Co-Agent (as the same may be amended from time to time, the "Credit Agreement"). ---------------- A-1-1 Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. KILROY REALTY, L.P., a Delaware limited partnership By: Kilroy Realty Corporation, a Maryland corporation, its general partner By: ________________________ Name: Title: A-1-2 Note (cont'd) LOANS AND PAYMENTS OF PRINCIPAL ______________________________________________________________________________ Amount of Amount of Type of Principal Maturity Notation Date Loan Loan Repaid Date Made By ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ A-1-3 EXHIBIT B --------- Unencumbered Asset Pool Properties (Fee Interests) PROPERTY LOCATION 701 - 741 E. Ball Road Anaheim, CA 26541 Agoura Rd. Calabasas, CA 5325 Hunter Anaheim, CA 5151 - 5155 Camino Ruiz Camarillo, CA 23600 - 610 Telo Avenue Torrance, CA Brea Industrial Properties Brea, CA Garden Grove Industrial Properties Garden Grove, CA Kilroy Tech Center Irvine Irvine, CA 2501 Pullman Santa Ana, CA 9401 & 9451 Toledo Way Irvine, CA 12400 Industry Garden Grove, CA 1675 MacArthur Costa Mesa, CA 1633 26th Street Santa Monica, CA 1961 Concourse San Jose, CA 2055 Main Street Irvine, CA 6828 Nancy Ridge San Diego, CA 1710 Fortune San Jose, CA 199 & 201 N. Sunrise Ave. Roseville, CA 14831 Franklin Tustin, CA 4361 Latham Riverside, CA 4351 Latham Riverside, CA 601 Valencia Brea, CA 3130 Mira Loma Anaheim, CA 3125 E. Coronado Anaheim, CA 1840 Aerojet Way Las Vegas, NV 1900 Aerojet Way Las Vegas, NV 41093 County Center Dr. Temecula, CA 1951 Carnegie Santa Ana, CA 3130 Wilshire Santa Monica, CA 12691 Monarch (Giltspur) Garden Grove, CA 525 N. Brand Glendale, CA Walnut Business Center Diamond Bar, CA Gothard Business Park Huntington Beach, CA Dimension Business Park El Toro, CA Pacific Park Plaza Aliso Viejo, CA Anaheim Corp Center Anaheim, CA Alton Business Center Irvine, CA Fullerton Business Center Fullerton, CA 12100 Olympic Boulevard Los Angeles, CA Fortune Park San Jose, CA 8101 Kaiser Anaheim, CA 795 Trademark Drive Reno, NV 1240 & 1250 N. Lakeview Ave. Anaheim, CA 4880 Santa Rosa Rd. Camarillo, CA 1250 N. Tustin Avenue Anaheim, CA 2911 Dow Avenue Tustin, CA Foothill Ranch Foothill Ranch, CA 12312 Olympic Boulevard Los Angeles, CA 5115 E. La Palma Ave. Anaheim, CA B-1 5115 N. 27th Avenue Phoenix, AZ Kilroy Tech Ctr, Anaheim - Ph I Anaheim, CA Kilroy Tech Ctr, Anaheim - Ph II Anaheim, CA Brea - Lambert Industrial Complex Brea, CA B-2 EXHIBIT C --------- Unencumbered Asset Pool Properties (Leasehold Interests) Kilroy Airport Center, (Long Beach) Long Beach, CA C-1 EXHIBIT D --------- FORM OF ASSIGNMENT AND ASSUMPTION FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT ------------------------------------------- AGREEMENT dated as of __________, ____ among [ASSIGNOR] (the "Assignor"), [ASSIGNEE] (the "Assignee"), KILROY REALTY, L.P. (the "Borrower") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Lead Agent (the "Agent"). W I T N E S S E T H ------------------- WHEREAS, this Assignment and Assumption Agreement (the "Assignment") relates to the Second Amended and Restated Revolving Credit Agreement, dated as of ________ __, 1999 (the "Loan Agreement"), among the Borrower, the Banks party thereto, the Agent, as Bank and as Lead Agent for the Banks, The Chase Manhattan Bank, as Bank and as Documentation Agent, J.P. Morgan Securities Inc., as Syndication Agent, Lead Arranger and Joint Bookmanager, Chase Securities Inc., as Lead Arranger and Joint Bookmanager, Bank One, N.A., PNC Bank, National Association, First Union Bank and Commerzbank Aktiengesellschaft, New York and Grand Cayman Branches, each, as Managing Agent, and Dresdner Bank AG, New York and Grand Cayman Branches, The Bank of Nova Scotia, Keybank National Association and Union Bank of California, each, as Co-Agent; WHEREAS, as provided under the Loan Agreement, the Assignor has a Commitment to make Loans to the Borrower in an aggregate principal amount at any time outstanding not to exceed $__________; WHEREAS, Loans made to the Borrower by the Assignor under the Loan Agreement in the aggregate principal amount of $____________ are outstanding at the date hereof; and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Loan Agreement in respect of a portion of its Commitment thereunder in an amount equal to $__________ (the "Assigned Amount"), together with a corresponding portion of its outstanding Loans, and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: SECTION 1. Definitions. All capitalized terms not otherwise defined ----------- herein shall have the respective meanings set forth in the Loan Agreement. SECTION 2. Assignment. The Assignor hereby assigns and sells to the ---------- Assignee all of the rights of the Assignor under the Loan Agreement to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Loan Agreement to the extent of the Assigned Amount, including the purchase from the Assignor of the corresponding portion of the principal amount of the Loans made by the Assignor outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee, the Borrower and the Agent and the payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Bank under the Loan Agreement with a Commitment in an amount equal to the Assigned Amount, and (ii) the Commitment of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor released from its obligations under the Loan Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. SECTION 3. Payments. As consideration for the assignment and sale -------- contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the date hereof in Federal funds the amount heretofore agreed between them./1/ It is understood that ______________________ /1/ The amount should combine principal together with accrued interest and breakage compensation, if any, to be paid by the Assignee, net of any portion of any upfront fee to be paid by the Assignor to the Assignee. It may be pref- D-2 Commitment Fees accrued to the date hereof are for the account of the Assignor and such fees accruing from and including the date hereof are for the account of the Assignee. Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Loan Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. SECTION 4. Consent of the Borrower and the Agent. This Agreement is ------------------------------------- conditioned upon the written consent of the Borrower and the consent of the Agent pursuant to section 9.6(c) of the Loan Agreement. The execution of this Agreement by the Borrower and the Agent is evidence of the required consents. Pursuant to Section 9.6(c) the Borrower agrees to execute and deliver a Note payable to the order of the Assignee to evidence the assignment and assumption provided for herein. SECTION 5. Non-Reliance on Assignor. The Assignor respresents and ------------------------ warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder, that it has not created any adverse claim upon such interest and that such interest is free and clear of any adverse claim, and that it is authorized to enter into this Agreement. The Assignor makes no other representation or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition, or statements of the Borrower, or the validity and enforceability of the obligations of the Borrower in respect of the Loan Agreement or any Note. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial D-3 condition of the Borrower. The Assignee represents and warrants that it is authorized to enter into this Agreement. SECTION 6. Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the external laws of the State of New York D-4 SECTION 7. Counterparts. This Agreement may be signed in any number ------------ of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. [ASSIGNOR] By:_______________________ Name: Title: [ASSIGNEE] By:________________________ Name: Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK By:________________________ Name: Title: CONSENTED TO: KILROY REALTY, L.P. By: Kilroy Realty Corporation, its general partner By: ____________________ Name: Tyler H. Rose Title: Senior Vice President and Treasurer D-5 EXHIBIT E Form of Money Market Quote Request ---------------------------------- [Date] To: Morgan Guaranty Trust Company of New York (the "Lead Agent") From: Kilroy Realty, L.P. Re: Second Amended and Restated Revolving Credit Agreement, dated as of ________ __, 1999, among the Borrower, the Banks party thereto, the Lead Agent, The Chase Manhattan Bank, as Bank and as Documentation Agent and J.P. Morgan Securities Inc., as Syndication Agent, Lead Arranger and Joint Bookmanager, Chase Securities Inc., as Lead Arranger and Joint Bookmanager, Bank One, N.A., PNC Bank, National Association, First Union Bank and Commerzbank Aktiengesellschaft, New York and Grand Cayman Branches, each, as Managing Agent, and Dresdner Bank AG, New York and Grand Cayman Branches, The Bank of Nova Scotia, Keybank National Association and Union Bank of California, each, as Co-Agent We hereby give notice pursuant to Section 2.3 of the Credit Agreement that we request Money Market Quotes for the following proposed Money Market Borrowing(s): Date of Borrowing: __________________ Principal Amount/2/ Interest Period/3/ - ---------------- --------------- /2/ Amount must be $10,000,000 or a larger multiple of $500,000. /3/ Not less than one month (LIBOR Auction) or not less than 30 days (Absolute Rate Auction), subject to the provisions of the definition of the Interest Period. E-1 $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] The funding of Money Market Loans made in connection with this Money Market Quote Request [may/may not] be made by Designated Lenders. Terms used herein have the meanings assigned to them in the Credit Agreement. Kilroy Realty, L.P. By: Kilroy Realty Corporation By:________________________ Name: Title: E-2 EXHIBIT F Form of Invitation for Money Market Quotes ------------------------------------------ To: [Name of Bank] Re: Invitation for Money Market Quotes to Kilroy Realty, L.P. (the "Borrower") Pursuant to Section 2.3 of Second Amended and Restated Revolving Credit Agreement, dated as of ________ __, 1999, among the Borrower, the Banks party thereto, the Lead Agent, The Chase Manhattan Bank, as Bank and as Documentation Agent, J.P. Morgan Securities Inc., as Syndication Agent, Lead Arranger and Joint Bookmanager, Chase Securities Inc., as Lead Arranger and Joint Bookmanager, Bank One, N.A., PNC Bank, National Association, First Union Bank and Commerzbank Aktiengesellschaft, New York and Grand Cayman Branches, each, as Managing Agent, and Dresdner Bank AG, New York and Grand Cayman Branches, The Bank of Nova Scotia, Keybank National Association and Union Bank of California, each, as Co-Agent, we are pleased on behalf of the Borrower to invite you to submit Money Market Quotes to the Borrower for the following proposed Money Market Borrowing(s): Date of Borrowing: __________________ Principal Amount Interest Period - ---------------- --------------- $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] Please respond to this invitation by no later than 10:00 A.M. (New York City time) on [date]. F-1 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Lead Agent By______________________ Authorized Officer F-2 EXHIBIT G Form of Money Market Quote -------------------------- To: Morgan Guaranty Trust Company of New York, as Lead Agent Re: Money Market Quote to Kilroy Realty, L.P. (the "Borrower") In response to your invitation on behalf of the Borrower dated _____________, 19__, we hereby make the following Money Market Quote on the following terms: 1. Quoting Bank: ________________________________ 2. Person to contact at Quoting Bank: _____________________________ 3. Date of Borrowing: ____________________* 4. We hereby offer to make Money Market Loan(s) in the following principal amounts, for the following Interest Periods and at the following rates: Principal Interest Money Market Amount** Period*** [Margin****] [Absolute Rate*****] - -------- --------- --------------------------------- $ $ [Provided, that the aggregate principal amount of Money Market Loans for which the above offers may be accepted shall not exceed $____________.]** We understand and agree that the offer(s) set forth above, subject to the satisfaction of the applicable conditions set forth in the Second Amended and Restated G-1 Revolving Credit Agreement, dated as of ________ __, 1999, among the Borrower, the Banks party thereto, The Chase Manhattan Bank, as Bank and as Documentation Agent, J.P. Morgan Securities Inc., as Syndication Agent, Lead Arranger and Joint Bookmanager, Chase Securities Inc., as Lead Arranger and Joint Bookmanager, Bank One, N.A., PNC Bank, National Association, First Union Bank and Commerzbank Aktiengesellschaft, New York and Grand Cayman Branches, each, as Managing Agent, Dresdner Bank AG, New York and Grand Cayman Branches, The Bank of Nova Scotia, Keybank National Association and Union Bank of California, each, as Co-Agent, and yourselves, as Lead Agent and Bank, irrevocably obligates us to make the Money Market Loan(s) for which any offer(s) are accepted, in whole or in part. Very truly yours, [NAME OF BANK] Dated:_______________ By:__________________________ Authorized Officer G-2 EXHIBIT H FORM OF DESIGNATION AGREEMENT ----------------------------- Dated _____________, 199___ Reference is made to that certain Second Amended and Restated Revolving Credit Agreement, dated as of ________ __, 1999 (the "Credit Agreement"), among the Borrower, the Banks party thereto, Morgan Guaranty Trust Company of New York, as Bank and as Lead Agent for the Banks ("Lead Agent"), The Chase Manhattan Bank, as Bank and as Documentation Agent, J.P. Morgan Securities Inc., as Syndication Agent, Lead Arranger and Joint Bookmanager, Chase Securities Inc., as Lead Arranger and Joint Bookmanager, Bank One, N.A., PNC Bank, National Association, First Union Bank and Commerzbank Aktiengesellschaft, New York and Grand Cayman Branches, each, as Managing Agent, and Dresdner Bank AG, New York and Grand Cayman Branches, The Bank of Nova Scotia, Keybank National Association and Union Bank of California, each, as Co-Agent. Terms defined in the Credit Agreement are used herein with the same meaning. [NAME OF DESIGNOR] (the "Designor"), [NAME OF DESIGNEE] (the "Designee") and the Lead Agent agree as follows: 1. The Designor hereby designates the Designee, and the Designee hereby accepts such designation, to have a right to make Money Market Loans pursuant to Article III of the Credit Agreement. Any assignment by Designor to Designee of its rights to make a Money Market Loan pursuant to such Article III shall be effective at the time of the funding of such Money Market Loan and not before such time. 2. Except as set forth in Section 7 below, the Designor makes no representation or warranty and assumes no responsibility pursuant to this Designation Agreement with respect to (a) any statements, warranties or representations made in or in connection with any Loan Document or the execution, legality, validity, enforceability, genuineness, sufficiency or value of any Loan Document or any other instrument and document furnished pursuant thereto and (b) the financial condition of the Borrower or the performance or observance by the Borrower of any of its obli- H-1 gations under any Loan Document or any other instrument or document furnished pursuant thereto. 3. The Designee (a) confirms that it has received a copy of each Loan Document, together with copies of the financial statements referred to in Articles IV and V of the Credit Agreement and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Designation Agreement; (b) agrees that it will independently and without reliance upon the Lead Agent, the Designor or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under any Loan Document; (c) confirms that it is a Designated Lender; (d) appoints and authorizes the Lead Agent to take such action as agent on its behalf and to exercise such powers and discretion under any Loan Document as are delegated to the Lead Agent by the terms thereof, together with such powers and discretion as are reasonably incidental thereto; and (e) agrees to be bound by each and every provision of each Loan Document and further agrees that it will perform in accordance with their terms all of the obligations which by the terms of any Loan Document are required to be performed by it as a Bank. 4. The Designee hereby appoints Designor as Designee's agent and attorney in fact, and grants to Designor an irrevocable power of attorney, to receive payments made for the benefit of Designee under the Credit Agreement, to deliver and receive all communications and notices under the Credit Agreement and other Loan Documents and to exercise on Designee's behalf all rights to vote and to grant and make approvals, waivers, consents of amendments to or under the Credit Agreement or other Loan Documents. Any document executed by the Designor on the Designee's behalf in connection with the Credit Agreement or other Loan Documents shall be binding on the Designee. The Borrower, the Lead Agent and each of the Banks may rely on and are beneficiaries of the preceding provisions. 5. Following the execution of this Designation Agreement by the Designor and its Designee, it will be delivered to the Lead Agent for acceptance and recording by the Lead Agent. The effective date for this Designation Agreement (the "Effective Date") shall be the date of acceptance hereof by the Lead Agent, unless otherwise specified on the signature page thereto. H-2 6. The Lead Agent hereby agrees that it will not institute against any Designated Lender or join any other Person in instituting against any Designated Lender any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding under any federal or state bankruptcy or similar law, until the later to occur of (i) one year and one day after the payment in full of the latest maturing commercial paper note issued by such Designated Lender and (ii) the Maturity Date. 7. The Designor unconditionally agrees to pay or reimburse the Designee and save the Designee harmless against all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed or asserted by any of the parties to the Loan Documents against the Designee, in its capacity as such, in any way relating to or arising out of this Agreement or any other Loan Documents or any action taken or omitted by the Designee hereunder or thereunder, provided -------- that the Designor shall not be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements if the same results from the Designee's gross negligence or willful misconduct. 8. Upon such acceptance and recording by the Lead Agent, as of the Effective Date, the Designee shall be a party to the Credit Agreement with a right (subject to the provisions of Section 2.3(b)) to make Money Market Loans as a Bank pursuant to Section 2.3 of the Credit Agreement and the rights and obligations of a Bank related thereto; provided, however, that the Designee ----------------- shall not be required to make payments with respect to such obligations except to the extent of excess cash flow of such Designee which is not otherwise required to repay obligations of such Designated Lender which are then due and payable. Notwithstanding the foregoing, the Designor, as administrative agent for the Designee, shall be and remain obligated to the Borrower, the Co-Agents and the Banks for each and every of the obligations of the Designee and its Designor with respect to the Credit Agreement, including, without limitation, any indemnification obligations under Section 7.6 of the Credit Agreement and any sums otherwise payable to the Borrower by the Designee. 9. This Designation Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. H-3 10. This Designation Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Designation Agreement by facsimile transmission shall be effective as delivery of a manually executed counterpart of this Designation Agreement. H-4 IN WITNESS WHEREOF, the Designor and the Designee, intending to be legally bound, have caused this Designation Agreement to be executed by their officers thereunto duly authorized as of the date first above written. Effective Date: ________________________, 199__ [NAME OF DESIGNOR], as Designor By: Title: [NAME OF DESIGNEE] as Designee By: Title: Applicable Lending Office (and address for notices): [ADDRESS] Accepted this _____ day of ________, 19__ MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Lead Agent By: Title: H-5 SCHEDULE 4.22 ------------- LABOR MATTERS Agreement between Building Owners and Managers Association of Greater Los Angeles, Inc., and International Union of Operating Engineers, Local No. 501, AFL-CIO (November 1, 1996-October 31, 2001) EX-10.2 3 2ND AMENDED AND RESTATED GUARANTY OF PAYMENT EXHIBIT 10.2 SECOND AMENDED AND RESTATED GUARANTY OF PAYMENT ----------------------------------------------- SECOND AMENDED AND RESTATED GUARANTY OF PAYMENT (this "Guaranty"), -------- made as of November 8, 1999, between KILROY REALTY CORPORATION, a Maryland corporation, having an address at 2250 East Imperial Highway, Suite 1200, El Segundo, California 90245 ("Guarantor"), and MORGAN GUARANTY TRUST COMPANY OF --------- NEW YORK, a New York banking corporation, having an office at 60 Wall Street, New York, New York 10260, as lead agent (the "Lead Agent") for the banks (the ---------- "Banks") listed on the signature pages of the Second Amended and Restated ----- Revolving Credit Agreement (as the same may be amended, modified, supplemented or restated, the "Credit Agreement"), dated as of the date hereof, among Kilroy ---------------- Realty, L.P. ("Borrower"), the Banks, the Lead Agent, in its capacity as Lead -------- Agent and Bank, The Chase Manhattan Bank, as Bank and as Documentation Agent, J.P. Morgan Securities Inc., as Syndication Agent, Co-Lead Arranger and Joint Bookmanager, and Chase Securities Inc., as Co-Lead Arranger and Joint Bookmanager. W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Borrower, the Lead Agent and the Banks entered into the Revolving Credit Agreement, dated as of February 24, 1998, which was amended and restated in its entirety by that certain Amended and Restated Revolving Credit Agreement, dated as of October 9, 1998 (the "Existing Credit Agreement"); and ------------------------- WHEREAS, the parties hereto have agreed to amend and restate the terms and conditions contained in the Existing Credit Agreement in their entirety in that Credit Agreement as hereinafter set forth; and WHEREAS, as a condition to the execution and delivery of the Credit Agreement, the Banks have required that Guarantor amend and restate the Guaranty of Payment, dated as February 24, 1998, which was amended and restated in its entirety by that certain Amended and Restated Guaranty of Payment, dated as of October 9, 1998 (the "Existing -------- Guaranty"); and - -------- WHEREAS, capitalized terms used herein and not otherwise defined shall have the meanings ascribed there-to in the Credit Agreement; NOW, THEREFORE, the parties hereto hereby agree as follows: I. The Existing Guaranty is hereby modified so that all of the terms and conditions of the aforesaid Existing Guaranty shall be restated in their entirety as set forth herein, and Guarantor agrees to comply with and be subject to all of the terms, covenants and conditions of this Guaranty. II. This Guaranty shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and assigns, and shall be deemed to be effective as of the date hereof. III. Any reference in the Notes, any other Loan Document or any other document executed in connection with this Agreement to the Existing Guaranty shall be deemed to refer to this Guaranty. 1. Guarantor, on behalf of itself and its successors and assigns, hereby irrevocably, absolutely and unconditionally guarantees the full and punctual payment when due, whether at stated maturity or otherwise, of all Obligations of Borrower now or hereafter existing under the Notes and the Credit Agreement, for principal and/or interest as well as any and all other amounts due thereunder, including, without limitation, all indemnity obligations of Borrower thereunder, and any and all rea- 2 sonable costs and expenses (including, without limitation, reasonable attorneys' fees and disbursements) incurred by the Lead Agent or the Banks in enforcing its rights under this Guaranty (all of the foregoing obligations being the "Guaranteed Obligations"). ---------------------- 2. It is agreed that the Guaranteed Obligations of Guarantor hereunder are primary and this Guaranty shall be enforceable against Guarantor and its successors and assigns without the necessity for any suit or proceeding of any kind or nature whatsoever brought by the Lead Agent against Borrower or its respective successors or assigns or any other party or against any security for the payment and performance of the Guaranteed Obligations and without the necessity of any notice of non-payment or non-observance or of any notice of acceptance of this Guaranty or of any notice or demand to which Guarantor might otherwise be entitled (including, without limitation, diligence, presentment, notice of maturity, extension of time, change in nature or form of the Guaranteed Obligations, acceptance of further security, release of further security, imposition or agreement arrived at as to the amount of or the terms of the Guaranteed Obligations, notice of adverse change in Borrower's financial condition and any other fact which might materially increase the risk to Guarantor), all of which Guarantor hereby expressly waives; and Guarantor hereby expressly agrees that the validity of this Guaranty and the obligations of Guarantor hereunder shall in no way be terminated, affected, diminished, modified or impaired by reason of the assertion of or the failure to assert by the Lead Agent against Borrower or its respective successors or assigns, any of the rights or remedies reserved to the Lead Agent pursuant to the provisions of the Loan Documents. Guarantor agrees that any notice or directive given at any time to the Lead Agent which is inconsistent with the waiver in the immediately preceding sentence shall be void and may be ignored by the Lead Agent, and, in addition, may not be pleaded or introduced 3 as evidence in any litigation relating to this Guaranty for the reason that such pleading or introduction would be at variance with the written terms of this Guaranty, unless the Lead Agent has specifically agreed otherwise in a writing, signed by a duly authorized officer of the Lead Agent. Guarantor specifically acknowledges and agrees that the foregoing waivers are of the essence of this transaction and that, but for this Guaranty and such waivers, the Lead Agent would decline to execute the Loan Documents. 3. Guarantor waives, and covenants and agrees that it will not at any time insist upon, plead or in any manner whatsoever claim or take the benefit or advantage of, any and all appraisal, valuation, stay, extension, marshalling-of-assets or redemption laws, or right of homestead or exemption, whether now or at any time hereafter in force, which may delay, prevent or otherwise affect the performance by Guarantor of its obligations under, or the enforcement by the Lead Agent of, this Guaranty. Guarantor further covenants and agrees not to set up or claim any defense, counterclaim, offset, set-off or other objection of any kind to any action, suit or proceeding in law, equity or otherwise, or to any demand or claim that may be instituted or made by the Lead Agent other than the defense of the actual timely payment and performance by Borrower of the Guaranteed Obligations hereunder; provided, however, that the foregoing shall not be deemed a waiver of Guarantor's right to assert any compulsory counterclaim, if such counterclaim is compelled under local law or rule of procedure, nor shall the foregoing be deemed a waiver of Guarantor's right to assert any claim which would constitute a defense, setoff, counterclaim or crossclaim of any nature whatsoever against Lead Agent or any Bank in any separate action or proceeding. Guarantor represents, warrants and agrees that, as of the date hereof, its obligations under this Guaranty are not subject to any counterclaims, 4 offsets or defenses against the Lead Agent or any of the Banks of any kind. 4. The provisions of this Guaranty are for the benefit of the Lead Agent and the Banks and their successors and permitted assigns, and nothing herein contained shall impair as between Borrower and the Lead Agent and the Banks the obligations of Borrower under the Loan Documents. 5. This Guaranty shall be a continuing, unconditional and absolute guaranty and the liability of Guarantor hereunder shall in no way be terminated, affected, modified, impaired or diminished by reason of the happening, from time to time, of any of the following, although without notice or the further consent of Guarantor: (a) any assignment, amendment, modification or waiver of or change in any of the terms, covenants, conditions or provisions of any of the Guaranteed Obligations or the Loan Documents or the invalidity or unenforceability of any of the foregoing; or (b) any extension of time that may be granted by the Lead Agent and/or any Bank to Borrower, any guarantor, or their respective successors or assigns, heirs, executors, administrators or personal representatives; or (c) any action which the Lead Agent may take or fail to take under or in respect of any of the Loan Documents or by reason of any waiver or, or failure to enforce any of the rights, remedies, powers or privileges available to the Lead Agent under this Guaranty or available to the Lead Agent at law, equity or otherwise, or any action on the part of the Lead Agent granting indulgence or extension in any form whatsoever; or 5 (d) any sale, exchange, release, or other disposition of any property pledged, mortgaged or conveyed, or any property in which the Lead Agent and/or the Banks have been granted a lien or security interest to secure any indebtedness of Borrower to the Lead Agent and/or the Banks; or (e) any release of any person or entity who may be liable in any manner for the payment and collection of any amounts owed by Borrower to the Lead Agent and/or the Banks; or (f) the application of any sums by whomsoever paid or however realized to any amounts owing by Borrower to the Lead Agent and/or the Banks under the Loan Documents in such manner as the Lead Agent shall determine in its sole discretion; or (g) Borrower's or any guarantor's voluntary or involuntary liquidation, dissolution, sale of all or substantially all of their respective assets and liabilities, appointment of a trustee, receiver, liquidator, sequestrator or conservator for all or any part of Borrower's or Guarantor's assets, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment, or the commencement of other similar proceedings affecting Borrower or any guarantor or any of the assets of any of them, including, without limitation, (i) the release or discharge of Borrower or any guarantor from the payment and performance of their respective obligations under any of the Loan Documents by operation of law, or (ii) the impairment, limitation or modification of the liability of Borrower or any guarantor in bankruptcy, or of any remedy for the enforcement of the Guaranteed Obligations under any of the Loan Documents, or Guarantor's liability under this Guaranty, 6 resulting from the operation of any present or future provisions of the Bankruptcy Code or other present or future federal, state or applicable statute or law or from the decision in any court; or (h) any improper disposition by Borrower of the proceeds of the Loans, it being acknowledged by Guarantor that the Lead Agent or any Bank shall be entitled to honor any request made by Borrower for a disbursement of such proceeds and that neither the Lead Agent nor any Bank shall have any obligation to see the proper disposition by Borrower of such proceeds. 6. Guarantor agrees that if at any time all or any part of any payment at any time received by the Lead Agent and/or any Bank from Borrower or Guarantor under or with respect to this Guaranty is or must be rescinded or returned by the Lead Agent or any Bank for any reason whatsoever (including, without limitation, the insolvency, bankruptcy or reorganization of Borrower or Guarantor), then Guarantor's obligations hereunder shall, to the extent of the payment rescinded or returned, be deemed to have continued in existence notwithstanding such previous receipt by such party, and Guarantor's obligations hereunder shall continue to be effective or reinstated, as the case may be, as to such payment, as though such previous payment had never been made. 7. Until this Guaranty is terminated pursuant to the terms hereof, Guarantor (i) shall have no right of subrogation against Borrower or any entity comprising same by reason of any payments or acts of performance by Guarantor in compliance with the obligations of Guarantor hereunder; (ii) waives any right to enforce any remedy which Guarantor now or hereafter shall have against Borrower or any entity comprising same by reason of any one or more payment or acts of performance in compliance with the obligations of Guarantor hereunder and (iii) subor- 7 dinates any liability or indebtedness of Borrower or any entity comprising same now or hereafter held by Guarantor or any affiliate of Guarantor to the obligations of Borrower under the Loan Documents, provided, however, until an -------- ------- Event of Default has occurred and is continuing, Borrower or any entity comprising same shall not be prohibited from making payments to Guarantor or any affiliate thereof on such subordinated liability or indebtedness in accordance with the terms thereof. The foregoing, however, shall not be deemed in any way to limit any rights that Guarantor may have pursuant to the Agreement of Limited Partnership of Borrower or which it may have at law or in equity with respect to any other partners of Borrower. 8. Guarantor represents and warrants to the Lead Agent and the Banks (with the knowledge that the Lead Agent and the Banks are relying upon the same) as of the date hereof, as follows: (a) as of the date hereof, Guarantor is the sole general partner of Borrower; (b) based upon such relationship, Guarantor has determined that it is in its best interests to enter into this Guaranty; (c) in the good faith judgement of Guarantor, the benefits to be derived by Guarantor from Borrower's access to funds made possible by the Loan Documents are at least equal to the obligations undertaken pursuant to this Guaranty; (d) Guarantor is solvent and has corporate power and authority to enter into this Guaranty and to perform its obligations under the term hereof and (i) Guarantor is organized and validly existing under the laws of the State of Maryland, (ii) Guarantor has complied with all provisions of applicable 8 law in connection with all aspects of this Guaranty, and (iii) the person executing this Guaranty has all the requisite power and authority to execute and deliver this Guaranty; (e) to the best of Guarantor's knowledge, there is no action, suit, proceeding, or investigation pending or threatened against or affecting Guarantor at law, in equity, in admiralty or before any arbitrator or any governmental department, commission, board, bureau, agency or instrumentality (domestic or foreign) which is reasonably likely to materially and adversely impair the ability of Guarantor to perform its obligations under this Guaranty; (f) the execution and delivery of and the performance by Guarantor of its obligations under this Guaranty have been duly authorized by all necessary action on the part of Guarantor and do not (i) violate any provision of any law, rule, regulation (including, without limitation, Regulation U or X of the Board of Governors of the Federal Reserve System of the United States), order, writ, judgment, decree, determination or award presently in effect having applicability to Guarantor or the organizational documents of Guarantor the consequences of which violation is likely to materially and adversely impair the ability of Guarantor to perform its obligations under this Guaranty or (ii) violate or conflict with, result in a breach of or constitute a default under any material indenture, agreement or other instrument to which Guarantor is a party, or by which Guarantor or any of its property is bound the consequences of which violation, conflict, breach or default is reasonably likely to materially and adversely impair the ability of Guarantor to perform its obligations under this Guaranty; 9 (g) this Guaranty has been duly executed by Guarantor and constitutes the legal, valid and binding obligation of Guarantor, enforceable against it in accordance with its terms except as enforceability may be limited by applicable insolvency, bankruptcy or other laws affecting creditors' rights generally or general principles of equity, whether such enforceability is considered in a proceeding in equity or at law; (h) no authorization, consent, approval, license or formal exemption from, nor any filing, declaration or registration with, any Federal, state, local or foreign court, governmental agency or regulatory authority is required in connection with the execution, delivery and performance by Guarantor of this Guaranty, except those which have already been obtained; and (i) Guarantor is not an "investment company" as that term is defined in, nor is it otherwise subject to regulation under, the Investment Company Act of 1940, as amended. 9. Guarantor and the Lead Agent each acknowledge and agree that this Guaranty is a guarantee of payment and performance and not of collection and enforcement in respect of any obligations which may accrue to the Lead Agent and/or the Banks from Borrower under the provisions of any Loan Document. 10. Subject to the terms and conditions of the Credit Agreement, and in conjunction therewith, the Lead Agent or any Bank may assign any or all of its rights under this Guaranty. In the event of any such assignment, the Lead Agent shall give Guarantor prompt written notice of same. If the Lead Agent and/or any Bank elects to sell all the Loans or participations in the Loans and the Loan Documents, including this Guaranty, the Lead 10 Agent or any Bank may forward to each purchaser and prospective purchaser all documents and information relating to this Guaranty or to Guarantor, whether furnished by Borrower or Guarantor or otherwise, subject to the terms and conditions of the Credit Agreement. 11. Guarantor agrees, upon the written request of the Lead Agent, to execute and deliver to the Lead Agent, from time to time, any modification or amendment hereto or any additional instruments or documents reasonably considered necessary by the Lead Agent or its counsel to cause this Guaranty to be, become or remain valid and effective in accordance with its terms, provided, that, any such modification, amendment, additional instrument or document shall not increase Guarantor's obligation's or diminish its rights hereunder and shall be reasonably satisfactory as to form to Guarantor and to Guarantor's counsel. 12. The representations and warranties of Guarantor set forth in this Guaranty shall survive until this Guaranty shall terminate in accordance with the terms hereof. 13. This Guaranty contains the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior agreements relating to such subject matter and may not be modified, amended, supplemented or discharged except by a written agreement signed by Guarantor and the Lead Agent. 14. If all or any portion of any provision contained in this Guaranty shall be determined to be invalid, illegal or unenforceable in any respect for any reason, such provision or portion thereof shall be deemed stricken and severed from this Guaranty and the remaining provisions and portions thereof shall continue in full force and effect. 11 15. This Guaranty may be executed in counterparts which together shall constitute the same instrument. 16. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission followed by telephonic confirmation or similar writing) and shall be, addressed to such party at the address set forth below or to such other address as may be identified by any party in a written notice to the others: If to Guarantor: Kilroy Realty Corporation 2250 East Imperial Highway Suite 1200 El Segundo, California 90245 Attn: Chief Financial Officer Telecopy: (310) 322-5981 With Copies of Notices to Guarantor to: Latham & Watkins 633 West Fifth Street Suite 4000 Los Angeles, California 90071 Attn: Glen B. Collyer, Esq. Telecopy: (213) 891-8763 If to the Lead Agent: Morgan Guaranty Trust Company of New York 60 Wall Street New York, New York 10260 Attn: David Stone Telecopy: 212-648-5018 12 With Copies of Notices to the Lead Agent to: if, prior to January 15, 2000, to: Skadden, Arps, Slate, Meagher & Flom LLP 919 Third Avenue New York, New York 10022 Attn: Martha Feltenstein, Esq. Telecopy: (212) 735-2000 if, after January 15, 2000, to: Skadden, Arps, Slate, Meagher & Flom LLP 4 Times Square New York, New York Attn: Martha Feltenstein, Esq. Telecopy: (212) 735-2000 Each such notice, request or other communication shall be effective (i) if given by telex or facsimile transmission, when such telex or facsimile is transmitted to the telex number or facsimile number specified in this Section and the appropriate answerback or facsimile confirmation is received, (ii) if given by certified registered mail, return receipt requested, with first class postage prepaid, addressed as aforesaid, upon receipt or refusal to accept delivery, (iii) if given by a nationally recognized overnight carrier, 24 hours after such communication is deposited with such carrier with postage prepaid for next day delivery, or (iv) if given by any other means, when delivered at the address specified in this Section. 17. Any acknowledgment or new promise, whether by payment of principal or interest or otherwise by 13 Borrower or Guarantor, with respect to the Guaranteed Obligations shall, if the statute of limitations in favor of Guarantor against the Lead Agent shall have commenced to run, toll the running of such statute of limitations, and if the period of such statute of limitations shall have expired, prevent the operation of such statute of limitations. 18. This Guaranty shall be binding upon Guarantor and its successors and assigns and shall inure to the benefit of the Lead Agent and the Banks and their successors and permitted assigns. 19. The failure of the Lead Agent to enforce any right or remedy hereunder, or promptly to enforce any such right or remedy, shall not constitute a waiver thereof, nor give rise to any estoppel against the Lead Agent, nor excuse Guarantor from its obligations hereunder. Any waiver of any such right or remedy to be enforceable against the Lead Agent must be expressly set forth in a writing signed by the Lead Agent. 20. (a) THIS GUARANTY AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. (b) Any legal action or proceeding with respect to this Guaranty and any action for enforcement of any judgment in respect thereof may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York, and, by execution and delivery of this Guaranty, the Guarantor hereby accepts for itself and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts and appellate courts from any thereof. The Guarantor irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of 14 copies thereof by registered or certified mail, postage prepaid, to the Guarantor at its address for notices set forth herein. The Guarantor hereby irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Guaranty brought in the courts referred to above and hereby further irrevocably waives, to the fullest extent permitted by law, and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. Nothing herein shall affect the right of the Lead Agent to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Guarantor in any other jurisdiction. (c) GUARANTOR HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY AND ALL CLAIMS OR CAUSES OF ACTION BASED UPON OR ARISING OUT OF THIS GUARANTY. IT IS HEREBY ACKNOWLEDGED BY GUARANTOR THAT THE WAIVER OF A JURY TRIAL IS A MATERIAL INDUCEMENT FOR THE LEAD AGENT TO ACCEPT THIS GUARANTY AND THAT THE LOANS MADE BY THE BANKS ARE MADE IN RELIANCE UPON SUCH WAIVER. GUARANTOR FURTHER WARRANTS AND REPRESENTS THAT SUCH WAIVER HAS BEEN KNOWINGLY AND VOLUNTARILY MADE, FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS GUARANTY MAY BE FILED BY THE LEAD AGENT IN COURT AS A WRITTEN CONSENT TO A NON-JURY TRIAL. (d) Guarantor does hereby further covenant and agree to and with the Lead Agent that Guarantor may be joined in any action against Borrower in connection with the Loan Documents and that recovery may be had against Guarantor in such action or in any independent action against Guarantor (with respect to the Guaranteed Obligations), without the Lead Agent first pursuing or exhausting any remedy or claim against Borrower or its successors or assigns. Guarantor also agrees that, in an action brought with respect to the Guaranteed Obligations 15 in any jurisdiction, it shall be conclusively bound by the judgment in any such action by the Lead Agent (wherever brought) against Borrower or its successors or assigns, as if Guarantor were a party to such action, even though Guarantor was not joined as parties in such action. (e) Guarantor agrees to pay all reasonable expenses (including, without limitation, attorneys' fees and disbursements) which may be incurred by the Lead Agent or the Banks in connection with the enforcement of their rights under this Guaranty, whether or not suit is initiated. 21. Notwithstanding anything to the contrary contained herein, this Guaranty shall terminate and be of no further force or effect upon the full performance and payment of the Guaranteed Obligations hereunder. Upon termination of this Guaranty in accordance with the terms of this Guaranty, the Lead Agent promptly shall deliver to Guarantor such documents as Guarantor or Guarantor's counsel reasonably may request in order to evidence such termination. 22. All of the Lead Agent's rights and remedies under each of the Loan Documents or under this Guaranty are intended to be distinct, separate and cumulative and no such right or remedy therein or herein mentioned is intended to be in exclusion of or a waiver of any other right or remedy available to the Lead Agent. 16 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Guaranty of Payment as of the date and year first above written. GUARANTOR: KILROY REALTY CORPORATION By: /s/ Tyler H. Rose ________________________________________ Name: Tyler H. Rose Title: Senior Vice President & Treasurer EX-10.3 4 CREDIT AGMT. AND FORM OF PROMISSORY NOTE EXHIBIT 10.3 - -------------------------------------------------------------------------------- CREDIT AGREEMENT among KILROY REALTY, L.P., as Borrower The Banks Listed Herein and COMMERZBANK AKTIENGESELLSCHAFT acting through its NEW YORK BRANCH, as Administrative Agent and Lead Arranger and Bank and DRESDNER BANK AG, NEW YORK and GRAND CAYMAN BRANCHES, as Syndication Agent and Arranger and Bank Dated as of October 20, 1999 - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- ARTICLE 1 DEFINITIONS.......................................................................................... 1 1.1 Defined Terms................................................................................ 1 ARTICLE 2 LOAN FACILITY........................................................................................ 11 2.1 Loan......................................................................................... 11 2.2 Note......................................................................................... 11 2.3 Repayment of Loans........................................................................... 12 2.4 Use of Proceeds.............................................................................. 12 ARTICLE 3 [INTENTIONALLY DELETED].............................................................................. 12 ARTICLE 4 GENERAL PROVISIONS APPLICABLE TO LOAN................................................................ 12 4.1 Election and Continuation of Eurodollar Loans; Floating Rate Loans; Election Procedure....... 12 4.2 Optional Prepayment.......................................................................... 13 4.3 Interest Rates and Payment Dates............................................................. 15 4.4 Computation of Interest and Fees............................................................. 15 4.5 Commitment Fee............................................................................... 15 4.6 Yield Protection............................................................................. 15 4.7 Pro Rata Treatment and Payments.............................................................. 17 4.8 Legal Details................................................................................ 18 4.9 Method and Place of Payment.................................................................. 18 4.10 Taxes........................................................................................ 18 4.11 Booking Loans................................................................................ 21 4.12 Sharing of Setoffs........................................................................... 21 4.13 Interest Rate Protection..................................................................... 22 ARTICLE 5 CONDITIONS PRECEDENT................................................................................. 22 5.1 Closing Conditions........................................................................... 22 ARTICLE 6 AFFIRMATIVE COVENANTS................................................................................ 26 6.1 General...................................................................................... 26 6.2 Financial Covenants.......................................................................... 27 6.3 Reporting Requirements....................................................................... 27 6.4 Property Covenants........................................................................... 29 ARTICLE 7 NEGATIVE COVENANTS................................................................................... 30 7.1 Mergers, Sales of Assets, Etc................................................................ 30 7.2 Limitation on Liens.......................................................................... 30 7.3 No Change in Fiscal Year..................................................................... 30
i ARTICLE 8 REPRESENTATIONS AND WARRANTIES....................................................................... 31 8.1 Organization and Qualification............................................................... 31 8.2 Power and Authority.......................................................................... 31 8.3 Authorization................................................................................ 31 8.4 No Conflicts................................................................................. 31 8.5 Enforceable Obligations...................................................................... 31 8.6 Governmental Approvals....................................................................... 32 8.7 Taxes........................................................................................ 32 8.8 Margin Stock, Etc............................................................................ 32 8.9 Possession of Franchises, Licenses, Etc...................................................... 32 8.10 Disclosure................................................................................... 32 8.11 Employee Matters............................................................................. 32 8.12 Certain Fees................................................................................. 33 8.13 Litigation................................................................................... 33 8.14 Real Property................................................................................ 34 8.15 Deed of Trust................................................................................ 34 8.16 Construction Performed....................................................................... 34 8.17 Use of Proceeds: Margin Regulations.......................................................... 34 8.18 Subsidiaries................................................................................. 35 8.19 Building Compliance.......................................................................... 35 8.20 Annual Budget................................................................................ 35 8.21 Ground Lease................................................................................. 35 8.22 Year 2000 Representations and Covenants...................................................... 35 ARTICLE 9 EVENTS OF DEFAULT; REMEDIES.......................................................................... 36 9.1 Events of Default............................................................................ 36 9.2 Remedies Upon Default........................................................................ 38 9.3 Remedies in General.......................................................................... 38 ARTICLE 10 LIMITED RECOURSE OBLIGATIONS........................................................................ 38 10.1 Limited Recourse............................................................................. 38 ARTICLE 11 THE AGENT........................................................................................... 39 11.1 Appointment; Powers and Immunities........................................................... 39 11.2 Reliance by Agent............................................................................ 40 11.3 Defaults..................................................................................... 40 11.4 Rights of Agent as a Bank.................................................................... 40 11.5 Indemnification.............................................................................. 40 11.6 CONSEQUENTIAL DAMAGES........................................................................ 41 11.7 Payee of Note Treated as Owner............................................................... 41 11.8 Nonreliance on Agent and Other Banks......................................................... 41 11.9 Failure to Act............................................................................... 41
ii 11.10 Resignation or Removal of Agent.............................................................. 41 11.11 Reliance by Borrower......................................................................... 42 11.12 Syndication Agent............................................................................ 43 ARTICLE 12 MISCELLANEOUS....................................................................................... 43 12.1 Notices...................................................................................... 43 12.2 Survival of Agreements....................................................................... 44 12.3 Parties in Interest.......................................................................... 44 12.4 Expenses..................................................................................... 44 12.5 Governing Law; Jurisdiction; Venue; Jury Trial............................................... 44 12.6 Right of Setoff.............................................................................. 45 12.7 Severability................................................................................. 45 12.8 Indemnity.................................................................................... 45 12.9 Headings..................................................................................... 46 12.10 Exceptions to Covenants...................................................................... 46 12.11 Amendments and Waivers....................................................................... 46 12.12 Entire Agreement............................................................................. 46 12.13 No Waiver; Remedies.......................................................................... 47 12.14 Binding Effect............................................................................... 47 12.15 Counterparts................................................................................. 47 12.16 Assignment and Participations................................................................ 47
iii CREDIT AGREEMENT THIS CREDIT AGREEMENT is made as of the 20th day of October, 1999, among KILROY REALTY, L.P., a Delaware limited partnership ("Borrower"), -------- COMMERZBANK AKTIENGESELLSCHAFT, acting through its NEW YORK BRANCH ("Commerzbank"), as Administrative Agent on behalf of the Banks, as described ----------- below (in such capacity, the "Agent") and Lead Arranger, DRESDNER BANK AG, NEW ----- YORK and GRAND CAYMAN BRANCHES ("Dresdner"), as Syndication Agent and Arranger, -------- and the financial institutions listed in Annex I, including Commerzbank, and each other financial institution which has been assigned an interest herein pursuant to Section 12.16(b), as evidenced by an Assignment and Acceptance Agreement (each, a "Bank" and, collectively, the "Banks"). ---- ----- PRELIMINARY STATEMENT --------------------- In consideration of the mutual covenants herein contained and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS 1.1 Defined Terms. The terms defined in this Article 1 (except as ------------- otherwise expressly provided in this Agreement) for all purposes shall have the following meanings, and the singular shall include the plural, and vice versa, unless otherwise specifically required by the context: "Adjusted LIBOR Rate" shall mean, with respect to any Eurodollar Loan for ------------------- any Interest Period, the per annum rate equal to the product obtained (rounded upward, if necessary, to the next higher 1/16 of 1%) by multiplying (a) the applicable LIBOR Rate in effect for such Interest Period by (b) the Statutory Reserves. "Affiliate" shall mean a Person that directly, or indirectly through one or --------- more intermediaries, Controls or is Controlled by or is under common Control with another Person. "Agent" shall mean Commerzbank, in its capacity as Administrative Agent ----- hereunder, and shall include any successor to the Agent appointed pursuant to Section 11.10. "Agreement" shall mean this Agreement and any amendments hereto duly made --------- in accordance with this Agreement. -1- "Alternate Base Rate" shall mean a rate per annum (rounded upwards, if ------------------- necessary, to the nest 1/16 of 1%) equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. If for any reason the Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability or failure of the Agent to obtain sufficient quotations in accordance with the terms thereof, the Alternate Base Rate shall be determined without regard to clause (b) of the first sentence of this definition until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective as of the opening of business on the effective day of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. The Agent will give notice promptly to Borrower and the Banks of changes in the Alternate Base Rate, provided, however, that the Agent's failure to give any such notice will not affect Borrower's obligation to pay interest to the Banks on any Floating Rate Loan at the then effective Alternate Base Rate. "Applicable Margin" shall mean 175 basis points (i.e., 1.75%). ----------------- ---- "Assignment and Acceptance Agreement" shall mean an Assignment and ----------------------------------- Acceptance Agreement entered into by a Bank and an Assignee (as defined in Section 12.16(b)), and accepted by the Agent, pursuant to which the Assignee shall acquire all or a portion of the assigning Bank's Commitments and shall become a Bank party to this Agreement, and which shall include such terms and conditions as shall be reasonably acceptable to the Agent, the assigning Bank and the Assignee. "Auditors" shall mean independent certified public accountants selected by -------- Borrower and acceptable to the Agent. "Authorized Officer" shall mean, with respect to Borrower, the General ------------------ Partner or the General Partner's president, any senior or executive vice president, chief financial officer, chief accounting officer or treasurer. "Business Day" shall mean a day other than a Saturday or Sunday on which ------------ (a) commercial banks in New York, New York and in London, England are open for business and (b) on which dealings in Dollars are carried out on the Interbank Market. "Capitalization Documents" shall mean the Partnership Agreement and each of ------------------------ the documents governing the issuance of or setting forth the terms of any partnership interests issued or to be issued by Borrower. "Closing Checklist" shall mean the list of closing items required to be ----------------- satisfied by Borrower on or prior to the Closing Date, which list is attached hereto as Annex II. "Closing Date" shall mean the date hereof. ------------ -2- "Commitment Percentage" shall mean, as to any Bank, the percentage of the --------------------- aggregate Commitments constituted by such Bank's Commitment; "Commitment" shall mean, as to any Bank, the amount committed by such Bank ---------- pursuant to this Agreement with respect to the Loan, as such amount may be reduced from time to time pursuant to this Agreement. "Control" (and "Controlled By" with correlative meaning) shall mean, with ------- ------------- respect to any Person, the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "Debt Service Coverage Ratio" shall mean, with respect to any six (6) month --------------------------- period, the ratio of (a) Net Operating Income for such period, to (b) the greater of (i) the actual Interest Expense due for such period, or (ii) the Interest Expense and projected amortization payments for such period applicable to the principal balance of the Loan outstanding on the last day of such period assuming an interest rate for such period of 2% per annum plus the yield rate on 10-year United States Treasury Notes most recently issued prior to the end of such period, as quoted in The Wall Street Journal (or, if The Wall Street Journal shall cease publication, such other publication as Agent may select in its reasonable discretion), and further assuming a 25-year amortization schedule. "Debt Yield Calculation" shall mean, with respect to any six (6) month ---------------------- period, the quotient of (i) annualized Net Operating Income, divided by (ii) the ------- -- outstanding principal balance of the Loan. "Deed of Trust" shall mean the Variable Interest Rate Deed of Trust, ------------- Leasehold Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated the date thereof given by Borrower to First American Title Insurance Company, as trustee for the use and benefit of the Agent on behalf of the Banks, in the maximum principal amount of $90,000,000. "Default" shall mean any event specified in Section 9.1, whether or not any ------- requirement in connection with such event for the giving of notice, lapse of time, or happening of any further condition, event or act has been satisfied; provided, however, that it is understood that the characterization of such event - -------- ------- as a "Default" shall not affect Borrower's right to cure, if any, or entitlement to any applicable grace period, as may be provided herein or in any of the other Loan Documents. "Default Rate" shall have the meaning specified in Section 4.3(b). ------------ "Dollars" and the symbol "$" shall mean lawful money of the United States ------- - of America. -3- "Domestic Lending Office" shall mean, as to each Bank which is a party to ----------------------- this Agreement on the Closing Date, such Bank's office located at its address set forth on Annex I hereto identified as its Domestic Lending Office, and as to each other Bank, such Bank's office located at its address set forth in the Assignment and Acceptance Agreement pursuant to which such Bank became a party hereto identified as its Domestic Lending Office, or such other office of any Bank which such Bank may hereafter designate as its Domestic Lending Office by notice to Borrower and the Agent. "Environmental Complaint" shall mean any complaint, order, citation, notice ----------------------- or other written communication from any Person with respect to the existence or alleged existence of a violation of an environmental Law or legal liability resulting from the occurrence of any, or alleged occurrence of any, release, spill or discharge of any Pollutant from, under, into or on an Individual Property, or any other environmental matter at, upon, under or within an Individual Property or otherwise relating to an Individual Property or the ownership, use, operation or occupancy thereof. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as ----- amended, and the rules and regulations issued thereunder, as from time to time in effect. "Eurocurrency Liabilities" shall have the meaning specified in the ------------------------ definition of "Statutory Reserves". "Eurodollar Lending Office" shall mean, as to each Bank which is a party to ------------------------- this Agreement on the Closing Date, such Bank's office, branch or Affiliate located at its address set forth on Annex I hereto identified as its Eurodollar Lending Office, and as to each other Bank, such Bank's office, branch or Affiliate located at its address set forth in the Assignment and Acceptance Agreement pursuant to which such Bank become a party hereto identified as its Eurodollar Lending Office, or such other office, branch or Affiliate of any Bank which such Bank may hereafter designate as its Eurodollar Lending Office by notice to Borrower and the Agent. "Eurodollar Loan" shall mean the Loan, or any portion thereof, bearing --------------- interest at a rate determined by reference to the Adjusted LIBOR Rate. "Event of Default" shall mean any of the events specified in Section 9.1, ---------------- after the expiration of any period of grace or right to cure provided therein, provided there has been satisfied any requirement in connection therewith for the giving of notice, lapse of time, or happening of any further condition, event or act. "Federal Funds Effective Rate" shall mean for any day, the weighted average ---------------------------- of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the -4- average of the quotations for the day of such transactions received by the Agent from three federal funds brokers of recognized standing selected by it. "Financial Covenants" shall mean the covenants set forth in Section 6.2. ------------------- "Floating Rate Loan" shall mean the Loan, or any portion thereof, bearing ------------------ interest at a rate determined by reference to the Alternate Base Rate. "Full-Fledged Appraisal" shall mean an M.A.I. appraisal of the Property ---------------------- acceptable to the Agent, prepared by an appraiser selected by Borrower and acceptable to the Agent. In the event that at the time of such appraisal there exists a casualty to the Property, the appraisal shall assume that the Property has been restored if (a) it is reasonable to do so and (b) there are available to Borrower insurance proceeds or other funds in an amount sufficient to finance such restoration within the time required by the lease of each principal tenant of the Property. "GAAP" shall mean generally accepted accounting principles applied on a ---- consistent basis, set forth in the Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or in such other statement by such other entity as the Agent may reasonably approve, which are applicable as of the date in question, or such other accounting principles as may be mutually agreed by the Agent and Borrower. Subject to the preceding sentence, the requirement that accounting principles be applied on a consistent basis shall mean that once such principles become applicable to any matter set forth in or contemplated by this Agreement in respect of any accounting period, then in any subsequent accounting period accounting principles must be applied which are comparable in all material respects to those which were applicable in the earlier period. Unless otherwise indicated herein, all accounting terms shall be defined according to GAAP. "General Partner" shall mean Kilroy Realty Corporation, a Maryland --------------- corporation, in its capacity as general partner of Borrower. "Ground Lease" shall mean that certain Agreement for Ground Lease ------------ Development and Use of Real Property dated September 22, 1988 executed by and between The City of San Diego, as lessor, and JOSP Partners, as lessee, and recorded on April 21, 1989 as Instrument No. 89-209941 of the Official Records of San Diego County, California (the "Official Records"), as amended by First -------- ------- Amendment dated March 31, 1989 between such parties and recorded on April 21, 1989 as File No. 1989-209942 of the Official Records, as further amended by Second Amendment dated March 26, 1990 between such parties and recorded on May 17, 1990 as File No. 90-270833 of the Official Records as further amended by that Consent and Estoppel Certificate executed as of June 18, 1998 by such parties and Borrower, and as assigned by JOSP Partners to Borrower pursuant to Assignment dated ____________ and recorded on June 18, 1998 as File No. 98- 0375194 of the Official Records. -5- "Guaranteed Indebtedness" shall mean all indebtedness of a Person other ----------------------- than Borrower of a type described in clauses (a), (b), (c) and (e) of the definition of "Indebtedness" which is guaranteed directly or indirectly in any manner by Borrower, or in effect guaranteed directly or indirectly in any manner by Borrower. "Increased Cost" shall have the meaning set forth in Section 4.6(a)(ii). -------------- "Indebtedness" shall mean, as at any date, (a) all indebtedness of Borrower ------------ for borrowed money or for the deferred purchase price of property or services (except such indebtedness the existence of which is being contested by Borrower in good faith and by appropriate action), (b) all obligations of Borrower evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations under leases which shall have been or should be, in accordance with GAAP, recorded as capital leases in respect of which Borrower is liable as lessee (except such obligations the existence of which is being contested by Borrower in good faith and by appropriate actions), (d) any Guaranteed Indebtedness, and (e) any other indebtedness required to be recorded as indebtedness on the financial statements of Borrower in accordance with GAAP. "Indemnifiable Taxes" shall have the meaning specified in Section 4.10(a). ------------------- "Individual Property" shall mean each discrete parcel of land included in ------------------- the Property, as identified in each separate sub-exhibit to Exhibit A attached to the Deed of Trust. "Initial Date" shall have the meaning specified in Section 4.10(a). ------------ "Interbank Market" shall mean any market for the buying and selling of ---------------- Dollar deposits payable outside the United States of America between the Agent and other financial institutions in the ordinary course of the Agent's business. "Interest Coverage Ratio" shall mean, with respect to any six (6) month ----------------------- period, the ratio of (a) Net Operating Income for such period to (b) the actual Interest Expense for such period. "Interest Expense" shall mean, with respect to any period, all interest ---------------- paid or payable by Borrower during such period on the Loan. "Interest Payment Date" shall mean, (a) with respect to any Eurodollar --------------------- Loan, the last day of each Interest Period therefor and, in the case of an Interest Period of six months, the day numerically corresponding to such date (or if there is no such day, then the last day) in the third calendar month during such Interest Period and (b) with respect to any portion of the Loan which is not a Eurodollar Loan, on the Quarterly Payment Date. "Interest Period" shall mean, with respect to any Eurodollar Loan, a period --------------- of one, two, three or six months, as selected by Borrower, beginning (i) on the date such Loan is made and (ii) -6- thereafter, on the last day of the immediately preceding Interest Period, provided that (x) no Interest Period for any Loan shall extend beyond the - -------- Maturity Date, (y) any Interest Period which begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period shall end on the last Business Day of such calendar month and (z) any Interest Period which would otherwise end on a day that is not a Business Day shall end on the next succeeding Business Day unless such Interest Period would thereby end in a different calendar month, in which case such Interest Period shall end on the next preceding Business Day. There may be no more than five (5) Interest Periods in effect at any one time. If any portion of the Loan is not a Eurodollar Loan, there may be no more than four (4) Interest Periods in effect at any one time. "Laws" shall mean all statutes, laws, ordinances, rules, regulations, ---- orders, writs, injunctions or decrees of any Tribunal. "Leased Land" shall mean the property demised to Borrower pursuant to the ------------ Ground Lease. "Lending Branch" shall mean Commerzbank's New York Office or any other -------------- office or Affiliate of Commerzbank hereafter selected and notified to Borrower from time to time by Commerzbank. "LIBOR Rate" shall mean the rate (rounded upward, if necessary, to the next ---------- higher 1/16 of 1%) at which Dollar deposits approximately equal in principal amount to the Agent's portion of such Eurodollar Loan and for a maturity comparable to such Interest Period that appears on Telerate (as defined below) Page 3750 as of 11:00 am., London time, on the date which is two (2) Business Days prior to the beginning of the subsequent Interest Period (an "Interest -------- Determination Date"). If such rate does not appear on Telerate Page 3750 as of - ------------------ 11:00 a.m., London time, on such Interest Determination Date, LIBOR will be determined on the basis of the rate (rounded upward, if necessary, to the next higher 1/16 of 1%) at which deposits in U.S. Dollars approximately equal in principal amount to the Agent's portion of such Eurodollar Loan and for a maturity comparable to such Interest Period are offered to the Lending Branch in immediately available funds in the Interbank Market at approximately 10:00 a.m., New York City time, two (2) Business Days prior to the commencement of such Interest Period. "Lien" shall mean any deed of trust, mortgage, pledge, security interest, ---- encumbrance, lien or charge of any kind, including without limitation, any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature of a conditional sale or title retention agreement, the filing of or agreement to give any financing statement or other similar form of public notice under the Laws of any jurisdiction. "Litigation" shall mean any pending or, to the best knowledge of Borrower, ---------- threatened proceeding, claim, lawsuit, arbitration or investigation conducted or threatened by or before any Tribunal, including, without limitation, proceedings, claims, lawsuits and investigations under or -7- pursuant to any environmental, occupational, safety and health, antitrust, unfair competition, securities, Tax or other Law, or under or pursuant to any contract, agreement or other instrument; provided, however, that "Litigation" -------- ------- shall not include any of the foregoing that is covered by adequate insurance. "Loan" shall mean the loan in the maximum principal sum of $90,000,000 made ---- to Borrower pursuant to this Agreement (or, as the context requires, any portion thereof). "Loan Documents" shall mean this Agreement, the Note, the Deed of Trust and -------------- all other documents, instruments and certificates to be executed by Borrower or the General Partner in connection with this Agreement or as security for the Loans. "Majority Banks" shall mean Banks collectively having outstanding -------------- Commitments in excess of 50% of the total aggregate outstanding Commitments. "Margin Security" and "Margin Stock" shall have the meanings given to those --------------- ------------ terms in Regulations U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and 224. "Material Adverse Change" or "Material Adverse Effect" shall mean any act, ----------------------- ----------------------- circumstance or event that might be material and adverse to (a) the financial condition or business operations of Borrower, (b) the Property or Borrower's interest in the Property or (c) the Agent's and the Banks' interests in the Property. "Maturity Date" shall mean October 20, 2003. ------------- "Net Operating Income" shall mean, with respect to any period, (a) the -------------------- total income received by Borrower for such period from the operation of the Property in the ordinary course of business (including, but not limited to, fixed rent, percentage rent, escalation payments, parking income, tenant work order income, cost recoveries and similar operating income items) less (b) all ---- ordinary operating expenses incurred and paid (or payable in the ordinary course of business) in connection with the operation of the Property, including, but not limited to, utility charges, insurance premiums, salaries and payroll costs, maintenance and repair costs, real estate taxes, and all other general operating expenses attributable to the Property. Net Operating Income shall be determined on a cash basis of accounting. "New York Office" shall mean Commerzbank's principal office in New York --------------- City located, on the date hereof, at 2 World Financial Center, New York, New York 10281-1050 or any other office of Commerzbank hereafter selected and notified to Borrower from time to time by Commerzbank. "Note" shall have the meaning specified in Section 2.2 hereof. ---- -8- "Obligations" shall mean the aggregate principal, interest, fees and other ----------- amounts payable by Borrower to the Agent or any Bank under the Loan Documents. "Other Taxes" shall have the meaning specified in Section 4.10. ----------- "Partnership Agreement" shall mean the Fourth Amended and Restated --------------------- Partnership Agreement of Borrower dated as of November 24, 1998. "Permitted Encumbrances" shall mean: ---------------------- (a) the Deed of Trust and other Liens in favor of the Agent on behalf of the Banks under the Loan Documents; (b) Liens for taxes, assessments or other governmental charges or levies not at the time delinquent or thereafter payable without penalty or being contested in good faith, provided that appropriate provision is made for the -------- payment thereof when due as provided in the Deed of Trust; (c) exceptions to title listed on the marked title insurance commitments delivered to the Agent at Closing pursuant to Section 5.1(l)(ii) and approved in writing by the Agent; and (d) Liens incidental to the conduct of the business of Borrower which are not incurred in connection with any Indebtedness of Borrower described in clauses (a) or (b) of the definition of "Indebtedness" in Section 1.1 and which do not materially detract from the value of the Property or materially impair the use thereof in the operation of the Property, provided that appropriate -------- provision is made for the payment thereof when due in the event it is found that any obligation secured by any such Lien is payable by Borrower. "Person" shall mean and include an individual, partnership, joint venture, ------ corporation, limited liability company, trust, Tribunal, unincorporated organization or government, or any department, agency or political subdivision thereof. "Plan" shall mean any plan subject to Title IV of ERISA and maintained for ---- employees of Borrower, or of any member of a controlled group of corporations as defined in Section 1563 of the Internal Revenue Code of 1986, as amended, of which Borrower is a part. "Pollutant" shall mean any reportable quantity of any hazardous waste or --------- substance as defined in any applicable federal, state or local law, regulation, ordinance or directive, including but not limited to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act, 42 U.S.C. (S) 9601, et seq.; -- --- the Hazardous Materials Transportation Act, 49 U.S.C. (S) 1801, et seq.; the -- --- Toxic Substances Control Act, 15 U.S.C. (S) 2601, et seq.; the Resource -- --- Conservation and Recovery Act, as amended (42 U.S.C. (S)(S) 9601, et seq.); the -- --- -9- Clean Water Act, 33 U.S.C. (S) 1251 et seq.; and the Clean Air Act, 42 U.S.C. -- --- (S) 7401 et seq. the Emergency Planning and Community-Right-to-Know Act (42 -- --- U.S.C. (S) 11001 et seq.), the Endangered Species Act (16 U.S.C. (S) 1531 et -- --- -- seq.), the Toxic Substances Control Act (15 U.S.C. (S) 2601 et seq.), the - --- -- --- Occupational Safety and Health Act (29 U.S.C. (S) 651 et seq.) or the Hazardous -- --- Materials Transportation Act (49 U.S.C. (S) 1801 et seq.), Sections 25115, -- --- 25117, 25122.7, 25140, 25249.8, 25281, 25501 and 25316 of the California Health and Safety Code, Section 2782.6(d) of the California Civil Code and Title 22 of the California Code of Regulations and the regulations adopted pursuant to the above listed laws, as any such acts or regulations may be amended, modified or supplemented. The term "Pollutant" shall include any reportable quantity of airborne asbestos. The term "Pollutant" shall specifically not include the emission, discharge, generation, processing, storage or transportation of any hazardous waste or substance pursuant to, and in accordance with, a valid federal or state permit, license or order. "Prime Rate" shall mean the rate of interest per annum publicly announced ---------- from time to time by Commerzbank as its prime lending rate or reference rate in effect at its principal office in New York City. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. Commerzbank may make commercial loans or other loans at rates of interest at, above or below the Prime Rate. Any change in the Prime Rate announced by Commerzbank shall take effect at the opening of business on the day specified in the public announcement of such change. "Property" shall have the meaning ascribed thereto in the Deed of Trust. -------- "Quarterly Payment Date" shall mean March 31, June 30, September 30 and ---------------------- December 31 of each year. The first Quarterly Payment Date shall be December 31, 1999. "Regulatory Change" shall mean any change after the Closing Date in ----------------- federal, state or foreign Laws (including the introduction of any new Law), or the adoption or making after such date of any interpretations, directives or requests applying to a class of banks including the Banks of or under any federal, state or foreign Laws (whether or not having the force of Law) by any Tribunal charged with the interpretation or administration thereof. "Reuters" shall mean Reuters Monitor Money Rates Service. ------- "Revolving Credit Agreement" shall mean the Amended and Restated Revolving --------------------------- Credit Agreement dated as of October 9, 1998 among Borrower, Morgan Guaranty Trust Company of New York, as Bank and as Lead Agent for the Banks, Bank of Montreal, as Bank and as Co-Agent, Commerzbank Aktiengesellschaft, Los Angeles Branch, as Bank and Co-Agent, Dresdner Bank AG, New York Branch and Grand Cayman Branch, as Bank and as Co-Agent, PNC Bank, National Association, as Bank and as Co-Agent, Union Bank of California, as Bank and as Co-Agent, and the other banks listed therein, as in effect on the date hereof. "Rights" shall mean rights, remedies, powers and privileges. ------ -10- "Special Counsel" shall mean Robinson Silverman Pearce Aronsohn & Berman --------------- LLP, or such other counsel as the Agent may designate from time to time. "Statutory Reserves" shall mean a fraction (expressed as a decimal), the ------------------ numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum applicable reserve percentages, including any marginal, special, emergency or supplemental reserves (expressed as a decimal) established by the Board of Governors of the Federal Reserve System and any other banking authority to which any Bank is subject with respect to the Adjusted LIBOR Rate, for Eurocurrency Liabilities (as defined in Regulation D of the Board, "Eurocurrency Liabilities"). Such reserve percentages shall include ------------------------ those imposed pursuant to Regulation D of the Board of Governors of the Federal Reserve System. Eurodollar Loans shall be deemed to constitute Eurocurrency Liabilities and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Bank under such Regulation D. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "Subsidiary" shall mean any corporation at least a majority of whose ---------- securities having ordinary voting power for the election of directors (other than securities having such power only by reason of happening of a contingency) are owned by Borrower, or one or more Subsidiaries of Borrower, or a combination thereof. "Taxes" shall mean all taxes, assessments, fees or other charges at any ----- time imposed by any Laws or Tribunal. "Telerate" means the display page so designated on the Dow Jones Markets -------- (formerly known as Telerate) Service (or such other page as may replace such page on that service, or such other service as may be nominated by the Agent, in its discretion, as the information vendor, for the purpose of displaying rates or prices comparable thereto). "Tribunal" shall mean any municipal, state, commonwealth, federal, foreign, -------- territorial or other court, legislature or governmental body, subdivision, agency, department, commission, board, bureau or instrumentality, in each case with applicable regulatory authority. "Value" shall mean, as at any date of determination thereof, the fair ----- market value of the Property. -11- ARTICLE 2 LOAN FACILITY 2.1 Loan. (a) Subject to the terms and conditions hereof, each Bank, ---- severally, and not jointly, agrees to make the Loan to Borrower on the Closing Date in a principal amount not to exceed the amount set forth under the heading "Loan Commitments" opposite the name of such Bank on Annex I. (b) The Loan shall be fully secured by the Deed of Trust and the Property described therein and in the other Loan Documents. The Loan or any portion thereof may either be, from time to time, a (i) Eurodollar Loan or (ii) a Floating Rate Loan. Eurodollar Loans shall be made by each Bank at its respective Eurodollar Lending Office. Floating Rate Loans shall be made by each Bank at its respective Domestic Lending Office. 2.2 Note. The Loan made by each Bank pursuant to Section 2.1(b) shall be ---- evidenced by a promissory note (or notes) of Borrower substantially in the form of Exhibit A (individually and collectively, a "Note"), payable to the order of ---- each such Bank. Each Note shall (i) be dated the Closing Date, and (ii) bear interest, payable as specified in Section 4.3, for the period from the date thereof on the unpaid principal amount thereof at the applicable interest rate per annum specified in Section 4.3 until paid in full. Borrower agrees, from time to time, upon the request of the Agent or any affected Bank, to reissue new Notes, in accordance with the terms and in the form herein provided, to any Bank and/or any assignee of such Bank pursuant to Section 12.16 hereof, in renewal of and substitution for the Note previously issued by Borrower to the affected Bank. 2.3 Repayment of Loans. Interest on the outstanding principal balance of ------------------ the Loan shall be due and payable on each Interest Payment Date. The entire unpaid principal amount of the Loan, together with interest accrued and unpaid on such amount and all other sums due and payable pursuant to the Loan Documents, shall be paid in full on the Maturity Date. 2.4 Use of Proceeds. The proceeds of the Loan shall be used by Borrower --------------- solely to repay Indebtedness incurred pursuant to the Revolving Credit Agreement, and for working capital in connection with the operation of the Property. -12- ARTICLE 3 [INTENTIONALLY DELETED] ARTICLE 4 GENERAL PROVISIONS APPLICABLE TO LOAN 4.1 Election and Continuation of Eurodollar Loans; Floating Rate Loans; ------------------------------------------------------------------- Election Procedure. (a) Borrower may elect from time to time in the manner - ------------------ hereinafter described to have all or a portion of the entire principal balance of the Loan to be either a Eurodollar Loan or an Floating Rate Loan. (b) Borrower shall give the Agent written (including telecopy) notice (or telephonic notice promptly confirmed in writing) specifying whether the Loan shall initially be a Eurodollar Loan or a Floating Rate Loan or a combination thereof, and the length of the Interest Period(s) for the Eurodollar Loan. If all or any portion of the Loan is to be a Eurodollar Loan, such notice shall be given prior to 10:00 a.m., New York City time, at least three Business Days prior to the Closing Date; if the entire Loan is to be a Floating Rate Loan, such notice shall be given prior to 10:00 a.m., New York City time, at least one Business Day prior to the Closing Date. Upon receipt of such notice from Borrower, the Agent shall promptly notify each Bank thereof. On the Closing Date, (A) each Bank shall make available to the Agent an amount in immediately available funds equal to the sum of such Bank's Commitment on such date and (B) the Agent shall make available to Borrower, the proceeds of the Loan by crediting the account of Borrower on the books of the Agent with the aggregate amount of the Loan made available to the Agent by the Banks and in like funds received by the Agent for transmittal by the Agent upon Borrower's request. Any borrowing of, or conversion to, Eurodollar Loans under this Article 4 shall be in such amounts and be made pursuant to such elections so that, after giving effect thereto, the aggregate principal amount of each such borrowing of Eurodollar Loans shall not be less than $5,000,000 or a whole multiple of $1,000,000 in excess thereof. (c) Borrower shall have the right at any time upon prior written (including telecopy) notice (or telephonic notice promptly confirmed in writing) to the Agent not later than 10:00 a.m., New York City time, three Business Days prior to the end of an Interest Period with respect to a Eurodollar Loan, or three Business Days prior to the end of a calendar month with respect to a Floating Rate Loan, (i) to convert a Floating Rate Loan to a Eurodollar Loan, (ii) to continue a Eurodollar Loan as a Eurodollar Loan for an additional Interest Period, (iii) to convert a Eurodollar Loan to a Floating Rate Loan and (iv) to convert the Interest Period with respect to any Eurodollar Loan to another permissible Interest Period, subject in each case to the following: (i) each conversion or continuation shall be made pro rata --- ---- among the Banks in accordance with their respective principal amounts of the portion of the Loan comprising the converted or continued portion; (ii) the Eurodollar Loan may not be continued as a Eurodollar Loan with the same or different Interest Period at a time other than the end of the Interest Period applicable thereto; and (iii) the Eurodollar Loan may not be continued as a Eurodollar Loan at a time when an Event of Default has occurred and is continuing. Each notice pursuant to this Section 4.1(c) shall be irrevocable and shall specify the Interest Period for the Eurodollar Loan resulting from such continuation or conversion. If no -13- Interest Period is specified in any such notice with respect to any continuation as or conversion into the Eurodollar Loan, or if Borrower shall not have given notice in accordance with this Section 4.1(c) to continue the Eurodollar Loan into a subsequent Interest Period (and shall not otherwise have given notice in accordance with this Section 4.1(c) to convert such Eurodollar Loan), Borrower shall be deemed to have selected an Interest Period of one month's duration. The Agent shall advise the other Banks of any notice given pursuant to this Section 4.1(c) and of each Bank's portion of any continued or converted Borrowing. (d) It is understood that the entire principal balance of the Loan shall be advanced on the Closing Date. If any portion of the principal balance of the Loan shall be repaid or prepaid, Borrower shall not be entitled to any advances or readvances thereof. 4.2 Optional Prepayment. (a) The Loans may not be prepaid in whole or ------------------- in part at the option of the Borrower except as provided in this Article 4. (b) (i) Notwithstanding any provision of this Agreement to the contrary, Borrower may prepay the principal balance of the Note, in whole or in part, upon not less than ten (10) days' prior written notice to the Agent specifying the date on which prepayment is to be made (the "Tender Date") and the amount of any ----------- such prepayment, and upon payment of (a) interest accrued and unpaid on the principal balance of the Note to and including the Tender Date, (b) all other sums then due under the Note, the Deed of Trust and the other Loan Documents, and (c) if all or any portion of the Loan being prepaid is a Eurodollar Loan, amounts as set forth in Section 4.2(d) hereof. The Agent shall not be obligated to accept any prepayment of the principal balance of the Note unless (1) the payment is accompanied by all sums required under this Section 4.2, (2) if a partial prepayment, the partial prepayment, if any, shall not be in an amount less than the lesser of (i) Five Million and 00/100 Dollars ($5,000,000) and (ii) the unpaid principal amount of the Loan and (3) the prepayment is made on the applicable Tender Date. (c) If, following the occurrence of any Event of Default, Borrower shall tender payment of an amount sufficient to repay the Loan and all other sums due hereunder or under the Loan Documents in full at any time prior to a sale of the Property, either through foreclosure or the exercise of the other remedies available to the Agent under the Deed of Trust or under the other Loan Documents, such tender by Borrower shall be deemed to be a voluntary prepayment in the amount tendered and Borrower shall, in addition, also pay to the Agent the Prepayment Compensation (as defined in Section 4.2(e) hereof). It is agreed and understood that the Prepayment Compensation shall be due, to the extent permitted by applicable law, under any and all circumstances where all or any portion of the Note is paid prior to the Maturity Date, whether such prepayment is voluntary or involuntary, even if such prepayment results from the Agent's exercise of its rights upon Borrower's default and acceleration of the maturity date of the Note (irrespective of whether foreclosure proceedings have been commenced), and shall be in addition to any other sums due hereunder, under the Deed of Trust or under any of the other Loan Documents. Notwithstanding the previous sentence, however, if the Agent elects to apply condemnation proceeds or casualty proceeds as a full or partial prepayment of the outstanding -14- principal amount of the Note, such application shall be without payment of any Prepayment Compensation, unless, however, an Event of Default has occurred and is continuing, in which event the Prepayment Compensation shall be due and payable based upon the amount of the prepayment. (d) The Borrower shall compensate each Bank, upon such Bank's written request to the Agent and the Agent's delivery thereof to the Borrower (which request shall set forth in reasonable detail the basis for requesting such amounts), for all losses, expenses, and liabilities (including, without limitation, any interest paid by such Bank to lenders of funds borrowed by it to make or carry its Commitment to the extent not recovered by such Bank in connection with the re-employment of such funds but excluding loss of anticipated profits), which such Bank may sustain if any prepayment occurs on a date which is not the Maturity Date or the last day of an Interest Period. With respect to losses, expenses and liabilities which a Lender may sustain as described in this Section 4.2(d) relating to any period in which the Commitment is in effect, the provisions of this Section 4.2(d) shall survive the termination of this Agreement and the payment of the Note and all other amounts payable hereunder. (e) Borrower acknowledges and agrees that the sums payable pursuant to Section 4.2(d) hereof (the "Prepayment Compensation") represent a reasonable and ----------------------- fair estimate of compensation for the loss that the Banks may sustain from the prepayment of the Note or any portion of the Loan on a date other than the Maturity Date or the last day of an Interest Period. Borrower acknowledges and agrees that it has no right to prepay the Note without paying the Prepayment Compensation except as specifically provided hereinafter and Borrower specifically acknowledges and agrees that it shall be liable for the Prepayment Consideration upon any acceleration of the Note in accordance with its terms at any time, in addition to the principal amount and all outstanding interest, fees, penalties and other sums due hereunder, under the Deed of Trust or under any of the other Loan Documents. 4.3 Interest Rates and Payment Dates. (a) If the Loan is a Eurodollar -------------------------------- Loan, the Loan shall bear interest for each Interest Period applicable thereto on the unpaid principal amount thereof at a rate per annum equal to the Adjusted LIBOR Rate determined for such Interest Period plus the Applicable Margin. If the Loan is a Floating Rate Loan, the Loan shall bear interest for each Interest Period applicable thereto on the unpaid principal amount thereof at a rate per annum equal to the Alternate Base Rate determined for such Interest Period plus the Applicable Margin. (b) Notwithstanding the foregoing, if any Event of Default occurs, then, while such Event of Default continues, the Loan shall bear interest at a rate per annum equal to the Alternate Base Rate plus 6.00% (the "Default Rate"). ------------ (c) Interest on the Loan shall be payable in arrears on each Interest Payment Date, except that interest which is accruing at the Default Rate shall be payable on demand of the Agent. -15- 4.4 Computation of Interest and Fees. Interest and fees shall be -------------------------------- calculated on the basis of the actual number of days elapsed over a 360-day year. The Agent shall as soon as practicable notify Borrower and the Banks of each determination of the Eurodollar Rate. 4.5 Commitment Fee. On the Closing Date, Borrower shall pay to the -------------- Agent its upfront commitment fee, and such other fees as provided in the separate fee letter agreement between Borrower and the Agent dated as of the date hereof. 4.6 Yield Protection. ---------------- (a) Events Relating to Loans. ------------------------ (i) Interbank Market Conditions or Regulatory Changes. Notwithstanding ------------------------------------------------- anything in this Agreement to the contrary, if (A) by reason of changes affecting the Interbank Market generally, adequate and fair means do not exist for ascertaining the LIBOR Rate or the continuation of Eurodollar Loans has been made impracticable by the occurrence of a contingency which materially and adversely affects the Interbank Market, or (B) any Regulatory Change shall make it unlawful for any Bank to make or maintain any Eurodollar Loans or to match Eurocurrency Liabilities thereto (which Bank shall deliver prompt notice thereof to the Agent and Borrower), then, at Borrower's option set forth in a notice to the Agent, either (1) Borrower shall request that the outstanding Eurodollar Loans be converted into Loans bearing interest at an alternate rate of interest offered by the Banks to Borrower (the Banks shall use their best efforts to provide Borrower with a rate of interest commensurate with loans and borrowers of a similar type), or (2) Borrower shall promptly prepay in full all outstanding Eurodollar Loans, with accrued interest thereon and all other amounts payable by Borrower hereunder and upon such prepayment the Banks' obligation to make or maintain Eurodollar Loans shall terminate. (ii) Increased Costs. If, as a result of any Regulatory Change, --------------- (A) the basis of taxation of payments to any Bank of the principal of or interest on the Loan, or any other amounts payable under this Agreement in respect thereof (other than Taxes imposed on the overall net income of any Bank and Indemnifiable Taxes and Other Taxes which are covered by the indemnification provisions set forth in Section 4.10) is changed; or (B) any reserve, special deposit or similar requirements relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, any Bank are imposed, modified or deemed applicable with respect to the Loan; or (C) any other condition affecting the Loan or any Bank's Commitment is imposed on such Bank; and such Bank reasonably determines that, solely by reason thereof, the cost to such Bank of making or maintaining the Loan is increased by an amount deemed by such Bank to be material, -16- or any amount receivable by such Bank hereunder in respect of the Loans is reduced by an amount deemed by such Bank to be material (such increases in cost and reductions in amounts receivable being "Increased Costs"), then Borrower --------------- shall pay to such Bank, on the later of the date on which any such Increased Cost is due by such Bank or a date within ten Business Days after demand by such Bank therefor, such additional amounts as such Bank reasonably determines will compensate such Bank for such Increased Costs (such demand to be accompanied by a certificate setting forth the basis for the calculation thereof). Upon the request of Borrower, after notification by any Bank of a Regulatory Change that may result in any Increased Cost or a demand for compensation by such Bank pursuant to this Section 4.6(a)(ii), such Bank shall use reasonable efforts to reduce or eliminate the Increased Costs by transferring any Loan or any depository account giving rise to such Increased Costs to another branch of such Bank, provided, that such transfer will not have an adverse effect on such Bank -------- or its Rights hereunder or under the Note. Except to the extent required by any Regulatory Change, no Bank shall discriminate against Borrower in charging Borrower for Increased Costs pursuant to this Section 4.6(a)(ii). (iii) Capital Adequacy. If the adoption of or any change in the substance ---------------- or interpretation of any Law generally applicable to banking institutions including the Banks, or the compliance by any Bank with any guideline or request from any central bank or other Tribunal (whether or not having the force of Law), affects or would affect the amount of capital required or expected to be maintained by such Bank as a consequence of such Bank's obligations hereunder, and such Bank reasonably determines that the amount of such capital, based upon the existence of its Commitments or its portion of the Loan, would have to be increased, then Borrower shall pay to such Bank, upon demand from time to time (each such demand to be accompanied by a certificate setting forth the basis for the calculation thereof), additional amounts sufficient to compensate such Bank for the necessity of such increase to the extent that such Bank reasonably determines that such necessity is allocable to the existence of its Commitments or its portion of the Loan. (b) Indemnity. Without prejudice to any other provision of this Section --------- 4.6, Borrower hereby agrees to indemnify each Bank against any loss or expense which such Bank may actually sustain or incur as reasonably determined by such Bank as a result (before or after an Event of Default) of (i) any payment or prepayment of principal of, or any conversion of, the Loan, on any date other than the last day of the Interest Period applicable thereto, (ii) any failure by Borrower to convert or continue the Loan after irrevocable notice of such conversion or continuation has been given pursuant to Section 4.1, or (iii) any default in payment or prepayment of the principal amount of the Loan or any part thereof or interest accrued thereon, as and when due and payable (at the due date thereof, whether by scheduled maturity, acceleration, notice of prepayment pursuant to Section 4.2 or otherwise); provided, however, that each Bank will -------- ------- use its reasonable efforts to mitigate to the greatest extent possible such losses and expenses by investing any funds so paid, prepaid or redeposited, or not so converted, continued or withdrawn by Borrower, in a manner so as to reduce the amount of any such loss or expense and, provided, further, that any -------- ------- funding loss of any Bank for which Borrower is required to indemnify such Bank hereunder shall -17- be deemed to equal, in the case of a Eurodollar Loan, the difference between (x) such Bank's cost of obtaining the funds for the Loan being paid, prepaid or not converted or continued, or the proceeds so redeposited (assumed to be the Adjusted LIBOR Rate applicable thereto), for the period from the date of such payment, prepayment, redeposit or failure to convert or continue, as the case may be, until the end of the applicable Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period for the Loan that would have commenced on the date of such failure) minus (y) the amount of ----- interest (as reasonably determined by such Bank) that would be realized by such Bank in reemploying the funds so paid, prepaid, redeposited or not converted or continued, in the Interbank Market for a period comparable to the period from the date of such payment, prepayment, redeposit or failure to convert, continue or withdraw, as the case may be, until the end of the applicable Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period for such Loan that would have commenced on the date of such failure), which amount of interest shall be calculated by interpolation from the relevant LIBOR Rates then prevailing in the Interbank Market. If Borrower shall give notice of prepayment pursuant to Section 4.2 but shall fail to prepay the Loan in accordance with such notice as provided in Section 4.2, or if Borrower shall give notice of a rate election pursuant to Section 4.1 but shall fail to withdraw, convert or continue in accordance with such notice as provided in Section 4.1, Borrower shall indemnify each Bank for the actual losses incurred by such Bank as a result of such failure to prepay, withdraw, convert or continue, as determined by such Bank. Each Bank claiming compensation pursuant to this paragraph (b) shall make a written demand to Borrower therefor (such demand to be accompanied by a certificate setting forth the basis for the calculation thereof), and Borrower shall pay such amount to such Bank within ten (10) Business Days after such demand. (c) Conclusive Determination. Provided that notice shall have been given ------------------------ to Borrower of the reasons and basis therefor (including evidence in reasonable detail documenting the applicability of this Section and the respective Bank's calculations in connection therewith), determinations by any Bank for purposes of this Section 4.6 shall be conclusive and binding absent manifest error. 4.7 Pro Rata Treatment and Payments . (a) Each payment (including each ------------------------------- prepayment) by Borrower on account of principal of and interest on the Loans (other than as set forth in Sections 4.6(a)(ii), 4.6(a)(iii) and 4.6(b)) shall, except as may otherwise be provided pursuant to any Assignment and Acceptance Agreement, be made pro rata according to the respective Commitment Percentages --- ---- by each Bank. All payments (including prepayments) to be made by Borrower on account of principal and interest on the Loan shall be made without set-off or counterclaim and shall be made to the Agent, for the account of the Banks at the Agent's New York Office, in Dollars and in immediately available funds. The Agent shall distribute such payments to the Banks promptly upon receipt in like funds as received. (b) If any payment hereunder (other than payments of a Eurodollar Loan) becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest thereon shall be -18- payable at the then applicable rate during such extension. If any payment on a Eurodollar Loan becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day (and interest shall accrue and be payable at the then applicable rate during such extension), unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Business Day. 4.8 Legal Details. All documents executed or submitted pursuant hereto ------------- by Borrower shall be reasonably satisfactory in form and substance to the Agent and Special Counsel. All legal matters incident to the transactions contemplated by this Agreement (including without limitation matters arising from time to time as a result of changes occurring with respect to any Laws) shall be reasonably satisfactory to the Banks. 4.9 Method and Place of Payment. Except as otherwise specifically --------------------------- provided herein, all payments under this Agreement and the Note shall be made to the Agent (for the account of the Agent or the Banks, as the case may be) not later than 12:00 noon, New York City time, on the date when due and shall be made in Dollars and in immediately available funds, or by New York Clearing House Interbank Payment System transfer, at the New York Office. The Agent shall promptly remit in Dollars and in immediately available funds to each Bank its pro rata share of such payments received by the Agent. Any payment under --- ---- this Agreement and the Note made later than 12:00 noon, New York City time, shall be deemed to have been made on the next succeeding Business Day. Whenever any payment to be made hereunder or under the Note shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest shall accrue on such principal at the applicable rate during such extension and be payable on the extended due date. 4.10 Taxes. (a) Any and all payments by Borrower to the Agent or the ----- Banks hereunder or under the other Loan Documents shall be made free and clear of and without deduction for any and all present or future Taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding (i) in the case of each Bank and the Agent, Taxes that would --------- not be imposed but for a connection between such Bank or the Agent (as the case may be) and the jurisdiction imposing such Tax, other than a connection arising solely by virtue of the activities of such Bank or the Agent (as the case may be) pursuant to or in respect of this Agreement or under any other Loan Document, including, without limitation, entering into, lending money or extending credit pursuant to, receiving payments under, or enforcing, this Agreement or any other Loan Document, and (ii) in the case of each Bank and the Agent, any United States withholding Taxes payable with respect to payments hereunder or under the other Loan Documents under Laws (including, without limitation, any statute, treaty, ruling, determination or regulation) in effect on the Initial Date (as hereinafter defined) for such Bank or the Agent, as the case may be, but not excluding any United States withholding Taxes payable solely as a result of any change in such Laws occurring after the -19- Initial Date (all such non-excluded Taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Indemnifiable ------------- Taxes"). For purposes of this Section 4.10, the term "Initial Date" shall mean - ----- ------- ---- (i) in the case of the Agent or any Bank, the date on which such Person became a party to this Agreement and (ii) in the case of any assignment, including any assignment by a Bank or to a new Eurodollar Lending Office, the date of such assignment. If any Indemnifiable Taxes shall be required by law to be deducted from or in respect of any sum payable hereunder or under any other Loan Document to any Bank or the Agent (i) the sum payable by Borrower shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 4.10) such Bank or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) Borrower shall make such deductions and (iii) Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable Law. Borrower shall not, however, be required to pay any amounts pursuant to clause (i) of the preceding sentence to any Bank or the Agent not organized under the laws of the United States of America or a state thereof if such Bank or the Agent fails to comply with the requirements of paragraphs (f) and (g) of this Section 4.10. (b) In addition, Borrower agrees to pay any present or future stamp or documentary Taxes or any other excise or property Taxes, deed of trust recording or intangible Taxes, charges or similar levies which arise from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Document (hereinafter referred to as "Other Taxes"). ----------- (c) Borrower will indemnify each Bank and the Agent for the full amount of Indemnifiable Taxes and Other Taxes (including any Indemnifiable Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 4.10) paid by such Bank or the Agent, as the case may be, and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto whether or not such Indemnifiable Taxes or Other Taxes were correctly or legally asserted. Such indemnification shall be made within ten (10) Business Days after the date any Bank or the Agent, as the case may be, makes written demand therefor. If a Bank or the Agent shall become aware that it is entitled to receive a refund or is reasonably requested by Borrower to pursue a claim for a refund in respect of Indemnifiable Taxes or Other Taxes, it shall promptly notify Borrower of the availability of such refund (unless instructed to pursue a claim by Borrower) and shall, within thirty (30) days after receipt of a request by Borrower, pursue or timely claim such refund at Borrower's expense. If any Bank or the Agent receives a refund in respect of any Indemnifiable Taxes or Other Taxes for which such Bank or the Agent has received payment from Borrower hereunder, it shall promptly notify Borrower of such refund and shall, within 30 days after receipt of a request by Borrower (or promptly upon receipt, if Borrower has requested application for such refund pursuant hereto), repay such refund (plus any interest received) to Borrower, provided that Borrower, upon the request of such Bank or the Agent, agrees to return such refund (plus any penalties, interest or other charges required -20- to be paid) to such Bank or the Agent in the event the Bank or the Agent is required to repay such refund. (d) Within thirty (30) days after the date of any payment of Indemnifiable Taxes or Other Taxes withheld by Borrower in respect of any payment to any Bank or the Agent, Borrower will furnish to the Agent the original or a certified copy of a receipt evidencing payment thereof. (e) Without prejudice to the survival of any other agreement contained herein, the agreements and obligations contained in this Section 4.10 shall survive the payment in full of the Obligations. (f) Each Bank that is not organized under the laws of the United States of America or a state thereof agrees that not later than ten (10) Business Days prior to the first Interest Payment Date following the Initial Date in respect of such Bank, it will deliver to Borrower and the Agent two duly completed copies of either (i) United States Internal Revenue Service Form 1001 or 4224 or successor applicable form, as the case may be, certifying in each case that such Bank is entitled to receive payments under this Agreement and the Note payable to it without deduction or withholding of any United States federal income Taxes and backup withholding Taxes or is entitled to receive such payments at a reduced rate pursuant to a treaty provision or (ii) in the case of a Bank that is not a "bank" within the meaning of Section 881 (c)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), United States Internal Revenue Service ---- Form W-8 or successor applicable form and a statement from such Bank certifying to the fact that interest payable to it hereunder (A) will not be described in Section 871(h)(3)(A) or Section 881(c)(3)(A), (B) or (C) of the Code and (B) will not be effectively connected with a trade or business carried on in the United States by such Bank. Each Bank required to deliver to Borrower and the Agent a Form 1001, 4224 or W-8 pursuant to the preceding sentence further undertakes to deliver to Borrower and the Agent (if appropriate) two further copies of Form 1001, 4224 or W-8, or successor forms, or other similar manner of certification and such extensions or renewals thereof as may reasonably be requested by Borrower and, in the case where a Form W-8 has been delivered, a further statement certifying to the fact set forth in clause (B) of the preceding sentence (i) at the times reasonably requested by Borrower, (ii) after the occurrence of an event requiring a change in the most recent form or statement previously delivered by it to Borrower or (iii) in the case of Form 1001, 4224 or W-8, on or before the date that any such form expires or becomes obsolete, and, in the case of Form 1001 or 4224, certifying that such Bank is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income Taxes and backup withholding Taxes or is entitled to receive such payments at a reduced rate pursuant to a treaty provision, unless such Bank advises Borrower that it is unable lawfully to provide such forms and other certifications and notifies Borrower to such effect. Unless Borrower and the Agent have received forms, certificates and other documents satisfactory to them indicating that payments hereunder or under or in respect of the Note to or for a Bank not incorporated under the laws of the United States or a state thereof are not subject to United States withholding Tax or are subject to such Tax at a -21- rate reduced by an applicable Tax treaty, Borrower or the Agent shall withhold such Taxes from such payments at the applicable statutory rate. (g) Any Bank claiming any additional amounts payable pursuant to this Section 4.10 shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document requested by Borrower to change the jurisdiction of its applicable Eurodollar Lending Office or Domestic Lending Office if the making of such a filing or change would avoid the need for or reduce the amount of any such additional amounts which may thereafter accrue and would not, in the sole determination of such Bank, be otherwise disadvantageous to such Bank. 4.11 Booking Loans. Each Bank may, upon prior written notice to Borrower, ------------- make, carry or transfer the Loan or any portion thereof at, to or for the account of any Eurodollar Lending Office of such Bank, so long as (a) such making, carrying or transfer does not have a material adverse effect on Borrower or its indemnification obligations hereunder or (b) any Increased Cost resulting from the change of the Eurodollar Lending Office is borne by the applicable Bank. 4.12 Sharing of Setoffs. Each Bank agrees that if it shall, through the ------------------ exercise of a right of banker's lien, setoff or counterclaim against Borrower, or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Bank under any applicable bankruptcy, insolvency or other similar law or otherwise, obtain payment (voluntary or involuntary) in respect of the Loan as a result of which its unpaid pro rata share of the --- ---- outstanding principal balance of the Loan shall be less than its Commitment Percentage, such Bank shall be deemed simultaneously to have purchased from the other Banks at face value, and shall promptly pay to the other Banks the purchase price for, a participation in the Loan of such other Bank, so that the aggregate unpaid principal amount of the Loan and participations in the Loan held by each Bank shall be in the same proportion as prior to such exercise of banker's lien, setoff or counterclaim or other event; provided, however, that if -------- ------- any such purchase or purchases or adjustments shall be made pursuant to this Section 4.12 and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustment restored without interest (unless the Bank from which such payment is recovered is required to pay interest thereon, in which case each Bank returning funds to such Bank shall pay its pro rata share of such interest). Borrower expressly consents to the foregoing arrangements and agrees that any Bank holding a participation in a Loan deemed to have been so purchased may exercise any and all rights of banker's lien, setoff or counterclaim with respect to any and all moneys owing by Borrower to such Bank by reason thereof as fully as if such Bank had made a Loan directly to Borrower in the amount of such participation. 4.13 Interest Rate Protection. At Borrower's request, and at Borrower's ------------------------ sole expense, the Agent, or such other financial institution as is designated by Borrower and is satisfactory to -22- the Agent, will enter into one or more interest rate protection agreements with Borrower having the effect of fixing Borrower's cost of borrowing all or a portion of the Loans hereunder, which agreements shall be in such form and have such terms as may be usual and customary for the Agent and consistent with the Agent's then-existing requirements. Borrower will be responsible for and shall indemnify the Agent against all breakage costs, if any, which result from Borrower's early termination of any such interest rate protection agreements. All liabilities of Borrower to the Agent under and in respect of any such interest rate protection agreements with the Agent, including all obligations of Borrower under Section 4.6, shall be fully secured by the Deed of Trust in all respects acceptable to the Agent in its sole discretion. ARTICLE 5 CONDITIONS PRECEDENT 5.1 Closing Conditions. The obligation of the Banks to make the Loan is ------------------ subject to satisfaction (or waiver by the Agent) on the Closing Date of the following conditions: (a) Officer's Certificate. The Agent shall have received a certificate, --------------------- executed by an Authorized Officer of Borrower, dated as of the Closing Date, certifying (i) that at the time of and immediately after giving effect to the borrowing to be made hereunder on the Closing Date, no Default or Event of Default has occurred and is continuing, (ii) that all the representations and warranties contained in Article 8 hereof are true and correct in all material respects on and as of such date, and (iii) that Borrower has complied with all covenants and conditions required to be complied with by it hereunder by such date. (b) Partnership Proceedings. The Agent shall have received a copy of (i) ----------------------- the resolutions of the Board of Directors of the General Partner confirming that the General Partner is authorized under the Partnership Agreement to take all actions on behalf of Borrower contemplated by this Agreement and authorizing (A) the execution, delivery and performance by Borrower of each of the Loan Documents and the making of the borrowings provided for herein and (B) the granting by Borrower of the Lien provided for in the Deed of Trust, certified by the Secretary or an Assistant Secretary of the General Partner as of the Closing Date, which certificate shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded as of the Closing Date and (ii) any other document evidencing partnership action required by the Partnership Agreement to authorize or approve the aforementioned transactions. (c) Incumbency Certificate. The Agent shall have received a certificate ---------------------- signed by the Secretary or an Assistant Secretary of the General Partner, dated as of the Closing Date, which shall certify the names of the officers of the General Partner authorized to sign each Loan Document on behalf of Borrower and each other document, certificate or instrument to be delivered by Borrower pursuant to the Loan Documents, together with the true signatures of each -23- such officer. The Agent may conclusively rely on such certificate until it shall receive a further certificate cancelling or amending the prior certificate and submitting the signatures of the officers named in such further certificate. (d) Note. The Agent shall have received a duly executed Note for each ---- Bank substantially in the form of Exhibit A, and with all blanks appropriately --------- completed. (e) Opinion of Counsel. The Agent shall have received opinions of counsel ------------------ to Borrower in substantially the form of Exhibit B and as to such other matters, --------- and otherwise in form and substance, reasonably satisfactory to the Agent and Special Counsel. (f) Fees. The Agent shall have received the fees referred to in Section ---- 4.5 and the fees and expenses of Special Counsel through the date hereof shall have been paid as provided in Section 12.4. (g) Partnership Agreement. The Agent shall have received a copy of the --------------------- Partnership Agreement and of the Certificate of Limited Partnership of Borrower, in each case certified by the Secretary or an Assistant Secretary of the General Partner as being true and complete. (h) Certificate of Incorporation and By-Laws. The Agent shall have ---------------------------------------- received a copy of the Certificate of Incorporation and By-Laws of the General Partner, in each case certified by the Secretary or an Assistant Secretary of the General Partner as being true and complete. (i) Good Standing Certificates. The Agent shall have received, in form -------------------------- and substance satisfactory to it, (a) a certificate from the Secretary of State of Delaware certifying that Borrower is a limited partnership duly formed and in good standing in said state and (b) a certificate from the Secretary of State of Maryland certifying that the General Partner is a corporation duly organized and in good standing in said state. (j) Consents, Licenses and Approvals, etc. The Agent shall have received ------------------------------------- copies of all consents, licenses and approvals, if any, required in connection with the execution, delivery and performance by Borrower, and the validity and enforceability against Borrower, of this Agreement and the other Loan Documents, and such consents, licenses and approvals shall be in full force and effect. (k) Leases. The Agent shall have received copies of each existing lease ------ pertaining to the Property, certified to be true, correct and complete by an Authorized Officer, which Leases shall be consistent with the underwriting assumptions of the Agent. (l) Deed of Trust. The Agent shall have received from Borrower a fully ------------- executed Deed of Trust, together with the following documents in respect of the property and interests to be encumbered by the Deed of Trust, each of which shall be satisfactory in form and substance to the Agent: -24- (i) Uniform Commercial Code financing statements covering all furnishings, fixtures, equipment and other personal or other property of Borrower located or to be located on the Property and used in the operation or management thereof, and any other portion of the Property (as defined in the Deed of Trust) the Lien on which may be perfected by the filing of a Uniform Commercial Code financing statement, which financing statements shall be filed promptly hereafter with the appropriate Tribunals; (ii) an ALTA Lender's title insurance policy, or a final, marked fully-paid commitment of title insurance (which must have the same force and effect as a title insurance policy), containing such coverages and endorsements as the Agent deems necessary (including without limitation full coverage over mechanic's liens and mortgage or intangible taxes), with all general survey exceptions deleted (and subject to no other exceptions other than those reasonably approved in writing by Agent), on forms of, and issued by, First American Title Insurance Company (the "Title Company"), ------------- insuring the first lien priority of the Deed of Trust and in all other respects reasonably acceptable to Agent; (iii) a certified rent roll with respect to the Property; (iv) [Reserved]; (v) an ALTA/ACSM as-built survey of the Land (as defined in the Deed of Trust), certified to the Title Company and the Agent; (vi) an assignment of contracts pertaining to the Property; (vii) proof that Borrower has delivered to Title Company all sums necessary to pay all mortgage and/or intangible taxes, title and recording fees and other charges relative to the Deed of Trust, it being understood that all such taxes and charges, whenever incurred, due or payable are Borrower's responsibility hereunder; (viii) an environmental indemnity agreement pertaining to the Property, executed by Borrower and the General Partner; and (ix) such other instruments, documents and certificates as the Agent shall require. (m) Appraisal. The Agent shall have received a Full-Fledged Appraisal of --------- the Property, satisfactory in form and substance to the Agent, showing the Value of the Property to be not less than $138,462,000.00. -25- (n) Engineer's Report. The Agent shall have received a copy of a report ----------------- of a qualified engineering or other firm satisfactory to the Agent concerning such firm's engineering survey of the Property, and such report shall be satisfactory to the Agent in all respects. (o) Phase I Environmental Audit/Engineering Survey. The Agent shall have ---------------------------------------------- received a copy of a Phase I environmental audit relating to the Property, and such report shall be satisfactory to the Agent in all respects. (p) Insurance. Insurance complying with this Agreement and the Deed of --------- Trust shall be in full force and effect and the Agent shall have received certified copies of all policies evidencing such insurance (or certificates therefor signed by the insurer or an agent authorized to bind the insurer). (q) Subordination, Non-Disturbance and Attornment Agreements; Tenant ---------------------------------------------------------------- Estoppels. The Agent and each existing tenant of the Property whose lease is - --------- not subordinate to the Deed of Trust, or which subordination is contingent upon the granting of non-disturbance to the tenant, or whose lease does not contain a provision requiring tenant to attorn to the beneficiary of the Deed of Trust in the event of foreclosure thereof, shall have executed a subordination, nondisturbance and attornment agreement; and the Agent shall have received an appropriate estoppel letter from each tenant of the Property. All of such subordination, non-disturbance and attornment agreements and estoppel letters shall be reasonably satisfactory in form and substance to the Agent. (r) Ground Lease. The Agent shall have received a true and correct copy ------------ of the Ground Lease, together with an estoppel certificate executed and delivered by the lessor under the Ground Lease, which Ground Lease and estoppel certificate shall be satisfactory to the Agent. (s) Operating Statements. The Agent shall have received annual operating -------------------- statements for each Individual Property for calendar years 1996, 1997 and 1998, to the extent such Individual Property was owned by Borrower during such years, and quarterly operating statements for calendar year 1999, which shall be in form satisfactory to the Agent and in substance consistent with the underwriting assumptions of the Agent. (t) Further Documents. The Agent shall have received (or shall have waived the requirement of delivery), in form and substance reasonably satisfactory to it, (i) each item listed on the Closing Checklist and (ii) such other documents, information and certificates as the Agent shall reasonably require. -26- ARTICLE 6 AFFIRMATIVE COVENANTS From the date hereof until payment in full of the Obligations and termination of this Agreement, Borrower shall: 6.1 General. ------- (a) Compliance with Laws. -------------------- (i) Comply in all respects with all applicable Laws. (ii) Take whatever steps are reasonably necessary to procure and maintain valid and accurate certificates of occupancy for the Property, and keep and maintain the Property in good condition and repair (subject to ordinary wear and tear) in record compliance with all applicable rules and regulations, except to the extent non-compliance would not have a Material Adverse Effect on an Individual Property or the Borrower, and further provided that non-compliance would not result in the placing of a Lien on an Individual Property (other than Permitted Encumbrances). (b) Maintenance of Existence; Licenses and Franchises. Except as permitted ------------------------------------------------- by Section 7.1 hereof, maintain its existence as a Delaware limited partnership, preserve and maintain all material licenses, privileges, franchises, certificates, authorizations and other permits and agreements necessary for the operation of its business. Borrower's Partnership Agreement may not be materially amended in a manner adverse to the interests of the Agent or the Banks without the Agent's prior consent, which consent shall not be unreasonably withheld or delayed. (c) Maintaining Records; Inspection. Keep proper books of record and ------------------------------- account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities relating to the Property which permit financial statements to be prepared in conformity with GAAP and all applicable Laws; and permit any employees and other representatives of the Agent, upon reasonable notice and during regular business hours, to visit and inspect the Property, to reasonably examine books of account, records, reports and other papers applicable to the Property, and to discuss their affairs, finances and accounts with their officers, employees and Auditors (and by this provision such Auditors are authorized to discuss with the Agent the finances and affairs of Borrower), at such times and as often as may be reasonably requested; provided, however, that all such visits, inspections and examinations -------- ------- shall be scheduled so as to cause minimal disruption to the business and operations of Borrower and the Property, and provided, further, that the Agent -------- ------- and the Banks shall cause their respective employees and representatives to hold in strict confidence all information acquired pursuant to the Agent's rights under this Section, except (i) as provided in Section 12.16 hereof, or (ii) for necessary disclosure required in litigation proceedings relating to the Loan Documents, or (iii) disclosure compelled by judicial or administrative process or by other requirements of Law. -27- 6.2 Financial Covenants. ------------------- (a) Interest Coverage Ratio. Maintain an Interest Coverage Ratio of not ----------------------- less than 1.50 to 1.00 at all times. (b) Debt Service Coverage Ratio. Maintain a Debt Service Coverage Ratio --------------------------- of not less than 1.25 to 1.00 at all times. (c) Debt Yield Requirement. Maintain a Debt Yield Calculation of not less ---------------------- than 0.13 at all times. (d) Revolving Credit Covenants. Comply with each and every of the -------------------------- covenants set forth in Section 5.8 of the Revolving Credit Agreement, as in effect on the date hereof. Compliance with each of the financial covenants set forth in Section 6.2(a), Section 6.2(b) and Section 6.2(c) shall be calculated on a rolling semi- annual basis. 6.3 Reporting Requirements. Maintain a standard system of accounting in ---------------------- accordance with GAAP and shall furnish to the Agent: (a) Quarterly Operating Statements. Quarterly operating statements of ------------------------------ each Individual Property, together with a property balance sheet for such quarter, prepared and certified by Borrower in form satisfactory to Agent, detailing the revenues received, the expenses incurred and the Net Operating Income before and after debt service (principal and interest) and major capital improvements for that quarter and containing appropriate year to date information, and containing a comparison for such quarter with the annual budget delivered pursuant to Section 6.3(e) hereof, within forty-five (45) days after the end of each fiscal quarter; (b) Quarterly Rent Rolls. Quarterly certified rent rolls certified by --------------------- Borrower, detailing the names of all tenants of the Property, the portion of each Individual Property occupied by each tenant, the base rent and any other charges payable under each Lease and the term of each Lease, including the expiration date, an accounting of all security deposits held in connection with any Lease of any part of the Property, including the name and identification number of the accounts in which such security deposits are held and any other information as is reasonably required by Lender, within forty-five (45) days after the end of each fiscal quarter; (c) Audited Annual Financial Statements. Audited annual financial ------------------------------------ statements for Borrower and General Partner, prepared by the Auditors, within ninety (90) days after the close of each calendar year; (d) Quarterly Financial Statements. Quarterly consolidated financial ------------------------------- statements of Borrower and General Partner, containing a balance sheet, income statement funds statement, and such other information as is reasonably required by Agent, which statements shall either be audited by the Auditors or certified to be true and correct by an Authorized Officer. -28- (e) Budgets. An annual operating budget presented on a quarterly basis ------- consistent with the quarterly and annual operating statements described above for the Property, including cash flow projections for the upcoming year, and all proposed capital replacements and improvements at least fifteen (15) days prior to the start of each calendar year; and (f) Tax Returns. Copies of Borrower's federal income tax returns within ----------- fifteen (15) Business Days of the date such returns are filed. (g) Miscellaneous. Such other additional financial or management -------------- information concerning Borrower, General Partner or the Property as may, from time to time, be reasonably required by Agent in form and substance satisfactory to Agent. (h) Officer's Certificate. Each set of financial statements delivered to --------------------- the Agent pursuant to Section 6.3(a) shall be accompanied by a certificate of an Authorized Officer of Borrower (i) certifying that Borrower is in compliance with the Financial Covenants set forth in Section 6.2, and (ii) setting forth calculations, in form and detail reasonably satisfactory to the Agent, demonstrating compliance with such Financial Covenants, and (iii) stating that no Default or Event of Default has occurred and is continuing. (i) Notice of Default. Within three (3) Business Days after becoming ----------------- aware of the happening of any condition or event that constitutes a Default or Event of Default, a written notice to the Agent specifying the details of such Default or Event of Default and the action proposed to be taken with respect thereto. (j) Notice of Litigation. Within thirty (30) days after becoming aware of -------------------- the existence of any Litigation involving Borrower or the Property that could have a Material Adverse Effect, a written notice specifying the nature and status thereof and the action being taken and proposed to be taken with respect thereto. (k) Notice of Environmental Complaints. Promptly and, in any case, within ---------------------------------- ten (10) Business Days after becoming aware thereof, a written notice describing any Environmental Complaint affecting or relating to Borrower or the Property or the ownership, use, operation or occupancy thereof or any business or activity of Borrower or any other Person on or in connection with the Property and any notice from any Person of (i) any violation or alleged violation of any environmental Law relating to any of the foregoing, (ii) the occurrence of any release, spill or discharge of any Pollutant from, under, into or on the Property in a quantity or of a nature that is reportable under any environmental law or (iii) the commencement of any clean-up pursuant to or in accordance with any environmental Law of any Pollutants on or about the Property. (l) Requested Information. With reasonable promptness, such other data --------------------- and information as from time to time may be reasonably requested by the Agent. The Agent agrees, -29- for itself and its attorneys, that it will maintain as confidential all information relating to Borrower furnished to it by Borrower, and will not disclose such information to any Persons other than the Banks and any participant or prospective participant in the Loans (and, solely in connection with the modification and/or enforcement of any Loan Document, their respective attorneys) unless and until such information is or becomes publicly known other than as a result of disclosure by the Agent, except as such information may be required to be disclosed by the Agent under any Law or by any Tribunal. The Banks and any prospective or actual Loan participants (as to Loan information only) and Borrower shall also be bound by this confidentiality provision 6.4 Property Covenants. ------------------ (a) Insurance. Maintain property damage, third-party liability and other --------- insurance policies with respect to the Property and Borrower`s business in such amounts and against such casualties and contingencies as is required pursuant to the Deed of Trust. Each policy shall be in form, for a term, and issued by an insurer, satisfactory to the Agent, and provide that no cancellation thereof shall be effective against the Agent until at least 30 days after the Agent receives written notice thereof. Borrower shall notify the Agent of all material changes of all policies of insurance promptly after Borrower receives notice of same. At least 15 days prior to the expiration of any policy, Borrower shall furnish the Agent with evidence reasonably satisfactory to the Agent of the renewal or reissuance of a policy continuing insurance in force as required by this Agreement and the other Loan Documents. All policies of property damage insurance shall have attached thereto a standard mortgagee clause in favor of the Agent and the Banks, not subject to contribution or co- insurance, and a lender's loss payable endorsement for the benefit of the Agent. All policies of liability insurance shall name the Agent as an additional insured and shall have a combined single limit of not less than Twenty-Five Million and 00/100 Dollars ($25,000,000) per occurrence. (b) Notices by Tribunal; Fire and Casualty Losses; Etc. Timely comply --------------------------------------------------- with, and promptly furnish to the Agent, true, correct and complete copies of, any official notice or claim by any Tribunal pertaining to the Property which could have a Material Adverse Effect. Borrower shall promptly notify the Agent of any fire or other casualty to the Property involving (i) a loss in an amount in excess of five percent (5%) of the Value of any Individual Property, or (ii) notice of any taking or eminent domain action or proceeding affecting the Property. (c) Tenant Notices. Promptly furnish to the Agent true, correct and -------------- complete copies of any notice or claim from any tenant of the Property or any creditor of Borrower alleging any material violation of or default by Borrower under any Lease or other material contractual obligation of Borrower relating to the Property. (d) Maintenance of Property. Maintain or cause to be maintained the ----------------------- Property in good repair and safe condition at all times, subject to ordinary wear and tear. -30- (e) Inspection. Permit the Agent and its representatives, and/or an ---------- architect or engineer representing the Agent, upon reasonable prior notice during regular business hours (unless an emergency is reasonably deemed to exist, in which event (i) inspection shall not require notice other than as is commercially practicable under the circumstances, and (ii) Borrower shall use its best efforts to afford access to Lender during other hours, if requested by Lender) to enter upon the Property and inspect the improvements thereon and permit examination of all plans and specifications therefor, provided that all --------- such inspections and examinations shall be scheduled so as to cause minimal disruption to the business and operations of Borrower and the Property. ARTICLE 7 NEGATIVE COVENANTS From the date hereof until payment in full of the Obligations and termination of this Agreement: 7.1 Mergers, Sales of Assets, Etc. (a) Borrower shall not merge with or ----------------------------- into, or consolidate with or into, or sell, convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or any portion of any Individual Property (together with the Improvements thereon) to, any Person, except: (i) one or more space leases, licenses or other occupancy agreements in the ordinary course of its business (but subject to the provisions of the Deed of Trust); or (ii) a transfer or sale of the Property to a Person (A) that is wholly owned by Borrower and (B) that assumes all of the obligations of Borrower under the Loan Documents (subject to the provisions of Article 10). (b) If Borrower desires to sell an Individual Property (each a "Release ------- Parcel"), Borrower shall deliver to the Agent all information in connection with - ------ the proposed sale as the Agent may require. The Agent and the Banks agree to consider in good faith any request by Borrower to permit a sale of a Release Parcel and to accept substitute collateral therefor of equal or greater value than the Release Parcel. It is explicitly understood, however, that any agreement to release a Release Parcel and accept either substitute collateral therefor or a prepayment of the outstanding principal balance of the Loan shall be in the sole discretion, and require the unanimous approval, of the Banks. 7.2 Limitation on Liens. Borrower shall not create, assume or permit to ------------------- exist any Lien upon the Property other than Permitted Encumbrances. 7.3 No Change in Fiscal Year. Borrower shall not change its fiscal ------------------------ year. -31- ARTICLE 8 REPRESENTATIONS AND WARRANTIES In order to induce the Banks to enter into this Agreement and to make the Loan provided hereunder, Borrower makes the following representations and warranties, which shall survive the execution and delivery of this Agreement and the Note and the making of the Loan: 8.1 Organization and Qualification. Borrower is duly organized, validly ------------------------------ existing and in good standing as a limited partnership under the Laws of the State of Delaware, and is duly qualified or licensed and in good standing in California and in each other state in which the nature of its business or location of its property is such as to require qualification or licensing, except where the failure to obtain such qualification or licensing in such other state would not have a Material Adverse Effect on the Borrower. The General Partner is duly organized, validly existing and in good standing as a corporation under the Laws of the State of Maryland and is duly qualified or licensed and in good standing in California and in each other state in which the nature of its business or location of its property is such as to require qualification or licensing, except where the failure to obtain such qualification or licensing in such other state would not have a Material Adverse Effect on the Borrower or the General Partner. 8.2 Power and Authority. Borrower has the partnership power, authority ------------------- and legal right to (a) own and operate the Property and to carry on its business and (b) execute, deliver and perform its obligations under each of the Loan Documents and to borrow hereunder. 8.3 Authorization. Borrower has taken all necessary partnership action ------------- to authorize the execution and delivery of, and the performance of its obligations under, the Loan Documents and the borrowing provided for hereunder. General Partner has taken all necessary corporate action to authorize the execution and delivery of the Loan Documents on behalf of, and as the general partner of Borrower. 8.4 No Conflicts. Borrower is not party to or otherwise subject to any ------------ contract or agreement which restricts or otherwise affects its right or ability to execute, deliver and perform its obligations under the Loan Documents or to borrow hereunder. Neither the execution and delivery of the Loan Documents, nor compliance therewith, will conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon the Property under, or require any consent, approval or other action by, notice to or filing with any Tribunal pursuant to, the Partnership Agreement, any award of any arbitrator or any judgment, order or decree of any Tribunal, or any material agreement, mortgage, deed of trust, lease agreement, promissory note, credit agreement or other instrument to which Borrower is a party or by which it or the Property may be bound, subject or affected. -32- 8.5 Enforceable Obligations. This Agreement and the other Loan Documents ----------------------- are, or when executed and delivered will be, the legal, valid and binding obligation of Borrower, enforceable in accordance with their respective terms (subject as to enforcement of remedies to any applicable bankruptcy, reorganization, moratorium or other Laws or principles of equity affecting the enforcement of creditors' rights generally). 8.6 Governmental Approvals. No order, consent, license, authorization ---------------------- or approval of or exemption or other action by, and no notice to or filing with, any Tribunal is required for the due execution, delivery and performance by Borrower of this Agreement and the other Loan Documents. 8.7 Taxes. Borrower has filed all federal, state and other income Tax ----- returns which are required to be filed, and has paid all Taxes as shown on said returns, as well as all other material Taxes to the extent that they have become due (subject to properly filed extensions thereof ). All Tax liabilities of Borrower are adequately provided for on its books, including interest and penalties. No income Tax liability of a material nature has been asserted by taxing authorities for Taxes in excess of those already paid, and no taxing authority has notified Borrower of any deficiency of a material nature in any of its federal, state and other income Tax returns. 8.8 Margin Stock, Etc. Borrower is not engaged principally, or as one ----------------- of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Securities or Margin Stock. Borrower is not (a) an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended, (b) a "holding company" or a subsidiary company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended, or (c) subject to any other Law that purports to restrict its ability to borrow money. 8.9 Possession of Franchises, Licenses, Etc. Borrower possesses all --------------------------------------- franchises, certificates, licenses, permits and other authorizations from Tribunals that are necessary for the ownership, maintenance and operation of the Property, and is not in violation thereof. 8.10 Disclosure. (a) Neither this Agreement nor any other document, ---------- certificate or statement furnished to the Agent or any Bank by or on behalf of Borrower, its General Partner, its principals, officers and/or employees (collectively "Borrower Parties") in connection herewith or in connection with ---------------- the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact known to Borrower which is necessary in order to make the statements contained herein and therein not misleading. (b) To the best of Borrower's knowledge, no document, certificate or statement furnished to the Agent or any Bank by a Person other than Borrower Parties in connection herewith or in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact known to Borrower which is necessary in order to make the statements contained herein and therein not misleading. -33- 8.11 Employee Matters. Borrower participates in no Plans, collective ---------------- bargaining agreement or similar agreement or any employee benefit plan, except as disclosed in Schedule 8.11 attached hereto. 8.12 Certain Fees. No broker's, finder's or other fee or commission was ------------ or will be payable with respect to the making of the Commitment or Loan hereunder. 8.13 Litigation. There is no Litigation against or affecting Borrower, ---------- the Property or Borrower's interest in the Property, at law or in equity, before or by any Tribunal which would have a Material Adverse Effect on Borrower, the Property or Borrower's interest in the Property. Borrower is not operating under or subject to any order, writ, injunction, decree or demand of any Tribunal the non-compliance with which could have a Material Adverse Effect. 8.14 Real Property. ------------- (a) Ownership. Borrower is (and covenants that at all times after the --------- date hereof Borrower will be), the actual, record and beneficial owner and holder of the fee estate in the Fee Land (as defined in the Deed of Trust) and the leasehold estate in the Leased Land (as defined in the Deed of Trust) demised pursuant to the Ground Lease, subject to no Liens except for Permitted Encumbrances. (b) Eminent Domain. There exists no actual or, to the best knowledge of -------------- Borrower, proposed or threatened exercise of the power of eminent domain or other taking by any governmental or quasi-governmental body or agency of all or any portion of the Property or any interest therein. (c) Casualty. No part of the Property has been damaged or destroyed by -------- fire or other casualty that has not been restored prior to the date hereof. (d) Pollutants. Except as disclosed to the Agent and each of the Banks in ---------- writing in the environmental reports described in Exhibit C attached hereto, the Property has never been used by Borrower nor, to the knowledge of Borrower, by any previous owners and/or operators, to generate, store, treat or dispose of any Pollutants and, to the best knowledge of Borrower, no lessee and no owner has used in the past, and none of the aforementioned parties intends to use, or permit to be used, in the future, the Property, or any portion thereof, for the purpose of generating, storing, treating or disposing of any Pollutant, except as required in the normal operations of its business and not in any manner which would violate any environmental Law. Borrower has not allowed, and to the actual knowledge of Borrower, no lessee or prior owner has allowed, any Pollutant to spill, leak, escape, be discharged, dumped, emptied or otherwise disposed of, incorporated into or dealt with on the Property or allowed to be discharged or drained into or on any property adjacent to the Property. The Property is (i) not included or proposed to be included on the National Priorities List issued pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, as amended ("CERCLA"), by the United States ------ Department of Environmental Protection Agency (the "EPA") or on the inventory of --- other potential "problem" sites issued by the EPA or (ii) to the best of Borrower's knowledge, -34- otherwise identified by the EPA as a potential CERCLA site or included or proposed for inclusion on any list or inventory issued pursuant to any state environmental statute or issued by any other Tribunal. Borrower has not received any notice of, nor does Borrower have any actual knowledge of, any occurrence or circumstance which with notice or passage of time or both would reasonably be expected to give rise to an Environmental Complaint. (e) Violations. Borrower has not received any notices of any violations, ---------- nor does Borrower otherwise have actual knowledge of any violations, of (i) any Law applicable to the Property or (ii) the Partnership Agreement or any other agreement or instrument to which Borrower is a party or by which the Property is bound, the effect of which in either case would reasonably be likely to be a Material Adverse Change. (f) Default. Except as disclosed in Schedule 8.14 hereto, no declared ------- defaults by any party have occurred and are continuing under any lease or sublease of any portion of the Property. (g) Insurance. Borrower and the Property are fully insured with the --------- coverages required by Section 6.4(a) and the Deed of Trust. 8.15 Deed of Trust. The Deed of Trust is effective (i) to grant to the ------------- Agent and the Banks a legal, valid and enforceable Lien on all right, title and interest of Borrower in the Property and fixtures thereon and (ii) to create in favor of the Banks and the Agent a legal, valid and enforceable security interest in the Personal Property (as defined and described therein). When the Deed of Trust is duly recorded in the Official Records of San Diego County, California and when the fixture filings are made in such Office and all recording fees and taxes (if any) in respect thereof are paid and compliance is otherwise had with the formal requirements of state law applicable to the recordings of real estate deeds of trust generally, the Deed of Trust will constitute a fully perfected first Lien on and security interest in such encumbered real property and fixtures, subject only to the Permitted Encumbrances. When financing statements have been filed in the offices of the Secretary of State of California and of the Official Records of San Diego County, California, the Deed of Trust will constitute a fully perfected first priority Lien on and security interest in the Personal Property (except for Permitted Encumbrances). 8.16 Construction Performed. All construction hereafter performed on the ---------------------- Property shall comply with all applicable Laws and shall not result in any mechanics, materialmen's or other liens being placed against the Property for more than thirty (30) days after Borrower receives notice thereof, except for those that are within such thirty (30) day period fully bonded and insured over by the Title Company in a manner that is in all respects acceptable to the Agent; all improvements located on the Property will be constructed within the perimeter of the Property; to the best of Borrower's knowledge, there are no structural defects in the existing improvements located on the Property; no violation of any applicable Law exists with respect thereto and the anticipated use thereof complies with all applicable Laws and restrictive covenants affecting the Property and all requirements for such use have been satisfied to the extent possible as of the Closing Date. -35- 8.17 Use of Proceeds: Margin Regulations. All proceeds of the Loan shall ----------------------------------- be used by Borrower solely for the purposes specified in Section 2.4. No part of the proceeds of the Loan shall be used by Borrower to purchase or carry any Margin Security or Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Security or Margin Stock. Neither the making of the Loan nor the use of the proceeds thereof will violate or be inconsistent with the provisions of Regulations G, T, U or X of the Board of Governors of the Federal Reserve System. 8.18 Subsidiaries. As of the date hereof, Borrower has no Subsidiaries ------------ other than Kilroy Services, Inc., a Maryland corporation. 8.19 Building Compliance. No zoning, building or environmental claims or ------------------- actions are pending or, to Borrower's knowledge, threatened against Borrower (with respect to the Property) or the Property. The Property (including the improvements located thereon (the "Improvements")) and the use and occupancy ------------ thereof, complies with all applicable Laws, including, without limitation all zoning, building and environmental laws. 8.20 Annual Budget. The preliminary budget delivered at Closing and the ------------- annual budget most recently delivered pursuant to Section 6.3(e) is complete and correct in all material respects and represents Borrower's good faith expectation of all costs, expenses and fees, and Borrower's then current leasing projections, related to the Property for the fiscal year covered thereby. 8.21 Ground Lease. As of the date hereof: (i) the Ground Lease has not ------------ been further modified or amended, and is in full force and effect, (ii) Borrower is the owner and holder of the lessee's interest in and to the Ground Lease, (iii) neither Borrower nor, to the best of Borrower's knowledge, the lessor under the Ground Lease, is in default under the Ground Lease, nor does any state of fact exist which with the passage of time or the giving of notice, or both, could constitute a default under the Ground Lease, (iv) Borrower is in possession of the Leased Land and is fully obligated to pay and is paying the rent and other charges due under the Ground Lease and is fully obligated to perform and is performing all of the other obligations of the tenant under the Ground Lease, (v) the termination date of the current term of the Ground Lease is October 31, 2043, (vi) the base rent being paid under the Ground Lease is $14,246.00 per month ($170,952.00 per annum), (vii) all rents due and payable pursuant to the Ground Lease have been paid in full, and no such rents have been paid more than one month in advance of the due date thereof, and (viii) there are no offsets or defenses to any portion of the rents payable pursuant to the Ground Lease. 8.22 Year 2000 Representations and Covenants. Borrower represents and --------------------------------------- warrants that it has reviewed its operations with a view to assessing whether its businesses will be vulnerable to a Year 2000 Problem (hereafter defined) or will be vulnerable to the effects of a Year 2000 Problem suffered by any of Borrower's major commercial counter-parties. Borrower shall take all actions reasonably necessary, and commit adequate resources to reasonably assure, that its computer-based and other systems necessary for Borrower to carry on its business in all material respects as presently conducted and as contemplated to be conducted in the future are able (or will be able) to effectively process data, including dates before, on and after January 1, 2000, -36- without experiencing any Year 2000 Problem that could cause a Material Adverse Effect. At the request of the Agent, Borrower shall provide the Agent with assurances and substantiations (including, but not limited to, the results of internal or external audit reports prepared in the ordinary course of business) reasonably acceptable to the Agent as to the capability of the Borrower to conduct its businesses and operations before, on and after January 1, 2000 without experiencing a Year 2000 Problem causing a Material Adverse Effect. Borrower represents and warrants that it has a reasonable basis to believe that no Year 2000 Problem will cause a Material Adverse Effect. As used herein, the term "Year 2000 Problem" means any significant risk that computer hardware, ----------------- software or equipment containing embedded microchips essential to the business or operations of Borrower will not, in the case of dates or time periods occurring after December 31, 1999, function substantially as effectively and reliably as in the case of dates or time periods occurring before January 1, 2000, including the making of accurate leap year calculations. ARTICLE 9 EVENTS OF DEFAULT; REMEDIES 9.1 Events of Default. Any one or more of the following events shall be ----------------- an "Event of Default" hereunder (which shall include by definition the ---------------- expiration of any grace period with respect thereto), whether the same shall occur and be continuing for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of Law or otherwise): (a) Borrower shall fail to pay principal, interest, fees or other amounts payable with respect to the Obligations within three (3) Business Days after the date any such payment is due, or Borrower shall fail to pay the entire principal balance and all other sums due hereunder or under the Loan Documents on the Maturity Date; or (b) Any representation or warranty made by Borrower in this Agreement or in any certificate or other document furnished by Borrower in connection with or pursuant to this Agreement shall be incorrect in any material respect on the date as of which made or deemed made; or (c) Borrower shall default in the performance or observance of any agreement, term, covenant or condition contained in any Loan Document, other than any default described in the other paragraphs of this Section 9.1, which default shall continue for more than fifteen (15) days after Borrower receives notice of such default, unless such default is capable of being cured but cannot be cured within such fifteen (15) day period and Borrower is diligently proceeding, to the satisfaction of the Agent, to cure such default; or (d) Borrower shall fail to be in compliance with any of the covenants set forth in Section 6.2 hereof; or -37- (e) Borrower shall default in the performance or observance of any agreement, term, covenant or condition beyond any applicable cure period contained in the Deed of Trust or any other agreement or instrument evidencing a deed of trust or security interest in favor of the Agent and the Banks in respect of the Property; or (f) Borrower shall default (beyond any applicable grace period) in the payment of any amount of any Indebtedness (other than the Obligations) with an outstanding principal amount in excess of $2,500,000 in the aggregate, or shall default (beyond any applicable grace period) in the performance of any agreement under which such Indebtedness is created or evidenced, if the effect of such default is to cause, or to permit the holder (or a trustee on behalf of such holder) of such Indebtedness to cause, such Indebtedness to become due prior to its stated maturity; or (g) Any of the following shall occur: (i) Borrower or the General Partner shall make an assignment for the benefit of creditors or be unable to pay its debts generally as they become due; (ii) Borrower or the General Partner shall petition or apply to any Tribunal for the appointment of a trustee, receiver or liquidator of it, or of any substantial part of its assets, or shall commence any proceedings relating to Borrower under any bankruptcy, reorganization, compromise, arrangement, insolvency, conservatorship, moratorium, dissolution, liquidation or similar debtor relief Laws of any jurisdiction, whether now or hereafter in effect; (iii) any such petition or application shall be filed, or any such proceedings shall be commenced, against Borrower or the General Partner and the same is not dismissed or otherwise discharged within sixty (60) days, or an order, judgment or decree shall be entered appointing any such trustee, receiver or liquidator, or approving the petition in any such proceedings; (iv) any final order, judgment or decree shall be entered in any proceedings against Borrower or the General Partner decreeing its dissolution; or (v) any final order, judgment or decree shall be entered in any proceedings against Borrower decreeing a split-up of Borrower or the General Partner which requires the divestiture of a substantial part of its assets; or (h) Final judgment(s) on the merits (not affecting or docketed against the Property) for the payment of Ten Million and 00/100 Dollars ($10,000,000.00) or more in the aggregate shall be outstanding against Borrower, and such judgment(s) shall remain unstayed or unbonded and in effect and unpaid for more than thirty (30) days, unless a reputable insurance company has acknowledged coverage of 75% or more of the amount of such judgment in a manner satisfactory to the Agent; or (i) Any Loan Document or material provision thereof shall, for any reason, not be valid and binding on Borrower or in full force and effect, or shall be declared to be null and void; or the validity or enforceability of any Loan Document shall be contested by Borrower; or Borrower shall deny that it has any or further liability or obligation under any Loan Document; or the Deed of Trust shall not constitute, or shall cease to constitute, a valid, perfected first priority (except for Permitted Encumbrances) Lien on the Property and the other Collateral described therein; or (j) Any easement (other than any Permitted Encumbrance) over, across, under or otherwise affecting the Property or any portion thereof shall be granted or released without the -38- Agent's prior written consent, which shall not be unreasonably withheld, conditioned or delayed; or (k) Borrower shall fail to maintain insurance in accordance with the terms of Section 6.4 or the Deed of Trust; or (l) The Agent shall not be afforded the inspection rights provided in Section 6.1(c) and Section 6.4(e); or (m) An Event of Default under and as defined in the Revolving Credit Agreement, as the same may hereafter be amended, replaced or supplemented from time to time, shall occur and be continuing. 9.2 Remedies Upon Default. If an Event of Default specified in Section --------------------- 9.1(g) occurs, the aggregate unpaid principal balance of and accrued interest on the Obligations shall thereupon become due and payable concurrently therewith, without any action by the Agent or any Bank and without diligence, presentment, demand, protest, notice of protest or intent to accelerate, or notice of any other kind, all of which are hereby expressly waived. Except as set forth in the preceding sentence, should any Event of Default occur and be continuing, the Agent may, at its option, do any one or more of the following: (a) Acceleration. Declare (by written notice to Borrower) the entire ------------ unpaid balance of the Obligations, or any part thereof, immediately due and payable, whereupon such Obligations shall be due and payable, without diligence, presentment, demand, protest, notice of protest or other notice of any kind, all of which are hereby expressly waived. (b) Termination. Terminate the Commitments by written notice to Borrower. ----------- (c) Judgment. Reduce any claim to judgment. -------- (d) Rights. Exercise any and all Rights afforded by the Laws or ------ principles of equity of the State of California or any other jurisdiction, or by any Loan Documents, or otherwise. 9.3 Remedies in General. If any Event of Default shall occur and be ------------------- continuing, the Agent may immediately proceed to protect and enforce all or any Rights with respect thereto contained in this Agreement or any other Loan Documents, or may enforce any other legal or equitable Rights. All Rights conferred upon the Agent shall be cumulative and not exclusive of any other Rights available. No delay or omission to exercise any Right shall impair any such Right or shall be construed to be a waiver of any Event of Default or an acquiescence therein. Any Right may be exercised from time to time, independently or concurrently, and as often as shall be deemed expedient. No waiver of any Event of Default shall extend to any subsequent Event of Default. No single or partial exercise of any Right shall preclude other or further exercise of any Right. Borrower agrees that if an Event of Default shall happen and be continuing, it will pay reasonable attorneys' fees and court costs incurred in collecting the amounts due and in exercising Rights hereunder. -39- ARTICLE 10 LIMITED RECOURSE OBLIGATIONS 10.1 Limited Recourse. (a) Notwithstanding anything in this Agreement or ---------------- the other Loan Documents to the contrary, neither Borrower nor any partner, officer or Affiliate of Borrower shall have any personal liability for the payment of any Loan, the performance of any Obligation or liability of Borrower hereunder or under any other Loan Document, or for any deficiency judgment that the Agent or any Bank may obtain after foreclosure on or sale of the Property, and the Agent and the Banks will look solely to the Property as security for the Obligations and will not commence any action or enter any deficiency judgment against Borrower or any partner, officer or Affiliate of Borrower personally; provided, however, that Borrower shall not be exonerated or exculpated from, and - -------- ------- Borrower shall remain personally liable for (i) payment to the Agent and the Banks to the extent provided in Article 15 of the Deed of Trust, and (ii) its obligations and liabilities as set forth in the Environmental Indemnity Agreement and the Guaranty of Payment of Recourse Obligations, each dated the date hereof given by Borrower and General Partner to the Agent. (b) The foregoing limitations on personal liability shall not impair the validity of the obligations hereunder and under the other Loan Documents, or the Lien of the Deed of Trust upon the Property, or the right of the Agent and the Banks to foreclose and/or enforce the Lien of, or cause the power of sale to be exercised pursuant to, the Deed of Trust or any other Loan Document. (c) Nothing herein shall be deemed to be a waiver of any right which the Agent and the Banks may have under any bankruptcy law of the United States or any state to file a claim for the full amount of the Obligations or to require that all of the Property shall continue to secure all of the Obligations in accordance with this Agreement and the other Loan Documents. ARTICLE 11 THE AGENT 11.1 Appointment; Powers and Immunities. Each Bank hereby irrevocably ---------------------------------- appoints and authorizes the Agent to act as its agent hereunder and under the other Loan Documents with such powers as are specifically delegated to the Agent by the terms hereof and thereof, together with such other powers as are reasonably incidental thereto. The Agent: (a) shall have no duties or responsibilities except as expressly set forth in this Agreement and the other Loan Documents, and shall not by reason of this Agreement or any other Loan Document be a trustee for any Bank; (b) shall not be responsible to the Banks for any recitals, statements, representations or warranties contained in this Agreement or any other Loan Document, or in any certificate or other document referred to or provided for in, or received by any Bank under, this Agreement or -40- any other Loan Document, or for the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or any other document referred to or provided for herein or therein or for any failure by Borrower to perform any of its obligations hereunder or thereunder; (c) shall not be required to initiate or conduct any litigation or collection proceedings hereunder or under any other Loan Document except to the extent requested by the Majority Banks, and then only on terms and conditions satisfactory to the Agent; and (d) shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other Loan Document or any other document or instrument referred to or provided for herein or therein or in connection herewith or therewith, except for its own gross negligence or wilful misconduct. The Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in- fact selected by it with reasonable care. Except as expressly provided herein, the provisions of this Article 11 are solely for the benefit of the Agent and the Banks, and Borrower shall not have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement and under the other Loan Documents, the Agent shall act solely as agent of the Banks and does not assume and shall not be deemed to have assumed any obligation towards or relationship of agency or trust with or for Borrower. The duties of the Agent shall be ministerial and administrative in nature, and the Agent shall not have by reason of this Agreement or any other Loan Document a fiduciary relationship in respect of any Bank. 11.2 Reliance by Agent. The Agent shall be entitled to rely upon any ----------------- certification, notice or other communication (including any thereof by telephone, telecopy, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants or other experts selected by the Agent. As to any matters not expressly provided for by this Agreement or any other Loan Document, the Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and thereunder in accordance with instructions signed by the Majority Banks, and such instructions of the Majority Banks in any action taken or failure to act pursuant thereto shall be binding on all of the Banks. 11.3 Defaults. The Agent shall not be deemed to have knowledge of the -------- occurrence of a Default or an Event of Default (other than the nonpayment of principal of or interest on the Loans) unless the Agent has received notice from a Bank or Borrower specifying such Default or Event of Default and stating that such notice is a "Notice of Default". In the event that the Agent receives such a notice of the occurrence of a Default or an Event of Default, the Agent shall give prompt notice thereof to the Banks. The Agent shall give each Bank prompt notice of each nonpayment of principal of or interest on the Loan whether or not it has received any notice of the occurrence of such nonpayment. The Agent shall take such action hereunder with respect to such Default or Event of Default as shall be directed by the Majority Banks, provided that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Banks. 11.4 Rights of Agent as a Bank. With respect to the Loans made by it, ------------------------- Commerzbank in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other -41- Bank and may exercise the same as though it were not acting as the Agent, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include Commerzbank in its individual capacity. The Agent may (without having to account therefor to any Bank) accept deposits from, lend money to and generally engage in any kind of banking, trust or other business with Borrower (and any of its Affiliates) as if it were not acting as the Agent, and the Agent may accept fees and other consideration from Borrower for services in connection with this Agreement or any other Loan Document or otherwise without having to account for the same to the Banks. 11.5 Indemnification. Each Bank severally agrees to indemnify the Agent, --------------- to the extent the Agent shall not have been reimbursed by Borrower, ratably in accordance with its Commitment, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including, without limitation, reasonable counsel fees and disbursements) or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement or any other Loan Document or any other documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby (excluding, unless an Event of Default has occurred and is continuing, the normal administrative costs and expenses incident to the performance of its agency duties hereunder) or the enforcement of any of the terms hereof or thereof or any such other documents; provided, however, that no Bank shall be -------- ------- liable for any of the foregoing to the extent they arise from the gross negligence or wilful misconduct of the Agent. If any indemnity furnished to the Agent for any purpose shall, in the opinion of the Agent, be insufficient or become impaired, the Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. 11.6 CONSEQUENTIAL DAMAGES. THE AGENT SHALL NOT BE RESPONSIBLE OR LIABLE --------------------- TO ANY BANK, BORROWER OR ANY OTHER PERSON OR ENTITY FOR ANY PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. 11.7 Payee of Note Treated as Owner. The Agent may deem and treat the ------------------------------ payee of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof shall have been filed with the Agent and the provisions of Section 12.16 have been satisfied. Any requests, authority or consent of any Person who at the time of making such request or giving such authority or consent is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee or assignee of that Note or of any Note or Note issued in exchange therefor or replacement thereof. 11.8 Nonreliance on Agent and Other Banks. Each Bank agrees that it has, ------------------------------------ independently and without reliance on the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of Borrower and decision to enter into this Agreement and that it will, independently and without -42- reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or any of the other Loan Documents. The Agent shall not be required to keep itself informed as to the performance or observance by Borrower of this Agreement or any of the other Loan Documents or any other document referred to or provided for herein or therein or to inspect the properties or books of Borrower or any other Person. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Agent hereunder or under the other Loan Documents, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition or business of Borrower or any other Person (or any of their Affiliates) which may come into the possession of the Agent. 11.9 Failure to Act. Except for action expressly required of the Agent -------------- hereunder or under the other Loan Documents, the Agent shall in all cases be fully justified in failing or refusing to act hereunder and thereunder unless it shall receive further assurances to its satisfaction by the Banks of their indemnification obligations under Section 11.5 against any and all liability and expense which may be incurred by the Agent by reason of taking, continuing to take, or failing to take any such action. 11.10 Resignation or Removal of Agent. Subject to the appointment and ------------------------------- acceptance of a successor Agent as provided below, the Agent may, for good cause with the consent of Borrower, which consent will be granted provided that Borrower, in its reasonable discretion, agrees with the cause given, resign at any time by giving notice thereof to the Banks and Borrower. The Banks shall not have the right to remove the Agent under any circumstances. Upon any such resignation, the Majority Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Banks and shall have accepted such appointment within 30 days after the retiring Agent's notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent. Any successor Agent shall be a bank which is reasonably acceptable to Borrower and which has a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article 11 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent hereunder. 11.11 Reliance by Borrower. (a) Notwithstanding anything to the contrary -------------------- in this Agreement or in any Assignment and Acceptance Agreement, the Banks and the Agent hereby agree that throughout the term of the Loan: (i) Borrower may assume conclusively and without the need of any inquiry or investigation on its part that any communication received from, any agreement entered into by, any waiver given by, or any other action taken on the part of, the Agent has been authorized by the Banks and shall bind the Banks, including, without limitation, -43- the execution and delivery of (A) subordination, non-disturbance and attornment agreements with tenants under leases relating to the Property, (B) satisfaction of the Loan Documents, and (C) the amendment or modification of any of the Loan Documents; and (ii) Borrower may assume that all decisions and actions of the Banks shall be implemented by the Agent. (b) Borrower shall have the right without the need of any inquiry or investigation to rely on the appointment of the Agent as agent for all of the Banks for the purposes and with the powers specifically set forth herein and the continuance of that appointment throughout the term of the Loan unless Borrower has received notice pursuant to Section 11.10 of the resignation of the Agent and designation of a replacement Agent. (c) The right of Borrower hereunder to rely upon and look to the Agent shall continue during the term of the Loan and no dispute, complaint or claim between any Bank and the Agent shall impair or negate such right of Borrower to rely upon and look exclusively to the Agent as set forth in this Article 11; provided, however, that if and at such time as a replacement Agent or co-Agent - -------- ------- has been duly appointed in the place of the Agent originally named herein (or in the place of any earlier replacement Agent or co-Agent(s) appointed in accordance with the terms hereof), Borrower shall rely on such replacement Agent or co-Agent(s) and shall no longer rely on any prior Agent. 11.12 Syndication Agent. Dresdner Bank AG, New York and Grand Cayman ----------------- Branches, shall have no obligations hereunder in its capacity as Syndication Agent, but shall, in its capacity as a Bank, have the obligations of a Bank hereunder. ARTICLE 12 MISCELLANEOUS 12.1 Notices. Unless otherwise provided herein, all notices, requests, ------- consents and demands shall be in writing and shall be personally delivered, sent by telecopy (answerback received), or mailed, by certified mail, postage prepaid, to the following addresses: (a) If to the Agent: Commerzbank Aktiengesellschaft New York Branch 2 World Financial Center New York, New York 10281-1050 Telecopier No.: (212) 266-7565 Attention: Mr. David Schwarz, Vice President with a copy to: -44- Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Avenue New York, New York 10104 Telecopier No.: (212) 541-4630 Attention: Michael B. Levy, Esq. (b) If to a Bank, to such Bank at its address or telecopier number set forth on Annex III hereto or in the Assignment and Acceptance Agreement pursuant to which it became a party hereto (c) If to Borrower: Kilroy Realty, L.P. 2250 East Imperial Highway El Segundo, California 90245 Telecopier No.: (310) 322-5981 Attention: Mr. Tyler Rose, Treasurer with a copy to: Latham & Watkins 633 West Fifth Street, Suite 4000 Los Angeles, California 90071 Telecopier No.: (213) 891-8763 Attention: Jennifer Upham Saunders, Esq. or to such other address as any party may designate by written notice to the other parties. All notices, requests, consents and demands hereunder will be effective when so personally delivered or sent by telecopy, or three days after being so mailed. 12.2 Survival of Agreements. All covenants, agreements, representations ---------------------- and warranties made or incorporated by reference herein shall survive the execution and delivery of this Agreement and the other Loan Documents. All statements contained in any certificate or instrument delivered by Borrower hereunder shall be deemed to constitute representations and warranties made by Borrower. 12.3 Parties in Interest. All covenants and agreements contained in this ------------------- Agreement and all other Loan Documents shall bind and inure to the benefit of the respective successors and assigns of the parties hereto. 12.4 Expenses. Borrower shall pay the reasonable out-of-pocket expenses -------- of the Agent (including, without limitation, reasonable attorneys' fees and expenses) in connection with the preparation and negotiation of this Agreement and all other Loan Documents, the closing of the Loans, the performance of routine post-closing services rendered to the Agent and post-closing -45- services rendered to the Agent in connection with matters that the parties agree to resolve after the Closing Date, the Agent's administration of the Loan, the release of any security, the consideration, preparation and negotiation of any amendments, consents and waivers relating to any Loan Documents, review of leases or lease renewals and any subordination, non-disturbance and attornment agreements or estoppel letters. Borrower also agrees to pay the reasonable out- of-pocket expenses of the Agent and the Banks (including, without limitation, reasonable attorneys' fees and expenses) in connection with the enforcement of this Agreement or any other Loan Document after the occurrence of an Event of Default. 12.5 Governing Law; Jurisdiction; Venue; Jury Trial. (a) THIS AGREEMENT ---------------------------------------------- AND THE LOAN DOCUMENTS, EXCEPT AS OTHERWISE PROVIDED IN SUCH DOCUMENTS, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO CONFLICT OF LAWS PRINCIPLES THEREOF. BORROWER HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK OR THE COURTS OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY IN ANY ACTION OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT, AND BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT. BORROWER IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. (b) EACH OF BORROWER, THE AGENT AND EACH BANK HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. (c) NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE AGENT OR ANY BANK TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST BORROWER IN ANY OTHER JURISDICTION. 12.6 Right of Setoff. If an Event of Default shall have occurred and be --------------- continuing, each Bank is hereby authorized at any time and from time to time, to the extent permitted by applicable Law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Bank to or for the credit or the account of Borrower against any of and all the obligations of Borrower now or hereafter existing under this Agreement, the Note and the other Loan Documents held by such Bank, irrespective of whether such Bank shall have made any demand under this Agreement, the Note or such other Loan Documents and although such obligations may be -46- unmatured. Each Bank agrees to promptly notify Borrower after any such set off and application by such Bank. The rights of each Bank under this Section 12.6 are in addition to other rights and remedies (including other rights of setoff) that such Bank may have. 12.7 Severability. If any provision of any Loan Document is determined to ------------ be illegal, invalid or unenforceable under present or future Laws during the term thereof, such provision shall be fully severable, the appropriate Loan Document shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part thereof, and the remaining provisions thereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance therefrom. 12.8 Indemnity. Borrower agrees to indemnify and hold harmless the Agent --------- and each of the Banks against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Agent or any Bank or any of its respective employees, officers, directors or other representatives in any way relating to or arising out of the Loan Documents, any transaction related hereto or thereto, or any act, omission or transaction of Borrower or its Affiliates, or any of their employees, officers, directors or other representatives relating hereto or thereto, to the extent that any of the same results, directly or indirectly, from any claims made or actions, suits or proceedings commenced by or on behalf of any Person other than the Agent or any Bank, including without limitation, liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements relating to or arising out of (a) any Pollutant(s), or (b) possible non-compliance with any building or zoning regulations affecting the Property; in all cases excepting any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements resulting from or arising out of the gross negligence or willful misconduct of the Agent or any Bank or any of its respective employees, officers, directors or representatives. If an Event of Default has occurred and is continuing and either Borrower shall fail to do any act or thing which it has covenanted to do hereunder or any representation or warranty on the part of Borrower contained herein or in any Loan Document shall be breached, the Agent may (but shall not be obligated to) do the same or cause it to be done or remedy any such breach, and may expend its funds for such purpose; provided, however, that no such action by the Agent shall relieve -------- ------- Borrower of any liability in connection with such failure or breach or be deemed to constitute a waiver of any default under such Loan Document. Any and all amounts so expended by the Agent shall be repayable to it by Borrower, immediately upon the Agent's demand therefor, with interest at the rate set forth in Section 4.3(b). The obligations of Borrower under this Section 12.8 shall continue after payment of the Obligations and termination of any or all Loan Documents, but shall not in any event apply to (i) any act, event or omission related to the Property occurring after the Agent shall foreclose the Lien of the Deed of Trust, or accept a deed-in-lieu-of-foreclosure, and become the owner of the Property or (ii) any act, or failure to act where there was a duty to act, related to the Property by the Agent occurring after the Agent becomes a mortgagee-in-possession or by a receiver appointed during any proceeding to foreclose the Lien of the Deed of Trust. -47- 12.9 Headings. The headings and captions used in any Loan Documents are, -------- unless specified otherwise, for convenience only and shall not be deemed to limit, amplify or modify the terms of the Loan Documents, nor affect the meaning thereof. 12.10 Exceptions to Covenants. Borrower shall not be deemed to be ----------------------- permitted to take any action or fail to take any action which is permitted as an exception to any of the covenants contained herein or which is within the permissible limits of any of the covenants contained herein if such action or omission would result in the breach of any other covenant contained herein. 12.11 Amendments and Waivers. Any provision of this Agreement, the Note or ---------------------- any other Loan Document may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by Borrower and the Majority Banks; provided that no such amendment or waiver shall, unless signed by each Bank - -------- whose Commitment is affected by the change, (i) change the amount of the Commitment of any Bank or subject any Bank to any additional obligation, (ii) change the principal of or rate of interest on the Loan or any fees hereunder, (iii) change the date fixed for any payment of principal of or interest on the Loan or any fees hereunder, (iv) change the amount of principal, interest or fees due on any date fixed for the payment thereof, (v) change the manner of application of any payments made under this Agreement or the Note, (vi) release or substitute all or any substantial part of the Collateral, or (vii) affirmatively subordinate the Loan to other Indebtedness. 12.12 Entire Agreement. This Agreement, together with the other Loan ---------------- Documents, embodies the entire agreement among Borrower, the Banks and the Agent, and supersedes all prior proposals, agreements and understandings relating to the subject matter hereof. Borrower certifies that it is relying on no representation, warranty, covenant or agreement except for those set forth herein and in the other Loan Documents. 12.13 No Waiver; Remedies. No failure on the part of the Agent or any Bank ------------------- to exercise, and no delay in exercising, any right under any Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 12.14 Binding Effect. This Agreement shall be binding upon and inure to -------------- the benefit of Borrower, the Banks and the Agent and their respective successors and assigns, except that Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Agent and each Bank. 12.15 Counterparts. This Agreement and the other Loan Documents may be ------------ executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, but in making proof of any such Loan Document, it shall not be necessary to produce or account for more than one such counterpart. -48- 12.16 Assignment and Participations. (a) Each Bank may at any time, ----------------------------- without the consent of Borrower, sell to one or more Persons (each a "Participant") participating interests in the outstanding portion of the Loan ----------- made by such Bank or the Commitments of such Bank or any other interest of Such Bank hereunder relating thereto, all on such terms as such Bank may deem acceptable. In the event of any such sale by a Bank of a participating interest to a Participant, such Bank's obligations under this Agreement shall remain unchanged, and such Bank shall remain solely responsible for the performance thereof. (b) Each Bank may at any time, with the consent of the Borrower (which consent of Borrower shall not be required if either (i) an Event of Default has occurred and is continuing, or (ii) the assignment described in this paragraph below is to an Affiliate of such Bank) and the consent of the Agent (each of which consents shall not be unreasonably withheld or delayed) assign to one or more banks or financial institutions (each an "Assignee") all or any of its -------- rights and obligations under this Agreement, its Note and the other Loan Documents, and such Assignee shall assume all such rights and obligations, pursuant to an Assignment and Acceptance Agreement executed by such Assignee, all on such terms as the Agent may deem acceptable, provided, however, that (i) -------- ------- Commerzbank shall at all times hold at least 20% of the outstanding Loan and continue to be the Agent or a co-Agent hereunder, and (ii) if the assignment is of less than the entire portion of the Loan and Commitment held by the assigning Bank, then, after giving effect to the Assignment, the assigning Bank shall hold at least a $10,000,000 Commitment, and the Assignee shall hold at least a $5,000,000 Commitment. Borrower shall assist Commerzbank in the process of syndicating the Loan and Commitments to the extent reasonably requested by Commerzbank. -49- (c) Borrower authorizes Commerzbank to disclose to any Participant, Assignee or other transferee (each a "Transferee") and any prospective ---------- Transferee any and all financial information in such Bank's possession concerning Borrower which has been delivered to such Bank by Borrower pursuant to this Agreement or which has been delivered to such Bank by Borrower in connection with such Bank's credit evaluation prior to entering into this Agreement, provided such Transferee agrees to maintain the confidentiality of such information in accordance with Section 6.3(l) hereof. (d) Anything in this Section 12.16 to the contrary notwithstanding, any Bank may assign and pledge all or any portion of its interest in the Loan and/or obligations owing to it to any Federal Reserve Bank or the United States Treasury as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve Bank, provided that any payment in respect of such interest -------- in the assigned Loan and/or obligations made by Borrower to the assigning and/or pledging Bank in accordance with the terms of this Agreement shall satisfy Borrower's obligations hereunder in respect of such assigned interest in the Loan and/or obligations to the extent of such payment. No such assignment shall release the assigning and/or pledging Bank from its obligations hereunder. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above. KILROY REALTY, L.P., a Delaware limited partnership By: Kilroy Realty Corporation,. a Maryland corporation, general partner By: /s/ Tyler H. Rose ______________________________________ Name: Tyler H. Rose Title: Senior Vice President and Treasurer COMMERZBANK AKTIENGESELLSCHAFT, NEW YORK BRANCH, as Administrative Agent and Lead Arranger and Bank By: /s/ Lisa C. Miller _______________________________ Name: Lisa C. Miller Title: Asst. Vice President By: /s/ David M. Schwartz _______________________________ Name: David M. Schwartz Title: Vice President -50- DRESDNER BANK AG, NEW YORK and GRAND CAYMAN BRANCHES, as Syndication Agent and Arranger and Bank By: /s/ Andrew Dubin _______________________________ Name: Andrew Dubin Title: Vice President By: /s/ Craig P. Meisner _______________________________ Name: Craig P. Meisner Title: Vice President -51- ANNEXES - ------- ANNEX I - Commitments ANNEX II - Notice Adresses of Banks EXHIBITS - -------- EXHIBIT A - Form of Note SCHEDULES - --------- SCHEDULE 8.11 Collective Bargaining Agreement SCHEDULE 8.14 Lease Defaults -52- ANNEX I ------- Commitments
Name of Bank Commitment Amount Domestic Lending Ofc. Eurodlr. Lending Ofc. - ------------ ----------------- ---------------------- --------------------- Commerzbank 2 World Financial Ctr. 2 World Financial Ctr. Aktiengesellschaft, New York, NY 10281 New York, NY 10281 New York Branch $45,000,000.00 Att: David Schwarz Att: David Schwarz Tel: 212-266-7632 Tel:212-266-7632 Fax: 212-266-7565 Fax: 212-266-7565 Dresdner Bank, AG, Dresdner Bank AG, Dresdner Bank AG, New York and Grand New York Branch Grand Cayman Branch Cayman Branches $45,000,000.00 75 Wall Street c/o Dresdner Bank AG New York, NY 10005 New York Branch Att:______________ 75 Wall Street Tel:______________ New York, NY 10005 Fax:______________ Att:_______________ Tel:_______________ Fax:_______________
ANNEX II Notice Addresses of Banks 1. Commerzbank: As set forth in Section 12.1(a) 2. Dresdner Bank AG: c/o Dresdner Kleinwort Benson Global Finance - Real Estate - Los Angeles 333 S. Grand Street, Suite 1700 Los Angeles, CA 90071 Telecopier No.: 213-473-5450 Attn: Aden Kun EXHIBIT A --------- Form of Note PROMISSORY NOTE --------------- $______________ New York, New York October ___, 1999 FOR VALUE RECEIVED, KILROY REALTY, L.P., a Delaware limited partnership ("Borrower"), promises to pay to the order of ____________________________ (the "Bank"), at the office of the Agent (as defined in and as more particularly set forth in Section 4.7 and Section 4.9 of the Credit Agreement hereinafter referred to), in lawful money of the United States of America and in immediately available funds, the principal amount of ________________________ DOLLARS ($____________), which sum shall be due and payable in installments in such amounts and on such dates as are set forth in Section 2.3 of the Credit Agreement. The undersigned further agrees to pay interest at said office, in like money, from the date hereof on the unpaid principal amount hereof from time to time outstanding at the rates and on the dates specified in Section 4.3 of the Credit Agreement. This Note is one of the notes referred to in Section 2.2 of the Credit Agreement dated as of the date hereof (as the same may from time to time be amended, modified or supplemented, the "Credit Agreement" ) among Borrower, the Bank, the other Banks parties thereto, Dresdner Bank AG, New York and Grand Cayman Branches, as Syndication Agent and Arranger and Commerzbank Aktiengesellechaft, acting through its New York Branch, as Administrative Agent on behalf of the Banks and Lead Arranger, to which reference is made for a statement of the rights, obligations and security of the Agent and the Banks and the duties and obligations of Borrower in relation thereto; but neither this reference to the Credit Agreement nor any provision thereof shall affect or impair the absolute and unconditional obligation of Borrower to pay the principal sum of and interest on this Note when due. All defined terms used but not specifically defined herein shall have the meanings set forth in the Credit Agreement. The unpaid principal balance of this Note, together with accrued interest thereon and any Prepayment Premium due with respect thereto, unless earlier paid, shall be due and payable in full on the Final Maturity Date (as defined herein). All payments shall be applied to the payment of accrued interest hereon and thereafter to the payment of principal, and shall otherwise be applied as set forth in the Credit Agreement. As used in this Note, the term "Final Maturity Date" shall mean the earlier to occur of (a) the acceleration of the maturity of the Loan pursuant to the terms of the Credit Agreement or (b) the Maturity Date. A-1 If an Event of Default under the Credit Agreement shall occur and be continuing, the unpaid principal of and interest on this Note may be declared due and payable in the manner and with the effect provided therein. If this Note is placed in the hands of an attorney for collection after default, or if all or any part of the indebtedness represented hereby is proved, established or collected in any court or in any bankruptcy, receivership, debtor relief, probate or other court proceeding, Borrower and all endorsers, sureties and guarantors of this Note, if any, jointly and severally agree to pay reasonable attorneys' fees and collection costs to the holder hereof in addition to the principal and interest payable hereunder. To the extent that a person signs or endorses this Note in the capacity of an officer on behalf of the general partner of Borrower, such person will not incur personal liability thereby. Borrower and all endorsers, sureties and guarantors of this Note, if any, hereby severally waive demand, presentment for payment, protest, notice of protest, notice of intention to accelerate the maturity of this Note, the bringing of any suit against any party and any notice of or defense on account of any extensions, renewals, partial payments or changes in any manner of or in this Note or in any of its terms, provisions and covenants, or any releases or substitutions of any security, or any delay, indulgence or other act of any trustee or any holder hereof, whether before or after maturity (provided that, with respect to the foregoing notices, such waiver shall be limited to notices other than as expressly provided in the Loan Documents). Borrower hereby waives, to the fullest extent permitted by law, all rights and benefits which might be otherwise available to Borrower under California Civil Code Section 2822(a). Payment of this Note is secured by certain Property pursuant to the terms of the Deed of Trust and certain of the other Loan Documents referred to in the Credit Agreement, and the holder of this Note is entitled to the benefits of the Deed of Trust and such other Loan Documents. This Note shall be deemed to take effect as a sealed instrument under the laws of the State of New York, without reference to the conflict of laws principles thereof, and for all purposes shall be construed in accordance with such laws. The provisions of Article 15 of the Deed of Trust are hereby incorporated herein by reference as if fully set forth herein. Nothing herein shall be deemed to be a waiver of any right which the Agent and the Banks may have under any bankruptcy law of the United States or any state to file a claim for the full amount of the Loan, including interest thereon and any Prepayment Compensation payable with respect thereto, or to require that all of the Property shall continue to secure all of the [TEXT CONTINUED ON NEXT PAGE] A-2 principal amount of the Loan and interest, Prepayment Compensation, fees and other amounts payable by Borrower with respect thereto in accordance with this Note and the other Loan Documents. IN WITNESS WHEREOF, Borrower has caused this instrument to be executed by its duly Authorized Officer as of the date above written. KILROY REALTY, L.P., a Delaware limited partnership By: Kilroy Realty Corporation, a Maryland corporation, its general partner By____________________________________ Name: Title: A-3 SCHEDULE 8.11 ------------- Collective Bargaining Agreement Agreement between Building Owners and Managers Association of Greater Los Angeles, Inc., and International Union of Operating Engineers, Local No. 501, AFL-CIO (November 1, 1996-October 31, 2001). SCHEDULE 8.14 ------------- Lease Defaults None EX-10.4 5 VARIABLE INTEREST RATE DEED OF TRUST EXHIBIT 10.4 ================================================================================ KILROY REALTY, L.P., as trustor (Borrower) to FIRST AMERICAN TITLE INSURANCE COMPANY, as trustee (Trustee) for the benefit of COMMERZBANK AKTIENGESELLSCHAFT (New York Branch), as Administrative Agent on behalf of the Banks, as beneficiary (Lender) ================================================================================ VARIABLE INTEREST RATE DEED OF TRUST, LEASEHOLD DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FILING ================================================================================ Dated: October 20, 1999 Location: San Diego County, California PREPARED BY AND UPON RECORDATION RETURN TO: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, New York 10104 Attention: Michael B. Levy, Esq. TABLE OF CONTENTS
Page Article 1 - GRANTS OF SECURITY...................................................................... -1- Section 1.1 Property Mortgaged....................................................... -1- Section 1.2 Assignment of Rents...................................................... -4- Section 1.3 Security Agreement....................................................... -4- Section 1.4 Pledge of Moneys Held.................................................... -4- Article 2 - DEBT AND OBLIGATIONS SECURED............................................................ -4- Section 2.1 Debt..................................................................... -4- Section 2.2 Other Obligations........................................................ -5- Section 2.3 Debt and Other Obligations............................................... -5- Article 3 - BORROWER COVENANTS...................................................................... -5- Section 3.1 Payment of Debt.......................................................... -5- Section 3.2 Incorporation by Reference............................................... -5- Section 3.3 Insurance................................................................ -6- Section 3.4 Payment of Taxes, etc.................................................... -9- Section 3.5 Escrow Fund.............................................................. -10- Section 3.6 Condemnation............................................................. -10- Section 3.7 Leases and Rents......................................................... -11- Section 3.8 Maintenance of Property.................................................. -12- Section 3.9 Waste.................................................................... -12- Section 3.10 Compliance With Laws..................................................... -13- Section 3.11 Books and Records........................................................ -13- Section 3.12 Payment For Labor and Materials.......................................... -13- Section 3.13 Performance of Other Agreements.......................................... -14- Section 3.14 Change of Name, Identity or Structure.................................... -14- Section 3.15 Existence................................................................ -14- Article 4 - SPECIAL COVENANTS....................................................................... -14- Section 4.1 Property Use............................................................. -14- Section 4.2 ERISA.................................................................... -14- Section 4.3 Intentionally Deleted.................................................... -15- Section 4.4 Restoration.............................................................. -15- Article 5 - REPRESENTATIONS AND WARRANTIES.......................................................... -22- Section 5.1 Warranty of Title........................................................ -22- Section 5.2 Authority................................................................ -22- Section 5.3 Legal Status and Authority............................................... -22- Section 5.4 Validity of Documents.................................................... -22- Section 5.5 Litigation............................................................... -23-
-i- Section 5.6 Status of Property....................................................... -23- Section 5.7 No Foreign Person........................................................ -24- Section 5.8 Separate Tax Lot......................................................... -24- Section 5.9 ERISA Compliance......................................................... -24- Section 5.10 Leases................................................................... -24- Section 5.11 Financial Condition...................................................... -25- Section 5.12 Business Purposes........................................................ -25- Section 5.13 Taxes.................................................................... -25- Section 5.14 Mailing Address.......................................................... -25- Section 5.15 No Change in Facts or Circumstances...................................... -25- Section 5.16 Disclosure............................................................... -25- Section 5.17 Third Party Representations.............................................. -25- Section 5.18 Illegal Activity......................................................... -25- Article 6 - OBLIGATIONS AND RELIANCES............................................................... -25- Section 6.1 Relationship of Borrower and Lender...................................... -25- Section 6.2 No Reliance on Lender.................................................... -26- Section 6.3 No Lender Obligations.................................................... -26- Section 6.4 Reliance................................................................. -26- Article 7 - FURTHER ASSURANCES...................................................................... -26- Section 7.1 Recording of Security Instrument, etc.................................... -26- Section 7.2 Further Acts, etc........................................................ -27- Section 7.3 Changes in Tax, Debt, Credit and Documentary Stamp Laws.................. -27- Section 7.4 Estoppel Certificates.................................................... -28- Section 7.5 Splitting of Security Instrument......................................... -28- Section 7.6 Replacement Documents.................................................... -28- Article 8 - DUE ON SALE/ENCUMBRANCE................................................................. -29- Section 8.1 Lender Reliance.......................................................... -29- Section 8.2 No Sale/Encumbrance...................................................... -29- Section 8.3 Sale/Encumbrance Defined................................................. -29- Section 8.4 Lender's Rights.......................................................... -29- Article 9 - PREPAYMENT.............................................................................. -30- Section 9.1 Prepayment Before Event of Default....................................... -30- Section 9.2 Prepayment on Casualty and Condemnation.................................. -30- Section 9.3 Prepayment After Event of Default........................................ -30- Article 10 - DEFAULT................................................................................ -31- Section 10.1 Events of Default........................................................ -31- Section 10.2 Late Payment Charge...................................................... -32- Section 10.3 Default Interest......................................................... -32-
-ii- Article 11 - RIGHTS AND REMEDIES.................................................................... -33- Section 11.1 Remedies................................................................. -33- Section 11.3 Right to Cure Defaults................................................... -35- Section 11.4 Actions and Proceedings.................................................. -35- Section 11.5 Recovery of Sums Required To Be Paid..................................... -36- Section 11.6 Examination of Books and Records......................................... -36- Section 11.7 Other Rights, etc........................................................ -36- Section 11.8 Right to Release Any Portion of the Property............................. -37- Section 11.9 Recourse and Choice of Remedies.......................................... -37- Section 11.10 Right of Entry........................................................... -37- Article 12 - ENVIRONMENTAL HAZARDS.................................................................. -37- Section 12.1 Environmental Representations and Warranties............................. -37- Section 12.2 Environmental Covenants.................................................. -39- Section 12.3 Lender's Rights.......................................................... -40- Article 13 - INDEMNIFICATION........................................................................ -40- Section 13.1 General Indemnification.................................................. -40- Section 13.2 Mortgage and/or Intangible Tax........................................... -40- Section 13.3 ERISA Indemnification.................................................... -41- Section 13.4 Environmental Indemnification............................................ -41- Section 13.5 Duty to Defend; Attorneys'Fees and Other Fees and Expenses............... -42- Article 14 - WAIVERS................................................................................ -42- Section 14.1 Waiver of Counterclaim................................................... -42- Section 14.2 Marshalling and Other Matters............................................ -42- Section 14.3 Waiver of Notice......................................................... -42- Section 14.4 Waiver of Statute of Limitations......................................... -43- Section 14.5 Sole Discretion of Lender................................................ -43- Section 14.6 Survival................................................................. -43- Section 14.7 WAIVER OF TRIAL BY JURY.................................................. -43- Article 15 - EXCULPATION ......................................................................... -43- Section 15.1 Exculpation.............................................................. -43- Section 15.2 Reservation of Certain Rights............................................ -44- Section 15.3 Exceptions to Exculpation................................................ -44- Section 15.4 Recourse................................................................. -44- Section 15.5 Bankruptcy Claims........................................................ -45- Article 16 - NOTICES................................................................................ -45- Section 16.1 Notices.................................................................. -45- Article 17 - SERVICE OF PROCESS..................................................................... -46- Section 17.1 Consent to Service....................................................... -46-
-iii- Section 17.2 Submission to Jurisdiction............................................... -46- Section 17.3 Jurisdiction Not Exclusive............................................... -46- Article 18 - APPLICABLE LAW......................................................................... -46- Section 18.1 Choice of Law............................................................ -46- Section 18.2 Usury Laws............................................................... -46- Section 18.3 Provisions Subject to Applicable Law..................................... -47- Article 19 - Intentionally Deleted.................................................................. -47- Article 20 - COSTS.................................................................................. -47- Section 20.1 Performance at Borrower's Expense........................................ -47- Section 20.2 Attorney's Fees for Enforcement.......................................... -47- Article 21 - DEFINITIONS............................................................................ -47- Section 21.1 General Definitions...................................................... -47- Article 22 - MISCELLANEOUS PROVISIONS............................................................... -48- Section 22.1 No Oral Change........................................................... -48- Section 22.2 Liability................................................................ -48- Section 22.3 Inapplicable Provisions.................................................. -48- Section 22.4 Headings, etc............................................................ -48- Section 22.5 Duplicate Originals; Counterparts........................................ -48- Section 22.6 Number and Gender........................................................ -48- Section 22.7 Subrogation.............................................................. -49- Section 22.8 Entire Agreement......................................................... -49- Section 22.9 Trustee.................................................................. -49- Article 23 - CERTAIN MATTERS RELATING TO THE STATE OF CALIFORNIA.................................... -50-
-iv- This VARIABLE INTEREST RATE DEED OF TRUST, LEASEHOLD DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FILING (this "Security Instrument") is made as of the 20th day of October, 1999, by KILROY REALTY, L.P., a Delaware limited partnership, having its principal place of business at 2250 East Imperial Highway, El Segundo, California 90245, as trustor ("Borrower") to FIRST AMERICAN TITLE INSURANCE COMPANY, a California corporation, as trustee, having an address of 411 Ivy Street, San Diego, California 92101 ("Trustee") for the benefit of COMMERZBANK AKTIENGESELLSCHAFT, New York Branch), a branch duly licensed under the laws of the State of New York, having an address at 2 World Financial Center, New York, New York 10251- 1050, as Administrative Agent on behalf of the Banks (as defined below), as beneficiary ("Lender"). R E C I T A L S : --------------- WHEREAS, pursuant to the Credit Agreement dated October 20, 1999 (the "Credit Agreement") among Borrower, Lender, as Administrative Agent and Arranger, Dresdner Bank AG, acting through its New York Branch and Grand Cayman Branch, as Syndication Agent, and the other banks party thereto (collectively, the "Banks"), the Banks have loaned to Borrower up to $90,000,000, which loan is evidenced by, inter alia, the Note of Borrower obligating Borrower to pay said loan (the "Note"), together with all interest accrued thereon, and all other amounts due or payable, in accordance with the terms of the Note, the Credit Agreement and the other Security Documents (as hereinafter defined); WHEREAS, Borrower is the owner of the Property (as defined below) and Borrower, in order to secure the payment of the indebtedness evidenced by Promissory Note, has duly authorized the execution and delivery of this Security Instrument; and WHEREAS, Borrower and Lender intend these recitals to be a material part of this Security Instrument. NOW, THEREFORE, in consideration of the loan to Borrower evidenced by the Note (the "Loan") and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be bound hereby, Borrower hereby agrees as follows: Article 1 - GRANTS OF SECURITY Section 1.1 Property Mortgaged. Borrower does hereby irrevocably ------------------ mortgage, grant, bargain, sell, pledge, assign, warrant, transfer and convey to Trustee and grant a security interest to Trustee in, for the benefit of Lender and Lender's successors, substitutes and assigns, the following property, rights, interests and estates now owned, or hereafter acquired by Borrower (collectively, the "Property"), IN TRUST WITH POWER OF SALE AND RIGHT OF ENTRY AND POSSESSION TO HAVE AND TO HOLD the same, together with all and singular the rights, hereditaments, and appurtenances in any way appertaining or belonging thereto forever: -1- (a) Fee Land. The real property described in Exhibit A attached hereto and -------- made a part hereof (the "Fee Land"); (b) Ground Lease. The leasehold estate in the real property described in ------------ Exhibit A-13 attached hereto and leased pursuant to the ground lease described in Exhibit B attached hereto (the "Ground Lease"). The land conveyed pursuant to the Ground Lease (the "Leased Land"), together with the Fee Land, is referred to as the "Land". (c) Additional Land. All additional lands, estates and development rights --------------- hereafter acquired by Borrower for use in connection with the Land and the development of the Land and all additional lands and estates therein which may, from time to time, by supplemental mortgage or otherwise, be expressly made subject to the lien of this Security Instrument; (d) Improvements. The buildings, structures, fixtures, additions, ------------ enlargements, extensions, modifications, repairs, replacements and improvements now or hereafter erected or located on the Land (the "Improvements"); (e) Easements. All easements, rights-of-way or use, rights, strips and --------- gores of land, streets, ways, alleys, passages, sewer rights, water, water courses, water rights and powers, air rights and development rights, and all estates, rights, titles, interests, privileges, liberties, servitudes, tenements, hereditaments and appurtenances of any nature whatsoever, in any way now or hereafter belonging, relating or pertaining to the Land and the Improvements and the reversion and reversions, remainder and remainders, and all land lying in the bed of any street, road or avenue, opened or proposed, in front of or adjoining the Land, to the center line thereof and all the estates, rights, titles, interests, dower and rights of dower, curtesy and rights of curtesy, property, possession, claim and demand whatsoever, both at law and in equity, of Borrower of, in and to the Land and the Improvements and every part and parcel thereof, with the appurtenances thereto; (f) Fixtures and Personal Property. All machinery, equipment, fixtures ------------------------------ (including all heating, air conditioning, plumbing, lighting, communications and elevator fixtures) and other property of every kind and nature whatsoever owned by Borrower, or in which Borrower has or shall have an interest, now or hereafter located upon the Land and the Improvements, or appurtenant thereto, and used or contemplated to be used in connection with the present or future operation and occupancy of the Land and the Improvements and all building equipment, materials and supplies of any nature whatsoever owned by Borrower, or in which Borrower has or shall have an interest, now or hereafter located upon the Land and the Improvements, or appurtenant thereto, and used or contemplated to be used in connection with the present or future operation and occupancy of the Land and the Improvements (collectively, the "Personal Property"), and the right, title and interest of Borrower in and to any of the Personal Property which may be subject to any security interests, as defined in the Uniform Commercial Code, as adopted and enacted by the state or states where any of the Property is located (the "Uniform Commercial Code"), superior in lien to the lien of this Security Instrument and all proceeds and products of the above; -2- (g) Leases and Rents. All leases and other agreements affecting the use, ---------------- enjoyment or occupancy of the Land and the Improvements heretofore or hereafter entered into, whether before or after the filing by or against Borrower of any petition for relief under 11 U.S.C. (S)101 et seq., as the same may be amended from time to time (the "Bankruptcy Code") (the "Leases") and all right, title and interest of Borrower, its successors and assigns therein and thereunder, including cash or securities deposited thereunder to secure the performance by the lessees of their obligations thereunder and all rents, additional rents, revenues, issues and profits (including all oil and gas or other mineral royalties and bonuses) from the Land and the Improvements whether paid or accruing before or after the filing by or against Borrower of any petition for relief under the Bankruptcy Code (the "Rents") and all proceeds from the sale or other disposition of the Leases and the right to receive and apply the Rents to the payment of the Debt (as defined in Article 2); (h) Condemnation Awards. All awards or payments, including interest ------------------- thereon, which may hereafter be made with respect to the Property to the extent actually received or receivable by Borrower, whether from the exercise of the right of eminent domain (including any transfer made in lieu of or in anticipation of the exercise of the right), or for a change of grade, or for any other injury to or decrease in the value of the Property; (i) Insurance Proceeds. All proceeds of and any unearned premiums on any ------------------ insurance policies covering the Property, including the right to receive and apply the proceeds of any insurance, judgments, or settlements made in lieu thereof, for damage to the Property; (j) Tax Certiorari. All refunds, rebates or credits in connection with a -------------- reduction in real estate taxes and assessments charged against the Property as a result of tax certiorari or any applications or proceedings for reduction; (k) Conversion. All proceeds of the conversion, voluntary or involuntary, ---------- of any of the foregoing including proceeds of insurance and condemnation awards, into cash or liquidation claims; (l) Rights. The right, in the name and on behalf of Borrower, to appear in ------ and defend any action or proceeding brought with respect to the Property and to commence any action or proceeding to protect the interest of Lender in the Property; (m) Agreements. All agreements, contracts, certificates, instruments, ---------- franchises, permits, licenses, plans, specifications and other documents, now or hereafter entered into, and all rights therein and thereto, respecting or pertaining to the use, occupation, construction, management or operation of the Land and any part thereof and any Improvements or respecting any business or activity conducted on the Land and any part thereof and all right, title and interest of Borrower therein and thereunder, including the right, upon the happening of any default hereunder, to receive and collect any sums payable to Borrower thereunder; -3- (n) Trademarks. All tradenames, trademarks, servicemarks, logos, ---------- copyrights, goodwill, books and records and all other general intangibles relating to or used in connection with the operation of the Property; and (o) Rights Under Ground Lease. All modifications, extensions and renewals ------------------------- of the Ground Lease and all credits, deposits, options, privileges and rights of Borrower, as tenant under the Ground Lease, including the right, if any, to renew or extend the Ground Lease for a succeeding term or terms; (p) Additional Interests in Property. All the estate, right, title, claim -------------------------------- or demand of any notice whatsoever of Borrower, either in law or in equity, in possession or expectancy in and to the Property or any part thereof; and (q) Other Rights. Any and all other rights of Borrower in and to the items ------------ set forth in Subsections (a) through (p) above. Section 1.2 Assignment of Rents. Borrower hereby absolutely and ------------------- unconditionally assigns to Trustee, for the benefit of Lender, Borrower's right, title and interest in and to all current and future Leases and Rents; it being intended by Borrower that this assignment constitutes a present, absolute assignment and not an assignment for additional security only. Nevertheless, subject to the terms of this Section 1.2 and Section 3.7, each of Trustee and Lender grants to Borrower a revocable license to collect and receive the Rents. Borrower shall hold the Rents, or a portion thereof sufficient to discharge all current sums due on the Debt, for use in the payment of such sums. Section 1.3 Security Agreement. (a) This Security Instrument is both a ------------------ real property deed of trust and a "security agreement" within the meaning of the Uniform Commercial Code. The Property includes both real and personal property and all other rights and interests, whether tangible or intangible in nature, of Borrower in the Property. By executing and delivering this Security Instrument, Borrower hereby grants to Lender, as security for the Obligations (defined in Section 2.3), a security interest in the Personal Property to the full extent that the Personal Property may be subject to the Uniform Commercial Code. (b) This Security Instrument shall be effective from the date of its recording as a financing statement filed as a fixture filing in accordance with Section 9313 of the Uniform Commercial Code with respect to all goods constituting part of the Property which are or are to become fixtures. This Security Instrument shall also be effective as a financing statement covering minerals or the like (including oil and gas) and is to be filed for record in the real estate records of the county where the Land is situated. Section 1.4 Pledge of Moneys Held. Borrower hereby pledges to Lender any --------------------- and all moneys now or hereafter held by Lender, including any sums deposited in the Escrow Fund (as defined in Section 3.5), Net Proceeds (as defined in Section 4.4), and condemnation awards or -4- payments described in Section 4.4, as additional security for the Obligations until expended or applied as provided in this Security Instrument. Article 2 - DEBT AND OBLIGATIONS SECURED Section 2.1 Debt. This Security Instrument and the grants, assignments ---- and transfers made in Article 1 are given for the purpose of securing the following, in such order of priority as Lender may determine in its sole discretion (the "Debt"): (a) the payment of the indebtedness evidenced by the Note in lawful money of the United States of America; (b) the payment of interest, default interest, late charges and other sums, as provided in the Note, the Credit Agreement, this Security Instrument or the Other Security Documents (defined below); (c) the payment of all other moneys agreed or provided to be paid by Borrower in the Note, the Credit Agreement, this Security Instrument or the Other Security Documents; (d) the payment of all sums advanced by Lender pursuant to and in accordance with this Security Instrument to protect and preserve the Property and the lien and the security interest created hereby; and (e) the payment of all sums advanced and costs and expenses incurred by Lender in connection with the Debt or any part thereof, any renewal, extension, or change of or substitution for the Debt or any part thereof, or the acquisition or perfection of the security therefor, whether made or incurred at the request of Borrower or Lender. Section 2.2 Other Obligations. This Security Instrument and the grants, ----------------- assignments and transfers made in Article 1 are also given for the purpose of securing the following (the "Other Obligations"): (a) the performance of all other obligations of Borrower contained herein; (b) the performance of each obligation of Borrower contained in any other agreement given by Borrower to Lender which is for the purpose of further securing the obligations secured hereby, and any amendments, modifications and changes thereto; and (c) the performance of each obligation of Borrower contained in any renewal, extension, amendment, modification, consolidation, change of, or substitution or replacement for, all or any part of the Note, this Security Instrument or the Other Security Documents. -5- Section 2.3 Debt and Other Obligations. Borrower's obligations for the -------------------------- payment of the Debt and the performance of the Other Obligations shall be referred to collectively below as the "Obligations." Article 3 - BORROWER COVENANTS Borrower covenants and agrees that: Section 3.1 Payment of Debt. Borrower will pay the Debt at the time and --------------- in the manner provided in the Note and in this Security Instrument. Section 3.2 Incorporation by Reference. All the covenants, conditions -------------------------- and agreements contained in (a) the Note and (b) all and any of the documents other than the Note or this Security Instrument now or hereafter executed by Borrower and/or others and by or in favor of Lender, which wholly or partially secure or guaranty payment of the Note including the Loan Agreement (the "Other Security Documents"), are hereby made a part of this Security Instrument to the same extent and with the same force as if fully set forth herein. Section 3.3 Insurance. --------- (a) Borrower shall obtain and maintain, or cause to be maintained, insurance for Borrower and the Property providing at least the following coverages: (i) comprehensive all risk insurance on the Improvements and the Personal Property, including contingent liability from Operation of Building Laws, Demolition Costs and Increased Cost of Construction Endorsements, in each case (A) in an amount equal to 100% of the "Full Replacement Cost," which for purposes of this Security Instrument shall mean actual replacement value (exclusive of costs of excavations, foundations, underground utilities and footings) with a waiver of depreciation; (B) containing an agreed amount endorsement with respect to the Improvements and Personal Property waiving all co-insurance provisions; and (C) providing for no deductible in excess of the lesser of $25,000.00 and one percent (1%) of the face value of such policy. In addition, Borrower shall obtain (y) if any portion of the Improvements is currently or at any time in the future located in a federally designated "special flood hazard area," flood hazard insurance in an amount equal to the lesser of (a) the outstanding principal balance of the Note or (b) the maximum amount of such insurance available under the National Flood Insurance Act of 1968, the Flood Disaster Protection Act of 1973 or the National Flood Insurance Reform Act of 1994, as each may be amended or such greater amount as Lender shall reasonably require; and (z) earthquake insurance in amounts and in form and substance satisfactory to Lender, provided that the insurance pursuant to clauses (y) and (z) hereof shall be on terms consistent with the comprehensive all risk insurance policy required under this Subsection 3.3(a)(i) except that the deductible on such insurance shall not be in excess of five percent (5%) of the appraised value of the Property, or such greater deductible as may generally be available from reputable insurers issuing such insurance and is in accordance with customary -6- requirements of institutional lenders with respect to similar loans secured by deeds of trust on similar buildings in similar localities; (ii) commercial general liability insurance against claims for personal injury, bodily injury, death or property damage occurring upon, in or about the Property, such insurance (A) to be on the so-called "occurrence" form with a combined single limit of not less than $1,000,000.00; (B) to continue at not less than the aforesaid limit until required to be changed by Lender in writing by reason of changed economic conditions making such protection inadequate; and (C) to cover at least the following hazards: (1) premises and operations; (2) products and completed operations on an "if any" basis; (3) independent contractors; (4) blanket contractual liability for all written and oral contracts; and (5) contractual liability covering the indemnities contained in Article 13 hereof to the extent the same is available; (iii) business income insurance (A) with loss payable to Lender; (B) covering all risks required to be covered by the insurance provided for in Subsection 3.3(a)(i); (C) containing an extended period of indemnity endorsement which provides that after the physical loss to the Improvements and Personal Property has been repaired, the continued loss of income will be insured until such income either returns to the same level it was at prior to the loss, or the expiration of twelve (12) months from the date of the loss, whichever first occurs, and notwithstanding that the policy may expire prior to the end of such period; and (D) in an amount equal to 100% of the projected gross income from the Property for a period of twelve (12) months. The amount of such business income insurance shall be determined prior to the date hereof and at least once each year thereafter based on Borrower's reasonable estimate of the gross income from the Property for the succeeding twelve (12) month period. All insurance proceeds payable to Lender pursuant to this Subsection 3.3(a)(iii) shall be held by Lender and shall be applied to the obligations secured hereunder from time to time due and payable hereunder and under the Note; provided, however, that nothing herein contained shall be deemed to relieve Borrower of its obligations to pay the obligations secured hereunder on the respective dates of payment provided for in the Note except to the extent such amounts are actually paid out of the proceeds of such business income insurance; (iv) at all times during which structural construction, repairs or alterations are being made with respect to the Improvements (A) owner's contingent or protective liability insurance covering claims not covered by or under the terms or provisions of the above mentioned commercial general liability insurance policy; and (B) the insurance provided for in Subsection 3.3(a)(i) written in a so-called builder's risk completed value form (1) on a non-reporting basis, (2) against all risks insured against pursuant to Subsection 3.3(a)(i), (3) including permission to occupy the Property, and (4) with an agreed amount endorsement waiving co-insurance provisions; (v) workers' compensation, subject to the statutory limits of the state in which the Property is located, and employer's liability insurance with a limit of at least $1,000,000.00 per accident and per disease per employee, and $1,000,000.00 for disease aggregate in respect of any -7- work or operations on or about the Property, or in connection with the Property or its operation (if applicable); (vi) comprehensive boiler and machinery insurance with respect to the Property, if applicable, in amounts as shall be reasonably required by Lender on terms consistent with the commercial general liability insurance policy required under Subsection 3.3(a)(ii); (vii) umbrella liability insurance in an amount not less than $25,000,000.00 per occurrence on terms consistent with the commercial general liability insurance policy required under Subsection 3.3(a)(ii); (viii) motor vehicle liability coverage for all owned and non-owned vehicles used in the operation of the Property, including rented and leased vehicles containing minimum limits per occurrence of $1,000,000.00; and (ix) such other insurance and in such amounts as Lender from time to time may reasonably request against such other insurable hazards which at the time are commonly insured against for property similar to the Property located in or around the region in which the Property is located. (b) All insurance provided for in Subsection 3.3(a) hereof shall be obtained under valid and enforceable policies (the "Policies" or in the singular, the "Policy"), and shall be subject to the approval of Lender as to insurance companies, amounts, forms, deductibles, loss payees and insureds. The Policies shall be issued by financially sound and responsible insurance companies authorized to do business in the state in which the Property is located and approved by Lender. The insurance companies must have an investment grade rating for claims paying ability assigned by Moody's Investors Service, Inc. and Standard & Poor's Corporation and/or an A.M. Best Rating of A:IX or better for claims paying ability (each such insurer shall be referred to below as a "Qualified Insurer"). The Policies described in Subsections 3.3(a)(i), (iii), (iv)(B) and (vi) shall designate Lender as loss payee. Not less than fifteen (15) days prior to the expiration dates of the Policies theretofore furnished to Lender pursuant to Subsection 3.3(a), certificates of insurance marked "premium paid" or accompanied by evidence satisfactory to Lender of payment of the premiums due thereunder (the "Insurance Premiums"), shall be delivered by Borrower to Lender; provided, however, that if an insurer permits payment of the Insurance Premium on a Policy in installments, Borrower may elect to pay in installments, in which event Borrower will timely pay each such installment when due and will deliver to Lender, not more than thirty (30) days after payment of the first such installment, a copy of the insurer's written acknowledgement of receipt of payment of such installment together with a schedule of all installment amounts and due dates. (c) In the event Borrower obtains an umbrella or a blanket Policy, Borrower shall notify Lender of the same and shall cause certified copies of each Policy to be delivered as required in Subsection 3.3(a). Any blanket insurance Policy shall specifically allocate to the Property the amount of coverage from time to time required hereunder and shall otherwise -8- provide the same protection as would a separate Policy insuring only the Property in compliance with the provisions of Subsection 3.3(a). (d) All Policies of insurance provided for or contemplated by Subsection 3.3(a), except for the Policy referenced in Subsection (a)(v), shall name Lender and Borrower as the insured or additional insured, as their respective interests may appear, and in the case of property damage, boiler and machinery, flood and earthquake insurance, shall contain a so-called New York standard non- contributing mortgagee clause in favor of Lender providing that the loss thereunder as and to the extent set forth in Section 4.4 hereof shall be payable to Lender. (e) All Policies of insurance provided for in Subsection 3.3(a) shall contain clauses or endorsements to the effect that: (i) no act or negligence of Borrower, or anyone acting for Borrower, or of any tenant under any Lease or other occupant, or failure to comply with the provisions of any Policy which might otherwise result in a forfeiture of the insurance or any part thereof, shall in any way affect the validity or enforceability of the insurance insofar as Lender is concerned; (ii) the Policy shall not be materially changed (other than to increase the coverage provided thereby) or canceled without at least thirty (30) days' written notice to Lender and any other party named therein as an insured; (iii) each Policy shall provide that the issuers thereof shall give written notice to Lender if the Policy has not been renewed fifteen (15) days prior to its expiration; and (iv) Lender shall not be liable for any Insurance Premiums thereon or subject to any assessments thereunder. (f) Borrower shall furnish to Lender, on or before thirty (30) days after the close of each of Borrower's fiscal years, a statement certified by Borrower or a duly authorized officer of Borrower of the amounts of insurance maintained in compliance herewith, of the risks covered by such insurance and of the insurance company or companies which carry such insurance. (g) If at any time Lender is not in receipt of written evidence that all insurance required hereunder is in full force and effect, Lender shall have the right, without notice to Borrower, to take such action as Lender deems necessary to protect its interest in the Property, including the obtaining of such insurance coverage as Lender in its sole discretion deems appropriate, and all expenses incurred by Lender in connection with such action or in obtaining such insurance and keeping it in effect shall be paid by Borrower to Lender upon demand and until paid shall be secured by this Security Instrument and shall bear interest in accordance with Section 10.3 hereof. (h) If the Property shall be damaged or destroyed, in whole or in part, by fire or other casualty, and if in part, the cost of restoration is estimated to exceed $50,000, Borrower shall -9- give prompt notice of such damage to Lender and shall promptly commence and diligently prosecute the completion of the repair and restoration of the Property as nearly as possible to the condition the Property was in immediately prior to such fire or other casualty, with such alterations as may be reasonably approved by Lender (the "Restoration") and otherwise in accordance with Section 4.4 of this Security Instrument. Borrower shall pay all costs of such Restoration whether or not such costs are covered by insurance. Lender may, but shall not be obligated to make proof of loss if not made promptly by Borrower; (i) In the event of foreclosure of this Security Instrument, or other transfer of title to the Property in extinguishment in whole or in part of the Debt, all right, title and interest of Borrower in and to such policies then in force concerning the Property and all proceeds payable thereunder shall thereupon vest in the purchaser at such foreclosure or Lender or other transferee in the event of such other transfer of title. Section 3.4 Payment of Taxes, etc. Borrower shall promptly pay all --------------------- taxes, assessments, water rates, sewer rents, governmental impositions, and other charges, including vault charges and license fees for the use of vaults, chutes and similar areas adjoining the Land, now or hereafter levied or assessed or imposed against the Property or any part thereof (the "Taxes"), all ground rents, maintenance charges and similar charges, now or hereafter levied or assessed or imposed against the Property or any part thereof (the "Other Charges"), and all charges for utility services provided to the Property as same become due and payable, in each case to the extent payable by Borrower directly. Borrower will deliver to Lender, promptly upon Lender's request, evidence satisfactory to Lender that the Taxes, Other Charges and such utility service charges have been so paid or are not then delinquent. Borrower shall not suffer and shall promptly cause to be paid and discharged any lien or charge whatsoever which may be or become a lien or charge against the Property (other than a Permitted Encumbrance). After prior notice to Lender, in the case of any material item, Borrower, at its own expense, may contest by appropriate legal proceeding, promptly initiated and conducted in good faith and with due diligence, the amount or validity or application in whole or in part of any of the Taxes, provided that (i) no Event of Default exists under this Security Instrument or the Credit Agreement, (ii) Borrower is permitted to do so under the provisions of the Ground Lease, if applicable, (iii) such proceeding shall suspend the collection of the Taxes from Borrower and from the Property, (iv) such proceeding shall be permitted under and be conducted in accordance with the provisions of any other instrument to which Borrower or the Property is subject and shall not constitute a default thereunder, (v) neither the Property nor any part thereof or interest therein will be in danger of being sold, forfeited, terminated, cancelled or lost as a result of such proceeding, (vi) Borrower shall have set aside adequate reserves for the payment of the Taxes, together with all interest and penalties thereon, and (vii) Borrower shall have furnished such security as may be required in the proceeding to insure the payment of any such Taxes, together with all interest and penalties thereon. Section 3.5 Escrow Fund. If an Event of Default (hereinafter defined) ----------- shall have occurred and be continuing, at the option of Lender, evidenced by a written notice thereof to Borrower, Borrower shall thereafter pay to Lender on the first day of each calendar month (a) -10- one-twelfth of an amount which would be sufficient to pay the Taxes payable, or estimated by Lender to be payable, during the next ensuing twelve (12) months and (b) one-twelfth of an amount which would be sufficient to pay the Insurance Premiums due for the renewal of the coverage afforded by the Policies upon the expiration thereof (the amounts in (a) and (b) above shall be called the "Escrow Fund"). So long as the Escrow Fund is in effect, Borrower agrees to notify Lender immediately of any changes to the amounts, schedules and instructions for payment of any Taxes and Insurance Premiums of which it has obtained knowledge and authorizes Lender or its agent to obtain the bills for Taxes and Other Charges directly from the appropriate taxing authority. The Escrow Fund and the payments of interest or principal, or both, payable pursuant to the Note shall be added together and shall be paid as an aggregate sum by Borrower to Lender. So long as the Escrow Fund is in effect, Lender will apply the Escrow Fund to payments of Taxes and Insurance Premiums required to be made by Borrower pursuant to Sections 3.3 and 3.4 hereof, and if the amount of the Escrow Fund shall exceed the amounts due for Taxes and Insurance Premiums pursuant to Sections 3.3 and 3.4 hereof, Lender shall, in its discretion, return any excess to Borrower or credit such excess against future payments to be made to the Escrow Fund. If the Escrow Fund is not sufficient to pay the items set forth in clauses (a) and (b) of this Section 3.5 above, Borrower shall promptly pay to Lender, upon demand, an amount which Lender shall estimate as sufficient to make up the deficiency. The Escrow Fund shall not constitute a trust fund and may be commingled with other moneys held by Lender. No earnings or interest on the Escrow Fund shall be payable to Borrower. Section 3.6 Condemnation. Borrower shall promptly give Lender notice of ------------ the actual or threatened commencement of any condemnation or eminent domain proceeding and shall deliver to Lender copies of any and all papers served in connection with such proceedings. Lender may participate in any such proceedings, and Borrower shall from time to time deliver to Lender all instruments reasonably requested by it to permit such participation. Borrower shall, at its expense, diligently prosecute any such proceedings, and shall consult with Lender, its attorneys and experts, and cooperate with them in the carrying on or defense of any such proceedings. Notwithstanding any taking by any public or quasi-public authority through eminent domain or otherwise (including any transfer made in lieu of or in anticipation of the exercise of such taking), Borrower shall continue to pay the Debt at the time and in the manner provided for its payment in the Note and in this Security Instrument and the Debt shall not be reduced as a result of such condemnation or eminent domain proceeding until any award or payment therefor shall have been actually received and applied by Lender, after the deduction of expenses of collection, to the reduction or discharge of the Debt. Lender shall not be limited to the interest paid on the award by the condemning authority but shall be entitled to receive out of the award interest at the rate or rates provided herein or in the Note. If the Property or any portion thereof is taken by a condemning authority, Borrower shall promptly commence and diligently prosecute the Restoration of the Property and otherwise comply with the provisions of Section 4.4 of this Security Instrument. If the Property is sold, through foreclosure or otherwise, prior to the receipt by Lender of the award or payment, Lender shall have the right, whether or not a deficiency judgment on the Note shall have been sought, recovered or denied, to receive the award or payment, or a portion thereof sufficient to pay the Debt. -11- Section 3.7 Leases and Rents. (a) Except as otherwise consented to by ---------------- Lender, all Leases shall be written on the standard form of lease which shall have been approved by Lender. Borrower shall furnish Lender with executed copies of all Leases. In addition, all renewals of Leases and all proposed leases shall provide for rental rates and terms comparable to existing local market rates and terms and shall be arms-length transactions with bona fide, independent third- party tenants (except for approximately 8,000 square feet of space in the property located at 12348 High Bluff Drive, which is occupied by Borrower or its affiliate (the "Related Party Space")). All proposed leases and renewals of existing Leases other than Minor Leases (hereinafter defined) shall be subject to the prior approval of Lender and its counsel, at Borrower's expense. All Leases hereafter entered into shall provide that they are subordinate to this Security Instrument and that the lessee agrees to attorn to Lender, or the tenant shall execute a subordination, nondisturbance and attornment agreement satisfactory to Lender. Borrower (i) shall observe and perform all the obligations imposed upon the lessor under the Leases and shall not do or permit to be done anything to materially impair the value of the Leases as security for the Debt; (ii) shall promptly send copies to Lender of all notices of default which Borrower shall send or receive thereunder; (iii) shall enforce in a commercially prudent manner all of the terms, covenants and conditions contained in the Leases upon the part of the lessee thereunder to be observed or performed; (iv) shall not collect any of the Rents more than one (1) month in advance; (v) shall not execute any other assignment of the lessor's interest in the Leases or the Rents other than in favor of Lender; (vi) shall not alter, modify or change the material terms of the Leases in a material adverse manner without the prior written consent of Lender, or cancel or terminate the Leases except in accordance with their respective terms or accept a surrender thereof (except in the event of a default by the tenant under the Lease) or convey or transfer or suffer or permit a conveyance or transfer of the Land or of any interest therein so as to effect a merger of the estates and rights of, or a termination or diminution of the obligations of, lessees thereunder; (vii) shall not alter, modify or change the terms of any guaranty, letter of credit or other credit support with respect to the Leases (the "Lease Guaranty") in a manner adverse to Lender's interests or cancel or terminate such Lease Guaranty except in accordance with its terms without the prior written consent of Lender; and (viii) shall not consent to any assignment of or subletting under the Leases not in accordance with their terms, without the prior written consent of Lender. (b) Notwithstanding the provisions of Subsection (a) above, renewals of existing Leases and proposed Leases shall not be subject to the prior approval of Lender provided: (i) the renewal Lease or proposed lease covers less than 15,000 rentable square feet of space ("Minor Leases"), (ii) no rent credits, free rents or concessions have been granted under the renewal Lease or proposed lease in excess of then current market terms, (iii) the renewal Lease or proposed lease shall provide for rental rates and terms comparable to existing local market rates and terms, but in no event less than the previous lease for such space, and (iv) the renewal Lease or proposed lease shall be an arms-length transaction with a bona fide, independent third party tenant (except with respect to the Related Party Space). Borrower shall deliver to Lender copies of all Leases which are entered into pursuant to the preceding sentence together with Borrower's certification that it has satisfied all of the conditions of the preceding sentence within thirty (30) days after the execution of the Lease. -12- (c) Upon and during the continuance of an Event of Default, to the extent permitted by law, Borrower shall promptly deposit with Lender any and all moneys actually received by Borrower representing security deposits under the Leases (the "Security Deposits"). Lender shall hold the Security Deposits (i) in accordance with the terms of the respective Lease, and shall only release the Security Deposits in order to return a tenant's Security Deposit to such tenant if such tenant is entitled to the return of the Security Deposit under the terms of the Lease and is not otherwise in default under the Lease, or (ii) to Borrower, if Borrower is entitled thereto pursuant to the provisions of the Lease. To the extent required by Applicable Laws (defined below), Lender shall hold the Security Deposits in an interest bearing account selected by Lender in its sole discretion. Section 3.8 Maintenance of Property. Borrower shall cause the Property ----------------------- to be maintained in a good and safe condition and repair, subject to ordinary wear and tear. The Improvements and the Personal Property shall not be removed, demolished or materially altered (except for normal replacement of the Personal Property) without the consent of Lender. Borrower shall promptly repair, replace or rebuild any part of the Property which may be destroyed by any casualty, or become damaged, worn or dilapidated or which may be affected by any proceeding of the character referred to in Section 3.6 hereof and shall complete and pay for any structure at any time in the process of construction or repair on the Land. Borrower shall not initiate, join in, acquiesce in, or consent to any change in any private restrictive covenant, zoning law or other public or private restriction, limiting or defining the uses which may be made of the Property or any part thereof. If under applicable zoning provisions the use of all or any portion of the Property is or shall become a nonconforming use, Borrower will not cause or permit the nonconforming use to be discontinued or abandoned without the express written consent of Lender, which consent shall not be unreasonably withheld or delayed. Section 3.9 Waste. Borrower shall not commit or suffer any waste of the ----- Property or make any change in the use of the Property which will in any way materially increase the risk of fire or other hazard arising out of the operation of the Property, or take any action that could reasonably be expected to result in the invalidation or cancellation of any Policy, or do or permit to be done thereon anything that may in any way materially impair the value of the Property or the security of this Security Instrument. Borrower will not, without the prior written consent of Lender, permit any drilling or exploration for or extraction, removal, or production of any minerals from the surface or the subsurface of the Land, regardless of the depth thereof or the method of mining or extraction thereof. Section 3.10 Compliance With Laws. (a) Borrower shall promptly comply -------------------- with all existing and future federal, state and local laws, orders, ordinances, governmental rules and regulations or court orders affecting the Property, or the use thereof including the Americans with Disabilities Act ("ADA") (collectively, the "Applicable Laws"), to the extent provided in Section 6.1(a) of the Credit Agreement. -13- (b) Borrower shall from time to time, upon Lender's request, provide Lender with evidence satisfactory to Lender that the Property complies with all Applicable Laws or is exempt from compliance with Applicable Laws. (c) Notwithstanding any provisions set forth herein or in any document regarding Lender's approval of alterations of the Property, Borrower shall not alter the Property in any manner which would materially increase Borrower's responsibilities for compliance with Applicable Laws without the prior written approval of Lender. Lender's approval of the plans, specifications, or working drawings for alterations of the Property shall create no responsibility or liability on behalf of Lender for their completeness, design, sufficiency or their compliance with Applicable Laws. The foregoing shall apply to tenant improvements constructed by Borrower or by any of its tenants. Lender may condition any such approval upon receipt of a certificate of compliance with specific Applicable Laws from an independent architect, engineer, or other person acceptable to Lender. (d) Borrower shall give prompt notice to Lender of the receipt by Borrower of any notice related to a violation of any Applicable Laws and of the commencement of any proceedings or investigations which relate to compliance with Applicable Laws. (e) Borrower will take commercially reasonable measures to prevent, and will not engage in or knowingly permit, any illegal activities at the Property. Section 3.11 Books and Records. Borrower and any Guarantors (defined in ----------------- Subsection 10.1(e)) and Indemnitors (defined in Subsection 10.1(k)), if any, shall keep adequate books and records of account as provided in the Credit Agreement. Section 3.12 Payment For Labor and Materials. Borrower will promptly pay ------------------------------- when due all bills and costs for labor, materials, and specifically fabricated materials incurred in connection with the Property and never permit to exist beyond the due date thereof in respect of the Property or any part thereof any lien or security interest, even though inferior to the liens and the security interests hereof, and in any event never permit to be created or exist in respect of the Property or any part thereof any other or additional lien or security interest other than the liens or security interests hereof, except for the Permitted Exceptions (defined below). Section 3.13 Performance of Other Agreements. Borrower shall observe and ------------------------------- perform each and every term to be observed or performed by Borrower pursuant to the terms of any agreement or recorded instrument affecting or pertaining to the Property, or given by Borrower to Lender for the purpose of further securing an obligation secured hereby and any amendments, modifications or changes thereto. Section 3.14 Change of Name, Identity or Structure. Borrower will not ------------------------------------- change Borrower's name, identity (including its trade name or names) or, if not an individual, Borrower's corporate, partnership or other structure without notifying Lender of such change in writing at least thirty (30) days prior to the effective date of such change and, in the case of a change in Borrower's structure, without first obtaining the prior written consent of Lender. -14- Borrower will execute and deliver to Lender, prior to or contemporaneously with the effective date of any such change, any financing statement or financing statement change required by Lender to establish or maintain the validity, perfection and priority of the security interest granted herein. At the request of Lender, Borrower shall execute a certificate in form satisfactory to Lender listing the trade names under which Borrower intends to operate the Property, and representing and warranting that Borrower does business under no other trade name with respect to the Property. Section 3.15 Existence. Borrower will continuously maintain its --------- existence and its rights to do business in the state where the Property is located together with its franchises and trade names. Article 4 - SPECIAL COVENANTS Borrower covenants and agrees that: Section 4.1 Property Use. The Property shall be used only as commercial ------------ buildings and for no other use without the prior written consent of Lender, which consent may be withheld in Lender's sole and absolute discretion. Section 4.2 ERISA. (a) Borrower shall not engage in any transaction ----- which would cause any obligation, or action taken or to be taken, hereunder (or the exercise by Lender of any of its rights under the Note, this Security Instrument and the Other Security Documents) to be a non-exempt (under a statutory or administrative class exemption) prohibited transaction under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). (b) Borrower further covenants and agrees to deliver to Lender such certifications or other evidence from time to time throughout the term of the Security Instrument, as requested by Lender in its sole discretion, that (i) Borrower is not an "employee benefit plan" as defined in Section 3(3) of ERISA, which is subject to Title I of ERISA, or a "governmental plan" within the meaning of Section 3(32) of ERISA; (ii) Borrower is not subject to state statutes regulating investments and fiduciary obligations with respect to governmental plans; and (iii) one or more of the following circumstances is true: (A) Equity interests in Borrower are publicly offered securities, within the meaning of 29 C.F.R. (S) 2510.3-101(b)(2); (B) Less than 25 percent of each outstanding class of equity interests in Borrower are held by "benefit plan investors" within the meaning of 29 C.F.R. (S) 2510.3-101(f)(2); or (C) Borrower qualifies as an "operating company" or a "real estate operating company" within the meaning of 29 C.F.R. (S) 2510.3-101(c) or (e) or an investment company registered under The Investment Company Act of 1940. -15- Section 4.3 Intentionally Deleted. --------------------- Section 4.4 Restoration. As used herein, an "Individual Premises" shall ----------- mean each of (x) the Land conveyed pursuant to the Ground Lease and the Improvements now or hereafter erected or located thereon and (y) each parcel of Land described in Exhibit A and the Improvements now or hereafter erected or located thereon. The following provisions shall apply in connection with the Restoration of each Individual Premises: (a) If the Net Proceeds (as defined below) shall be less than $1,000,000.00 and the costs of completing the Restoration shall be less than $1,000,000.00, the Net Proceeds will be disbursed by Lender to Borrower upon receipt, provided that all of the conditions set forth in Subsection 4.4(b)(i) are met and Borrower delivers to Lender a written undertaking to expeditiously commence and to satisfactorily complete with due diligence the Restoration in accordance with the terms of this Security Instrument. (b) If the Net Proceeds are equal to or greater than $1,000,000.00 or the costs of completing the Restoration is equal to or greater than $1,000,000.00 Lender shall make the Net Proceeds available for the Restoration in accordance with the provisions of this Subsection (b). The term "Net Proceeds" for purposes of this Section 4.4 shall mean: (i) the net amount of all insurance proceeds received by Lender pursuant to Subsections 3.3(a) of this Security Instrument as a result of such damage or destruction, after deduction of its reasonable costs and expenses (including reasonable counsel fees), if any, in collecting same ("Insurance Proceeds"), or (ii) the net amount of all awards and payments received by Lender with respect to a taking referenced in Section 3.6 of this Security Instrument, after deduction of its reasonable costs and expenses (including reasonable counsel fees), if any, in collecting same ("Condemnation Proceeds"), whichever the case may be. (i) The Net Proceeds shall be made available to Borrower for the Restoration provided that each of the following conditions are met: (A) no Event of Default shall have occurred and be continuing under the Note, this Security Instrument or any of the Other Security Documents; (B) Borrower shall commence the Restoration as soon as reasonably practicable (but in no event later than thirty (30) days after such damage or destruction or taking, whichever the case may be, occurs) and shall diligently pursue the same to satisfactory completion; (C) Lender shall be satisfied that any operating deficits, including all scheduled payments of principal and interest under the Note which will be incurred with respect to the Property as a result of the occurrence of any such fire or other casualty or taking, whichever the case may be, will be covered out of (1) the Net Proceeds, (2) the insurance coverage referred to in Subsection 3.3(a)(iii), if applicable, or (3) by other funds of Borrower; -16- (D) Lender shall be satisfied that, upon the completion of the Restoration, the Debt Service Coverage Ratio (as defined in the Credit Agreement) shall be at least 1.25 to 1.0, as determined by Lender in its sole and absolute discretion; (E) Lender shall be satisfied that the Restoration will be completed on or before the earliest to occur of (1) twelve (12) months prior to the Maturity Date (as defined in the Credit Agreement), (2) twelve (12) months after the occurrence of such fire or other casualty or taking, whichever the case may be, or (3) such time as may be required under applicable zoning law, ordinance, rule or regulation in order to repair and restore the Individual Premises to the condition it was in immediately prior to such fire or other casualty or to as nearly as possible the condition it was in immediately prior to such taking, as applicable; (F) the Individual Premises and the use thereof after the Restoration will be in compliance with and permitted under all applicable zoning laws, ordinances, rules and regulations; (G) the Restoration shall be done and completed by Borrower in an expeditious and diligent fashion and in compliance with all applicable governmental laws, rules and regulations (including all applicable Environmental Laws) defined below; (H) such fire or other casualty or taking, as applicable, does not result in the loss of access to the Individual Premises, including the Improvements thereof; and (I) no default shall have occurred and be continuing pursuant to the Ground Lease. (ii) The Net Proceeds not otherwise disbursed to Borrower in accordance herewith shall be held by Lender and, until disbursed in accordance with the provisions of this Subsection 4.4(b), shall constitute additional security for the Obligations. The Net Proceeds shall be disbursed by Lender to, or as directed by, Borrower from time to time during the course of the Restoration, upon receipt of evidence satisfactory to Lender that (A) all materials installed and work and labor performed (except to the extent that they are to be paid for out of the requested disbursement) in connection with the Restoration have been paid for in full, and (B) there exist no notices of pendency, stop orders, mechanic's or materialman's liens or notices of intention to file same, or any other liens or encumbrances of any nature whatsoever on the Property arising out of the Restoration which have not either been fully bonded to the satisfaction of Lender and discharged of record or in the alternative fully insured to the satisfaction of Lender by the title company insuring the lien of this Security Instrument. (iii) All plans and specifications required in connection with the Restoration shall be subject to prior review and acceptance in all respects by Lender and by an independent consulting engineer selected by Lender (the "Casualty Consultant"). Lender shall have the use of the plans and specifications and all permits, licenses and approvals required or obtained in -17- connection with the Restoration. All costs and expenses incurred by Lender in connection with making the Net Proceeds available for the Restoration, including reasonable counsel fees and disbursements and the Casualty Consultant's fees, shall be paid by Borrower. (iv) In no event shall Lender be obligated to make disbursements of the Net Proceeds in excess of an amount equal to the costs actually incurred from time to time for work in place as part of the Restoration, as certified by the Casualty Consultant, minus the Casualty Retainage. The term "Casualty ----- Retainage" as used in this Subsection (b) shall mean an amount equal to 10% of the costs actually incurred for work in place as part of the Restoration, as certified by the Casualty Consultant, until the Restoration has been completed. The Casualty Retainage shall in no event, and notwithstanding anything to the contrary set forth above in this Subsection (b), be less than the amount actually held back by Borrower from contractors, subcontractors and materialmen engaged in the Restoration. The Casualty Retainage shall not be released until the Casualty Consultant certifies to Lender that the Restoration has been completed in accordance with the provisions of this Subsection (b) and that all approvals necessary for the re-occupancy and use of the Property have been obtained from all appropriate governmental and quasi-governmental authorities, and Lender receives evidence satisfactory to Lender that the costs of the Restoration have been paid in full or will be paid in full out of the Casualty Retainage, provided, however, that Lender will release the portion of the Casualty Retainage being held with respect to any contractor, subcontractor or materialman engaged in the Restoration as of the date upon which the Casualty Consultant certifies to Lender that the contractor, subcontractor or materialman has satisfactorily completed all work and has supplied all materials in accordance with the provisions of the contractor's, subcontractor's or materialman's contract, and the contractor, subcontractor or materialman delivers the lien waivers and evidence of payment in full of all sums due to the contractor, subcontractor or materialman as may be reasonably requested by Lender or by the title company insuring the lien of this Security Instrument. If required by Lender, the release of any such portion of the Casualty Retainage shall be approved by the surety company, if any, which has issued a payment or performance bond with respect to the contractor, subcontractor or materialman. (v) Lender shall not be obligated to make disbursements of the Net Proceeds more frequently than once every calendar month. (vi) If at any time the Net Proceeds or the undisbursed balance thereof shall not, in the opinion of Lender, be sufficient to pay in full the balance of the costs which are estimated by the Casualty Consultant to be incurred in connection with the completion of the Restoration, Borrower shall deposit the deficiency (the "Net Proceeds Deficiency") with Lender before any further disbursement of the Net Proceeds shall be made. The Net Proceeds Deficiency deposited with Lender shall be held by Lender and shall be disbursed for costs actually incurred in connection with the Restoration on the same conditions applicable to the disbursement of the Net Proceeds, and until so disbursed pursuant to this Subsection 4.4(b) shall constitute additional security for the Obligations. -18- (vii) The excess, if any, of the Net Proceeds and the remaining balance, if any, of the Net Proceeds Deficiency deposited with Lender after the Casualty Consultant certifies to Lender that the Restoration has been completed in accordance with the provisions of this Subsection 4.4(b), and the receipt by Lender of evidence satisfactory to Lender that all costs incurred in connection with the Restoration have been paid in full, shall be remitted by Lender to Borrower, provided no Event of Default shall have occurred and shall be continuing under the Note, this Security Instrument or any of the Other Security Documents. (c) All Net Proceeds not required (i) to be made available for the Restoration or (ii) to be returned to Borrower as excess Net Proceeds pursuant to Subsection 4.4(b)(vii) may be retained and applied by Lender toward the payment of the Debt whether or not then due and payable in such order, priority and proportions as Lender in its discretion shall deem proper or, at the discretion of Lender, the same may be paid, either in whole or in part, to Borrower for such purposes as Lender shall designate, in its discretion. If Lender shall receive and retain Net Proceeds, the lien of this Security Instrument shall be reduced only by the amount thereof received and retained by Lender and actually applied by Lender in reduction of the Debt. Section 4.5 The Ground Lease. (a) Borrower shall (i) pay all rents, ---------------- additional rents and other sums required to be paid by Borrower, as tenant under and pursuant to the provisions of the Ground Lease, (ii) diligently perform and observe all of the terms, covenants and conditions of the Ground Lease on the part of Borrower, as tenant thereunder, to be performed and observed, unless such performance or observance shall be waived or not required by the landlord under the Ground Lease ("Ground Lessor"), to the end that all things shall be done which are necessary to keep unimpaired the rights of Borrower, as tenant, under the Ground Lease, and (iii) promptly notify Lender of the giving of any notice by the Ground Lessor to Borrower of any of the terms, covenants or conditions of the Ground Lease on the part of Borrower, as tenant thereunder, to be performed or observed and deliver to Borrower a true copy of each such notice. (b) Borrower shall not, without the prior consent of Lender, surrender the leasehold estate created by the Ground Lease or terminate or cancel the Ground Lease or modify, change, supplement, alter or amend the Ground Lease, in any respect, either orally or in writing, and Borrower hereby assigns to Lender, as further security for the payment of the Debt and for the performance and observance of the terms, covenants and conditions of this Security Instrument, all of the rights, privileges and prerogatives of Borrower, as tenant under the Ground Lease, to surrender the leasehold estate created by the Ground Lease or to terminate, cancel, modify, change, supplement, alter or amend the Ground Lease, and any such surrender of the leasehold estate created by the Ground Lease without the prior consent of Lender shall be void and of no force and effect. (c) If Borrower shall default in the performance or observance of any term, covenant or condition of the Ground Lease on the part of Borrower, as tenant thereunder, to be performance or observed, then, without limiting the generality of the other provisions of this Security Instrument, and without waiving or releasing Borrower from any of its obligations -19- hereunder, Lender shall have the right, but shall be under no obligation, to pay any sums and to perform any act or take any action as may be appropriate to cause all of the terms, covenants and conditions of the Ground Lease on the part of Borrower, as tenant thereunder, to be performed or observed to be promptly performed or observed on behalf of Borrower, to the end that the rights of Borrower in, to and under the Ground Lease shall be kept unimpaired and free from default. If Lender shall make any payment or perform any act or take action in accordance with the preceding sentence, Lender will notify Borrower of the making of any such payment, the performance of any such act, or taking of any such action. In any such event, subject to the rights of lessees, sublessees and other occupants under the Leases, Lender and any person designated by Lender shall have, and are hereby granted, the right to enter upon the Leased Land (such term being used herein as defined in the Credit Agreement) and at any time and from time to time for the purpose of taking any such action. (d) If Ground Lessor shall deliver to Lender a copy of any notice of default sent by Ground Lessor to Borrower, as tenant under the Ground Lease, such notice shall constitute full protection to Lender for any action taken or omitted to be taken by Lender, in good faith, in reliance thereon. (e) Borrower shall, from time to time, use its best efforts to obtain from Ground Lessor such certificates of estoppel with respect to compliance by Borrower with the terms of the Ground Lease as may reasonably be requested by Lender in substantially the form delivered to Lender on or prior to the date hereof. (f) Borrower shall exercise each individual option, if any, to extend or renew the term of the Ground Lease upon demand by Lender made any time within one (1) year of the last day upon which any such option may be exercised, and Borrower hereby expressly authorizes and appoints Lender its attorney-in-fact to exercise any such option in the name of and upon behalf of Borrower, which power of attorney shall be irrevocable and shall be deemed to be coupled with an interest. (g) So long as any portion of the Debt shall remain unpaid, unless Lender shall otherwise consent, the fee title to the Land, and the leasehold estate therein created pursuant to the provisions of the Ground Lease shall not merge but shall always be kept separate and distinct, notwithstanding the union of such estates in Borrower, or in any other person by purchase, option of law or otherwise. If Lender shall acquire the fee title to the Land and the leasehold estate therein created pursuant to the provisions of the Ground Lease, by foreclosure of this Secured Instrument or otherwise, such estates shall not merge as a result of such acquisition and shall remain separate and distinct for all purposes after such acquisition unless and until Lender shall elect to merge such estates. (h) To the extent permitted by law, the price payable by Borrower or any other person or entity in the exercise of any right of redemption following foreclosure of the Property demised pursuant to the Ground Lease shall include all rents paid and other sums advanced by Lender, -20- together with interest thereon at the Default Rate, as ground lessee under the Ground Lease, on behalf of Borrower on account of such Property. (i) Upon acquisition of the fee title or any other estate, title or interest in the Leased Land, this Security Instrument shall, automatically and without the necessity of execution of any other documents, attach to and cover and be a lien upon such other estate so acquired, and such other estate shall be considered as mortgaged, assigned and conveyed to Lender and the lien hereof spread to cover such estate with the same force and effect as though specifically herein mortgaged, assigned and conveyed. Borrower shall execute such instruments as Lender may require to confirm any such spreads. The provisions of this subsection (i) shall not apply if Lender acquires title to the Leased Land unless Lender shall so elect. (j) Each Lease hereafter made for space in the improvements located on the Leased Property (each, a "Leased Property Space Lease") and each renewal of any existing Leased Property Space Lease shall provide that, (i) in the event of the termination of the Ground Lease, the Leased Property Space Lease shall not terminate or be terminable by the tenant thereunder; (ii) in the event of any action for the foreclosure of this Security Instrument, the Leased Property Space Lease shall not terminate or be terminable by the tenant thereunder by reason of the termination of the Ground Lease unless such tenant is specifically named and joined in any such action and unless a judgment is obtained therein against such tenant; and (iii) in the event that the Ground Lease is terminated as aforesaid, the tenant under the Leased Property Space Lease shall attorn to the tenant under the Ground Lease or to the purchaser at the sale of the Leased Property on such foreclosure, as the case may be. (k) Borrower hereby assigns, transfers and sets over to Lender all of Borrower's claims and rights to the payment of damages arising from any rejection by the Ground Lessor of the Ground Lease under the Bankruptcy Code. Borrower shall notify Lender promptly (and in any event within ten (10) days) of any claim, suit action or proceeding relating to the rejection of the Ground Lease. Lender is hereby irrevocably appointed as Borrower's attorney-in-fact, coupled with an interest, with exclusive power to file and prosecute, to the exclusion of Borrower during the continuance of an Event of Default, any proofs of claim, complaints, motions, applications, notices and other documents, in any case in respect of the Ground Lessor under the Bankruptcy Code. Borrower may make any compromise or settlement in connection with such proceedings (subject to Lender's reasonable approval); provided, however, that Lender shall be authorized and entitled to compromise or settle any such proceeding if such compromise or settlement is made after the occurrence and during the continuance of an Event of Default. Borrower shall promptly execute and deliver to Lender any and all instruments reasonably required in connection with any such proceeding after request therefor by Lender. Except as set forth above, Borrower shall not adjust, compromise, settle or enter into any agreement with respect to such proceedings without the prior written consent of Lender. (l) Borrower shall not, without Lender's prior written consent, elect to treat the Ground Lease as terminated under Section 365(h)(l) of the Bankruptcy Code. Any such election made without Lender's prior written consent shall be void. -21- (m) If pursuant to Section 365(h)(2) of the Bankruptcy Code, Borrower seeks to offset against the rent reserved in the Ground Lease the amount of any damages caused by the non-performance by the Ground Lessor of any of the Ground Lessor's obligations under the Ground Lease after the rejection by the Ground Lessor of the Ground Lease under the Bankruptcy Code, Borrower shall, prior to effecting such offset, notify Lender of its intention to do so, setting forth the amounts proposed to be so offset and the basis therefor. If Lender has failed to object as aforesaid within ten (10) days after notice from Borrower in accordance with the first sentence of this subsection (m), Borrower may proceed to effect such offset in the amounts set forth in Borrower's notice. Neither Lender's failure to object as aforesaid nor any objection or other communication between Lender and Borrower relating to such offset shall constitute an approval of any such offset by Lender. Borrower shall indemnify and save Lender harmless from and against any and all claims, demands, actions, suits, proceedings, damages, losses, costs and expenses of every nature whatsoever (including reasonable attorneys' fees and disbursements) arising from or relating to any such offset by Borrower against the rent reserved in the Ground Lease, other than to the extent arising from Lender's gross negligence or willful misconduct. (n) If any action, proceeding, motion or notice shall be commenced or filed in respect of Borrower or, after the occurrence and during the continuance of an Event of Default, the Property in connection with any case under the Bankruptcy Code, Lender shall have the option, to the exclusion of Borrower, exercisable upon notice from Lender to Borrower, to conduct and control any such litigation with respect to the Ground Lease with counsel of Lender's choice. Lender may proceed in its own name or in the name of Borrower in connection with any such litigation, and Borrower agrees to execute any and all powers, authorizations, consents and other documents required by Lender in connection therewith. Borrower shall pay to Lender all costs and expenses (including reasonable attorneys' fees and disbursements) paid or incurred by Lender in connection with the prosecution or conduct of any such proceedings within ten (10) days after notice from Lender setting forth such costs and expenses in reasonable detail. Any such costs or expenses not paid by Borrower as aforesaid shall be secured by the lien of this Security Instrument, shall be added to the principal amount of the Debt and shall bear interest at the Default Interest Rate. Borrower shall not commence any action, suit, proceeding or case, or file any application or make any motion, in respect of the Ground Lease in any such case under the Bankruptcy Code without the prior written consent of Lender. (o) Borrower shall immediately, after obtaining knowledge thereof, notify Lender of any filing by or against the Ground Lessor of a petition under the Bankruptcy Code. Borrower shall thereafter forthwith give written notice of such filing to Lender, setting forth any information available to Borrower as to the date of such filing, the court in which such petition was filed, and the relief sought therein. Borrower shall promptly deliver to Lender following receipt any and all notices, summonses, pleadings, applications and other documents received by Borrower in connection with any such petition and any proceedings relating thereto. (p) If there shall be filed by or against Borrower a petition under the Bankruptcy Code, and Borrower, as the tenant under the Ground Lease, shall determine to reject the Ground -22- Lease pursuant to Section 365(a) of the Bankruptcy Code, then Borrower shall give Lender not less than ten (10) days' prior notice of the date on which Borrower shall apply to the bankruptcy court for authority to reject the Ground Lease. Lender shall have the right, but not the obligation, to serve upon Borrower within such 10-day period a notice stating that (i) Lender demands that Borrower assume and assign the Ground Lease to Lender pursuant to Section 365 of the Bankruptcy Code and (ii) Lender covenants to cure or provide adequate assurance of prompt cure of all defaults and provide adequate assurance of future performance under the Ground Lease. If Lender serves upon Borrower the notice described in the preceding sentence, Borrower shall not seek to reject the Ground Lease and shall comply with the demand provided for in clause (i) of the preceding sentence within thirty (30) days after the notice shall have been given, subject to the performance by Lender of the covenant provided for in clause (ii) of the preceding sentence. (q) Effective upon the entry of an order for relief in respect of Borrower under the Bankruptcy Code, Borrower hereby assigns and transfers to Lender a non-exclusive right to apply to the Bankruptcy Code under Section 365(d)(4) of the Bankruptcy Code for an order extending the period during which the Ground Lease may be rejected or assumed. Article 5 - REPRESENTATIONS AND WARRANTIES Borrower represents and warrants to Lender that: Section 5.1 Warranty of Title. Borrower warrants the title to the Land, ----------------- the Improvements, the Personal Property and the Ground Lease, subject to Permitted Encumbrances. Section 5.2 Authority. Borrower (and the undersigned representative of --------- Borrower, if any) has full power, authority and legal right to execute this Security Instrument, and to mortgage, grant, bargain, sell, pledge, assign, warrant, transfer and convey the Property pursuant to the terms hereof and to keep and observe all of the terms of this Security Instrument on Borrower's part to be performed. Section 5.3 Legal Status and Authority. Borrower (a) is duly organized, -------------------------- validly existing and in good standing under the laws of its state of organization; (b) is duly qualified to transact business and is in good standing in the State where the Property is located; and (c) has all necessary approvals, governmental and otherwise, and full power and authority to own the Property and carry on its business as now conducted and proposed to be conducted. Borrower now has and shall continue to have the full right, power and authority to operate and lease the Property, to encumber the Property as provided herein and to perform all of the other obligations to be performed by Borrower under the Note, this Security Instrument and the Other Security Documents. Section 5.4 Validity of Documents. (a) The execution, delivery and --------------------- performance of the Note, this Security Instrument and the Other Security Documents and the borrowing evidenced by the Note (i) are within the partnership power of Borrower; (ii) have been authorized by all requisite partnership action; (iii) have received all necessary approvals and consents, -23- corporate, governmental or otherwise; (iv) will not violate, conflict with, result in a breach of or constitute (with notice or lapse of time, or both) a default under any provision of law, any order or judgment of any court or governmental authority, the partnership agreement or other governing instruments of Borrower, or any indenture, agreement or other instrument to which Borrower is a party or by which it or any of its assets or the Property is or may be bound or affected; (v) will not result in the creation or imposition of any lien, charge or encumbrance whatsoever upon any of its assets, except the lien and security interest created hereby; and (vi) will not require any authorization or license from, or any filing with, any governmental or other body (except for the recordation of this instrument and an Assignment of Leases and Rents being given contemporaneously herewith by Borrower to Lender in appropriate land records in the State where the Property is located and except for Uniform Commercial Code filings relating to the security interest created hereby); and (b) the Note, this Security Instrument and the Other Security Documents constitute the legal, valid and binding obligations of Borrower. Section 5.5 Litigation. There is no action, suit or proceeding, ---------- judicial, administrative or otherwise (including any condemnation or similar proceeding), pending or, to the best of Borrower's knowledge, threatened or contemplated against, or affecting, Borrower, a Guarantor, if any, an Indemnitor, if any, or the Property that would be reasonably expected to have a Material Adverse Effect (said term being used herein as defined in the Credit Agreement) that has not been disclosed to Lender or is not adequately covered by insurance, as determined by Lender in its sole and absolute discretion. Section 5.6 Status of Property. (a) To Borrower's knowledge, no portion ------------------ of the Improvements is located in an area identified by the Secretary of Housing and Urban Development or any successor thereto as an area having special flood hazards pursuant to the National Flood Insurance Act of 1968 or the Flood Disaster Protection Act of 1973, as amended, or any successor law, or, if located within any such area, Borrower has obtained and will maintain the insurance prescribed in Section 3.3(a)(i)(y) hereof. (b) Borrower has obtained all necessary certificates, licenses and other approvals, governmental and otherwise, necessary for the operation of the Property and the conduct of its business with respect to the Property and all required zoning, building code, land use, environmental and other similar permits or approvals relating to the foregoing, all of which are in full force and effect as of the date hereof and not subject to revocation, suspension, forfeiture or modification. (c) To the best of Borrower's knowledge, the Property and the present and contemplated use and occupancy thereof are in full compliance with all Applicable Laws, including zoning ordinances, building codes, land use and environmental laws, laws relating to the disabled (including the ADA) and other similar laws. (d) The Property is served by all utilities required for the current or contemplated use thereof. All utility service is provided by public utilities and the Property has accepted or is equipped to accept such utility service. -24- (e) All public roads and streets necessary for service of and access to the Property for the current or contemplated use thereof have been completed, are serviceable and all-weather and are physically and legally open for use by the public. (f) The Property is served by public water and sewer systems. (g) The Property is presently free from damage caused by fire or other casualty. (h) All costs and expenses of any and all labor, materials, supplies and equipment used in the construction of the Improvements (i) have been paid in full, or have been bonded, or adequate reserves therefor have been established, or (ii) are not delinquent in payment. (i) Borrower has paid in full for, and is the owner of, all furnishings, fixtures and equipment (other than tenants' property) used in connection with the operation of the Property, free and clear of any and all security interests, liens or encumbrances, except the lien and security interest created hereby and the other Permitted Encumbrances. (j) All liquid and solid waste disposal, septic and sewer systems located on the Property are in a good and safe condition and repair and in compliance with all Applicable Laws. (k) All Improvements lie within the boundary of the Land. Section 5.7 No Foreign Person. Borrower is not a "foreign person" ----------------- within the meaning of Section 1445(f)(3) of the Internal Revenue Code of 1986, as amended and the related Treasury Department regulations, including temporary regulations. Section 5.8 Separate Tax Lot. The Property is assessed for real estate ---------------- tax purposes as one or more wholly independent tax lot or lots, separate from any adjoining land or improvements not constituting a part of such lot or lots, and no other land or improvements is assessed and taxed together with the Property or any portion thereof. Section 5.9 ERISA Compliance. (a) As of the date hereof and throughout ---------------- the term of this Security Instrument, (i) Borrower is not and will not be an "employee benefit plan" as defined in Section 3(3) of ERISA, which is subject to Title I of ERISA, and (ii) the assets of Borrower do not and will not constitute "plan assets" of one or more such plans for purposes of Title I of ERISA; and (b) As of the date hereof and throughout the term of this Security Instrument (i) Borrower is not and will not be a "governmental plan" within the meaning of Section 3(32) of ERISA and (ii) transactions by or with Borrower are not and will not be subject to state statutes applicable to Borrower regulating investments of and fiduciary obligations with respect to governmental plans. -25- Section 5.10 Leases. (a) Borrower is the sole owner of the entire ------ lessor's interest in the Leases; (b) the Leases are valid and enforceable in accordance with their terms; (c) the terms of all alterations, modifications and amendments to the Leases are reflected in the certified rent roll delivered to and approved by Lender contemporaneously herewith; (d) none of the Rents reserved in the Leases have been assigned or otherwise pledged or hypothecated; (e) none of the Rents have been collected for more than one (1) month in advance; (f) the premises demised under the Leases have been completed and the tenants under the Leases have accepted the same and have taken possession of the same on a rent-paying basis, except as disclosed in the tenant estoppel letters delivered by Borrower to Lender on the date hereof; (g) there exist no offsets or defenses to the payment of any portion of the Rents; (h) no Lease contains an option to purchase, right of first refusal to purchase, or any other similar provision; and (i) no person or entity has any possessory interest in, or right to occupy, the Property except under and pursuant to a Lease. Section 5.11 Financial Condition. (a) Borrower is solvent, and no ------------------- bankruptcy, reorganization, insolvency or similar proceeding under any state or federal law with respect to Borrower has been initiated, and (b) Borrower has received reasonably equivalent value for the granting of this Security Instrument. Section 5.12 Business Purposes. The Loan is solely for the business ----------------- purpose of Borrower, and is not for personal, family, household, or agricultural purposes. Section 5.13 Taxes. Borrower, any Guarantor and any Indemnitor have ----- filed all federal, state, county, municipal, and city income and other tax returns relating to Taxes required to have been filed by them and have paid all Taxes and related liabilities which have become due pursuant to such returns or pursuant to any assessments received by them, except such material items as are being contested in good faith, and with respect to which Borrower, Guarantor or Indemnitor, as the case may be, has advised Lender. Neither Borrower, any Guarantor nor any Indemnitor knows of any basis for any additional assessment in respect of any such taxes and related liabilities for prior years. Section 5.14 Mailing Address. Borrower's mailing address, as set forth --------------- in the opening paragraph hereof or as changed in accordance with the provisions hereof, is true and correct. Section 5.15 No Change in Facts or Circumstances. All information ----------------------------------- submitted by or on behalf of Borrower in all rent rolls, reports, certificates, financial statements and other documents submitted in connection with the Loan or in satisfaction of the terms thereof, are accurate, complete and correct in all material respects. There has been no adverse change in any condition, fact, circumstance or event that would make any such information materially inaccurate, incomplete or otherwise misleading. Section 5.16 Disclosure. Borrower has disclosed to Lender all material ---------- facts and has not failed to disclose any material fact that could cause any representation or warranty made herein to be materially misleading. -26- Section 5.17 Third Party Representations. To the best of Borrower's --------------------------- knowledge, each of the representations and the warranties made by each Guarantor and Indemnitor herein or in any Other Security Document(s) is true and correct in all material respects. Section 5.18 Illegal Activity. No portion of the Property has been or ---------------- will be purchased with proceeds of any illegal activity. Article 6 - OBLIGATIONS AND RELIANCES Section 6.1 Relationship of Borrower and Lender. The relationship ----------------------------------- between Borrower and Lender is solely that of debtor and creditor, and Lender has no fiduciary or other special relationship with Borrower, and no term or condition of any of the Note, this Security Instrument and the Other Security Documents shall be construed so as to deem the relationship between Borrower and Lender to be other than that of debtor and creditor. Section 6.2 No Reliance on Lender. The Borrower is experienced in the --------------------- ownership and operation of properties similar to the Property. Borrower is not relying on Lender's expertise, business acumen or advice in connection with the Property. Section 6.3 No Lender Obligations. (a) Notwithstanding the provisions of --------------------- Subsections 1.1(g) and 1.1(l) or Section 3.7, Lender is not undertaking the performance of (i) any obligations under the Leases; or (ii) any obligations with respect to such agreements, contracts, certificates, instruments, franchises, permits, trademarks, licenses and other documents. (b) By accepting or approving anything required to be observed, performed or fulfilled or to be given to Lender pursuant to this Security Instrument, the Note or the Other Security Documents, including any officer's certificate, balance sheet, statement of profit and loss or other financial statement, survey, appraisal, or insurance policy, Lender shall not be deemed to have warranted, consented to, or affirmed the sufficiency, the legality or effectiveness of same, and such acceptance or approval thereof shall not constitute any warranty or affirmation with respect thereto by Lender. Section 6.4 Reliance. Borrower recognizes and acknowledges that in -------- accepting the Note, this Security Instrument and the Other Security Documents, Lender is expressly and primarily relying on the truth and accuracy of the warranties and representations set forth in Article 5 and in the Credit Agreement without any obligation to investigate the Property and notwithstanding any investigation of the Property by Lender; that such reliance existed on the part of Lender prior to the date hereof; that the warranties and representations are a material inducement to Lender in accepting the Note, this Security Instrument and the Other Security Documents; and that Lender would not be willing to make the Loan, this Security Instrument and the Other Security Documents and accept this Security Instrument in the absence of the warranties and representations as set forth in Article 5 and in the Credit Agreement. -27- Article 7 - FURTHER ASSURANCES Section 7.1 Recording of Security Instrument, etc. Borrower forthwith ------------------------------------- upon the execution and delivery of this Security Instrument and thereafter, from time to time, will cause this Security Instrument and any of the Other Security Documents creating a lien or security interest or evidencing the lien hereof upon the Property and each instrument of further assurance to be filed, registered or recorded in such manner and in such places as may be required by any present or future law in order to publish notice of and fully to protect and perfect the lien or security interest hereof upon, and the interest of Lender in, the Property. Borrower will pay all taxes, filing, registration or recording fees, and all expenses incident to the preparation, execution, acknowledgment and/or recording of the Note, this Security Instrument, the Other Security Documents, any note or mortgage supplemental hereto, any security instrument with respect to the Property and any instrument of further assurance, and any modification or amendment of the foregoing documents, and all federal, state, county and municipal taxes, duties, imposts, assessments and charges arising out of or in connection with the execution and delivery of this Security Instrument, any mortgage supplemental hereto, any security instrument with respect to the Property or any instrument of further assurance, and any modification or amendment of the foregoing documents, except where prohibited by law so to do. Section 7.2 Further Acts, etc. Borrower will, at the cost of Borrower, ----------------- and without expense to Lender, do, execute, acknowledge and deliver all and every such further acts, deeds, conveyances, mortgages, assignments, notices of assignments, transfers and assurances as Lender shall, from time to time, require, for the better assuring, conveying, assigning, transferring, and confirming unto Lender the property and rights hereby mortgaged, granted, bargained, sold, conveyed, confirmed, pledged, assigned, warranted and transferred or intended now or hereafter so to be, or which Borrower may be or may hereafter become bound to convey or assign to Lender, or for carrying out the intention or facilitating the performance of the terms of this Security Instrument or for filing, registering or recording this Security Instrument, or for complying with all Applicable Laws. Borrower, on demand, will execute and deliver and hereby authorizes Lender to execute in the name of Borrower should Borrower fail to so execute and deliver, or without the signature of Borrower to the extent Lender may lawfully do so, one or more financing statements, chattel mortgages or other instruments, to evidence more effectively the security interest of Lender in the Property. Borrower grants to Lender an irrevocable power of attorney coupled with an interest for the purpose of exercising and perfecting any and all rights and remedies available to Lender at law and in equity, including such rights and remedies available to Lender pursuant to this Section 7.2. Section 7.3 Changes in Tax, Debt, Credit and Documentary Stamp Laws. (a) ------------------------------------------------------- If any law is enacted or adopted or amended after the date of this Security Instrument which deducts the Debt from the value of the Property for the purpose of taxation or which imposes a tax, either directly or indirectly, on the Debt or Lender's interest in the Property, Borrower shall assume the payment of such tax as an Obligation hereunder, to the extent permitted by law, and will pay the tax, with interest and penalties thereon, if any, in each case within thirty (30) days of demand by Lender. If Lender is advised based upon an opinion of counsel chosen by it that the -28- payment of tax by Borrower would be unlawful, or taxable to Lender in a material amount, or unenforceable or provide the basis for a defense of usury, then Lender shall have the option by written notice of not less than ninety (90) days to declare the Debt immediately due and payable. (b) Borrower will not claim or demand or be entitled to any credit or credits on account of the Debt for any part of the Taxes or Other Charges assessed against the Property, or any part thereof, and no deduction shall otherwise be made or claimed from the assessed value of the Property, or any part thereof, for real estate tax purposes by reason of this Security Instrument or the Debt. If such claim, credit or deduction shall be required by law, Lender shall have the option, by written notice of not less than ninety (90) days, to declare the Debt immediately due and payable. (c) If at any time the United States of America, any State thereof or any subdivision of any such State shall require revenue or other stamps to be affixed to the Note, this Security Instrument, or any of the Other Security Documents or impose any other tax or charge on the same, Borrower will pay for the same, with interest and penalties thereon, if any. Section 7.4 Estoppel Certificates. (a) After request by Lender, --------------------- Borrower, within ten (10) days (but no more frequently than semi-annually), shall furnish Lender or any proposed assignee with a statement, duly acknowledged and certified, setting forth (i) the amount of the original principal amount of the Note, (ii) the unpaid principal amount of the Note, (iii) the then-current rate of interest of the Note, (iv) the terms of payment and maturity date of the Note, (v) the date installments of interest and/or principal were last paid, (v) that, except as provided in such statement, there are no defaults or events which with the passage of time or the giving of notice or both, would constitute an event of default under the Note, the Security Instrument or the Ground Lease, (vi) that the Note and this Security Instrument are valid, legal and binding obligations and have not been modified or if modified, giving particulars of such modification, (vii) whether any offsets or defenses exist against the obligations secured hereby and, if any are alleged to exist, a detailed description thereof, (viii) that all Leases are in full force and effect and have not been modified (or if modified, setting forth all modifications), (ix) the date to which the Rents thereunder have been paid pursuant to the Leases, (x) whether or not, to the best knowledge of Borrower, any of the lessees under the Leases are in default under the Leases, and, if any of the lessees are in default, setting forth the specific nature of all such defaults, (xi) the amount of security deposits held by Borrower under each Lease and that such amounts are consistent with the amounts required under each Lease, and (xii) as to any other matters reasonably requested by Lender and reasonably related to the Leases, the obligations secured hereby, the Property or this Security Instrument. (b) Borrower shall use commercially reasonable efforts to deliver to Lender, promptly upon request, duly executed estoppel certificates from any one or more lessees as reasonably required by Lender attesting to such facts regarding the Lease as Lender may reasonably require, including attestations that each Lease covered thereby is in full force and effect with no defaults thereunder on the part of any party, that none of the Rents have been paid more than one month in advance, and that the lessee claims no defense or offset against the full and timely -29- performance of its obligations under the Lease except as may be disclosed in said estoppel certificate. Section 7.5 Splitting of Security Instrument. This Security Instrument -------------------------------- and the Note shall, at any time until the same shall be fully paid and satisfied, at the sole election of Lender, be split or divided into two or more notes and two or more security instruments, each of which shall cover all or a portion of the Property to be more particularly described therein. To that end, Borrower, upon written request of Lender, shall execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered by the then owner of the Property, to Lender and/or its designee or designees substitute notes and security instruments in such principal amounts, aggregating not more than the then unpaid principal amount of this Security Instrument, and containing terms, provisions and clauses similar to those contained herein and in the Note, and such other documents and instruments as may be required by Lender. Section 7.6 Replacement Documents. Upon receipt of an affidavit of an --------------------- officer of Lender as to the loss, theft, destruction or mutilation of the Note or any Other Security Document which is not of public record, and, in the case of any such mutilation, upon surrender and cancellation of such Note or Other Security Document, Borrower will issue, in lieu thereof, a replacement Note or Other Security Document, dated the date of such lost, stolen, destroyed or mutilated Note or Other Security Document in the same principal amount thereof and otherwise of like tenor. Article 8 - DUE ON SALE/ENCUMBRANCE Section 8.1 Lender Reliance. Borrower acknowledges that Lender has --------------- examined and relied on the experience of Borrower in owning and operating properties such as the Property in agreeing to make the Loan, and will continue to rely on Borrower's ownership of the Property as a means of maintaining the value of the Property as security for repayment of the Debt and the performance of the Other Obligations. Borrower acknowledges that Lender has a valid interest in maintaining the value of the Property so as to ensure that, should Borrower default in the repayment of the Debt or the performance of the Other Obligations, Lender can recover the Debt by a sale of the Property. Section 8.2 No Sale/Encumbrance. Borrower agrees that it shall not merge ------------------- with or into, or consolidate with or into, or sell, convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or any portion of the Property, except as permitted by Section 7.1 of the Credit Agreement or Section 3.7 of this Deed of Trust. Borrower shall not, without the prior written consent of Lender, create, assume or permit to exist any encumbrance upon all or any portion of the Property except for Permitted Encumbrances. Section 8.3 Sale/Encumbrance Defined. A sale, conveyance, mortgage, ------------------------ encumbrance or transfer within the meaning of this Article 8 shall be deemed to include (a) an installment sales agreement wherein Borrower agrees to sell the Property or any substantial part thereof for a price to be paid in installments; (b) an agreement by Borrower leasing all or a substantial part of the -30- Property for other than actual occupancy by a space tenant thereunder or a sale, assignment or other transfer of, or the grant of a security interest in, Borrower's right, title and interest in and to any Leases or any Rents; (c) the change, removal or resignation of the general partner of Borrower, or the transfer or pledge of the partnership interest of the general partner to less than 50% of all partnership interests of Borrower. Section 8.4 Lender's Rights. Lender reserves the right to condition the --------------- consent required under Section 8.2 of this Security Instrument to a modification of the terms hereof and on assumption of the Note, the Credit Agreement, this Security Instrument and the Other Security Documents as so modified by the proposed transferee, payment of a transfer fee and all of Lender's expenses incurred in connection with such transfer, the proposed transferee's continued compliance with the covenants set forth in Sections 4.2 hereof, or such other conditions as Lender shall determine in its sole discretion to be in the interest of Lender. Lender shall not be required to demonstrate any actual impairment of its security or any increased risk of default hereunder in order to declare the Debt immediately due and payable upon Borrower's sale, conveyance, mortgage, encumbrance or transfer of the Property in violation of the Loan Documents. This provision shall apply to every sale, conveyance, mortgage, grant, bargain, encumbrance or transfer of the Property regardless of whether voluntary or not, or whether or not Lender has consented to any previous sale, conveyance, mortgage, encumbrance or transfer of the Property. Article 9 - PREPAYMENT Section 9.1 Prepayment Before Event of Default. The Debt may be prepaid ---------------------------------- only in strict accordance with the express terms and conditions of the Credit Agreement, including the payment of any prepayment consideration as may be set forth therein. Section 9.2 Prepayment on Casualty and Condemnation. Provided no Event --------------------------------------- of Default exists and is continuing under the Note, this Security Instrument or the Other Security Documents, in the event of any prepayment of the Debt pursuant to the terms of Section 4.4 hereof, no prepayment premium shall be due in connection therewith, but Borrower shall be responsible for all other amounts due under the Note, this Security Instrument and the Other Security Documents. -31- Section 9.3 Prepayment After Event of Default. If a Default Prepayment --------------------------------- (defined below) occurs, Borrower shall pay to Lender the entire Debt, including the Prepayment Compensation (as defined in the Credit Agreement), if any, payable pursuant to the provisions of the Note and the Credit Agreement. For purposes of this Section 9.3, the term "Default Prepayment" shall mean a prepayment of the principal amount of the Note made after the occurrence and during the continuance of any Event of Default or an acceleration of the Maturity Date (as defined in the Note) under any circumstances, including a prepayment occurring in connection with reinstatement of this Security Instrument provided by statute under foreclosure proceedings or exercise of a power of sale, any statutory right of redemption exercised by Borrower or any other party having a statutory right to redeem or prevent foreclosure, any sale in foreclosure or under exercise of a power of sale or otherwise. Borrower agrees that if, at any time prior to the Maturity Date an Event of Default shall occur and be continuing, then a tender of payment by Borrower, or by anyone on behalf of Borrower, of the amount necessary to satisfy all sums due hereunder made at any time prior to judicial, public or private sale of the property encumbered by this Security Instrument or under any other instrument given as collateral security for the obligation evidenced by the Note shall constitute an evasion of the payment terms thereof and shall be deemed to be a voluntary prepayment hereunder, and any such payment, to the extent permitted by law, therefore must include the Prepayment Compensation, if any, required under the Credit Agreement. Borrower hereby expressly (a) waives any rights it may have under California Civil Code 2954.10 to prepay the Debt, in whole or in part, without penalty, upon acceleration of the maturity of the Debt, and (b) agrees that if a prepayment of any or all of the Debt is made, following any acceleration of the Maturity Date by the holder hereof on account of any transfer or disposition as prohibited or restricted by Section 8.2 of this Security Instrument, then Borrower shall be obligated to pay, concurrently therewith, as a prepayment fee, the applicable sum specified in this paragraph. By initialing this provision in the space provided below, the undersigned hereby declares that Borrower's agreement to make the Loan at the interest rate and for the term set forth in the Credit Agreement constitutes adequate consideration, given individual weight by the undersigned, for this waiver and agreement. INITIALS: ___________ Article 10 - DEFAULT Section 10.1 Events of Default. The occurrence of any one or more of the ----------------- following events shall constitute an "Event of Default": (a) if any portion of the Debt is not paid prior to the third (3rd) Business Day after the same is due or if the entire Debt is not paid on or before the Maturity Date; (b) if any of the Taxes or Other Charges is not paid when the same is due and payable except to the extent such Taxes and Other Charges have been deposited with Lender in accordance with the terms of this Security Instrument; -32- (c) if the Policies are not kept in full force and effect, or if the Policies are not delivered to Lender upon request or Borrower has not delivered evidence of the renewal of the Policies fifteen (15) days prior to their expiration as provided in Section 3.3(b); (d) if Borrower violates or does not comply with any of the provisions of Sections 3.7 or Article 8; (e) if any representation or warranty of Borrower, Indemnitor or any person guaranteeing payment of the Debt or any portion thereof or performance by Borrower of any of the terms of this Security Instrument (a "Guarantor"), or any general partner, principal or beneficial owner of any of the foregoing, made herein or in the Environmental Indemnity (defined below) or any guaranty, or in any certificate, report, financial statement or other instrument or document furnished to Lender shall have been false or misleading in any material respect when made; (f) if an Event of Default shall occur under Section 9.1(g) of the Credit Agreement; (g) if Borrower shall be in default beyond any applicable grace period under any other mortgage, deed of trust, deed to secure debt or other security agreement covering any part of the Property whether it be superior or junior in lien to this Security Instrument; (h) if the Property becomes subject to any mechanic's, materialman's or other lien other than a lien for Taxes not then due and payable, and the lien shall remain undischarged of record (by payment, bonding or otherwise) for a period of forty-five (45) days; (i) if any federal tax lien is filed against the Property and same is not discharged of record (by payment, bonding or otherwise) for a period of forty- five (45) days; (j) if (i) Borrower fails to timely provide Lender with the written certification and evidence referred to in Section 4.2(b) hereof, or (ii) Borrower consummates a transaction which would cause this Security Instrument or Lender's exercise of its rights under this Security Instrument, the Note or the Other Security Documents to constitute a nonexempt prohibited transaction under ERISA or result in a violation of a state statute regulating governmental plans, subjecting Lender to liability for a violation of ERISA or a state statute; (k) if Borrower shall default beyond any applicable grace period in the observance or performance of any term, covenant or condition of the Ground Lease on the part of Borrower, as tenant thereunder, to be observed or performed, unless any such observance or performance shall have been waived or not required by the landlord under the Ground Lease, or if any one or more of the events referred to in the Ground Lease shall occur which would cause the Ground Lease to terminate without notice or action by the landlord thereunder or which would entitle the landlord under the Ground Lease to terminate the Ground Lease and the term thereof by giving notice to Borrower, as tenant thereunder, or if the leasehold estate created by the Ground Lease shall be surrendered or the Ground Lease shall be terminated or canceled for any reason or under any circumstance whatsoever, or if any of the terms, covenants or conditions of the Ground Lease -33- shall in any manner be modified, changed, supplemented, altered or amended in any material manner or in any manner adverse to Lender without the consent of Lender; (l) if any default occurs under that certain environmental indemnity agreement dated the date hereof given by Borrower and Kilroy Realty Corporation ("Indemnitor") to Lender (the "Environmental Indemnity") and such default continues after the expiration of applicable notice and grace periods, if any; (m) if any default occurs under any guaranty or indemnity executed in connection herewith and such default continues after the expiration of applicable grace periods, if any; or (n) if Borrower shall continue to be in default beyond the expiration of any applicable grace periods under any other term, covenant or condition of the Note, the Credit Agreement, this Security Instrument or the Other Security Documents. Section 10.2 Late Payment Charge. If any monthly installment of ------------------- principal and interest is not paid on or before the third (3rd) Business Day after the date on which it is due, Borrower shall pay to Lender upon demand an amount equal to the lesser of five percent (5%) of such unpaid portion of the outstanding monthly installment of principal and interest then due or the maximum amount permitted by applicable law, to defray the expense incurred by Lender in handling and processing such delinquent payment and to compensate Lender for the loss of the use of such delinquent payment, and such amount shall be secured by this Security Instrument and the Other Security Documents. Section 10.3 Default Interest. Borrower does hereby agree that Lender ---------------- shall be entitled to receive interest on the entire principal amount of the Note at the "Default Rate" (as defined in the Credit Agreement) as provided in Section 4.3(b) of the Credit Agreement, or the maximum interest rate that Borrower may by law pay, whichever is lower. Interest calculated at the Default Rate shall be added to the Debt, and shall be deemed secured by this Security Instrument. This clause, however, shall not be construed as an agreement or privilege to extend the date of the payment of the Debt, nor as a waiver of any other right or remedy accruing to Lender by reason of the occurrence of any Event of Default. Article 11 - RIGHTS AND REMEDIES Section 11.1 Remedies. Upon the occurrence and during the continuance of -------- any Event of Default, Borrower agrees that Lender may take such action, without notice or demand, as it deems advisable to protect and enforce its rights against Borrower and in and to the Property, including the following actions, each of which may be pursued concurrently or otherwise, at such time and in such order as Lender may determine, in its sole discretion, without impairing or otherwise affecting the other rights and remedies of Lender: (a) declare the entire unpaid Debt to be immediately due and payable; -34- (b) institute proceedings, judicial or otherwise, for the complete foreclosure of this Security Instrument under any applicable provision of law in which case the Property or any interest therein may be sold for cash or upon credit in one or more parcels or in several interests or portions and in any order or manner; (c) with or without entry, to the extent permitted and pursuant to the procedures provided by applicable law, institute proceedings for the partial foreclosure of this Security Instrument for the portion of the Debt then due and payable, subject to the continuing lien and security interest of this Security Instrument for the balance of the Debt not then due, unimpaired and without loss of priority; (d) sell for cash or upon credit the Property or any part thereof and all estate, claim, demand, right, title and interest of Borrower therein and rights of redemption thereof, pursuant to power of sale or otherwise, at one or more sales, as an entity or in parcels, at such time and place, upon such terms and after such notice thereof as may be required or permitted by law; (e) institute an action, suit or proceeding in equity for the specific performance of any covenant, condition or agreement contained herein, in the Note or in the Other Security Documents; (f) subject to the provisions of Section 15.1 of this Security Instrument, recover judgment on the Note and the Credit Agreement either before, during or after any proceedings for the enforcement of this Security Instrument or the Other Security Documents; (g) apply for the appointment of a receiver, trustee, liquidator or conservator of the Property, without notice and without regard for the adequacy of the security for the Debt and without regard for the solvency of Borrower, any Guarantor, Indemnitor or of any person, firm or other entity liable for the payment of the Debt; (h) subject to any applicable law, the license granted to Borrower under Section 1.2 shall automatically be revoked and Lender may enter into or upon the Property, either personally or by its agents, nominees or attorneys and dispossess Borrower and its agents and servants therefrom, without liability for trespass, damages or otherwise and exclude Borrower and its agents or servants wholly therefrom, and take possession of all books, records and accounts relating thereto and Borrower agrees to surrender possession of the Property and of such books, records and accounts to Lender upon demand, and thereupon Lender may (i) use, operate, manage, control, insure, maintain, repair, restore and otherwise deal with all and every part of the Property and conduct the business thereat; (ii) complete any construction on the Property in such manner and form as Lender deems advisable; (iii) make alterations, additions, renewals, replacements and improvements to or on the Property; (iv) exercise all rights and powers of Borrower with respect to the Property, whether in the name of Borrower or otherwise, including, the right to make, cancel, enforce or modify Leases, obtain and evict tenants, and demand, sue for, collect and receive all Rents of the Property and every part thereof; (v) require Borrower to pay monthly in advance to Lender, or any receiver appointed to collect the Rents, the fair and -35- reasonable rental value for the use and occupation of such part of the Property as may be occupied by Borrower; (vi) require Borrower to vacate and surrender possession of the Property to Lender or to such receiver and, in default thereof, Borrower may be evicted by summary proceedings or otherwise; and (vii) apply the receipts from the Property to the payment of the Debt, in such order, priority and proportions as Lender shall deem appropriate in its sole discretion after deducting therefrom all expenses (including reasonable attorneys' fees) incurred in connection with the aforesaid operations and all amounts necessary to pay the Taxes, Other Charges, insurance and other expenses in connection with the Property, as well as just and reasonable compensation for the services of Lender, its counsel, agents and employees; (i) exercise any and all rights and remedies granted to a secured party upon default under the Uniform Commercial Code, including, without limiting the generality of the foregoing: (i) the right to take possession of the Personal Property or any part thereof, and to take such other measures as Lender may deem necessary for the care, protection and preservation of the Personal Property, and (ii) request Borrower at its expense to assemble the Personal Property and make it available to Lender at a convenient place acceptable to Lender. Any notice of sale, disposition or other intended action by Lender with respect to the Personal Property sent to Borrower in accordance with the provisions hereof at least ten (10) days prior to such action, shall constitute commercially reasonable notice to Borrower; (j) apply any sums then deposited in the Escrow Fund and any other sums held in escrow or otherwise by Lender in accordance with the terms of this Security Instrument or any Other Security Document to the payment of the following items in any order in its uncontrolled discretion: (i) Taxes and Other Charges; (ii) Insurance Premiums; (iii) Interest on the unpaid principal balance of the Note; (iv) All other sums payable pursuant to the Note, this Security Instrument and the Other Security Documents, including advances made by Lender pursuant to the terms of this Security Instrument; (k) surrender the Policies maintained pursuant to Article 3 hereof, collect the unearned Insurance Premiums and apply such sums as a credit on the Debt in such priority and proportion as Lender in its discretion shall deem proper, and in connection therewith, Borrower hereby appoints Lender as agent and attorney-in-fact (which is coupled with an interest and is therefore irrevocable) for Borrower to collect such Insurance Premiums; (l) pursue such other remedies as Lender may have under applicable law; or -36- (m) apply the undisbursed balance of any Net Proceeds Deficiency deposit, together with interest thereon, to the payment of the Debt in such order, priority and proportions as Lender shall deem to be appropriate in its discretion. In the event of a sale, by foreclosure, power of sale, or otherwise, of less than all of the Property, this Security Instrument shall continue as a lien and security interest on the remaining portion of the Property unimpaired and without loss of priority. Notwithstanding the provisions of this Section 11.1 to the contrary, if any Event of Default as described in clauses (i) or (ii) of Subsection 9.1(g) of the Credit Agreement shall occur, the entire unpaid Debt shall be automatically due and payable, without any further notice, demand or other action by Lender. Section 11.2 Application of Proceeds. The purchase money, proceeds and ----------------------- avails of any disposition of the Property, or any part thereof, or any other sums collected by Lender pursuant to the Note, this Security Instrument or the Other Security Documents, may be applied by Lender to the payment of the Debt in such priority and proportions as Lender in its discretion shall deem proper. Section 11.3 Right to Cure Defaults. Upon the occurrence and during the ---------------------- continuance of any Event of Default or if Borrower fails to make any payment or to do any act as herein provided, Lender may, but without any obligation to do so and without notice to or demand on Borrower and without releasing Borrower from any obligation hereunder, make or do the same in such manner and to such extent as Lender may deem necessary to protect the security hereof. Lender is authorized to enter upon the Property for such purposes, or appear in, defend, or bring any action or proceeding to protect its interest in the Property or to foreclose this Security Instrument or collect the Debt, and the cost and expense thereof (including reasonable attorneys' fees to the extent permitted by law), with interest as provided in this Section 11.3, shall constitute a portion of the Debt and shall be due and payable to Lender upon demand. All such costs and expenses incurred by Lender in remedying such Event of Default or such failed payment or act or in appearing in, defending, or bringing any such action or proceeding shall bear interest at the Default Rate, for the period after notice from Lender that such cost or expense was incurred to the date of payment to Lender. All such costs and expenses incurred by Lender together with interest thereon calculated at the Default Rate shall be deemed to constitute a portion of the Debt and be secured by this Security Instrument and the Other Security Documents and shall be immediately due and payable upon demand by Lender therefor. Section 11.4 Actions and Proceedings. Lender has the right to appear in ----------------------- and defend any action or proceeding brought with respect to the Property and to bring any action or proceeding, in the name and on behalf of Borrower, which Lender, in its discretion, decides should be brought to protect its interest in the Property. Section 11.5 Recovery of Sums Required To Be Paid. Lender shall have the ------------------------------------ right from time to time to take action to recover any sum or sums which constitute a part of the Debt as the same become due, without regard to whether or not the balance of the Debt shall be due, and without prejudice to the right of Lender thereafter to bring an action of foreclosure, or any -37- other action, for a default or defaults by Borrower existing at the time such earlier action was commenced. Section 11.6 Examination of Books and Records. Lender, its agents, -------------------------------- accountants and attorneys shall have the right as provided in the Credit Agreement to examine the records, books, management and other papers of Borrower and its affiliates or of any Guarantor or Indemnitor, and to make copies and extracts from the foregoing records and other papers, and to examine and audit the books and records of Borrower and its affiliates or of any Guarantor or Indemnitor pertaining to the income, expenses and operation of the Property. This Section 11.6 shall apply throughout the term of the Loan and without regard to whether an Event of Default has occurred or is continuing. Section 11.7 Other Rights, etc. (a) The failure of Lender to insist upon ----------------- strict performance of any term hereof shall not be deemed to be a waiver of any term of this Security Instrument. Borrower shall not be relieved of Borrower's obligations hereunder by reason of (i) the failure of Lender to comply with any request of Borrower, any Guarantor or any Indemnitor to take any action to foreclose this Security Instrument or otherwise enforce any of the provisions hereof or of the Note or the Other Security Documents, (ii) the release, regardless of consideration, of the whole or any part of the Property, or of any person liable for the Debt or any portion thereof, or (iii) any agreement or stipulation by Lender extending the time of payment or otherwise modifying or supplementing the terms of the Note, this Security Instrument or the Other Security Documents. (b) It is agreed that the risk of loss or damage to the Property is on Borrower, and Lender shall have no liability whatsoever for decline in value of the Property, for failure to maintain the Policies, or for failure to determine whether insurance in force is adequate as to the amount of risks insured. Possession by Lender shall not be deemed an election of judicial relief, if any such possession is requested or obtained, with respect to any Property or collateral not in Lender's possession. (c) Upon the occurrence of an Event of Default, Lender may resort for the payment of the Debt to any other security held by Lender in such order and manner as Lender, in its discretion, may elect. Lender may take action to recover the Debt, or any portion thereof, or to enforce any covenant hereof without prejudice to the right of Lender thereafter to foreclose this Security Instrument. The rights of Lender under this Security Instrument shall be separate, distinct and cumulative and none shall be given effect to the exclusion of the others. No act of Lender shall be construed as an election to proceed under any one provision herein to the exclusion of any other provision. Lender shall not be limited exclusively to the rights and remedies herein stated but shall be entitled to every right and remedy now or hereafter afforded at law or in equity. Section 11.8 Right to Release Any Portion of the Property. Lender may -------------------------------------------- release any portion of the Property for such consideration as Lender may require without, as to the remainder of the Property, in any way impairing or affecting the lien or priority of this Security Instrument, -38- or improving the position of any subordinate lienholder with respect thereto, except to the extent that the obligations hereunder shall have been reduced by the actual monetary consideration, if any, received by Lender for such release, and may accept by assignment, pledge or otherwise any other property in place thereof as Lender may require without being accountable for so doing to any other lienholder. This Security Instrument shall continue as a lien and security interest in the remaining portion of the Property. Section 11.9 Recourse and Choice of Remedies. Notwithstanding any other ------------------------------- provision of this Security Instrument, including Article 15 hereof, Lender and other Indemnified Parties (defined in Section 13.1 below) are entitled to enforce the obligations of Borrower, Guarantor and Indemnitor contained in Sections 13.2,13.3 and 13.4 without first resorting to or exhausting any security or collateral and without first having recourse to the Note or any of the Property, through foreclosure or acceptance of a deed in lieu of foreclosure or otherwise, and in the event Lender commences a foreclosure action against the Property, Lender is entitled to pursue a deficiency judgment with respect to such obligations against Borrower, Guarantor and Indemnitor. The provisions of Sections 13.2, 13.3, 13.4, 15.3 and 15.4 are exceptions to any non-recourse or exculpation provisions in the Note, this Security Instrument or the Other Security Documents, and Borrower, Guarantor and Indemnitor are fully and personally liable for the obligations to the extent provided pursuant to Sections 13.2, 13.3, 13.4, 15.3 and 15.4. The liability of Borrower, Guarantor and Indemnitor are not limited to the original principal amount of the Note. Notwithstanding the foregoing, nothing herein shall inhibit or prevent Lender from foreclosing pursuant to this Security Instrument or exercising any other rights and remedies pursuant to the Note, this Security Instrument and the Other Security Documents, whether simultaneously with foreclosure proceedings or in any other sequence. A separate action or actions may be brought and prosecuted against Borrower, whether or not action is brought against any other person or entity or whether or not any other person or entity is joined in the action or actions. In addition, Lender shall have the right but not the obligation to join and participate in, as a party if it so elects, any administrative or judicial proceedings or actions initiated in connection with any matter addressed in Article 12 or Section 13.4. Section 11.10 Right of Entry. Lender and its agents shall have the right -------------- to enter and inspect the Property at all reasonable times, upon reasonable prior notice except (i) in the event of an emergency, and (ii) if an Event of Default has occurred and is continuing. -39- Article 12 - ENVIRONMENTAL HAZARDS Section 12.1 Environmental Representations and Warranties. To Borrower's -------------------------------------------- knowledge: (a) there are no Hazardous Substances (defined below) or underground storage tanks in, on, or under the Property, except those that are both (i) in compliance with Environmental Laws (defined below) and with permits issued pursuant thereto and (ii) fully disclosed to Lender in writing pursuant to the written reports resulting from the environmental assessments of the Property delivered to Lender (collectively, the "Environmental Report"); (b) there are no past, present or threatened Releases (defined below) of Hazardous Substances in, on, under or from the Property except as described in the Environmental Report; (c) there is no threat of any Release of Hazardous Substances migrating to the Property except as described in the Environmental Report; (d) there is no past or present non-compliance with Environmental Laws, or with permits issued pursuant thereto, in connection with the Property except as described in the Environmental Report; (e) Borrower does not know of, and has not received, any written or oral notice or other communication from any person or entity (including a governmental entity) relating to Hazardous Substances or Remediation (defined below) thereof, of possible liability of any person or entity pursuant to any Environmental Law, other environmental conditions in connection with the Property, or any actual or potential administrative or judicial proceedings in connection with any of the foregoing that has not otherwise been disclosed to Lender; and (f) Borrower has truthfully and fully provided to Lender, in writing, any and all material information relating to conditions in, on, under or from the Property that is known to Borrower and that is contained in Borrower's files and records, including any reports relating to Hazardous Substances in, on, under or from the Property and/or to the environmental condition of the Property, that is not otherwise set forth in the Environmental Report. "Environmental Law" means any present and future federal, state and local laws, statutes, ordinances, rules, regulations and the like, as well as common law, relating to protection of human health or the environment, relating to Hazardous Substances, relating to liability for or costs of Remediation or prevention of Releases of Hazardous Substances or relating to liability for or costs of other actual or threatened danger of Hazardous Substances to human health or the environment. "Environmental Law" includes, but is not limited to, the following statutes, as amended, any successor thereto, and any regulations promulgated pursuant thereto, and any state or local statutes, ordinances, rules, regulations and the like addressing similar issues: the Comprehensive Environmental Response, Compensation and Liability Act; the Emergency Planning and Community Right-to-Know Act; the Hazardous Substances Transportation Act; the Resource Conservation and Recovery Act (including, but not limited to Subtitle I relating to underground storage tanks); the Solid Waste Disposal Act; the Clean Water Act; the Clean Air Act; the Toxic Substances Control Act; the Safe Drinking Water Act; the Occupational Safety and Health Act; the Federal Water Pollution Control Act; the Federal Insecticide, Fungicide and Rodenticide Act; the Endangered Species Act; the National Environmental Policy Act; and the River and Harbors Appropriation Act, Sections 25115, 25117, 25122.7, 25140, 25249.8, 25281, 25501 and 25316 of the California Health and Safety Code, Section 2782.6(d) of the California Civil Code and Title 22 of the California Code of Regulations. "Environmental Law" also includes, but is not limited to, any present and future federal, state and local laws, statutes, ordinances, rules, regulations and the like, as well as common law: conditioning transfer of property upon a negative declaration or other approval of a governmental authority of the -40- environmental condition of the property; and requiring notification or disclosure of Releases of Hazardous Substances or other environmental condition of the Property to any governmental authority or other person or entity, whether or not in connection with transfer of title to or interest in property. "Hazardous Substances" include but are not limited to any and all substances (whether solid, liquid or gas) defined, listed, or otherwise classified as pollutants, hazardous wastes, hazardous substances, hazardous materials, extremely hazardous wastes, or words of similar meaning or regulatory effect under any present or future Environmental Laws or that may have a negative impact on human health or the environment, including but not limited to petroleum and petroleum products, asbestos and asbestos-containing materials, polychlorinated biphenyls, lead, radon, radioactive materials, flammables and explosives. "Release" of any Hazardous Substance includes but is not limited to any release, deposit, discharge, emission, leaking, spilling, seeping, migrating, injecting, pumping, pouring, emptying, escaping, dumping, disposing or other movement of Hazardous Substances. "Remediation" includes but is not limited to any response, remedial, removal, or corrective action, any activity to cleanup, detoxify, decontaminate, contain or otherwise remediate any Hazardous Substance, any actions to prevent, cure or mitigate any Release of any Hazardous Substance, any action to comply with any Environmental Laws or with any permits issued pursuant thereto, any inspection, investigation, study, monitoring, assessment, audit, sampling and testing, laboratory or other analysis, or evaluation relating to any Hazardous Substances or to anything referred to in Article 12. Section 12.2 Environmental Covenants. Borrower covenants and agrees ----------------------- that: (a) all uses and operations on or of the Property, whether by Borrower or any other person or entity, shall be in compliance with all Environmental Laws and permits issued pursuant thereto (if necessary pursuant to Environmental Laws); (b) there shall be no Releases of Hazardous Substances in, on, under or from the Property; (c) there shall be no Hazardous Substances in, on, or under the Property, except those that are both (i) in compliance with all Environmental Laws and with permits issued pursuant thereto and (ii) used in the ordinary course of the respective tenant's business or otherwise fully disclosed to Lender in writing; (d) Borrower shall keep the Property free and clear of all liens and other encumbrances imposed pursuant to any Environmental Law, whether due to any act or omission of Borrower or any other person or entity (the "Environmental Liens"); (e) Borrower shall, at its sole cost and expense, fully and expeditiously cooperate in all activities pursuant to Section 12.3 below, including but not limited to providing all relevant information and making knowledgeable persons available for interviews; (f) Borrower shall, at its sole cost and expense, perform any environmental site assessment or other investigation of environmental conditions in connection with the Property, pursuant to any reasonable written request of Lender (including but not limited to sampling, testing and analysis of soil, water, air, building materials and other materials and substances whether solid, liquid or gas), and share with Lender the reports and other results thereof, and Lender and other Indemnified Parties shall be entitled to rely on such reports and other results -41- thereof; (g) Borrower shall, at its sole cost and expense, comply with all reasonable written requests of Lender to (i) reasonably effectuate Remediation of any condition (including but not limited to a Release of a Hazardous Substance) in, on, under or from the Property; (ii) comply with any Environmental Law; (iii) comply with any directive from any governmental authority; and (iv) take any other reasonable action with respect to the Property necessary or appropriate for protection of human health or the environment; (h) Borrower shall not do or allow any tenant or other user of the Property to do any act that materially increases the dangers to human health or the environment, poses an unreasonable risk of harm to any person or entity (whether on or off the Property), impairs or may impair the value of the Property, is contrary to any requirement of any insurer, constitutes a public or private nuisance, constitutes waste, or violates any covenant, condition, agreement or easement applicable to the Property; and (i) Borrower shall immediately notify Lender in writing of (A) any presence or Releases or threatened Releases of Hazardous Substances in, on, under, from or migrating towards the Property; (B) any non-compliance with any Environmental Laws related in any way to the Property; (C) any actual or potential Environmental Lien; (D) any required or proposed Remediation of environmental conditions relating to the Property; and (E) any notice or other communication which Borrower receives from any source whatsoever (including but not limited to a governmental entity) relating in any way to Hazardous Substances or Remediation thereof, possible liability of any person or entity pursuant to any Environmental Law, other environmental conditions in connection with the Property, or any actual or potential administrative or judicial proceedings in connection with anything referred to in this Article 12. Section 12.3 Lender's Rights. Lender and any other person or entity --------------- designated by Lender, including but not limited to any receiver, any representative of a governmental entity, and any environmental consultant, shall have the right, but not the obligation, to enter upon the Property at all reasonable times upon reasonable prior notice to assess any and all aspects of the environmental condition of the Property and its use, including but not limited to conducting any environmental assessment or audit (the scope of which shall be determined in Lender's sole and absolute discretion) and taking samples of soil, groundwater or other water, air, or building materials, and conducting other invasive testing. Borrower shall cooperate with and provide access to Lender and any such person or entity designated by Lender. -42- Article 13 - INDEMNIFICATION Section 13.1 General Indemnification. Borrower shall, at its sole cost ----------------------- and expense, protect, defend, indemnify, release and hold harmless the Indemnified Parties from and against any and all claims, suits, liabilities (including strict liabilities), actions, proceedings, obligations, debts, damages, losses, costs, expenses, diminutions in value, fines, penalties, charges, fees, expenses, judgments, awards, amounts paid in settlement, punitive damages, foreseeable and unforeseeable consequential damages, of whatever kind or nature (including reasonable attorneys' fees and other costs of defense) (the "Losses") as provided, and subject to the limitations contained, in Section 12.8 of the Credit Agreement. For purposes of this Article 13, the term "Indemnified Parties" means Lender, the Banks and any person or entity who is or will have been involved in the origination of the Loan, any person or entity who is or will have been involved in the servicing of the Loan, any person or entity in whose name the encumbrance created by this Security Instrument is or will have been recorded, persons and entities who may hold or acquire or will have held a full or partial interest in the Loan as well as the respective directors, officers, shareholders, partners, employees, agents, servants, representatives, contractors, subcontractors, affiliates, subsidiaries, participants, successors and assigns of any and all of the foregoing (including any other person or entity who holds or acquires or will have held a participation or other full or partial interest in the Loan or the Property, whether during the term of the Loan or as a part of or following a foreclosure of the Loan and including any successors by merger, consolidation or acquisition of all or a substantial portion of Lender's assets and business). Section 13.2 Mortgage and/or Intangible Tax. Borrower shall, at its sole ------------------------------ cost and expense, protect, defend, indemnify, release and hold harmless the Indemnified Parties from and against any and all Losses imposed upon or incurred by or asserted against any Indemnified Parties and directly or indirectly arising out of or in any way relating to any tax on the making and/or recording of this Security Instrument, the Note or any of the Other Security Documents. Section 13.3 ERISA Indemnification. Borrower shall, at its sole cost and --------------------- expense, protect, defend, indemnify, release and hold harmless the Indemnified Parties from and against any and all Losses (including reasonable attorneys' fees and costs incurred in the investigation, defense, and settlement of Losses incurred in correcting any prohibited transaction or in the sale of a prohibited loan, and in obtaining any individual prohibited transaction exemption under ERISA that may be required, in Lender's sole discretion) that Lender may incur, directly or indirectly, as a result of a default under Sections 4.2 or 5.9 hereof. Section 13.4 Environmental Indemnification. Borrower shall, at its sole ----------------------------- cost and expense, protect, defend, indemnify, release and hold harmless the Indemnified Parties from and against any and all Losses and costs of Remediation (whether or not performed voluntarily), engineers' fees, environmental consultants' fees, and costs of investigation (including sampling, testing, and analysis of soil, water, air, building materials and other materials and substances whether solid, liquid or gas) imposed upon or incurred by or asserted against any Indemnified Parties, and directly or indirectly arising out of or in any way relating to any one or more of the -43- following: (a) any presence of any Hazardous Substances in, on, above, or under the Property; (b) any past, present or threatened Release of Hazardous Substances in, on, above, under or from the Property; (c) any activity by Borrower, any person or entity affiliated with Borrower or any tenant or other user of the Property in connection with any actual, proposed or threatened use, treatment, storage, holding, existence, disposition or other Release, generation, production, manufacturing, processing, refining, control, management, abatement, removal, handling, transfer or transportation to or from the Property of any Hazardous Substances at any time located in, under, on or above the Property; (d) any activity by Borrower, any person or entity affiliated with Borrower or any tenant or other user of the Property in connection with any actual or proposed Remediation of any Hazardous Substances at any time located in, under, on or above the Property, whether or not such Remediation is voluntary or pursuant to court or administrative order, including any removal, remedial or corrective action; (e) any past or present non- compliance or violations of any Environmental Laws (or permits issued pursuant to any Environmental Law) in connection with the Property or operations thereon, including any failure by Borrower, any person or entity affiliated with Borrower or any tenant or other user of the Property to comply with any order of any governmental authority in connection with any Environmental Laws; (f) the imposition, recording or filing of any Environmental Lien encumbering the Property; (g) any administrative processes or proceedings or judicial proceedings in any way connected with any matter addressed in Article 12 and this Section 13.4; (h) any past, present or threatened injury to, destruction of or loss of natural resources in any way connected with the Property, including costs to investigate and assess such injury, destruction or loss; (i) any acts of Borrower or other users of the Property in arranging for disposal or treatment, or arranging with a transporter for transport for disposal or treatment, of Hazardous Substances owned or possessed by such Borrower or other users, at any facility or incineration vessel owned or operated by another person or entity and containing such or any similar Hazardous Substance; (j) any acts of Borrower or other users of the Property, in accepting any Hazardous Substances for transport to disposal or treatment facilities, incineration vessels or sites selected by Borrower or such other users, from which there is a Release, or a threatened Release of any Hazardous Substance which causes the incurrence of costs for Remediation; (k) any personal injury, wrongful death, or property damage arising under any statutory or common law or tort law theory, including damages assessed for the maintenance of a private or public nuisance or for the conducting of an abnormally dangerous activity on or near the Property; and (l) any misrepresentation or inaccuracy in any representation or warranty or material breach or failure to perform any covenants or other obligations pursuant to Article 12. This indemnity shall survive any termination, satisfaction or foreclosure of this Security Instrument. Notwithstanding the foregoing, however, the indemnity under this Section 13.4 shall not apply for Losses and costs of Remediation, the underlying causes of which (i) did not directly or indirectly result from the acts or omissions of Borrower and (ii) arose after Borrower has been divested of title to the relevant Individual Property by reason of foreclosure, deed in lieu of foreclosure, or assignment of lease in lieu of foreclosure. Section 13.5 Duty to Defend; Attorneys' Fees and Other Fees and Expenses. ----------------------------------------------------------- Upon written request by any Indemnified Party, Borrower shall defend such Indemnified Party (if requested by any Indemnified Party, in the name of the Indemnified Party) by attorneys and other -44- professionals reasonably approved by the Indemnified Parties. Notwithstanding the foregoing, any Indemnified Parties may, in their sole and absolute discretion, engage their own attorneys and other professionals to defend or assist them, and, at the option of Indemnified Parties, upon and during the continuance of an Event of Default, their attorneys shall control the resolution of claim or proceeding. Upon demand, Borrower shall pay or, in the sole and absolute discretion of the Indemnified Parties, reimburse, the Indemnified Parties for the payment of reasonable fees and disbursements of attorneys, engineers, environmental consultants, laboratories and other professionals in connection therewith. Article 14 - WAIVERS Section 14.1 Waiver of Counterclaim. Borrower hereby waives the right to ---------------------- assert a counterclaim, other than a mandatory or compulsory counterclaim, in any action or proceeding brought against it by Lender arising out of or in any way connected with this Security Instrument, the Note, any of the Other Security Documents, or the Obligations. Section 14.2 Marshalling and Other Matters. Borrower hereby waives, to ----------------------------- the extent permitted by law, the benefit of all appraisement, valuation, stay, extension, reinstatement and redemption laws now or hereafter in force and all rights of marshalling in the event of any sale hereunder of the Property or any part thereof or any interest therein. Further, Borrower hereby expressly waives any and all rights of redemption from sale under any order or decree of foreclosure of this Security Instrument on behalf of Borrower, and on behalf of each and every person acquiring any interest in or title to the Property subsequent to the date of this Security Instrument and on behalf of all persons to the extent permitted by applicable law. Section 14.3 Waiver of Notice. Borrower shall not be entitled to any ---------------- notices of any nature whatsoever from Lender except with respect to matters for which this Security Instrument or any other Loan Document specifically and expressly provides for the giving of notice by Lender to Borrower and except with respect to matters for which Lender is required by applicable law to give notice, and Borrower hereby expressly waives the right to receive any notice from Lender with respect to any matter for which this Security Instrument or any other Loan Document does not specifically and expressly provide for the giving of notice by Lender to Borrower. Section 14.4 Waiver of Statute of Limitations. Borrower hereby expressly -------------------------------- waives and releases to the fullest extent permitted by law, the pleading of any statute of limitations as a defense to payment of the Debt or performance of its Other Obligations. Section 14.5 Sole Discretion of Lender. Wherever pursuant to this ------------------------- Security Instrument (a) Lender exercises any right given to it to approve or disapprove, (b) any arrangement or term is to be satisfactory to Lender, or (c) any other decision or determination is to be made by Lender, the decision of Lender to approve or disapprove, all decisions that arrangements or terms are satisfactory or not satisfactory and all other decisions and determinations made by Lender, -45- shall be in the sole and absolute discretion of Lender and shall be final and conclusive, except as may be otherwise expressly and specifically provided herein. Section 14.6 Survival. The indemnifications made pursuant to Sections -------- 13.2, 13.3 and 13.4 and the representations and warranties, covenants, and other obligations arising under Article 12, shall continue indefinitely in full force and effect and shall survive and shall in no way be impaired by: any satisfaction or other termination of this Security Instrument; any assignment or other transfer of all or any portion of this Security Instrument or Lender's interest in the Property (but, in such case, shall benefit both Indemnified Parties and any assignee or transferee); any exercise of Lender's rights and remedies pursuant hereto including foreclosure or acceptance of a deed in lieu of foreclosure; any exercise of any rights and remedies pursuant to the Note, the Credit Agreement or any of the Other Security Documents; any transfer of all or any portion of the Property (whether by Borrower or by Lender following foreclosure or acceptance of a deed in lieu of foreclosure or at any other time); any amendment to this Security Instrument, the Note, the Credit Agreement or the Other Security Documents; and any act or omission that might otherwise be construed as a release or discharge of Borrower from the obligations pursuant hereto. SECTION 14.7 WAIVER OF TRIAL BY JURY. BORROWER HEREBY WAIVES, TO THE ----------------------- FULLEST EXTENT PERMITTED BY LAW, THE RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM, WHETHER IN CONTRACT, TORT OR OTHERWISE, RELATING DIRECTLY OR INDIRECTLY TO THE LOAN, THE NOTE, THE CREDIT AGREEMENT, THIS SECURITY INSTRUMENT OR THE OTHER SECURITY DOCUMENTS OR ANY ACTS OR OMISSIONS OF LENDER, ITS OFFICERS, EMPLOYEES, DIRECTORS OR AGENTS IN CONNECTION THEREWITH. Article 15 - EXCULPATION Section 15.1 Exculpation. Except as otherwise provided, Lender shall not ----------- enforce the liability and obligation of Borrower to perform and observe the obligations contained in the Note or this Security Instrument by any action or proceeding wherein a money judgment shall be sought against Borrower, except that Lender may bring a foreclosure action, action for specific performance or other appropriate action or proceeding to enable Lender to enforce and realize upon this Security Instrument, the Other Security Documents, and the interest in the Property, the Rents and any other collateral given to Lender created by this Security Instrument and the Other Security Documents; provided, however, that any judgment in any action or proceeding shall be enforceable against Borrower only to the extent of Borrower's interest in the Property, in the Rents and in any other collateral given to Lender. Lender, by accepting the Note and this Security Instrument, agrees that it shall not, except as otherwise provided in Section 15.3 or Section 15.4, sue for, seek or demand any deficiency judgment against Borrower in any action or proceeding, under or by reason of or under or in connection with the Note, the Other Security Documents or this Security Instrument. -46- Section 15.2 Reservation of Certain Rights. The provisions of Section 15.1 ----------------------------- shall not (a) constitute a waiver, release or impairment of any obligation evidenced or secured by the Note, the Other Security Documents or this Security Instrument; (b) impair the right of Lender to name Borrower as a party defendant in any action or suit for judicial foreclosure and sale under this Security Instrument; (c) affect the validity or enforceability of any indemnity, guaranty, master lease or similar instrument made in connection with the Note, this Security Instrument, or the Other Security Documents; (d) impair the right of Lender to obtain the appointment of a receiver; (e) impair the enforcement of the Assignment of Leases and Rents executed in connection herewith; (f) impair the right of Lender to obtain a deficiency judgment or judgment on the Note against Borrower if necessary to obtain any insurance proceeds or condemnation awards to which Lender would be otherwise entitled under this Security Instrument, provided, however, Lender shall only enforce such judgment against the insurance proceeds and/or condemnation awards; or (g) impair the right of Lender to enforce the provisions of Sections 11.9, 13.1, 13.2, 13.3 and 13.4 of this Security Instrument. Section 15.3 Exceptions to Exculpation. Notwithstanding the provisions of ------------------------- this Article 15 to the contrary, Borrower shall be personally liable to Lender for the Losses it incurs due to: (i) fraud or intentional misrepresentation by Borrower, Guarantor or any other person or entity affiliated with either Borrower or Guarantor in connection with the execution and the delivery of the Note, this Security Instrument, the Credit Agreement or the Other Security Documents; (ii) Borrower's misapplication or misappropriation of Rents received by Borrower after the occurrence and during the continuance of an Event of Default; (iii) Borrower's misappropriation of tenant security deposits or Rents collected in advance; (iv) the misapplication or the misappropriation of insurance proceeds or condemnation awards; (v) Borrower's failure to pay Taxes or Insurance Premiums except in accordance with the terms and provisions of the Loan Documents; (vi) Borrower's failure to carry the insurance coverages required pursuant to Section 3.3(a) of this Security Instrument; or (vii) Borrower's failure to comply with the provisions of Sections 3.9, 12.1 or 12.2 of this Security Instrument. Section 15.4 Recourse. Notwithstanding the foregoing, the agreement of -------- Lender not to pursue recourse liability as set forth in Section 15.1 above SHALL BECOME NULL AND VOID and shall be of no further force and effect if Borrower shall contest any judicial or non-judicial enforcement action by Lender for the sole purpose of delaying Lender's realization on its collateral for the Loan. Section 15.5 Bankruptcy Claims. Nothing herein shall be deemed to be a ----------------- waiver of any right which Lender may have under Sections 506(a), 506(b), 1111(b) or any other provisions of the Bankruptcy Code to file a claim for the full amount of the Debt secured by this Security Instrument or to require that all collateral shall continue to secure all of the Debt owing to Lender in accordance with the Note, this Security Instrument and the Other Security Documents. -47- Article 16 - NOTICES Section 16.1 Notices. All notices or other written communications ------- hereunder shall be deemed to have been properly given (i) upon delivery, if delivered in person or by facsimile transmission with receipt acknowledged by the recipient thereof, (ii) one (1) Business Day (defined below) after having been deposited for overnight delivery with any reputable overnight courier service, or (iii) three (3) Business Days after having been deposited in any post office or mail depository regularly maintained by the U.S. Postal Service and sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to Borrower: Kilroy Realty, L.P. 2250 East Imperial Highway El Segundo, California 90245 Attention: Mr. Tyler Rose, Treasurer Facsimile No.: (310) 322-5981 With a copy to: Latham & Watkins 633 West Fifth Street, Suite 4000 Los Angeles, California 90071 Attention: Jennifer Upham Saunders, Esq. Facsimile No.: (213) 891-8763 If to Lender: Commerzbank Aktiengesellschaft, New York Branch 2 World Financial Center New York, New York 10251-1050 Attention: David Schwarz Facsimile No. (212) 266-7632 With a copy to: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, New York 10104 Attention: Michael B. Levy, Esq. Facsimile No. (212) 541-4630 or addressed as such party may from time to time designate by written notice to the other parties. Either party by notice to the other may designate additional or different addresses for subsequent notices or communications. For purposes of this Subsection 16.1, "Business Day" shall mean a day on which commercial banks are not authorized or required by law to close in New York, New York. -48- Article 17 - SERVICE OF PROCESS Section 17.1 Consent to Service. Borrower irrevocably consents to ------------------ service of process by registered or certified mail, postage prepaid, to it at its address given in or pursuant to the first paragraph hereof. Section 17.2 Submission to Jurisdiction. With respect to any claim or -------------------------- action arising hereunder or under the Note or the Other Security Documents, Borrower (a) irrevocably submits to the nonexclusive jurisdiction of the courts of the State of New York and the State where the Property is located and the United States District Court located in the Borough of Manhattan in New York, New York and the county in which the Property is located, and appellate courts from any thereof, and (b) irrevocably waives any objection which it may have at any time to the laying on venue of any suit, action or proceeding arising out of or relating to this Security Instrument brought in any such court, irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Section 17.3 Jurisdiction Not Exclusive. Nothing in this Security -------------------------- Instrument will be deemed to preclude Lender from bringing an action or proceeding with respect hereto in any other jurisdiction. Article 18 - APPLICABLE LAW Section 18.1 Choice of Law. This Security Instrument shall be governed, ------------- construed, applied and enforced in accordance with the laws of the state in which the Property is located and the applicable laws of the United States of America. Section 18.2 Usury Laws. This Security Instrument and the Note are ---------- subject to the express condition that at no time shall Borrower be obligated or required to pay interest on the Debt at a rate which could subject the holder of the Note to either civil or criminal liability as a result of being in excess of the maximum interest rate which Borrower is permitted by applicable law to contract or agree to pay. If by the terms of this Security Instrument or the Note, Borrower is at any time required or obligated to pay interest on the Debt at a rate in excess of such maximum rate, the rate of interest under the Security Instrument and the Note shall be deemed to be immediately reduced to such maximum rate and the interest payable shall be computed at such maximum rate and all prior interest payments in excess of such maximum rate shall be applied and shall be deemed to have been payments in reduction of the principal balance of the Note. All sums paid or agreed to be paid to Lender for the use, forbearance, or detention of the Debt shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full stated term of the Note until payment in full so that the rate or amount of interest on account of the Debt does not exceed the maximum lawful rate of interest from time to time in effect and applicable to the Debt for so long as the Debt is outstanding. Section 18.3 Provisions Subject to Applicable Law. All rights, powers and ------------------------------------ remedies provided in this Security Instrument may be exercised only to the extent that the exercise thereof -49- does not violate any applicable provisions of law and are intended to be limited to the extent necessary so that they will not render this Security Instrument invalid, unenforceable or not entitled to be recorded, registered or filed under the provisions of any applicable law. If any term of this Security Instrument or any application thereof shall be invalid or unenforceable, the remainder of this Security Instrument and any other application of the term shall not be affected thereby. Article 19 - Intentionally Deleted Article 20 - COSTS Section 20.1 Performance at Borrower's Expense. Borrower acknowledges and --------------------------------- confirms that Lender shall impose certain administrative processing and/or commitment fees in connection with (a) the extension, renewal, modification, amendment and termination of its loans, (b) the release or substitution of collateral therefor, (c) obtaining certain consents, waivers and approvals with respect to the Property, or (d) the review of any Lease or proposed lease or the preparation or review of any subordination, non-disturbance agreement (the occurrence of any of the above shall be called an "Event"). Borrower further acknowledges and confirms that it shall be responsible for the payment of all costs of reappraisal of the Property or any part thereof, whether required by law, regulation, Lender or any governmental or quasi-governmental authority. Borrower hereby acknowledges and agrees to pay, upon demand, all such fees (as the same may be increased or decreased from time to time), and any additional fees of a similar type or nature which may be imposed by Lender from time to time, upon the occurrence of any Event or otherwise. Wherever it is provided for herein that Borrower pay any costs and expenses, such costs and expenses shall include all reasonable legal fees and disbursements of Lender, whether of retained firms, the reimbursement for the expenses of in-house staff or otherwise. Section 20.2 Attorney's Fees for Enforcement. (a) Borrower shall pay all ------------------------------- reasonable legal fees incurred by Lender in connection with (i) the preparation of the Note, this Security Instrument and the Other Security Documents and (ii) the items set forth in Section 20.1 above, and (b) Borrower shall pay to Lender on demand any and all expenses, including legal expenses and reasonable attorneys' fees, incurred or paid by Lender in protecting its interest in the Property or Personal Property or in collecting any amount payable hereunder or in enforcing its rights hereunder with respect to the Property or Personal Property, whether or not any legal proceeding is commenced hereunder or thereunder and whether or not any default or Event of Default shall have occurred and is continuing, together with interest thereon at the Default Rate from the date paid or incurred by Lender until such expenses are paid by Borrower. Article 21 - DEFINITIONS -50- Section 21.1 General Definitions. Unless the context clearly indicates a ------------------- contrary intent or unless otherwise specifically provided herein, words used in this Security Instrument may be used interchangeably in singular or plural form and the word "Borrower" shall mean "each Borrower and any subsequent owner or owners of the Property or any part thereof or any interest therein," the word "Lender" shall mean "Lender and any subsequent holder of the Note," the word "Note" shall mean "the Note and any other evidence of indebtedness secured by this Security Instrument," the word "person" shall include an individual, corporation, partnership, trust, unincorporated association, government, governmental authority, and any other entity, the word "Property" shall include any portion of the Property and any interest therein, and the phrases "attorneys' fees", "legal fees" and "counsel fees" shall include any and all attorneys', paralegal and law clerk fees and disbursements, including, but not limited to, fees and disbursements at the pre-trial, trial and appellate levels incurred or paid by Lender in protecting its interest in the Property, the Leases and the Rents and enforcing its rights hereunder. The terms "including," "include" and similar terms shall be construed as if followed by the phrase "without being limited to." Article 22 - MISCELLANEOUS PROVISIONS Section 22.1 No Oral Change. This Security Instrument, and any provisions -------------- hereof, may not be modified, amended, waived, extended, changed, discharged or terminated orally or by any act or failure to act on the part of Borrower or Lender, but only by an agreement in writing signed by the party against whom enforcement of any modification, amendment, waiver, extension, change, discharge or termination is sought. Section 22.2 Liability. If Borrower consists of more than one person, the --------- obligations and liabilities of each such person hereunder shall be joint and several. This Security Instrument shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns forever. Section 22.3 Inapplicable Provisions. If any term, covenant or condition ----------------------- of the Note, the Credit Agreement or this Security Instrument is held to be invalid, illegal or unenforceable in any respect, the Note, the Credit Agreement and this Security Instrument shall be construed without such provision. Section 22.4 Headings, etc. The headings and captions of various Sections ------------- of this Security Instrument are for convenience of reference only and are not to be construed as defining or limiting, in any way, the scope or intent of the provisions hereof. Section 22.5 Duplicate Originals; Counterparts. This Security Instrument --------------------------------- may be executed in any number of duplicate originals and each duplicate original shall be deemed to be an original. This Security Instrument may be executed in several counterparts, each of which counterparts shall be deemed an original instrument and all of which together shall constitute a single Security Instrument. The failure of any party hereto to execute this Security Instrument, or any counterpart hereof, shall not relieve the other signatories from their obligations hereunder. -51- Section 22.6 Number and Gender. Whenever the context may require, any ----------------- pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice versa Section 22.7 Subrogation. If any or all of the proceeds of the Note have ----------- been used to extinguish, extend or renew any indebtedness heretofore existing against the Property, then, to the extent of the funds so used, Lender shall be subrogated to all of the rights, claims, liens, titles, and interests existing against the Property heretofore held by, or in favor of, the holder of such indebtedness and such former rights, claims, liens, titles, and interests, if any, are not waived but rather are continued in full force and effect in favor of Lender and are merged with the lien and security interest created herein as cumulative security for the repayment of the Debt, the performance and discharge of Borrower's obligations hereunder, under the Note, the Credit Agreement and the Other Security Documents and the performance and discharge of the Other Obligations. Section 22.8 Entire Agreement. The Note, the Credit Agreement, this ---------------- Security Instrument and the Other Security Documents constitute the entire understanding and agreement between Borrower and Lender with respect to the transactions arising in connection with the Debt and supersede all prior written or oral understandings and agreements between Borrower and Lender with respect thereto. Borrower hereby acknowledges that, except as incorporated in writing in the Note, the Credit Agreement, this Security Instrument and the Other Security Documents, there are not, and were not, and no persons are or were authorized by Lender to make, any representations, understandings, stipulations, agreements or promises, oral or written, with respect to the transaction which is the subject of the Note, the Credit Agreement, this Security Instrument and the Other Security Documents. Section 22.9 Trustee. (a) Trustee, by its acceptance hereof, covenants ------- faithfully to perform and fulfill the trusts herein created, being liable, however, only for willful negligence or misconduct, and hereby waives any statutory fee and agrees to accept reasonable compensation, in lieu thereof, for any services rendered by it in accordance with the terms hereof. (b) Trustee, upon presentation to it of an affidavit signed by or on behalf of Lender, setting forth any fact or facts showing a default by Borrower under any of the terms or conditions of this Security Instrument, is authorized to accept as true and conclusive all facts and statements in such affidavit and to act hereunder in complete reliance thereon. (c) Trustee may resign at any time upon giving thirty (30) days' notice in writing to Borrower and to Lender. (d) In the event of Trustee's death, removal, resignation, refusal to act, or inability to act or, in the sole discretion of Lender for any reason whatsoever, Lender may, at any time or from time to time without notice and without specifying any reason therefor and without applying to any court, select and appoint a successor trustee and all powers, rights, duties and -52- authority of Trustee, as aforesaid, shall thereupon become vested in such successor without conveyance from the predecessor trustee. Such substitute trustee shall not be required to give bond for the faithful performance of his duties unless required by Lender. Such substitute trustee shall be appointed by written instrument duly recorded in the county where the Premises are located, which appointment may be executed by any authorized agent of Lender and if Lender is a business trust or corporation, such appointment be executed on its behalf by any officer of such business trust or corporation, such appointment shall be conclusively presumed to have been executed with authority and shall be valid and sufficient without proof of any action by the Board of Trustees or Board of Directors or any superior officer of the business trust or corporation. Borrower hereby ratifies and confirms any and all acts which the herein-named trustee, or its successor or successors in this trust, shall do lawfully by virtue hereof. Borrower hereby agrees, on behalf of itself and of its heirs, executors, administrators and assigns, that the recitals contained in any deed or deeds executed in due form by Trustee or any substitute trustee, acting under the provisions of this Security Instrument, shall be prima facie evidence of the facts recited, and that it shall not be necessary to prove in any court, otherwise than by such recitals, the existence of the facts essential to authorize the execution and delivery of such deed or deeds and the passing of title thereby. (e) At any time and from time to time, without liability therefor and without notice, upon written request of Lender, Trustee shall (i) consent in writing to the making of any map or plat of the Property, (ii) join in granting any easement thereon, (iii) join in any extension agreement or any agreement subordinating the lien or charge hereof, or (iv) upon presentation of this Security Instrument and the Note or notes secured hereby for endorsement, and without affecting the personal liability of any person for the payment of the Obligations or the effect of this Security Instrument upon the remainder of the Property, reconvey any part of the Property. (f) The trust created hereby is irrevocable by Borrower. Article 23 - CERTAIN MATTERS RELATING TO THE STATE OF CALIFORNIA Notwithstanding anything contained herein to the contrary: Section 23.1 Full Reconveyance. Upon written request of Lender stating ----------------- that all sums secured hereby have been paid, upon surrender to Trustee of the Note and the original or a certified copy of this Security Instrument for cancellation and retention, and upon payment of its fees, Trustee shall fully reconvey, without warranty, the entire remaining Property then held hereunder. The recitals in such reconveyance of any matters of facts shall be conclusive proof of the truthfulness thereof. The grantee in such reconveyance may be described as "the person or persons legally entitled thereto." Section 23.2 Dwellings. No portion of the proceeds of the Loan shall be --------- used by Borrower to finance the purchase or construction of real property containing four (4) or fewer residential units or on which four (4) or fewer residential units are to be constructed. No portion -53- of the Property is or will be a "dwelling" within the meaning of Section 10240.1 or Section 10240.2 of the California Business and Professions Code. Section 23.4 Indemnity; Expenses. Borrower will pay or reimburse Trustee ------------------- and Lender for all reasonable attorneys' fees, costs and expenses incurred by either of them in any suit, action, legal proceeding or dispute of any kind in which either of them is made a party or appears as party plaintiff or defendant, affecting the Debt, this Security Instrument or the interest created herein, or the Property, or any appeal thereof, including activities related to enforcement of the remedies of Lender, activities related to protection of Lender's collateral, any foreclosure action or exercise of the power of sale, any condemnation action involving the Property or any action to protect the security hereof, any bankruptcy or other insolvency proceeding commenced by or against Borrower, and any such amounts paid or incurred by Trustee or Lender shall be added to the Debt and shall be secured by this Security Instrument. The agreements of this subsection shall expressly survive in perpetuity satisfaction of this Security Instrument and repayment of the Debt, any release, reconveyance, discharge of foreclosure of this Security Instrument, conveyance by deed in lieu of foreclosure, sale, and any subsequent transfer by trustee's conveyance of the Property. Section 23.5 Supplemental Environmental Provisions. In the event that any ------------------------------------- portion of the Property is determined to be "environmentally impaired" (as "environmentally impaired" is defined in California Code of Civil Procedure Section 726.5(e)(3)) or to be an "affected parcel" (as "affected parcel" is defined in California Code of Civil Procedure Section 726.5(e)(1)), then, without otherwise limiting or in any way affecting Lender's or Trustee's rights and remedies under this Security Instrument, Lender may elect to exercise its right under California Code of Civil Procedure Section 726.5(a) to (i) waive its lien on such environmentally impaired or affected portion of the Property, and (ii) exercise the rights and remedies of an unsecured creditor, including reduction of its claim against Borrower to judgment and any other rights and remedies permitted by law. For purposes of determining Lender's right to proceed as an unsecured creditor under California Code of Civil Procedure Section 726.5(a), Borrower shall be deemed to have willfully permitted or acquiesced in a release or threatened release of hazardous materials, within the meaning of California Code of Civil Procedure Section 726.5(d)(1), if (i) the release or threatened release of Hazardous Substances was knowingly or negligently caused or contributed to by any lessee, occupant or user of any portion of the Property and (ii) Borrower had prior knowledge of the activity by such lessee, occupant or user which caused or contributed to the release or threatened release but failed to take commercially reasonable action to prevent such release or threatened release. -54- IN WITNESS WHEREOF, this Security Instrument has been executed by Borrower as of the day and year first above written. KILROY REALTY, L.P., a Delaware limited partnership By Kilroy Realty Corporation, a Maryland corporation, its general partner By: /s/ Tyler H. Rose _________________________________ Name: Tyler H. Rose Title: Senior Vice President and Treasurer -55- Exhibits - -------- Exhibit A Description of Land Exhibit B Ground Lease -ii- EXHIBIT A --------- (Description of Land) ALL of that certain lot, piece or parcel of land, with the buildings and improvements thereon, situate, lying and being as described in Exhibits A-1 through A-13 attached hereto. The parcel described in Exhibit A-13 constitutes the Leased Land, as defined in the Deed of Trust. The parcels described in Exhibits A-1 through A-12 collectively constitute the Fee Land, as defined in the Deed of Trust. -1- EXHIBIT A-1 ----------- ALL of that certain lot, piece or parcel of land, with the buildings and improvements thereon, situate, lying and being in the State of California, County of San Diego, and described as follows: Parcel 4 of Parcel Map No. 15064, in the City of San Diego, County of San Diego, State of California, filed in the Office of the County Recorder of San Diego County, December 17, 1987 as File No. 87-694386 of Official Records. -2- EXHIBIT A-2 ----------- ALL of that certain lot, piece or parcel of land, with the buildings and improvements thereon, situate, lying and being in the State of California, County of San Diego, and described as follows: Parcel 1 of Parcel Map No. 17755, in the City of San Diego, County of San Diego, State of California, filed in the Office of the County Recorder of San Diego County, September 17, 1996 as File No. 1996-474607 of Official Records. ------------------ -3- EXHIBIT A-3 ----------- ALL of that certain lot, piece or parcel of land, with the buildings and improvements thereon, situate, lying and being in the State of California, County of San Diego, and described as follows: Parcel 2 of Parcel Map No. 17755, in the City of San Diego, County of San Diego, State of California, filed in the Office of the County Recorder of San Diego County, September 17, 1996 as File No. 1996-474607 of Official Records. ------------------ -4- EXHIBIT A-4 ----------- ALL of that certain lot, piece or parcel of land, with the buildings and improvements thereon, situate, lying and being in the State of California, County of San Diego, and described as follows: Parcel 2 of Parcel Map No. 13090, in the City of San Diego, County of San Diego, State of California, according to the map thereof filed in the Office of the County Recorder of San Diego County, December 29, 1983 as File No. 83-474919 of Official Records. -5- EXHIBIT A-5 ----------- ALL of that certain lot, piece or parcel of land, with the buildings and improvements thereon, situate, lying and being in the State of California, County of San Diego, and described as follows: Lot 7 of Collins Business Park, in the City of San Diego, County of San Diego, State of California, according to map thereof No. 9245, filed in the Office of the County Recorder of San Diego County, June 8, 1979. -6- EXHIBIT A-6 ----------- ALL of that certain lot, piece or parcel of land, with the buildings and improvements thereon, situate, lying and being in the State of California, County of San Diego, and described as follows: Parcels 2 and 3 of Parcel Map No. 17965, in the City of San Diego, County of San Diego, State of California, recorded in the Office of the County Recorder of San Diego County on December 19, 1997 as File No. 1997-0646743 of Official Records. -7- EXHIBIT A-7 ----------- ALL of that certain lot, piece or parcel of land, with the buildings and improvements thereon, situate, lying and being in the State of California, County of San Diego, and described as follows: PARCEL A: Parcel 2 of Parcel Map No. 15605, in the City of San Diego, County of San Diego, State of California filed in the Office of the County Recorder of San Diego County, March 16, 1989 as File No. 89-134442 of Official Records. PARCEL B: An easement for ingress and egress over and along the southeasterly 28 feet of the northeasterly 83 feet of Parcel 1 of Said Parcel Map No. 15605, as set forth in Article VI, Section 6.02 in the Declaration of Covenants, Conditions and Restrictions recorded April 7, 1989 as File No. 89-181579, Official Records. -8- EXHIBIT A-8 ----------- ALL of that certain lot, piece or parcel of land, with the buildings and improvements thereon, situate, lying and being in the State of California, County of San Diego, and described as follows: PARCEL A: Parcel 1 of Parcel Map No. 18159, in the City of San Diego, County of San Diego, State Of California, according to map thereof filed in the Office of the County Recorder of San Diego County, on December 4, 1998. PARCEL B: An easement for access over Parcel 2 of Parcel Map No. 18159, in the City of San Diego, County of San Diego, State Of California, according to map thereof filed in the Office of the County Recorder of San Diego County, on December 4, 1998 as described in the Reciprocal Grant of Easements recorded July 23, 1999 as File No. 1999-0511150 of Official Records. -9- EXHIBIT A-9 ----------- ALL of that certain lot, piece or parcel of land, with the buildings and improvements thereon, situate, lying and being in the State of California, County of San Diego, and described as follows: PARCEL A: Parcel 1 of Parcel Map No. 17927 in the City of San Diego , County of San Diego, State of California, recorded in the Office of the County Recorder for San Diego County on October 29, 1997 as File No. 1997-0541874 of Official Records. PARCEL B: A non-exclusive easement for vehicular and pedestrian access, ingress and egress and installation, operation, use, maintenance, repair, improvement, replacement and removal of underground utilities over, under and across the private driveway located within Parcels 1 and 2 of Parcel Map No. 14590, as more particularly set out in that certain Reciprocal Easement Agreement recorded October 9, 1997 as File No. 1997-0503692, Official Records of San Diego County, and that certain Amended and Restated Easement Agreement recorded January 12, 1998 as File No. 1998-0015638, Official Records of San Diego County. -10- EXHIBIT A-10 ------------ ALL of that certain lot, piece or parcel of land, with the buildings and improvements thereon, situate, lying and being in the State of California, County of San Diego, and described as follows: PARCEL A: LOT 6 OF CARLSBAD TRACT NO. 94-09, CARLSBAD RANCH, UNIT NO. 1, IN THE CITY OF CARLSBAD, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA, ACCORDING TO MAP THEREOF NO. 13357, FILED IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO COUNTY, SEPTEMBER 11, 1996 AS FILE NO. 1996-0463214 OF OFFICIAL RECORDS. TOGETHER WITH ALL THAT PORTION OF LOT 7 OF CARLSBAD TRACT NO. 94-09, CARLSBAD - ------------- RANCH, UNIT NO. 1, IN THE CITY OF CARLSBAD, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA, ACCORDING TO MAP THEREOF NO. 13357, FILED IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO COUNTY, SEPTEMBER 11, 1996 AS FILE NO. 1996-0463214 OF OFFICIAL RECORDS, MORE PARTICULARLY DESCRIBED AS FOLLOWS: BEGINNING AT THE NORTHWESTERLY CORNER OF SAID LOT 7; THENCE ALONG THE NORTHERLY LINE OF SAID LOT 7, NORTH 67(degrees) 30' 48" EAST, 434.00 FEET TO THE NORTHEASTERLY CORNER OF SAID LOT 7; THENCE ALONG THE EASTERLY LINE OF SAID LOT 7, SOUTH 22(degrees) 29' 12" EAST, 25.13 FEET THENCE LEAVING SAID EASTERLY LINE, SOUTH 67(degrees) 30' 48" WEST, 434.00 FEET TO A POINT ON THE WESTERLY LINE OF SAID LOT 7; THENCE ALONG SAID WESTERLY LINE, NORTH 22(degrees) 29' 12" WEST, 25.13 FEET TO THE POINT OF BEGINNING. (SAID PROPERTY BEING DESCRIBED AS PARCEL A (ADJUSTED LOT 6), IN CERTIFICATE OF COMPLIANCE RECORDED ON JULY 1, 1997 AS FILE NO. 1997-0311133 OF OFFICIAL RECORDS.) PARCEL B: AN EASEMENT FOR DRIVEWAY ACCESS OVER, ALONG AND ACROSS A PORTION OF LOT 7 OF CARLSBAD TRACT NO. 94-09, CARLSBAD RANCH, UNIT NO. 1, IN THE CITY OF CARLSBAD, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA, ACCORDING TO MAP THEREOF NO. 13357, FILED IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO COUNTY, SEPTEMBER 11, 1996 AS FILE NO. 1996-0463214, MORE PARTICULARLY DESCRIBED AS FOLLOWS: -11- BEGINNING AT THE NORTHWESTERLY CORNER OF SAID LOT 7; THENCE ALONG THE WESTERLY LINE OF SAID LOT 7, SOUTH 22(degrees) 29' 12" EAST, 25.13 FEET TO THE TRUE POINT OF BEGINNING; THENCE LEAVING SAID WESTERLY LINE, NORTH 67(degrees) 30' 48" EAST, 40.00 FEET; THENCE SOUTH 22(degrees) 29' 12" EAST, 18.00 FEET; THENCE SOUTH 67(degrees) 30' 48" WEST, 40.00 FEET TO A POINT ON THE WESTERLY LINE OF SAID LOT 7; THENCE ALONG SAID WESTERLY LINE, NORTH 22(degrees) 29' 12" WEST, 18.00 FEET TO THE TRUE POINT OF BEGINNING. -12- EXHIBIT A-11 ------------ ALL of that certain lot, piece or parcel of land, with the buildings and improvements thereon, situate, lying and being in the State of California, County of San Diego, and described as follows: PARCEL A: LOT 7 OF CARLSBAD TRACT NO. 94-09, CARLSBAD RANCH, UNIT NO. 1, IN THE CITY OF CARLSBAD, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA, ACCORDING TO MAP THEREOF NO. 13357, FILED IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO COUNTY, SEPTEMBER 11, 1996 EXCEPTING THEREFROM ALL THAT PORTION OF SAID LOT 7, MORE PARTICULARLY DESCRIBED AS FOLLOWS: BEGINNING AT THE NORTHWESTERLY CORNER OF SAID LOT 7; THENCE ALONG THE NORTHERLY LINE OF SAID LOT 7, NORTH 67(degrees) 30' 48" EAST, 434.00 FEET TO THE NORTHEASTERLY CORNER OF SAID LOT 7; THENCE ALONG THE EASTERLY LINE OF SAID LOT 7, SOUTH 22(degrees) 29' 12" EAST, 25.13 FEET THENCE LEAVING SAID EASTERLY LINE, SOUTH 67(degrees) 30' 48" WEST, 434.00 FEET TO A POINT ON THE WESTERLY LINE OF SAID LOT 7; THENCE ALONG SAID WESTERLY LINE, NORTH 22(degrees) 29' 12" WEST, 25.13 FEET TO THE POINT OF BEGINNING. PARCEL B: AN EASEMENT FOR DRIVEWAY ACCESS OVER, ALONG AND ACROSS A PORTION OF LOT 8 OF CARLSBAD TRACT NO. 94-09, CARLSBAD RANCH, UNIT NO. 1, IN THE CITY OF CARLSBAD, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA, ACCORDING TO MAP THEREOF NO. 13357, FILED IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO COUNTY, SEPTEMBER 11, 1996, BEING DESCRIBED AS FOLLOWS: BEGINNING AT THE MOST WESTERLY CORNER OF SAID LOT 8, THENCE ALONG THE NORTHWESTERLY LINE THEREOF, NORTH 67(degrees) 30' 48" EAST 80.00 FEET, THENCE SOUTH 22(degrees) 29' 12" EAST 17.50 FEET; THENCE SOUTH 67(degrees) 30' 48" WEST 80.00 FEET TO THE SOUTHWESTERLY LINE OF SAID LOT 8, SAID LINE BEING ALSO THE NORTHEASTERLY LINE OF ARMADA DRIVE; THENCE ALONG THE SOUTHWESTERLY LINE OF SAID LOT 8, NORTH 22(degrees) 29' 12" WEST 17.50 FEET TO THE POINT OF BEGINNING. PARCEL C: -13- AN EASEMENT FOR DRIVEWAY ACCESS OVER, ALONG AND ACROSS A PORTION OF LOT 7 OF CARLSBAD TRACT NO. 94-09, CARLSBAD RANCH, UNIT NO. 1, IN THE CITY OF CARLSBAD, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA, ACCORDING TO MAP THEREOF NO. 13357, FILED IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO COUNTY, SEPTEMBER 11, 1996 AS FILE NO. 1996-0463214, MORE PARTICULARLY DESCRIBED AS FOLLOWS: BEGINNING AT THE NORTHWESTERLY CORNER OF SAID LOT 7; THENCE ALONG THE WESTERLY - --------- LINE OF SAID LOT 7, SOUTH 22(degrees) 29' 12" EAST, 7.13 FEET TO THE TRUE POINT ---------- OF BEGINNING; THENCE LEAVING SAID WESTERLY LINE, NORTH 67(degrees) 30' 48" EAST, - ------------ 40.00 FEET; THENCE SOUTH 22(degrees) 29' 12" EAST, 18.00 FEET; THENCE SOUTH 67(degrees) 30' 48" WEST, 40.00 FEET TO A POINT ON THE WESTERLY LINE OF SAID LOT 7; THENCE ALONG SAID WESTERLY LINE, NORTH 22(degrees) 29' 12" WEST, 18.00 FEET TO THE TRUE POINT OF BEGINNING. ----------------------- PARCEL D: AN NON-EXCLUSIVE EASEMENT FOR GENERAL ACCESS AND UTILITY, TOGETHER WITH THE RIGHT TO CONVEY TO OTHERS, OVER, ALONG AND ACROSS A PORTION OF LOT 7 OF CARLSBAD TRACT NO. 94-09, CARLSBAD RANCH, UNIT NO. 1, IN THE CITY OF CARLSBAD, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA, ACCORDING TO MAP THEREOF NO. 13357, FILED IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO COUNTY, SEPTEMBER 11, 1996 AS FILE NO. 1996-0463214, MORE PARTICULARLY DESCRIBED AS FOLLOWS: BEGINNING AT THE NORTHWESTERLY CORNER OF SAID LOT 7; THENCE ALONG THE NORTHERLY LINE OF SAID LOT 7, NORTH 67(degrees) 30' 48" EAST, 27.00 FEET; THENCE LEAVING SAID NORTHERLY LINE, SOUTH 22(degrees) 29' 12" EAST, 25.13 FEET; THENCE SOUTH 67(degrees) 30' 48" WEST, 27.00 FEET TO A POINT ON THE WESTERLY LINE OF SAID LOT 7; THENCE ALONG SAID WESTERLY LINE NORTH 22(degrees) 29' 12" WEST, 25.13 FEET TO THE POINT OF BEGINNING. -14- EXHIBIT A-12 ------------ ALL of that certain lot, piece or parcel of land, with the buildings and improvements thereon, situate, lying and being in the State of California, County of San Diego, and described as follows: Lot 25 of Carlsbad Tract 81-10 Unit No. 2A, in the City of Carlsbad, County of San Diego, State of California, according to map thereof No. 11134, filed in the Office of the County Recorder of San Diego County, January 31, 1985. -15- EXHIBIT A-13 ------------ ALL of that certain lot, piece or parcel of land, with the buildings and improvements thereon, situate, lying and being in the State of California, County of San Diego, and described as follows: Parcel 3 of Parcel Map No. 16265, in the City of San Diego, County of San Diego, State of California, according to map thereof filed in the Office of the County Recorder of said San Diego County, October 18, 1990, as File No. 90-0567278 of Official Records. -16- EXHIBIT B (Description of Ground Lease) Agreement for Ground Lease Development and Use of Real Property dated September 22, 1988 executed by and between The City of San Diego, as lessor, and JOSP Partners, as lessee, and recorded on April 21, 1989 as Instrument No. 89-209941 of the Official Records of San Diego County, California (the "Official -------- Records"), as amended by First Amendment dated March 31, 1989 between such - ------- parties and recorded on April 21, 1989 as File No. 1989-209942 of the Official Records, as further amended by Second Amendment dated March 26, 1990 between such parties and recorded on May 17, 1990 as File No. 90-270833 of the Official Records as further amended by that Consent and Estoppel Certificate executed as of June 18, 1998 by such parties and Borrower, and as assigned by JOSP Partners to Borrower pursuant to Assignment dated ____________ and recorded on June 18, 1998 as File No. 98-0375194 of the Official Records. -xvii- EX-10.5 6 GUARANTY OF RECOURSE OBLIGATIONS EXHIBIT 10.5 New York, New York October 20, 1999 GUARANTY OF RECOURSE OBLIGATIONS OF BORROWER -------------------------------------------- FOR VALUE RECEIVED, and to induce COMMERZBANK AKTIENGESELLSCHAFT, New York branch, having an address at 2 World Financial Center, New York, New York 10281- 1050, as Agent ("Lender"), to lend to KILROY REALTY, L.P., a Delaware limited partnership, having its principal place of business at 2250 East Imperial Highway, El Segundo, California 90245 ("Borrower"), the principal sum of Ninety Million Dollars ($90,000,000) (the "Loan"), evidenced by the Note (as defined in the Credit Agreement hereinafter referred to) and secured by a certain deed of trust (the "Security Instrument") and loaned to Borrower pursuant to a credit agreement (the "Credit Agreement"), each as described in Exhibit A attached hereto and made a part hereof, and by other documents executed in connection therewith (the "Other Security Documents"), The undersigned, KILROY REALTY CORPORATION, a Maryland corporation, having an address at 2250 East Imperial Highway, El Segundo, California 90245 (hereinafter referred to as "Guarantor") hereby absolutely and unconditionally guarantees to Lender the prompt and unconditional payment of the Guaranteed Recourse Obligations of Borrower (hereinafter defined) and the due and prompt performance of all of the terms, agreements, covenants and conditions of the Note, the Security Instrument, and the Other Security Documents. It is expressly understood and agreed that this is a continuing guaranty and that the obligations of Guarantor hereunder are and shall be absolute under any and all circumstances, without regard to the validity, regularity or enforceability of the Note, the Security Instrument, or the Other Security Documents, a true copy of each of said documents Guarantor hereby acknowledges having received and reviewed. The term "Debt" as used in this Guaranty shall mean the principal sum evidenced by the Note and the Credit Agreement and secured by the Security Instrument, or so much thereof as may be outstanding from time to time, together with interest thereon at the rate of interest specified in the Note and the Credit Agreement and all other sums other than principal or interest which may or shall become due and payable pursuant to the provisions of the Note, the Credit Agreement, the Security Instrument or the Other Security Documents. The term "Guaranteed Recourse Obligations of Borrower" as used in this Guaranty shall mean all obligations and liabilities of Borrower for which Borrower shall be personally liable pursuant to the Note, the Credit Agreement, the Security Instrument or the Other Security Documents, as set forth in Section 15.3 and Section 15.4 of the Deed of Trust and Article 10 of the Credit Agreement. Upon and during the continuance of an Event of Default, any indebtedness of Borrower to Guarantor now or hereafter existing (including, but not limited to, any rights to subrogation 1 Guarantor may have as a result of any payment by Guarantor under this Guaranty), together with any interest thereon, shall be, and such indebtedness is, hereby deferred, postponed and subordinated to the prior payment in full of the Debt. Until payment in full of the Debt (and including interest accruing on the Note after the commencement of a proceeding by or against Borrower under the Bankruptcy Reform Act of 1978, as amended, 11 U.S.C. Sections 101 et seq., and -- --- the regulations adopted and promulgated pursuant thereto (collectively, the "Bankruptcy Code") which interest the parties agree shall remain a claim that is prior and superior to any claim of Guarantor notwithstanding any contrary practice, custom or ruling in cases under the Bankruptcy Code generally), after an Event of Default shall have occurred and is continuing under the Credit Agreement, Guarantor agrees not to accept any payment or satisfaction of any kind of indebtedness of Borrower to Guarantor and hereby assigns such indebtedness to Lender (such assignment to be effective upon and during the occurrence of an Event of Default), including the right to file proof of claim and to vote thereon in connection with any such proceeding under the Bankruptcy Code, including the right to vote on any plan of reorganization. Guarantor agrees that, upon demand, Guarantor will reimburse Lender, to the extent that such reimbursement is not made by Borrower, for all expenses (including reasonable counsel fees) incurred by Lender in connection with the collection of the Guaranteed Recourse Obligations of Borrower or any portion thereof or with the enforcement of this Guaranty. All moneys available to Lender for application in payment or reduction of the Debt may be applied by Lender in such manner and in such amounts and at such time or times and in such order and priority as Lender may see fit to the payment or reduction of such portion of the Debt as Lender may elect. Guarantor hereby waives notice of the acceptance hereof, presentment, demand for payment, protest, notice of protest, or any and all notice of non- payment, non-performance or non-observance, or other proof, or notice or demand, whereby to charge Guarantor therefor. Guarantor further agrees that the validity of this Guaranty and the obligations of Guarantor hereunder shall in no way be terminated, affected or impaired (a) by reason of the assertion by Lender of any rights or remedies which it may have under or with respect to either the Note, the Security Instrument, or the Other Security Documents, against any person obligated thereunder or against the owner of the Property, or (b) by reason of any failure to file or record any of such instruments or to take or perfect any security intended to be provided thereby, or (c) by reason of the release or exchange of any property covered by the Security Instrument or other collateral for the Loan, or (d) by reason of Lender's failure to exercise, or delay in exercising, any such right or remedy or any right or remedy Lender may have hereunder or in respect to this Guaranty, or (e) by reason of the commencement of a case under the Bankruptcy Code by or against any person obligated under the Note, the Credit Agreement, the Security Instrument or the Other Security Documents or (f) by reason of any payment made on the Debt or any other indebtedness arising under the Note, the Credit Agreement, the Security Instrument or the Other Security Documents, whether made by Borrower or Guarantor or any other person, which is required to be refunded 2 pursuant to any bankruptcy or insolvency law; it being understood that no payment so refunded shall be considered as a payment of any portion of the Debt, nor shall it have the effect of reducing the liability of Guarantor hereunder. It is further understood that, if Borrower shall have taken advantage of, or be subject to the protection of, any provision in the Bankruptcy Code, the effect of which is to prevent or delay Lender from taking any remedial action against Borrower, including the exercise of any option Lender has to declare the Debt due and payable on the happening of any default or event by which under the terms of the Note, the Credit Agreement, the Security Instrument or the Other Security Documents, the Debt shall become due and payable, Lender may, as against Guarantor, nevertheless, declare the Debt due and payable and enforce any or all of its rights and remedies against Guarantor provided for herein. Guarantor further covenants that this Guaranty shall remain and continue in full force and effect as to any modification, extension or renewal of the Note, the Credit Agreement, the Security Instrument, or any of the Other Security Documents, that Lender shall not be under a duty to protect, secure or insure any security or lien provided by the Security Instrument or other such collateral, and that other indulgences or forbearance may be granted under any or all of such documents, all of which may be made, done or suffered without notice to, or further consent of, Guarantor. As a further inducement to Lender to make the Loan and in consideration thereof, Guarantor further covenants and agrees (a) that in any action or proceeding brought by Lender against Guarantor on this Guaranty, Guarantor shall and does hereby waive trial by jury, (b) Guarantor (i) irrevocably submits to the nonexclusive jurisdiction of the courts of the State of New York and the State where the Property is located and the United States District Court located in the Borough of Manhattan in New York, New York and the county in which the Property is located, and appellate courts from any thereof, and (ii) irrevocably waives any objection which it may have at any time to the laying on venue of any suit, action or proceeding arising out of or relating to this Security Instrument brought in any such court, irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum, and (c) nothing in this Guaranty will be deemed to preclude Lender from bringing an action or proceeding with respect hereto in any other jurisdiction. Guarantor hereby irrevocably consents to service of process by registered or certified mail, postage prepaid, to it at its address given in the second paragraph of this Guaranty. This is a guaranty of payment and not of collection and upon and during the continuance of any Default of Borrower under the Note, the Credit Agreement, the Security Instrument or the Other Security Documents, Lender may, at its option, proceed directly and at once, without notice, against Guarantor to collect and recover the full amount of the liability hereunder or any portion thereof, without proceeding against Borrower or any other person, or foreclosing upon, selling, or otherwise disposing of or collecting or applying against any of the mortgaged property or other collateral for the Loan. Guarantor hereby waives the pleading of any statute of limitations as a defense to the obligation hereunder. 3 Each reference herein to Lender shall be deemed to include its successors and assigns, to whose favor the provisions of this Guaranty shall also inure. Each reference herein to Guarantor shall be deemed to include the heirs, executors, administrators, legal representatives, successors and assigns of Guarantor, all of whom shall be bound by the provisions of this Guaranty. Guarantor (and its representative, executing below, if any) has full power, authority and legal right to execute this Guaranty and to perform all its obligations under this Guaranty. All understandings, representations and agreements heretofore had with respect to this Guaranty are merged into this Guaranty which alone fully and completely expresses the agreement of Guarantor and Lender. This Guaranty may not be modified, amended, waived, extended, changed, discharged or terminated orally or by any act or failure to act on the part of Lender or Borrower, but only by an agreement in writing signed by the party against whom enforcement of any modification, amendment, waiver, extension, change, discharge or termination is sought. This Guaranty shall be deemed to be a contract entered into pursuant to the laws of the State of New York and shall in all respects be governed, construed, applied and enforced in accordance with applicable federal law and the laws of the State of New York, without reference or giving effect to any choice of law doctrine. IN WITNESS WHEREOF, Guarantor has duly executed this Guaranty as of the date first above set forth. KILROY REALTY CORPORATION, a Maryland corporation By: /s/ Tyler H. Rose ____________________________________ Name: Tyler H. Rose Title: Senior Vice President and Treasurer 4 EXHIBIT A --------- (Description of Credit Agreement and Security Instrument) Credit Agreement: CREDIT AGREEMENT made as of the 20th day of October, 1999, - ----------------- among KILROY REALTY, L.P., a Delaware limited partnership, COMMERZBANK AKTIENGESELLSCHAFT, acting through its NEW YORK BRANCH, as Administrative Agent on behalf of the Banks listed in Annex I to the Credit Agreement and Lead Arranger, DRESDNER BANK AG, NEW YORK and GRAND CAYMAN BRANCHES, as Syndication Agent and Arranger, and the financial institutions listed in Annex I to the Credit Agreement. Security Instrument: VARIABLE INTEREST RATE DEED OF TRUST, LEASEHOLD DEED OF - -------------------- TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FILING made as of the 20th day of October, 1999, by KILROY REALTY, L.P., a Delaware limited partnership, as trustor, to FIRST AMERICAN TITLE INSURANCE COMPANY, a California corporation, as trustee for the benefit of COMMERZBANK AKTIENGESELLSCHAFT, New York Branch, a branch duly licensed under the laws of the State of New York, having an address at 2 World Financial Center, New York, New York 10251-1050, as Administrative Agent on behalf of the Banks listed in Annex I to the Credit Agreement, as beneficiary. 5 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM F0RM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS 9-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 SEP-30-1999 SEP-30-1998 6,857 27,311 0 0 18,354 19,951 (1,348) (494) 0 0 0 0 1,354,043 1,132,158 165,000 (139,170) 1,244,920 1,063,670 0 0 526,667 403,920 0 0 0 0 279 276 478,259 476,122 1,244,920 1,063,670 0 0 118,797 98,853 0 0 54,846 46,682 0 0 1,744 1,059 18,420 14,642 43,787 36,470 0 0 43,787 36,470 75 0 0 0 0 0 31,617 28,649 1.14 1.07 1.14 1.07 Net income is shown net of equity in loss of unconsolidated subsidiary of <$22> and minority interests of <$12,223>
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